~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

13. Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):

Three months ended June 30, 2021

Three months ended June 30, 2020

Net

Unrealized

Gains and

Losses on

Defined

Losses on

Defined

Investment

Benefit

Investment

Benefit

Securities

Pension

Securities

Pension

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

Beginning balance

2,348

(16,296)

(13,948)

2,639

(17,469)

(14,830)

Other comprehensive income (loss) before reclassifications

581

2,953

3,534

759

(512)

247

Amounts reclassified from accumulated other comprehensive loss

(66)

1,163

1,097

—

512

Net current period other comprehensive income

515

4,116

4,631

759

—

759

Ending balance

2,863

(12,180)

(9,317)

3,398

(17,469)

(14,071)

Three months ended September 30, 2020

Three months ended September 30, 2019


Net





Net




Unrealized

Unrealized

Gains and

Gains and

Losses on

Defined

Losses on

Defined

Investment

Benefit

Investment

Benefit

Securities

Pension

Securities

Pension

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾
Beginning balance

$
3,398

$
(17,469)

$
(14,071)

$
1,398

$
(13,948)

$
(12,550)
Other comprehensive income (loss) before reclassifications

113

(483)

(370)

480

(7)

473
Amounts reclassified from accumulated other comprehensive loss

—

483

483

(69)

325

256
Net current period other comprehensive income

113

—

113

411

318

729
Ending balance

$
3,511

$
(17,469)

$
(13,958)

$
1,809

$
(13,630)

$
(11,821)

(1)	Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

Nine months ended September 30, 2020

Nine months ended September 30, 2019


Net





Net






Unrealized

Unrealized

Gains and

Gains and

Losses on

Defined

Losses on

Defined

Investment

Benefit

Investment

Benefit

Securities

Pension

Securities

Pension

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

Beginning balance

$
1,715

$
(17,886)

$
(16,171)

$
(1,409)

$
(12,816)

$
(14,225)

Other comprehensive income (loss) before reclassifications

1,796

(1,031)

765

3,311

(1,790)

1,521

Amounts reclassified from accumulated other comprehensive loss

—

1,448

1,448

(93)

976

883

Net current period other comprehensive income (loss)

1,796

417

2,213

3,218

(814)

2,404

Ending balance

$
3,511

$
(17,469)

$
(13,958)

$
1,809

$
(13,630)

$
(11,821)

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Six months ended June 30, 2021

Six months ended June 30, 2020

Net

Unrealized

Gains and

Losses on

Defined

Losses on

Defined

Investment

Benefit

Investment

Benefit

Securities

Pension

Securities

Pension

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

Beginning balance

3,539

(16,737)

(13,198)

1,715

(17,886)

(16,171)

Other comprehensive income (loss) before reclassifications

(610)

2,903

2,293

1,683

(607)

1,076

Amounts reclassified from accumulated other comprehensive loss

(66)

1,654

1,588

—

1,024

Net current period other comprehensive income (loss)

(676)

4,557

3,881

1,683

417

2,100

Ending balance

2,863

(12,180)

(9,317)

3,398

(17,469)

(14,071)

(1)	Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

~~Table of Contents~~

~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three and ~~nine~~six months ended ~~Septembere~~June 30, ~~2020~~2021 and ~~2019~~2020 (in thousands):


	Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾
	For the three		For the three
Details about accumulated other	months ended		months ended		Affected line item in the
comprehensive loss components	June 30, 2021		June 30, 2020		statement of operations
Realized gains on sale of securities
	$	(84)	$	—	Net realized gains on investment securities
		18		—	Provision for income taxes
	$	(66)	$	—
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	1,472	$	648	Other expense
		(309)		(136)	Provision for income taxes
	$	1,163	$	512
Total reclassifications for the period	$	1,097	$	512

Amount reclassified from accumulated

other comprehensive loss⁽¹⁾

For the three

For the three

months ended

months ended

Affected line item in the
Details about accumulated other comprehensive loss components

September 30, 2020

September 30, 2019

statement of operations
Realized (gains) losses on sale of securities

$
—

$
(88)

Net realized gains on investment securities

—

19

Provision for income taxes

$
—

$
(69)

Amortization of estimated defined benefit pension plan loss⁽²⁾

$
611

$
412

Other expense

(128)

(87)

Provision for income taxes

$
483

$
325

Total reclassifications for the period

$
483

$
256

(1) Amounts in parentheses indicate credits.

(2) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 18 for additional details).


	Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾
	For the six		For the six
Details about accumulated other	months ended		months ended		Affected line item in the
comprehensive loss components	June 30, 2021		June 30, 2020		statement of operations
Realized gains on sale of securities
	$	(84)	$	—	Net realized gains on investment securities
		18		—	Provision for income taxes
	$	(66)	$	—
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	2,094	$	1,296	Other expense
		(440)		(272)	Provision for income taxes
	$	1,654	$	1,024
Total reclassifications for the period	$	1,588	$	1,024

Amount reclassified from accumulated

other comprehensive loss⁽¹⁾

For the nine

For the nine

months ended

months ended

Affected line item in the

Details about accumulated other comprehensive loss components

September 30, 2020

September 30, 2019

statement of operations

Realized (gains) losses on sale of securities

$
—

$
(118)

Net realized gains on investment securities

—

25

Provision for income taxes

$
—

$
(93)

Amortization of estimated defined benefit pension plan loss⁽²⁾

$
1,833

$
1,236

Other expense

(385)

(260)

Provision for income taxes

$
1,448

$
976

Total reclassifications for the period

$
1,448

$
883

(1) Amounts in parentheses indicate credits.

(2) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 18 for additional details).

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14. Regulatory Capital

The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum

~~Table of Contents~~

~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. For a more detailed discussion, see the Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total, common equity tier 1, and tier 1 capital to risk-weighted assets (as defined) and tier 1 capital to average assets. Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of ~~September~~June 30, ~~2020,~~2021, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action promulgated by the Federal Reserve. The Company believes that no conditions or events have occurred that would change this conclusion as of such date. To be categorized as well capitalized, the Bank must maintain minimum total capital, common equity tier 1 capital, tier 1 capital, and tier 1 leverage ratios as set forth in the ~~table (in thousands, except ratios).~~table.

At June 30, 2021

TO BE WELL

MINIMUM

CAPITALIZED

REQUIRED

UNDER

FOR

PROMPT

CAPITAL

CORRECTIVE

ADEQUACY

ACTION

COMPANY

BANK

PURPOSES

REGULATIONS*

AMOUNT

RATIO

AMOUNT

RATIO

(IN THOUSANDS, EXCEPT RATIOS)

Total Capital (To Risk Weighted Assets)

137,411

12.79

126,897

11.87

8.00

10.00

Tier 1 Common Equity (To Risk Weighted Assets)

106,804

9.94

114,217

10.68

4.50

6.50

Tier 1 Capital (To Risk Weighted Assets)

118,715

11.05

114,217

10.68

6.00

8.00

Tier 1 Capital (To Average Assets)

118,715

8.89

114,217

8.64

4.00

5.00


	At December 31, 2020
											TO BE WELL
									MINIMUM		CAPITALIZED
									REQUIRED		UNDER
									FOR		PROMPT
									CAPITAL		CORRECTIVE
									ADEQUACY		ACTION
	COMPANY				BANK				PURPOSES		REGULATIONS*
	AMOUNT		RATIO		AMOUNT		RATIO		RATIO		RATIO

	(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)	$	135,777	12.93	%	$	125,182	11.95	%	8.00	%	10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)		105,653	10.06			112,965	10.78		4.50		6.50
Tier 1 Capital (To Risk Weighted Assets)		117,556	11.20			112,965	10.78		6.00		8.00
Tier 1 Capital (To Average Assets)		117,556	9.29			112,965	9.03		4.00		5.00

At September 30, 2020

TO BE WELL

MINIMUM

CAPITALIZED

REQUIRED

UNDER

FOR

PROMPT

CAPITAL

CORRECTIVE

ADEQUACY

ACTION

COMPANY

BANK

PURPOSES

REGULATIONS*


AMOUNT

RATIO

AMOUNT

RATIO

RATIO

RATIO

(IN THOUSANDS, EXCEPT RATIOS)

Total Capital (To Risk Weighted Assets)

$
135,967

13.02
%
$
122,960

11.80
%
8.00
%
10.00
%
Tier 1 Common Equity (To Risk Weighted Assets)

105,383

10.09

111,803

10.73

4.50

6.50

Tier 1 Capital (To Risk Weighted Assets)

117,282

11.23

111,803

10.73

6.00

8.00

Tier 1 Capital (To Average Assets)

117,282

9.39

111,803

9.05

4.00

5.00

At December 31, 2019

TO BE WELL

MINIMUM

CAPITALIZED

REQUIRED

UNDER

FOR

PROMPT

CAPITAL

CORRECTIVE

ADEQUACY

ACTION

COMPANY

BANK

PURPOSES

REGULATIONS*


AMOUNT

RATIO

AMOUNT

RATIO

RATIO

RATIO

(IN THOUSANDS, EXCEPT RATIOS)

Total Capital (To Risk Weighted Assets)

$
132,544

13.49
%
$
119,477

12.23
%
8.00
%
10.00
%
Tier 1 Common Equity (To Risk Weighted Assets)

102,841

10.47

109,173

11.17

4.50

6.50

Tier 1 Capital (To Risk Weighted Assets)

114,729

11.68

109,173

11.17

6.00

8.00

Tier 1 Capital (To Average Assets)

114,729

9.87

109,173

9.50

4.00

5.00

*	Applies to the Bank only.

~~Table of Contents~~

~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Additionally, while not a regulatory capital ratio, the Company’s tangible common equity ratio was 7.34% (non-GAAP) at September 30, 2020. See the reconciliation of the tangible common equity ratio under the Balance Sheet section of the MD&A.

15. Derivative Hedging Instruments

The Company can use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. The Company can use derivative instruments, primarily interest rate swaps, to manage interest rate risk and match the rates

Table of Contents

on certain assets by hedging the fair value of certain fixed rate debt, which converts the debt to variable rates and by hedging the cash flow variability associated with certain variable rate debt by converting the debt to fixed rates.

Interest Rate Swap Agreements

To accommodate the needs of our customers and support the Company’s asset/liability positioning, we may enter into interest rate swap agreements with customers and a large financial institution that specializes in these types of transactions. These arrangements involve the exchange of interest payments based on the notional amounts. The Company entered into floating rate loans and fixed rate swaps with our customers. Simultaneously, the Company entered into offsetting fixed rate swaps with ~~Pittsburgh National Bank (PNC).~~this large financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay ~~PNC~~the large financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customers to effectively convert a variable rate loan to a fixed rate. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.

These swaps are considered free-standing derivatives and are reported at fair value within other assets and other liabilities on the Consolidated Balance Sheets. Disclosures related to the fair value of the swap transactions can be found in Note 19.

The following table summarizes the interest rate swap transactions that impacted the Company’s first ~~nine~~six months of ~~2020~~2021 and ~~2019~~2020 performance (in thousands, except percentages).

At June 30, 2021

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

Swap assets

N/A

54,551

2.59

Monthly

(380)

Swap liabilities

N/A

(54,551)

(2.59)

Monthly

380

Net exposure

—

At June 30, 2020

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

Swap assets

N/A

32,866

3.37

Monthly

(179)

Swap liabilities

N/A

(32,866)

(3.37)

Monthly

179

Net exposure

—

Risk Participation Agreement

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 Company has no obligations under the RPA unless the borrower defaults on their swap transaction with the lead bank and the swap is a liability to the borrower. In that instance, the Company has agreed to pay the lead bank a pre-determined percentage of the swap’s value at the time of default. In exchange for providing the guarantee, the Company received an upfront fee from the lead bank.

RPAs are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings with a corresponding offset within other liabilities. Disclosures related to the fair value of the RPA can be found in Note 19. The notional amount of the risk participation agreement outstanding at June 30, 2021 was $2.7 million.

��

At September 30, 2020

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE
Swap assets

Fair Value

$
36,726

3.06
%
Monthly

$
(345)
Swap liabilities

Fair Value

(36,726)

(3.06)

Monthly

345
Net exposure

—

—



—

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At September 30, 2019

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE
Swap assets

Fair Value

$
23,866

4.69
%
Monthly

$
11
Swap liabilities

Fair Value

(23,866)

(4.69)

Monthly

(11)
Net exposure

—

—



—

The Company monitors and controls all derivative products with a comprehensive Board of Directors approved Hedging Policy. This policy permits a total maximum notional amount outstanding of $500 million for interest rate swaps, interest rate caps/floors, and swaptions. All hedge transactions must be approved in advance by the Investment

~~Table of Contents~~

~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Asset/Liability Committee (ALCO) of the Board of Directors, unless otherwise approved, as per the terms, within the Board of Directors approved Hedging Policy. The Company had no caps or floors outstanding at ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. None of the Company's derivatives are designated as hedging instruments.

16. Segment Results

The financial performance of the Company is also monitored by an internal funds transfer pricing profitability measurement system which produces line of business results and key performance measures. The Company’s major business units include community banking, wealth management, and investment/parent. The reported results reflect the underlying economics of the business segments. Expenses for centrally provided services are allocated based upon the cost and estimated usage of those services. The businesses are match-funded and interest rate risk is centrally managed and accounted for within the investment/parent business segment. The key performance measure the Company focuses on for each business segment is net income contribution.

The community banking segment includes both retail and commercial banking activities. Retail banking includes the deposit-gathering branch franchise and lending to both individuals and small businesses. Lending activities include residential mortgage loans, direct consumer loans, and small business commercial loans. Commercial banking to businesses includes commercial loans, business services, and CRE loans. The wealth management segment includes the Trust Company, West Chester Capital Advisors (WCCA), our registered investment advisory firm, and Financial Services. Wealth management activities include personal trust products and services such as personal portfolio investment management, estate planning and administration, custodial services and pre-need trusts. Also, institutional trust products and services such as 401(k) plans, defined benefit and defined contribution employee benefit plans, and individual retirement accounts are included in this segment. Financial Services include the sale of mutual funds, annuities, and insurance products. The wealth management businesses also include the union collective investment funds (ERECT funds) which are designed to use union pension dollars in construction projects that utilize union labor. The investment/parent includes the net results of investment securities and borrowing activities, general corporate expenses not allocated to the business segments, interest expense on corporate debt, and centralized interest rate risk management. Inter-segment revenues were not material.

The contribution of the major business segments to the Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30, 2020				September 30, 2020				June 30, 2021				June 30, 2021
	Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)
Community banking	$	12,263	$	2,509	$	36,096	$	7,788	$	12,930	$	2,938	$	26,090	$	6,258
Wealth management		2,620		547		7,672		1,510		3,041		734		5,928		1,396
Investment/Parent		(1,788)		(1,978)		(4,850)		(5,392)		(1,705)		(1,964)		(3,446)		(3,865)
Total	$	13,095	$	1,078	$	38,918	$	3,906	$	14,266	$	1,708	$	28,572	$	3,789


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30, 2019				September 30, 2019				June 30, 2020				June 30, 2020
	Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)
Community banking	$	11,739	$	2,791	$	34,367	$	8,621	$	12,385	$	2,755	$	23,833	$	5,279
Wealth management		2,458		477		7,315		1,365		2,484		476		5,052		963
Investment/Parent		(1,338)		(1,579)		(3,843)		(4,627)		(1,629)		(1,812)		(3,062)		(3,414)
Total	$	12,859	$	1,689	$	37,839	$	5,359	$	13,240	$	1,419	$	25,823	$	2,828

~~Table of Contents~~

~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

17. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating ~~$235.7~~$246.2 million and ~~$195.5~~$213.9 million along with standby letters of credit of ~~$13.5~~$13.4 million and ~~$14.7~~$13.3 million as of ~~September~~June 30, ~~2020~~2021 and December

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31, ~~2019,~~2020, respectively. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The carrying amount of the reserves for AmeriServ obiligations related to unfunded commitments and standby letters of credit was $928,000 at June 30, 2021 and $872,000 at December 31, 2020.

Additionally, the Company is also subject to a number of asserted and unasserted potential claims encountered in the normal course of business. In the opinion of the Company, neither the resolution of these claims nor the funding of these credit commitments will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

18. Pension Benefits

The Company has a noncontributory defined benefit pension plan covering certain employees who work at least 1,000 hours per year. The participants have a vested interest in their accrued benefit after five full years of service. The benefits of the plan are based upon the employee’s years of service and average annual earnings for the highest five consecutive calendar years during the final ten-year period of employment. Plan assets are primarily debt securities (including USU.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were as follows (in thousands):


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost	$	419	$	368	$	1,257	$	1,104	$	427	$	441	$	854	$	882
Interest cost		320		392		960		1,176		225		319		450		638
Expected return on plan assets		(811)		(756)		(2,433)		(2,268)		(992)		(817)		(1,985)		(1,634)
Recognized net actuarial loss		611		412		1,833		1,236		621		648		1,243		1,296
Settlement charge										851		—		851		—
Net periodic pension cost	$	539	$	416	$	1,617	$	1,248	$	1,132	$	591	$	1,413	$	1,182

The service cost component of net periodic benefit cost is included in ~~“Salaries~~salaries and employee ~~benefits”~~benefits and all other components of net periodic benefit cost are included in ~~“Other expense” in~~other expense on the Consolidated Statements of Operations.

The Company recognized an $851,000 settlement charge in connection with its defined benefit pension plan in the second quarter and first six months of 2021. A settlement charge must be recognized when the total dollar amount of lump sum distributions paid from the pension plan to retired employees exceed a threshold of expected annual service and interest costs in the current year. So far in 2021, all employees that retired have elected to take a lump sum distribution as opposed to collecting future monthly annuity payments since the value of the lump sums is elevated due to the historically low interest rates. It is anticipated that the Company will be required to recognize additional settlement charges through year end as more people retire. However, the amounts of these future settlement charges are difficult to estimate but management believes that, in aggregate, they will not be at the high level of this initial charge. It is important to note that since the retired employees have chosen to take the lump sum payments, these individuals are no longer included in the pension plan. Therefore, the Company’s normal annual pension expense is expected to be lower in the future.

The accrued pension liability, which had a positive (debit) balance of $11.4 million, was reclassified to other assets on the Consolidated Balance Sheets as of June 30, 2021. The balance of the accrued pension liability became a positive value as a result of the $4.0 million contribution made earlier in 2021 and the revaluation of the obligation due to the recognition of the settlement charge.

The Company implemented a soft freeze of its defined benefit pension plan to provide that non-union employees hired on or after January 1, 2013 and union employees hired on or after January 1, 2014 are not eligible to participate in

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the pension plan. Instead, such employees are eligible to participate in a qualified 401(k) plan. This change was made to help reduce pension costs in future periods.

