AmeriServ Financial 10Q 2022 Q3 Quarterly report

Table of Contents

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 30, 2022

☐ 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 1, 2022
Common Stock, par value $0.01		17,114,617

Table of Contents

AmeriServ Financial, Inc.

INDEX


	Page No.

PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets (Unaudited) – September 30, 2022 and December 31, 2021	3
Consolidated Statements of Operations (Unaudited) – Three and nine months ended September 30, 2022 and 2021	4
Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three and nine months ended September 30, 2022 and 2021	5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three and nine months ended September 30, 2022 and 2021	6
Consolidated Statements of Cash Flows (Unaudited) – Nine months ended September 30, 2022 and 2021	7
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosure About Market Risk	54
Item 4. Controls and Procedures	55
PART II. OTHER INFORMATION	55
Item 1. Legal Proceedings	55
Item 1A. Risk Factors	55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	55
Item 5. Other Information	55
Item 6. Exhibits	56

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
ASSETS
Cash and due from depository institutions	$	24,383	$	24,748
Interest bearing deposits		4,133		10,942
Short-term investments		—		5,411
Cash and cash equivalents		28,516		41,101
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
Loans held for sale		—		983
Loans		979,843		985,880
Less: Unearned income		393		826
Less: Allowance for loan losses		10,672		12,398
Net loans		968,778		972,656
Premises and equipment:
Operating lease right-of-use asset		645		667
Financing lease right-of-use asset		2,480		2,684
Other premises and equipment, net		14,450		14,082
Accrued interest income receivable		4,620		3,984
Intangible assets:
Goodwill		13,611		13,611
Core deposit intangible		135		158
Bank owned life insurance		39,016		38,842
Net deferred tax asset		4,339		—
Federal Home Loan Bank stock		3,907		2,692
Federal Reserve Bank stock		2,125		2,125
Other assets		30,559		25,053
TOTAL ASSETS	$	1,350,048	$	1,335,560
LIABILITIES
Non-interest bearing deposits	$	214,547	$	211,106
Interest bearing deposits		938,266		928,272
Total deposits		1,152,813		1,139,378
Short-term borrowings		26,274		—
Advances from Federal Home Loan Bank		28,522		42,653
Operating lease liabilities		658		682
Financing lease liabilities		2,736		2,899
Subordinated debt		26,634		26,603
Total borrowed funds		84,824		72,837
Net deferred tax liability		—		934
Other liabilities		10,824		5,862
TOTAL LIABILITIES		1,248,461		1,219,011
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)
Capital surplus		146,198		146,069
Retained earnings		65,052		60,005
Accumulated other comprehensive loss, net		(26,650)		(6,512)
TOTAL SHAREHOLDERS' EQUITY		101,587		116,549
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,350,048	$	1,335,560

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three months ended					Nine months ended
	September 30,					September 30,
	2022			2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	10,691		$	9,830	$	29,912	$	30,440
Interest bearing deposits		9			2		11		6
Short-term investments		63			26		143		41
Investment securities:
Available for sale		1,490			1,133		3,917		3,392
Held to maturity		447			381		1,272		1,100
Total Interest Income		12,700			11,372		35,255		34,979
INTEREST EXPENSE
Deposits		1,720			1,189		3,472		3,897
Short-term borrowings		36			—		39		1
Advances from Federal Home Loan Bank		127			217		459		681
Financing lease liabilities		25			26		76		80
Guaranteed junior subordinated deferrable interest debentures		—			383		—		944
Subordinated debt		263			331		789		591
Total Interest Expense		2,171			2,146		4,835		6,194
Net Interest Income		10,529			9,226		30,420		28,785
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
NON-INTEREST INCOME
Wealth management fees		2,813			3,137		8,954		9,031
Service charges on deposit accounts		289			260		824		685
Net gains on loans held for sale		53			15		183		632
Mortgage related fees		27			81		92		310
Net realized gains on investment securities		—			—		—		84
Bank owned life insurance		329			221		769		771
Other income		815			702		1,977		1,916
Total Non-Interest Income		4,326			4,416		12,799		13,429
NON-INTEREST EXPENSE
Salaries and employee benefits		7,071			6,910		21,439		20,718
Net occupancy expense		698			651		2,136		1,980
Equipment expense		393			390		1,205		1,183
Professional fees		1,656			1,379		4,490		4,089
Supplies, postage and freight		172			158		481		486
Miscellaneous taxes and insurance		350			318		1,022		922
Federal deposit insurance expense		125			170		400		480
Branch acquisition costs		—			87		—		390
Other expense		1,262			1,457		4,143		4,615
Total Non-Interest Expense		11,727			11,520		35,316		34,863

