UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to_____________

Commission File Number 0-11204

AmeriServ Financial, Inc.

(Exact name of registrant as specified in its charter)


	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)

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

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


Title Of Each Class	Trading Symbol	Name of Each Exchange On Which Registered
Common Stock	ASRV	The NASDAQ Stock Market LLC

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at ~~November~~August 1, ~~2022~~2023
Common Stock, par value $0.01		~~17,114,617~~17,147,270

Table of Contents

AmeriServ Financial, Inc.

INDEX


	Page No.

PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets (Unaudited) – ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022	3
Consolidated Statements of Operations (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	4
Consolidated Statements of Comprehensive ~~(Loss) Income~~Loss (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	6
Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3441
Item 3. Quantitative and Qualitative Disclosure About Market Risk	5461
Item 4. Controls and Procedures	5561
PART II. OTHER INFORMATION	5561
Item 1. Legal Proceedings	5561
Item 1A. Risk Factors	5561
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5561
Item 3. Defaults Upon Senior Securities	5561
Item 4. Mine Safety Disclosures	5561
Item 5. Other Information	5562
Item 6. Exhibits	5663

Table of Contents

Item 1. Financial Statements

AmeriServ Financial, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022
ASSETS
Cash and due from depository institutions	$	24,383	$	24,748	$	13,720	$	18,830
Interest bearing deposits		4,133		10,942
Short-term investments		—		5,411
Interest bearing deposits and short-term investments						3,366		4,132
Cash and cash equivalents		28,516		41,101		17,086		22,962
Investment securities:
Available for sale, at fair value		174,300		163,171
Held to maturity (fair value $55,788 on September 30, 2022 and $55,516 on December 31, 2021)		62,567		53,751
Investment securities, net of allowance for credit losses:
Available for sale, at fair value (allowance for credit losses $926 on June 30, 2023)						170,427		179,508
Held to maturity (fair value $55,429 on June 30, 2023 and $55,192 on December 31, 2022; allowance for credit losses $109 on June 30, 2023)						61,832		61,878
Loans held for sale		—		983		560		59
Loans		979,843		985,880		987,988		991,109
Less: Unearned income		393		826		327		343
Less: Allowance for loan losses		10,672		12,398
Less: Allowance for credit losses						12,221		10,743
Net loans		968,778		972,656		975,440		980,023
Premises and equipment:
Operating lease right-of-use asset		645		667		599		630
Financing lease right-of-use asset		2,480		2,684		2,277		2,413
Other premises and equipment, net		14,450		14,082		14,195		14,460
Accrued interest income receivable		4,620		3,984		4,790		4,804
Intangible assets:
Goodwill		13,611		13,611		13,611		13,611
Core deposit intangible		135		158		113		128
Bank owned life insurance		39,016		38,842		39,607		38,895
Net deferred tax asset		4,339		—		4,315		2,789
Federal Home Loan Bank stock		3,907		2,692		4,430		5,754
Federal Reserve Bank stock		2,125		2,125		2,125		2,125
Other assets		30,559		25,053		34,314		33,835
TOTAL ASSETS	$	1,350,048	$	1,335,560	$	1,345,721	$	1,363,874
LIABILITIES
Non-interest bearing deposits	$	214,547	$	211,106	$	196,487	$	195,123
Interest bearing deposits		938,266		928,272		931,082		913,414
Total deposits		1,152,813		1,139,378		1,127,569		1,108,537
Short-term borrowings		26,274		—		56,676		88,641
Advances from Federal Home Loan Bank		28,522		42,653		16,117		19,765
Operating lease liabilities		658		682		612		643
Financing lease liabilities		2,736		2,899		2,568		2,680
Subordinated debt		26,634		26,603		26,665		26,644
Total borrowed funds		84,824		72,837		102,638		138,373
Net deferred tax liability		—		934
Other liabilities		10,824		5,862		11,949		10,786
TOTAL LIABILITIES		1,248,461		1,219,011		1,242,156		1,257,696
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,741,436 shares issued and 17,112,617 shares outstanding on September 30, 2022; 26,710,319 shares issued and 17,081,500 shares outstanding on December 31, 2021		267		267
Treasury stock at cost, 9,628,819 shares on September 30, 2022 and December 31, 2021		(83,280)		(83,280)
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,776,089 shares issued and 17,147,270 shares outstanding on June 30, 2023; 26,746,436 shares issued and 17,117,617 shares outstanding on December 31, 2022						268		267
Treasury stock at cost, 9,628,819 shares on June 30, 2023 and December 31, 2022						(83,280)		(83,280)
Capital surplus		146,198		146,069		146,343		146,225
Retained earnings		65,052		60,005		64,604		65,486
Accumulated other comprehensive loss, net		(26,650)		(6,512)		(24,370)		(22,520)
TOTAL SHAREHOLDERS' EQUITY		101,587		116,549		103,565		106,178
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,350,048	$	1,335,560	$	1,345,721	$	1,363,874

See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three months ended					Nine months ended				Three months ended				Six months ended
	September 30,					September 30,				June 30,				June 30,
	2022			2021		2022		2021		2023		2022		2023		2022
INTEREST INCOME
Interest and fees on loans	$	10,691		$	9,830	$	29,912	$	30,440	$	12,609	$	9,725	$	24,885	$	19,221
Interest bearing deposits		9			2		11		6
Short-term investments		63			26		143		41
Interest bearing deposits and short-term investments											73		64		130		82
Investment securities:
Available for sale		1,490			1,133		3,917		3,392		1,722		1,304		3,492		2,427
Held to maturity		447			381		1,272		1,100		475		434		946		825
Total Interest Income		12,700			11,372		35,255		34,979		14,879		11,527		29,453		22,555
INTEREST EXPENSE
Deposits		1,720			1,189		3,472		3,897		5,019		956		9,208		1,752
Short-term borrowings		36			—		39		1		335		3		829		3
Advances from Federal Home Loan Bank		127			217		459		681		128		156		210		332
Financing lease liabilities		25			26		76		80		24		25		48		51
Guaranteed junior subordinated deferrable interest debentures		—			383		—		944
Subordinated debt		263			331		789		591		263		263		526		526
Total Interest Expense		2,171			2,146		4,835		6,194		5,769		1,403		10,821		2,664
Net Interest Income		10,529			9,226		30,420		28,785		9,110		10,124		18,632		19,891
Provision (credit) for loan losses		500			350		(225)		850
Net Interest Income after Provision (Credit) for Loan Losses		10,029			8,876		30,645		27,935
Provision (credit) for credit losses											43		(325)		1,222		(725)
Net Interest Income after Provision (Credit) for Credit Losses											9,067		10,449		17,410		20,616
NON-INTEREST INCOME
Wealth management fees		2,813			3,137		8,954		9,031		2,789		2,976		5,527		6,141
Service charges on deposit accounts		289			260		824		685		280		263		546		535
Net gains on loans held for sale		53			15		183		632		38		35		64		130
Mortgage related fees		27			81		92		310		34		32		67		65
Net realized gains on investment securities		—			—		—		84
Gain on sale of Visa Class B shares											—		—		1,748		—
Bank owned life insurance		329			221		769		771		242		231		481		440
Other income		815			702		1,977		1,916		479		601		936		1,162
Total Non-Interest Income		4,326			4,416		12,799		13,429		3,862		4,138		9,369		8,473
NON-INTEREST EXPENSE
Salaries and employee benefits		7,071			6,910		21,439		20,718		7,728		6,963		14,903		14,368
Net occupancy expense		698			651		2,136		1,980		713		697		1,485		1,438
Equipment expense		393			390		1,205		1,183		422		415		837		812
Professional fees		1,656			1,379		4,490		4,089		1,907		838		3,215		1,468
Data processing and IT expense											1,080		937		2,158		1,890
Supplies, postage and freight		172			158		481		486		164		144		343		309
Miscellaneous taxes and insurance		350			318		1,022		922		323		349		662		672
Federal deposit insurance expense		125			170		400		480		175		130		300		275
Branch acquisition costs		—			87		—		390
Other expense		1,262			1,457		4,143		4,615		665		1,637		1,237		2,357
Total Non-Interest Expense		11,727			11,520		35,316		34,863		13,177		12,110		25,140		23,589

PRETAX INCOME		2,628	��		1,772		8,128		6,501
Provision for income taxes		526			341		1,627		1,281
NET INCOME	$	2,102		$	1,431	$	6,501	$	5,220
PRETAX INCOME (LOSS)											(248)		2,477		1,639		5,500
Provision (credit) for income taxes											(61)		496		311		1,101
NET INCOME (LOSS)										$	(187)	$	1,981	$	1,328	$	4,399
PER COMMON SHARE DATA:
Basic:
Net income	$	0.12		$	0.08	$	0.38	$	0.31
Net income (loss)										$	(0.01)	$	0.12	$	0.08	$	0.26
Average number of shares outstanding		17,111			17,075		17,105		17,071		17,147		17,109		17,139		17,102
Diluted:
Net income	$	0.12		$	0.08	$	0.38	$	0.31
Net income (loss)										$	(0.01)	$	0.12	$	0.08	$	0.26
Average number of shares outstanding		17,145			17,114		17,146		17,114		17,147		17,149		17,148		17,148

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~(LOSS) INCOME~~LOSS

(In thousands)

(Unaudited)

Three months ended

Nine months ended


September 30,

September 30,

2022

2021

2022

2021
COMPREHENSIVE (LOSS) INCOME








Net income

$
2,102

$
1,431

$
6,501

$
5,220
Other comprehensive (loss) income








Pension obligation change for defined benefit plan

(59)

2,422

(4,577)

8,190
Income tax effect

12

(509)

961

(1,720)
Unrealized holding losses on available for sale securities arising during period

(8,064)

(589)

(20,915)

(1,362)
Income tax effect

1,694

123

4,393

286
Reclassification adjustment for net realized gains on available for sale securities included in net income

—

—

—

(84)
Income tax effect

—

—

—

18
Other comprehensive (loss) income

(6,417)

1,447

(20,138)

5,328
Comprehensive (loss) income

$
(4,315)

$
2,878

$
(13,637)

$
10,548


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
COMPREHENSIVE LOSS
Net income (loss)	$	(187)	$	1,981	$	1,328	$	4,399
Other comprehensive loss
Pension obligation change for defined benefit plan		—		(5,681)		—		(4,518)
Income tax effect		—		1,193		—		949
Unrealized holding losses on available for sale securities arising during period		(3,241)		(5,433)		(2,673)		(12,851)
Income tax effect		681		1,141		562		2,699
Fair value change for interest rate hedge		1,159		—		330		—
Income tax effect		(243)		—		(69)		—
Other comprehensive loss		(1,644)		(8,780)		(1,850)		(13,721)
Comprehensive loss	$	(1,831)	$	(6,799)	$	(522)	$	(9,322)

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data)

(Unaudited)

Three months ended

Nine months ended


September 30,

September 30,

2022

2021

2022

2021
COMMON STOCK








Balance at beginning of period

$
267

$
267

$
267

$
267
New common shares issued for exercise of stock options (3,520 shares for the three months ended September 30, 2022 and 31,117 and 14,856 shares for the nine months ended September 30, 2022 and 2021, respectively)

—

—

—

—
Balance at end of period

267

267

267

267
TREASURY STOCK








Balance at beginning of period

(83,280)

(83,280)

(83,280)

(83,280)
Treasury stock purchased

—

—

—

—
Balance at end of period

(83,280)

(83,280)

(83,280)

(83,280)
CAPITAL SURPLUS








Balance at beginning of period

146,175

146,025

146,069

145,969
New common shares issued for exercise of stock options (3,520 shares for the three months ended September 30, 2022 and 31,117 and 14,856 shares for the nine months ended September 30, 2022 and 2021, respectively)

11

—

91

39
Stock option expense

12

13

38

30
Balance at end of period

146,198

146,038

146,198

146,038
RETAINED EARNINGS








Balance at beginning of period

63,463

57,577

60,005

54,641
Net income

2,102

1,431

6,501

5,220
Cash dividend declared on common stock ($0.030 amd $0.025 per share for the three months ended September 30, 2022 and 2021, respectively and $0.085 amd $0.075 per share for the nine months ended September 30, 2022 and 2021, respectively)

(513)

(427)

(1,454)

(1,280)
Balance at end of period

65,052

58,581

65,052

58,581
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET








Balance at beginning of period

(20,233)

(9,317)

(6,512)

(13,198)
Other comprehensive (loss) income

(6,417)

1,447

(20,138)

5,328
Balance at end of period

(26,650)

(7,870)

(26,650)

(7,870)
TOTAL SHAREHOLDERS’ EQUITY

$
101,587

$
113,736

$
101,587

$
113,736


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
COMMON STOCK
Balance at beginning of period	$	268	$	267	$	267	$	267
New common shares issued for exercise of stock options (13 shares for the three months ended June 30, 2022 and 29,653 and 27,597 shares for the six months ended June 30, 2023 and 2022, respectively)		—		—		1		—
Balance at end of period		268		267		268		267
TREASURY STOCK
Balance at beginning of period		(83,280)		(83,280)		(83,280)		(83,280)
Treasury stock purchased		—		—		—		—
Balance at end of period		(83,280)		(83,280)		(83,280)		(83,280)
CAPITAL SURPLUS
Balance at beginning of period		146,331		146,162		146,225		146,069
New common shares issued for exercise of stock options (13 shares for the three months ended June 30, 2022 and 29,653 and 27,597 shares for the six months ended June 30, 2023 and 2022, respectively)		—		—		94		80
Stock option expense		12		13		24		26
Balance at end of period		146,343		146,175		146,343		146,175
RETAINED EARNINGS
Balance at beginning of period		65,306		61,996		65,486		60,005
Net income (loss)		(187)		1,981		1,328		4,399
Cash dividend declared on common stock ($0.030 for the three months ended June 30, 2023 and 2022 and $0.060 and $0.055 for the six months ended June 30, 2023 and 2022, respectively)		(515)		(514)		(1,029)		(941)
Cumulative effect adjustment for adoption of ASU 2016-13		—		—		(1,181)		—
Balance at end of period		64,604		63,463		64,604		63,463
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
Balance at beginning of period		(22,726)		(11,453)		(22,520)		(6,512)
Other comprehensive loss		(1,644)		(8,780)		(1,850)		(13,721)
Balance at end of period		(24,370)		(20,233)		(24,370)		(20,233)
TOTAL SHAREHOLDERS’ EQUITY	$	103,565	$	106,392	$	103,565	$	106,392

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine months ended				Six months ended
	September 30,				June 30,
	2022		2021		2023		2022
OPERATING ACTIVITIES
Net income	$	6,501	$	5,220	$	1,328	$	4,399
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(225)		850
Provision (credit) for credit losses						1,222		(725)
Depreciation and amortization expense		1,531		1,508		1,055		1,029
Amortization expense of core deposit intangible		23		11		15		16
Amortization of fair value adjustment on acquired time deposits		(83)		(58)		(23)		(63)
Net amortization of investment securities		98		189		29		63
Net realized gains on investment securities — available for sale		—		(84)
Net amortization of deferred loan fees						(61)		(396)
Net gains on loans held for sale		(183)		(632)		(64)		(130)
Net amortization of deferred loan fees		(486)		(967)
Origination of mortgage loans held for sale		(8,239)		(10,467)		(3,961)		(7,518)
Sales of mortgage loans held for sale		9,405		17,349		3,524		7,377
(Increase) decrease in accrued interest receivable		(636)		148
Decrease in accrued interest payable		(571)		(731)
Decrease (increase) in accrued interest receivable						14		(110)
Increase (decrease) in accrued interest payable						1,234		(346)
Earnings on bank-owned life insurance		(769)		(771)		(481)		(440)
Deferred income taxes		601		1,023		(257)		455
Stock compensation expense		38		30		24		26
Net change in operating leases		(69)		(71)		(31)		(48)
Other, net		(5,082)		(4,968)		(1,073)		(2,541)
Net cash provided by operating activities		1,854		7,579		2,494		1,048
INVESTING ACTIVITIES
Purchase of investment securities — available for sale		(49,372)		(48,951)		(4,999)		(34,396)
Purchase of investment securities — held to maturity		(11,104)		(15,272)		(1,943)		(7,114)
Proceeds from maturities of investment securities — available for sale		15,755		30,314		10,484		12,427
Proceeds from maturities of investment securities — held to maturity		2,244		5,490		1,848		1,836
Proceeds from sales of investment securities — available for sale		1,519		960
Purchase of regulatory stock		(4,405)		(1,245)		(10,033)		(1,100)
Proceeds from redemption of regulatory stock		3,190		2,842		11,357		1,404
Long-term loans originated		(163,679)		(232,781)		(86,294)		(104,816)
Principal collected on long-term loans		168,215		209,771		89,399		125,814
Purchases of premises and equipment		(1,621)		(834)		(623)		(1,033)
Proceeds from sale of other real estate owned and repossessed assets		14		—		39		14
Cash acquired in branch acquisition, net		—		40,431
Proceeds from life insurance policies		670		645
Net cash used in investing activities		(38,574)		(8,630)
Net cash provided by (used in) investing activities						9,235		(6,964)
FINANCING ACTIVITIES
Net increase in deposit balances		13,518		47,097		19,055		3,441
Net increase (decrease) in other short-term borrowings		26,274		(24,702)
Net decrease in other short-term borrowings						(31,965)		—
Principal borrowings on advances from Federal Home Loan Bank						10,920		—
Principal repayments on advances from Federal Home Loan Bank		(14,131)		(21,336)		(14,568)		(8,625)
Principal payments on financing lease liabilities		(163)		(156)		(112)		(108)
Redemption of guaranteed junior subordinated deferrable interest debentures		—		(13,085)
Subordinated debt issuance, net		—		26,597
Redemption of subordinated debt		—		(7,650)
Stock options exercised		91		39		94		80
Common stock dividend paid		(1,454)		(1,280)		(1,029)		(941)
Net cash provided by financing activities		24,135		5,524
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(12,585)		4,473
Net cash used in financing activities						(17,605)		(6,153)
NET DECREASE IN CASH AND CASH EQUIVALENTS						(5,876)		(12,069)
CASH AND CASH EQUIVALENTS AT JANUARY 1		41,101		31,504		22,962		41,101
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30	$	28,516	$	35,977
CASH AND CASH EQUIVALENTS AT JUNE 30					$	17,086	$	29,032

See accompanying notes to unaudited consolidated financial statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank) and AmeriServ Trust and Financial Services Company (the Trust Company). The Bank is a Pennsylvania state-chartered full service bank with 16 locations in Pennsylvania and 1 location in Maryland. The Trust Company offers a complete range of trust and financial services and administers assets valued at ~~$2.3~~$2.4 billion and ~~$2.7~~$2.3 billion that are not reported on the Company’s Consolidated Balance Sheets at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

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

2. Basis of Preparation

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.

For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

3. ~~Recent~~Adoption of Accounting ~~Pronouncements~~Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit ~~Losses:~~Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13)~~, which changes~~ and subsequent related updates. This ASU replaces the ~~impairment model~~incurred loss methodology for ~~most financial assets. This update is intended to improve financial reporting by requiring timelier recording of~~recognizing credit losses ~~on loans~~and requires businesses and other ~~financial instruments held by financial institutions and other organizations. The underlying premise of~~organizations to measure the ~~update is that~~current expected credit losses (CECL) on financial assets measured at amortized cost, ~~should~~including loans and held to maturity (HTM) securities, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASU 2016-13 requires credit losses on available for sale (AFS) debt securities to be presented atas an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on January 1, 2023 for the ~~net amount expected~~Company. The results reported for periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be ~~collected, through an allowance~~reported in accordance with previously applicable accounting standards.

The Company adopted ASU 2016-13, and subsequent related updates, using the modified retrospective approach for ~~credit losses that is deducted from the~~all financial assets measured at amortized cost, ~~basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected~~including loans and held to ~~occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets,~~maturity debt securities, as well as unfunded commitments. On January 1, 2023, the ~~expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through~~Company recorded a cumulative effect ~~adjustment~~decrease to ~~opening~~ retained earnings of $1.2 million, net of tax, of which $951,000 related to loans, $90,000 related to held to maturity debt securities, and $140,000 related to unfunded commitments. In addition, the Company adopted the provisions of ASU 2016-13 related to presenting other-than-temporary impairment on available for sale debt securities on January 1, 2023, though no such charges were recorded on the securities held by the Company as of the ~~beginning~~date of adoption.

It should be noted that the Company expanded the pooling utilized under the legacy incurred loss method to include additional segmentation based on risk within the loan portfolio. The following table presents the impact of the ~~first reporting period in which~~change from the ~~guidance is adopted. This update is effective for SEC filers that are eligible~~incurred loss model to ~~be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.~~

~~The Company, as a smaller reporting company, continues to evaluate~~ the impact that ASU 2016-13 will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the implementation of ASU 2016-13. Our implementation plan includes assessment and documentation of processes, internal controls and data sources; model development, documentation and validation, including loan segmentation procedures and analyzing the methodology options; and system configuration, among other things. The Company intends to adopt ASU 2016-13 effective January 1, 2023.

current expected credit loss model.

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The allowance for credit losses (ACL) will be based on our historical loss experience, borrower characteristics, reasonable and supportable forecasts of future economic conditions, and other relevant factors. We will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results to ensure that the ACL reflects the best estimate of current expected credit losses.


	January 1, 2023
	Pre-ASU 2016-13		Impact of ASU 2016-13 Adoption		As Reported Under ASU 2016-13

	(In Thousands)
Assets
Allowance for credit losses - held to maturity securities
Municipal	$	—	$	3	$	3
Corporate bonds and other securities		—		111		111
Allowance for credit losses - held to maturity securities	$	—	$	114	$	114

Loans, net of unearned income
Commercial real estate (owner occupied)	$	75,158	$	6,201	$	81,359
Other commercial and industrial		153,420		(31)		153,389
Commercial real estate (non-owner occupied) - retail		—		148,901		148,901
Commercial real estate (non-owner occupied) - multi-family		—		106,423		106,423
Other commercial real estate (non-owner occupied)		450,744		(225,831)		224,913
Residential mortgages		297,971		(124,194)		173,777
Consumer		13,473		88,531		102,004
Loans, net of unearned income	$	990,766	$	—	$	990,766

Allowance for credit losses - loans
Commercial real estate (owner occupied)	$	—	$	1,380	$	1,380
Other commercial and industrial		—		2,908		2,908
Commercial real estate (non-owner occupied) - retail		—		1,432		1,432
Commercial real estate (non-owner occupied) - multi-family		—		1,226		1,226
Other commercial real estate (non-owner occupied)		5,972		(2,776)		3,196
Commercial (owner occupied real estate and other)		2,653		(2,653)		—
Residential mortgages		1,380		(355)		1,025
Consumer		85		695		780
Allocation for general risk		653		(653)		—
Allowance for credit losses - loans	$	10,743	$	1,204	$	11,947

Liabilities
Allowance for credit losses - unfunded commitments	$	746	$	177	$	923

Our team, under the direction of senior management, has completed the initial data gap assessment, enhancement of existing data, finalizing the loan segmentation selections, and analyzing the methodology options regarding the calculation of expected credit losses. After analyzing our data and the nature of our portfolio in relation to the CECL transition, the team agreed to utilize the static pool analysis (cohort) method. This methodology most closely aligns with the Company’s current methodology leveraged in our incurred loss model calculation. The Company’s current methodology will be adjusted to appropriately incorporate and comply with ASU 2016-13 and, thus, offers an effective and efficient path to CECL compliance.

The static pool analysis methodology captures loans that qualify for a segment (i.e. balance of a pool of loans with similar risk characteristics) as of a point in time to form a cohort, then tracks that cohort over their remaining lives to determine their loss behavior. The remaining lifetime loss rate is then applied to current loans that qualify for the same segmentation criteria to form a remaining life expectation on current loans. Based on a preliminary parallel calculation as of September 30, 2022, the Company believes thatIn summary, the adoption of ASU 2016-13 ~~will not have~~necessitated a ~~significant impact~~day one increase of $1.2 million be made to the allowance for credit losses on our ~~financial statements. The~~loan portfolio and a $177,000 increase to the allowance offor credit losses under the CECL methodology is estimated to be between $11.0 million and $13.0 million. However, such estimates are subject to significant change as we continue to finalize the judgmental qualitative factors. The Company will continue to make refinements to its expected credit loss estimates throughout the remainder of 2022.

on unfunded commitments. Furthermore, ~~ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for held to maturity (HTM) debt securities. Based~~based on the credit quality of the Company’s HTM debt securities portfolio, ~~we do not expect~~ the ~~ACL to be significant.~~day one allowance for credit losses on our HTM securities portfolio totaled only $114,000. Additional disclosures regarding the allowance for credit losses are included within Note 7 – Investment Securities, Note 9 – Allowance for Credit Losses – Loans, and Note 15 – Commitments and Contingent Liabilities.

~~The ultimate impact of adoption on~~In January 1, 2023, ~~could be significantly different than our current expectation as our modeling processes will be significantly influenced by~~ the ~~composition, characteristics and quality of our loan and HTM securities portfolios as well as the prevailing economic conditions and forecasts at that time.~~

~~In March 2022, the FASB issued~~Company adopted ASU 2022-02, Financial Instruments – Credit Losses ~~(ASC~~(Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures~~. The guidance amends ASC 326 to eliminate~~ (ASU 2022-02), which eliminated the accounting guidance for TDRs ~~by creditors,~~ while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, ~~creditors will determine~~the Company determines whether a modification results in a new loan or continuation of an existing loan. ~~These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain~~Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications ~~of receivables made~~ to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective homogenous loan pools. Additionally, the amendments of ~~ASC 326~~ASU 2022-02 require ~~that an entity~~the Company to disclose current-period gross ~~writeoffs~~charge-offs by year of origination within the vintage disclosures. The vintage disclosures ~~which requires that an entity disclose~~contain the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. ~~The~~This guidance ~~is only for entities that have adopted the amendments~~was applied on a prospective basis.

Table of ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations which will be adopted with ASU 2016-13 effective January 1, 2023.Contents

4. Revenue Recognition

~~ASU 2014-09,~~Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ~~– Topic 606~~, requires the Company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain non-interest revenue sources including net realized gains (losses) on investment securities, mortgage related fees, net gains on loans held for sale, and bank owned life insurance are not within the scope of Topic 606. These sources of revenue cumulatively comprise ~~76.5%~~81.8% of the total revenue of the Company.

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

●

Wealth management fees - Wealth management fee income is primarily comprised of fees earned from the management and administration of trusts and customer investment portfolios. The Company’s performance obligation is generally satisfied over a period of time and the resulting fees are billed monthly or quarterly, based upon the month end market value of the assets under management. Payment is generally received after month end through a direct charge to customers’ accounts. Due to this delay in payment, a receivable of $850,000 has been established as of ~~September~~June 30, ~~2022~~2023 and is included in other assets on the Consolidated Balance Sheets in order to properly recognize the revenue earned but not yet received. Other performance obligations (such as delivery of account statements to customers) are generally considered immaterial to the overall transactions’ price. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Also included within wealth management fees are commissions from the sale of mutual funds, annuities, and life insurance products. Commissions on the sale of mutual funds, annuities, and life insurance products are recognized when sold, which is when the Company has satisfied its performance obligation.

●

Service charges on deposit accounts - The Company has contracts with its deposit account customers where fees are charged for certain items or services. Service charges include account analysis fees, monthly service fees, overdraft fees, and other deposit account related fees. Revenue related to account analysis fees and service fees is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. Fees attributable to specific performance obligations of the Company (i.e. overdraft fees, etc.) are recognized at a defined point in time based on completion of the requested service or transaction.

●

Other non-interest income - Other non-interest income consists of other recurring revenue streams such as safe deposit box rental fees, gain (loss) on sale of other real estate owned, ATM and VISA debit card fees, and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to issuance of annual bill), the revenue is recognized upon receipt of payment. The Company has determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Gains and losses on the sale of other real estate owned are recognized at the completion of the property sale when the buyer obtains control of the real estate and all the performance obligations of the Company have been satisfied. The Company offers ATM and VISA debit cards to deposit account holders which allows our customers to access their account electronically at ATMs and POS terminals. Fees related to ATM and VISA debit card transactions are recognized when the transactions are completed and the Company has satisfied its performance obligation.