19. Disclosures about Fair Value Measurements and Financial Instruments

The following disclosures establish a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. Financial assets and liabilities are classified in their

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~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

entirety based on the lowest level of input that is significant to the fair value measurement. The three broad levels defined within this hierarchy are as follows:

Level I: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II: Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and ~~Liability~~Liabilities Measured and Recorded on a Recurring Basis

Equity securities are reported at fair value utilizing Level 1 inputs. These securities are mutual funds held within a rabbi trust for the Company's executive deferred compensation plan. The mutual funds held are open-end funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price.

Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

The fair values of the interest rate swaps used for interest rate risk management and the risk participation agreement associated with a commercial real estate loan are based on an external derivative valuation model using data inputs from similar transactions as of the valuation date and classified Level 2.

The following table presents the assets and ~~liability~~liabilities measured and reported on the Consolidated Balance Sheets on a recurring basis at their fair value as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, by level within the fair value hierarchy (in thousands).

Fair Value Measurements at June 30, 2021

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Equity securities (1)

492

—

Available for sale securities:

U.S. Agency

6,886

—

6,886

—

U.S. Agency mortgage-backed securities

84,824

—

84,824

—

Municipal

20,452

—

20,452

—

Corporate bonds

53,681

—

53,681

—

Interest rate swap asset (1)

1,997

—

1,997

—

Interest rate swap liability (2)

(1,997)

—

(1,997)

—

Risk participation agreement (2)

(5)

—

(5)

—

Fair Value Measurements at September 30, 2020


TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)
Equity securities

$
424

$
424

$
—

$
—
Available for sale securities:

U.S. Agency

3,276

—

3,276

—
U.S. Agency mortgage-backed securities

69,042

—

69,042

—
Municipal

18,651

—

18,651

—
Corporate bonds

50,747

—

50,747

—
Fair value swap asset

3,665

—

3,665

—
Fair value swap liability

(3,665)

—

(3,665)

—

3433

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~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~


	Fair Value Measurements at December 31, 2020
	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Equity securities (1)	$	443	$	443	$	—	$	—
Available for sale securities:
U.S. Agency		3,152		—		3,152		—
U.S. Agency mortgage-backed securities		67,913		—		67,913		—
Municipal		20,348		—		20,348		—
Corporate bonds		52,752		—		52,752		—
Interest rate swap asset (1)		3,320		—		3,320		—
Interest rate swap liability (2)		(3,320)		—		(3,320)		—

Fair Value Measurements at December 31, 2019


TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)
Equity securities

$
366

$
366

$
—

$
—
Available for sale securities:

U.S. Agency

5,116

—

5,116

—
U.S. Agency mortgage-backed securities

81,633

—

81,633

—
Municipal

15,170

—

15,170

—
Corporate bonds

39,830

—

39,830

—
Fair value swap asset

959

—

959

—
Fair value swap liability

(959)

—

(959)

—

(1)	Included within other assets on the Consolidated Balance Sheets.

(2)	Included within other liabilities on the Consolidated Balance Sheets.

Assets Measured and Recorded on a Non-Recurring Basis

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are reported at the fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted using unobservable inputs. At ~~September~~June 30, 2021, collateral-based impaired loans with a carrying value of $7,000 were reduced by a specific valuation allowance totaling $7,000 resulting in a net fair value of 0. At December 31, 2020, collateral-based impaired loans with a carrying value of $266,000 were reduced by a specific valuation allowance totaling $8,000 resulting in a net fair value of $258,000. ~~At December 31, 2019, collateral-based impaired loans with a carrying value of $263,000 were reduced by a specific valuation allowance totaling $8,000 resulting in a net fair value of $255,000.~~

Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

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~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

Assets measured and recorded at fair value on a non-recurring basis are summarized below (in thousands, except range data):

Fair Value Measurements

June 30, 2021

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Impaired loans

—

FAIR VALUE MEASUREMENTS AT SEPTEMBER 30, 2020 USING


TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)
Impaired loans

$
258

$
—

$
—

$
258
Other real estate owned

40

—

—

40

FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2019 USING


TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)
Impaired loans

$
255

$
—

$
—

$
255
Other real estate owned

37

—

—

37

September 30, 2020

Quantitative Information About Level 3 Fair Value Measurements

Valuation

Unobservable


Fair Value

Techniques

Input

Range (Wgtd Ave)

Impaired loans

$
258

Appraisal of

Appraisal

0% to 100% (3%)

collateral (1)

adjustments(2)

Other real estate owned

40

Appraisal of

Appraisal

57% (57%)



collateral (1)

adjustments(2)

Liquidation

22% to 38% (30%)

expenses

December 31, 2019

Quantitative Information About Level 3 Fair Value Measurements

Valuation

Unobservable

Fair Value

Techniques

Input

Range (Wgtd Ave)

Fair Value Measurements

December 31, 2020

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Impaired loans

255

Appraisal of

Appraisal

0% to 100% (3%)

258

—

258

collateral (1)

adjustments(2)

Other real estate owned

Appraisal of

Appraisal

0% to 57% (38%)

collateral (1)

adjustments(2)

Liquidation

21% to 134% (30%)

expenses

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	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
June 30, 2021	Fair Value		Techniques	Input	Range (Wgtd Ave)
Impaired loans	$	—	Appraisal of	Appraisal	100% (100%)
			collateral (1)	adjustments(2)


	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
December 31, 2020	Fair Value		Techniques	Input	Range (Wgtd Ave)
Impaired loans	$	258	Appraisal of	Appraisal	0% to 100% (3%)
			collateral (1)	adjustments(2)

(1)	Fair Value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable. Also includes qualitative adjustments by management and estimated liquidation expenses.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company’s financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that use the best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash and cash equivalents, bank owned life insurance, regulatory stock, accrued interest receivable and payable, deposits with no stated maturities, and short-term borrowings have fair values which approximate the recorded carrying values. The fair value measurements for all of these financial instruments are Level 1 measurements.

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~~AmeriServ Financial, Inc.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

The estimated fair values based on US GAAP measurements and recorded carrying values at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, for the remaining financial instruments not required to be measured or reported at fair value were as follows:


	September 30, 2020										June 30, 2021
	Carrying										Carrying
	Value			Fair Value		(Level 1)		(Level 2)		(Level 3)	Value			Fair Value		(Level 1)		(Level 2)		(Level 3)

		(IN THOUSANDS)										(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities – HTM	$	42,636	$	45,308	$	—	$	42,311	$	2,997	$	53,552	$	55,891	$	—	$	52,892	$	2,999
Loans held for sale		7,587		7,766		7,766		—		—		153		157		157		—		—
Loans, net of allowance for loan loss and unearned income		931,496		941,988		—		—		941,988		980,960		985,516		—		—		985,516
FINANCIAL LIABILITIES:
Deposits with no stated maturities		728,507		745,879		—		—		745,879
Deposits with stated maturities		313,728		317,679		—		—		317,679		311,236		314,093		—		—		314,093
All other borrowings ⁽¹⁾		94,830		100,945		—		—		100,945		68,673		72,784		—		—		72,784

December 31, 2019


Carrying

Value


Fair Value


(Level 1)


(Level 2)


(Level 3)

(IN THOUSANDS)
FINANCIAL ASSETS:

Investment securities – HTM

$
39,936

$
41,082

$
—

$
38,129

$
2,953
Loans held for sale

4,868

4,970

4,970

—

—
Loans, net of allowance for loan loss and unearned income

873,427

873,908

—

—

873,908
FINANCIAL LIABILITIES:










Deposits with no stated maturities

651,469

631,023

—

—

631,023
Deposits with stated maturities

309,044

310,734

—

—

310,734
All other borrowings⁽¹⁾

74,134

76,323

—

—

76,323

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	December 31, 2020
	Carrying
	Value			Fair Value		(Level 1)		(Level 2)		(Level 3)

		(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities – HTM	$	44,222	$	47,106	$	—	$	44,108	$	2,998
Loans held for sale		6,250		6,428		6,428		—		—
Loans, net of allowance for loan loss and unearned income		960,750		969,433		—		—		969,433
FINANCIAL LIABILITIES:
Deposits with stated maturities		311,064		314,845		—		—		314,845
All other borrowings⁽¹⁾		85,493		90,907		—		—		90,907

(1)	All other borrowings include advances from Federal Home Loan Bank, guaranteed junior subordinated deferrable interest debentures, and subordinated debt.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company’s remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.

20. Risks and Uncertainties

The impact of the ongoing COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Company’s customers. The pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, and consumer spending has resulted in less economic activity, and significant volatility and disruption in the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments and other factors, including, among others, the duration and scope of the pandemic, as well as governmental, regulatory, and private sector responses to the pandemic, including the distribution and effectiveness of COVID-19 vaccines, and the associated impacts on the economy, financial markets and our customers, employees, and vendors. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees, and communities during this difficult time.

21. Branch Aquisition

On May 21, 2021, AmeriServ Financial Bank, the Company’s wholly owned banking subsidiary, completed its previously announced acquisition of the branch and deposit customers of Citizen’s Neighborhood Bank (CNB), an operating division of Riverview Bank, located in Meyersdale, Pennsylvania and the deposit customers of CNB at the branch located in Somerset, Pennsylvania. On this date, the Meyersdale branch continued in operation under the AmeriServ name while the Somerset branch customers were transferred to the neighboring full service AmeriServ office at 108 West Main Street. Pursuant with the terms of the purchase and assumption agreement, the related deposits, totaling approximately $42 million, were acquired for a 3.71% deposit premium, or $1.6 million.

The acquisition was accounted for under the acquisition method of accounting as prescribed by FASB Accounting Standards Codification 805, Business Combinations, as amended. Accordingly, the acquisition’s results of operations have been included in the Company’s results of operations as of the date of acquisition. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based on their estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition.

In accordance with the purchase and assumption agreement, the purchase price of the real property (i.e. premise and equipment) was equal to the net book value as of the date of acquisition. The Company determined that the net book value was a reasonable proxy of fair value based on review of appraisals on record at Riverview Bank. The Company engaged a consultant to assist in the valuation of the core deposit intangible asset and fair value of certificates of deposit. Core deposits include demand deposits, interest-bearing checking, money market, and savings accounts. The core deposit intangible value assigned to the acquired deposits was determined using the income approach and represents the

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future economic benefit of the potential cost savings from acquiring those core deposits compared to the cost of obtaining generally higher cost FHLB borrowings. Certificates of deposit (CDs) are not considered to be core deposits as they typically are less stable and generally do not have an all-in favorable funding advantage to alternative funding sources. The fair value of CDs represents the present value of the certificates’ expected contractual payments discounted by market rates for similar CDs.

The following table reflects the basis of assets acquired and liabilities assumed from Riverview Bank as of the acquisition date (in thousands).


Consideration received
Cash received			$	40,154


Fair value of assets acquired
Cash and cash equivalents	$	258
Loans		36
Premises and equipment		158
Core deposit intangible		177
Other assets		19
				648
Fair value of liabilities assumed
Deposits		(42,432)
Other liabilities		(37)
				(42,469)

Total fair value of identifiable net assets				(41,821)

Goodwill resulting from acquisition			$	1,667

The Company recorded goodwill and other intangibles associated with the acquisition of the Meyersdale and Somerset branches from Riverview Bank totaling $1.8 million. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the six months ended June 30, 2021. The carrying amount of the goodwill at June 30, 2021 related to the Riverview branch acquisition was $1.7 million.

Identifiable intangible assets are amortized to their estimated residual values over their expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the six months ended June 30, 2021, 0 such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over a ten-year useful life. The gross carrying amount of the core deposit intangible at June 30, 2021 was $177,000 with $3,000 accumulated amortization as of that date.

The amount of revenue of the acquired business since the acquisition date, and the pro-forma results of operations, are not material to the financial statements.

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As of June 30, 2021, the current year and estimated future amortization expense for the core deposit intangible associated with the Riverview branch acquisition is as follows (in thousands):


2021	$	19
2022		30
2023		27
2024		24
2025		21
After five years		56
	$	177

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

…~~..2020 THIRD~~..2021 SECOND QUARTER SUMMARY OVERVIEW…..

AmeriServ reported ~~third~~second quarter ~~2020~~2021 net income of ~~$1,078,000,~~$1,708,000, or ~~$0.06~~$0.10 per diluted common share. This represents a ~~36.2%~~20.4%, or ~~$611,000, decrease from the third quarter of 2019 when net income totaled $1,689,000, or $0.10 per share. It also represents a decline~~$289,000, increase from the second quarter of 2020 when net income ~~was reported as~~totaled $1,419,000, or $0.08 per ~~diluted~~ share. ~~The decline can be attributed primarily to the recovery process from the nearly three months of lockdown brought about by the COVID-19 pandemic event during the first and second quarters of 2020.~~

The lockdown began on or about March 16, 2020 and was substantially uniform throughout the 50 states. The banking industry was classified as essential and therefore was permitted to continue to operate but with significant restrictions. Most banks, AmeriServ included, closed the lobbies of branch offices and permitted transaction activity only through automated teller machines, drive up facilities, or through internet access. Concurrently, the Federal Reserve requested that all banks support their borrowing customers with loan payment deferrals and forbearance agreements so they might reduce expenses during the lockdown. The premise at that time was that the lockdown would be short-lived.

However, though the lockdown partially ended mid-June, some restrictions continued even up to and including today. The pandemic event has had serious consequences for some entire industries such as airlines, hotels, cruise lines, restaurants and others. The enemy of these industries is the length of the necessary period of recovery. The Congress, the Administration, and the Federal Reserve have instituted numerous stimulus programs to help recovery and which also have increased the liquidity of the banks. However, the payment deferrals and forbearance agreements have continued for some borrowers. These events throughout the economy are actually only a reflection of the continuation of the pandemic event well beyond most forecasts. It is these conditions that we must consider and attempt to mitigate throughout all AmeriServ activities.

~~As prudent bankers we have found it necessary to once again strengthen our allowance for loan losses. During~~While the second quarter of 2021 trailed the first quarter of 2021 by $373,000, it was stronger than any other quarter as far back as the second quarter of 2019 before the pandemic. It is our view that the 2021 second quarter represents another important step in the recovery from the pandemic based on the lockdown in 2020.

Net interest income was at the highest level in more than two years with a record level of loans. Over $60 million of these loans were a part of the Small Business Administration (SBA) Payroll Protection Program (PPP) which sought to stimulate the economic recovery process. Traditional loan products continued the increases that began late in 2020 ~~that strengthening required~~and increased by $25 million or 2.8% during the second quarter of 2021. AmeriServ also continued to support borrowers who are disadvantaged by the slow economic recovery. The Federal Reserve continues to encourage community banks, such as AmeriServ, to aid these victims of forces well beyond their control.

Perhaps the most positive news for the second quarter is the continued growth of deposits. For the year 2020, deposits increased by over $94 million. But in just two quarters of 2021, the increase has totaled another $114 million. Admittedly, approximately $42 million of the total came from the acquisition of deposits from two branches in Somerset County. For the first time in the history of the franchise, deposits have exceeded $1 billion for five consecutive quarters. Thrifty western Pennsylvanians are building their reserve fund. In a ~~$450,000 increase~~tribute to its safety and soundness, AmeriServ continues to be their rainy day fund depository.

AmeriServ has been at the forefront of residential mortgage loans. As families strive to protect their need for housing, AmeriServ is following up a record year in 2020, as 2021 will probably be the second strongest year ever. To add to our ~~allowance~~Banking for Life pledge, the AmeriServ Wealth Management group is laying the foundation for another record year. One of our most used services is Retirement Planning which includes our unique Pathroad investment products that many of our friends and neighbors utilize to enjoy a worry free retirement.

This Board and this management team understand that these are unusual times throughout the nation. Many of our employees are continuing to work on a remote basis. The process of returning to normalcy is well underway within the limitations and restrictions governmental authorities set forth. It is these same employees who managed a seamless integration of two Somerset County branch banks into AmeriServ. This acquisition strengthens our brand in Somerset County and along the Maryland border.

We believe the recovery at AmeriServ is well demonstrated by our record so far in 2021. Earnings per share in the ~~third quarter~~first two quarters of 2021 surpass the same two quarters in 2020 by 30%. Both loans and deposits are at historic record levels. Residential mortgage activity remains strong. The Wealth Management group is already more than 40% above its net contributions to the Corporation during the first six months of 2020, ~~an additional loan loss provision~~the strongest previous year on record.

Challenges continue to exist, such as the age old challenge of ~~$675,000. Our Asset Quality Task Force meets regularly to evaluate our borrowers~~balancing risk against reward, which is the very nature of the finance and ~~our relationship managers are in constant contact with~~commerce business. The ground rules of the ~~principals. Thus far, the process has worked satisfactorily and we~~pandemic continue to be ~~helpful to~~a challenge. However, our borrowers but also we seek to always protect the interests of AmeriServ. It is our belief that the nation’s banks have done an outstanding job of preventing economic chaos. AmeriServ will continue that effort and always protect the safety and soundness of this franchise.

Within these difficult events however, AmeriServ has experienced some significant bright spots. For example, our loan portfolio, excluding PPP loans, grew by over $20 million in the third quarter indicating that there are small and mid-sized businesses who are recovering. Then, reflecting the various governmental stimulus programs, our average deposits increased by $18 million in the third quarter of 2020. Even more impressive is that deposits in AmeriServ have grown by over $81 million in the period from December 31, 2019 to September 30, 2020. AmeriServ’s liquidity is at an all-time high, a very good thing in a difficult economy.

One of the negatives of Federal Reserve policy has been their choosing a scenario of low interest rates. Such a scenario punishes savers, the retired, and the net interest margin of community financial institutions such as AmeriServ. However, low interest rates increase demand for residential mortgages. Through the end of the third quarter, AmeriServ has already closed more mortgages than it closed in the entire year of 2019. This increase has been evident in every market where AmeriServ is present. Particularly, that includes the special relationship which AmeriServ has developed with the Pennsylvania State Education Association, which brings us mortgage opportunities in most counties of the Commonwealth.

The AmeriServ wealth management activities are centered in AmeriServ Trust and Financial Services Company and West Chester Capital Advisors, our registered investment advisor. It goes without saying that 2020 has been a volatile year in virtually all financial markets, but as of September 30, 2020, wealth management activity reached an all-time high of assets under administration and management. The purpose of this activity is to be counter cyclical to the interestgoals

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~~rates driven business model of AmeriServ Financial Bank.~~remain unchanged. It is to provide our markets with the very ~~positive to watch it perform so well~~best in ~~such a difficult environment. The lifecycle has an effect on all of us. Therefore, our~~banking and wealth management ~~business lines attempt to promote future life planning.~~services based on a safe and sound financial institution. We ~~help with college tuition, with retirement expenses~~approach these challenges as just another test. We are also pleased that AmeriServ has maintained its quarterly common stock dividend and ~~the rainy day funds that are so necessary as age creeps up~~met all debt service requirements on ~~all of us.~~our Trust Preferred shares and our subordinated debt issue.