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
PER COMMON SHARE DATA:
Basic:
Net income	$	0.12		$	0.08	$	0.38	$	0.31
Average number of shares outstanding		17,111			17,075		17,105		17,071
Diluted:
Net income	$	0.12		$	0.08	$	0.38	$	0.31
Average number of shares outstanding		17,145			17,114		17,146		17,114

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(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

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

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
	September 30,
	2022		2021
OPERATING ACTIVITIES
Net income	$	6,501	$	5,220
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(225)		850
Depreciation and amortization expense		1,531		1,508
Amortization expense of core deposit intangible		23		11
Amortization of fair value adjustment on acquired time deposits		(83)		(58)
Net amortization of investment securities		98		189
Net realized gains on investment securities — available for sale		—		(84)
Net gains on loans held for sale		(183)		(632)
Net amortization of deferred loan fees		(486)		(967)
Origination of mortgage loans held for sale		(8,239)		(10,467)
Sales of mortgage loans held for sale		9,405		17,349
(Increase) decrease in accrued interest receivable		(636)		148
Decrease in accrued interest payable		(571)		(731)
Earnings on bank-owned life insurance		(769)		(771)
Deferred income taxes		601		1,023
Stock compensation expense		38		30
Net change in operating leases		(69)		(71)
Other, net		(5,082)		(4,968)
Net cash provided by operating activities		1,854		7,579
INVESTING ACTIVITIES
Purchase of investment securities — available for sale		(49,372)		(48,951)
Purchase of investment securities — held to maturity		(11,104)		(15,272)
Proceeds from maturities of investment securities — available for sale		15,755		30,314
Proceeds from maturities of investment securities — held to maturity		2,244		5,490
Proceeds from sales of investment securities — available for sale		1,519		960
Purchase of regulatory stock		(4,405)		(1,245)
Proceeds from redemption of regulatory stock		3,190		2,842
Long-term loans originated		(163,679)		(232,781)
Principal collected on long-term loans		168,215		209,771
Purchases of premises and equipment		(1,621)		(834)
Proceeds from sale of other real estate owned and repossessed assets		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)
FINANCING ACTIVITIES
Net increase in deposit balances		13,518		47,097
Net increase (decrease) in other short-term borrowings		26,274		(24,702)
Principal repayments on advances from Federal Home Loan Bank		(14,131)		(21,336)
Principal payments on financing lease liabilities		(163)		(156)
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
Common stock dividend paid		(1,454)		(1,280)
Net cash provided by financing activities		24,135		5,524
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(12,585)		4,473
CASH AND CASH EQUIVALENTS AT JANUARY 1		41,101		31,504
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30	$	28,516	$	35,977

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

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 billion and $2.7 billion that are not reported on the Company’s Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, 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 losses, intangible assets, income taxes, investment securities, pension, 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.

3. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changes the impairment model for most financial assets. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company, as a smaller reporting company, 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.

Table of Contents

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.

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 that the adoption of ASU 2016-13 will not have a significant impact on our financial statements. The allowance of 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.

Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for held to maturity (HTM) debt securities. Based on the credit quality of the Company’s HTM debt securities portfolio, we do not expect the ACL to be significant.

The ultimate impact of adoption on 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 ASU 2022-02, Financial Instruments – Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate 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 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 modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments of ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments 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.

4. Revenue Recognition

ASU 2014-09, Revenue from Contracts with Customers – Topic 606, requires the Company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain 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% of the total revenue of the Company.

Table of Contents

Non-interest income within the scope of Topic 606 are 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 30, 2022 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

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

Table of Contents

in the calculation. Treasury shares are excluded for earnings per share purposes. For the three month periods ending September 30, 2022 and 2021, options to purchase 22,000 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 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.