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine month periods ending September 30, 2022 and 2021 (in thousands).

Three months ended

Nine months ended

September 30,

September 30,

2022

2021

2022

2021
Non-interest income:

In-scope of Topic 606








Wealth management fees

$
2,813

$
3,137

$
8,954

$
9,031
Service charges on deposit accounts

289

260

824

685
Other

538

548

1,521

1,510
Non-interest income (in-scope of topic 606)

3,640

3,945

11,299

11,226
Non-interest income (out-of-scope of topic 606)

686

471

1,500

2,203
Total non-interest income

$
4,326

$
4,416

$
12,799

$
13,429

~~5. Earnings Per Common Share~~

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The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three- and six-month periods ending June 30, 2023 and 2022 (in thousands).


	Three months ended				Six months ended
	June 30,				June 30,
	2023		2022		2023		2022
Non-interest income:
In-scope of Topic 606
Wealth management fees	$	2,789	$	2,976	$	5,527	$	6,141
Service charges on deposit accounts		280		263		546		535
Other		516		511		997		983
Non-interest income (in-scope of topic 606)		3,585		3,750		7,070		7,659
Non-interest income (out-of-scope of topic 606)		277		388		2,299		814
Total non-interest income	$	3,862	$	4,138	$	9,369	$	8,473

5. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. For the ~~three month~~three-month periods ending ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, options to purchase ~~22,000~~292,500 common shares, with an exercise price of $4.00 to $4.22, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. For the nine month periods ending September 30, 2022 and 2021, options to purchase 12,000 common shares, with an exercise price of $4.19$2.96 to $4.22, and options to purchase 22,000 common shares, with an exercise price of $4.00 to $4.22, respectively, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be ~~antidilutive.~~anti-dilutive. For the six-month periods ending June 30, 2023 and 2022, options to purchase 172,000 common shares, with an exercise price of $3.83 to $4.22, and options to purchase 12,000 common shares, with an exercise price of $4.19 to $4.22, respectively, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be anti-dilutive.


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2022		2021		2022		2021		2023		2022		2023		2022

	(In thousands, except per share data)								(In thousands, except per share data)
Numerator:
Net income	$	2,102	$	1,431	$	6,501	$	5,220
Net income (loss)									$	(187)	$	1,981	$	1,328	$	4,399
Denominator:
Weighted average common shares outstanding (basic)		17,111		17,075		17,105		17,071		17,147		17,109		17,139		17,102
Effect of stock options		34		39		41		43		—		40		9		46
Weighted average common shares outstanding (diluted)		17,145		17,114		17,146		17,114		17,147		17,149		17,148		17,148
Earnings per common share:
Basic	$	0.12	$	0.08	$	0.38	$	0.31	$	(0.01)	$	0.12	$	0.08	$	0.26
Diluted		0.12		0.08		0.38		0.31		(0.01)		0.12		0.08		0.26

6. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits and short-term investments in both money market funds and commercial paper. The Company made ~~$950,000~~$500,000 in income tax payments in the first ~~nine~~six months of ~~2022~~2023 compared to ~~$200,000~~$600,000 in the same ~~2021~~2022 period. The Company made total interest payments of ~~$5,407,000~~$9,587,000 in the first ~~nine~~six months of ~~2022~~2023 compared to ~~$6,898,000~~$3,010,000 in the same ~~2021~~2022 period. The Company had ~~$53,000~~no non-cash transfers to other real estate owned (OREO) and repossessed assets in the first ~~nine~~six months of ~~2022~~2023 compared to ~~$8,000 non-cash transfers~~$14,000 in the same ~~2021~~2022 period. During the first ~~nine~~six months of 2023, the Company did not enter into any new lease agreements. During the first six months of 2022, the Company entered into a new operating lease related to an office location and recorded a right-of-use asset and lease liability of ~~$45,000~~$45,000.

~~. During~~

As a result of the ~~first nine months~~adoption of ~~2021,~~ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2023, the Company ~~did not enter into any new lease agreements.~~had non-cash transactions associated with the day one adjustments necessary to record the adoption. Specifically, the adoption of this accounting standard

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necessitated that a day one increase of $1.2 million be made to the allowance for credit losses on our loan portfolio. Furthermore, ASU 2016-13 necessitated that the Company establish an allowance for expected credit losses for held to maturity (HTM) debt securities. Based upon the credit quality of the Company’s HTM debt securities portfolio, the day one allowance for credit losses on our HTM securities portfolio totaled $114,000. Finally, the adoption of CECL led to the recognition of a day one increase of $177,000 for the Company’s unfunded loan commitments.

7. Investment Securities

Securities are classified at the time of purchase as investment securities held to maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management’s intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation/depreciation excluded from income and credited/charged to accumulated other comprehensive income (loss) within shareholders’ equity on a net of tax basis. Realized gains or losses on securities sold are computed upon the adjusted cost of the specific securities sold. Additionally, the Company holds equity securities which are comprised of mutual funds held within a rabbi trust for the executive deferred compensation plan. Such securities are reported at fair value within other assets on the Consolidated Balance Sheets. Unrealized holding gains and losses on equity securities are included in earnings.

Allowance for Credit Losses – Held to Maturity Securities

The Company measures expected credit losses on held to maturity debt securities, which are comprised of U.S. government agency and mortgage-backed securities as well as taxable municipal, corporate, and other bonds. The Company’s agency and mortgage-backed securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no allowance for credit losses has been established for these securities. The allowance for credit losses on the taxable municipal, corporate, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default (PD/LGD) method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At June 30, 2023, the allowance for credit losses on the held to maturity securities portfolio totaled $109,000.

The allowance for credit losses on held to maturity debt securities is included within investment securities held to maturity on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision (credit) for credit losses on the Consolidated Statements of Operations.

Accrued interest receivable on held to maturity debt securities totaled $363,000 at June 30, 2023 and is included within accrued interest income receivable on the Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest credited to income is reversed. The Company had no held to maturity debt securities in non-accrual status at June 30, 2023.

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Allowance for Credit Losses – Available for Sale Securities

The Company measures expected credit losses on available for sale debt securities when the Company does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair ~~values of~~value is less than the amortized cost basis. At June 30, 2023, the allowance for credit losses on the available for sale securities portfolio totaled $926,000.

The allowance for credit losses on available for sale debt securities is included within investment ~~securities are summarized as follows:~~

~~Investment~~ securities available for sale ~~(AFS):~~on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision (credit) for credit losses on the Consolidated Statements of Operations. Losses are charged against the allowance when the Company believes the collectability of an available for sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available for sale debt securities totaled $968,000 at June 30, 2023 and is included within accrued interest income receivable on the Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Available for sale debt securities are typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available for sale debt securities are placed on non-accrual status, unpaid interest credited to income is reversed. It should be noted that the Company had one available for sale debt security in non-accrual status at June 30, 2023 totaling $926,000 with an associated allowance for credit losses of $926,000.

Credit Losses on Investment Securities – Prior to adopting ASU 2016-13

September 30, 2022

GROSS

GROSS

UNREALIZED

UNREALIZED

FAIR


COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)
U.S. Agency

$
11,349

$
—

$
(1,312)

$
10,037
U.S. Agency mortgage-backed securities

101,389

14

(13,377)

88,026
Municipal

21,438

—

(1,799)

19,639
Corporate bonds

59,284

36

(2,722)

56,598
Total

$
193,460

$
50

$
(19,210)

$
174,300

The Company adopted ASU 2016-13 effective January 1, 2023. Financial statement amounts related to investment securities recorded as of December 31, 2022 and for the period ending June 30, 2022 are presented in accordance with the accounting policies described in the following paragraphs.

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 expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery. The term other than temporary is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term recovery of value are not necessarily favorable or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

Declines in the fair value of securities below their cost that are deemed to be other than temporary are separated into (a) the amount of the total other than temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other than temporary impairment related to all other factors. The amount of the total other than temporary impairment related to the credit loss is recognized in earnings. The amount of the total other than temporary impairment related to all other factors is recognized in other comprehensive income (loss).

At December 31, 2022, the Company believes the unrealized losses on certain securities within the investments portfolio are primarily a result of increases in market yields from the time of purchase. 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

1113

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not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

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

Investment securities available for sale (AFS):

June 30, 2023

GROSS

ALLOWANCE

UNREALIZED

FOR CREDIT

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

11,655

—

(1,266)

—

10,389

U.S. Agency mortgage-backed securities

99,945

(13,126)

—

86,836

Municipal

20,672

—

(1,678)

—

18,994

Corporate bonds

60,663

(5,533)

(926)

54,208

Total

192,935

(21,603)

(926)

170,427

Investment securities held to maturity (HTM):

September 30, 2022

June 30, 2023

GROSS

ALLOWANCE

UNREALIZED

FAIR

UNREALIZED

FAIR

FOR CREDIT

COST BASIS

GAINS

LOSSES

VALUE

COST BASIS

GAINS

LOSSES

VALUE

LOSSES

(IN THOUSANDS)

U.S. Agency

2,500

—

(439)

2,061

2,500

—

(444)

2,056

—

U.S. Agency mortgage-backed securities

19,354

(2,343)

17,022

19,957

(2,317)

17,643

—

Municipal

34,206

(3,818)

30,394

33,975

—

(3,533)

30,442

(2)

Corporate bonds and other securities

6,507

—

(196)

6,311

5,400

—

(112)

5,288

(107)

Total

62,567

(6,796)

55,788

61,832

(6,406)

55,429

(109)

Investment securities available for sale (AFS):


	December 31, 2021								December 31, 2022
			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	$	7,371	$	86	$	(70)	$	7,387	$	11,797	$	1	$	(1,265)	$	10,533
U.S. Agency mortgage-backed securities		80,136		1,202		(1,171)		80,167		102,631		64		(12,710)		89,985
Municipal		20,066		851		(25)		20,892		20,837		—		(1,799)		19,038
Corporate bonds		53,843		1,028		(146)		54,725		63,152		30		(3,230)		59,952
Total	$	161,416	$	3,167	$	(1,412)	$	163,171	$	198,417	$	95	$	(19,004)	$	179,508

Investment securities held to maturity (HTM):


	December 31, 2021								December 31, 2022
			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	$	2,500	$	—	$	(11)	$	2,489	$	2,500	$	—	$	(432)	$	2,068
U.S. Agency mortgage-backed securities		10,556		203		(115)		10,644		18,877		8		(2,212)		16,673
Municipal		33,188		1,734		(103)		34,819		33,993		2		(3,880)		30,115
Corporate bonds and other securities		7,507		64		(7)		7,564		6,508		—		(172)		6,336
Total	$	53,751	$	2,001	$	(236)	$	55,516	$	61,878	$	10	$	(6,696)	$	55,192

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At September 30, 2022, 52.9% of the portfolio was rated “AAA” as compared to 47.1% at December 31, 2021. Approximately 13.9% of the portfolio was either rated below “A” or unrated at September 30, 2022 as compared to 14.7% at December 31, 2021.

The Company sold $1.5 million AFS securities during the third quarter and first nine months of 2022 resulting in $5,000 of gross investment security gains and $5,000 of gross investment security losses. The Company sold no AFS securities during the ~~third~~second quarter ~~of 2021. Total proceeds from the sale of AFS securities for the~~or first ~~nine~~six months of ~~2021 were $960,000 resulting in $84,000~~2023 and 2022.

Table of ~~gross investment security gains.~~Contents

The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was ~~$129,517,000~~$133,639,000 at ~~September~~June 30, ~~2022~~2023 and ~~$122,574,000~~$134,002,000 at December 31, ~~2021.~~2022.

The interest rate environment and market yields can have a significant impact on the yield earned on mortgage-backed securities (MBS). Prepayment speed assumptions are an important factor to consider when evaluating the returns on an MBS. Generally, as interest rates decline, borrowers have more incentive to refinance into a lower rate, so prepayments will rise. Conversely, as interest rates increase, prepayments will decline. When an MBS is purchased at a premium, the yield will decrease as prepayments increase and the yield will increase as prepayments decrease. As of June 30, 2023, the Company had low premium risk as the book value of our mortgage-backed securities purchased at a premium was only 100.8% of the par value.

Contractual maturities of securities at June 30, 2023 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration of the total investment securities portfolio at June 30, 2023 is 54.7 months and is shorter than the duration at December 31, 2022 which was 56.0 months. The duration remains within our internally established guideline to not exceed 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

Total investment securities:

June 30, 2023

Available for sale

Held to maturity

Cost Basis

Fair Value

Cost Basis

Fair Value

Within 1 year

4,220

4,174

3,413

3,376

After 1 year but within 5 years

48,377

45,721

11,926

11,330

After 5 years but within 10 years

46,387

39,518

25,497

22,364

Over 10 years

93,951

81,014

20,996

18,359

Total

192,935

170,427

61,832

55,429

The following table summarizes the available for sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded as of June 30, 2023, aggregated by security type and length of time in a continuous loss position (in thousands):

June 30, 2023

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED

VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES

U.S. Agency

1,955

(42)

8,434

(1,224)

10,389

(1,266)

U.S. Agency mortgage-backed securities

25,108

(1,316)

57,621

(11,810)

82,729

(13,126)

Municipal

3,766

(132)

14,728

(1,546)

18,494

(1,678)

Corporate bonds

24,229

(1,723)

26,477

(3,810)

50,706

(5,533)

Total

55,058

(3,213)

107,260

(18,390)

162,318

(21,603)

At June 30, 2023, within the available for sale debt securities portfolio, the Company had three U.S. Agency, 40 U.S. Agency mortgage-backed securities, 11 municipal, and 39 corporate bonds that have been in a gross unrealized loss position for less than 12 months with depreciation of 5.5% from its amortized cost basis. Additionally, at June 30, 2023, within the available for sale debt securities portfolio, the Company had 11 U.S. Agency, 112 U.S. Agency mortgage-backed securities, 47 municipal, and 54 corporate bonds that have been in a gross unrealized loss position for greater than 12 months with depreciation of 14.6% from its amortized cost basis.

These 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 decrease, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, no provision for credit losses has been recorded for these securities. Management has also concluded that based on

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Table of Contents

~~The following tables present information concerning investments with unrealized losses as of September 30, 2022 and December 31, 2021 (in thousands):~~

~~Total investment securities:~~

September 30, 2022

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED


VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES
U.S. Agency

$
5,917

$
(432)

$
6,181

$
(1,319)

$
12,098

$
(1,751)
U.S. Agency mortgage-backed securities

65,965

(6,084)

37,261

(9,636)

103,226

(15,720)
Municipal

43,069

(4,327)

5,796

(1,290)

48,865

(5,617)
Corporate bonds and other securities

46,988

(2,416)

5,898

(502)

52,886

(2,918)
Total

$
161,939

$
(13,259)

$
55,136

$
(12,747)

$
217,075

$
(26,006)

~~Total investment securities:~~

December 31, 2021

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED


VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES
U.S. Agency

$
7,419

$
(81)

$
—

$
—

$
7,419

$
(81)
U.S. Agency mortgage-backed securities

45,422

(972)

6,691

(314)

52,113

(1,286)
Municipal

7,832

(128)

—

—

7,832

(128)
Corporate bonds and other securities

14,558

(92)

2,439

(61)

16,997

(153)
Total

$
75,231

$
(1,273)

$
9,130

$
(375)

$
84,361

$
(1,648)

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. There are 423 positions that are considered temporarily impaired at September 30, 2022. 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 or mature.

The Company did not record a provision for credit losses on available for sale debt securities during the second quarter of 2023 while a $926,000 provision for credit losses on available for sale debt securities was recorded during the first six months of 2023. The recognition of the loss resulted from a subordinated debt investment issued by Signature Bank which was closed by banking regulators on March 12, 2023. In a press release issued by the Federal Deposit Insurance Corporation (FDIC), it was disclosed that unsecured debt holders of the institution will not be protected. Management reviewed the Form 10-K for the year ended December 31, 2022 filed by Signature Bank, which was filed on March 1, 2023, and determined that no circumstances existed to indicate that the debt security held by the Company was impaired as of December 31, 2022. Specifically, as of December 31, 2022, Signature Bank had total assets of $110.4 billion, net income of $1.3 billion for the year then ended, and demonstrated strong regulatory capital ratios. The corporate security has been placed in non-accrual status and approximately $17,000 of unpaid interest ~~rate environment~~previously credited to income was reversed.

The following tables present the activity in the allowance for credit losses on held to maturity debt securities by major security type for the three and ~~market yields can also~~six months ended June 30, 2023 (in thousands).


	Three months ended June 30, 2023
	Balance at		Charge-				Provision		Balance at
	March 31, 2023		Offs		Recoveries		(Credit)		June 30, 2023
U.S. Agency	$	—	$	—	$	—	$	—	$	—
U.S. Agency mortgage-backed securities		—		—		—		—		—
Municipal		3		—		—		(1)		2
Corporate bonds and other securities		80		—		—		27		107
Total	$	83	$	—	$	—	$	26	$	109


	Six months ended June 30, 2023
	Balance at		Impact of Adopting		Charge-				Provision		Balance at
	December 31, 2022		ASU 2016-13		Offs		Recoveries		(Credit)		June 30, 2023
U.S. Agency	$	—	$	—	$	—	$	—	$	—	$	—
U.S. Agency mortgage-backed securities		—		—		—		—		—		—
Municipal		—		3		—		—		(1)		2
Corporate bonds and other securities		—		111		—		—		(4)		107
Total	$	—	$	114	$	—	$	—	$	(5)	$	109

As stated previously, the Company’s agency and mortgage-backed securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a ~~significant impact~~long history of no credit losses. As such, no allowance for credit losses has been established for these securities. The allowance for credit losses on the ~~yield earned~~taxable municipal, corporate, and other bonds within the held to maturity securities portfolio is calculated using the PD/LGD method. The calculation is completed on ~~mortgage-backed securities (MBS). Prepayment speed assumptions are~~a quarterly basis using the default studies provided by an ~~important factor to consider when evaluating the returns on an MBS. Generally, as interest rates decline, borrowers have more incentive to refinance into~~industry leading source.

Maintaining investment quality is a lower rate, so prepayments will rise. Conversely, as interest rates increase, prepayments will decline. When an MBS is purchased at a premium, the yield will decrease as prepayments increase and the yield will increase as prepayments decrease. As of September 30, 2022, the Company had low premium risk as the book value of our mortgage-backed securities purchased at a premium was only ~~100.9%~~primary objective of the ~~par value.~~

~~Contractual maturities~~Company’s Investment Policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of A. The Company monitors the credit ratings of its debt securities ~~at September~~on a quarterly basis. At June 30, 2022 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration2023, 53.0% of the total investment securities portfolio ~~at September 30, 2022 is 58.2 months and is higher than the duration~~was rated AAA as compared to 52.5% at December 31, ~~2021 which~~2022. Approximately 14.2% of the total investment securities portfolio was ~~41.5 months. The duration remains within our internally established guideline~~either rated below A or unrated at June 30, 2023 as compared to ~~not exceed 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.~~

14.7% at December 31, 2022.

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Table of Contents

Specifically, the following table summarizes the amortized cost of held to maturity debt securities at June 30, 2023, aggregated by credit quality indicator (in thousands).

June 30, 2023

Credit Rating

AAA/AA/A

BBB/BB/B

Unrated

Total

U.S. Agency

2,500

—

2,500

U.S. Agency mortgage-backed securities

19,957

—

19,957

Municipal

33,975

—

33,975

Corporate bonds and other securities

4,007

—

1,393

5,400

Total

60,439

—

1,393

61,832

The Company had no held to maturity debt securities in non-accrual status or past due 90 days still accruing interest at June 30, 2023. The underlying issuers continue to make timely principal and interest payments on the securities.

8. Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of any deferred fees or costs and an allowance for credit losses. Accrued interest receivable on loans totaled $3.5 million as of June 30, 2023 and December 31, 2022 which is reported in accrued interest income receivable on the Consolidated Balance Sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) over the contractual life of the loan.

The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The commercial loan segment includes both the owner occupied commercial real estate loan and the other commercial and industrial loan classes. The commercial real estate loan segment includes the non-owner occupied commercial real estate loan classes of retail, multi-family, and other. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans while the consumer loan segment consists primarily of home equity loans secured by residential real estate, installment loans, and overdraft lines of credit associated with customer deposit accounts.

Table of Contents

The loan portfolio of the Company consists of the following (in thousands):


	June 30, 2023
Commercial:
Commercial real estate (owner occupied) ⁽¹⁾	$	86,949
Other commercial and industrial		150,842
Commercial real estate (non-owner occupied):
Retail ⁽¹⁾		153,164
Multi-family ⁽¹⁾		100,322
Other ⁽¹⁾		219,558
Residential mortgages		175,787
Consumer		101,039
Loans, net of unearned income	$	987,661


	December 31, 2022
Commercial:
Commercial and industrial	$	153,398
Paycheck Protection Program (PPP)		22
Commercial real estate (owner occupied) ⁽¹⁾		75,158
Commercial real estate (non-owner occupied) ⁽¹⁾		450,744
Residential mortgages ⁽¹⁾		297,971
Consumer		13,473
Loans, net of unearned income	$	990,766

(1)	Real estate construction loans constituted 2.4% and 4.7% of the Company’s total loans, net of unearned income as of June 30, 2023 and December 31, 2022, respectively.

Loan balances at June 30, 2023 and December 31, 2022 are net of unearned income of $327,000 and $343,000, respectively.

~~Total investment securities:~~9. Allowance for Credit Losses – Loans

September 30, 2022

Available for sale

Held to maturity


Cost Basis

Fair Value

Cost Basis

Fair Value
Within 1 year

$
7,265

$
7,234

$
2,200

$
2,132
After 1 year but within 5 years

40,696

39,101

12,136

11,620
After 5 years but within 10 years

49,071

44,735

24,434

21,526
Over 10 years

96,428

83,230

23,797

20,510
Total

$
193,460

$
174,300

$
62,567

$
55,788

The allowance for credit losses (ACL) is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged-off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

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

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Company has aligned our segmentation to the quarterly Call Report. This allowed the Company to use not only our data, but also peer institutions to supplement loss observations in determining our qualitative adjustments. Some further sub-

Table of Contents

~~8. Loans~~segmenting was performed on the commercial and industrial (C&I) and commercial real estate (CRE) portfolios based on collateral type. The Company has identified the following portfolio segments:

~~The loan portfolio of the Company consists of the following (in thousands):~~

September 30, 2022

December 31, 2021
Commercial:

Commercial and industrial

$
128,116

$
134,182
Paycheck Protection Program (PPP)

24

17,311
Commercial loans secured by owner occupied real estate ⁽¹⁾

80,247

99,644
Commercial loans secured by non-owner occupied real estate ⁽¹⁾

459,943

430,825
Real estate − residential mortgage ⁽¹⁾

297,384

287,996
Consumer

13,736

15,096
Loans, net of unearned income

$
979,450

$
985,054

~~(1)~~

●

C&I and CRE Owner Occupied – Real ~~estate construction loans constituted 4.5%~~Estate

●

C&I and ~~5.6% of the Company’s total loans, net of unearned income as of September 30, 2022 and December 31, 2021, respectively.~~CRE Owner Occupied – Other

●

CRE Non-Owner Occupied – Retail

●

CRE Non-Owner Occupied – Multi-Family

●

CRE Non-Owner Occupied – Other

●

Residential Mortgages

●

Consumer

~~Loan balances at September~~The Company is utilizing the static pool analysis (cohort) method for our CECL model. The static pool analysis methodology captures loans that qualify for a segment (i.e. balance of a pool of loans with similar risk characteristics) as of a point in time to form a cohort, then tracks that cohort over their remaining lives to determine their loss behavior. The remaining lifetime loss rate is then applied to current loans that qualify for the same segmentation criteria to form a remaining life expectation on current loans. Once historical cohorts are established, the loans in each individual cohort are tracked over their remaining lives for loss and recovery events. Each cohort is evaluated individually and as a result, a loss may be counted in several different quarterly cohort periods, as long as the specific loan existed in the population of each of those cohort periods.

The following tables summarize the rollforward of the allowance for credit losses by loan portfolio segment for the three- and six-month periods ending June 30, 2023 and 2022 ~~and December 31, 2021 are net~~(in thousands).

Three months ended June 30, 2023

Balance at

Charge-

Provision

Balance at

March 31, 2023

Offs

Recoveries

(Credit)

June 30, 2023

Commercial real estate (owner occupied)

1,320

—

191

1,517

Other commercial and industrial

2,873

—

(25)

2,849

Commercial real estate (non-owner occupied) - retail

1,486

—

(9)

1,477

Commercial real estate (non-owner occupied) - multi-family

1,146

—

(3)

1,145

Other commercial real estate (non-owner occupied)

3,197

—

(113)

3,087

Residential mortgages

1,032

—

1,037

Consumer

1,078

(30)

(11)

1,109

Total

12,132

(30)

12,221


	Three months ended June 30, 2022
	Balance at		Charge-				Provision		Balance at
	March 31, 2022		Offs		Recoveries		(Credit)		June 30, 2022
Commercial	$	3,251	$	—	$	—	$	(93)	$	3,158
Commercial real estate (non-owner occupied)		5,930		—		13		(227)		5,716
Residential mortgages		1,465		(23)		4		27		1,473
Consumer		99		(41)		18		26		102
Allocation for general risk		1,177		—		—		(58)		1,119
Total	$	11,922	$	(64)	$	35	$	(325)	$	11,568

Table of ~~unearned income~~Contents


	Six months ended June 30, 2023
	Balance at		Impact of Adopting		Charge-				Provision		Balance at
	December 31, 2022		ASU 2016-13		Offs		Recoveries		(Credit)		June 30, 2023
Commercial real estate (owner occupied)	$	—	$	1,380	$	—	$	12	$	125	$	1,517
Other commercial and industrial		—		2,908		—		2		(61)		2,849
Commercial real estate (non-owner occupied) - retail		—		1,432		—		—		45		1,477
Commercial real estate (non-owner occupied) - multi-family		—		1,226		—		3		(84)		1,145
Other commercial real estate (non-owner occupied)		5,972		(2,776)		—		7		(116)		3,087
Commercial (owner occupied real estate and other)		2,653		(2,653)		—		—		—		—
Residential mortgages		1,380		(355)		—		3		9		1,037
Consumer		85		695		(169)		81		417		1,109
Allocation for general risk		653		(653)		—		—		—		—
Total	$	10,743	$	1,204	$	(169)	$	108	$	335	$	12,221


	Six months ended June 30, 2022
	Balance at		Charge-				Provision		Balance at
	December 31, 2021		Offs		Recoveries		(Credit)		June 30, 2022
Commercial	$	3,071	$	(72)	$	—	$	159	$	3,158
Commercial real estate (non-owner occupied)		6,392		—		26		(702)		5,716
Residential mortgages		1,590		(23)		12		(106)		1,473
Consumer		113		(86)		38		37		102
Allocation for general risk		1,232		—		—		(113)		1,119
Total	$	12,398	$	(181)	$	76	$	(725)	$	11,568

The Company recorded a $34,000 provision for credit losses in the second quarter of ~~$393,000 and $826,000, respectively. The unearned income balance at September 30, 2022 includes~~ ~~no unrecognized fee income from the PPP loan originations~~2023 as compared to ~~$386,000~~a $325,000 provision recovery recorded in the second quarter of 2022. For the first six months of 2023, the Company recorded a $335,000 provision for credit losses compared to a $725,000 provision recovery recorded in the first six months of 2022, representing a $1.1 million unfavorable shift between years. The 2023 provision for credit losses in the loan portfolio was necessary due to risk rating and non-accrual activity. Specifically, total classified and criticized loan levels exhibited a net increase during the first six months of 2023 due to the risk rating downgrade of three commercial real estate loan relationships. In addition, an increased historical loss rate within the consumer loan pool resulted in a significant increase in the allocated allowance for credit losses despite contraction within the portfolio since the beginning of the year.