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2020~~2021 VS. THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

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


	Three months ended			Three months ended			Three months ended			Three months ended
	September 30, 2020			September 30, 2019			June 30, 2021			June 30, 2020
Net income	$	1,078		$	1,689		$	1,708		$	1,419
Diluted earnings per share		0.06			0.10			0.10			0.08
Return on average assets (annualized)		0.34	%		0.57	%		0.51	%		0.46	%
Return on average equity (annualized)		4.17	%		6.60	%		6.46	%		5.63	%

The Company reported net income of ~~$1,078,000,~~$1,708,000, or ~~$0.06~~$0.10 per diluted common share. This earnings performance ~~represents~~represented a ~~$611,000,~~$289,000, or ~~36.2%~~20.4%, ~~decrease~~increase from the ~~third~~second quarter of ~~2019~~2020 when net income totaled ~~$1,689,000,~~$1,419,000, or ~~$0.10~~$0.08 per diluted common share. ~~AmeriServ Financial, Inc.~~During the second quarter of 2021, the Company continued to ~~experience~~achieve record levels of both loans and deposits. Excluding PPP loan activity, growth in both commercial real estate loans and residential mortgage loans caused our total loan portfolio to increase by $25 million, or 2.8%, during the second quarter of 2021. Our second quarter also included the successful completion of our Somerset County branch acquisition which provided AmeriServ Financial with approximately $42 million of additional deposits. The Company will be able to utilize $33 million of these deposits ~~while dealing with the challenges presented by the COVID-19 pandemic. The decline in earnings between years is due~~ to ~~our decision to further strengthen our allowance for loan losses given the economic uncertainty resulting from the pandemic. Additionally, over 32% of total revenue in~~replace higher cost institutional deposits that mature during the third quarter of ~~2020~~2021, which will result in a meaningful reduction in our future interest expense. Additionally, the diversification of our revenue streams continues to be a strength for our Company as 31% of our second quarter revenue came from non-interest income sources, which included record contributions from our strong wealth management ~~business~~businesses. As a result of this good earnings momentum and ~~active residential mortgage operation.~~our diligent and continuing focus on asset quality, the Company is well positioned for the second half of 2021.

…..NET INTEREST INCOME AND MARGIN…..The Company’s net interest income represents the amount by which interest income on ~~average~~ earning assets exceeds interest paid on ~~average~~ interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and it is ~~effected~~affected by interest rate fluctuations as well as changes in the amount and mix of ~~average~~ earning assets and ~~average~~ interest bearing liabilities. The following table compares the Company’s net interest income performance for the ~~third~~second quarter of ~~2020~~2021 to the ~~third~~second quarter of ~~2019~~2020 (in thousands, except percentages):


	Three			Three
	months ended			months ended
	June 30, 2021			June 30, 2020			Change			% Change
Interest income	$	11,838		$	12,061		$	(223)		(1.8)	%
Interest expense		1,971			2,588			(617)		(23.8)
Net interest income	$	9,867		$	9,473		$	394		4.2
Net interest margin		3.13	%		3.30	%		(0.17)	%	N/M

Three

Three






months ended

months ended

September 30, 2020

September 30, 2019

$ Change

% Change

Interest income

$
11,237

$
12,433

$
(1,196)

(9.6)
%
Interest expense

2,446

3,669

(1,223)

(33.3)

Net interest income

$
8,791

$
8,764

$
27

0.3

Net interest margin

2.97
%

3.18
%

(0.21)
%
  N/M

N/M — not meaningful

The Company’s net interest income in the ~~third~~second quarter of ~~2020~~2021 increased ~~slightly~~ by ~~$27,000,~~$394,000, or ~~0.3%~~4.2%, from the prior year’s ~~third quarter. The Company’s~~second quarter while the net interest margin of ~~2.97% for the third quarter of 2020~~3.13% was 2117 basis points lower than the ~~third~~net interest margin of 3.30% for the second quarter of ~~2019.~~2020. The ~~third~~second quarter of ~~2020~~2021 results were indicative of the ~~slow~~Company’s effective execution of strategies as a solid economic recovery ~~currently being experienced due~~is underway in our core markets and we work to meet the ~~uncertainty that exists from~~challenges of the ~~COVID-~~19 pandemic and the upcoming Presidential election. Although demonstrating increasing strength late in the third quarter, the economic uncertainty resulted in slow commercial loan demand, which has an unfavorable impact on our business model since commercial loans comprise approximately 73% of our total loan portfolio.current low interest rate environment. The ~~slow loan demand combined with low national interest rates~~economy continued to ~~pressure earning asset margins. The Company’s balance sheet experienced robust growth~~demonstrate improvement during the second quarter as the COVID-19 vaccine was more widely distributed and some businesses began to operate at full capacity while consumers also experienced more normalcy as social restrictions dissipated. The Company continued to experience robust balance sheet growth as both total loans and total deposits reached new record levels due to business

Table of ~~2020~~Contents

development efforts and the impact from the government stimulus programs. Total deposit volumes were also positively impacted from the previously disclosed Somerset County branch acquisition which the Company successfully completed on May 21, 2021. Net interest income improved as fee income from existing PPP loan forgiveness and new fee income from the most recently completed second round of this program, that was implemented earlier in 2021, more than offset net interest margin pressure from the low interest rate environment. Also, the growth experienced in our commercial real estate portfolio resulted in traditional loan fee income increasing by $244,000 for the second quarter of 2021 when compared to the same time period from last year. The low interest rate environment is positively impacting deposit and borrowings interest expense cost. As a result, total interest expense decreased significantly more than the decrease in total interest income, resulting in net interest income increasing for the second quarter of 2021, compared to last year. Overall, the ~~Paycheck Protection Program (PPP) and other government sponsored initiatives established~~increase to ~~stimulate the economy. The~~net interest income, a higher level of ~~loans~~non-interest income, and ~~deposits that resulted from these government sponsored programs remained on~~a reduced loan loss provision more than offset a higher level of non-interest expense resulting in an improved earnings performance for the ~~balance sheet throughout the third quarter. As a result, the~~second quarter of 2021.

The average balance of total interest earning assets for the ~~third~~second quarter of ~~2020~~2021 continued to grow and is now $114 million, or 10.0%, higher ~~compared to~~than the ~~same period in 2019. The higher level~~second quarter of 2020. Likewise, on the liability side of the balance sheet, total average ~~earning assets was primarily attributable to approximately $68 million of PPP loans that have an~~

~~Table of Contents~~

interest rate of 1.0% and approximately $40 million of short-term investments which earned 0.5% during the third quarter. These low earning assets further contributed to the pressure being experienced on earning asset margins, which are already unfavorably impacted by low interest rate environment. Excluding the low yielding PPP loans from the net interest margin calculationdeposits for the ~~2020 third~~second quarter would result in the net interest margin percentage being 9 basis points higher and averaging 3.06% (non-GAAP). The Company believes that this non-GAAP financial measure provides information to investors that is useful in understanding its net interest margin. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for,increased by $129 million, 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 to exclude the effect of PPP loans, this presentation may not be comparable to other similarly titled measures calculated by other companies.

~~The following table sets forth the calculation of this non-GAAP financial measure (in thousands, except percentages).~~

Three months

ended

September 30, 2020

Tax-equivalent net interest income⁽¹⁾

$
34,599

Average earning assets

1,166,451

Net interest margin

2.97
%
Net interest margin, excluding PPP lending activity and corresponding increase in total deposits from government related assistance programs:

Tax-equivalent net interest income⁽¹⁾

$
34,599

PPP loan income⁽¹⁾

(1,515)

Borrowings expense to fund PPP loans⁽¹⁾

564

Non-GAAP tax-equivalent net interest income

33,648

Average earning assets

1,166,451

Average PPP loans

(67,970)

Non-GAAP average earning assets

1,098,481

Non-GAAP net interest margin

3.06
%

~~(1)~~

~~Value is annualized and the tax effect totaled $22,000.~~

~~Total interest earning assets increased in the third quarter of 2020 due to growth in~~12.5%, since last year. As stated previously, total loans and short-term investments which more than offset total investment securities decreasing. Both non-interest and interest bearing deposits increased resulting in less reliance on short-term borrowed funds. Effective management of our funding costs along with the downward repricing of certain interest bearing liabilities tied to market indexes resulted in total interest expense decreasing between years. The decrease to total interest expense more than offset the decrease in total interest income resulting in the increase to net interest income.

~~Total loans continued to reach~~reached a new record level and averaged ~~$933~~$991.5 million in the ~~third~~second quarter of ~~2020~~2021 which ~~was $52.8~~is $79.0 million, or ~~6.0%~~8.7%, higher than the ~~$880~~$912.5 million average for the ~~third~~second quarter of ~~2019.~~2020. The solid economic recovery was evident in our lending activity as we continued to experience commercial loan growth during the second quarter of 2021. Commercial loan pipelines had returned to pre-COVID levels earlier this year and remained at that level through the end of this reporting period. Strong residential mortgage loan production also continued through the second quarter of 2021. The Company revised strategy in ~~total average loans was due primarily to the Company’s participation~~2021 and retained a higher percentage of our residential mortgage loan production in the ~~PPP program. As~~loan portfolio as opposed to selling into the secondary market. In the second quarter of ~~September~~ ~~30, 2020,~~2021, the Company ~~processed 474 PPP loans totaling~~retained approximately ~~$68 million to assist small businesses and our markets in this difficult economy. The Company recorded a~~91% of total ~~of $381,000 of processing fee income and interest income from PPP lending activity~~residential mortgage loan production in the ~~third quarter. Note that PPP processing fee income decreased significantly, by~~loan portfolio. This compares to a retention of approximately ~~$700,000, between the second and third quarters of 2020 as most of the allowable up-front fees from the PPP loans were already recognized as income~~32% in the second ~~quarter. The remaining~~quarter of 2020. This strategic change allowed us to more profitably deploy a portion of ~~PPP processing fees totals approximately $1.1 million and are being amortized into income over~~ the ~~time period~~increased liquidity that ~~the loans remain~~we have on our balance sheet ~~or until~~that resulted from the significant influx of deposits. Additionally, loan volumes were positively impacted by the previously mentioned second round of the 100% guaranteed PPP loans. Overall, the combination of growth in traditional loan products and our participation in the latest round of the PPP resulted in total loans reaching a record level.

The Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan ~~is forgiven at which time the remaining fee will be recognized immediately as income. Normal commercial lending activity has been slow because~~payment modifications. All of these borrowers are those that have requested more than one payment deferral plan. Borrower requested modifications primarily consist of the ~~economic uncertainty but did improve~~deferral of principal and/or interest payments for a period of three to six months. On June 30, 2021, loans totaling approximately $26.7 million, or 2.7% of total loans, were on a payment modification plan. These loans include 11 commercial borrowers primarily in the hospitality industry. 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 ~~third~~customer’s needs and their impacted industry, borrower and guarantor capacity to service debt and issued regulatory guidance.

Total investment securities averaged $212.3 million for the second quarter ~~progressed. Commercial loan pipelines are currently at levels that are similar~~of 2021, which is $25.0 million, or 13.4%, higher than the $187.3 million average for the second quarter of 2020. The Company continues to ~~where they were prior~~be selective when purchasing securities due to the ~~pandemic. Residential mortgage loan activity continued to be exceptionally strong given the lower~~low interest rate environment. However, the yield curve began to steepen during the latter part of the first quarter and held this position through the end of May as the long end of the U.S. Treasury yield curve increased while the short end of the curve remained relatively stable. This ~~along with management’s~~resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds, and management decided to add more of these investments to our portfolio. Similar to our change in strategy to retain more residential mortgage loan production in our loan portfolio, ~~has~~the steeper yield curve provided 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 also resulted in ~~the~~

~~Table of Contents~~

balance of residential mortgage loans increasing. Overall, on an end of period basis, excluding total PPP loans, the total loan portfolio grew by approximately $20 million since June 30, 2020. Even though total average loans increased compared to the same period last year and loan interest income was enhanced by the PPP revenue, loan interest and fee income decreased by $1.0 million, or 9.4%,securities growing between the third quarter of 2020 and last year’s third quarter. The lower loan interest income reflects the challenges presented from the lower interest rate environment as new loans originated at lower yields and certain loans tied to LIBOR or the prime rate repriced downward as both of these indices have moved down with the Federal Reserve’s decision to decrease the target federal funds interest rate by a total of 225 basis points since June 2019.

~~Total investment securities averaged $188 million in the third quarter of 2020 which is $4.7 million, or 2.4%, lower than the $192 million average for the third quarter of 2019.~~years. The Company ~~continues~~also continued to be selective when purchasing the more typical types of securities that have been purchased historically as the market is less favorable given the differences in the position and shape of the U.S. Treasury yield curve from the prior year. The Company was active during the third quarter of 2020 purchasingpurchase corporate securities, particularly subordinated debt issued by other financial ~~institutions. Subordinated debt offers higher yields than~~institutions, along with taxable municipal securities.

Table of Contents

Similar to what is occurring across the typical types of securities in which we invest and is particularly attractive given the current low interest rate environment and flat shape of the yield curve. Management believes it to be acceptable to increasefinancial services industry, 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. In addition, investments in subordinated debt are being executed according to guidelines established by both the regulators and our internal ALCO policy. Interest income on investment securities decreased between the third quarter of 2020 and the third quarter of 2019 by $148,000, or 9.2%.

~~Our~~ liquidity position continues to be ~~exceptionally~~very strong due to the significant influx of ~~deposits~~deposits. The challenges this increased liquidity presents are twofold. First, there is uncertainty regarding the duration that ~~resulted from~~these increased funds will remain on the ~~government stimulus programs and~~balance sheet which will be determined by customer behavior as ~~customers continue to be cautious and are demonstrating reduced spending activity due to~~ the economic ~~uncertainty.~~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, ~~average~~ short-term ~~investments increased by $28.7~~investment balances averaged $50.4 million in the ~~third~~second quarter of ~~2020 when compared~~2021, which remains high by historical standards. Therefore, future loan growth and continued prudent investment in securities are critical to achieve the ~~third quarter of 2019. The challenge of profitably deploying this~~best return on the excess liquidity resulted in management investing in high quality commercial paper given their short maturities and higher rates of return. However, as the third quarter progressed, the yields on commercial paper demonstrated a steady decline, making it even more challenging to find a suitable return for our excess liquidity. Interest income on short-term investments decreased by $33,000, or 39.3%.funds. Overall, total interest income on both loans and investments decreased by ~~$1.2 million,~~$223,000, or ~~9.6%~~1.8%, between ~~the third quarter of 2020 and the third quarter of 2019.~~years despite increased volume.

Total interest expense for the ~~third~~second quarter of ~~2020~~2021 decreased by ~~$1.2 million,~~$617,000, or ~~33.3%~~23.8%, when compared to the ~~third~~second quarter of ~~2019,~~2020, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense ~~in the third quarter of 2020~~ was lower by ~~$1.2 million,~~$563,000, or ~~40.3%~~30.1%, ~~compared to~~despite the ~~third quarter of 2019. Total~~previously mentioned record increase in deposits ~~grew significantly during~~that occurred reflecting new deposit inflows as well as the ~~second quarter of 2020 because~~loyalty of the government stimulus programs and consumers being more cautious with their spending. The higher level of total deposits remained on the Company’s balance sheet throughout the third quarter. Similar to total loans, total average deposits, again, reached a record level, averaging $1.054 billion for the quarter, which is $69.1 million, or 7.0%, higher than the 2019 third quarter average. In addition, the Company’s loyalbank’s core deposit ~~base continues to be a source of strength for the Company during periods of market volatility.~~base. Management continued to ~~prudently and~~ effectively execute several deposit product pricing ~~decreases given~~reductions in order to address the net interest margin challenges presented by the low interest rate ~~environment and the corresponding downward pressure that these low interest rates have on the net interest margin.~~environment. As a result, the Company experienced deposit cost relief. Specifically, our total deposit cost averaged 0.45% in the ~~Company’s average~~second quarter of 2021 compared to 0.73% in the second quarter of 2020, representing a meaningful decrease of 28 basis points. Management expects to utilize $33 million of the additional deposits from the Somerset County branch acquisition to replace institutional funds that have an interest cost of ~~interest bearing deposits declined by 59 basis points since~~2.95% later during the third quarter of ~~2019 and averaged 0.79%~~2021, which will result in ~~the third quarter of 2020. Also offsetting a portion of the net~~further deposit interest ~~margin pressure from~~cost savings. Overall, the lower national interest rates is a significant portion of the deposit growth occurring in non-interest bearing demand deposits. Overall, total deposit cost, including demand deposits, averaged 0.65% in the third quarter of 2020 as compared to 1.17% in the third quarter of 2019. The Company’s loan to deposit ratio averaged ~~88.6%~~85.1% in the ~~third~~second quarter of ~~2020~~2021, which we believe indicates that the Company ~~is well positioned to continue assisting our customers and the community given the impact that the COVID-19 pandemic is having on the economy and~~ 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 ~~opportunities arise.~~they recover from the COVID-19 pandemic and respond to an improving economy.