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021

	(In thousands, except per share data)
Numerator:
Net income	$	2,102	$	1,431	$	6,501	$	5,220
Denominator:
Weighted average common shares outstanding (basic)		17,111		17,075		17,105		17,071
Effect of stock options		34		39		41		43
Weighted average common shares outstanding (diluted)		17,145		17,114		17,146		17,114
Earnings per common share:
Basic	$	0.12	$	0.08	$	0.38	$	0.31
Diluted		0.12		0.08		0.38		0.31

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 in income tax payments in the first nine months of 2022 compared to $200,000 in the same 2021 period. The Company made total interest payments of $5,407,000 in the first nine months of 2022 compared to $6,898,000 in the same 2021 period. The Company had $53,000 non-cash transfers to other real estate owned (OREO) and repossessed assets in the first nine months of 2022 compared to $8,000 non-cash transfers in the same 2021 period. During the first nine 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. During the first nine months of 2021, the Company did not enter into any new lease agreements.

7. Investment Securities

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

Investment securities available for sale (AFS):

September 30, 2022

GROSS

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

(13,377)

88,026

Municipal

21,438

—

(1,799)

19,639

Corporate bonds

59,284

(2,722)

56,598

Total

193,460

(19,210)

174,300

Table of Contents

Investment securities held to maturity (HTM):

September 30, 2022

GROSS

UNREALIZED

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

2,500

—

(439)

2,061

U.S. Agency mortgage-backed securities

19,354

(2,343)

17,022

Municipal

34,206

(3,818)

30,394

Corporate bonds and other securities

6,507

—

(196)

6,311

Total

62,567

(6,796)

55,788

Investment securities available for sale (AFS):


	December 31, 2021
			GROSS		GROSS
			UNREALIZED		UNREALIZED		FAIR
	COST BASIS		GAINS		LOSSES		VALUE

	(IN THOUSANDS)
U.S. Agency	$	7,371	$	86	$	(70)	$	7,387
U.S. Agency mortgage-backed securities		80,136		1,202		(1,171)		80,167
Municipal		20,066		851		(25)		20,892
Corporate bonds		53,843		1,028		(146)		54,725
Total	$	161,416	$	3,167	$	(1,412)	$	163,171

Investment securities held to maturity (HTM):


	December 31, 2021
			GROSS		GROSS
			UNREALIZED		UNREALIZED		FAIR
	COST BASIS		GAINS		LOSSES		VALUE

	(IN THOUSANDS)
U.S. Agency	$	2,500	$	—	$	(11)	$	2,489
U.S. Agency mortgage-backed securities		10,556		203		(115)		10,644
Municipal		33,188		1,734		(103)		34,819
Corporate bonds and other securities		7,507		64		(7)		7,564
Total	$	53,751	$	2,001	$	(236)	$	55,516

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 quarter of 2021. Total proceeds from the sale of AFS securities for the first nine months of 2021 were $960,000 resulting in $84,000 of gross investment security gains.

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

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 interest rate environment and market yields can also 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 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% of the par value.

Contractual maturities of securities at September 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 duration of the total investment securities portfolio at September 30, 2022 is 58.2 months and is higher than the duration at December 31, 2021 which was 41.5 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.

Table of Contents

Total investment securities:

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

8. Loans

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)	Real estate construction loans constituted 4.5% and 5.6% of the Company’s total loans, net of unearned income as of September 30, 2022 and December 31, 2021, respectively.

Loan balances at September 30, 2022 and December 31, 2021 are net of unearned income 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 compared to $386,000 at December 31, 2021.

The ongoing COVID-19 pandemic is a fluid situation and continues to evolve, impacting the way many businesses operate. The pandemic and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, inflation, and consumer spending has resulted in less economic activity and significant volatility and disruption. Certain loans within our commercial and commercial real estate portfolios have been disproportionately adversely affected by the pandemic.

Table of Contents

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

Protection

secured by owner

secured by non-owner

and industrial

Program

occupied real estate

Total

1-4 unit residential

—

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

Eating and drinking places

303

4,656

1,363

6,346

Personal care

959

—

2,666

3,625

Amusement and recreation

—

3,819

3,899

Mixed use

—

4,181

49,833

54,014

Other

17,799

—

30,475

18,498

66,772

Total

128,116

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.