Non-performing assets increased from $5.2 million at December 31, ~~2021.~~2022 to $5.7 million at June 30, 2023 primarily due to an increase in non-accrual loans reflecting the transfer of a commercial real estate loan relationship together with a small business loan to non-accrual status which were partially offset by a decline in non-accrual residential mortgage loans. Overall, non-performing assets remain well controlled at 0.57% of total loans. Through six months of 2023, the Company experienced net loan charge-offs of $61,000, or 0.01% of total average loans, which compares favorably to net charge-offs of $105,000, or 0.02% of total average loans, in the first half of 2022. In summary, the allowance for credit losses on our loan portfolio provided 216% coverage of non-performing assets, and 1.24% of total loans, on June 30, 2023, compared to 207% coverage of non-performing assets, and 1.08% of total loans, on December 31, 2022.

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Historical credit loss experience is the basis for the estimation of expected credit losses. The Company applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already captured in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on a blend of peer and Company data as well as management judgment. Including peer data addresses the Company’s lack of loss history in some pools of loans. For periods beyond our reasonable and supportable forecast period of two years, loss expectations revert to the long-run historical mean. The qualitative adjustments for current conditions are based upon the following factors:

●

changes in lending policies and procedures;

●

changes in economic conditions;

●

changes in the nature and volume of the portfolio;

●

staff experience;

●

changes in volume and severity of delinquency, non-performing loans, and classified loans;

●

changes in the quality of the Company’s loan review system;

●

trends in underlying collateral value;

●

concentration risk; and

●

external factors: competition, legal, regulatory.

These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. Ultimately, 68% of the second quarter of 2023 general reserve represented qualitative adjustment with 32% representing quantitative reserve.

In accordance with ASU 2016-13, the Company will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. In contrast to legacy accounting standards, this criterion is broader than the impairment concept and management may evaluate loans individually even when no specific expectation of collectability is in place. Loans will not be included in both collective and individual analysis. The ~~ongoing COVID-19 pandemic~~individual analysis will establish a specific reserve for loans in scope. It should be noted that there is a ~~fluid situation~~review threshold of $150,000 or more for loans being subject to individual evaluation within the consumer and ~~continues~~residential mortgage segments.

Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. The method is selected on a loan-by-loan basis, with management primarily utilizing either the discounted cash flows or the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance is made on a quarterly basis.

The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to ~~evolve, impacting~~determine a reasonable value for the ~~way many businesses operate.~~ property and to support an appropriate and adequate allowance for credit losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Collections and Assigned Risk Department to support the value of the property.

When reviewing an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s Chief Credit Officer must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

●

the passage of time;

●

the volatility of the local market;

●

the availability of financing;

●

natural disasters;

●

the inventory of competing properties;

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●

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;

●

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or

●

environmental contamination.

The ~~pandemic~~value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Chief Credit Officer determines that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Collections and Assigned Risk Department personnel, rests with the Chief Credit Officer and not the originating account officer.

The following tables summarize the loan portfolio and allowance for credit losses (in thousands).


	At June 30, 2023
	Commercial real estate (owner occupied)		Other commercial and industrial		Commercial real estate (non-owner occupied) - retail			Commercial real estate (non-owner occupied) - multi-family	Other commercial real estate (non-owner occupied)		Residential mortgages		Consumer		Total
Loans:
Individually evaluated	$	—	$	1,884	$	—	$	—	$	2,625	$	—	$	—	$	4,509
Collectively evaluated		86,949		148,958		153,164		100,322		216,933		175,787		101,039		983,152
Total loans	$	86,949	$	150,842	$	153,164	$	100,322	$	219,558	$	175,787	$	101,039	$	987,661
Allowance for credit losses:
Specific reserve allocation	$	—	$	398	$	—	$	—	$	2	$	—	$	—	$	400
General reserve allocation		1,517		2,451		1,477		1,145		3,085		1,037		1,109		11,821
Total allowance for credit losses	$	1,517	$	2,849	$	1,477	$	1,145	$	3,087	$	1,037	$	1,109	$	12,221


	At December 31, 2022
			Commercial
			real estate		Residential				Allocation for
	Commercial		(non-owner occupied)		mortgages		Consumer		general risk		Total
Loans:
Individually evaluated	$	1,989	$	1,586	$	—	$	—			$	3,575
Collectively evaluated		226,589		449,158		297,971		13,473				987,191
Total loans	$	228,578	$	450,744	$	297,971	$	13,473			$	990,766
Allowance for credit losses:
Specific reserve allocation	$	520	$	3	$	—	$	—	$	—	$	523
General reserve allocation		2,133		5,969		1,380		85		653		10,220
Total allowance for credit losses	$	2,653	$	5,972	$	1,380	$	85	$	653	$	10,743

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The following table presents the amortized cost basis of collateral-dependent loans by class of loans (in thousands).


	Collateral Type
June 30, 2023	Real Estate
Commercial real estate (non-owner occupied):
Other	$	2,625
Total	$	2,625

Allowance for Loan Losses – Prior to adopting ASU 2016-13

Prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), the Company calculated our allowance for loan losses (ALL) using an incurred loss methodology. The following policy related to the ALL in prior periods.

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

The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The commercial loan segment includes both the commercial and industrial and the owner occupied commercial real estate loan classes while the remaining segments are not separated into classes as management monitors risk in these loans at the segment level. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

The allowance consists of three elements: (1) an allowance established on specifically identified problem loans, (2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors, and (3) a general risk reserve which provides support for variance from our assessment of the qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company’s loan portfolio, and recognizes the model and estimation risk associated ~~impacts~~with the specific and formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company’s management to establish allocations which accommodate each of the risk factors.

Management reviews the loan portfolio on ~~trade (including supply chains~~a quarterly basis using a defined, consistently applied process in order to make appropriate and ~~export levels), travel, employee productivity, unemployment, inflation,~~timely adjustments to the ALL. Specifically, this methodology includes:

●

Review of all impaired commercial and commercial real estate loans to determine if any specific reserve allocations are required on an individual loan basis. In addition, consumer and residential mortgage loans with a balance of $150,000 or more are evaluated for impairment and specific reserve allocations are established, if applicable. All required specific reserve allocations are based on careful analysis of the loan’s performance, the related collateral value, cash flow considerations and the financial capability of any guarantor. For impaired loans the measurement of impairment may be based upon (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the observable market price of the impaired loan; or (3) the fair value of the collateral of a collateral dependent loan.

●

The application of formula driven reserve allocations for all commercial and commercial real estate loans by using a three-year migration analysis of net losses incurred within each risk grade for the entire commercial loan portfolio. The difference between estimated and actual losses is reconciled through the nature of the migration analysis.

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●

The application of formula driven reserve allocations to consumer and residential mortgage loans which are based upon historical net charge-off experience for those loan types. The residential mortgage loan and consumer loan allocations are based upon the Company’s three-year historical average of actual loan net charge-offs experienced in each of those categories.

●

The application of formula driven reserve allocations to all outstanding loans is based upon review of historical losses and qualitative factors, which include but are not limited to, economic trends, delinquencies, levels of non-accrual and 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. Pass rated credits are segregated from criticized and classified credits for the application of qualitative factors.

●

Management recognizes that there may be events or economic factors that have occurred affecting specific borrowers or segments of borrowers that may not yet be fully reflected in the information that the Company uses for arriving at reserves for a specific loan or portfolio segment. Therefore, the Company believes that there is estimation risk associated with the use of specific and formula driven allowances.

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

When it is determined that the prospects for recovery of the principal of a loan have significantly diminished, the loan is charged-off against the allowance account; subsequent recoveries, if any, are credited to the allowance account. In addition, non-accrual and ~~consumer spending has resulted in less economic activity and significant volatility and disruption. Certain~~large delinquent loans ~~within our~~are reviewed monthly to determine potential losses.

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

The ALL is maintained to support loan growth and cover charge-offs from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, the amount of non-performing loans, and past and anticipated loss experience.

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Non-Performing Assets

Non-performing assets are comprised of (i) loans which are on a non-accrual basis, (ii) loans which are contractually past due 90 days or more as to interest or principal payments, and (iii) other real estate owned (OREO – real estate acquired through foreclosure and in-substance foreclosures) and repossessed assets.

Loans will be transferred to non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating the loan include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The following table presents non-accrual loans, loans past due over 90 days still accruing interest, and OREO and repossessed assets by portfolio class (in thousands).


	At June 30, 2023
	Non-accrual with no ACL		Non-accrual with ACL		Total non-accrual		Loans past due over 90 days still accruing		OREO and repossessed assets		Total non-performing assets
Commercial real estate (owner occupied)	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial and industrial		—		1,884		1,884		—		—		1,884
Commercial real estate (non-owner occupied) - retail		—		—		—		—		—		—
Commercial real estate (non-owner occupied) - multi-family		—		—		—		—		—		—
Other commercial real estate (non-owner occupied)		2,623		2		2,625		—		—		2,625
Residential mortgages		—		483		483		—		—		483
Consumer		—		658		658		—		—		658
Total	$	2,623	$	3,027	$	5,650	$	—	$	—	$	5,650


	At December 31, 2022
Non-accrual loans:
Commercial and industrial	$	1,989
Commercial real estate (non-owner occupied)		1,586
Residential mortgages		1,577
Consumer		9
Total		5,161

Other real estate owned and repossessed assets:
Residential mortgages		38
Consumer		1
Total		39
Total non-performing assets	$	5,200

It should be noted that the Company has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed in non-accrual status, any outstanding interest is reversed against interest income.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk.

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special mention, substandard and doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans in the doubtful category have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for credit losses are placed in substandard or doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $1,000,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios ~~have been disproportionately adversely affected~~at origination and on an ongoing basis. Risk ratings are assigned by the ~~pandemic.~~account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced, independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for the year ending December 31, 2023 requires review of approximately 30% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated pass-6 with aggregate balances greater than $2,000,000, all credits rated special mention or substandard with aggregate balances greater than $250,000, and all credits rated doubtful with aggregate balances greater than $100,000 on an individual basis to the Company’s Loan Loss Reserve Committee on a quarterly basis. Additionally, the Asset Quality Task Force, which is a group comprised of senior level personnel, meets monthly to monitor the status of problem loans.

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The following table provides information regarding our potential COVID-19 risk concentrations for commercial and commercial real estate loans by industry type at September 30, 2022 and December 31, 2021 (in thousands).

September 30, 2022

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

$
5

$
—

$
—

$
8,778

$
8,783
Multifamily/apartments/student housing

—

—

267

82,181

82,448
Office

37,622

—

8,059

24,081

69,762
Retail

7,030

—

17,348

154,010

178,388
Industrial/manufacturing/warehouse

64,321

—

11,442

77,368

153,131
Hotels

—

—

—

41,162

41,162
Eating and drinking places

303

24

4,656

1,363

6,346
Personal care

959

—

—

2,666

3,625
Amusement and recreation

77

—

3,819

3

3,899
Mixed use

—

—

4,181

49,833

54,014
Other

17,799

—

30,475

18,498

66,772
Total

$
128,116

$
24

$
80,247

$
459,943

$
668,330

December 31, 2021

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

$
1,246

$
—

$
96

$
8,565

$
9,907
Multifamily/apartments/student housing

—

—

245

73,912

74,157
Office

37,386

203

8,644

28,500

74,733
Retail

7,253

444

20,439

148,668

176,804
Industrial/manufacturing/warehouse

74,508

5,940

21,468

44,316

146,232
Hotels

154

1,764

—

42,425

44,343
Eating and drinking places

484

6,591

4,537

1,752

13,364
Personal care

1,197

173

—

4,315

5,685
Amusement and recreation

92

53

5,402

12

5,559
Mixed use

—

—

4,031

62,088

66,119
Other

11,862

2,143

34,782

16,272

65,059
Total

$
134,182

$
17,311

$
99,644

$
430,825

$
681,962

~~Paycheck Protection Program~~

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act and subsequent legislation authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans.

~~An eligible business could apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0~~ ~~million. PPP loans have: (a) an interest rate of~~ ~~1.0%; (b) a two-year (if originated prior to June 5, 2020) or five-year~~ ~~(if originated after June 5, 2020) loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee~~ 100% of the PPP loans made to eligible borrowers pursuant to standards as defined by the SBA. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and at least 60% of the loan proceeds are used for payroll expenses, with the remaining loan proceeds being used for other qualifying expenses such as interest on mortgages, rent, and utilities.

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In addition, PPP allowed certain eligible borrowers that previously received a PPP loan to apply for a second draw loan with the same general loans terms described above. The maximum loan amount of a second draw PPP loan was 2.5 times, or 3.5 times for borrowers within the hospitality industry, the average monthly 2019 or 2020 payroll costs up to $2.0 million. Eligibility for a second draw PPP loan was based on the following criteria: (a) borrower previously received a first draw PPP loan and used the full amount for only authorized expenditures; (b) borrower has 300 or less employees; and (c) borrower can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. The PPP loan program expired on May 31, 2021 for originating new loans.

~~As of September 30, 2022, the Company had 1 PPP loan outstanding totaling $24,000 and has recorded a total of $58,000 and $433,000~~ ~~of processing fee income and interest income from PPP lending activity in the third quarter and first nine months of 2022, respectively.~~

~~9. Allowance for Loan Losses~~

~~The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and nine month periods ending September 30, 2022 and 2021 (in thousands).~~

Three months ended September 30, 2022

Balance at

Charge-

Provision

Balance at

June 30, 2022

Offs

Recoveries

(Credit)

September 30, 2022
Commercial

$
3,158

$
—

$
4

$
(406)

$
2,756
Commercial loans secured by non-owner occupied real estate

5,716

(1,390)

13

1,093

5,432
Real estate-residential mortgage

1,473

(9)

2

(89)

1,377
Consumer

102

(24)

8

1

87
Allocation for general risk

1,119

—

—

(99)

1,020
Total

$
11,568

$
(1,423)

$
27

$
500

$
10,672

Three months ended September 30, 2021

Balance at

Charge-

Provision

Balance at

June 30, 2021

Offs

Recoveries

(Credit)

September 30, 2021
Commercial

$
3,534

$
—

$
35

$
(445)

$
3,124
Commercial loans secured by non-owner occupied real estate

5,535

—

13

670

6,218
Real estate-residential mortgage

1,388

—

8

61

1,457
Consumer

123

(50)

16

28

117
Allocation for general risk

1,172

—

—

36

1,208
Total

$
11,752

$
(50)

$
72

$
350

$
12,124

Nine months ended September 30, 2022

Balance at

Charge-

Provision

Balance at

December 31, 2021

Offs

Recoveries

(Credit)

September 30, 2022
Commercial

$
3,071

$
(72)

$
4

$
(247)

$
2,756
Commercial loans secured by non-owner occupied real estate

6,392

(1,390)

39

391

5,432
Real estate-residential mortgage

1,590

(32)

14

(195)

1,377
Consumer

113

(110)

46

38

87
Allocation for general risk

1,232

—

—

(212)

1,020
Total

$
12,398

$
(1,604)

$
103

$
(225)

$
10,672

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Nine months ended September 30, 2021

Balance at

Charge-

Provision

Balance at

December 31, 2020

Offs

Recoveries

(Credit)

September 30, 2021
Commercial

$
3,472

$
(147)

$
52

$
(253)

$
3,124
Commercial loans secured by non-owner occupied real estate

5,373

—

37

808

6,218
Real estate-residential mortgage

1,292

(17)

42

140

1,457
Consumer

115

(85)

47

40

117
Allocation for general risk

1,093

—

—

115

1,208
Total

$
11,345

$
(249)

$
178

$
850

$
12,124

The Company recorded a $500,000 loan loss provision in the third quarter of 2022 as compared to a $350,000 provision expense recorded in the third quarter of 2021. For the first nine months of 2022, the Company recorded a $225,000 provision recovery compared to an $850,000 provision expense recorded in the first nine months of 2021, representing a $1.1 million favorable shift between years. The increased third quarter 2022 provision expense reflects the partial charge-down and transfer of one non-owner occupied commercial real estate loan relationship into non-accrual status while the borrower pursues the sale of the property. However, the provision recovery for the nine-month time period in 2022 reflects improved credit quality for the overall portfolio due to several loan upgrades and increased payoff and paydown activity including two substandard credits. As demonstrated historically, the Company continues its strategic conviction that a strong allowance for loan losses is needed, which has proven to be essential given the support provided to certain borrowers as they fully recover from the COVID-19 pandemic. Even with the third quarter increase, overall non-performing assets remain well controlled, and such assets totaled $4.6 million, or 0.47% of total loans, at September 30, 2022 compared to $3.3 million, or 0.34% of total loans, at December 31, 2021. It should be noted that the 100% SBA guarantee on PPP loans minimizes the level of credit risk associated with the loans. As a result, such loans are assigned a 0% risk weight for purposes of calculating the Bank’s risk-based capital ratios. Therefore, it was deemed appropriate to not allocate any portion of the loan loss reserve for the PPP loans.

Due primarily to the partial charge-down described above, the Company experienced net loan charge-offs of $1.5 million, or 0.21% of total average loans, in the nine months of 2022 which is considerably higher than the net loan charge-offs of $71,000, or 0.01% of total average loans, in the nine months of 2021. The allowance for loan losses provided 232% coverage of non-performing assets, and 1.09% of total loans, at September 30, 2022, compared to 373% coverage of non-performing assets, and 1.26% of total loans, at December 31, 2021.

~~The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).~~

At September 30, 2022

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

$
2,045

$
1,623

$
—

$
—



$
3,668
Collectively evaluated for impairment

206,342

458,320

297,384

13,736



975,782
Total loans

$
208,387

$
459,943

$
297,384

$
13,736



$
979,450
Allowance for loan losses:












Specific reserve allocation

$
567

$
3

$
—

$
—

$
—

$
570
General reserve allocation

2,189

5,429

1,377

87

1,020

10,102
Total allowance for loan losses

$
2,756

$
5,432

$
1,377

$
87

$
1,020

$
10,672

~~Table of Contents~~

At December 31, 2021

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

$
2,165

$
5

$
—

$
—



$
2,170
Collectively evaluated for impairment

248,972

430,820

287,996

15,096



982,884
Total loans

$
251,137

$
430,825

$
287,996

$
15,096



$
985,054
Allowance for loan losses:












Specific reserve allocation

$
628

$
5

$
—

$
—

$
—

$
633
General reserve allocation

2,443

6,387

1,590

113

1,232

11,765
Total allowance for loan losses

$
3,071

$
6,392

$
1,590

$
113

$
1,232

$
12,398

The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The commercial loan segment includes both the commercial and industrial and the owner occupied commercial real estate loan classes while the remaining segments are not separated into classes as management monitors risk in these loans at the segment level. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates for possible impairment any individual loan in the commercial or commercial real estate segment that is in non-accrual status or classified as a Troubled Debt Restructure (TDR). In addition, consumer and residential mortgage loans with a balance of $150,000 or more are evaluated for impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependent loans. The method is selected on a loan-by-loan basis, with management primarily utilizing either the discounted cash flows or the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Collections and Assigned Risk Department to support the value of the property.

When reviewing an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s internal Collections and Assigned Risk Department must determine if there have been material changes to the underlying

~~Table of Contents~~

~~assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:~~

●

~~the passage of time;~~

●

~~the volatility of the local market;~~

●

~~the availability of financing;~~

●

~~natural disasters;~~

●

~~the inventory of competing properties;~~

●

~~new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;~~

●

~~environmental contamination.~~

The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Collections and Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Collections and Assigned Risk Department personnel, rests with the Collections and Assigned Risk Department and not the originating account officer.

~~The following tables present impaired loans by portfolio segment, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary.~~

At September 30, 2022

IMPAIRED

LOANS WITH

IMPAIRED LOANS WITH

NO SPECIFIC

SPECIFIC ALLOWANCE

ALLOWANCE

TOTAL IMPAIRED LOANS

UNPAID

RECORDED

RELATED

RECORDED

RECORDED

PRINCIPAL


INVESTMENT

ALLOWANCE

INVESTMENT

INVESTMENT

BALANCE

(IN THOUSANDS)
Commercial

$
2,045

$
567

$
—

$
2,045

$
2,251
Commercial loans secured by non-owner occupied real estate

3

3

1,620

1,623

1,645
Total impaired loans

$
2,048

$
570

$
1,620

$
3,668

$
3,896

At December 31, 2021

IMPAIRED

LOANS WITH

IMPAIRED LOANS WITH

NO SPECIFIC

SPECIFIC ALLOWANCE

ALLOWANCE

TOTAL IMPAIRED LOANS

UNPAID

RECORDED

RELATED

RECORDED

RECORDED

PRINCIPAL


INVESTMENT

ALLOWANCE

INVESTMENT

INVESTMENT

BALANCE

(IN THOUSANDS)
Commercial

$
2,165

$
628

$
—

$
2,165

$
2,260
Commercial loans secured by non-owner occupied real estate

5

5

—

5

27
Total impaired loans

$
2,170

$
633

$
—

$
2,170

$
2,287

~~Table of Contents~~

~~The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).~~

Three months ended

Nine months ended


September 30,

September 30,

2022

2021

2022

2021
Average impaired balance:








Commercial

$
2,066

$
2,233

$
2,106

$
1,972
Commercial loans secured by non-owner occupied real estate

814

7

410

7
Average investment in impaired loans

$
2,880

$
2,240

$
2,516

$
1,979
Interest income recognized:








Commercial

$
—

$
3

$
—

$
15
Commercial loans secured by non-owner occupied real estate

—

—

—

—
Interest income recognized on a cash basis on impaired loans

$
—

$
3

$
—

$
15

Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass-6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $1,000,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced, independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for the year ending December 31, 2022 requires review of approximately 40% of the commercial loan portfolio.

In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $2,000,000, all credits rated Special Mention or Substandard with aggregate balances ~~greater~~ than $250,000, and all credits rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company’s Loan Loss Reserve Committee on a quarterly basis. Additionally, the Asset Quality Task Force, which is a group comprised of senior level personnel, meets monthly to monitor the status of problem loans.

~~Table of Contents~~

The following table presents the classes of the commercial and commercial real estate loan portfolios summarized by the aggregate ~~Pass~~pass and the criticized categories of ~~Special Mention, Substandard~~special mention, substandard and ~~Doubtful~~doubtful within the internal risk rating system.

At September 30, 2022

SPECIAL


PASS

MENTION

SUBSTANDARD

DOUBTFUL

TOTAL

(IN THOUSANDS)
Commercial and industrial

$
122,959

$
—

$
5,157

$
—

$
128,116
Paycheck Protection Program (PPP)

24

—

—

—

24
Commercial loans secured by owner occupied real estate

79,257

—

990

—

80,247
Commercial loans secured by non-owner occupied real estate

436,874

13,801

9,265

3

459,943
Total

$
639,114

$
13,801

$
15,412

$
3

$
668,330


											At June 30, 2023
																								Revolving		Revolving
																								Loans		Loans
	At December 31, 2021																							Amortized		Converted
			SPECIAL								Term Loans Amortized Cost Basis by Origination Year													Cost		to
	PASS		MENTION		SUBSTANDARD		DOUBTFUL		TOTAL		2023			2022		2021		2020		2019		Prior		Basis		Term		Total

	(IN THOUSANDS)										(IN THOUSANDS)
Commercial and industrial	$	125,079	$	6,722	$	738	$	1,643	$	134,182
Paycheck Protection Program (PPP)		17,311		—		—		—		17,311
Commercial loans secured by owner occupied real estate		98,271		297		1,076		—		99,644
Commercial loans secured by non-owner occupied real estate		399,104		19,322		12,394		5		430,825
Commercial real estate (owner occupied)
Pass											$	11,141		$	7,133	$	15,791	$	8,714	$	11,206	$	28,054	$	550	$	—	$	82,589
Special Mention												—			—		466		—		2,258		—		703		—		3,427
Substandard												—			—		—		—		—		933		—		—		933
Doubtful												—			—		—		—		—		—		—		—		—
Total	$	639,765	$	26,341	$	14,208	$	1,648	$	681,962	$	11,141		$	7,133	$	16,257	$	8,714	$	13,464	$	28,987	$	1,253	$	—	$	86,949
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial and industrial													��
Pass											$	6,899		$	38,924	$	14,421	$	6,701	$	9,086	$	22,770	$	46,514	$	—	$	145,315
Special Mention												—			—		134		—		—		—		—		—		134
Substandard												—			44		—		—		—		1,480		3,869		—		5,393
Doubtful												—			—		—		—		—		—		—		—		—
Total											$	6,899		$	38,968	$	14,555	$	6,701	$	9,086	$	24,250	$	50,383	$	—	$	150,842
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate (non-owner occupied) - retail
Pass											$	18,022		$	23,764	$	33,677	$	23,560	$	9,417	$	43,475	$	1,249	$	—	$	153,164
Special Mention												—			—		—		—		—		—		—		—		—
Substandard												—			—		—		—		—		—		—		—		—
Doubtful												—			—		—		—		—		—		—		—		—
Total											$	18,022		$	23,764	$	33,677	$	23,560	$	9,417	$	43,475	$	1,249	$	—	$	153,164
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate (non-owner occupied) - multi-family
Pass											$	8,836		$	16,760	$	16,028	$	12,232	$	11,937	$	33,067	$	351	$	—	$	99,211
Special Mention												—			—		—		—		—		—		—		—		—
Substandard												—			—		—		990		—		121		—		—		1,111
Doubtful												—			—		—		—		—		—		—		—		—
Total											$	8,836		$	16,760	$	16,028	$	13,222	$	11,937	$	33,188	$	351	$	—	$	100,322
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial real estate (non-owner occupied)
Pass											$	9,658		$	31,998	$	49,024	$	20,531	$	23,427	$	60,265	$	1,111	$	—	$	196,014
Special Mention												—			—		—		—		—		3,911		—		—		3,911
Substandard												—			1,080		—		—		7,047		11,305		—		199		19,631
Doubtful												—			—		—		—		—		2		—		—		2
Total											$	9,658		$	33,078	$	49,024	$	20,531	$	30,474	$	75,483	$	1,111	$	199	$	219,558
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Total by risk rating
Pass											$	54,556		$	118,579	$	128,941	$	71,738	$	65,073	$	187,631	$	49,775	$	—	$	676,293
Special Mention												—			—		600		—		2,258		3,911		703		—		7,472
Substandard												—			1,124		—		990		7,047		13,839		3,869		199		27,068
Doubtful												—			—		—		—		—		2		—		—		2
Total											$	54,556		$	119,703	$	129,541	$	72,728	$	74,378	$	205,383	$	54,347	$	199	$	710,835
Current period gross charge-offs											$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents


	At December 31, 2022
			SPECIAL
	PASS		MENTION		SUBSTANDARD		DOUBTFUL		TOTAL

	(IN THOUSANDS)
Commercial and industrial	$	148,361	$	—	$	5,037	$	—	$	153,398
Paycheck Protection Program (PPP)		22		—		—		—		22
Commercial real estate (owner occupied)		74,187		—		971		—		75,158
Commercial real estate (non-owner occupied)		423,486		11,015		16,240		3		450,744
Total	$	646,056	$	11,015	$	22,248	$	3	$	679,322

It is generally the policy of the Bank that the outstanding balance of any residential mortgage or home equity loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge-down is recorded for any deficiency balance determined from the collateral evaluation. ~~The remaining non-accrual balance is reported as impaired with no specific allowance.~~ It is generally the policy of the Bank that the outstanding balance of any unsecured consumer loan that exceeds 90-days past due as to principal and/or interest is charged-off. Loans past due 90 days or more and loans in non-accrual status are considered non-performing. The following tables present the performing and non-performing outstanding balances of the residential mortgage and consumer loan portfolio classes.