The Company experienced a ~~$55,000,~~$54,000, or ~~7.1%~~7.5%, decrease in the interest cost of borrowings in the ~~third~~second quarter of ~~2020~~2021 when compared to the ~~third~~second quarter of ~~2019.~~2020. The ~~decline~~current strong liquidity position has allowed the Company to paydown Federal Home Loan Bank (FHLB) advances, which typically cost more than similar term deposit products. On an end of period basis, at June 30, 2021, total FHLB advances were $48.1 million, which is a result of the Federal Reserve’s actions to decrease interest rates and the impact that these rate decreases have on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. The total 2020 third quarter average term advance borrowings balance increased by

~~Table of Contents~~

~~approximately $18.1~~$14.2 million, or ~~32.4%~~22.8%, ~~when compared to the third quarter of 2019 as the Company took advantage of the lower yield curve to prudently extend borrowings. The rate on certain FHLB term advances is~~ lower than the rate on overnight borrowings. As a result, the combined growth of average FHLB term advances and total average deposits resulted in less reliance on overnight borrowed funds, which decreased between years by $4.6 million, or 76.4%, for the quarter. Overall, theJune 30, 2020 ~~third quarter average of total short-term and FHLB borrowed funds was $75.3 million, which represents an increase of $13.5 million, or 21.8%, from the 2019 third quarter.~~level.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the three month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of ~~these tables,~~this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 was $5,000 ~~which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread~~ and ~~margin from a GAAP basis to a tax-equivalent basis were not material.~~

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

2020

2019

Interest

Interest

Average

Income/

Yield/

Average

Income/

Yield/

Balance

Expense

Rate

Balance

Expense

Rate

Interest earning assets:
















Loans and loans held for sale, net of unearned income

$
933,139

$
9,729

4.10
%
$
880,320

$
10,742

4.80
%
Short-term investments and bank deposits

45,553

55

0.47

12,168

90

2.92

Investment securities – AFS

145,489

1,122

3.07

152,304

1,265

3.34

Investment securities – HTM

42,270

336

3.17

40,163

341

3.32

Total investment securities

187,759

1,458

3.10

192,467

1,606

3.34

Total interest earning assets/interest income

1,166,451

11,242

3.81

1,084,955

12,438

4.52

Non-interest earning assets:










Cash and due from banks

18,512



19,803



Premises and equipment

18,352



18,881



Other assets

72,247



65,545



Allowance for loan losses

(9,792)



(8,247)



TOTAL ASSETS

$
1,265,770



$
1,180,937



Interest bearing liabilities:










Interest bearing deposits:










Interest bearing demand

$
177,242

$
64

0.16
%
$
174,452

$
427

0.97
%
Savings

107,824

36

0.13

97,281

41

0.17

Money markets

237,758

191

0.32

231,024

639

1.10

Time deposits

345,923

1,436

1.67

330,878

1,788

2.15

Total interest bearing deposits

868,747

1,727

0.79

833,635

2,895

1.37

Short-term borrowings

1,429

1

0.24

6,053

38

2.43

Advances from Federal Home Loan Bank

73,857

280

1.52

55,781

297

2.11

Guaranteed junior subordinated deferrable interest debentures

13,085

280

8.57

13,085

280

8.57

Subordinated debt

7,650

130

6.80

7,650

130

6.80

~~Table of Contents~~

Lease liabilities

3,911

28

2.85

4,122

29

2.82

Total interest bearing liabilities/interest expense

968,679


2,446

1.01

920,326


3,669

1.58

Non-interest bearing liabilities:







Demand deposits

185,108



151,096



Other liabilities

9,170



7,949



Shareholders’ equity

102,813



101,566



TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,265,770



$
1,180,937



Interest rate spread

2.80



2.94

Net interest income/ Net interest margin (non-GAAP)

8,796

2.97
%

8,769

3.18
%
Tax-equivalent adjustment

(5)



(5)

Net Interest Income (GAAP)

$
8,791



$
8,764

~~…..PROVISION FOR LOAN LOSSES…..~~The Company recorded a $675,000 provision expense for loan losses in the third quarter of 2020 as compared to a $225,000 provision expense in the third quarter of 2019. The Company continues to build the allowance for loan losses given the overall economic climate and the uncertainty that exists because of the COVID-19 pandemic. The 2020 provision expense reflects management’s decision to strengthen certain qualitative factors within our allowance for loan losses calculation as well as the third quarter rating downgrade of several loans to special mention totaling approximately $29 million from the hotel industry. The hotel industry has been especially negatively impacted from the pandemic and is demonstrating a slow pace of recovery from the economic lockdown. Additionally, during the third quarter, two substantial commercial loans previously classified as substandard were upgraded, while another troubled commercial loan paid off. The rating improvements on these loans helped limit the increase in the loan loss provision during the third quarter of 2020 which partially off set the previously mentioned rating downgrades. The Company’s asset quality continues to remain strong as evidenced by low levels of net loan charge-offs and non-performing assets. The Company experienced net loan charge-offs of $90,000, or 0.04% of total loans, in the 2020 third quarter compared to net loan recoveries of $18,000, or 0.01% of total loans, in the third quarter of 2019. Non-performing assets totaled $2.6 million, or only 0.27% of total loans, at September 30, 2020. In summary, the allowance for loan losses provided 395% coverage of non-performing assets, and was 1.08% of total loans, at September 30, 2020, compared to 397% coverage of non-performing assets, and 1.05% of total loans, at December 31, 2019. The reserve coverage of total loans, excluding PPP loans, was 1.17% (non-GAAP) at September 30, 2020. See the reconciliation of the non-GAAP measure of the reserve coverage of total loans, excluding PPP loans, within the Allowance for Loan Losses Section of the MD&A.

~~…..NON-INTEREST INCOME…..~~ Non-interest income for the third quarter of 2020 totaled $4.3 million and increased $209,000, or 5.1%, from the third quarter 2019 performance. Factors contributing to the higher level of non-interest income for the quarter included:

●

a $173,000 increase in wealth management fees as the entire wealth management division has been resilient and performed well in spite of the volatility of the markets. The wealth management division continued the effective execution of managing client accounts. In addition, there was an improved level of fee income from the financial services business unit;

●

a $115,000 decrease in service charges on deposit accounts as consumer spending activity based fees such as deposit service charges, which include overdraft fees, decreased significantly with the shutdown of the economy and has been slow to improve given the pace of the economic recovery;

●

a $102,000 increase in income from residential mortgage loan sales into the secondary market due to the strong level of residential mortgage loan production in the third quarter of 2020. Additionally, the higher level of residential mortgage loan production resulted in a $64,000 increase in mortgage related fee income;

~~Table of Contents~~

●

no investment security sale activity occurred in the third quarter of 2020 after the Company recognized an $88,000 investment security sale gain in the third quarter of 2019. The 2019 gain resulted from the opportunity to capture gains on certain securities that demonstrated higher than typical market appreciation in the low interest rate environment; and

●

~~a $43,000 increase in other income due to a higher level of other fee income that primarily resulted from a credit received from our ATM provider.~~

~~…..NON-INTEREST EXPENSE…..~~ Non-interest expense for the third quarter of 2020 totaled $11.1 million and increased by $604,000, or 5.8%, from the prior year’s third quarter. Factors contributing to the higher level of non-interest expense for the quarter included:

●

~~a $514,000 increase in salaries~~ & benefits expense due to several factors, including, pension expense, health care costs, salaries, and incentive compensation. Pension expense increased by $71,000 for the quarter between years due to the unfavorable impact that the lower interest rate environment has on the discount rates that are used to revalue the defined benefit pension obligation each year. Also contributing to the higher salaries & benefits expense, was a $90,000 increase in health care costs and a $92,000 increase in total salaries. In addition, there was a $160,000 increase in incentive compensation primarily due to commissions earned as a result of increased residential mortgage loan production;

●

a $216,000 decrease in other expense due to a lower level of meals & travel costs that is related to travel restrictions from the pandemic as well as reduced outside processing fees and telephone costs;

●

a $140,000 increase in FDIC insurance expense as this line item returned to a more normal level after the benefit from the application of the Small Bank Assessment Credit regulation expired earlier this year; and

●

a $97,000 increase in professional fees resulted from higher appraisal fees due to the significantly higher level of residential mortgage loan production, higher legal fees related to PPP loan processing, and a higher level of outside professional services.

~~…..INCOME TAX EXPENSE…..~~The Company recorded an income tax expense of $235,000, or an effective tax rate of 17.9%, in the third quarter of 2020. This compares to an income tax expense of $442,000, or an effective tax rate of 20.7%, for the third quarter of 2019. The lower effective tax rate and income tax expense in the third quarter of 2020 reflected a modest income tax credit recognized to correct an over accrual of income tax expense that occurred earlier this year.

~~NINE MONTHS ENDED SEPTEMBER 30, 2020 VS. NINE MONTHS ENDED SEPTEMBER 30, 2019~~

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

Nine months ended

Nine months ended




September 30, 2020

September 30, 2019



Net income

$
3,906

$
5,359

Diluted earnings per share

0.23

0.31

Return on average assets

0.43
%

0.61
%

Return on average equity

5.15

7.21

For the nine-month time period ended September 30, 2020, the Company reported net income of $3,906,000, or $0.23 per diluted common share. This earnings performance was a $1,453,000, or 27.1%, decline from the nine-month period of 2019 where net income totaled $5,359,000, or $0.31 per diluted common share. The earnings per share performance for the nine-month period of 2020 decreased 25.8% when compared to the nine-month period of 2019.

~~Table of Contents~~

~~…..NET INTEREST INCOME AND MARGIN…..~~~~The following table compares the Company’s net interest income performance for the first nine months of 2020 to the first nine months of 2019 (in thousands, except percentages):~~

Nine months ended

Nine months ended









September 30, 2020

September 30, 2019

$ Change

% Change



Interest income

$
35,242

$
37,362

$
(2,120)

(5.7)
%

Interest expense

8,227

10,880

(2,653)

(24.4)

Net interest income

$
27,015

$
26,482

$
533

2.0

Net interest margin

3.16
%

3.24
%

(0.08)
%
  N/M

~~N/M — not meaningful~~

The Company’s net interest income in the first nine months of 2020 increased by $533,000, or 2.0%, when compared to the first nine months of 2019. The Company’s net interest margin of 3.16% for the first nine months of 2020 declined by 8 basis point from the prior year’s first nine-month time period. Total average earning assets increased in the first nine months of 2020 by $48.7 million, or 4.5%. The increase in earning assets is due to growth in total loans and short-term investments which more than offset a decrease in total investment securities. As discussed earlier, the higher level of average earning assets was primarily attributable to the additional low yielding PPP loans and short-term investments. These low earning assets further contributed to the pressure being experienced on earning asset margins, which are already unfavorably impacted by the low interest rate environment. Both non-interest and interest bearing deposits increased since last year resulting in less reliance on short-term borrowed funds. Effective management of our funding costs along with the downward repricing of certain interest bearing liabilities tied to market indexes resulted in total interest expense decreasing between years. The decrease in total interest expense more than offset the decrease in total interest income resulting in the increase to net interest income.

Total loans averaged $908 million in the first nine months of 2020 which was $33.0 million, or 3.8%, higher than the 2019 first nine-month average. As previously discussed in the quarterly comparison of this MD&A, the growth in total average loans was due primarily to the Company’s participation in the PPP program. As of September 30, 2020, the Company processed 474 PPP loans totaling approximately $68 million to assist small businesses and our community in this difficult economy. Also, the Company recorded a total of $1.4 million of processing fee income and interest income from PPP lending activity. In addition to the PPP lending activity, residential mortgage loan activity continued to be exceptionally strong given the lower interest rate environment. Through the first nine months of 2020, residential mortgage loan production was 65.0% higher than the production level achieved for the full year of 2019. Normal commercial lending activity has been slow because of the economic uncertainty but has improved as the year progresses. Commercial loan pipelines are currently at levels that are similar to where they were prior to the pandemic. Even though total average loans increased compared to the same period last year and loan interest income was enhanced by the PPP revenue, loan interest and fee income decreased by $1.6 million, or 5.1%, for the first nine months of 2020. Again, the lower interest income reflects the challenges that this record low interest rate environment has created. New loans are being originated at lower yields and certain loans tied to LIBOR or the prime rate have repriced downward as both of these indices have moved down with the Federal Reserve’s decision to decrease the target federal funds interest rate by a total of 225 basis points since June 2019.

Total investment securities averaged $187 million in the first nine months of 2020 which was $9.9 million, or 5.0%, lower than the $197 million average for the first nine months of 2019. The Company continues to be selective when purchasing securities given the differences in the position and shape of the U.S. Treasury yield curve from the prior year. As stated in more detail in the quarterly comparison narrative of this MD&A, the lower interest rates have resulted in a significant reduction in the more typical types of securities normally purchased. The Company has been active since March purchasing corporate securities, particularly subordinated debt issued by other financial institutions. Interest income on investments decreased between the first nine months of 2020 and the first nine months of 2019 by $474,000, or 9.5%.

Our liquidity position continues to be exceptionally strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending

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activity due to the economic uncertainty. As a result, average short-term investments and bank deposits increased by $25.6 million for the first nine months of 2020 when compared to the same period of 2019. Therefore, the challenge existed to profitably deploy this excess liquidity, to which management has responded by utilizing the commercial paper market. Interest income on short-term investments increased $7,000, or 3.3%. Overall, total interest income decreased by $2.1 million, or 5.7%, in the first nine months of 2020, as compared to the same period in 2019.

Total deposit interest expense decreased by $2.4 million, or 28.7%, between time periods and reflects management’s action to effectively execute several deposit product pricing decreases. Given the low interest rate environment and the downward pressure that the low interest rates have on the net interest margin, the Company has experienced deposit cost relief. Specifically, the Company’s average cost of interest bearing deposits for the first nine months of 2020 declined by 42 basis points when compared to the same period of 2019 and averaged 0.95%. Additionally, and similar to the quarterly comparison, a significant portion of deposit growth occurred in non-interest bearing demand deposits. Therefore, total deposit cost, including demand deposits, was lower and averaged 0.79% for the first nine months of 2020. Overall, total deposits averaged $1.024 billion in the first nine months of 2020 which was $46.1 million, or 4.7%, higher than the $978 million average for 2019.

~~The Company experienced a $215,000, or 9.0%, decrease in borrowings interest expense in the first nine months of 2020 when compared to the first nine~~ months of 2019. The decline is a result of the Federal Reserve’s actions to decrease interest rates and the impact that these rate decreases have on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. In the first nine months of 2020, the average FHLB term advance borrowings balance was $63.0 million, an increase of $11.9 million, or 23.2%, from the same period during 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 total average deposits and average FHLB term advances resulted in less reliance on overnight borrowed funds, which decreased between years by $11.1 million, or 79.5%. Overall, total interest expense for the first nine months of 2020 decreased by $2.7 million, or 24.4%.

~~The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the nine month periods ended September~~ 30, 2020 and 2019. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 42. The tax equivalent adjustments to interest income on loans and municipal securities for the nine months ended September 30, 2020 and 2019 was $18,000 and $17,000,$6,000, 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.

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


	2021						2020
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Interest earning assets:
Loans and loans held for sale, net of unearned income	$	991,527	$	10,288	4.12	%	$	912,541	$	10,454	4.55	%
Short-term investments and bank deposits		50,357		11	0.09			40,446		99	0.97
Investment securities – AFS		162,282		1,171	2.89			145,579		1,159	3.20
Investment securities – HTM		50,050		373	2.98			41,709		355	3.35
Total investment securities		212,332		1,544	2.91			187,288		1,514	3.24
Total interest earning assets/interest income		1,254,216		11,843	3.77			1,140,275		12,067	4.22
Non-interest earning assets:
Cash and due from banks		17,770						17,586
Premises and equipment		17,805						18,545
Other assets		75,267						70,657
Allowance for loan losses		(11,876)						(9,373)
TOTAL ASSETS	$	1,353,182					$	1,237,690
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	213,968	$	59	0.11	%	$	172,786	$	118	0.29	%
Savings		125,545		43	0.14			102,505		34	0.13
Money markets		269,814		170	0.25			230,863		212	0.37
Time deposits		339,331		1,034	1.22			346,314		1,505	1.75
Total interest bearing deposits		948,658		1,306	0.55			852,468		1,869	0.88
Short-term borrowings		—		—	—			4,245		4	0.34
Advances from Federal Home Loan Bank		50,469		227	1.83			59,786		276	1.86
Guaranteed junior subordinated deferrable interest debentures		13,085		281	8.57			13,085		281	8.57
Subordinated debt		7,650		130	6.80			7,650		130	6.80
Lease liabilities		3,766		27	2.85			3,977		28	2.84
Total interest bearing liabilities/interest expense		1,023,628		1,971	0.77			941,211		2,588	1.10
Non-interest bearing liabilities:
Demand deposits		216,223						183,352
Other liabilities		7,322						11,791
Shareholders’ equity		106,009						101,336
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,353,182					$	1,237,690
Interest rate spread					3.00						3.12
Net interest income/ Net interest margin (non-GAAP)				9,872	3.13	%				9,479	3.30	%
Tax-equivalent adjustment				(5)						(6)
Net Interest Income (GAAP)			$	9,867					$	9,473

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Interest bearing deposits:










Interest bearing demand

$
172,365

$
424

0.33
%
$
169,125

$
1,260

1.00
%
Savings

102,498

111

0.15

97,672

122

0.17

Money markets

232,819

867

0.50

235,936

1,975

1.12

Time deposits

344,729

4,652

1.81

323,116

5,135

2.12

Total interest bearing deposits

852,411

6,054

0.95

825,849

8,492

1.37

Short-term borrowings

2,860

17

0.80

13,944

276

2.65

Advances from Federal Home Loan Bank

62,979

840

1.79

51,112

793

2.07

Guaranteed junior subordinated deferrable interest debentures

13,085

841

8.57

13,085

841

8.57

Subordinated debt

7,650

390

6.80

7,650

390

6.80

Lease liabilities

3,960

85

2.85

3,238

88

3.63

Total interest bearing liabilities/interest expense

942,945


8,227

1.16

914,878


10,880

1.59

Non-interest bearing liabilities:







Demand deposits

171,767



152,197



Other liabilities

11,192



7,501



Shareholders’ equity

101,254



99,367



TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,227,158



$
1,173,943



Interest rate spread

2.97



3.00

Net interest income/ Net interest margin (non-GAAP)

27,033

3.16
%

26,499

3.24
%
Tax-equivalent adjustment

(18)



(17)

Net Interest Income (GAAP)

$
27,015



$
26,482

…..PROVISION FOR LOAN LOSSES…..The Company recorded a ~~$1.3 million~~$100,000 provision expense for loan losses in the ~~first nine months~~second quarter of ~~2020~~2021 as compared to a ~~$175,000~~$450,000 provision ~~recovery~~expense in the ~~first nine~~ ~~months~~second quarter of ~~2019, which represents~~2020. The 2021 provision reflects an improved credit quality outlook for the overall portfolio as both classified and criticized asset levels as well as non-accrual loan balances have demonstrated improvement during the second quarter. This is a ~~net unfavorable shift~~reflection of ~~$1,475,000.~~the Company’s loan officers working effectively with our customers as the economy improves and as businesses begin to open to full capacity. The Company, however, continues to ~~build~~believe that a strong allowance for loan losses is needed

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until certain borrowers have fully recovered from the COVID-19 pandemic. Overall, non-performing assets remain well controlled and totaled $3.7 million, or 0.38% of total loans, at June 30, 2021 compared to $3.3 million, or 0.34% of total loans, at December 31, 2020. The Company experienced net loan recoveries of $21,000, or 0.01% of total loans, in the second quarter of 2021 which compares favorably to net loan charge-offs of $85,000, or 0.04% of total loans, in the second quarter of 2020. Since the end of the second quarter of 2020, the balance of the allowance for loan losses given the economic climate and the uncertainty that exists because of the COVID-19 pandemic. The 2020 provision reflects management’s decision to strengthen certain qualitative factors within our allowance for loan losses calculation as well as risk rating adjustments on several loans within the portfolio, which was discussed previously in the quarterly comparison of this MD&A.. For the first nine months of 2020, the Company experienced net loan charge-offs of $295,000, or 0.04% of total loans, compared to net loan charge-offs of $151,000, or 0.02%, in 2019. Overall, the Company continued to maintain strong asset quality as its nonperforming assets totaled $2.6increased by $2.1 million, or ~~only 0.27% of total loans,~~21.2%, to $11.8 million at ~~September~~June 30, ~~2020.~~2021. Management ~~will be~~continues to carefully ~~monitoring~~monitor asset quality with a particular focus on loan customers that have requested an additional payment ~~deferrals during this difficult economic time.~~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 315% coverage of non-performing assets, and 1.18% of total loans, at June 30, 2021, compared to 341% coverage of non-performing assets, and 1.16% of total loans, at December 31, 2020. The reserve coverage of total loans, excluding PPP loans, was 1.24% (non-GAAP) at June 30, 2021. 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. See the reconciliation of the non-GAAP measure of the reserve coverage of total loans, excluding PPP loans, within the Allowance for Loan Losses Section of the MD&A.