Table of Contents

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

—

(406)

2,756

Commercial loans secured by non-owner occupied real estate

5,716

(1,390)

1,093

5,432

Real estate-residential mortgage

1,473

(9)

(89)

1,377

Consumer

102

(24)

Allocation for general risk

1,119

—

(99)

1,020

Total

11,568

(1,423)

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)

(247)

2,756

Commercial loans secured by non-owner occupied real estate

6,392

(1,390)

391

5,432

Real estate-residential mortgage

1,590

(32)

(195)

1,377

Consumer

113

(110)

Allocation for general risk

1,232

—

(212)

1,020

Total

12,398

(1,604)

103

(225)

10,672

Table of Contents


	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

—

570

General reserve allocation

2,189

5,429

1,377

1,020

10,102

Total allowance for loan losses

2,756

5,432

1,377

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;

●

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 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

PRINCIPAL

INVESTMENT

ALLOWANCE

INVESTMENT

BALANCE

(IN THOUSANDS)

Commercial

2,045

567

—

2,045

2,251

Commercial loans secured by non-owner occupied real estate

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 and the criticized categories of Special Mention, Substandard and 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 December 31, 2021
			SPECIAL
	PASS		MENTION		SUBSTANDARD		DOUBTFUL		TOTAL

	(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
Total	$	639,765	$	26,341	$	14,208	$	1,648	$	681,962

It is generally the policy of the Bank that the outstanding balance of any residential mortgage 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 consumer loan that exceeds 90-days past due as to principal and/or interest is charged-off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolio classes.


	At September 30, 2022
			NON-
	PERFORMING		PERFORMING		TOTAL

	(IN THOUSANDS)
Real estate – residential mortgage	$	296,495	$	889	$	297,384
Consumer		13,736		—		13,736
Total	$	310,231	$	889	$	311,120


	At December 31, 2021
			NON-
	PERFORMING		PERFORMING		TOTAL

	(IN THOUSANDS)
Real estate – residential mortgage	$	286,843	$	1,153	$	287,996
Consumer		15,096		—		15,096
Total	$	301,939	$	1,153	$	303,092

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
													90 DAYS
			30 – 59		60 – 89								PAST DUE
			DAYS		DAYS		90 DAYS		TOTAL		TOTAL		AND STILL
	CURRENT		PAST DUE		PAST DUE		PAST DUE		PAST DUE		LOANS		ACCRUING

	(IN THOUSANDS)
Commercial and industrial	$	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		—
Consumer		13,441		289		6		—		295		13,736		—
Total	$	976,266	$	1,275	$	1,081	$	828	$	3,184	$	979,450	$	—


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

	(IN THOUSANDS)
Commercial and industrial	$	133,918	$	14	$	250	$	—	$	264	$	134,182	$	—
Paycheck Protection Program (PPP)		17,311		—		—		—		—		17,311		—
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		—
Consumer		14,938		151		7		—		158		15,096		—
Total	$	977,589	$	4,649	$	1,687	$	1,129	$	7,465	$	985,054	$	—

An allowance for 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 that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.

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

Table of Contents

identified problem loans, (2) formula driven general reserves established for 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 risk associated 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 listed risk factors.

“Pass” rated credits are segregated from “Criticized” and “Classified” credits for the application of qualitative factors.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process 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.

10. Non-Performing Assets Including Troubled Debt Restructurings (TDR)

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	%

The Company had no 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 to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a TDR is 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).


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

Table of Contents

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 and Advances from Federal Home Loan Bank

Total short-term and Federal Home Loan Bank (FHLB) borrowings and advances consist of the following (in thousands, except percentages):


	At September 30, 2022
				Weighted
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
	2024		4,197	1.19
Total FHLB advances			28,522	1.59
Total short-term and FHLB borrowings		$	54,796	2.32	%

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

Unrealized

Gains and

Losses on

Defined

Losses on

Defined

Investment

Benefit

Investment

Benefit

Securities

Pension

Securities

Pension

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

AFS⁽¹⁾

Items⁽¹⁾

Total⁽¹⁾

Beginning balance

(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

—

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

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

(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 the amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Amount reclassified from accumulated
	other comprehensive loss⁽¹⁾
	For the three		For the three
Details about accumulated other	months ended		months ended		Affected line item in the
comprehensive loss components	September 30, 2022		September 30, 2021		statement of operations
Amortization of estimated defined benefit pension plan loss⁽²⁾
	$	571	$	879	Other expense
		(120)		(185)	Provision for income taxes
	$	451	$	694
Total reclassifications for the period	$	451	$	694

(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 17 for additional details).


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

(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 17 for additional details).