							At June 30, 2023
																			Revolving		Revolving
																			Loans		Loans
	At September 30, 2022																		Amortized		Converted
			NON-				Term Loans Amortized Cost Basis by Origination Year												Cost		to
	PERFORMING		PERFORMING		TOTAL		2023		2022		2021		2020		2019		Prior		Basis		Term		Total

	(IN THOUSANDS)						(IN THOUSANDS)
Real estate – residential mortgage	$	296,495	$	889	$	297,384
Residential mortgages
Performing							$	6,524	$	12,221	$	63,231	$	46,114	$	7,447	$	39,767	$	—	$	—	$	175,304
Non-performing								—		—		—		—		—		483		—		—		483
Total							$	6,524	$	12,221	$	63,231	$	46,114	$	7,447	$	40,250	$	—	$	—	$	175,787
Current period gross charge-offs							$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer		13,736		—		13,736
Performing							$	7,147	$	22,636	$	11,061	$	3,711	$	1,405	$	6,011	$	48,410	$	—	$	100,381
Non-performing								17		—		—		47		49		287		159		99		658
Total	$	310,231	$	889	$	311,120	$	7,164	$	22,636	$	11,061	$	3,758	$	1,454	$	6,298	$	48,569	$	99	$	101,039
Current period gross charge-offs							$	4	$	35	$	17	$	—	$	3	$	110	$	—	$	—	$	169
Total by payment performance
Performing							$	13,671	$	34,857	$	74,292	$	49,825	$	8,852	$	45,778	$	48,410	$	—	$	275,685
Non-performing								17		—		—		47		49		770		159		99		1,141
Total							$	13,688	$	34,857	$	74,292	$	49,872	$	8,901	$	46,548	$	48,569	$	99	$	276,826
Current period gross charge-offs							$	4	$	35	$	17	$	—	$	3	$	110	$	—	$	—	$	169


	At December 31, 2021						At December 31, 2022
			NON-						NON-
	PERFORMING		PERFORMING		TOTAL		PERFORMING		PERFORMING		TOTAL

	(IN THOUSANDS)						(IN THOUSANDS)
Real estate – residential mortgage	$	286,843	$	1,153	$	287,996
Residential mortgages							$	296,401	$	1,570	$	297,971
Consumer		15,096		—		15,096		13,457		16		13,473
Total	$	301,939	$	1,153	$	303,092	$	309,858	$	1,586	$	311,444

2128

Table of Contents

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans.


	At September 30, 2022														At June 30, 2023
													90 DAYS
			30 – 59		60 – 89								PAST DUE				30 – 59		60 – 89
			DAYS		DAYS		90 DAYS		TOTAL		TOTAL		AND STILL				DAYS		DAYS		90 DAYS		TOTAL		TOTAL
	CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS		ACCRUING		CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS

	(IN THOUSANDS)														(IN THOUSANDS)
Commercial and industrial	$	127,634	$	402	$	80	$	—	$	482	$	128,116	$	—
Paycheck Protection Program (PPP)		24		—		—		—		—		24		—
Commercial loans secured by owner occupied real estate		80,247		—		—		—		—		80,247		—
Commercial loans secured by non-owner occupied real estate		459,943		—		—		—		—		459,943		—
Real estate – residential mortgage		294,977		584		995		828		2,407		297,384		—
Commercial real estate (owner occupied)															$	86,949	$	—	$	—	$	—	$	—	$	86,949
Other commercial and industrial																150,765		77		—		—		77		150,842
Commercial real estate (non-owner occupied) - retail																153,164		—		—		—		—		153,164
Commercial real estate (non-owner occupied) - multi-family																100,322		—		—		—		—		100,322
Other commercial real estate (non-owner occupied)																218,478		—		268		812		1,080		219,558
Residential mortgages																174,719		43		470		555		1,068		175,787
Consumer		13,441		289		6		—		295		13,736		—		99,594		773		294		378		1,445		101,039
Total	$	976,266	$	1,275	$	1,081	$	828	$	3,184	$	979,450	$	—	$	983,991	$	893	$	1,032	$	1,745	$	3,670	$	987,661


	At December 31, 2021														At December 31, 2022
													90 DAYS
			30 – 59		60 – 89								PAST DUE				30 – 59		60 – 89
			DAYS		DAYS		90 DAYS		TOTAL		TOTAL		AND STILL				DAYS		DAYS		90 DAYS		TOTAL		TOTAL
	CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS		ACCRUING		CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS

	(IN THOUSANDS)														(IN THOUSANDS)
Commercial and industrial	$	133,918	$	14	$	250	$	—	$	264	$	134,182	$	—	$	152,314	$	797	$	287	$	—	$	1,084	$	153,398
Paycheck Protection Program (PPP)		17,311		—		—		—		—		17,311		—		22		—		—		—		—		22
Commercial loans secured by owner occupied real estate		99,454		—		190		—		190		99,644		—
Commercial loans secured by non-owner occupied real estate		428,790		2,035		—		—		2,035		430,825		—
Real estate – residential mortgage		283,178		2,449		1,240		1,129		4,818		287,996		—
Commercial real estate (owner occupied)																74,960		198		—		—		198		75,158
Commercial real estate (non-owner occupied)																446,809		3,935		—		—		3,935		450,744
Residential mortgages																295,790		489		422		1,270		2,181		297,971
Consumer		14,938		151		7		—		158		15,096		—		13,290		60		114		9		183		13,473
Total	$	977,589	$	4,649	$	1,687	$	1,129	$	7,465	$	985,054	$	—	$	983,185	$	5,479	$	823	$	1,279	$	7,581	$	990,766

~~An allowance for~~Loan Modifications to Borrowers Experiencing Financial Difficulty

Occasionally, the Company modifies loans to borrowers experiencing financial difficulty as a result of our loss mitigation activities. A variety of solutions are offered to borrowers, including loan losses (“ALL”) is maintained to support loan growth and cover charge-offs from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

~~Loans~~modifications that ~~are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used~~may result in ~~the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.~~principal forgiveness, interest rate reductions, term extensions, payment delays, or combinations thereof.

●

Principal forgiveness includes principal and accrued interest forgiveness. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

●

Interest rate reductions include modifications where the interest rate is reduced and interest is deferred.

●

Term extensions extend the original contractual maturity date of the loan.

●

Payment delays consist of modifications where we expect to collect the contractual amounts due, but result in a delay in the receipt of payments specified under the original loan terms. We generally consider payment delays to be insignificant when the delay is three months or less.

Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios is based on a three-year historical average of actual loss experience.

The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: (1) an allowance established on specifically

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Table of Contents

~~identified problem~~The following table summarizes the amortized cost basis, as of June 30, 2023, of loans ~~(2) formula driven general reserves established for~~modified to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023 (in thousands).


	Term Extension
	Amortized Cost Basis		% of Total Class of Loans
Other commercial and industrial	$	428		0.28	%
Total	$	428

	Combination - Interest Rate Reduction and Term Extension
	Amortized Cost Basis		% of Total Class of Loans
Other commercial real estate (non-owner occupied)	$	7,047		3.21	%
Total	$	7,047

At June 30, 2023, the Company had no unfunded loan categories based upon historical loss experience and other qualitative factors which include delinquency, non-performing and TDR loans, loan trends, economic trends, 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, and (3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company’s loan portfolio, and recognizes the model and estimation riskcommitments associated with the ~~specific~~loan modifications to borrowers experiencing financial difficulty.

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty during the three and ~~formula driven allowances.~~ six months ended June 30, 2023.


Term Extension
Loan Type		Financial Effect
Other commercial and industrial		During the first quarter of 2023, provided five month expiration date extension on non-accrual line of credit under which availability has been eliminated. During the second quarter of 2023, provided the same borrower with a one year maturity date extension

Combination - Interest Rate Reduction and Term Extension
Loan Type		Financial Effect
Other commercial real estate (non-owner occupied)		During the second quarter, provided seven months of interest only payments at a reduced rate with the remaining portion of interest, totaling approximately $303,000, being deferred until maturity. Additionally, provided three month maturity date extension

Table of Contents

The ~~qualitative factors used~~Company had no loans which were modified to borrowers experiencing financial difficulty which subsequently defaulted during the three and six months ended June 30, 2023. The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Specifically, the $7.0 million other commercial real estate (non-owner occupied) loan disclosed above is secured by a mixed use (retail/office) property located within the City of Pittsburgh, but not in the ~~formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company’s management to establish allocations which accommodate each~~downtown central business district. Additionally, a recent appraisal of the ~~listed risk factors.~~property supports the collectability of the outstanding loan balance as the borrower works to find new tenants for open spaces. As of June 30, 2023, the modified loans described in the tables above were current as to payments.

~~“Pass” rated credits are segregated from “Criticized” and “Classified” credits for~~

The Company had no loans modified as TDRs during the ~~application of qualitative factors.~~

~~Management reviews~~three-month period ended June 30, 2022. The following table details the loan ~~portfolio on~~modified as a ~~quarterly basis using a defined, consistently applied process~~TDR during the six-month period ended June 30, 2022 (dollars in ~~order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.~~thousands).


Loans in non-accrual status	# of Loans	Current Balance		Concession Granted
Commercial and industrial	1	$	464	Subsequent modification of a TDR - Extension of maturity date with a below market interest rate

10. ~~Non-Performing Assets Including Troubled Debt Restructurings (TDR)~~Short-Term Borrowings and Advances from Federal Home Loan Bank

~~The~~Total short-term and Federal Home Loan Bank (FHLB) borrowings and advances consist of the following ~~table presents information concerning non-performing assets including TDR~~ (in thousands, except percentages):

September 30, 2022

December 31, 2021

Non-accrual loans:

Commercial and industrial

$
2,045

$
2,165

Commercial loans secured by non-owner occupied real estate

1,623

5

Real estate – residential mortgage

889

1,153

Total

4,557

3,323

Other real estate owned and repossessed assets:





Real estate – residential mortgage

38

—

Consumer

1

—

Total

39

—

Total non-performing assets including TDR

$
4,596

$
3,323

Total non-performing assets as a percent of loans, net of unearned income, other real estate owned and repossessed assets

0.47
%

0.34
%


	At June 30, 2023
				Weighted
Type	Maturing	Amount		Average Rate
Open Repo Plus	Overnight	$	56,676	5.39	%
FHLB Advances	2023		1,000	2.86
	2024		4,197	1.19
	2025		—	—
	2026		6,920	3.94
	2027		4,000	3.91
Total FHLB advances			16,117	3.15
Total short-term and FHLB borrowings		$	72,793	4.90	%


	At December 31, 2022
				Weighted
Type	Maturing	Amount		Average Rate
Open Repo Plus	Overnight	$	88,641	4.45	%
FHLB Advances	2023		15,568	1.59
	2024		4,197	1.19
Total FHLB advances			19,765	1.50
Total short-term and FHLB borrowings		$	108,406	3.91	%

The ~~Company had no~~rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance. All FHLB stock along with an interest in certain residential mortgage, commercial real estate, and commercial and industrial loans ~~past due 90 days or more for the periods presented which were accruing interest.~~

~~Consistent~~ with ~~accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession~~an aggregate statutory value equal to the ~~borrower that would not normally be considered. Regardless~~amount of the ~~form~~advances are pledged as collateral to the FHLB of ~~concession granted, the Bank’s objective in offering a TDR is~~Pittsburgh to ~~increase the probability of repayment of the borrower’s loan.~~

~~The following table details the loan modified as a TDR during the three-month period ended September 30, 2022 (dollars in thousands).~~

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted
Commercial loans secured by non-owner occupied real estate

1

$
1,620

Extension of maturity date with an interest only period at below market interest rate

~~Table of Contents~~

~~The following table details the loans modified as TDRs during the nine-month period ended September 30, 2022 (dollars in thousands).~~

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted
Commercial and industrial

1

$
458

Subsequent modification of a TDR - Extension of maturity date with a below market interest rate
Commercial loans secured by non-owner occupied real estate

1

$
1,620

Extension of maturity date with an interest only period at below market interest rate

The Company had no loans modified as TDRs during the three-month period ended September 30, 2021. The following table details the loan modified as a TDR during the nine-month period ended September 30, 2021 (dollars in thousands).support these borrowings.

Loans in non-accrual status

# of Loans

Current Balance

Concession Granted
Commercial and industrial

1

$
480

Subsequent modification of a TDR - Extension of maturity date with a below market interest rate

~~All TDRs are individually evaluated for impairment and a related allowance is recorded, as needed. The specific ALL reserve for loans modified as TDRs was~~ ~~$129,000 and $132,000 as of September 30, 2022 and December 31, 2021, respectively.~~

The Company had no loans that were classified as TDRs or were subsequently modified during each 12-month period prior to the current reporting periods, which begin January 1, 2021 and 2020 (nine-month periods) and July 1, 2021 and 2020 (three-month periods), respectively, and that subsequently defaulted during these reporting periods.

~~The Company is unaware of any additional loans which are required to either be charged-off or added to the non-performing asset totals disclosed above.~~

~~Loan Modifications Related to COVID-19~~

Under section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes and reporting the loan as past due. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency so long as the loan was current on payments as of December 31, 2019. The suspension of TDR identification and accounting triggered by the effects of the COVID-19 pandemic was extended by the Consolidated Appropriations Act, 2021, signed into law on December 27, 2020. The period established by Section 4013 of the CARES Act was extended to the earlier of January 1, 2022 or 60 days after the date on which the national COVID-19 emergency terminates. Additionally, the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.

In response to the COVID-19 pandemic, the Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. The following table presents information comparing loans which were subject to a loan modification related to COVID-19, as of

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September 30, 2022 and December 31, 2021. Note that the percentage of outstanding loans presented below was calculated based on loan totals excluding PPP loans. Management believes that this method more accurately reflects the concentration of COVID-19 related modifications within the loan portfolio.

At September 30, 2022

At December 31, 2021


% of Outstanding




% of Outstanding

Balance

Non-PPP Loans

Balance

Non-PPP Loans

(in thousands)

(in thousands)

CRE/Commercial
$
3,919

0.6
%

$
7,488

1.1
%
Home Equity/Consumer

—

—

57

0.1

Residential Mortgage

248

0.1

203

0.1

Total
$
4,167

0.4

$
7,748

0.8

The balance of loan modifications related to COVID-19 at September 30, 2022 represents a decrease of $3.6 million, or 46.2%, from the balance of loans modified for COVID-19 at December 31, 2021. In addition, this current level of borrowers requesting payment deferrals is down sharply from its peak level of approximately $200 million that occurred at June 30, 2020. As a result of these loan modifications, the Company has recorded $503,000 of accrued interest income that has not been received as of September 30, 2022.

Borrower requested modifications primarily consist of the deferral of principal and/or interest payments. The following table presents the composition of the types of payment relief that have been granted.

At September 30, 2022

At December 31, 2021

Number of Loans

Balance

Number of Loans

Balance

(in thousands)

(in thousands)
Type of Payment Relief







Interest only payments
2

$
3,919

6

$
3,768
Complete payment deferrals
2

248

5

3,980
Total
4

$
4,167

11

$
7,748

Management continues to carefully monitor asset quality with a particular focus on customers that have requested payment deferrals during this difficult economic time. Deferral extension requests were considered based upon the customer’s needs and their impacted industry, borrower and guarantor capacity to service debt, and issued regulatory guidance. At September 30, 2022, the COVID-19 related modifications within the commercial real estate and commercial loan portfolios are to two borrowers in the hospitality and personal care industries, with loans totaling approximately $3.9 million. In order to properly monitor the increased credit risk associated with the modified loans, the Asset Quality Task Force is meeting periodically to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers.

11. ~~Short-Term Borrowings~~Accumulated Other Comprehensive Loss

The following tables present the changes in each component of accumulated other comprehensive loss, net of tax, for the three and ~~Advances from Federal Home Loan Bank~~

~~Total short-term~~six months ended June 30, 2023 and ~~Federal Home Loan Bank (FHLB) borrowings and advances consist of the following~~2022 (in ~~thousands, except percentages)~~thousands):

At September 30, 2022

Three months ended June 30, 2023

Three months ended June 30, 2022

Weighted

Net

Type

Maturing

Amount

Average Rate

Open Repo Plus

Overnight

26,274

3.11

FHLB Advances

2022

8,757

1.79

2023

15,568

1.59

Unrealized

2024

4,197

1.19

Gains and

Total FHLB advances

28,522

1.59

Total short-term and FHLB borrowings

54,796

2.32

Losses on

Defined

Losses on

Defined

Investment

Interest

Benefit

Investment

Benefit

Securities

Rate

Pension

Securities

Pension

AFS⁽¹⁾

Hedge⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

Beginning balance

(14,489)

(655)

(7,582)

(22,726)

(4,474)

(6,979)

(11,453)

Other comprehensive income (loss) before reclassifications

(2,560)

991

—

(1,569)

(4,292)

(5,577)

(9,869)

Amounts reclassified from accumulated other comprehensive loss

—

(75)

—

(75)

—

1,089

Net current period other comprehensive income (loss)

(2,560)

916

—

(1,644)

(4,292)

(4,488)

(8,780)

Ending balance

(17,049)

261

(7,582)

(24,370)

(8,766)

(11,467)

(20,233)

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


	Six months ended June 30, 2023								Six months ended June 30, 2022
	Net								Net
	Unrealized								Unrealized
	Gains and								Gains and
	Losses on				Defined				Losses on		Defined
	Investment		Interest		Benefit				Investment		Benefit
	Securities		Rate		Pension				Securities		Pension
	AFS⁽¹⁾		Hedge⁽¹⁾		Items⁽¹⁾		Total⁽¹⁾		AFS⁽¹⁾		Items⁽¹⁾		Total⁽¹⁾
Beginning balance	$	(14,938)	$	—	$	(7,582)	$	(22,520)	$	1,386	$	(7,898)	$	(6,512)
Other comprehensive income (loss) before reclassifications		(2,111)		355		—		(1,756)		(10,152)		(4,945)		(15,097)
Amounts reclassified from accumulated other comprehensive loss		—		(94)		—		(94)		—		1,376		1,376
Net current period other comprehensive income (loss)		(2,111)		261		—		(1,850)		(10,152)		(3,569)		(13,721)
Ending balance	$	(17,049)	$	261	$	(7,582)	$	(24,370)	$	(8,766)	$	(11,467)	$	(20,233)

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

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Table of Contents

At December 31, 2021

Weighted

Type

Maturing

Amount

Average Rate

Open Repo Plus

Overnight

$
—

—
%
FHLB Advances

2022

22,888

1.88

2023

15,568

1.59

2024

4,197

1.19

Total FHLB advances



42,653

1.71

Total short-term and FHLB borrowings



$
42,653

1.71
%

The rate on Open Repo Plus advances can change daily, while the rates on the advances are fixed until the maturity of the advance. All FHLB stock along with an interest in certain residential mortgage, commercial real estate, and commercial and industrial loans with an aggregate statutory value equal to the amount of the advances are pledged as collateral to the FHLB of Pittsburgh to support these borrowings.

~~12. 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 months ended September 30, 2022 and 2021 (in thousands):~~

Three months ended September 30, 2022

Three months ended September 30, 2021


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

$
(8,766)

$
(11,467)

$
(20,233)

$
2,863

$
(12,180)

$
(9,317)
Other comprehensive income (loss) before reclassifications

(6,370)

(498)

(6,868)

(466)

1,219

753
Amounts reclassified from accumulated other comprehensive loss

—

451

451

—

694

694
Net current period other comprehensive income (loss)

(6,370)

(47)

(6,417)

(466)

1,913

1,447
Ending balance

$
(15,136)

$
(11,514)

$
(26,650)

$
2,397

$
(10,267)

$
(7,870)

~~(1)~~

~~Amounts in parentheses indicate debits on the Consolidated Balance Sheets.~~

Nine months ended September 30, 2022

Nine months ended September 30, 2021


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

$
1,386

$
(7,898)

$
(6,512)

$
3,539

$
(16,737)

$
(13,198)

Other comprehensive income (loss) before reclassifications

(16,522)

(5,408)

(21,930)

(1,076)

4,140

3,064

Amounts reclassified from accumulated other comprehensive loss

—

1,792

1,792

(66)

2,330

2,264

Net current period other comprehensive income (loss)

(16,522)

(3,616)

(20,138)

(1,142)

6,470

5,328

Ending balance

$
(15,136)

$
(11,514)

$
(26,650)

$
2,397

$
(10,267)

$
(7,870)

~~(1)~~

~~Amounts in parentheses indicate debits on the Consolidated Balance Sheets.~~

~~Table of Contents~~

~~The following table presents~~tables present the amounts reclassified out of each component of accumulated other comprehensive loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (in thousands):


	Amount reclassified from accumulated					Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾					other comprehensive loss⁽¹⁾
	For the three		For the three			For the three		For the three
Details about accumulated other	months ended		months ended		Affected line item in the	months ended		months ended		Affected line item in the
comprehensive loss components	September 30, 2022		September 30, 2021		statement of operations	June 30, 2023		June 30, 2022		statement of operations
Interest rate hedge
						$	(95)	$	—	Interest expense - Deposits
							20		—	Provision (credit) for income taxes
						$	(75)	$	—
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	571	$	879	Other expense	$	—	$	1,378	Other expense
		(120)		(185)	Provision for income taxes		—		(289)	Provision (credit) for income taxes
	$	451	$	694		$	—	$	1,089
Total reclassifications for the period	$	451	$	694		$	(75)	$	1,089

(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 1716 for additional details).


	Amount reclassified from accumulated					Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾					other comprehensive loss⁽¹⁾
	For the nine		For the nine			For the six		For the six
Details about accumulated other	months ended		months ended		Affected line item in the	months ended		months ended		Affected line item in the
comprehensive loss components	September 30, 2022		September 30, 2021		statement of operations	June 30, 2023		June 30, 2022		statement of operations
Realized gains on sale of securities
Interest rate hedge
	$	—	$	(84)	Net realized gains on investment securities	$	(119)	$	—	Interest expense - Deposits
		—		18	Provision for income taxes		25		—	Provision (credit) for income taxes
	$	—	$	(66)		$	(94)	$	—
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	2,268	$	2,949	Other expense	$	—	$	1,742	Other expense
		(476)		(619)	Provision for income taxes		—		(366)	Provision (credit) for income taxes
	$	1,792	$	2,330		$	—	$	1,376
Total reclassifications for the period	$	1,792	$	2,264		$	(94)	$	1,376

(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 1716 for additional details).

~~13.~~12. 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 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 30, 2022, 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

2733

Table of Contents

made to opt-out of including accumulated other comprehensive income in regulatory capital. As of June 30, 2023, 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.

At September 30, 2022

At June 30, 2023

TO BE WELL

MINIMUM

CAPITALIZED

MINIMUM

CAPITALIZED

REQUIRED

UNDER

REQUIRED

UNDER

FOR

PROMPT

FOR

PROMPT

CAPITAL

CORRECTIVE

CAPITAL

CORRECTIVE

ADEQUACY

ACTION

ADEQUACY

ACTION

COMPANY

BANK

PURPOSES

REGULATIONS*

COMPANY

BANK

PURPOSES

REGULATIONS*

AMOUNT

RATIO

AMOUNT

RATIO

AMOUNT

RATIO

AMOUNT

RATIO

(IN THOUSANDS, EXCEPT RATIOS)

Total Capital (To Risk Weighted Assets)

152,571

13.92

136,390

12.49

8.00

10.00

154,095

14.01

138,575

12.65

8.00

10.00

Tier 1 Common Equity (To Risk Weighted Assets)

114,491

10.44

124,944

11.45

4.50

6.50

Common Equity Tier 1 Capital (To Risk Weighted Assets)

114,211

10.38

125,356

11.44

4.50

6.50

Tier 1 Capital (To Risk Weighted Assets)

114,491

10.44

124,944

11.45

6.00

8.00

114,211

10.38

125,356

11.44

6.00

8.00

Tier 1 Capital (To Average Assets)

114,491

8.56

124,944

9.44

4.00

5.00

114,211

8.45

125,356

9.37

4.00

5.00


	At December 31, 2021												At December 31, 2022
											TO BE WELL												TO BE WELL
									MINIMUM		CAPITALIZED										MINIMUM		CAPITALIZED
									REQUIRED		UNDER										REQUIRED		UNDER
									FOR		PROMPT										FOR		PROMPT
									CAPITAL		CORRECTIVE										CAPITAL		CORRECTIVE
									ADEQUACY		ACTION										ADEQUACY		ACTION
	COMPANY				BANK				PURPOSES		REGULATIONS*		COMPANY				BANK				PURPOSES		REGULATIONS*
	AMOUNT		RATIO		AMOUNT		RATIO		RATIO		RATIO		AMOUNT		RATIO		AMOUNT		RATIO		RATIO		RATIO

	(IN THOUSANDS, EXCEPT RATIOS)												(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)	$	149,177	14.04	%	$	133,881	12.66	%	8.00	%	10.00	%	$	153,092	13.87	%	$	136,767	12.44	%	8.00	%	10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)		109,292	10.29			120,656	11.41		4.50		6.50
Common Equity Tier 1 Capital (To Risk Weighted Assets)														114,959	10.41			125,278	11.39		4.50		6.50
Tier 1 Capital (To Risk Weighted Assets)		109,292	10.29			120,656	11.41		6.00		8.00			114,959	10.41			125,278	11.39		6.00		8.00
Tier 1 Capital (To Average Assets)		109,292	8.17			120,656	9.12		4.00		5.00			114,959	8.52			125,278	9.39		4.00		5.00

*Applies to the Bank only.

~~14.~~13. 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 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 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 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.

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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 ~~18.~~17.

The following table summarizes the interest rate swap transactions that impacted the Company’s first ~~nine~~six months of ~~2022~~2023 and ~~2021~~2022 performance (in thousands, except percentages).

At September 30, 2022

At June 30, 2023

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

Swap assets

N/A

64,624

3.54

Monthly

(306)

N/A

65,187

7.22

Monthly

953

Swap liabilities

N/A

(64,624)

(3.54)

Monthly

306

N/A

(65,187)

(7.22)

Monthly

(953)

Net exposure

—


	At September 30, 2021								At June 30, 2022
							INCREASE								INCREASE
		AGGREGATE		WEIGHTED			(DECREASE)			AGGREGATE		WEIGHTED			(DECREASE)
		NOTIONAL		AVERAGE RATE		REPRICING	IN INTEREST			NOTIONAL		AVERAGE RATE		REPRICING	IN INTEREST
	HEDGE TYPE	AMOUNT		RECEIVED/(PAID)		FREQUENCY	EXPENSE		HEDGE TYPE	AMOUNT		RECEIVED/(PAID)		FREQUENCY	EXPENSE
Swap assets	N/A	$	55,061	2.59	%	Monthly	$	(602)	N/A	$	65,138	2.95	%	Monthly	$	(396)
Swap liabilities	N/A		(55,061)	(2.59)		Monthly		602	N/A		(65,138)	(2.95)		Monthly		396
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 ~~18.~~17. The notional amount of the risk participation agreement outstanding at ~~September~~June 30, 2023 and December 31, 2022 ~~and 2021~~ was ~~$2.2~~$1.9 million and ~~$2.6~~$2.1 million, respectively.

Interest Rate Hedge

The Company has entered into two interest rate swaps with a total notional value of $60 million in order to hedge the interest rate risk associated with certain floating-rate time deposit accounts. The hedge transactions allow the Company to add stability to interest expense and manage its exposure to interest rate movements. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in accumulated other comprehensive loss (within Shareholders’ Equity), net of tax, with a corresponding offset within other liabilities. Disclosures related to the fair value of the interest rate hedge can be found in Note 17. Amounts recorded in accumulated other comprehensive loss for the effective portion of changes in the fair value are subsequently reclassified to earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of the hedging relationship

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by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the period ended June 30, 2023.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on certain of the Company’s variable rate time deposit accounts. During the three and six months ended June 30, 2023, the Company had $95,000 and $119,000 of gains, respectively, which resulted in a decrease to interest expense. In the twelve months that follow June 30, 2023, the Company estimates that approximately $518,000 will be reclassified as a decrease to interest expense. This reclassified amount could differ from amounts actually recognized due to changes in interest rates. As of June 30, 2023, the maximum length of time over which forecasted transactions are hedged is three years with all hedge transactions terminating in the first half of 2026.