…..NON-INTEREST INCOME…..Non-interest income for the ~~first nine months~~second quarter of 2021 totaled $4.4 million and increased by $632,000, or 16.8%, from the second quarter of 2020 ~~totaled $11.9 million, increasing by $546,000, or 4.8%.~~performance. Factors contributing to the higher level of non-interest income for the ~~nine-month period~~quarter included:

●

a ~~$505,000~~$551,000, or 22.3%, increase in ~~income~~wealth management fees 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. The fair market value of wealth management assets has increased for the fifth consecutive quarter and is now in excess of $2.6 billion and improved from ~~residential mortgage loan sales into~~ the ~~secondary~~early pandemic fair market ~~due to the strong level of residential mortgage loan production. The higher level of residential mortgage loan production also resulted in mortgage related fees increasing~~value low point at March 31, 2020, exceeding by ~~$214,000;~~31.8%;

●

a ~~$383,000 increase~~$213,000, or 63.6%, decrease in ~~wealth management fees~~net gains on loans held for sale due to ~~an improved level~~the Company’s revised strategy to retain a higher percentage of ~~fee income from~~our residential mortgage loan production in the ~~financial services business unit. In addition,~~loan portfolio as opposed to selling into the wealth management division has continued the effective execution of managing client accounts despite the volatility of the markets and the major market value decline that occurred in late March which had been fully recovered by the end of the third quarter of 2020;secondary market;

●

a ~~$280,000 decrease~~$142,000, or 29.1%, increase in other income primarily due to higher interchange fee income that resulted from increased usage of debit cards as the pandemic caused consumers to increase online purchases and many businesses to implement contactless services by not accepting cash due to health safety concerns. Another indication that consumers are becoming more active and increasing their spending habits is service charges on deposit accounts ~~as the shutdown of the economy significantly decreased consumer spending activity based fees such as deposit service charges, including overdraft fees;~~

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●

a $208,000 decrease in other income due to the impact of the economic shutdown and, more significantly, after a gain recognized in 2019 on the sale of equity shares from a previous acquisition when no such gain occurred in 2020; andcomparing favoraby by $48,000, or 27.3%;

●

~~no investment security sale activity occurred in the first nine months of 2020 after~~ the Company recognized ~~a $118,000~~an $84,000 gain on investment security ~~sale gain~~sales in ~~the first nine months~~2021 as compared to last year when no securities were sold; and

●

a $66,000, or 43.4%, increase in bank owned life insurance income as a result of ~~2019.~~a financial floor taking hold which caused increased earnings and a higher rate of return on certain policies.

…..NON-INTEREST EXPENSE…..Non-interest expense for the ~~first nine months~~second quarter of ~~2020~~2021 totaled ~~$32.7~~$12.0 million and increased by ~~$1,494,000,~~$1.0 million, or ~~4.8%~~9.4%, from the prior ~~year.~~year’s second quarter. Factors contributing to the higher level of non-interest expense for the ~~nine-month period~~quarter included:

●

a ~~$1,188,000~~$687,000, or 48.4%, increase in other expense primarily due to the recognition of an $851,000 settlement charge in connection with the Company’s defined benefit pension plan, which is described in Note 18, Pension Benefits;

●

a $248,000, or 3.7%, increase in salaries &and employee benefits ~~expense due to increased pension expense, health care costs, total salaries, and incentive compensation. Pension expense increased by $447,000 as a result of~~expense. Factors causing the ~~unfavorable impact that the lower interest rate environment has on the discount rates that are used to revalue the defined benefit pension obligation each~~ ~~year. Also contributing to the higher salaries & benefits expense, was a $330,000~~ increase ~~in health care costs and a $285,000 increase in total salaries. In addition, there was a $327,000 increase in~~included greater incentive compensation primarily due to commissions earned as a result of ~~increased~~the strong residential mortgage loan ~~production;~~production and incentives earned from the good performance in the wealth management

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division. Also contributing to the higher salaries and employee benefits expense was increased health care costs and the normal annual employee merit salary increases;

●

a ~~$226,000~~$73,000, or 32.9%, decrease in ~~other~~supplies, postage, and freight expense ~~due~~as the majority of the personal protective equipment to ~~a lower level of meals & travel costs that is related to travel restrictions from~~protect our employees and customers during the pandemic ~~as well as reduced outside processing fees and telephone costs. In addition, earlier in 2020, the Company recognized a reduction in the unfunded commitment reserve;~~was purchased last year;

●

a ~~$213,000~~$65,000, or 4.9%, increase in ~~total~~ professional fees resulted from ~~higher appraisal~~an increased level of outside professional services related costs and increased fees due to the ~~significantly higher level of residential mortgage loan production, higher legal fees related to~~ PPP ~~loan processing,~~lending activity; and ~~a higher level of outside professional services; and~~

●

a ~~$136,000~~$25,000, or 19.2%, increase in FDIC deposit insurance expense due to an increase in the asset assessment base.

…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of $420,000, or an effective tax rate of 19.7%, in the second quarter of 2021. This compares to an income tax expense of $365,000, or an effective tax rate of 20.5%, for the second quarter of 2020. The lower effective tax rate in 2021 is primarily due to an increase in tax-free bank owned life insurance income.

SIX MONTHS ENDED JUNE 30, 2021 VS. SIX MONTHS ENDED JUNE 30, 2020

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


	Six months ended			Six months ended
	June 30, 2021			June 30, 2020
Net income	$	3,789		$	2,828
Diluted earnings per share		0.22			0.17
Return on average assets		0.58	%		0.47	%
Return on average equity		7.24			5.66

For the six-month period ended June 30, 2021, the Company reported net income of $3,789,000, or $0.22 per diluted common share. This earnings performance was a $961,000 improvement from the six-month period of 2020 when net income totaled $2,828,000, or $0.17 per diluted common share. The earnings per share performance for the six-month period of 2021 increased 29.4% when compared to the six-month period of 2020. Overall, increased net interest income, a higher 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 for the first six months of 2021.

…..NET INTEREST INCOME AND MARGIN….. The following table compares the Company’s net interest income performance for the first six months of 2021 to the first six months of 2020 (in thousands, except percentages):


	Six months ended			Six months ended
	June 30, 2021			June 30, 2020			Change			% Change
Interest income	$	23,607		$	24,005		$	(398)		(1.7)	%
Interest expense		4,048			5,781			(1,733)		(30.0)
Net interest income	$	19,559		$	18,224		$	1,335		7.3
Net interest margin		3.18	%		3.26	%		(0.08)	%	N/M

N/M — not meaningful

The Company’s net interest income in the first six months of 2021 increased by $1.3 million, or 7.3%, when compared to the first six months of 2020. The Company’s net interest margin of 3.18% for the first half of 2021 declined by eight basis points from the prior year’s first six-month time period. Total average earning assets increased in the first half of 2021 by $117.9 million, or 10.6%, due to growth in total loans, short term investments and investment securities. Both non-interest and interest bearing deposits increased resulting in less reliance on higher cost borrowed funds.

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Overall, total interest expense decreased significantly more than the decrease in total interest income, resulting in net interest income increasing for the year-to-date time period of 2021, compared to last year.

Total loans averaged $986.7 million in the first half of 2021 which was $91.9 million, or 10.3%, higher than the 2020 first six-month average. As previously mentioned, the solid economic recovery was evident in our lending activity as we continued to experience commercial loan growth throughout the first six months of 2021. Strong residential mortgage loan production also continued through the first half of 2021. Residential mortgage loan production totaled $57.7 million in the first six months of 2021 and improved by 4.3% from the production level of $55.3 million achieved in the first half of 2020. 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. In the first half of 2021, the Company retained approximately 71% of total residential mortgage loan production in the loan portfolio. This compares to a retention of approximately 26% in the first half of 2020. This strategic change allowed us to more profitably deploy a portion of the increased liquidity that we have on our balance sheet. Additionally, loan volumes were positively impacted by the second round of PPP loans, which was announced in late December 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and implemented during the middle of January 2021. The Company processed 264 PPP loans totaling $32.3 million from the second round of this program which ended in May 2021. Also, the Company recorded a total of $1.7 million of processing fee income and interest income from PPP lending activity through six months of 2021, which is $637,000 higher than the 2020 level. The combination of growth in traditional loan products and our participation in the latest round of the PPP resulted in total loans reaching a record level. This growth resulted in traditional loan fee income increasing by $180,000, or 39.4%, for the first six months of 2021 when compared to the same time period from last year. Finally, on an end of period basis, excluding total PPP loans, the total loan portfolio grew by approximately $83.4 million, or 9.7%. since the end of the second quarter of 2020.

Total investment securities averaged $201.4 million for the first six months of 2021, which is $14.9 million, or 8.0%, higher than the $186.5 million average for the first six months from last year. The Company continues to be selective in 2021 when purchasing securities due to the low interest rate environment. However, the yield curve began to steepen during the latter part of the first quarter and held this position through the end of May as the long end of the U.S. Treasury yield curve increased while the short end of the curve remained relatively stable. This resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds, and management decided to add more of these investments to our portfolio. Similar to the result of our change in strategy to retain more residential mortgage loan production in our loan portfolio, the steeper yield curve provided 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 also resulted in securities growing between years. The Company continued to purchase corporate securities, particularly subordinated debt issued by other financial institutions, along with taxable municipal securities.

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 and, similar to the loan portfolio, reaching a record level. Our deposit balances were also positively impacted in the second quarter of 2021 by the Somerset County branch acquitision, which provided approximately $42 million of additional deposits. As a result of this robust deposit growth, the Company’s liquidity position has been increasing and is exceptionally strong. Therefore, the challenge exists to profitably deploy this increased liquidity given the current low yields on short-term investment products. The significant influx of deposits onto the balance sheet resulted in short-term investment balances averaging $40.6 million for the first six months of 2021, which remains high by historical standards. Management expects to utilize $33 million of this short-term liquidity during the third quarter of 2021 to repay maturing institutional deposits that have an interest cost of 2.95% which is expected to result in a meaningful reduction in our future interest expense. Overall, for the first half of 2021, total interest income on both loans and investments decreased by $398,000, or 1.7%, between years despite the increased volumes.

Total interest expense for the first six months of 2021 decreased by $1.7 million, or 30.0%, when compared to 2020, due to lower levels of both deposit and borrowing interest expense. Through six months, deposit interest expense in 2021 is lower by $1.6 million, or 37.4%, despite the previously mentioned increase in the level of deposits. The deposit growth reflects new deposit inflows as well as the loyalty of the bank’s core deposit base. Management continued to

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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 0.48% in the first half of 2021 compared to 0.86% in the first half of 2020, representing a meaningful decrease of 38 basis points. As previously mentioned, the Company is planning to use a significant portion of the additional deposits from the branch acquisition to replace higher cost funds later during the third quarter of 2021, which will result in further deposit interest cost savings. Total borrowings interest expense in 2021 is lower by $114,000, or 7.8%, compared to the same time frame in 2020. The current strong liquidity position has allowed the Company to paydown Federal Home Loan Bank (FHLB) advances, which typically cost more than similar term deposit products. In the first half of 2021, total average short-term borrowings and advances from FHLB were $55.3 million, a decrease of $5.8 million, or 9.5%, from the same period during 2020.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the six month periods ended June 30, 2021 and 2020. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 41. The tax equivalent adjustments to interest income on loans and municipal securities for the six months ended June 30, 2021 and 2020 was $10,000 and $13,000, 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.

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Six months ended June 30 (In thousands, except percentages)


	2021						2020
			Interest						Interest
	Average		Income/		Yield/		Average		Income/		Yield/
	Balance		Expense		Rate		Balance		Expense		Rate
Interest earning assets:
Loans and loans held for sale, net of unearned income	$	986,702	$	20,620	4.17	%	$	894,819	$	20,793	4.62	%
Short-term investments and bank deposits		40,605		19	0.09			29,486		175	1.17
Investment securities – AFS		154,100		2,259	2.93			145,071		2,342	3.23
Investment securities – HTM		47,289		719	3.04			41,467		708	3.41
Total investment securities		201,389		2,978	2.96			186,538		3,050	3.27
Total interest earning assets/interest income		1,228,696		23,617	3.85			1,110,843		24,018	4.31
Non-interest earning assets:
Cash and due from banks		17,921						18,337
Premises and equipment		17,894						18,569
Other assets		72,763						69,447
Allowance for loan losses		(11,729)						(9,345)
TOTAL ASSETS	$	1,325,545					$	1,207,851
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	204,970	$	119	0.12	%	$	169,926	$	360	0.43	%
Savings		120,588		81	0.14			99,836		75	0.15
Money markets		263,548		342	0.26			230,350		676	0.59
Time deposits		339,275		2,166	1.29			344,131		3,216	1.88
Total interest bearing deposits		928,381		2,708	0.59			844,243		4,327	1.03
Short-term borrowings		590		1	0.12			3,576		16	0.88
Advances from Federal Home Loan Bank		54,709		464	1.71			57,539		560	1.98
Guaranteed junior subordinated deferrable interest debentures		13,085		561	8.57			13,085		561	8.57
Subordinated debt		7,650		260	6.80			7,650		260	6.80
Lease liabilities		3,803		54	2.84			3,985		57	2.85
Total interest bearing liabilities/interest expense		1,008,218		4,048	0.81			930,078		5,781	1.25
Non-interest bearing liabilities:
Demand deposits		205,764						165,096
Other liabilities		6,093						12,203
Shareholders’ equity		105,470						100,474
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,325,545					$	1,207,851
Interest rate spread					3.04						3.06
Net interest income/ Net interest margin (non-GAAP)				19,569	3.18	%				18,237	3.26	%
Tax-equivalent adjustment				(10)						(13)
Net Interest Income (GAAP)			$	19,559					$	18,224

…..PROVISION FOR LOAN LOSSES…..For the first six months of 2021, the Company recorded a $500,000 provision expense for loan losses compared to a $625,000 provision expense recorded in the first six months of 2020. The 2021 provision reflects an improved credit quality outlook for the overall portfolio as both classified and criticized asset levels as well as non-accrual loan balances have demonstrated improvement. The Company experienced low net loan charge-offs of $93,000, or 0.02% of total loans, in the first half of 2021 which compare favorably to net loan charge-offs of $205,000, or 0.05% of total loans, for the first half of 2020. Since the end of the second quarter of 2020,

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the balance of the allowance for loan losses increased by $2.1 million, or 21.2%, to $11.8 million at June 30, 2021. Management continues to carefully monitor asset quality with a particular focus on loan customers that have requested 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.

…..NON-INTEREST INCOME….. Non-interest income for the first six months of 2021 totaled $9.0 million and increased by $1.4 million, or 18.6%, from the first six months of 2020 performance. Factors contributing to the higher level of non-interest income for the six-month period included:

●

an $869,000, or 17.3%, increase in wealth management fees as ~~this line item returned~~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;

●

a ~~more normal~~$273,000, or 98.6%, increase in bank owned life insurance income due to the receipt of a $159,000 death claim early in the year as well as 2021 income being positively impacted by a financial floor taking hold which caused increased earnings and a higher rate of return on certain policies;

●

a $222,000, or 22.4%, increase in other income primarily due to higher interchange fee income that resulted from increased usage of debit cards as the pandemic caused consumers to increase online purchases and many businesses to implement contactless services by not accepting cash due to health safety concerns; and

●

the Company recognized an $84,000 gain on investment security sales in 2021 as compared to last year when no securities were sold.

…..NON-INTEREST EXPENSE….. Non-interest expense for the first six months of 2021 totaled $23.3 million and increased by $1.7 million, or 7.9%, from the prior year’s first six months. Factors contributing to the higher level of non-interest expense for the six-month period included:

●

an $812,000, or 30.7%, increase in other expense primarily due to the recognition of an $851,000 settlement charge in connection with the Company’s defined benefit pension plan, which is described in Note 18, Pension Benefits. Other items that contributed to the higher level ~~after~~of other expense were costs for the branch acquisition which totaled $303,000 for the first six months of 2021 and the Company recognizing $56,000 of expense associated with the unfunded commitment reserve so far in 2021 which represents a $223,000 unfavorable shift from the credit balance of $167,000 in 2020;

●

a $485,000, or 3.6%, increase in salaries and employee benefits expense due to several factors. Factors causing the increase included greater incentive compensation primarily due to commissions earned as a result of the strong residential mortgage loan production and incentives earned from the good performance in the wealth management division. Also contributing to the higher salaries and employee benefits expense was increased health care costs and employee merit salary increases;

●

a $225,000, or 9.1%, increase in professional fees resulted from an increased level of outside professional services related costs and increased fees due to the PPP lending activity;

●

an $154,000, or 98.7%, increase in FDIC deposit insurance expense due to an increase in the asset assessment base and the benefit ~~from the application~~ of the Small Bank Assessment Credit ~~regulation expired earlier this~~being fully utilized in the first quarter of 2020; and

●

a $73,000, or 18.2%, decrease in supplies, postage, and freight expense as the majority of the personal protective equipment to protect our employees and customers during the pandemic was purchased last year.

…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of ~~$966,000,~~$940,000, or an effective tax rate of ~~19.8%~~19.9%, in the first ~~nine~~six months of ~~2020.~~2021. This compares to ~~the~~an income tax expense of ~~$1,403,000,~~$731,000, or an effective tax rate of ~~20.7%~~20.5%, for the first ~~nine~~six months of ~~2019.~~2020.