13. 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

Table of Contents

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

TO BE WELL

MINIMUM

CAPITALIZED

REQUIRED

UNDER

FOR

PROMPT

CAPITAL

CORRECTIVE

ADEQUACY

ACTION

COMPANY

BANK

PURPOSES

REGULATIONS*

AMOUNT

RATIO

AMOUNT

RATIO

(IN THOUSANDS, EXCEPT RATIOS)

Total Capital (To Risk Weighted Assets)

152,571

13.92

136,390

12.49

8.00

10.00

Tier 1 Common Equity (To Risk Weighted Assets)

114,491

10.44

124,944

11.45

4.50

6.50

Tier 1 Capital (To Risk Weighted Assets)

114,491

10.44

124,944

11.45

6.00

8.00

Tier 1 Capital (To Average Assets)

114,491

8.56

124,944

9.44

4.00

5.00


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

	(IN THOUSANDS, EXCEPT RATIOS)
Total Capital (To Risk Weighted Assets)	$	149,177	14.04	%	$	133,881	12.66	%	8.00	%	10.00	%
Tier 1 Common Equity (To Risk Weighted Assets)		109,292	10.29			120,656	11.41		4.50		6.50
Tier 1 Capital (To Risk Weighted Assets)		109,292	10.29			120,656	11.41		6.00		8.00
Tier 1 Capital (To Average Assets)		109,292	8.17			120,656	9.12		4.00		5.00

*Applies to the Bank only.

14. 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.

Table of Contents

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.

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

At September 30, 2022

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

Swap assets

N/A

64,624

3.54

Monthly

(306)

Swap liabilities

N/A

(64,624)

(3.54)

Monthly

306

Net exposure

—

At September 30, 2021

INCREASE

AGGREGATE

WEIGHTED

(DECREASE)

NOTIONAL

AVERAGE RATE

REPRICING

IN INTEREST

HEDGE TYPE

AMOUNT

RECEIVED/(PAID)

FREQUENCY

EXPENSE

Swap assets

N/A

55,061

2.59

Monthly

(602)

Swap liabilities

N/A

(55,061)

(2.59)

Monthly

602

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. The notional amount of the risk participation agreement outstanding at September 30, 2022 and 2021 was $2.2 million and $2.6 million, respectively.

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 30, 2022 and 2021. None of the Company's derivatives are designated as hedging instruments.

15. 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 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 months ended September 30, 2022 and 2021 were as follows (in thousands):

Three months ended

Nine months ended

September 30, 2022

Total revenue

Net income (loss)

Total revenue

Net income (loss)

Community banking

13,341

3,359

37,912

9,493

Wealth management

2,827

425

9,006

1,658

Investment/Parent

(1,313)

(1,682)

(3,699)

(4,650)

Total

14,855

2,102

43,219

6,501


	Three months ended				Nine months ended
	September 30, 2021				September 30, 2021
	Total revenue		Net income (loss)		Total revenue		Net income (loss)
Community banking	$	12,515	$	2,801	$	38,605	$	9,059
Wealth management		3,154		831		9,082		2,227
Investment/Parent		(2,027)		(2,201)		(5,473)		(6,066)
Total	$	13,642	$	1,431	$	42,214	$	5,220

16. Commitments and Contingent Liabilities

The Company had various outstanding commitments to extend credit approximating $239.5 million and $216.6 million along with standby letters of credit of $12.0 million and $13.1 million as of September 30, 2022 and December 31, 2021, respectively. The Company’s exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Bank uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The carrying amount of the reserves for AmeriServ obiligations related to unfunded commitments and standby letters of credit was $774,000 at September 30, 2022 and $989,000 at December 31, 2021.

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. 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

Table of Contents

(including U.S. Treasury and Agency securities, corporate notes and bonds), listed common stocks (including shares of AmeriServ Financial, Inc. common stock which is limited to 10% of the plan’s assets), mutual funds, and short-term cash equivalent instruments. The net periodic pension cost for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands):


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost	$	358	$	429	$	1,073	$	1,287
Interest cost		365		221		1,094		664
Expected return on plan assets		(1,052)		(1,004)		(3,156)		(3,012)
Amortization of net loss		341		610		1,024		1,829
Settlement charge		230		269		1,244		1,120
Net periodic pension cost	$	242	$	525	$	1,279	$	1,888

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 Company recognized a $230,000 and $1.2 million settlement charge in connection with its defined benefit pension plan in the third quarter and first nine months of 2022, respectively. This compares to a $269,000 and $1.1 million settlement charge recognized in the third quarter and first nine months of 2021, respectively. 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 million and $19.5 million, was reclassified to other assets on the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021, 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.