The following table summarizes the effect of the effective portion of the Company’s cash flow hedge accounting on accumulated other comprehensive loss for the three and six months ended June 30, 2023 (in thousands).


	Three months ended June 30, 2023
Derivatives in Cash Flow Hedging Relationships	Amount Recognized in Other Comprehensive Loss on Derivative		Location on Consolidated Statements of Operations of Reclassification from Accumulated Other Comprehensive Loss	Amount Reclassified from Accumulated Other Compreshensive Loss
Interest rate hedge	$	1,159	Interest expense - Deposits	$	(95)
Total	$	1,159		$	(95)


	Six months ended June 30, 2023
Derivatives in Cash Flow Hedging Relationships	Amount Recognized in Other Comprehensive Loss on Derivative		Location on Consolidated Statements of Operations of Reclassification from Accumulated Other Comprehensive Loss	Amount Reclassified from Accumulated Other Compreshensive Loss
Interest rate hedge	$	330	Interest expense - Deposits	$	(119)
Total	$	330		$	(119)

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 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, ~~2022~~2023 and ~~2021. None of the Company's derivatives are designated as hedging instruments.~~2022.

~~15.~~14. 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.

~~Table of Contents~~

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

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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, ~~2022~~2023 and ~~2021~~2022 were as follows (in thousands):

Three months ended

Nine months ended

Three months ended

Six months ended

September 30, 2022

June 30, 2023

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Community banking

13,341

3,359

37,912

9,493

13,671

4,157

27,029

7,825

Wealth management

2,827

425

9,006

1,658

2,792

(28)

5,538

420

Investment/Parent

(1,313)

(1,682)

(3,699)

(4,650)

(3,491)

(4,316)

(4,566)

(6,917)

Total

14,855

2,102

43,219

6,501

12,972

(187)

28,001

1,328


	Three months ended				Nine months ended				Three months ended				Six months ended
	September 30, 2021				September 30, 2021				June 30, 2022				June 30, 2022
	Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)		Total revenue		Net income (loss)
Community banking	$	12,515	$	2,801	$	38,605	$	9,059	$	12,421	$	2,947	$	24,571	$	6,134
Wealth management		3,154		831		9,082		2,227		2,993		510		6,179		1,233
Investment/Parent		(2,027)		(2,201)		(5,473)		(6,066)		(1,152)		(1,476)		(2,386)		(2,968)
Total	$	13,642	$	1,431	$	42,214	$	5,220	$	14,262	$	1,981	$	28,364	$	4,399

~~16.~~15. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating ~~$239.5~~$239.0 million and ~~$216.6~~$227.6 million along with standby letters of credit of ~~$12.0~~$7.9 million and ~~$13.1~~$9.0 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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 Company estimates expected credit losses over the contractual period in which it is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision (credit) for credit losses line on the Consolidated Statements of Operations. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The carrying amount of the ~~reserves~~allowance for ~~AmeriServ obiligations~~credit losses for the Company’s obligations related to unfunded commitments and standby letters of credit, which is reported in other liabilities on the Consolidated Balance Sheets, was ~~$774,000~~$889,000 at ~~September~~June 30, ~~2022~~2023 and ~~$989,000~~$746,000 at December 31, ~~2021.~~2022.

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.

~~17.~~16. 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~~

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~~(including~~consecutive calendar years during the final ten-year period of employment. Plan assets are primarily debt securities (including U.S. Treasury and Agency securities and 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, ~~2022~~2023 and ~~2021~~2022 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,
	2022		2021		2022		2021		2023		2022		2023		2022
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost	$	358	$	429	$	1,073	$	1,287	$	258	$	363	$	516	$	727
Interest cost		365		221		1,094		664		435		349		870		697
Expected return on plan assets		(1,052)		(1,004)		(3,156)		(3,012)		(1,034)		(1,045)		(2,068)		(2,091)
Amortization of net loss		341		610		1,024		1,829		—		364		—		728
Settlement charge		230		269		1,244		1,120		—		1,014		—		1,014
Net periodic pension cost	$	242	$	525	$	1,279	$	1,888
Net periodic pension (benefit) cost									$	(341)	$	1,045	$	(682)	$	1,075

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

The reduced pension expense in the second quarter and first six months of 2023 reflects the retirement of a larger than typical number of employees over the past two years who chose to take a lump sum payment instead of receiving future monthly annuity payments. These individuals are no longer included in the pension plan which therefore favorably impacts the Company’s basic pension expense. Additionally, the Company recognized a ~~$230,000 and $1.2 million~~$1,014,000 settlement charge in connection with its defined benefit pension plan in the ~~third~~second quarter and first ~~nine~~six months of 2022 ~~respectively. This compares to a $269,000 and $1.1 million settlement~~while no such charge was recognized in the ~~third quarter and first nine months~~same periods of ~~2021, respectively.~~this year. A settlement charge must be recognized when the total dollar amount of lump sum distributions paid from the pension plan to retired employees exceeds a threshold of expected annual service and interest costs in the current year. So far in 2022, a vast majority of 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 continued to be elevated this year due to the low level of interest rates in late 2021 when these lump sums were calculated. It is anticipated that the Company will be required to recognize additional settlement charges through year end as more people retire. However, the amount of these future settlement charges are difficult to estimate. 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, we expect that the Company’s normal annual pension expense should be lower in the future, which has been evident so far in 2022 as the normal amount of pension expense required to be recognized is lower than the 2021 level.

The accrued pension liability, which had a positive (debit) balance of ~~$17.6~~$22.0 million and ~~$19.5~~$21.3 million, was reclassified to other assets on the Consolidated Balance Sheets as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The balance of the accrued pension liability continues to be a positive value as a result of Company contributions to the plan and the revaluation of the ~~obligation due to the recognition of the settlement charge.~~obligation.

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 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.

~~18.~~17. 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 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.

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Assets and 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 U.S. 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. It should be noted that available for sale securities are reported at fair value, net of any related allowance for credit losses.

The fair values of the simultaneous interest rate swaps and the interest rate hedge 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 liabilities measured and reported on the Consolidated Balance Sheets on a recurring basis at their fair value as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, by level within the fair value hierarchy (in thousands).

Fair Value Measurements at September 30, 2022

Fair Value Measurements at June 30, 2023

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Equity securities (1)

491

—

478

—

Available for sale securities:

U.S. Agency

10,037

—

10,037

—

10,389

—

10,389

—

U.S. Agency mortgage-backed securities

88,026

—

88,026

—

86,836

—

86,836

—

Municipal

19,639

—

19,639

—

18,994

—

18,994

—

Corporate bonds

56,598

—

56,598

—

54,208

—

54,208

—

Interest rate swap asset (1)

7,518

—

7,518

—

6,175

—

6,175

—

Interest rate hedge ⁽¹⁾

331

—

331

—

Interest rate swap liability (2)

(7,367)

—

(7,367)

—

(6,272)

—

(6,272)

—

Risk participation agreement (2)

—


	Fair Value Measurements at December 31, 2021								Fair Value Measurements at December 31, 2022
	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)		TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Equity securities (1)	$	526	$	526	$	—	$	—	$	502	$	502	$	—	$	—
Available for sale securities:
U.S. Agency		7,387		—		7,387		—		10,533		—		10,533		—
U.S. Agency mortgage-backed securities		80,167		—		80,167		—		89,985		—		89,985		—
Municipal		20,892		—		20,892		—		19,038		—		19,038		—
Corporate bonds		54,725		—		54,725		—		59,952		—		59,952		—
Interest rate swap asset (1)		1,226		—		1,226		—		6,992		—		6,992		—
Interest rate swap liability (2)		(1,226)		—		(1,226)		—		(6,872)		—		(6,872)		—
Risk participation agreement (2)		—		—		—		—		—		—		—		—

(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~~The Company evaluates individual loans for ~~which,~~expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Individually evaluated 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 ~~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~~observable market data which at times are discounted using unobservable inputs. At June

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30, 2023, individually evaluated loans ~~are reported at~~using the collateral method with a carrying value of $2.6 million were reduced by a specific valuation allowance totaling $2,000 resulting in a net 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.$2.6 million. At ~~September 30,~~December 31, 2022, ~~impaired~~individually evaluated loans ~~evaluated~~ using the collateral method with a carrying value of $1.6 million were reduced by a specific valuation allowance totaling $3,000 resulting in a net fair value of $1.6 million. At December 31, 2021, impaired loans evaluated using the collateral method with a carrying value of $5,000 were reduced by a specific valuation allowance totaling $5,000 resulting in a net fair value of zero.

Other real estate owned is measured at fair value based on appraisals, less estimated costs to sell at the date of foreclosure. The Bank’s internal Collections and Assigned Risk Department estimates the fair value of repossessed assets, such as vehicles and equipment, using a formula driven analysis based on automobile or other industry data, less estimated costs to sell at the time of repossession. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less ~~cost~~costs to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO and repossessed assets.

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

Fair Value Measurements
September 30, 2022

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)
Impaired loans

$
1,620

$
—

$
—

$
1,620
Other real estate owned and repossessed assets

39

—

—

39

Fair Value Measurements

June 30, 2023

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Individually evaluated loans

2,623

—

2,623

~~Fair Value Measurements~~

~~December 31, 2021~~

~~TOTAL~~

~~(LEVEL 1)~~

~~(LEVEL 2)~~

~~(LEVEL 3)~~

~~Impaired loans~~

—


	Fair Value Measurements
December 31, 2022	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Impaired loans	$	1,583	$	—	$	—	$	1,583
Other real estate owned and repossessed assets		39		—		—		39

Quantitative Information About Level 3 Fair Value Measurements

Valuation

Unobservable

Valuation

Unobservable

September 30, 2022

Fair Value

Techniques

Input

Range (Wgtd Avg)

Impaired loans

1,620

Appraisal of

Appraisal

0% to 100% (0%)

June 30, 2023

Fair Value

Techniques

Input

Range (Wgtd Avg)

Individually evaluated loans

2,623

Appraisal of

Appraisal

0% to 100% (0.1%)

collateral (1)

adjustments (2)

collateral ⁽¹⁾

adjustments ⁽²⁾

Other real estate owned and repossessed assets

Appraisal of

Appraisal

52% (52%)

collateral (1)

adjustments (2)

Liquidation

10% to 39% (11%)

expenses


	~~Quantitative Information About Level 3 Fair Value Measurements~~
			~~Valuation~~	~~Unobservable~~
~~December 31, 2021~~	~~Fair Value~~		~~Techniques~~	~~Input~~	~~Range (Wgtd Avg)~~
~~Impaired loans~~	$	—	~~Appraisal of~~	~~Appraisal~~	~~100% (100%)~~
			~~collateral~~ ~~(1)~~	~~adjustments~~ ~~(2)~~


	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
December 31, 2022	Fair Value		Techniques	Input	Range (Wgtd Avg)
Impaired loans	$	1,583	Appraisal of	Appraisal	0% to 100% (0.2%)
			collateral ⁽¹⁾	adjustments ⁽²⁾
Other real estate owned and repossessed assets		39	Appraisal of	Appraisal	52% (52%)
			collateral ⁽¹⁾	adjustments ⁽²⁾
				Liquidation	10% to 39% (11%)
				expenses

(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

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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.

The estimated fair values based on U.S. GAAP measurements and recorded carrying values at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 for the remaining financial instruments not required to be ~~measured or~~ reported at fair value were as follows:

September 30, 2022

June 30, 2023

Carrying

Value

Fair Value

(Level 1)

(Level 2)

(Level 3)

Value

Fair Value

(Level 1)

(Level 2)

(Level 3)

(IN THOUSANDS)

FINANCIAL ASSETS:

Investment securities – HTM

62,567

55,788

—

52,936

2,852

61,832

55,429

—

52,499

2,930

Loans, net of allowance for loan loss and unearned income

968,778

910,169

—

910,169

Loans held for sale

560

585

—

Loans, net of allowance for credit losses and unearned income

975,440

907,289

—

907,289

FINANCIAL LIABILITIES:

Deposits with stated maturities

283,640

279,204

—

279,204

301,734

299,269

—

299,269

All other borrowings ⁽¹⁾

55,156

52,845

—

52,845

42,782

41,004

—

41,004


	December 31, 2021										December 31, 2022
	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	$	53,751	$	55,516	$	—	$	52,523	$	2,993	$	61,878	$	55,192	$	—	$	52,323	$	2,869
Loans held for sale		983		1,022		1,022		—		—		59		57		57		—		—
Loans, net of allowance for loan loss and unearned income		972,656		969,681		—		—		969,681
Loans, net of allowance for credit losses and unearned income												980,023		938,188		—		—		938,188
FINANCIAL LIABILITIES:
Deposits with stated maturities		292,325		294,280		—		—		294,280		286,004		281,297		—		—		281,297
All other borrowings⁽¹⁾		69,256		69,506		—		—		69,506		46,409		44,759		—		—		44,759

(1)	All other borrowings include advances from Federal Home Loan Bank 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.

Item 2.

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

~~…..2022 THIRD QUARTER SUMMARY OVERVIEW…..~~AmeriServ Financial, Inc. reported third quarter 2022 net income of $2.1 million, or $0.12 per diluted common share. This earnings performance was a $671,000, or 46.9%, increase from the third quarter of 2021 when net income totaled $1.4 million, or $0.08 per diluted common share. For the nine-month period ended September 30, 2022, the Company reported net income of $6.5 million, or $0.38 per diluted common share. This represents a 22.6% increase in earnings per share from the nine-month period of 2021 when net income totaled $5.2 million, or $0.31 per diluted common share. The improved earnings performance in 2022 reflects the full benefit of several important strategic actions that our company executed in 2021, the successful management of our asset quality throughout the pandemic, and effective balance sheet management.

The financial markets have been characterized by uncertainty and turmoil during the third quarter of 2022 as the Federal Reserve has continued to aggressively increase interest rates to address the highest inflation in decades. It appears that this turmoil may well continue during the fourth quarter and into 2023. In such times, it is necessary for community-based financial institutions, like AmeriServ, to pursue the strategies that best protect the institution and its customers. There is no textbook to follow, no computer software designed to provide easy answers to these challenges.

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~~Therefore, it is usually best to rely on the time-tested ground rules that have governed community banks for generations, at the heart of which is a strong balance sheet.~~

We are a company that prioritizes safety and soundness. This allows our customers to understand our strategies and to trust us with their hard-earned funds. Our loan portfolio remains sound. We are pleased to see that our vigorous loan underwriting standards were equal to the challenges of these times. Additionally, the loyalty of our deposit customers is critically important as they provide cost effective funding during these volatile periods. We are pleased that after rapid fiscal stimulus related growth, our deposits have stabilized at these higher levels in 2022.

Our clients have used our wealth management services as a savings vehicle for their golden years. While the bear market has impacted the market value of our total wealth management assets, most clients have remained with us because they understand our investment strategies. This means we trust in the financial markets and in our Pathroad strategies, and so we wait together for the turnaround in this business cycle.

These are the times when it is our duty to work closely with our customers. Our commercial customers may need reassurance, our consumer customers may need advice and counsel. It is the collective efforts of hundreds of AmeriServ bankers during this period of stress that led to our positive financial results.

Yes, there are challenges and difficulties. We are using this period to increase our internal efficiency. Improvements in software and hardware are making it possible for our professional staff to move our products and services to new levels. Such improvements allow us to help our customers and provide assurance that we are not falling behind. We are particularly pleased with the refresh of our website (www.ameriserv.com) which went live on October 4, 2022.

We expect both the global and national economy to remain challenging. The economy of western Pennsylvania always requires hard work and that is what we provide. Even through these times, AmeriServ has recorded increased revenue and an increasingly stronger balance sheet. Our current common stock dividend yield approximates 3%. The Company is pleased that we were able to increase the common stock dividend earlier this year as it remains an important component of total shareholder return during periods of market volatility.

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2022~~2023 VS. THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022

…..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, 2022			September 30, 2021			June 30, 2023			June 30, 2022
Net income	$	2,102		$	1,431
Net income (loss)							$	(187)		$	1,981
Diluted earnings per share		0.12			0.08			(0.01)			0.12
Return on average assets (annualized)		0.62	%		0.41	%		(0.06)	%		0.59	%
Return on average equity (annualized)		7.81	%		5.07	%		(0.72)	%		7.10	%

The Company reported a net ~~income~~loss of ~~$2,102,000,~~$187,000, or ~~$0.12~~$0.01 per diluted common share. This earnings performance represented a ~~$671,000,~~$2,168,000, or ~~46.9%~~109.4%, ~~increase~~decrease from the ~~third~~second quarter of ~~2021~~2022 when net income totaled ~~$1,431,000,~~$1,981,000, or ~~$0.08~~$0.12 per diluted common share. The net loss reported in the second quarter of 2023 was primarily attributable to legal and professional costs incurred to defend the company against an activist investor waging a proxy contest for Board seats. The Company continued ~~its positive earnings momentum~~to effectively operate our customer relationship focused community bank in a

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conservative manner during this period of external distraction and took necessary steps to protect the best interests of all shareholders and stakeholders. Overall, a decrease to net interest income due to continued pressure from increasing deposit costs, along with a higher provision for credit losses and increased non-interest expense resulted in the ~~third~~lower level of earnings in the second quarter of 2022 and again posted increased earnings when compared to the 2021 results. AmeriServ Financial continues to benefit from our Banking for Life, customer focused business model which has contributed to good levels of loans, deposits, and fee income from our wealth management business.2023.

…..NET INTEREST INCOME AND MARGIN…..The Company’s net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company’s earnings, and it is affected by interest rate fluctuations as well as changes in the

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amount and mix of earning assets and interest bearing liabilities. The following table compares the Company’s net interest income performance for the ~~third~~second quarter of ~~2022~~2023 to the ~~third~~second quarter of ~~2021~~2022 (in thousands, except percentages):


	Three			Three								Three			Three
	months ended			months ended								months ended			months ended
	September 30, 2022			September 30, 2021			Change			% Change		June 30, 2023			June 30, 2022			Change			% Change
Interest income	$	12,700		$	11,372		$	1,328		11.7	%	$	14,879		$	11,527		$	3,352		29.1	%
Interest expense		2,171			2,146			25		1.2			5,769			1,403			4,366		311.2
Net interest income	$	10,529		$	9,226		$	1,303		14.1		$	9,110		$	10,124		$	(1,014)		(10.0)
Net interest margin		3.35	%		2.85	%		0.50	%	N/M			2.89	%		3.23	%		(0.34)	%	N/M

N/M — not meaningful

The ~~Company’s~~Company's net interest income in the ~~third~~second quarter of ~~2022 increased~~2023 decreased by ~~$1.3~~$1.0 million, or ~~14.1%~~10.0%, from the prior ~~year’s third~~year's second quarter while the net interest margin of ~~3.35%~~2.89% for the ~~third~~second quarter of ~~2022 improved by 50 basis points when compared to~~2023 represents a 34-basis point decrease from the second quarter of 2022. The decrease in net interest ~~margin of 2.85% for~~income reflects total interest expense increasing to a higher level than the ~~third quarter of 2021. The Company’s 2022 financial performance has been favorably impacted by the strategic actions taken by management~~increase in ~~2021 to lower funding costs.~~total interest income. The Company ~~has also benefitted~~continues to benefit from ~~the~~increased yields on total loans and investment securities due to a higher U.S. Treasury yield curve ~~as interest rates have increased due to~~and the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. ~~The higher~~However, similar to what is occurring across the banking industry, the increased national interest rates have ~~favorably impacted the Company’s financial performance, particularly net interest income in the third quarter of 2022. Specifically in 2022, the higher interest rates are causing~~caused total ~~interest income~~deposit and borrowing costs to increase to a higher level than the corresponding increase in total interest expense. In comparison to 2021, interest income increased for the third quarter while interest expense in the 2022 third quarter remained relatively consistent with the 2021 third quarter level, increasing slightly. The higher interest rate environment along with increased investment in the securities portfolio more than offset a reduced level of Paycheck Protection Program (PPP) loan fee income and caused total interest income to increase for the third quarter of 2022 when compared to the same time period from last year. The increased national interest rates resulted in total deposit costs increasing in the third quarter of 2022 when compared to the third quarter of 2021, but this increase in deposit interest expense was nearly offset by a decline in total borrowings interest expensedegree, resulting in ~~only a slight increase to total~~net interest ~~expense.~~margin compression and lower net interest income.

Total average loans in the ~~third~~second quarter of 2023 compare favorably to the 2022 ~~are lower than the 2021 third~~second quarter average by ~~$13.5~~$9.1 million, or ~~1.4%~~0.9%. Excluding PPP loans, which still existed on the balance sheet in 2022, total average loans in the ~~third~~second quarter of ~~2022 exceed the 2021 third~~2023 exceeded last year’s second quarter ~~average~~ by ~~$20.9~~$13.8 million, or ~~2.2%, as growth~~1.4%. Loan pipelines continue to be strong, but customers have delayed fundings given the uncertainty that exists in the economy and expectations regarding interest rates. However, the strong level of production experienced throughout 2022 resulted in total average loans in the second quarter of 2023 comparing favorably to the second quarter of 2022. Growth in commercial & industrial loans (C&I) and home equity loans more than offset decreased commercial real estate (CRE) ~~and home equity loans along with a higher volume of~~, residential mortgage ~~loans more than offset a decrease in the level of commercial & industrial~~and consumer loans. Total PPP loans averaged $1.3 million in the third quarter of 2022, representing a decrease of $34.5 million, or 96.3%, from the third quarter of last year. Additionally, of the $100 million of PPP loans originated from both government programs, only one very small PPP loan remains on the balance sheet that totals approximately $24,000, reflecting the Company’s successful efforts working with our customers through the SBA to complete the forgiveness process. Residential mortgage loan production was down in the third quarter of 2022 when compared to last year’s third quarter. Refinance transactions have been severely impacted with the quick escalation of interest rates since the beginning of 2022. Residential mortgage loan production totaled $4.6 million in the third quarter of 2022 and was 75.1% lower than the production level of $18.5 million achieved in the third quarter of 2021. Overall, the higher interest rate environment along with the higher average volumes of ~~CRE, residential mortgages~~C&I and home equity loans, resulted in total loan interest income improving by ~~$861,000,~~$2.9 million, or ~~8.8%~~29.7%, for the ~~third~~second quarter of ~~2022~~2023 when compared to the ~~third~~second quarter of last year. ~~Finally, on an end of period basis at September 30, 2022, excluding total PPP loans, the total loan portfolio is approximately $12.7 million, or 1.3%, higher from the September 30, 2021 level.~~

Total investment securities averaged ~~$253.4~~$261.8 million for the ~~third~~second quarter of ~~2022~~2023 which is ~~$35.5~~$21.2 million, or ~~16.3%~~8.8%, higher than the ~~$217.9~~$240.6 million average for the second quarter of last ~~year’s third quarter.~~year. The increase inreflects additional securities purchased primarily during 2022 as the increased U.S. Treasury yield curve resulted in a more favorable market for securities purchasing ~~activity so far in 2022.~~activity. The two-year to ten-year portion of the yield curve increased by approximately 220 to 344 basis points since the beginning of the year, with shorter yields in that range increasing to a higher degree than the longer yields. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities ~~portfolio. Management purchased more of these investments for our~~ portfolio ~~and, therefore, was able to more profitably deploy a portion of the increased liquidity on our balance sheet into~~causing interest income from the securities portfolio to increase by $459,000, or 26.4%, for the second quarter of this year.

Due to a combination of increased investment in securities, loan growth and total deposits modestly declining, short-term investments and bank deposits demonstrated a lower average balance in the second quarter of 2023 compared to last year’s second quarter by $25.0 million, or 87.0%. Despite this decline, the Company’s liquidity position remains strong. We will continue to carefully monitor our liquidity position and short-term investments as ~~opposed~~we expect deposits related to government stimulus programs to continue to decline during 2023. Overall, the 2023 second quarter average balance of

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to leaving these funds in low yielding federal funds sold. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipals and corporate securities to maintain a well-diversified portfolio. Overall, the average balance of total interest earning assets ~~for the third~~increased since last year’s second quarter ~~of 2022 was $36.4~~average by $5.3 million, or ~~2.9%~~0.4%, ~~lower than the third quarter of 2021~~ while total interest income increased by ~~$1.3~~$3.4 million, or ~~11.7%~~29.1%, ~~between years.~~

~~Although reduced from its high levels when government stimulus initially impacted~~compared to the ~~economy, our liquidity position continues to be solid as total short-term investments averaged $13.0 million in the third~~second quarter of 2022, which is lower than it has been trending over the past several quarters due to the additional investment in the securities portfolio. In addition, uncertainty remains regarding the duration that the increased funds from government stimulus will remain on the balance sheet. Diligent monitoring and management of our short-term investment position remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the Company’s liquid funds with management expecting to continue to be active with new security purchases during the remainder of 2022 given the increase in interest rates.

2022.

On the liability side of the balance sheet, total average deposits ~~continue~~for the second quarter of 2023 are $5.1 million, or 0.4%, lower than the 2022 second quarter average. The modest decrease since last year’s second quarter is reflective of a portion of the funds from the government stimulus programs leaving the balance sheet and reflects greater pricing competition in the market to retain deposits because of the increasing national interest rates. Since early March 2023 when two large bank failures occurred, customer fear of contagion within the industry caused deposit flight, especially uninsured deposits, from certain banks to other financial services providers. Despite this turmoil, AmeriServ Financial’s core deposit base continued to demonstrate the strength and stability ~~over~~that has been experienced for many years. In addition to its strong, loyal core deposit base, the ~~past year despite~~Company has several other sources of liquidity including a ~~$29.7 million, or 2.5%, decrease in total average~~significant unused borrowing capacity at the Federal Home Loan Bank, overnight lines of credit at correspondent banks and access to the Federal Reserve Discount Window. The Company does not currently utilize brokered deposits ~~when comparing the 2022 third quarter to last year’s third quarter. This decrease reflects management electing to allow~~as a ~~high cost, large institutional deposit to mature late in September 2021. Overall, the~~funding source. The loan to deposit ratio averaged ~~84.2%~~85.2% in the ~~third~~second quarter of ~~2022,~~2023, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to support our customers and our community during times of economic volatility.

Total interest expense ~~for~~in the ~~third~~second quarter of ~~2022~~2023 increased by ~~$25,000,~~$4.4 million, or ~~1.2%~~311.2%, when compared to the ~~third~~second quarter of ~~2021. Despite the decrease in total average deposits,~~2022, due to higher deposit and short-term borrowings interest expense. Deposit interest expense was higher by ~~$531,000,~~$4.1 million, or ~~44.7%~~425.0%, ~~when comparing~~despite the ~~third~~second quarter 2023 average volume of total interest bearing deposits remaining relatively consistent with the 2022 ~~to last year’s third quarter.~~second quarter average, growing by $12.5 million, or 1.3%. The ~~rising~~impact that the higher national interest rates ~~this year resulted~~had on deposit costs combined with increased market competition to retain and attract deposits contributed to net interest margin compression. For interest rate risk management purposes and in ~~total deposit~~an effort to offset a portion of the unfavorable impact that rising funding costs are having on net interest ~~expense increasing as~~income, management proactively executed a $50 million interest rate hedge in February 2023 and another $10 million interest rate hedge in April 2023 to fix the cost of certain ~~deposit products~~deposits that are ~~tied~~indexed and move with short-term interest rates. These hedging transactions brought the Company’s variability of net interest income to a ~~market index reprice upward with the move in national interest rates. Specifically,~~more neutral position. Overall, total deposit cost averaged ~~0.59%~~1.74% in the ~~third~~second quarter of ~~2022,~~2023, which is 19141 basis points higher than total deposit cost of ~~0.40%~~0.33% in the ~~third~~second quarter of ~~2021. Overall, management believes that total deposit cost will continue to rise given the expectation of additional short-term interest rate increases by the Federal Reserve throughout~~ 2022.