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…..SEGMENT RESULTS.…..The community banking segment reported a net income contribution of ~~$2,509,000~~$2,938,000 in the ~~third~~second quarter of ~~2020~~2021 and ~~$7,788,000~~$6,258,000 for the ~~first nine~~six months of ~~2020~~2021 which was ~~down~~higher by ~~$282,000~~$183,000 from the ~~third~~second quarter of last year and by ~~$833,000~~$979,000 from the net income contribution for the ~~first nine~~six months of ~~2019.~~2020. The ~~primary driver~~improvement between years in both time periods 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 the reduction to total interest expense more than offset the reduction to total interest income. The unfavorable impact that the lower interest rate environment had on the Company’s net interest margin performance more than offset the favorable impact of commercial real estate loan growth which correspondingly resulted in loan charge income increasing in both time periods. Also, loan growth was favorably 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 and interest income totaled $765,000 for the quarter and $1,662,000 for the six months, which was lower by $260,000 for the quarter but higher by $637,000 for the six months. Overall, total loan interest income decreased by $165,000 for the quarter and by $170,000 for the six month time period. Favorably impacting net interest income was this segment experiencing deposit cost relief as total deposit interest expense decreased in both time periods 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 reached another record level ~~of net income~~which is described previously in ~~2020 was~~ the MD&A. The Company ~~recording~~recorded a ~~$675,000~~$100,000 provision expense for loan losses for the ~~third~~second quarter of 2021 compared to a $450,000 provision in the second quarter of 2020 ~~compared to a $225,000 provision expense in the third quarter of 2019~~ and a ~~$1,300,000~~$500,000 provision expense for the first ~~nine~~six months of ~~2020~~2021 compared to a ~~$175,000~~$625,000 provision ~~recovery~~expense in ~~2019 which resulted in a net unfavorable shift of $1,475,000 between years.~~2020. This was discussed previously in the Provision for Loan Losses sections within this document. The downward shift in the U.S. Treasury yield curve between years along with the Federal Reserve’s actions to decrease the fed funds rate three times in the second half of 2019 and by 150 basis points in March of 2020 negatively impacted the Company’s earning asset margin performance. As a result, total loan interest income decreased between years. Partially offsetting the unfavorable impact that the lower interest rate environment had on loan interest income was the additional processing fee income and interest income that the Company recorded from PPP lending activity, which totaled $381,000 for the third quarter and $1,406,000 for the nine months. The exceptionally strongercontinued strong level of residential mortgage loan activity in ~~2020~~2021 resulted in this segment recognizing a higher gain on the sale of residential mortgage loans in the secondary market ~~and~~in the first six months of 2021. Non-interest income was also favorably impacted by a ~~corresponding greater~~higher level of ~~mortgage related fee income. Also favorably impacting net~~other income for the six months due to higher levels of interchange income and revenue from bank owned life insurance (BOLI). Note that non-interest income was ~~this segment experiencing deposit cost relief as total deposit interest expense decreased~~stable for the quarterly comparison between ~~years~~2021 and 2020 due to ~~management’s action~~the Company electing to ~~lower pricing~~retain the majority of ~~several deposit products, given~~residential mortgage loans production in the ~~declining interest rate environment. The~~loan portfolio, as mentioned previously, thereby resulting in a decrease to ~~total deposit interest~~loan sale gains. Non-interest expense ~~occurred even though total deposits reached record levels~~compares unfavorably for both the quarterly comparison and the six months due to the Company recognizing a settlement charge on its defined benefit pension plan, which ~~is described previously~~was discussed in the MD&A. The other significant increase to non-interest expense between years for both time periods was additional expense recognized for the Somerset County branch acquisition. Finally, ~~and~~non-interest expense was unfavorably ~~impacting net income was total employee costs increasing and a slightly~~impacted by higher ~~level of~~professional fees, FDIC insurance ~~expense.~~expense and occupancy costs.

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The wealth management segment’s net income contribution was ~~$547,000~~$734,000 in the ~~third~~second quarter and ~~$1,510,000~~$1,396,000 for the first ~~nine~~ six months of ~~2020~~2021 which was ~~$70,000~~$258,000 higher than the ~~third~~second quarter of ~~2019~~2020 and ~~$145,000~~$433,000 higher for the ~~nine-month~~six-month time period. The increase is due to wealth management fees increasing ~~in both time periods~~ as ~~this segment was positively impacted by management’s effective execution of managing client accounts. The~~the entire wealth management ~~division~~group has ~~been resilient and~~ performed exceptionally well through the pandemic, actively working with clients to increase the value of their holdings in ~~spite of~~ the ~~volatility of the~~financial markets and a major market value decline that occurred in late March. The wealth management division also benefitted from a lower level of meals & travel related expenses due to travel restrictions from the pandemic.adding new business. Slightly offsetting ~~these~~this favorable ~~items~~performance were higher levels of professional fees and incentive ~~compensation and equipment costs.~~compensation. Overall, the fair market value of trust assets under administration totaled ~~$2.290~~$2.615 billion at ~~September~~June 30, ~~2020,~~2021, an ~~increase of $147 million, or 6.9%,~~improvement from the ~~September 30, 2019 total of $2.143 billion.~~early pandemic fair market value low point at March 31, 2020, exceeding by 31.8%.

The investment/parent segment reported a net loss of ~~$1,978,000~~$1,964,000 in the ~~third~~second quarter of 2021 which is a greater loss by $152,000 than the second quarter of 2020 and a net loss of ~~$5,392,000~~$3,865,000 in the first ~~nine~~ six months of ~~2020~~2021 which is a greater loss by ~~$399,000 for the quarter and by $765,000 for the nine-month period.~~$451,000. The increased loss in both time periods was due to ~~securities~~short-term investments interest income decreasing by a higher amount than the decrease to total ~~short term~~short-term FHLB borrowings interest ~~expense. Also,~~expense as well as interest cost from FHLB term advances. The decrease to short-term ~~investment~~investments interest income ~~decreased for~~occurred even though the ~~quarter and only demonstrated a slight increase for the nine months even though~~balance of short-term investments increased as the Company experienced exceptionally strong growth in its liquidity position between years from the significant influx of deposits that resulted from the government stimulus ~~programs. However,~~programs and branch acquisition. Sightly offsetting the ~~yield~~lower level of short-term investments interest income was an increase in interest income from the securities portfolio due to a higher volume of securities. As a result of the increased level of liquidity on ~~commercial paper decreased significantly during~~ the ~~third quarter~~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 ~~resulted in reduced interest income. In 2019,~~also favorably impacting this segment ~~benefited from~~was the recognition of an ~~investment~~$84,000 security sale gain ~~and there~~in 2021 after no gain was ~~no such gain in 2020, as discussed previously. Finally, the greater net loss at the investment/parent segment results from higher salaries and group insurance expense.~~recognized last year.

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…..BALANCE SHEET…..The Company’s total consolidated assets were ~~$1.26~~$1.4 billion at ~~September~~June 30, ~~2020,~~2021, which increased by ~~$86.9~~$80.9 million, or ~~7.4%~~6.3%, from the December 31, ~~2019~~2020 asset level. This change was related, primarily, to increased levels of cash and cash equivalents, investment securities, and loans. Specifically, ~~short-term investments~~cash and cash equivalents increased ~~$16.2~~$28.7 million, or ~~430.6%~~91.2%, as the Company ~~utilized the liquidity created by the~~experienced a significant influx of deposits ~~that resulted~~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 acquisition completed in May 2021, which provided approximately $42 million of additional deposits. Total investment securities increased $31.0 million, or 16.5%, as the steepening of the U.S. Treasury yield curve in the latter part of the first quarter 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 ~~commercial paper.~~corporate securities, particularly subordinated debt issued by other financial institutions, along with taxable municipal securities. In addition, loans, net of unearned fees, and loans held for sale increased by ~~$61.8~~$14.5 million, or ~~7.0%~~1.5%, as a result of the Company’s participation in the ~~Paycheck Protection Program (PPP)~~PPP and higher levels of commercial real estate and residential mortgage loan production. ~~In addition, total investment securities~~Finally, other assets increased ~~$2.7~~$8.2 million, or ~~1.5%~~80.6%, as ~~the market value~~a result of a reclassification of the ~~available for sale securities increased since year-end,~~ accrued ~~interest income receivable increased $2.3~~pension liability, which had a positive balance of $11.4 million ~~or 65.9%,~~as of June 30, 2021, from other liabilities to other assets. The balance of the accrued pension liability became a positive value as a result of the $4.0 million contribution made earlier in 2021 and the revaluation of the obligation due to the ~~loan modifications executed related to COVID-19 which deferred~~settlement charge during the ~~payment~~second quarter of ~~interest on certain loans for a period of three to six months, and other assets increased $2.6 million, or 42.2%, driven by an increase in the fair value of the interest rate swap assets.~~2021.

Total deposits increased by ~~$81.7~~$113.8 million, or ~~8.5%~~10.8%, in the first ~~nine~~six months of ~~2020. This~~2021. As previously mentioned, this robust growth is the result of ~~consumers’ behavior to, 1) deposit their PPP funds into deposit accounts, 2) deposit~~the government stimulus ~~checks into~~programs and the ~~bank, and 3) keep higher balances in their accounts since they are not able to spend as much as they otherwise would because of the COVID-19 pandemic’s impact to the economy and our community.~~Somerset County branch acquisition. As of ~~September~~June 30, ~~2020,~~2021, the 25 largest depositors represented ~~20.7%~~21.2% of total deposits, which ~~is a slight decrease~~remained relatively unchanged from December 31, ~~2019~~2020 when it was ~~20.9%~~21.1%. Total borrowings have ~~increased~~decreased by ~~$4.1~~$41.7 million, or ~~4.1%~~36.5%, since year-end ~~2019.~~2020. The ~~increase~~decrease was driven, primarily, by a ~~higher~~lower level of both short-term borrowings and FHLB term advances. Specifically, at June 30, 2021, the Company had no short-term borrowings outstanding as compared to $24.7 million at December 31, 2020. In addition, FHLB term advances ~~which totaled $74.3 million at September 30, 2020, an increase of $20.7~~decreased by $16.8 million, or ~~38.5%. The increase in FHLB term advances more than offset the decrease in short-term borrowings. Specifically, short-term borrowings decreased by $16.5 million, or 73.7%~~25.9%, and totaled ~~$5.9 million.~~$48.1 million at June 30, 2021. The current strong liquidity position has allowed the Company ~~has utilized~~to paydown FHLB advances. However, the Company continues to utilize the FHLB term advances to help manage interest rate ~~risk and the lower U.S. Treasury yield curve and its flat shape allowed the Company to prudently extend borrowings.~~risk.

The Company’s total shareholders’ equity increased by ~~$4.8~~$6.9 million, or 6.6%, over the first ~~nine~~six months of ~~2020~~2021 due to the retention of earnings more than offsetting our common stock dividend payments to ~~shareholders~~shareholders. Additionally, the recording of the settlement charge in connection with the defined benefit pension plan and the ~~impact of our common stock buyback program. Additionally, the improved value~~revaluation of the ~~investment securities portfolio~~pension obligation had a positive impact on accumulated other comprehensive loss.

The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of ~~13.02%~~12.79%, and a common equity tier 1 capital ratio of ~~10.09%~~9.94% at ~~September~~June 30, ~~2020.~~2021. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of ~~September~~June 30, ~~2020,~~2021, the Company’s book value per common share was ~~$6.06~~$6.52 and its tangible book value per common share was ~~$5.36~~$5.71 (non-GAAP). When compared to

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December 31, ~~2019,~~2020, book value per common share improved by $0.40 per common share and tangible book value per common share ~~each~~ improved by ~~$0.28~~$0.29 per common share. The tangible common equity to tangible assets ratio was ~~7.34%~~7.24% (non-GAAP) at ~~September~~June 30, ~~2020~~2021 and declined by 14five basis points when compared to December 31, ~~2019.~~2020.

The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. The following table sets forth the calculation of the Company’s

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tangible common equity ratio and tangible book value per share at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 (in thousands, except share and ratio data):


	September 30,			December 31,			June 30,			December 31,
	2020			2019			2021			2020
Total shareholders’ equity	$	103,369		$	98,614		$	111,272		$	104,399
Less: Goodwill		11,944			11,944
Tangible equity		91,425			86,670
Less: Intangible assets								13,785			11,944
Tangible common equity								97,487			92,455
Total assets		1,258,131			1,171,184			1,360,583			1,279,713
Less: Goodwill		11,944			11,944
Less: Intangible assets								13,785			11,944
Tangible assets		1,246,187			1,159,240			1,346,798			1,267,769
Tangible common equity ratio (non-GAAP)		7.34	%		7.48	%		7.24	%		7.29	%
Total shares outstanding		17,058,644			17,057,871			17,075,000			17,060,144
Tangible book value per share (non-GAAP)	$	5.36		$	5.08		$	5.71		$	5.42

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


	June 30,			December 31,			June 30,
	2021			2020			2020
Total accruing loan delinquency (past due 30 to 89 days)	$	1,904		$	5,504		$	3,394
Total non-accrual loans		3,713			2,500			2,325
Total non-performing assets including TDRs*		3,727			3,331			3,122
Accruing loan delinquency, as a percentage of total loans, net of unearned income		0.19	%		0.56	%		0.37	%
Non-accrual loans, as a percentage of total loans, net of unearned income		0.37			0.26			0.25
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned		0.38			0.34			0.34
Non-performing assets as a percentage of total assets		0.27			0.26			0.25
As a percent of average loans, net of unearned income:
Annualized net charge-offs		0.02			0.03			0.05
Annualized provision for loan losses		0.10			0.26			0.14
Total classified loans (loans rated substandard or doubtful)**	$	10,002		$	11,829		$	16,596

September 30,

December 31,

September 30,

2020

2019

2019

Total accruing loan delinquency (past due 30 to 89 days)

$
2,534

$
2,956

$
2,397

Total non-accrual loans

1,724

1,487

1,080

Total non-performing assets including TDRs*

2,603

2,339

1,957

Accruing loan delinquency, as a percentage of total loans, net of unearned income

0.27
%

0.33
%

0.27
%
Non-accrual loans, as a percentage of total loans, net of unearned income

0.18

0.17

0.12

Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned

0.27

0.26

0.22

Non-performing assets as a percentage of total assets

0.21

0.20

0.17

As a percent of average loans, net of unearned income:







Annualized net charge-offs

0.04

0.02

0.02

Annualized provision (credit) for loan losses

0.19

0.09

(0.03)

Total classified loans (loans rated substandard or doubtful)**

$
7,619

$
16,338

$
7,687

*	Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments, (iii) performing loans classified as a troubled debt restructuring and (iv) other real estate owned.

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

Overall, the Company continued to maintain good asset quality in the first ~~nine~~six months of ~~2020~~2021 as evidenced by low levels of non-accrual loans, non-performing assets, and loan delinquency levels that continue to be below 1% of total

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loans. The ~~Company did experience~~increase in non-accrual loans is the result of three commercial loan relationships, two of which were previously designated as a troubled debt restructure (TDR), being transferred into non-accrual status during the first half of 2021, which was partially offset by a decrease in ~~total classified loans~~non-accrual residential mortgage loans. Additionally, the Company experienced a substantial decrease in accruing loan delinquency primarily attributable to the curing of commercial account delinquency during the ~~third quarter of 2020 as two substantial commercial loans previously classified as substandard were upgraded and another troubled commercial loan paid off.~~period.

The Company isremains committed to prudently working ~~prudently~~ with and supporting our borrowers that have been ~~negatively impacted from~~hardest hit by the ~~effects of this difficult economy~~pandemic by granting them loan payment modifications. Management iscontinues to carefully ~~monitoring~~monitor asset quality with a particular focus on customers that have requested payment ~~deferrals and does expect a significant number of~~deferrals. The Asset Quality Task Force meets at least monthly to review these particular relationships, receiving input from the ~~remaining loans~~business lenders regarding their ongoing discussions with ~~payment modifications to return to normal payment status during~~ the ~~fourth quarter of 2020.~~borrowers. Deferral extension requests ~~will be~~are considered based upon the customer’s needs and their impacted industry, borrower and guarantor capacity to service debt and ~~current as well as any additional~~issued regulatory guidance. See the

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disclosures regarding COVID-19 related modifications within the Non-Performing Assets Including Troubled Debt Restructurings (TDR) 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 ~~September~~June 30, ~~2020,~~2021, the 25 largest credits represented ~~23.2%~~22.1% of total loans outstanding, which represents a decrease from the ~~third~~second quarter of ~~2019~~2020 when it was ~~24.3%~~23.4%.

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


	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2020			2019			2019			2021			2020			2020
Allowance for loan losses	$	10,284		$	9,279		$	8,345		$	11,752		$	11,345		$	9,699
Allowance for loan losses as
a percentage of each of the following:
total loans, net of unearned income		1.08	%		1.05	%		0.95	%		1.18	%		1.16	%		1.04	%
total accruing delinquent loans
(past due 30 to 89 days)		405.84			313.90			348.14			617.23			206.12			285.77
total non-accrual loans		596.52			624.01			772.69			316.51			453.80			417.16
total non-performing assets		395.08			396.71			426.42			315.32			340.59			310.67

The Company recorded a ~~$1.3 million~~$500,000 provision expense for loan losses in the first ~~nine~~six months of ~~2020~~2021 compared to a ~~$175,000~~$625,000 provision ~~recovery~~expense in the first ~~nine~~six months of ~~2019, which represents a net unfavorable shift of $1,475,000 between periods.~~2020. As mentioned previously, the Company continues to ~~build~~believe that a strong allowance for loan losses is needed until certain borrowers have fully recovered from the COVID-19 pandemic. The 2021 provision reflects an improved credit quality outlook for the overall portfolio as both classified and criticized asset levels as well as non-accrual loan balances have demonstrated improvement. As a result of the provision expense sharply exceeding net loan charge-offs over the last 12 months, the balance in the allowance for loan losses ~~given the overall economic climate and the uncertainty that exists because of the COVID-19 pandemic.~~increased by $2.1 million, or 21.2%, to $11.8 million at June 30, 2021. The Company’s asset quality continues to remain strong as evidenced by low levels of net loan charge-offs and non-performing assets. Note that the reserve coverage to total loans, excluding PPP loans, is ~~1.17%~~1.24% (non-GAAP) at ~~September~~June 30, ~~2020.~~2021.

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 ~~September~~June 30, ~~2020~~2021 (in thousands, except percentages).