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. 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.

Table of Contents

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

Assets and 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.

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

The following table presents the assets and liabilities measured and reported on the Consolidated Balance Sheets on a recurring basis at their fair value as of September 30, 2022 and December 31, 2021, by level within the fair value hierarchy (in thousands).

Fair Value Measurements at September 30, 2022

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Equity securities (1)

491

—

Available for sale securities:

U.S. Agency

10,037

—

10,037

—

U.S. Agency mortgage-backed securities

88,026

—

88,026

—

Municipal

19,639

—

19,639

—

Corporate bonds

56,598

—

56,598

—

Interest rate swap asset (1)

7,518

—

7,518

—

Interest rate swap liability (2)

(7,367)

—

(7,367)

—

Risk participation agreement (2)

—


	Fair Value Measurements at December 31, 2021
	TOTAL		(LEVEL 1)		(LEVEL 2)		(LEVEL 3)
Equity securities (1)	$	526	$	526	$	—	$	—
Available for sale securities:
U.S. Agency		7,387		—		7,387		—
U.S. Agency mortgage-backed securities		80,167		—		80,167		—
Municipal		20,892		—		20,892		—
Corporate bonds		54,725		—		54,725		—
Interest rate swap asset (1)		1,226		—		1,226		—
Interest rate swap liability (2)		(1,226)		—		(1,226)		—
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 loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired

Table of Contents

loans are reported at the fair value of the underlying collateral if the repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on observable market data which at times are discounted using unobservable inputs. At September 30, 2022, impaired 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 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

December 31, 2021

TOTAL

(LEVEL 1)

(LEVEL 2)

(LEVEL 3)

Impaired loans

—


	Quantitative Information About Level 3 Fair Value Measurements
			Valuation	Unobservable
September 30, 2022	Fair Value		Techniques	Input	Range (Wgtd Avg)
Impaired loans	$	1,620	Appraisal of	Appraisal	0% to 100% (0%)
			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


	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)

(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

Table of Contents

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 30, 2022 and December 31, 2021 for the remaining financial instruments not required to be measured or reported at fair value were as follows:

September 30, 2022

Carrying

Value

Fair Value

(Level 1)

(Level 2)

(Level 3)

(IN THOUSANDS)

FINANCIAL ASSETS:

Investment securities – HTM

62,567

55,788

—

52,936

2,852

Loans, net of allowance for loan loss and unearned income

968,778

910,169

—

910,169

FINANCIAL LIABILITIES:

Deposits with stated maturities

283,640

279,204

—

279,204

All other borrowings ⁽¹⁾

55,156

52,845

—

52,845


	December 31, 2021
	Carrying
	Value			Fair Value		(Level 1)		(Level 2)		(Level 3)

		(IN THOUSANDS)
FINANCIAL ASSETS:
Investment securities – HTM	$	53,751	$	55,516	$	—	$	52,523	$	2,993
Loans held for sale		983		1,022		1,022		—		—
Loans, net of allowance for loan loss and unearned income		972,656		969,681		—		—		969,681
FINANCIAL LIABILITIES:
Deposits with stated maturities		292,325		294,280		—		—		294,280
All other borrowings⁽¹⁾		69,256		69,506		—		—		69,506

(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.

Table of Contents

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 30, 2022 VS. THREE 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).


	Three months ended			Three months ended
	September 30, 2022			September 30, 2021
Net income	$	2,102		$	1,431
Diluted earnings per share		0.12			0.08
Return on average assets (annualized)		0.62	%		0.41	%
Return on average equity (annualized)		7.81	%		5.07	%

The Company reported net income of $2,102,000, or $0.12 per diluted common share. This earnings performance represented a $671,000, or 46.9%, increase from the third quarter of 2021 when net income totaled $1,431,000, or $0.08 per diluted common share. The Company continued its positive earnings momentum in the third 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.