Total borrowings interest expense ~~decreased~~increased by ~~$506,000,~~$303,000, or ~~52.9%~~67.8%, ~~when comparing~~between the ~~third~~second quarter of ~~2022 to last year’s third quarter.~~2023 and the second quarter of 2022. The ~~decrease between years~~increase results from the ~~favorable~~ impact that the higher national interest rates had on overnight borrowings cost as well as the Company utilizing more overnight borrowed funds in 2023. Total overnight borrowings averaged $25.0 million in the second quarter of 2023 after only $1.5 million of average overnight borrowings were utilized during the August 2021 subordinated debt offering which was used to replace higher cost debt. This transaction effectively lowered debt cost on these long-term funds by nearly 4.0%. This savings is recognized even though the sizesecond quarter of ~~the new subordinated debt is $7.0 million higher than the debt instruments it replaced. Note that included in 2021 borrowings~~2022. Borrowings interest expense is $202,000 of additional interest expense that the Company had to recognize from the write-off of the unamortized issuance costs from the original debt instruments that the new sub debt replaced. The remaining portion of the favorable variance in borrowings interest expense between the third quarter of 2022 and the third quarter of 2021 is due towas favorably impacted by reduced interest expense from Federal Home Loan Bank (FHLB) ~~borrowings.~~term borrowings, which declined by $28,000, or 17.9%. The average balance of ~~total short-term and~~ FHLB term borrowings iswas lower in the ~~third~~second quarter of ~~2022~~2023 by ~~$9.6~~$18.0 million, or ~~21.0%~~49.7%, as the strength of the Company’s liquidity position allowed management to let ~~higher cost~~ FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve during 2023, FHLB term advances have rates that are lower than the cost of overnight borrowed funds. Therefore, management replaced matured FHLB term advances during the second quarter of 2023.

The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) for the ~~three month~~three-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 setting forth (i) average assets, liabilities, and stockholders’ equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) the Company’s interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) the Company’s net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the three months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ was ~~$3,000 and~~ $4,000

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~~respectively,~~ which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material.

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

2022

2021

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

$
975,615

$
10,694

4.31
%
$
989,164

$
9,834

3.91
%
Short-term investments and bank deposits

13,009

72

2.16

71,361

28

0.15

Investment securities – AFS

192,863

1,490

3.09

164,835

1,133

2.75

Investment securities – HTM

60,535

447

2.95

53,100

381

2.87

Total investment securities

253,398

1,937

3.06

217,935

1,514

2.78

Total interest earning assets/interest income

1,242,022

12,703

4.05

1,278,460

11,376

3.52

Non-interest earning assets:










Cash and due from banks

17,814



20,806



Premises and equipment

17,575



17,678



Other assets

74,758



82,919



Allowance for loan losses

(11,757)



(11,907)



TOTAL ASSETS

$
1,340,412



$
1,387,956



Interest bearing liabilities:










Interest bearing deposits:










Interest bearing demand

$
226,606

$
353

0.62
%
$
220,594

$
63

0.11
%
Savings

139,724

35

0.09

131,184

49

0.14

Money markets

289,701

570

0.79

281,427

169

0.24

Time deposits

283,504

762

1.08

334,635

908

1.08

Total interest bearing deposits

939,535

1,720

0.73

967,840

1,189

0.49

Short-term borrowings

5,142

36

2.88

—

—

—

Advances from Federal Home Loan Bank

31,109

127

1.66

45,867

217

1.89

Guaranteed junior subordinated deferrable interest debentures

—

—

—

12,794

383

11.98

Subordinated debt

27,000

263

3.90

18,017

331

7.34

Lease liabilities

3,424

25

2.91

3,695

26

2.86

Total interest bearing liabilities/interest expense

1,006,210


2,171

0.86

1,048,213


2,146

0.81

Non-interest bearing liabilities:







Demand deposits

219,307



220,745



Other liabilities

8,146



6,970



Shareholders’ equity

106,749



112,028



TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,340,412



$
1,387,956



Interest rate spread

3.19



2.71

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

10,532

3.35
%

9,230

2.85
%
Tax-equivalent adjustment

(3)



(4)

Net Interest Income (GAAP)

$
10,529



$
9,226

~~…..PROVISION FOR LOAN LOSSES…..~~The Company recorded a $500,000 loan loss provision in the third quarter of 2022 as compared to a $350,000 provision expense in the third quarter of 2021. The increased third quarter 2022 provision expense reflects the partial charge-down and transfer of one commercial real estate loan relationship into

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~~non-accrual status while~~Three months ended June 30 (In thousands, except percentages)


	2023						2022
			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	$	986,111	$	12,613	5.08	%	$	976,995	$	9,729	3.95	%
Short-term investments and bank deposits		3,727		73	7.73			28,684		64	0.89
Investment securities – AFS		200,287		1,722	3.44			180,881		1,304	2.89
Investment securities – HTM		61,482		475	3.09			59,734		434	2.91
Total investment securities		261,769		2,197	3.36			240,615		1,738	2.89
Total interest earning assets/interest income		1,251,607		14,883	4.74			1,246,294		11,531	3.69
Non-interest earning assets:
Cash and due from banks		16,612						17,882
Premises and equipment		17,299						17,395
Other assets		74,608						80,729
Allowance for credit losses		(13,332)						(12,070)
TOTAL ASSETS	$	1,346,794					$	1,350,230
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	225,260	$	1,029	1.85	%	$	229,394	$	127	0.22	%
Savings		129,672		31	0.10			139,963		34	0.09
Money markets		303,950		1,793	2.39			291,998		241	0.33
Time deposits		299,913		2,166	2.93			284,935		554	0.78
Total interest bearing deposits		958,795		5,019	2.10			946,290		956	0.41
Short-term borrowings		24,967		335	5.28			1,500		3	0.83
Advances from Federal Home Loan Bank		18,209		128	2.81			36,190		156	1.82
Subordinated debt		27,000		263	3.90			27,000		263	3.90
Lease liabilities		3,206		24	2.96			3,475		25	2.91
Total interest bearing liabilities/interest expense		1,032,177		5,769	2.24			1,014,455		1,403	0.55
Non-interest bearing liabilities:
Demand deposits		198,984						216,596
Other liabilities		10,720						7,281
Shareholders’ equity		104,913						111,898
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,346,794					$	1,350,230
Interest rate spread					2.50						3.14
Net interest income/ Net interest margin (non-GAAP)				9,114	2.89	%				10,128	3.23	%
Tax-equivalent adjustment				(4)						(4)
Net Interest Income (GAAP)			$	9,110					$	10,124

…..PROVISION FOR CREDIT LOSSES…..The Company recorded a $43,000 expense for the ~~borrower pursues~~provision for credit losses in the ~~sale~~second quarter of 2023 after recognizing a $325,000 benefit in the second quarter of 2022 resulting in a net unfavorable change of $368,000. The increased second quarter of 2023 provision for credit losses was comprised of the ~~property. As demonstrated historically,~~recognition of a $34,000 provision for credit losses for the ~~Company continues its strategic conviction that~~loan portfolio and a ~~strong allowance~~$26,000 provision for credit losses for the HTM securities portfolio which more than offset a $17,000 provision recovery for credit losses related to unfunded commitments.

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The second quarter 2023 provision for credit losses in the loan ~~losses is needed, which has proven~~portfolio was necessary due to ~~be essential given the support provided to certain borrowers as they fully recover from the COVID-19 pandemic. Even with the third quarter increase,~~risk rating and non-accrual activity. Overall, we believe that non-performing assets remain well controlled, totaling ~~$4.6 million, or 0.47% of total loans, on September 30, 2022. The Company experienced net loan charge-offs of $1.4~~$5.7 million, or 0.57% of total loans, ~~in the third quarter of 2022 due to the partial charge-down of one commercial real estate loan relationship compared to~~on June 30, 2023. The Company experienced net loan recoveries of ~~$22,000,~~$55,000, or 0.02% of total average loans, in the second quarter of 2023 which compares favorably to net charge-offs of $29,000, or 0.01% of total average loans, in the ~~third~~second quarter of 2021. In summary, the allowance for loan losses provided 232% coverage of non-performing assets, and 1.09% of total loans, on September 30, 2022, compared to 373% coverage of non-performing assets, and 1.26% of total loans, on December 31, 2021.2022.

…..NON-INTEREST INCOME…..Non-interest income for the ~~third~~second quarter of ~~2022~~2023 totaled ~~$4.3~~$3.9 million and decreased by ~~$90,000,~~$276,000, or ~~2.0%~~6.7%, from the ~~third~~second quarter of ~~2021~~2022 performance. Factors contributing to the lower level of non-interest income for the quarter included:

●

a ~~$324,000,~~$187,000, or ~~10.3%~~6.3%, decrease in wealth management fees due to the unfavorable ~~impact of~~market conditions for both equity securities and bonds which have reduced the declining equity markets as well as the unfavorable impact that the move in the bond market is having on wealth management asset values, both of which were partially offset by new customer business growth. The fair market value of wealth management ~~assets declined since~~assets. Also, new customer business growth has only partially offset the ~~fourth quarter~~unfavorable impact of ~~2021 by $422.0 million, or 15.6%,~~market conditions on fee income; and ~~totaled $2.3 billion at September 30, 2022;~~

●

a ~~$113,000,~~$122,000, or ~~16.1%~~20.3%, ~~increase~~decrease in other income due to the recognition of a positive credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain borrowers while managing our interest rate risk position;

●

~~a $108,000, or 48.9%, increase in revenue from bank owned life insurance (BOLI) due to the receipt of a death claim;~~

●

a $38,000, or 253.3%, increase in net gains on loans held for sale as a result of more residential mortgage loans being sold in the secondary market during the third quarter of 2022 when compared to the prior year’s third quarter. Overall, there was a lower level of residential mortgage loan production during the third quarter of 2022 which reflects a reduced level of mortgage loan refinance activity due to the rapid escalation of interest rates. The reduced level of mortgage loan production caused mortgage related fees to decline by $54,000, or 66.7%; and

●

~~a $29,000, 11.2%, increase in service charges on deposit accounts as consumers are more active this year, increasing their spending habits.~~

~~…..NON-INTEREST EXPENSE…..~~The Company has demonstrated good expense control in this inflationary environment as non-interest expense for the third quarter of 2022 totaled $11.7 million and increased by $207,000, or 1.8%, from the prior year’s third quarter. Factors contributing to the higher level of non-interest expense for the quarter included:

●

~~a $277,000, or 20.1%, increase in professional fees due primarily to higher legal costs within our wealth management group;~~

●

a $161,000, or 2.3%, increase in salaries and employee benefits expense. Within total salaries and benefits expense, salaries cost increased by $406,000 due to merit increases and a higher level of full-time equivalent employees (FTEs), which are up by nine FTEs. Also, there were additional increases to health care costs and other employee benefits. Partially offsetting these higher costs within salaries and benefits was lower incentive compensation by $139,000 due to the reduced level of loan production and a $71,000 decline in pension service cost;

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●

other expense was favorably impacted by a $66,000 credit for the unfunded commitment reserve during the third quarter of 2022 after $36,000 of expense was recognized in last year’s third quarter, resulting in a favorable shift of $102,000;

●

~~no additional costs related to the branch acquisition were recognized during the third quarter of 2022 after $87,000 of expense was recognized during the third quarter of 2021;~~

●

~~a $47,000, or 7.2%, increase in net occupancy expense due to increased utilities cost along with maintenance and repair expense which was primarily related to the new branch office; and~~

●

the Company was required to recognize a settlement charge in connection with its defined benefit pension plan in the third quarter of 2022, which is explained in Note 17, Pension Benefits. The amount of the 2022 charge was $230,000 which is $39,000, or 14.5%, lower than the $269,000 settlement charge recognized in the third quarter of 2021.

~~…..INCOME TAX EXPENSE…..~~The Company recorded an income tax expense of $526,000, or an effective tax rate of 20.0%, in the third quarter of 2022. This compares to an income tax expense of $341,000, or an effective tax rate of 19.2%, for the third quarter of 2021.

~~NINE MONTHS ENDED SEPTEMBER 30, 2022 VS. NINE MONTHS ENDED SEPTEMBER 30, 2021~~

~~…..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, 2022

September 30, 2021


Net income

$
6,501

$
5,220

Diluted earnings per share

0.38

0.31

Return on average assets

0.65
%

0.52
%
Return on average equity

7.80

6.48

For the nine-month period ended September 30, 2022, the Company reported net income of $6,501,000, or $0.38 per diluted common share. This earnings performance was a $1.3 million, or 24.5%, improvement from the nine-month period of 2021 when net income totaled $5,220,000, or $0.31 per diluted common share. The earnings per share performance for the nine-month period of 2022 increased 22.6% when compared to the nine-month period of 2021. The improved earnings performance in 2022 reflects the full benefit of several important strategic actions that the Company executed in 2021 along with the successful management of our asset quality throughout the pandemic and effective balance sheet management. Overall, the increase to net interest income, along with a reduced loan loss provision, more than offset a lower level of non-interest income and higher non-interest expense resulting in an improved earnings performance for the first nine months of 2022.

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~~…..NET INTEREST INCOME AND MARGIN…..~~~~The following table compares the Company’s net interest income performance for the first nine months of 2022 to the first nine months of 2021 (in thousands, except percentages):~~

Nine months ended

Nine months ended








September 30, 2022

September 30, 2021

Change

% Change

Interest income

$

35,255

$
34,979

$
276

0.8
%
Interest expense

4,835

6,194

(1,359)

(21.9)

Net interest income

$

30,420

$
28,785

$
1,635

5.7

Net interest margin

3.24
%

3.07
%

0.17
%
  N/M

~~N/M — not meaningful~~

The Company’s net interest income in the first nine months of 2022 increased by $1.6 million, or 5.7%, when compared to the first nine months of 2021. The Company’s net interest margin of 3.24% for the first nine months of 2022 improved by 17 basis points from the prior year’s first nine-month time period. While the size of the Company’s balance sheet remains high by historical standards prior to the COVID-19 government stimulus programs, both total loans and total deposits have demonstrated stabilization since the second half of last year. The Company’s net interest income has increased in each quarter of 2022 as we have been able to more rapidly capture the benefit of higher interest rates on our earning assets while limiting the negative impact that higher rates have on the cost of funding our balance sheet. Specifically, the 2022 financial performance has been favorably impacted by the strategic actions taken by management in 2021 to lower funding costs. The Company has also benefitted from the higher U.S. Treasury yield curve as interest rates have increased due to the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. The higher national interest rates have favorably impacted the Company’s financial performance, particularly net interest income, which has demonstrated an increasing trend as the year progresses. In comparison to 2021, interest income increased for the nine-month period despite a $1.5 million reduction in PPP loan related fee income which was more than offset by the increased investment in the securities portfolio. For the nine months in 2022, both deposit and borrowing interest expense declined and resulted in a significant decrease to total interest expense between years. Financial results also reflect the impact of continued diligent management of our asset quality, as the Company’s loan loss provision expense is $1,075,000 lower when compared to the first nine months of 2021.

Total loans averaged $977.4 million in the first nine months of 2022 which was $10.1 million, or 1.0%, lower than the 2021 first nine-month average. Strong loan pipelines have resulted in increased production during the second and third quarters of 2022 and more than offset a higher than typical level of payoff activity in the first half of 2022. Excluding PPP loans, total average loans in the first nine months of 2022 exceed the 2021 nine-month average by $37.2 million, or 4.0%, as growth of CRE and home equity loans along with a higher volume of residential mortgage loans more than offset a decrease in the level of commercial & industrial loans. Total PPP loans averaged $6.0 million in the first nine months of 2022, representing a decrease of $47.3 million, or 88.7%, from the first nine months of last year. As previously discussed, of the $100 million of PPP loans originated from both government programs, only one very small PPP loan remains on the balance sheet that totals approximately $24,000, reflecting the Company’s successful efforts working with our customers through the SBA to complete the forgiveness process. Residential mortgage loan production was down in the first nine months of 2022 when compared to the same period last year. Refinance transactions have been severely impacted with the quick escalation of interest rates since the beginning of 2022. Residential mortgage loan production totaled $19.9 million in the first nine months of 2022 and was 73.8% lower than the production level of $76.2 million achieved in the first nine months of 2021. On a year-to-date basis, loan interest and fee income is $528,000, or 1.7%, lower through nine months of 2022 compared to the same period in 2021, as the favorable impact of the higher volume of traditional loans and the higher interest rate environment was more than offset by the reduction in PPP loan interest and fee income. This decrease is primarily due to the Company recording a total of $433,000 of processing fees and interest income from PPP loans in the nine months of 2022, which is $1.5 million, or 77.6%, lower than PPP income in the nine months of 2021.

Total investment securities averaged $238.5 million for the nine months of 2022, which is $31.6 million, or 15.3%, higher than the $206.9 million average for the nine months of last year. As mentioned in the quarterly performance comparison of this MD&A, the increase in the U.S. Treasury yield curve has resulted in a more favorable market for

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securities purchasing activity so far in 2022. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio. Management purchased more of these investments and was able to redeploy the cash flow from the excess payoff activity from the loan portfolio and also more profitably utilize a portion of the increased short-term liquidity on our balance sheet into the securities portfolio. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipals and corporate securities to maintain a well-diversified portfolio.

Although reduced from its high levels when government stimulus initially impacted the economy, our liquidity position continues to be strong as total short-term investments averaged $29.4 million for the nine-month period of 2022, which is $21.4 million, or 42.2%, lower than the 2021 nine-month average. Diligent monitoring and management of our short-term investment position remains a priority as uncertainty remains regarding the duration that the increased funds from government stimulus will remain on the balance sheet. Continued loan growth and prudent investment in securities are critical to achieve the best return on the Company’s liquid funds with management expecting to continue to be active with new security purchases during the remainder of 2022 given the increase in interest rates. Overall, through nine months of 2022, the average balance of total interest earning assets was consistent with the nine-month average of 2021 while total interest income increased by $276,000, or 0.8%, between years.

Total interest expense for the nine months of 2022 decreased by $1.4 million, or 21.9%, when compared to the nine months of 2021, due to lower levels of both deposit and borrowing interest expense. Through nine months, total average deposits are $7.9 million, or 0.7% higher compared to the nine months of 2021. Deposit volumes continue to reflect the favorable impact of government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. Deposit volumes were also favorably impacted by the Company’s successful business development efforts and the Somerset County branch acquisition, which occurred in late May 2021. Deposit interest expense in 2022 was lower by $425,000, or 10.9%, despite the higher year to date average volume of total deposits. The deposit growth reflects new deposit inflows as well as the loyalty of the bank’s core deposit base. Also, management’s decision to allow the previously mentioned large, high cost institutional deposit to mature has proven to be beneficial since the interest rate on this particular deposit was indexed to the market and would have become more expensive with the rising national interest rates experienced so far in 2022. This large institutional deposit was replaced by the additional low cost, fixed rate deposits from the Somerset County branch acquisition and resulted in significant interest expense savings. Specifically, our total deposit cost averaged 0.40% in the first nine months of 2022 compared to 0.45% in the first nine months of 2021, representing a decrease of five basis points. Total borrowings interest expense in the first nine months of 2022 is lower by $934,000, or 40.7%, compared to the same time frame in 2021. As previously mentioned, the decrease between years results from the favorable impact of the August 2021 subordinated debt offering which was used to replace higher cost debt. The remaining portion of the favorable variance in borrowings interest expense between the first nine months of 2022 and the first nine months of 2021 is due to reduced interest expense from FHLB borrowings. The average balance of total short-term and FHLB borrowings was lower in the first nine months of 2022 by $13.8 million, or 26.4%, as strength of the Company’s liquidity position allowed management to let higher cost FHLB term advances mature and not be replaced.

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, 2022 and 2021. For a detailed discussion of the components and assumptions included in the table, see the paragraph on page 37 before the quarterly table. The tax equivalent adjustments to interest income on loans and municipal securities for the nine months ended September 30, 2022 and 2021 was $10,000 and $14,000, 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.

~~Table of Contents~~

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

2022

2021

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

$
977,386

$
29,922

4.05
%
$
987,523

$
30,454

4.08
%
Short-term investments and bank deposits

29,409

154

0.69

50,857

47

0.12

Investment securities – AFS

179,938

3,917

2.90

157,679

3,392

2.87

Investment securities – HTM

58,553

1,272

2.90

49,226

1,100

2.98

Total investment securities

238,491

5,189

2.90

206,905

4,492

2.89

Total interest earning assets/interest income

1,245,286

35,265

3.76

1,245,285

34,993

3.73

Non-interest earning assets:










Cash and due from banks

17,820



18,882



Premises and equipment

17,449



17,822



Other assets

79,016



76,147



Allowance for loan losses

(12,113)



(11,788)



TOTAL ASSETS

$
1,347,458



$
1,346,348



Interest bearing liabilities:










Interest bearing deposits:










Interest bearing demand

$
228,425

$
549

0.32
%
$
210,179

$
182

0.12
%
Savings

138,524

102

0.10

124,120

130

0.14

Money markets

290,946

971

0.45

269,509

511

0.25

Time deposits

286,061

1,850

0.87

337,726

3,074

1.21

Total interest bearing deposits

943,956

3,472

0.49

941,534

3,897

0.55

Short-term borrowings

2,214

39

2.42

437

1

0.38

Advances from Federal Home Loan Bank

36,164

459

1.72

51,717

681

1.75

Guaranteed junior subordinated deferrable interest debentures

—

—

—

12,988

944

9.69

Subordinated debt

27,000

789

3.90

11,106

591

7.09

Lease liabilities

3,477

76

2.91

3,767

80

2.85

Total interest bearing liabilities/interest expense

1,012,811


4,835

0.64

1,021,549


6,194

0.81

Non-interest bearing liabilities:







Demand deposits

216,266



210,758



Other liabilities

6,946



6,385



Shareholders’ equity

111,435



107,656



TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,347,458



$
1,346,348



Interest rate spread

3.12



2.92

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

30,430

3.24
%

28,799

3.07
%
Tax-equivalent adjustment

(10)



(14)

Net Interest Income (GAAP)

$
30,420



$
28,785

~~…..PROVISION FOR LOAN LOSSES…..~~For the first nine months of 2022, the Company recorded a $225,000 provision recovery for loan losses compared to an $850,000 provision expense recorded in the first nine months of 2021 resulting in a net favorable change of $1.1 million. The 2022 provision recovery reflects improved credit quality for the overall portfolio due to several loan upgrades and increased payoff and paydown activity including two substandard credits. The Company experienced net loan charge-offs of $1.5 million, or 0.21% of total average loans, in the nine months of 2022 which is considerably higher than net loan charge-offs of $71,000, or 0.01% of total average loans, for

~~Table of Contents~~

~~the nine months of 2021. The increase in net loan charge-offs in 2022 is the result of the partial charge-down of one commercial real estate loan relationship.~~

~~…..NON-INTEREST INCOME…..~~Non-interest income for the first nine months of 2022 totaled $12.8 million and decreased by $630,000, or 4.7%, from the first nine months of 2021 performance. Factors contributing to the lower level of non-interest income for the nine-month period included:

●

a $449,000, or 71.0%, decrease in net gains on loans held for sale due to the lower level of residential mortgage loan production which reflects a reduced level of mortgage loan refinance activity due to the rapid escalation of interest rates since the beginning of 2022. The reduced level of mortgage loan production also caused mortgage related fees to decline by $218,000, or 70.3%;

●

~~a $139,000, or 20.3%, increase in service charges on deposit accounts as consumers are more active this year, increasing their spending habits;~~

●

a $77,000, or 0.9%, decline in wealth management fees due to the unfavorable impact of the declining equity markets as well as the unfavorable impact that the move in the bond market is having on wealth management asset values, both of which were partially offset by new customer business growth;

●

~~the Company recognized an $84,000 gain on investment security sales in 2021 as compared to this year when no such gain was recognized; and~~

●

~~a $61,000, or 3.2%, increase in other income due to the recognition of a positive~~ credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain borrowers while managing our interest rate risk position.

…..NON-INTEREST EXPENSE…..~~The Company has demonstrated good expense control in this inflationary environment as non-interest~~Non-interest expense for the ~~first nine months~~second quarter of ~~2022~~2023 totaled ~~$35.3~~$13.2 million and increased by ~~$453,000,~~$1.1 million, or ~~1.3%~~8.8%, from the prior year’s ~~first nine months.~~second quarter. Factors contributing to the higher level of non-interest expense for the ~~nine-month period~~quarter included:

●

a ~~$721,000, or 3.5%, increase in salaries and employee benefits expense. Within total salaries & benefits expense, salaries cost increased by~~ $1.1 million, due to merit increases and a higher level of full-time equivalent employees. Also, there were additional increases to health care costs and other employee benefits. Partially offsetting these higher costs within salaries & benefits was lower incentive compensation by $354,000 due to the reduced level of loan production and a $214,000 decline in pension service cost;

●

~~a $401,000,~~ or ~~9.8%~~127.6%, ~~increase~~rise in professional fees due primarily to ~~higher~~increased legal ~~costs within our wealth management group;~~

●

~~no additional costs~~and professional fees related to the ~~branch acquisition were recognized~~Company’s recent annual meeting proxy contest and defense against an activist investor. The Company is still involved in ~~2022 after $390,000 of expense was recognized in 2021;~~

●

other expense was favorably impacted by a $215,000 credit for the unfunded commitment reserve during the nine months of 2022 after $92,000 of expense was recognized in last year’s nine month period, resulting in a favorable shift of $307,000;

●

~~a $156,000, or 7.9%, increase in net occupancy expense due to increased utilities cost along~~ongoing litigation with ~~maintenance and repair expense which was primarily related to the new branch office; and~~

●

the Company was required to recognize a settlement charge in connection with its defined benefit pension plan in 2022, which is explained in Note 17, Pension Benefits. The amount of the 2022 charge was $1.2 million which is $124,000, or 11.1%, higher than the $1.1 million settlement charge recognized in 2021.an activist investor.

~~Table of Contents~~

…..INCOME TAX EXPENSE…..The Company recorded an income tax credit of $61,000 in the second quarter of 2023. This compares to an income tax expense of ~~$1.6 million,~~$496,000, or an effective tax rate of 20.0%, ~~in the first nine months of 2022. This compares to an income tax expense of $1.3 million, or an effective tax rate of 19.7%,~~ for the ~~first nine months~~second quarter of ~~2021.~~2022.

SIX MONTHS ENDED JUNE 30, 2023 VS. SIX MONTHS ENDED JUNE 30, 2022

…~~..SEGMENT RESULTS.…~~..PERFORMANCE OVERVIEW…..The ~~community banking segment~~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, 2023			June 30, 2022
Net income	$	1,328		$	4,399
Diluted earnings per share		0.08			0.26
Return on average assets		0.20	%		0.66	%
Return on average equity		2.55			7.80

For the six-month period ended June 30, 2023, the Company reported a net income ~~contribution~~ of ~~$3,359,000 in~~$1,328,000, or $0.08 per diluted common share. This earnings performance was a $3,071,000, or 69.8%, decline from the ~~third quarter~~six-month period of 2022 ~~which was $558,000 higher than the~~when net income ~~contribution in~~totaled $4,399,000, or $0.26 per diluted common share. Overall, the ~~third quarter of 2021. For the nine month time period the community banking segment’s~~decrease to net interest income, contribution of $9,493,000 was $434,000 higher than the first nine months of 2021. The increase in the third quarter results from the higher national interest rates having a favorable impact on the Company’s financial performance, increased non-interest income and a reduced level of total non-interest expense which more than offsetalong with a higher ~~loan loss provision. The improvement~~provision for ~~the nine month time period is due to the favorable impact from the recognition of the loan loss provision recovery in the first nine months of 2022 as well as reduced~~credit losses and increased non-interest expense, more than ~~offsetting a lower~~offset an increased level of ~~total revenue. Net interest~~non-interest income ~~declined for the nine month time period as the reduction to total interest income more than offset the reduction to total interest expense. The primary reason for~~resulting in the lower level of ~~total interest income was due to a reduction in PPP processing fees and interest income as well as a lower level of total loan charges~~earnings in the first ~~nine~~six months of ~~2022 which combined were $1,759,000 lower when compared to~~2023.