September 30,

2020

Allowance for loan losses

$
10,284

Total loans, net of unearned income⁽¹⁾

949,367

Reserve coverage

1.08
%
Reserve coverage to total loans, excluding PPP loans:

Allowance for loan losses

$
10,284

Total loans, net of unearning income⁽¹⁾

949,367

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~~PPP loans~~	~~(68,460)~~
	~~880,907~~
~~Non-GAAP reserve coverage~~	~~1.17~~	%

~~(1)~~

~~Includes loans and loans held for sale~~


	JUNE 30,
	2021
Allowance for loan losses	$	11,752
Total loans, net of unearned income		992,712
Reserve coverage		1.18	%
Reserve coverage to total loans, excluding PPP loans:
Allowance for loan losses	$	11,752
Total loans, net of unearned income		992,712
PPP loans		(48,098)
		944,614
Non-GAAP reserve coverage		1.24	%

…..LIQUIDITY…..The Company’s liquidity position continues to be exceptionally strong due to the significant influx of deposits that resulted from the government stimulus programs, customers continuing to exhibit a degree of

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caution and ~~as customers continue to be cautious and are~~ demonstrating a reduced level of spending activity due to the economic uncertainty. Also, deposit levels were positively impacted in the second quarter of 2021 by the Somerset County branch acquisition. As a result, total deposits reached aanother record level, averaging ~~$1.054~~$1.165 billion for the ~~third~~second quarter of ~~2020.~~2021. In addition, the Company’s loyal core deposit base continues to prove to be a source of strength for the Company during periods of market volatility. The core deposit base is adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth. ~~The Company also responded to the uncertain economic environment by enhancing it’s already strong liquidity position as average~~Average short-term investments ~~increased by $28.7 million in~~grew during the ~~third~~second quarter of ~~2020 compared~~2021 and continue to be higher than they have been historically which presents the ~~third quarter of 2019. The~~ challenge of profitably deploying this excess liquidity ~~resulted in management investing in high quality commercial paper~~ given ~~their~~the current low yields on short ~~maturities and higher rates of return. However,~~term investment products. An additional challenge is the uncertainty regarding the duration that these excess funds will remain on the balance sheet which will be determined by customer behavior as the ~~third quarter progressed,~~economic conditions change. On an end of period basis, at June 30, 2021, total interest bearing deposits and short-term investments increased by $34.4 million since December 31, 2020. In addition to the ~~yields on~~ commercial ~~paper demonstrated~~real estate loan growth experienced during the year and greater level of residential mortgage loans being retained in the portfolio, a ~~steady decline, making it even~~portion of this increased liquidity was invested in additional securities to more ~~challenging to find a suitable return for our excess liquidity. The significant inflow of deposits are being held in~~profitably deploy these ~~low yielding products while their durability is assessed.~~funds. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio averaged ~~88.6%~~85.1% in the ~~third~~second quarter of ~~2020. We are~~2021. The Company has ample capacity to continue to grow its loan portfolio and is strongly positioned ~~well~~ to ~~support our local economy and~~ provide the necessary assistance to our customers and our community ~~partners during this period of~~as they continue their recovery from the COVID-19 pandemic asand respond to an improving economy. We are also well aspositioned 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 ~~$19.0~~$28.7 million from December 31, ~~2019,~~2020, to ~~$41.2~~$60.2 million at ~~September~~June 30, ~~2020,~~2021, due to ~~$84.4~~$28.9 million of cash provided by financing activities and $9.3 million of cash provided by operating activities which more than offset ~~$60.9~~$9.5 million of cash used in investing ~~activities and $4.4 million of cash used in operating~~ activities. Within financing activities, deposits increased by ~~$81.7~~$71.4 million while total short-term and FHLB borrowings ~~also increased as term advances increased~~decreased by ~~$20.7 million and more than offset total short-term borrowings decreasing by $16.5~~$41.5 million. Within investing activities, cash advanced for new loans originated totaled ~~$207.0~~$163.7 million and was ~~$59.0~~$19.9 million higher than the ~~$148.0~~$143.7 million of cash received from loan principal payments. Within operating activities, ~~$71.3~~$10.6 million of mortgage loans held for sale were originated while ~~$69.7~~$17.3 million of mortgage loans were sold into the secondary market.

The holding company had ~~$7.4~~$5.5 million of cash, short-term investments, and investment securities at ~~September~~June 30, ~~2020.~~2021. Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. At ~~September~~June 30, ~~2020,~~2021, our subsidiary Bank had ~~$11.4~~$10.2 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from the Trust Company to 75% of annual net income. Overall, we believe that the holding company has ~~good~~sufficient liquidity to meet its trust preferred debt service requirements, its subordinated debt interest payments, and its current dividend payout level with respect to its common ~~stock dividend.~~stock.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investments, ~~time~~interest bearing deposits with banks, and federal funds sold. These assets totaled ~~$41.2~~$60.2 million and ~~$22.2~~$31.5 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~September~~June 30, ~~2020,~~2021, the Company had ~~$348~~$388 million of overnight borrowing availability at the FHLB, ~~$30~~$33 million of short-term borrowing availability at

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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 ~~10.09%~~9.94%, the

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tier 1 capital ratio was ~~11.23%~~11.05%, and the total capital ratio was ~~13.02%~~12.79% at ~~September~~June 30, ~~2020.~~2021. The Company’s tier 1 leverage ratio was ~~9.39%~~8.89% at ~~September~~June 30, ~~2020.~~2021. We anticipate that we will maintain our strong capital ratios throughout the remainder of ~~2020.~~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 ~~334%~~364% of regulatory capital at ~~September~~June 30, ~~2020.~~2021. While we work through the COVID-19 pandemic, our focus is on preserving capital to support customer lending and ~~managing heightened credit risk due~~allow the Company to take advantage of opportunities that should result from the ~~downturn~~continued improvement in the ~~economy.~~economy during the second half of 2021. Additionally, we currently believe that we have sufficient capital and earnings power to continue to pay our common stock cash dividend at its current rate of $0.025 per quarter.

In the first quarter of 2020, the Company completed the common stock repurchase program, which it had announced on April 16, 2019, where it bought back 526,000 shares, or 3% of its common stock, over a 12-month period at a total cost of $2.23 million. Specifically, during the first three months of 2020, the Company was able to repurchase 35,962 shares of its common stock and return $151,000 of capital to its shareholders through this program. Evaluation of a new common stock buyback program is on hold. At ~~September~~June 30, ~~2020,~~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…..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 level of interest rates. Each rate scenario contains unique prepayment and

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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		VARIABILITY OF		CHANGE IN
	NET INTEREST		MARKET VALUE OF		NET INTEREST		MARKET VALUE OF
INTEREST RATE SCENARIO	INCOME		PORTFOLIO EQUITY		INCOME		PORTFOLIO EQUITY
200 bp increase	8.5	%	60.1	%	6.8	%	37.9	%
100 bp increase	4.7		33.4		3.6		20.6
100 bp decrease	(1.3)		(24.5)		(3.1)		0.7

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

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…..OFF BALANCE SHEET ARRANGEMENTS…..The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company had various outstanding commitments to extend credit approximating ~~$235.7~~$246.2 million and standby letters of credit of ~~$13.5~~$13.4 million as of ~~September~~June 30, ~~2020.~~2021. 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.

…..REGULATORY UPDATE…..A final rule adopted by the federal banking agencies in February 2019 provides banking organizations with the option to phase in, over a three-year period, the adverse day-one regulatory capital effects of the adoption of ASU 2019-10, “Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” (the “CECL accounting standard”). On March 27, 2020, the federal banking agencies issued an interim final rule that gives banking organizations that implement CECL before the end of 2020 the option to delay for two years CECL’s adverse effects on regulatory capital (CECL Interim Final Rule). This is in addition to the three-year transition period already in place, resulting in an optional five-year transition. The agencies noted this relief is being provided in order to allow banking organizations to better focus on lending to creditworthy households and businesses affected by recent strains on the U.S. economy caused by COVID-19. Comments on the CECL Interim Final Rule are due by May 15, 2020.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), was enacted into law on March 27, 2020, provides banking organizations with the option to not comply with CECL until the earlier of (i) the termination date of the national emergency concerning COVID-19 declared by the President under the National Emergencies Act or (ii) December 31, 2020. The federal banking agencies issued a statement on March 31, 2020, indicating that banking organizations that elect to use the optional, temporary statutory relief will be able to elect the remaining period of regulatory capital relief provided under the CECL Interim Final Rule after the end of the statutory relief period. Alternatively, banking organizations may adopt the CECL accounting standard as planned in 2020 and use the regulatory capital relief provided under the CECL Interim Final Rule starting at the time of their adoption of CECL.

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~~included “stay-at-home orders” that ~~allow~~allowed only essential businesses to operate. Financial

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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 (the 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 authorizes 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 modifications relating to COVID-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.

~~On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure~~ The suspension of ~~capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required~~TDR identification and accounting triggered by the ~~Economic Growth, Regulatory Relief and Consumer Protection Act.~~effects of the COVID-19 pandemic was extended by the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. The ~~CBLR framework is designed to reduce burden~~period established by ~~removing~~Section 4013 of the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. The CARES Act ~~reduced the minimum ratio~~was extended to 8% beginning in the 2nd quarter of 2020 through December 31, 2020, increasing to 8.5% for 2021 and returning to 9% beginning January 1, 2022. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The CBLR framework will be available for banks to use in their March 31, 2020, Call Report. The CARES Act provides that if a qualifying community bank falls below the CBLR, it “shall have a reasonable grace period to satisfy” the CBLR. This provision terminates on the earlier of ~~December 31, 2020~~January 1, 2022 or 60 days after the date on which the ~~President declares that the coronavirus~~national COVID-19 emergency ~~is terminated. The Company did not opt into the CBLR framework for the Bank at this time.~~

The Federal Reserve has established several lending facilities that are intended to support the flow of credit to households, businesses, and governments. One of these facilities is the Paycheck Protection Program Liquidity Facility (PPPLF) which was set up to allow the Federal Reserve Banks to extend credit to financial institutions that originate PPP loans, taking the loans as collateral at face value. On April 9, 2020, the federal banking agencies issued an interim finalterminates.

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rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on the leverage capital ratios of these organizations. Also, 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 Federal Reserve has also announced that it will be creating main street lending facilities to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses. The Company may participate in some or all of them.

Additionally, on March 15, 2020, the Federal Reserve reduced the target range for the federal funds rate to 00% to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The Federal Reserve has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020.

…..CRITICAL ACCOUNTING POLICIES AND ESTIMATES…..The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles (GAAP) and conform to general practices within the banking industry. Accounting and reporting policies for the pension liability, allowance for loan losses, ~~goodwill,~~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 ~~liabilities~~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 employees selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 18 of the Notes to Unaudited Consolidated Financial Statements.

ACCOUNT — Allowance for Loan Losses

BALANCE SHEET REFERENCE — Allowance for loan losses

INCOME STATEMENT REFERENCE — Provision ~~(credit)~~ for loan losses

DESCRIPTION

The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to significant change. Also, the allocation of the 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 ~~$7.9~~$9.1 million, or 77%, of the total allowance for loan losses at ~~September~~June 30, ~~2020~~2021 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends,

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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 — ~~Goodwill~~Intangible assets

BALANCE SHEET REFERENCE — ~~Goodwill~~Intangible assets

INCOME STATEMENT REFERENCE — Goodwill impairment and Other expense

DESCRIPTION

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

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

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

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

ACCOUNT — Income Taxes

BALANCE SHEET REFERENCE — Net deferred tax asset

INCOME STATEMENT REFERENCE — Provision for income ~~tax expense~~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

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increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of ~~September~~June 30, ~~2020,~~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.

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

ACCOUNT — Investment Securities

BALANCE SHEET REFERENCE — Investment securities

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

DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At ~~September~~June 30, ~~2020,~~2021, the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate and taxable municipal securities. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

…..FORWARD LOOKING STATEMENT…..

THE STRATEGIC FOCUS:

AmeriServ Financial is committed to increasing shareholder value by striving for consistently improving financial performance; providing our customers with products and exceptional service for every step in their lifetime financial journey; cultivating an employee atmosphere rooted in trust, empowerment and growth; and serving our communities through employee involvement and a philanthropic spirit. We will strive to provide our shareholders with consistently improved financial performance; the products, services and know-how needed to forge lasting banking for life customer relationships; a work environment that challenges and rewards staff; and the manpower and financial resources needed to make a difference in the communities we serve. Our strategic initiatives will focus on these four key constituencies:

●

Shareholders — We strive to increase earnings per share; identifying and managing revenue growth and expense control and reduction; and managing risk. Our goal is to increase value for AmeriServ shareholders by growing earnings per share and narrowing the financial performance gap between AmeriServ and its peer banks. We try to return earnings to shareholders through a combination of dividends and share repurchases subject to maintaining sufficient capital to support balance sheet growth and economic uncertainty. We strive to educate our employee base as to the meaning/ importance of earnings per share as a performance measure. We will develop a value added combination for increasing revenue and controlling expenses that is rooted in developing and offering high-quality financial products and services; an existing branch network; electronic banking capabilities with 24/7 convenience; and providing truly exceptional customer service. We will explore branch consolidation opportunities and further leverage union affiliated revenue streams, prudently manage the

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Company’s risk profile to improve asset yields and increase profitability and continue to identify and implement technological opportunities and advancements to drive efficiency for the holding company and its affiliates.

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●

Customers — The Company expects to provide exceptional customer service, identifying opportunities to enhance the Banking for Life philosophy by providing products and services to meet the financial needs in every step through a customer’s life cycle, and further defining the role technology plays in anticipating and satisfying customer needs. We anticipate providing leading banking systems and solutions to improve and enhance customers’ Banking for Life experience. We will provide customers with a comprehensive offering of financial solutions including retail and business banking, home mortgages and wealth management at one location. We have upgraded and modernized select branches to be more inviting and technologically savvy to meet the needs of the next generation of AmeriServ customers without abandoning the needs of our existing demographic.

●

Staff — We are committed to developing high-performing employees, establishing and maintaining a culture of trust and effectively and efficiently managing staff attrition. We will employ a work force succession plan to manage anticipated staff attrition while identifying and grooming high performing staff members to assume positions with greater responsibility within the organization. We will employ technological systems and solutions to provide staff with the tools they need to perform more efficiently and effectively.

●

Communities — We will continue to promote and encourage employee community involvement and leadership while fostering a positive corporate image. This will be accomplished by demonstrating our commitment to the communities we serve through assistance in providing affordable housing programs for low-to-moderate-income families; donations to qualified charities; and the time and talent contributions of AmeriServ staff to a wide-range of charitable and civic organizations.

This Form 10-Q contains various forward-looking statements and includes assumptions concerning the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan” or similar expressions. These forward-looking statements are based upon current expectations, are subject to risk and uncertainties and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Form 10-Q. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company’s control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.

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

Table of Contents

The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement.

Item 3…..QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK…..

The Company manages market risk, which for the Company is primarily interest rate risk, through its asset liability management process and committee, see further discussion in Interest Rate Sensitivity section of the MD&A.

Item 4…..CONTROLS AND PROCEDURES…..

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of ~~September~~June 30, ~~2020,~~2021, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2020,~~2021, are effective.

(b) Changes in Internal Controls. There have been no changes in AmeriServ Financial Inc.’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

There are no material proceedings to which the Company or any of our subsidiaries are a party or by which, to the Company’s knowledge, we, or any of our subsidiaries, are threatened. All legal proceedings presently pending or threatened against the Company or our subsidiaries involve routine litigation incidental to our business or that of the subsidiary involved and are not material in respect to the amount in controversy.

Item 1A. Risk Factors

Not Applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Table of Contents

Item 6. Exhibits


3.1	Amended and Restated Articles of Incorporation as amended through August 11, 2011 (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8 (File No. 333-176869) filed on September 16, 2011).
3.2	Bylaws, as amended and restated on April 2, 2020 (Incorporated by reference to Exhibit 3.1 to the Current report on Form 8-K filed on April 6, 2020).
15.1	Report of S.R. Snodgrass, P.C. regarding unaudited interim financial statement information.
15.2	Awareness Letter of S.R. Snodgrass, P.C.
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101	The following information from AMERISERV FINANCIAL, INC.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2020~~2021 formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to the Unaudited Consolidated Financial Statements.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	AmeriServ Financial, Inc.
	Registrant

Date: ~~November 6, 2020~~August 9, 2021	/s/ Jeffrey A. Stopko
	Jeffrey A. Stopko
	President and Chief Executive Officer

Date: ~~November 6, 2020~~August 9, 2021	/s/ Michael D. Lynch
	Michael D. Lynch
	~~Senior~~Executive Vice President and Chief Financial Officer


	Pennsylvania	25-1424278
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Main & Franklin Streets, P.O. Box 430, Johnstown, PA		15907-0430
(Address of principal executive offices)		(Zip Code)


Title Of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock	ASRV	The NASDAQ Stock Market LLC
8.45% Beneficial Unsecured Securities, Series A (AmeriServ Financial Capital Trust I)	ASRVP	The NASDAQ Stock Market LLC

Large Accelerated Filer ◻	Accelerated Filer ◻	Non-accelerated Filer ⌧	Smaller Reporting Company ⌧☒
			Emerging growth Company ◻☐


Class		Outstanding at ~~November~~August 1, ~~2020~~2021
Common Stock, par value $0.01		~~17,058,644~~17,075,000


	Page No.

PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements	23
Consolidated Balance Sheets (Unaudited) – ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020	23
Consolidated Statements of Operations (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	34
Consolidated Statements of Comprehensive Income (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	45
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020	56
Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~	6
~~Notes to Unaudited Consolidated Financial Statements .~~2020	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3. Quantitative and Qualitative Disclosure About Market Risk	60
Item 4. Controls and Procedures .	60
PART II. OTHER INFORMATION	60
Item 1. Legal Proceedings	60
Item 1A. Risk Factors	60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .	60
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures .	60
Item 5. Other Information	60
Item 6. Exhibits	61


	September 30, 2020		December 31, 2019
ASSETS
Cash and due from depository institutions	$	17,986	$	15,642
Interest bearing deposits		3,214		2,755
Short-term investments		20,008		3,771
Cash and cash equivalents		41,208		22,168
Investment securities:
Available for sale, at fair value		141,716		141,749
Held to maturity (fair value $45,308 on September 30, 2020 and $41,082 on December 31, 2019)		42,636		39,936
Loans held for sale		7,587		4,868
Loans		943,246		883,090
Less: Unearned income		1,466		384
Less: Allowance for loan losses		10,284		9,279
Net loans		931,496		873,427
Premises and equipment:
Operating lease right-of-use asset		781		846
Financing lease right-of-use asset		3,024		3,078
Other premises and equipment, net		14,533		14,643
Accrued interest income receivable		5,722		3,449
Goodwill		11,944		11,944
Bank owned life insurance		39,354		38,916
Net deferred tax asset		3,216		3,976
Federal Home Loan Bank stock		4,153		3,985
Federal Reserve Bank stock		2,125		2,125
Other assets		8,636		6,074
TOTAL ASSETS	$	1,258,131	$	1,171,184
LIABILITIES
Non-interest bearing deposits	$	179,922	$	136,462
Interest bearing deposits		862,313		824,051
Total deposits		1,042,235		960,513
Short-term borrowings		5,894		22,412
Advances from Federal Home Loan Bank		74,336		53,668
Operating lease liabilities		798		865
Financing lease liabilities		3,161		3,163
Guaranteed junior subordinated deferrable interest debentures		12,966		12,955
Subordinated debt		7,528		7,511
Total borrowed funds		104,683		100,574
Other liabilities		7,844		11,483
TOTAL LIABILITIES		1,154,762		1,072,570
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,687,463 shares issued and 17,058,644 shares outstanding on September 30, 2020; 26,650,728 shares issued and 17,057,871 shares outstanding on December 31, 2019		267		267
Treasury stock at cost, 9,628,819 shares on September 30, 2020 and 9,592,857 shares on December 31, 2019		(83,280)		(83,129)
Capital surplus		145,965		145,888
Retained earnings		54,375		51,759
Accumulated other comprehensive loss, net		(13,958)		(16,171)
TOTAL SHAREHOLDERS' EQUITY		103,369		98,614
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,258,131	$	1,171,184


Acquisition of Riverview Bank Branches
Non-cash assets acquired
Loans	$	36
Other premises and equipment, net		158
Intangible assets		1,844
	$	2,038
Non-cash liabilities assumed
Non-interest bearing deposits	$	(7,372)
Interest bearing deposits		(35,060)
Other liabilities		(37)
	$	(42,469)

Cash and cash equivalents acquired	$	258


	SEPTEMBER 30, 2020								June 30, 2021
			GROSS		GROSS						GROSS		GROSS
			UNREALIZED		UNREALIZED		FAIR				UNREALIZED		UNREALIZED		FAIR
	COST BASIS		GAINS		LOSSES		VALUE		COST BASIS		GAINS		LOSSES		VALUE

	(IN THOUSANDS)								(IN THOUSANDS)
U.S. Agency	$	3,079	$	197	$	—	$	3,276	$	6,725	$	161	$	—	$	6,886
U.S. Agency mortgage-backed securities		66,198		2,850		(6)		69,042		83,598		1,806		(580)		84,824
Municipal		17,409		1,242		—		18,651		19,358		1,106		(12)		20,452
Corporate bonds		50,586		557		(396)		50,747		52,538		1,206		(63)		53,681
Total	$	137,272	$	4,846	$	(402)	$	141,716	$	162,219	$	4,279	$	(655)	$	165,843


	SEPTEMBER 30, 2020
	LESS THAN 12 MONTHS				12 MONTHS OR LONGER				TOTAL
	FAIR		UNREALIZED		FAIR		UNREALIZED		FAIR		UNREALIZED
	VALUE		LOSSES		VALUE		LOSSES		VALUE		LOSSES
U.S. Agency	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Agency mortgage-backed securities		1,438		(5)		138		(1)		1,576		(6)
Municipal		1,044		(1)		752		(50)		1,796		(51)
Corporate bonds and other securities		15,741		(259)		6,859		(141)		22,600		(400)
Total	$	18,223	$	(265)	$	7,749	$	(192)	$	25,972	$	(457)


	September 30, 2020
	Available for sale				Held to maturity
	Cost Basis		Fair Value		Cost Basis		Fair Value
Within 1 year	$	5,060	$	5,093	$	3,400	$	3,403
After 1 year but within 5 years		22,222		22,536		7,629		8,054
After 5 years but within 10 years		48,851		50,395		17,115		18,607
After 10 years but within15 years		19,253		20,120		9,395		9,946
Over 15 years		41,886		43,572		5,097		5,298
Total	$	137,272	$	141,716	$	42,636	$	45,308


			Paycheck		Commercial loans		Commercial loans
	Commercial		Protection		secured by owner		secured by non-owner
	and industrial		Program		occupied real estate		occupied real estate		Total
1-4 unit residential	$	1,488	$	—	$	107	$	5,920	$	7,515
Multifamily/apartments/student housing		—		—		418		54,963		55,381
Office		32,793		9,924		10,075		34,452		87,244
Retail		7,997		1,786		21,213		116,830		147,826
Industrial/manufacturing/warehouse		89,382		29,463		17,751		43,093		179,689
Hotels		372		1,287		—		41,830		43,489
Eating and drinking places		855		13,630		4,424		538		19,447
Amusement and recreation		245		106		3,345		46		3,742
Mixed use		—		—		2,802		66,435		69,237
Other		19,504		12,264		30,684		14,751		77,203
Total	$	152,636	$	68,460	$	90,819	$	378,858	$	690,773


	Three months ended September 30, 2020										Three months ended June 30, 2021
	Balance at		Charge-				Provision		Balance at		Balance at		Charge-				Provision		Balance at
	June 30, 2020		Offs		Recoveries		(Credit)		September 30, 2020		March 31, 2021		Offs		Recoveries		(Credit)		June 30, 2021
Commercial	$	3,784	$	(111)	$	1	$	(638)	$	3,036	$	3,572	$	(25)	$	0	$	(13)	$	3,534
Commercial loans secured by non-owner occupied real estate		3,619		—		10		1,261		4,890		5,448		0		11		76		5,535
Real estate-residential mortgage		1,216		(19)		24		4		1,225		1,329		0		29		30		1,388
Consumer		119		(14)		19		(4)		120		121		(11)		17		(4)		123
Allocation for general risk		961		—		—		52		1,013		1,161		0		0		11		1,172
Total	$	9,699	$	(144)	$	54	$	675	$	10,284	$	11,631	$	(36)	$	57	$	100	$	11,752


	Three months ended September 30, 2019										Three months ended June 30, 2020
	Balance at		Charge-				Provision		Balance at		Balance at		Charge-				Provision		Balance at
	June 30, 2019		Offs		Recoveries		(Credit)		September 30, 2019		March 31, 2020		Offs		Recoveries		(Credit)		June 30, 2020
Commercial	$	2,538	$	(1)	$	8	$	464	$	3,009	$	3,860	$	0	$	0	$	(76)	$	3,784
Commercial loans secured by non-owner occupied real estate		3,425		—		12		(81)		3,356		3,288		0		7		324		3,619
Real estate-residential mortgage		1,218		—		25		(46)		1,197		1,141		(90)		16		149		1,216
Consumer		124		(36)		10		28		126		120		(29)		11		17		119
Allocation for general risk		797		—		—		(140)		657		925		0		0		36		961
Total	$	8,102	$	(37)	$	55	$	225	$	8,345	$	9,334	$	(119)	$	34	$	450	$	9,699


	Nine months ended September 30, 2019										Six months ended June 30, 2020
	Balance at		Charge-				Provision		Balance at		Balance at		Charge-				Provision		Balance at
	December 31, 2018		Offs		Recoveries		(Credit)		September 30, 2019		December 31, 2019		Offs		Recoveries		(Credit)		June 30, 2020
Commercial	$	3,057	$	(1)	$	13	$	(60)	$	3,009	$	3,951	$	0	$	0	$	(167)	$	3,784
Commercial loans secured by non-owner occupied real estate		3,389		(63)		36		(6)		3,356		3,119		0		21		479		3,619
Real estate-residential mortgage		1,235		(71)		101		(68)		1,197		1,159		(182)		22		217		1,216
Consumer		127		(206)		40		165		126		126		(91)		25		59		119
Allocation for general risk		863		—		—		(206)		657		924		0		0		37		961
Total	$	8,671	$	(341)	$	190	$	(175)	$	8,345	$	9,279	$	(273)	$	68	$	625	$	9,699


	At September 30, 2020												At June 30, 2021
			Commercial Loans												Commercial Loans
			Secured by												Secured by
			Non-Owner		Real Estate-										Non-Owner		Real Estate-
			Occupied		Residential				Allocation for						Occupied		Residential				Allocation for
	Commercial		Real Estate		Mortgage		Consumer		General Risk		Total		Commercial		Real Estate		Mortgage		Consumer		General Risk		Total
Loans:
Individually evaluated for impairment	$	859	$	8	$	—	$	—			$	867	$	2,265	$	7	$	0	$	0			$	2,272
Collectively evaluated for impairment		311,056		378,850		233,811		17,196				940,913		277,187		428,267		268,595		16,391				990,440
Total loans	$	311,915	$	378,858	$	233,811	$	17,196			$	941,780	$	279,452	$	428,274	$	268,595	$	16,391			$	992,712
Allowance for loan losses:
Specific reserve allocation	$	98	$	8	$	—	$	—	$	—	$	106	$	670	$	7	$	0	$	0	$	0	$	677
General reserve allocation		2,938		4,882		1,225		120		1,013		10,178		2,864		5,528		1,388		123		1,172		11,075
Total allowance for loan losses	$	3,036	$	4,890	$	1,225	$	120	$	1,013	$	10,284	$	3,534	$	5,535	$	1,388	$	123	$	1,172	$	11,752


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Non-interest income:
In-scope of Topic 606
Wealth management fees	$	2,604	$	2,431	$	7,629	$	7,246	$	3,022	$	2,471	$	5,894	$	5,025
Service charges on deposit accounts		206		321		668		948		224		176		425		462
Other		485		471		1,271		1,325		520		396		962		786
Non-interest income (in-scope of topic 606)		3,295		3,223		9,568		9,519		3,766		3,043		7,281		6,273
Non-interest income (out-of-scope of topic 606)		1,009		872		2,335		1,838		633		724		1,732		1,326
Total non-interest income	$	4,304	$	4,095	$	11,903	$	11,357	$	4,399	$	3,767	$	9,013	$	7,599


	At December 31, 2019
			Commercial Loans
			Secured by
			Non-Owner		Real Estate-
			Occupied		Residential				Allocation for
	Commercial		Real Estate		Mortgage		Consumer		General Risk		Total
Loans:
Individually evaluated for impairment	$	816	$	8	$	—	$	—			$	824
Collectively evaluated for impairment		264,761		363,627		235,239		18,255				881,882
Total loans	$	265,577	$	363,635	$	235,239	$	18,255			$	882,706
Allowance for loan losses:
Specific reserve allocation	$	84	$	8	$	—	$	—	$	—	$	92
General reserve allocation		3,867		3,111		1,159		126		924		9,187
Total allowance for loan losses	$	3,951	$	3,119	$	1,159	$	126	$	924	$	9,279


	At September 30,��2020										At June 30, 2021
					IMPAIRED										IMPAIRED
					LOANS WITH										LOANS WITH
	IMPAIRED LOANS WITH				NO SPECIFIC						IMPAIRED LOANS WITH				NO SPECIFIC
	SPECIFIC ALLOWANCE				ALLOWANCE		TOTAL IMPAIRED LOANS				SPECIFIC ALLOWANCE				ALLOWANCE		TOTAL IMPAIRED LOANS
									UNPAID										UNPAID
	RECORDED		RELATED		RECORDED		RECORDED		PRINCIPAL		RECORDED		RELATED		RECORDED		RECORDED		PRINCIPAL
	INVESTMENT		ALLOWANCE		INVESTMENT		INVESTMENT		BALANCE		INVESTMENT		ALLOWANCE		INVESTMENT		INVESTMENT		BALANCE

	(IN THOUSANDS)										(IN THOUSANDS)
Commercial	$	859	$	98	$	—	$	859	$	859	$	2,265	$	670	$	0	$	2,265	$	2,300
Commercial loans secured by non-owner occupied real estate		8		8		—		8		30		7		7		0		7		29
Total impaired loans	$	867	$	106	$	—	$	867	$	889	$	2,272	$	677	$	0	$	2,272	$	2,329


	At September 30, 2020										At December 31, 2020
			SPECIAL										SPECIAL
	PASS		MENTION		SUBSTANDARD		DOUBTFUL		TOTAL		PASS		MENTION		SUBSTANDARD		DOUBTFUL		TOTAL

	(IN THOUSANDS)										(IN THOUSANDS)
Commercial and industrial	$	142,948	$	6,336	$	3,352	$	—	$	152,636	$	134,186	$	13,722	$	3,254	$	—	$	151,162
Paycheck Protection Program (PPP)		68,460		—		—		—		68,460		58,344		—		—		—		58,344
Commercial loans secured by owner occupied real estate		87,844		1,889		1,086		—		90,819		92,189		2,154		1,143		—		95,486
Commercial loans secured by non-owner occupied real estate		349,901		27,472		1,477		8		378,858		371,815		23,980		4,948		8		400,751
Total	$	649,153	$	35,697	$	5,915	$	8	$	690,773	$	656,534	$	39,856	$	9,345	$	8	$	705,743


	At September 30, 2020						At June 30, 2021
			NON-						NON-
	PERFORMING		PERFORMING		TOTAL		PERFORMING		PERFORMING		TOTAL

	(IN THOUSANDS)						(IN THOUSANDS)
Real estate – residential mortgage	$	232,115	$	1,696	$	233,811	$	267,149	$	1,446	$	268,595
Consumer		17,196		—		17,196		16,383		8		16,391
Total	$	249,311	$	1,696	$	251,007	$	283,532	$	1,454	$	284,986


	At June 30, 2021
													90 DAYS
			30 – 59		60 – 89								PAST DUE
			DAYS		DAYS		90 DAYS		TOTAL		TOTAL		AND STILL
	CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS		ACCRUING

	(IN THOUSANDS)
Commercial and industrial	$	136,766	$	846	$	0	$	0	$	846	$	137,612	$	0
Paycheck Protection Program (PPP)		48,098		0		0		0		0		48,098	$	0
Commercial loans secured by owner occupied real estate		93,742		0		0		0		0		93,742		0
Commercial loans secured by non-owner occupied real estate		428,274		0		0		0		0		428,274		0
Real estate – residential mortgage		266,036		257		875		1,427		2,559		268,595		0
Consumer		16,349		30		4		8		42		16,391		0
Total	$	989,265	$	1,133	$	879	$	1,435	$	3,447	$	992,712	$	0


Loans in accrual status	# of Loans	Current Balance		Concession Granted
Commercial and industrial	1	$	47	Extension of maturity date with a below market interest rate


Loans in non-accrual status	# of Loans	Current Balance		Concession Granted
Commercial and industrial	1	$	486	Subsequent modification of a TDR - Extension of maturity date with a below market interest rate


	At June 30, 2021				At December 31, 2020
			% of Outstanding				% of Outstanding
	Balance		Non-PPP Loans		Balance		Non-PPP Loans
	(in thousands)				(in thousands)
CRE/Commercial	$	25,792	3.8	%	$	47,037	7.0	%
Home Equity/Consumer		3	0.0			83	0.1
Residential Mortgage		864	0.5			1,943	1.3
Total	$	26,659	2.8		$	49,063	5.3


	At December 31, 2020
				Weighted
Type	Maturing	Amount		Average Rate
Open Repo Plus	Overnight	$	24,702	0.41	%
FHLB Advances	2021		24,336	1.00
	2022		20,888	2.03
	2023		15,568	1.59
	2024		4,197	1.19
Total FHLB advances			64,989	1.48
Total short-term and FHLB borrowings		$	89,691	1.19	%


	June 30, 2021				December 31, 2020

	Operating		Financing		Operating		Financing
Weighted-average remaining term (years)	11.1		15.7		11.4		16.0
Weighted-average discount rate	3.51	%	3.54	%	3.49	%	3.52	%


	Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾
	For the nine		For the nine
	months ended		months ended		Affected line item in the
Details about accumulated other comprehensive loss components	September 30, 2020		September 30, 2019		statement of operations
Realized (gains) losses on sale of securities
	$	—	$	(118)	Net realized gains on investment securities
		—		25	Provision for income taxes
	$	—	$	(93)
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	1,833	$	1,236	Other expense
		(385)		(260)	Provision for income taxes
	$	1,448	$	976
Total reclassifications for the period	$	1,448	$	883


	Three months
	ended
	September 30, 2020
Tax-equivalent net interest income⁽¹⁾	$	34,599
Average earning assets		1,166,451
Net interest margin		2.97	%
Net interest margin, excluding PPP lending activity and corresponding increase in total deposits from government related assistance programs:
Tax-equivalent net interest income⁽¹⁾	$	34,599
PPP loan income⁽¹⁾		(1,515)
Borrowings expense to fund PPP loans⁽¹⁾		564
Non-GAAP tax-equivalent net interest income		33,648
Average earning assets		1,166,451
Average PPP loans		(67,970)
Non-GAAP average earning assets		1,098,481
Non-GAAP net interest margin		3.06	%

Lease liabilities		3,911		28	2.85			4,122		29	2.82
Total interest bearing liabilities/interest expense		968,679		2,446	1.01			920,326		3,669	1.58
Non-interest bearing liabilities:
Demand deposits		185,108						151,096
Other liabilities		9,170						7,949
Shareholders’ equity		102,813						101,566
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,265,770					$	1,180,937
Interest rate spread					2.80						2.94
Net interest income/ Net interest margin (non-GAAP)				8,796	2.97	%				8,769	3.18	%
Tax-equivalent adjustment				(5)						(5)
Net Interest Income (GAAP)			$	8,791					$	8,764

Interest bearing deposits:
Interest bearing demand	$	172,365	$	424	0.33	%	$	169,125	$	1,260	1.00	%
Savings		102,498		111	0.15			97,672		122	0.17
Money markets		232,819		867	0.50			235,936		1,975	1.12
Time deposits		344,729		4,652	1.81			323,116		5,135	2.12
Total interest bearing deposits		852,411		6,054	0.95			825,849		8,492	1.37
Short-term borrowings		2,860		17	0.80			13,944		276	2.65
Advances from Federal Home Loan Bank		62,979		840	1.79			51,112		793	2.07
Guaranteed junior subordinated deferrable interest debentures		13,085		841	8.57			13,085		841	8.57
Subordinated debt		7,650		390	6.80			7,650		390	6.80
Lease liabilities		3,960		85	2.85			3,238		88	3.63
Total interest bearing liabilities/interest expense		942,945		8,227	1.16			914,878		10,880	1.59
Non-interest bearing liabilities:
Demand deposits		171,767						152,197
Other liabilities		11,192						7,501
Shareholders’ equity		101,254						99,367
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,227,158					$	1,173,943
Interest rate spread					2.97						3.00
Net interest income/ Net interest margin (non-GAAP)				27,033	3.16	%				26,499	3.24	%
Tax-equivalent adjustment				(18)						(17)
Net Interest Income (GAAP)			$	27,015					$	26,482