…..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

Table of Contents

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


	Three			Three
	months ended			months ended
	September 30, 2022			September 30, 2021			Change			% Change
Interest income	$	12,700		$	11,372		$	1,328		11.7	%
Interest expense		2,171			2,146			25		1.2
Net interest income	$	10,529		$	9,226		$	1,303		14.1
Net interest margin		3.35	%		2.85	%		0.50	%	N/M

N/M — not meaningful

The Company’s net interest income in the third quarter of 2022 increased by $1.3 million, or 14.1%, from the prior year’s third quarter while the net interest margin of 3.35% for the third quarter of 2022 improved by 50 basis points when compared to the net interest margin of 2.85% for the third quarter of 2021. The Company’s 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 in the third quarter of 2022. Specifically in 2022, the higher interest rates are causing total interest income 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 expense resulting in only a slight increase to total interest expense.

Total average loans in the third quarter of 2022 are lower than the 2021 third quarter average by $13.5 million, or 1.4%. Excluding PPP loans, total average loans in the third quarter of 2022 exceed the 2021 third quarter average by $20.9 million, or 2.2%, as growth of 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 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 and home equity loans, resulted in total loan interest income improving by $861,000, or 8.8%, for the third quarter of 2022 when compared to the third 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 million for the third quarter of 2022 which is $35.5 million, or 16.3%, higher than the $217.9 million average for last year’s third quarter. The increase in the U.S. Treasury yield curve resulted in a more favorable market for securities purchasing activity so far in 2022. 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 the securities portfolio as opposed

Table of Contents

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 quarter of 2022 was $36.4 million, or 2.9%, lower than the third quarter of 2021 while total interest income increased by $1.3 million, or 11.7%, between years.

Although reduced from its high levels when government stimulus initially impacted the economy, our liquidity position continues to be solid as total short-term investments averaged $13.0 million in the third 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.

On the liability side of the balance sheet, total deposits continue to demonstrate stability over the past year despite a $29.7 million, or 2.5%, decrease in total average deposits when comparing the 2022 third quarter to last year’s third quarter. This decrease reflects management electing to allow a high cost, large institutional deposit to mature late in September 2021. Overall, the loan to deposit ratio averaged 84.2% in the third quarter of 2022, 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 the third quarter of 2022 increased by $25,000, or 1.2%, when compared to the third quarter of 2021. Despite the decrease in total average deposits, deposit interest expense was higher by $531,000, or 44.7%, when comparing the third quarter of 2022 to last year’s third quarter. The rising national interest rates this year resulted in total deposit interest expense increasing as certain deposit products that are tied to a market index reprice upward with the move in national interest rates. Specifically, total deposit cost averaged 0.59% in the third quarter of 2022, which is 19 basis points higher than total deposit cost of 0.40% in the third 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 by $506,000, or 52.9%, when comparing the third quarter of 2022 to last year’s third quarter. The decrease between years results from the favorable impact of 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 size of the new subordinated debt is $7.0 million higher than the debt instruments it replaced. Note that included in 2021 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 to reduced interest expense from Federal Home Loan Bank (FHLB) borrowings. The average balance of total short-term and FHLB borrowings is lower in the third quarter of 2022 by $9.6 million, or 21.0%, 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 three month periods ended September 30, 2022 and 2021 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 30, 2022 and 2021 was $3,000 and $4,000,

Table of Contents

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

Table of Contents

non-accrual status while the borrower pursues the sale of the property. 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, 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 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 net loan recoveries of $22,000, or 0.01% of total loans, in the third 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.

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

●

a $324,000, or 10.3%, decrease 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 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;

●

a $113,000, or 16.1%, 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;

●

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;

Table of Contents

●

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.

Table of Contents

…..NET INTEREST INCOME AND MARGIN…..The following table compares the Company’s net interest income performance for the first nine months of 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

Table of Contents

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 expense for the first nine months of 2022 totaled $35.3 million and increased by $453,000, or 1.3%, from the prior year’s first nine months. Factors contributing to the higher level of non-interest expense for the nine-month period 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%, increase in professional fees due primarily to higher legal costs within our wealth management group;

●

no additional costs related to the branch acquisition were recognized 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 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.

Table of Contents

…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of $1.6 million, 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 of 2021.