The benefits of maintaining a strong relationship focused community bank are evident during periods of market volatility and financial uncertainty. Since the first nine months of 2021. However, the higher national interest rates along with an increased balance of average total loans excluding PPP loans resulted in an additional $974,000 of loan interest income. This segment continues to benefit from the strong production of both commercial real estate loans and residential real estate loans that occurred throughout 2021, which resulted in the nine month average balance for both of these loan categories exceeding the 2021 nine month average by $41.1 million. This segment is also benefitting from a greater level of production of home equity loans, as the 2022 nine month average for this loan category exceeds the 2021 nine month average by $5.4 million. Total interest income from CRE, residential mortgage, and home equity loans was $1.3 million higher through nine monthsend of 2022, when compared to the first nine months of 2021. Also, favorably impacting net interest income and partially offsetting the lower level of total interest income was lower deposit cost in 2022 despite total deposit cost demonstrating an increasing trend this year because of the higher national interest rates. The decrease to total deposit interest expense occurred even though total average deposits in the first nine months of 2022 exceeded the 2021 first nine month average by $7.9 million. This segment was also favorably impacted by management electing to replace the third quarter of 2021 maturity of a high cost, large institutional deposit with the additional lower cost deposits obtained from the 2021 Somerset County branch acquisition. Overall, total deposit interest expense is $425,000 lower between years. This segment was also favorably impacted by the Company ~~recording a $225,000 loan loss provision revovery~~has seen an increase of $19.0 million, or 1.7%, in deposits which demonstrates customer confidence and the ~~first nine months~~strength and loyalty of 2022 compared to an $850,000 provision expense in first nine months of 2021. This was discussed previously in the Provision for Loan Losses section within this document. Non-interest income was unfavorably impacted by a reduced level of loan sale gain income by $449,000 due to the lower level of residential mortgage loan production in 2022, which also caused mortgage related fees to decline by $218,000 in the first nine months of 2022. Overall, these unfavorable items more than offset the favorable impact of higher service charges onour core deposit accounts by $139,000. Non-interest expense in the first nine months of 2022 compares favorably to the same time period in 2021 due to lower miscellaneous expense after the Company had $390,000 of additional costsbase. Additionally, wealth management revenues have shown modest growth for the the branch acquisition in the first nine months of 2021 while there were no such costs in 2022. This segment was favorably impacted by reduced incentive compensation and the Company recognizing a credit to the unfunded commitment reserve of $215,000 after $92,000 of expense was recognized in the first nine months of last year, resulting in a $307,000 favorable shift. This segment also benefitted from reduced pension costs in 2022 which is explained in Note 17. These favorable items were partially offset by higher salaries cost.

The wealth management segment’s net income contribution was $425,000 in the third quarter of 2022 which was $406,000 lower than the third quarter of 2021. Through nine months, the wealth management segment’s net income contribution was $1,658,000 which was $569,000 lower than the net income contribution for the first nine months of 2021. The decrease in both time periods reflects the unfavorable impact of the declining equity markets on wealth management fee income as well as the unfavorable impactpast two consecutive quarters. We believe that the move in the bond market is having on wealth management asset values. Both unfavorable items are being partially offset by new customer business growth. Also contributing to the decline in both time periods between years, were higher levels of legal fees, total employee costs and meals & travel related expenses for business development. Overall, the fair market value of wealth management assets declined since the fourth quarter of 2021 by $422.0 million, or 15.6%, and totaled $2.3 billion at September 30, 2022.

The investment/parent segment reported a net loss of $1,682,000 in the third quarter of 2022 and a net loss of $4,650,000 for the first nine months of 2022 which is a lower loss by $519,000 than the third quarter of 2021 and a

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~~lower loss~~Company is well positioned to withstand ongoing market volatility and potential industry-related challenges that it may face through the remainder of 2023.

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


	Six months ended			Six months ended
	June 30, 2023			June 30, 2022			Change			% Change
Interest income	$	29,453		$	22,555		$	6,898		30.6	%
Interest expense		10,821			2,664			8,157		306.2
Net interest income	$	18,632		$	19,891		$	(1,259)		(6.3)
Net interest margin		2.96	%		3.19	%		(0.23)	%	N/M

N/M — not meaningful

The Company's net interest income in the first six months of 2023 decreased by ~~$1.4~~$1.3 million, or 6.3%, from the prior year's first six months while the net interest margin of 2.96% for the first half of 2023 represents a 23-basis point decline from the first half of 2022. As previously mentioned, the decrease in net interest income reflects total interest expense increasing to a higher level than the ~~first nine months of 2021.~~increase in total interest income. The ~~reduced loss results~~Company continues to benefit from ~~lower borrowings interest expense primarily~~increased yields on total loans and investment securities due to ~~the favorable impact of the 2021 subordinated debt offering which was used to replace~~a higher cost debt. This transaction effectively lowered debt cost on long-term funds by nearly 4.0%, resulting in $746,000 of reduced interest expense on long term borrowings. The remaining portion of the favorable variance in borrowings interest expense between years is due to reduced interest expense from Federal Home Loan Bank (FHLB) borrowings. Finally, and also contributing to the reduced loss in this segment, was an increase in interest income from the securities portfolio due to the higher average volume of total securities. The increase to the U.S. Treasury yield curve and the Federal Reserve’s action to tighten monetary policy in their effort to tame decades high inflation. However, similar to what is occurring across the banking industry, the increased national interest rates have caused total deposit and borrowing costs to increase to a higher degree, resulting in net interest margin compression and lower net interest income.

Total average loans in the first six months of 2023 compare favorably to the 2022 first six-month average by $8.0 million, or 0.8%. Excluding PPP loans, which still existed on the balance sheet in 2022, total average loans in the first half of 2023 exceeded last year’s first half by $16.4 million, or 1.7%. As previously mentioned, loan pipelines continue to be strong, but customers have delayed fundings given the uncertainty that exists in the economy and expectations regarding interest rates. Therefore, loan production in 2023 has been slower so far this year than what was experienced in 2022. However, the strong level of production experienced throughout 2022 resulted in ~~improved yields for federal agency mortgage-backed securities~~total average loans in 2023 comparing favorably to the first six months of 2022. Growth in commercial & industrial loans (C&I) and ~~federal agency bonds making purchases~~home equity loans more than offset decreased commercial real estate (CRE), residential mortgage and consumer loans. Overall, the higher interest rate environment along with the higher average volumes of ~~these investments more attractive. Therefore, management was able to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio.~~

~~…..BALANCE SHEET…..~~~~The Company’s~~C&I and home equity loans, resulted in total ~~consolidated assets were $1.4 billion at September 30, 2022, which increased~~loan interest income improving by ~~$14.5~~$5.7 million, or ~~1.1%~~29.5%, ~~from~~for the ~~December 31, 2021 asset level.~~first six months of 2023 when compared to the first six months of last year. This ~~change was~~increase occurred despite a $376,000 reduction in PPP related ~~primarily, to increased levels of~~income in 2023.

Total investment securities ~~and other assets~~averaged $263.9 million for the first half of 2023 which ~~were partially offset by decreased levels of cash and cash equivalents and loans. Specifically, investment securities increased $19.9~~is $32.8 million, or ~~9.2%~~14.2%, higher than the $231.0 million average for the first half of last year. The increase reflects additional securities purchased primarily during 2022 as the ~~increase in the~~increased U.S. Treasury yield curve resulted in a more favorable market for securities purchasing activity ~~so far in 2022. The~~causing the Company to redeploy some of its short-term excess liquidity. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities ~~portfolio.~~portfolio causing interest income from the securities portfolio to increase by $1.2 million, or 36.5%, through six months of this year. So far in 2023, purchases of securities have slowed as more funds have been allocated to the loan portfolio and the Company has been controlling the amount of overnight borrowed funds. The rising national interest rates caused the rate on overnight borrowed funds to be in line with or exceed the yield on the typical types of federal agency mortgage-backed securities that are normally purchased. While yields on new security purchases still exceed the overall average yield of the existing securities portfolio, the shrinking and in some cases negative spread between overnight borrowings and the yield on new securities caused the slowdown in purchasing activity. Thus, the new investment security purchases have primarily been used to replace maturing securities cash flow in order to maintain appropriate balances for public funds pledging purposes.

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will continue to carefully monitor our liquidity position and short-term investments as we expect deposits related to government stimulus programs to continue to decline during 2023. Overall, the 2023 first six-month average balance of total interest earning assets increased since last year’s six-month average by $7.3 million, or 0.6%, while total interest income increased by $6.9 million, or 30.6%, since the first six months of 2022.

On the liability side of the balance sheet, through six months, total average deposits are $7.4 million, or 0.6%, lower compared to the first six months of 2022. The modest decrease since last year is reflective of a portion of the funds from the government stimulus programs leaving the balance sheet and reflects greater pricing competition in the market to retain deposits because of the increasing national interest rates. As previously mentioned, since early March 2023 when two large bank failures occurred, customer fear of contagion within the industry caused deposit flight, especially uninsured deposits, from certain banks to other financial services providers. Despite this turmoil, AmeriServ Financial’s core deposit base continued to demonstrate the strength and stability that it has for many years. Total deposits, in fact, grew during the first six months of 2023 by $19.0 million, or 1.7%, on an end of period basis since December 31, 2022 demonstrating what we believe is customer confidence in our bank. In addition to its strong, loyal core deposit base, the Company has several other sources of liquidity including a significant unused borrowing capacity at the Federal Home Loan Bank, overnight lines of credit at correspondent banks and access to the Federal Reserve Discount Window. The Company does not currently utilize brokered deposits as a funding source.

Total interest expense in the first six months of 2023 increased by $8.2 million, or 306.2%, when compared to the first six months of 2022, due to higher deposit and short-term borrowings interest expense. Deposit interest expense was higher by $7.5 million, or 425.6%, despite the first six months 2023 average volume of total interest bearing deposits remaining relatively consistent with the 2022 first six-month average, growing by $8.9 million, or 0.9%. The rising national interest rates resulted in certain deposit products, particularly public funds, that are tied to a market index, repricing upward with the move in national interest rates causing interest expense to increase. Additionally, increased market competition has caused the Company to increase rates on certain shorter-term certificates of deposit in order to retain funds. As previously mentioned, for interest rate risk management purposes and to offset a portion of the unfavorable impact that rising funding costs are having on net interest income, management proactively executed a $50 million interest rate hedge in February 2023 and another $10 million interest rate hedge in April 2023 to fix the cost of certain deposits that are indexed and move with short-term interest rates. These hedging transactions brought the Company’s variability of net interest income to a more neutral position. Overall, total deposit cost averaged 1.61% in the first half of 2023, which is 131 basis points higher than total deposit cost of 0.30% in the first half of 2022.

Total borrowings interest expense increased by $701,000, or 76.9%, in the first half of 2023 compared to the first half of 2022. The increase results from the impact that the higher national interest rates had on overnight borrowings cost as well as the Company utilizing more overnight borrowed funds so far in 2023. Total overnight borrowings averaged $32.8 million in the first half of 2023 after only $750,000 of average overnight borrowings were utilized during the first half of 2022. As previously mentioned, given the high cost of overnight borrowed funds, management has been effectively controlling the usage of this funding source. As a result, average overnight borrowed funds in the second quarter of 2023 decreased by $15.8 million, or 38.7%, from the first quarter of 2023 average balance. Borrowings interest expense was favorably impacted by reduced interest expense from Federal Home Loan Bank (FHLB) term borrowings, which declined by $122,000, or 36.7%, during the six months of 2023 compared to 2022. The average balance of FHLB term borrowings was lower in the first half of 2023 by $20.7 million, or 53.6%, as the strength of the Company’s liquidity position allowed management ~~purchased more~~to let FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve during 2023, FHLB term advances have rates that are lower than the cost of ~~these investments as well as taxable municipals~~overnight borrowed funds. Therefore, management began replacing matured FHLB term advances in 2023.

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, 2023 and ~~corporate~~2022. For a detailed discussion of the components and assumptions included in the table, see the paragraph before the quarterly table on page 43. The tax equivalent adjustments to interest income on loans and municipal securities for the six months ended June 30, 2023 and 2022 was $6,000 and $7,000, respectively, which is reconciled to ~~maintain~~the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a ~~well-diversified portfolio. Other~~GAAP basis to a tax-equivalent basis were not material.

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


	2023						2022
			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	$	986,302	$	24,891	5.03	%	$	978,272	$	19,228	3.92	%
Short-term investments and bank deposits		4,051		130	6.37			37,608		82	0.43
Investment securities – AFS		202,274		3,492	3.45			173,474		2,427	2.80
Investment securities – HTM		61,608		946	3.11			57,563		825	2.87
Total investment securities		263,882		4,438	3.37			231,037		3,252	2.82
Total interest earning assets/interest income		1,254,235		29,459	4.70			1,246,917		22,562	3.62
Non-interest earning assets:
Cash and due from banks		16,512						17,824
Premises and equipment		17,394						17,386
Other assets		74,853						81,145
Allowance for credit losses		(12,739)						(12,291)
TOTAL ASSETS	$	1,350,255					$	1,350,981
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand	$	225,993	$	1,889	1.69	%	$	229,333	$	196	0.17	%
Savings		131,096		63	0.10			137,925		67	0.10
Money markets		300,776		3,249	2.18			291,569		401	0.28
Time deposits		297,215		4,007	2.72			287,340		1,088	0.76
Total interest bearing deposits		955,080		9,208	1.94			946,167		1,752	0.37
Short-term borrowings		32,843		829	5.01			750		3	0.83
Advances from Federal Home Loan Bank		17,949		210	2.36			38,691		332	1.74
Subordinated debt		27,000		526	3.90			27,000		526	3.90
Lease liabilities		3,241		48	2.95			3,504		51	2.91
Total interest bearing liabilities/interest expense		1,036,113		10,821	2.10			1,016,112		2,664	0.53
Non-interest bearing liabilities:
Demand deposits		198,431						214,745
Other liabilities		10,709						6,346
Shareholders’ equity		105,002						113,778
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,350,255					$	1,350,981
Interest rate spread					2.60						3.09
Net interest income/ Net interest margin (non-GAAP)				18,638	2.96	%				19,898	3.19	%
Tax-equivalent adjustment				(6)						(7)
Net Interest Income (GAAP)			$	18,632					$	19,891

…..PROVISION FOR CREDIT LOSSES…..The Company recorded a $1.2 million expense for the provision for credit losses in the first six months of 2023 after recognizing a $725,000 benefit in the first six months of 2022 resulting in a net unfavorable change of $1.9 million. Included in the six-month 2023 provision expense was the recognition of a $926,000 loss from a subordinated debt investment with Signature Bank which was closed by banking regulators on March 12, 2023. In a press release issued by the Federal Deposit Insurance Corporation (FDIC), it was disclosed that unsecured debt holders of the institution will not be protected.

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The 2023 provision for credit losses for the loan portfolio was necessary due to risk rating and non-accrual activity. Total classified and criticized loan levels exhibited a net increase during the first six months of 2023 due to the downgrade of three commercial real estate loan relationships. Specifically, non-performing assets increased ~~$5.5~~from $5.2 million at December 31, 2022 to $5.7 million at June 30, 2023. Through six months of 2023, the Company experienced net loan charge-offs of $61,000, or 0.01% of total average loans, which compares favorably to net charge-offs of $105,000, or 0.02% of total average loans, in the first half of 2022. In summary, the allowance for credit losses on the loan portfolio provided 216% coverage of non-performing assets, and 1.24% of total loans, on June 30, 2023, compared to 207% coverage of non-performing assets, and 1.08% of total loans, on December 31, 2022.

…..NON-INTEREST INCOME…..Non-interest income for the first six months of 2023 totaled $9.4 million and increased by $896,000, or 10.6%, from the first six months of 2022 performance. Factors contributing to the higher level of non-interest income for the six-month period included:

●

AmeriServ Financial Bank sold all 7,859 shares of the Class B common stock of Visa, Inc. that it owned for a sale price of $1.7 million. The shares had no carrying value on the balance sheet and, as the Bank had no historical cost basis in the shares, the entire sale price was recognized as a gain. The Company believes that this was an appropriate time to capture the gain on these shares due to the volatility and uncertainty in the financial markets;

●

a $614,000, or 10.0%, decrease in wealth management fees due to the unfavorable market conditions for both equity securities and bonds which have reduced the market value of wealth management assets. Also, new customer business growth has only partially offset the unfavorable impact of market conditions on fee income. The fair market value of wealth management assets declined since December 31, 2021, by $266.1 million, or 9.8%, and totaled $2.4 billion at June 30, 2023;

●

a $226,000, or 19.4%, decrease in other income due to the recognition of a credit valuation adjustment to the market value of the interest rate swap contracts that the Company executed to accommodate the needs of certain borrowers while managing our interest rate risk position; and

●

a $66,000, or 50.8%, decrease in net gains on loans held for sale as the limited housing supply along with sharply higher interest rates continues to unfavorably impact residential mortgage loan production.

…..NON-INTEREST EXPENSE…..Non-interest expense for the first six months of 2023 totaled $25.1 million and increased by $1.6 million, or ~~22.0%~~6.6%, from the prior year’s first six months. Factors contributing to the higher level of non-interest expense for the six-month period included:

●

a $1.7 million, or 119.0%, rise in professional fees due primarily to increased legal and professional fees related to the Company’s recent annual meeting proxy contest and defense against an activist investor. Given that the Company’s shareholders voted to elect the Board’s slate of director candidates, the Company expects costs related to the activist issue to decline in the second half of 2023. However, the Company is still involved in ongoing litigation with an activist investor;

●

a $1.1 million, or 47.5%, decrease in other expense as the Company did not have to recognize a pension settlement charge in the first half of 2023 compared to a $1,014,000 charge recognized in the first half of 2022;

●

a $535,000, or 3.7%, increase in salaries and employee benefits expense. The increase is attributed to the annual employee merit increases, a greater level of full-time equivalent employees (FTE) as the Company filled certain open positions that were vacant last year, and the impact that inflationary pressures are having on the cost of new hires. Partially offsetting the higher level of salaries was lower incentive compensation and pension expense as there are fewer employees in the defined benefit pension plan due to numerous retirements over the past few years; and

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●

a $268,000, or 14.2%, increase in data processing and IT expense due to increased software costs from our core data provider and additional expenses related to monitoring our computing and network environment.

…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of $311,000, or an effective tax rate of 19.0%, in the first six months of 2023. This compares to an income tax expense of $1.1 million, or an effective tax rate of 20.0%, for the first six months of 2022. The lower level of income tax expense this year is due to the reduced level of pre-tax income.

…..SEGMENT RESULTS.….. The community banking segment reported a net income contribution of $7,825,000 in the first six months of 2023 which was $1,691,000 higher than the net income contribution in the first six months of 2022. The increase between time periods results from the strength that this segment provides to the Company which was determined by a thorough funds transfer pricing analysis. In short, a funds transfer pricing analysis determines how funding (deposits) and use of this funding (loans) by each segment contributes to the overall profitability of the Company by providing an estimated positive or negative dollar value of the segment’s contribution to the Company. Overall, the funds transfer pricing analysis indicated that the community banking segment provided a $4.5 million benefit to the Company. Despite the benefit that community banking provides, this segment was unfavorably impacted from net interest margin compression as total deposit interest expense increased to a higher level than the increase to total loan interest income. This segment continues to benefit from increased yields on loans due to a higher U.S. Treasury yield curve and the Federal Reserve’s action to tighten monetary policy. However, the increased national interest rates have caused total deposit costs to increase to a higher degree. The Company benefitted from a higher level of total average loans in the first half of 2023. Growth in commercial & industrial loans (C&I) and home equity loans more than offset decreased residential mortgage, consumer and commercial real estate (CRE) loans. This segment did benefit from an additional $215,000 of total loan charge income which partially offset a decline in PPP processing fees and interest. The Company recognized $376,000 of PPP related income in the first six months of 2022 and did not recognize any PPP related income in 2023. Overall, total loan interest income improved by $5.7 million, or 29.5%, for the first six months of 2023 when compared to the first six months of last year. Deposit interest expense was higher by $7.5 million, or 425.6%, while the first half 2023 average volume of total interest-bearing deposits increased by $8.9 million, or 0.9%. The impact that the higher national interest rates had on deposit costs combined with increased market competition to retain and attract deposits contributed to net interest margin compression. This segment was unfavorably impacted by the Company recording $335,000 of expense for the allowance for credit losses on our loan portfolio in the first six months of 2023 compared to a $725,000 recovery for loan losses in last year’s first six months. This was discussed previously in the Provision for Credit Losses section within this document. Non-interest income was unfavorably impacted by the recognition of a $217,000 credit valuation adjustment to the market value of the ~~Company’s~~ interest rate swap ~~transactions.~~ contracts that the Company executed to accommodate the needs of certain commercial borrowers while managing our interest rate risk position. Also, unfavorably impacting non-interest income was a reduced level of loan sale gain income by $66,000 due to the lower level of residential mortgage loan production in 2023. Non-interest expense, within the community banking segment, in the first six months of 2023 compares favorably to last year’s first six months as reduced pension expense, explained in Note 16, and lower incentive compensation more than offset higher salaries cost. As mentioned previously in the MD&A, the Company did not have to recognize a pension settlement charge in the first half of 2023 after recognizing a $1.0 million pension settlement charge last year, which positively impacted all segments.

The ~~redeployment~~wealth management segment’s net income contribution decreased by $813,000 in the first six months of 2023 from the first six months of 2022. The decrease reflects the unfavorable market conditions for both equity securities and bonds which have reduced the market value of wealth management assets. Also, new customer business growth has only partially offset the unfavorable impact of market conditions on fee income. The fair market value of wealth management assets declined since December 31, 2021 by $266.1 million, or 9.8%, and totaled $2.4 billion at June 30, 2023. Partially offsetting this decline were lower levels of incentive compensation, pension costs and professional fees.

The investment/parent segment reported a net loss of $6,917,000 in the first six months of 2023 which is greater than the net loss of $2,968,000 in the first six months of 2022 by $3,949,000. The funds ~~into~~transfer pricing analysis within this segment caused the loss reported within this segment to be $2.8 million higher due to the inverted yield curve and the accelerated increase in funding costs on our balance sheet. Also, contributing to the greater loss within this segment was the first quarter of 2023 recognition of a $926,000 loss from a subordinated debt investment with Signature Bank and $1.7 million of additional legal and professional fees related to the Company’s recent annual meeting proxy contest

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and defense against an activist shareholder. This segment was also unfavorably impacted by $700,000 of additional total borrowings interest expense due to the higher average balance of short-term borrowed funds. These unfavorable items more than offset the $1.7 million gain recognized during the first quarter of 2023 from the sale of the 7,859 shares of the Class B common stock of Visa Inc. that the Bank owned and an increased level of interest income from investment securities and short-term investments by $1.2 million as the higher interest rates resulted in an improved overall total portfolio ~~caused~~yield.

…..BALANCE SHEET…..The Company’s total consolidated assets were $1.3 billion at June 30, 2023, which declined by $18.2 million, or 1.3%, from the December 31, 2022 asset level. This change was related, primarily, to decreased levels of cash and cash equivalents, ~~to decrease~~investment securities, and loans. Specifically, cash and cash equivalents were reduced by ~~$12.6~~$5.9 million, or ~~30.6%.~~25.6%, while investment securities decreased $9.1 million, or 3.8%, during the first six months of 2023. Purchasing activity of investment securities slowed during 2023 as the Company controlled the amount of its overnight borrowed funds due to the shrinking and in some cases negative spread between overnight borrowings and the yield on new securities. Loans, net of unearned fees, ~~and~~decreased $3.1 million, or 0.3%, as loan production slowed during the first half of 2023. Loan pipelines continue to be strong, but customers have delayed fundings. Further, the allowance for credit losses on our loan portfolio increased $1.5 million, or 13.8%, due primarily to the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2023 which necessitated a day one increase of $1.2 million be made to the allowance. Partially offsetting the decrease in loans was a $501,000 increase in residential mortgage loans held for ~~sale decreased by $6.6 million, or 0.7%, as a decrease in the level of commercial and industrial loans more than offset the growth in volume of commercial real estate and residential mortgage loans.~~sale.

Total deposits increased by ~~$13.4~~$19.0 million, or ~~1.2%~~1.7%, in the first ~~nine~~six months of ~~2022.~~2023. This ~~reflects new deposit inflows as well as~~demonstrates customer confidence and the strength and loyalty of ~~the Company’s~~our core deposit base. Deposit volumes were favorably impacted by the government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. However, with government stimulus ending in 2021, deposit balances have demonstrated stabilization. As of ~~September~~June 30, ~~2022,~~2023, the 25 largest depositors represented ~~20.3%~~20.7% of total deposits, which is an increase from December 31, ~~2021~~2022, when it was ~~18.9%~~18.8%. As of June 30, 2023 and December 31, 2022, the estimated amount of uninsured deposits was $343.9 million and $316.5 million, respectively. The estimate of uninsured deposits was done at the single account level and does not take into account total customer balances in the Bank. It should be noted that approximately 50% of these uninsured deposits relate to public funds from municipalities, government entities, and school districts which by law are required to be collateralized by investment securities or FHLB letters of credit to protect these depositor funds. Total borrowings have ~~increased~~decreased by ~~$12.0 million,~~$35.7 millon, or ~~16.5%~~25.8%, since year-end ~~2021.~~2022. This change was driven by ~~an increase in short-term borrowing which was partially offset by~~ a decrease in both short-term borrowings and FHLB term advances. Specifically, short-term borrowings ~~totaled $26.3~~decreased by $32.0 million, ~~at September 30, 2022 compared to no short-term borrowings being outstanding at December 31, 2021. In addition,~~or 36.1%, while FHLB term advances decreased by ~~$14.1~~$3.6 million, or ~~33.1%, and totaled $28.5 million at September 30, 2022. The current strong liquidity position~~18.5%. Given the high cost of overnight borrowed funds, management has ~~allowed~~been effectively controlling the ~~Company to let higher cost FHLB term advances mature and not be replaced. However,~~usage of this funding source. In addition, the ~~Company does continue to utilize~~inversion in the yield curve has caused FHLB term advances to ~~help manage interest rate risk.~~have rates that are lower than the cost of overnight borrowed funds. Therefore, management began replacing matured FHLB term advances in 2023.

The Company’s total shareholders’ equity decreased by ~~$15.0~~$2.6 million, or ~~12.8%~~2.5%, ~~over~~during the first ~~nine~~six months of ~~2022.~~2023. The decrease in capital ~~during the first nine months of 2022~~ is the result of the ~~negative impact on accumulated other comprehensive loss due~~Company’s earnings performance during the first half of 2023 being more than offset by the cumulative effect adjustment for the adoption of ASU 2016-13 and our common stock dividend payments to shareholders. In addition, the reduced market value of the available for sale investment securities ~~portfolio. Additionally, the revaluation of the pension obligation resulting from a drop in the value of the pension plan assets~~portfolio had a negative impact on accumulated other comprehensive ~~loss. These decreases~~loss which more than offset the ~~Company’s~~ improved ~~first nine months earnings performance.~~market value adjustment on the interest rate hedge.

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The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of ~~13.92%~~14.01%, and a common equity tier 1 capital ratio of ~~10.44%~~10.38% at ~~September~~June 30, ~~2022.~~2023. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of ~~September~~June 30, ~~2022,~~2023, the Company’s book value per common share was ~~$5.94~~$6.04 and its tangible book value per common share ~~(non-GAAP)~~ was ~~$5.13.~~$5.24⁽¹⁾. When compared to December 31, ~~2021,~~2022, book value ~~per common share declined by $0.88~~ per common share and tangible book value per common share declined by ~~$0.89~~$0.16 per common share. The decline in the Company’s book value and tangible book value per share in the first six months of 2023 compared to last year-end reflects a decrease in the fair value of the Company’s available for sale investment securities by $2.7 million due to higher interest rates. Note that this caused a greater accumulated other comprehensive loss within total equity since December 31, 2022, as the decline in market value of the Company’s available for sale investment securities portfolio more than offset a positive market value adjustment for the interest rate hedges. There was no required revaluation of the net pension liability during the first half of 2023. The tangible common equity to tangible assets ratio ~~(non-GAAP)~~ was ~~6.57%~~6.74%⁽¹⁾ at ~~September~~June 30, ~~2022~~2023 and decreased by ~~121 basis~~11-basis points when compared to December 31, ~~2021. The decrease~~2022.

⁽¹⁾ Non-GAAP financial information, see “Reconciliation of Non-GAAP Financial Measures” later in ~~tangible book value and tangible common equity ratio relate to the previously discussed increase in the accumulated other comprehensive loss.~~

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The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. The following table sets forth the calculation of the Company’s tangible common equity ratio and tangible book value per share at September 30, 2022 and December 31, 2021 (in thousands, except share and ratio data):

September 30,

December 31,


2022

2021


Total shareholders’ equity
$
101,587

$
116,549

Less: Intangible assets

13,746

13,769

Tangible common equity

87,841

102,780

Total assets

1,350,048

1,335,560

Less: Intangible assets

13,746

13,769

Tangible assets

1,336,302

1,321,791

Tangible common equity ratio (non-GAAP)

6.57
%

7.78
%

Total shares outstanding

17,112,617

17,081,500

Tangible book value per share (non-GAAP)
$
5.13

$
6.02

MD&A.

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

September 30,

December 31,

September 30,

2022

2021

2021

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

$
2,343

$
6,336

$
1,882

Total non-accrual loans

4,557

3,323

3,111

Total non-performing assets including TDRs*

4,596

3,323

3,119

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

0.24
%

0.64
%

0.19
%
Non-accrual loans, as a percentage of total loans, net of unearned income

0.47

0.34

0.31

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

0.47

0.34

0.31

Non-performing assets as a percentage of total assets*

0.34

0.25

0.23

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







Annualized net charge-offs

0.21

—

0.01

Annualized provision for loan losses

(0.03)

0.11

0.12

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

$
16,304

$
17,009

$
13,889


	June 30,			December 31,			June 30,
	2023			2022			2022
Total accruing loan delinquency (past due 30 to 89 days)	$	1,530		$	6,296		$	2,228
Total non-accrual loans		5,650			5,161			3,240
Total non-performing assets*		5,650			5,200			3,240
Accruing loan delinquency, as a percentage of total loans, net of unearned income		0.15	%		0.64	%		0.23	%
Non-accrual loans, as a percentage of total loans, net of unearned income		0.57			0.52			0.34
Non-performing assets, as a percentage of total loans, net of unearned income, and other real estate owned and repossessed assets*		0.57			0.52			0.34
Non-performing assets as a percentage of total assets*		0.42			0.38			0.25
As a percent of average loans, net of unearned income:
Annualized net charge-offs		0.01			0.17			0.02
Annualized provision (credit) for credit losses - loans		0.07			0.01			(0.15)
Total classified loans (loans rated substandard or doubtful)**	$	28,211		$	23,837		$	18,778

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)~~(iii) other real estate owned and repossessed assets.

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

Overall, the Company continued to maintain good asset quality in the first ~~nine~~six months of ~~2022~~2023 as evidenced by low levels of non-accrual loans, non-performing assets, and loan delinquency levels that continue to be below 1% of total loans. The ~~decrease~~decline in accruing loan delinquency is primarily attributable to a decrease in commercial and commercial real estate loan delinquency which was partially offset by an increase in consumer and residential mortgage ~~loan and commercial~~ loan delinquency. The increase in non-accrual loans, as well as non-performing assets, reflects the ~~partial charge-down and~~ transfer of ~~one~~a commercial real estate loan relationship ~~into~~together with a small business loan to non-accrual status ~~while the borrower pursues the sale of the property. In addition, this partial charge-down led to an~~which were partially offset by a decline in non-accrual residential mortgage loans. The increase ~~in annualized net charge-offs. The decrease~~ in classified loans is the result of the ~~payoff of a substandard credit and the previously mentioned partial~~

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~~charge-down of a substandard credit during the first nine months of 2022 which were partially offset by the~~ risk rating downgrade of athree commercial ~~and industrial~~real estate loan ~~relationship.~~

The Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. Management continues to carefully monitor asset quality with a particular focus on customers that have requested payment deferrals. The Asset Quality Task Force meets periodically to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. See the disclosures regarding COVID-19 related modifications within the Non-Performing Assets Including Troubled Debt Restructurings (TDR) footnote.relationships.

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, ~~2022,~~2023, the 25 largest credits represented ~~21.6%~~21.8% of total loans outstanding, which isremained consistent with ~~the third quarter of 2021~~December 31, 2022 when it was ~~21.5%~~21.7%.

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


	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2022			2021			2021			2023			2022			2022
Allowance for loan losses	$	10,672		$	12,398		$	12,124
Allowance for loan losses as
a percentage of each of the following:
Allowance for credit losses - loans										$	12,221		$	10,743		$	11,568
Allowance for credit losses - loans as a percentage of each of the following:
total loans, net of unearned income		1.09	%		1.26	%		1.22	%		1.24	%		1.08	%		1.20	%
total accruing delinquent loans
(past due 30 to 89 days)		455.48			195.68			644.21
total non-accrual loans		234.19			373.10			389.71			216.30			208.16			357.04
total non-performing assets		232.20			373.10			388.71			216.30			206.60			357.04
Allowance for credit losses - securities										$	1,035		$	—		$	—
Allowance for credit losses - unfunded loan commitments											889			746			840

…..LIQUIDITY…..The Company’s liquidity position continues to be ~~strong due~~strong. Total average deposits are $7.4 million, or 0.6%, lower when compared to ~~effective business development efforts as well as management’s ability to retain~~ the ~~significant influx~~2022 first six-month average. The modest decrease is reflective of ~~deposits that resulted~~a portion of the funds from the government stimulus ~~programs. Also, deposit levels were positively impacted~~programs leaving the balance sheet and also reflects greater pricing competition in the ~~second quarter of 2021 by the Somerset County branch acquisition which more than offset the third quarter 2021 maturity~~market to retain deposits because of the ~~high cost, institutional deposit.~~increasing national interest rates. Since early March 2023 when two large bank failures occurred, customer fear of contagion within the industry caused deposit flight, especially uninsured deposits, from certain banks to other financial services providers. Despite this turmoil, AmeriServ Financial’s core deposit base continued to demonstrate the strength and stability that it has for many years. Total deposits in fact grew during the first six months of 2023 by $19.0 million, or 1.7%, on an end of period basis since December 31, 2022, demonstrating customer confidence in our bank. The Company does not currently utilize brokered deposits as a funding source. In addition ~~the Company’s~~to its strong, loyal core deposit base, ~~continues to prove to be a source of strength for~~ the Company ~~during periods~~has several other sources of ~~market volatility. As~~liquidity, including a ~~result, through nine months, total average deposits are $7.9 million, or 0.7%, higher compared~~significant unused borrowing capacity at the Federal Home Loan Bank, overnight lines of credit at correspondent banks and access to the ~~first nine months of 2021. Deposit~~Federal Reserve Discount Window. Overall, deposit volumes continue to remain at a high level by historical standards ~~and continue~~in relation to ~~reflect~~ the ~~favorable impact of government stimulus which provided support~~levels experienced prior to ~~many Americans and financial assistance to municipalities and school districts during~~ the pandemic. Deposit volumes ~~have demonstrated stabilization~~continue to demonstrate stability since the second half of 2021. The core deposit base is adequate to fund the Company’s operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth.

Average short-term investments ~~declined during~~demonstrated a lower average balance in the first ~~nine months~~half of ~~2022, but continue~~2023 compared to ~~be higher than they have been historically. Although eased somewhat~~the first half of last year by $33.6 million, or 89.2%. Despite this decline, the ~~additional investment~~Company’s liquidity position remains strong. The average balance of FHLB term borrowings was lower in the ~~securities portfolio,~~first half of 2023 by $20.7 million, or 53.6%, as the strength of the Company’s liquidity position allowed management to let FHLB term advances mature during 2022 and not be replaced. However, given the inversion in the yield curve, FHLB term advances have rates that are lower than the cost of overnight borrowed funds. Therefore, management is replacing matured FHLB term advances in 2023. The challenge remains as to the uncertainty regarding the duration that ~~these increased funds~~the higher than historical level of deposits will remain on the balance sheet which will be determined by customer behavior as the economic conditions change. Diligent monitoring and management of our short-term investment position and our level of overnight borrowed funds remains a priority. Given the high cost of overnight borrowed funds, management has been effectively controlling the usage of this funding source. As a result, average overnight borrowed funds in the second quarter of 2023 decreased by $15.8 million, or 38.7%, from the first quarter of 2023 average balance. Continued loan growth and prudent investment in securities are critical to achieve the best return on the ~~remaining liquid~~normal level of earning asset cash flow that occurs each month. So far in 2023, purchases of securities have slowed as more funds ~~with management expecting~~have been allocated to ~~continue to be active with new security purchases during~~ the ~~remainder~~loan portfolio. Loan production in the first half of 2023 has been slower than what was experienced in the first half of 2022 as customers have delayed fundings given the ~~increase~~uncertainty that exists in the economy and expectations regarding interest rates. On an end of period basis, at September 30, 2022, total interest bearing deposits and short-term investments decreased by $5.9 million since September 30, 2021. Given the increase to national interest rates experienced so far during 2022, a portion of the increased balance sheet liquidity was invested in additional securities to more profitably deploy these funds. In addition, loan production during 2022 was more than offset by a higher than typical level of payoff activity causing total loans and loans held for sale to decrease since the end of 2021 by $6.6 million. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company’s loan to deposit ratio averaged ~~84.2%~~85.2% in the ~~third~~second quarter of ~~2022,~~2023, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to

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support our customers and our community during times of economic volatility. We are also well positioned to service our existing loan pipeline and grow our loan to deposit ratio while remaining within our guideline parameters.

Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents decreased by ~~$12.6~~$5.9 million from December 31, ~~2021,~~2022, to ~~$28.5~~$17.1 million at ~~September~~June 30, ~~2022,~~2023, due to ~~$38.6~~$17.6 million of net cash used in ~~investing~~financing activities ~~which~~ more than ~~offset $24.1~~offsetting $9.2 million of net cash provided by ~~financing~~investing activities and ~~$1.9~~$2.5 million of net cash provided by operating activities. Within investing activities, cash advanced for new loans originated totaled ~~$163.7~~

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$86.3 million and was ~~$4.5~~$3.1 million lower than the ~~$168.2~~$89.4 million of cash received from loan principal payments. Within financing activities, total short-term borrowings decreased by $32.0 million, total FHLB borrowings decreased by ~~$14.1~~$3.6 million while total deposits increased by ~~$13.5~~$19.1 million. Within operating activities, ~~$8.2~~$4.0 million of mortgage loans held for sale were originated while ~~$9.4~~$3.5 million of mortgage loans were sold into the secondary market.

The holding company had ~~$9.2~~$7.9 million of cash, short-term investments, and investment securities at ~~September~~June 30, ~~2022,~~2023, which represents a ~~$104,000~~$1.7 million decrease from the holding company’s cash position since ~~the end of the fourth quarter of 2021.~~December 31, 2022. Dividend payments from our subsidiaries also provide ongoing cash to the holding company. At ~~September~~June 30, ~~2022,~~2023, our subsidiary Bank had ~~$14.1~~$11.9 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from the Trust Company to 75% of annual net income. Overall, we believe that the holding company has sufficient liquidity to meet its subordinated debt interest payments and its ~~new increased~~ dividend payout level with respect to its common stock.

Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by short-term investments, interest bearing deposits with banks, and federal funds sold. These assets totaled ~~$28.5~~$17.1 million and ~~$41.1~~$23.0 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short-term to longer-term advances based upon the Company’s investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. At ~~September~~June 30, ~~2022,~~2023, the Company had ~~$355~~$299 million of overnight borrowing availability at the FHLB, ~~$42~~$41 million of short-term borrowing availability at the Federal Reserve Bank and $35 million of unsecured federal funds lines with correspondent banks. The Company believes it has ample liquidity available to fund outstanding loan commitments if they were fully drawn upon.

…..CAPITAL RESOURCES…..The Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company’s common equity tier 1 capital ratio was ~~10.44%~~10.38%, the tier 1 capital ratio was ~~10.44%~~10.38%, and the total capital ratio was ~~13.92%~~14.01% at ~~September~~June 30, ~~2022.~~2023. The Company’s tier 1 leverage ratio was ~~8.56%~~8.45% at ~~September~~June 30, ~~2022.~~2023. We anticipate that we will maintain our strong capital ratios throughout the remainder of ~~2022.~~2023. There is a particular emphasis on ensuring that the subsidiary bank has appropriate levels of capital to support its non-owner occupied commercial real estate loan concentration, which stood at ~~360%~~339% of regulatory capital at ~~September~~June 30, ~~2022.~~2023.

Our focus is on preserving capital to support customer lending and allow the Company to take advantage of business opportunities as they arise. We currently believe that we have sufficient capital and earnings power to continue to pay our common stock cash dividend at its ~~increased~~current rate of $0.03 per quarter. While the Company has frequently executed common stock buyback programs in the past, we presently do not have one in place due to the drop in our tangible common equity ratio to 6.74%⁽¹⁾ as a result of the decline in value of our AFS securities portfolio. At ~~September~~June 30, ~~2022,~~2023, the Company had approximately 17.1 million common shares outstanding.

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

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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.

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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

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

…..INTEREST RATE SENSITIVITY…..The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company’s existing balance sheet that was developed under the flat interest rate scenario.


	VARIABILITY OF		CHANGE IN
	NET INTEREST		MARKET VALUE OF
INTEREST RATE SCENARIO	INCOME		PORTFOLIO EQUITY		VARIABILITY OF NET INTEREST INCOME		CHANGE IN MARKET VALUE OF PORTFOLIO EQUITY
200 bp increase	(0.5)	%	(0.9)	%	0.4	%	4.2	%
100 bp increase	(0.2)		0.8		0.2		3.0
100 bp decrease	0.1		(4.6)		(0.3)		(5.8)
200 bp decrease	(0.9)		(15.2)		(1.3)		(14.0)

The Company believes that its overall interest rate risk position is well controlled. ~~Based on~~The execution of a $50 million interest rate hedge, during the ~~slight change in~~first quarter of 2023, and the execution of an additional $10 million interest rate hedge, during the second quarter of 2023, to fix the cost of certain deposits that are indexed and move with short-term interest rates, brought the Company’s variability of net interest income to a more neutral position. The variability of net interest income is positive in the ~~various~~upward rate shocks due to the Company’s short duration investment securities portfolio and the scheduled repricing of loans tied to an index, such as SOFR or prime. Also, the Company will continue its disciplined approach to price its core deposit accounts in a controlled but competitive manner. The variability of net interest income is negative in the downward rate scenarios as the Company ~~is well positioned~~has more exposure to ~~sustain either~~assets repricing downward to a ~~rate increase or decrease.~~greater extent than liabilities. The fed funds rate is currently at a targeted range of ~~3.00%~~5.00% to ~~3.25%~~5.25% as the Federal Reserve took action ~~several times in 2022~~during the first six months of 2023 to increase the rate a total of ~~300~~75 basis points. ~~Further, there is an expectation of additional short-term interest rate increases by the Federal Reserve throughout the remainder of 2022.~~ The market value of portfolio equity increases in the ~~100~~ upward rate ~~shock~~shocks due to the improved value of the Company’s core deposit base. Alternatively, the market value of portfolio equity decreases in the 200 upward rate shock due to the fact that the improved value of the Company’s core deposit base was more than offset by the downward movement in the market value of the AFS investment securities portfolio and loans. Negative variability of market value of portfolio equity occurs in the downward rate shocks due to a reduced value for core deposits.

…..OFF BALANCE SHEET ARRANGEMENTS…..The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company had various outstanding commitments to extend credit approximating ~~$239.5~~$239.0 million and standby letters of credit of ~~$12.0~~$7.9 million as of ~~September~~June 30, ~~2022.~~2023. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Company uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending.

…..RECONCILIATION OF NON-GAAP FINANCIAL MEASURES…..The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be

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considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

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


	June 30,			December 31,
	2023			2022
Total shareholders’ equity	$	103,565		$	106,178
Less: Intangible assets		13,724			13,739
Tangible common equity		89,841			92,439
Total assets		1,345,721			1,363,874
Less: Intangible assets		13,724			13,739
Tangible assets		1,331,997			1,350,135
Tangible common equity ratio (non-GAAP)		6.74	%		6.85	%
Total shares outstanding		17,147,270			17,117,617
Tangible book value per share (non-GAAP)	$	5.24		$	5.40

…..CRITICAL ACCOUNTING POLICIES AND ~~ESTIMATES…~~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~~credit losses (related to investment securities, loans, and unfunded commitments), intangible assets, income taxes, and ~~investment securities~~derivatives (interest rate swaps/hedge) 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.

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ACCOUNT — Pension liability

BALANCE SHEET REFERENCE — Other assets

INCOME STATEMENT REFERENCE — Salaries and employee benefits and Other expense

DESCRIPTION

Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Additionally, pension expense can also be impacted by settlement accounting charges if the amount of employee selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 1716 of the Notes to Unaudited Consolidated Financial Statements.

ACCOUNT — Allowance for ~~Loan~~Credit Losses

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

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

DESCRIPTION

Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and subsequent related updates. This standard replaces the incurred loss methodology for recognizing credit losses and requires the Company to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held to maturity (HTM) securities, and off-balance sheet credit exposures such as unfunded commitments. In addition, ASU 2016-13

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requires credit losses on available for sale (AFS) debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell the security.

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

The allowance for credit losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb ~~estimated probable~~current expected credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, 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.estimates. This process also considers economic conditions, ~~uncertainties in estimating losses~~for a reasonable and ~~inherent risks in the various credit portfolios.~~supportable forecast period of two years. 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 $8.2 million, or 77%, of the total allowance for loan losses at September 30, 2022 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and troubled debt restructured (TDR) loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for ~~loan~~credit losses may be required that would adversely impact earnings in future periods.

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

ACCOUNT — Intangible assets

BALANCE SHEET REFERENCE — Intangible assets

INCOME STATEMENT REFERENCE — Other expense

DESCRIPTION

The Company considers our accounting policies related to goodwill and core deposit intangible to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past

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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

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susceptible to significant changes. The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company’s core deposit base. These core deposit valuation updates are based upon specific data provided from statistical analysis of the Company’s own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.

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

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

ACCOUNT — Income Taxes

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

INCOME STATEMENT REFERENCE — Provision (credit) for income taxes

DESCRIPTION

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

In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of ~~September~~June 30, ~~2022,~~2023, we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed.

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

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ACCOUNT — ~~Investment Securities~~Derivatives (interest rate swaps/hedges)

BALANCE SHEET REFERENCE — ~~Investment securities~~Other assets and Other liabilities

INCOME STATEMENT REFERENCE — ~~Net realized gains on investment securities~~Other income

DESCRIPTION

~~Available-for-sale~~The Company periodically enters into derivative instruments to meet the financing, interest rate and ~~held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment.~~ equity risk management needs of its customers or the Bank.

The ~~review includes an analysis of~~Company recognizes all derivatives as either assets or liabilities on the ~~facts~~Consolidated Balance Sheets and ~~circumstances of each individual investment such~~measures those instruments at fair value. For derivatives designated 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~~hedges, changes 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 30, 2022, the unrealized losses in the available-for-sale securities 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~~the derivative and hedged item related to the hedged risk are recognized in earnings. Changes in fair value ~~caused by changes~~of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in other comprehensive loss, net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

To accommodate the needs of our customers and support the Company’s asset/liability positioning, we may enter into interest ~~rates as temporary; therefore,~~rate swap agreements with customers and a large financial institution that specializes in these ~~securities have not been classified as other-than-temporarily impaired. Management has also concluded~~types of transactions. The Company enters into offsetting positions to minimize interest rate and equity risk to the Company. These derivative financial instruments are reported at fair value with any resulting gain or loss recorded in current period earnings in amounts that ~~based~~offset. These instruments and their offsetting positions are recorded in other assets and other liabilities 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.~~Consolidated Balance Sheets.

…..FORWARD LOOKING STATEMENT…..

THE STRATEGIC FOCUS:

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

●

Shareholders — We strive to increase earnings per share; identifying and managing revenue growth and expense control; and managing risk. Our goal is to increase value for AmeriServ shareholders by growing earnings per share and narrowing the financial performance gap between AmeriServ and its peer banks. We try to return earnings to shareholders through a combination of dividends and share repurchases (none currently authorized) subject to maintaining sufficient capital to support balance sheet growth and economic uncertainty. We strive to educate our employee base as to the meaning/importance of earnings per share as a performance measure. We will develop a value added combination for increasing revenue and controlling expenses that is rooted in developing and offering high-quality financial products and services; an existing branch network; electronic banking capabilities with 24/7 convenience; and providing truly exceptional customer service. We will explore branch consolidation opportunities and further leverage union affiliated revenue streams, prudently manage the Company’s risk profile to improve asset yields and increase profitability and continue to identify and implement technological opportunities and advancements to drive efficiency for the holding company and its affiliates.

●

Customers — The Company expects to provide exceptional customer service, identifying opportunities to enhance the Banking for Life philosophy by providing products and services to meet the financial needs in every step through a customer’s life cycle, and further defining the role technology plays in anticipating and satisfying customer needs. We anticipate providing leading banking systems and solutions to improve and enhance customers’ Banking for Life experience. We will provide customers with a comprehensive offering of

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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

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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;~~regulations and supervisory actions by such regulators, including bank failures; (vii) the presence in the Company’s market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors’ products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; (xii) the ability to attract new or retain existing deposits or to retain or grow loans, including growth from unfunded closed loans; (xiii) the ability to generate future revenue growth or to control future growth in non-interest expense, including, but not limited to, those related to technological changes, including changes regarding artificial intelligence and cybersecurity, changes affecting oversight of the financial services industry, and changes intended to manage or mitigate climate and related environmental risks; (xiv) the impact of failure in, or breach of, our operational or security systems or those of third parties with whom we do business, including as a result of cyberattacks or an increase in the incidence of fraud, illegal payments, security breaches or other illegal acts impacting us or our customers; (xv) expense and reputational impact on the Company as a result of litigation related to its proxy contest; (xvi) legal, reputational, and financial risks resulting from the MOVEit cyber incident, our ongoing investigation of the incident, including the Company’s potential ~~risks and uncertainties also include those relating~~discovery of additional information related to the ~~duration~~incident in connection with this investigation, any potential regulatory inquiries and/or litigation to which the Company may become subject in connection with this incident, the extent of ~~the COVID-19 outbreak~~remediation and ~~its variants, and actions~~other additional costs that may be ~~taken~~incurred by ~~governmental authorities to contain~~ the ~~outbreak or to treat its impact,~~Company in connection with this incident, the extent of insurance

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coverage and contractual indemnification, the potential that other third-party vendors may have been affected by the MOVEit vulnerability in a manner that may compromise client data, including ~~the distribution~~personally identifiable information; and ~~effectiveness of COVID-19 vaccines; and (xiii)~~(xvii) other external developments which could materially impact the Company’s operational and financial performance.

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

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 the Interest Rate Sensitivity section of the MD&A.

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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, ~~2022,~~2023, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2022,~~2023, are effective.

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

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Item 5. Other Information

~~None~~During the second quarter of 2023, a prominent third-party vendor (the “Vendor”) to AmeriServ Financial Bank (the "Bank") and to AmeriServ Trust and Financial Services Company (the “Trust Company”), each wholly-owned subsidiaries of AmeriServ Financial, Inc. (together with Bank and the Trust Company, the "Company"), confirmed to the Bank and the Trust Company that personally identifiable information associated with their respective clients had been compromised in a security incident that the Vendor experienced ("Vendor Incident"). The Vendor Incident resulted from a zero-day vulnerability in a popular file sharing software that the Vendor used called MOVEit Transfer ("MOVEit"). Progress Software Corporation developed and maintains MOVEit, which is used by thousands of organizations around the world. According to recent national media reports, the MOVEit zero-day vulnerability was exploited in a large-scale cyber campaign that is impacting government agencies, universities, and corporations around the world. Each of the Bank and the Trust Company uses the Vendor for certain operational support services.

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

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

The Company has incurred, and may continue to incur, certain expenses related to the Vendor Incident. Further, the Company remains subject to risks and uncertainties as a result of the Vendor Incident, including litigation risk and additional regulatory scrutiny. The Company is continuing to evaluate the full scope and impact of the Vendor Incident.

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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	Includes the following financial and related information from AMERISERV FINANCIAL, INC.’s Quarterly Report on Form 10-Q as of and for the quarter ~~and nine months~~ ended ~~September~~June 30, ~~2022,~~2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive ~~(Loss) Income~~Loss (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.
104	The cover page from this Quarterly Report on Form 10-Q formatted in Inline XBRL.

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~~August 10, ~~2022~~2023	/s/ Jeffrey A. Stopko
	Jeffrey A. Stopko
	President and Chief Executive Officer

Date: ~~November~~August 10, ~~2022~~2023	/s/ Michael D. Lynch
	Michael D. Lynch
	Executive Vice President and Chief Financial Officer

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	December 31, 2021
			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	$	1,246	$	—	$	96	$	8,565	$	9,907
Multifamily/apartments/student housing		—		—		245		73,912		74,157
Office		37,386		203		8,644		28,500		74,733
Retail		7,253		444		20,439		148,668		176,804
Industrial/manufacturing/warehouse		74,508		5,940		21,468		44,316		146,232
Hotels		154		1,764		—		42,425		44,343
Eating and drinking places		484		6,591		4,537		1,752		13,364
Personal care		1,197		173		—		4,315		5,685
Amusement and recreation		92		53		5,402		12		5,559
Mixed use		—		—		4,031		62,088		66,119
Other		11,862		2,143		34,782		16,272		65,059
Total	$	134,182	$	17,311	$	99,644	$	430,825	$	681,962


	At December 31, 2021
			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	$	2,165	$	5	$	—	$	—			$	2,170
Collectively evaluated for impairment		248,972		430,820		287,996		15,096				982,884
Total loans	$	251,137	$	430,825	$	287,996	$	15,096			$	985,054
Allowance for loan losses:
Specific reserve allocation	$	628	$	5	$	—	$	—	$	—	$	633
General reserve allocation		2,443		6,387		1,590		113		1,232		11,765
Total allowance for loan losses	$	3,071	$	6,392	$	1,590	$	113	$	1,232	$	12,398


	At December 31, 2021
					IMPAIRED
					LOANS WITH
	IMPAIRED LOANS WITH				NO SPECIFIC
	SPECIFIC ALLOWANCE				ALLOWANCE		TOTAL IMPAIRED LOANS
									UNPAID
	RECORDED		RELATED		RECORDED		RECORDED		PRINCIPAL
	INVESTMENT		ALLOWANCE		INVESTMENT		INVESTMENT		BALANCE

	(IN THOUSANDS)
Commercial	$	2,165	$	628	$	—	$	2,165	$	2,260
Commercial loans secured by non-owner occupied real estate		5		5		—		5		27
Total impaired loans	$	2,170	$	633	$	—	$	2,170	$	2,287


	At September 30, 2022				At December 31, 2021
			% of Outstanding				% of Outstanding
	Balance		Non-PPP Loans		Balance		Non-PPP Loans
	(in thousands)				(in thousands)
CRE/Commercial	$	3,919	0.6	%	$	7,488	1.1	%
Home Equity/Consumer		—	—			57	0.1
Residential Mortgage		248	0.1			203	0.1
Total	$	4,167	0.4		$	7,748	0.8


	At September 30, 2022			At December 31, 2021
	Number of Loans	Balance		Number of Loans	Balance
		(in thousands)			(in thousands)
Type of Payment Relief
Interest only payments	2	$	3,919	6	$	3,768
Complete payment deferrals	2		248	5		3,980
Total	4	$	4,167	11	$	7,748