…..SEGMENT RESULTS.…..The community banking segment reported a net income contribution of $3,359,000 in the third quarter of 2022 which was $558,000 higher than the net income contribution in the third quarter of 2021. For the nine month time period the community banking segment’s net 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 offset a higher loan loss provision. The improvement 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 non-interest expense more than offsetting a lower level of total revenue. Net 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 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 in the first nine months of 2022 which combined were $1,759,000 lower when compared to 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 months 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 in the first nine months 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 on 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 costs 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 impact 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

Table of Contents

lower loss by $1.4 million than the first nine months of 2021. The reduced loss results from lower borrowings interest expense primarily due to the favorable impact of the 2021 subordinated debt offering which was used to replace 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 resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds making purchases 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 total consolidated assets were $1.4 billion at September 30, 2022, which increased by $14.5 million, or 1.1%, from the December 31, 2021 asset level. This change was related, primarily, to increased levels of investment securities and other assets which were partially offset by decreased levels of cash and cash equivalents and loans. Specifically, investment securities increased $19.9 million, or 9.2%, as the increase in the U.S. Treasury yield curve resulted in a more favorable market for securities purchasing activity so far in 2022. The higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall yield of the existing securities portfolio. As a result, management purchased more of these investments as well as taxable municipals and corporate securities to maintain a well-diversified portfolio. Other assets increased $5.5 million, or 22.0%, due primarily to an increase in the market value of the Company’s interest rate swap transactions. The redeployment of funds into the investment securities portfolio caused cash and cash equivalents to decrease by $12.6 million, or 30.6%. Loans, net of unearned fees, and 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.

Total deposits increased by $13.4 million, or 1.2%, in the first nine months of 2022. This reflects new deposit inflows as well as the loyalty of the Company’s 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 30, 2022, the 25 largest depositors represented 20.3% of total deposits, which is an increase from December 31, 2021 when it was 18.9%. Total borrowings have increased by $12.0 million, or 16.5%, since year-end 2021. This change was driven by an increase in short-term borrowing which was partially offset by a decrease in FHLB term advances. Specifically, short-term borrowings totaled $26.3 million at September 30, 2022 compared to no short-term borrowings being outstanding at December 31, 2021. In addition, FHLB term advances decreased by $14.1 million, or 33.1%, and totaled $28.5 million at September 30, 2022. The current strong liquidity position has allowed the Company to let higher cost FHLB term advances mature and not be replaced. However, the Company does continue to utilize the FHLB term advances to help manage interest rate risk.

The Company’s total shareholders’ equity decreased by $15.0 million, or 12.8%, over the first nine months of 2022. The decrease in capital during the first nine months of 2022 is the result of the negative impact on accumulated other comprehensive loss due to 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 had a negative impact on accumulated other comprehensive loss. These decreases more than offset the Company’s improved first nine months earnings performance.

The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 13.92%, and a common equity tier 1 capital ratio of 10.44% at September 30, 2022. See the discussion of the Basel III capital requirements under the Capital Resources section below. As of September 30, 2022, the Company’s book value per common share was $5.94 and its tangible book value per common share (non-GAAP) was $5.13. When compared to December 31, 2021, book value per common share declined by $0.88 per common share and tangible book value per common share declined by $0.89 per common share. The tangible common equity to tangible assets ratio (non-GAAP) was 6.57% at September 30, 2022 and decreased by 121 basis points when compared to December 31, 2021. The decrease in tangible book value and tangible common equity ratio relate to the previously discussed increase in the accumulated other comprehensive loss.

Table of Contents

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

…..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

Non-performing assets are comprised of (i) loans that are on a non-accrual basis, (ii) loans that are contractually past due 90 days or more as to interest and principal payments, (iii) performing loans classified as a troubled debt restructuring and (iv) other real estate owned 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 months of 2022 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 in accruing loan delinquency is primarily attributable to a decrease in 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 commercial real estate loan relationship into non-accrual status while the borrower pursues the sale of the property. In addition, this partial charge-down led to an 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

Table of Contents

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

We also continue to closely monitor the loan portfolio given the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As of September 30, 2022, the 25 largest credits represented 21.6% of total loans outstanding, which is consistent with the third quarter of 2021 when it was 21.5%.

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


	September 30,			December 31,			September 30,
	2022			2021			2021
Allowance for loan losses	$	10,672		$	12,398		$	12,124
Allowance for loan losses as
a percentage of each of the following:
total loans, net of unearned income		1.09	%		1.26	%		1.22	%
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
total non-performing assets		232.20			373.10			388.71

…..LIQUIDITY…..The Company’s liquidity position continues to be strong due to effective business development efforts as well as management’s ability to retain the significant influx of deposits that resulted from the government stimulus programs. Also, deposit levels were positively impacted in the second quarter of 2021 by the Somerset County branch acquisition which more than offset the third quarter 2021 maturity of the high cost, institutional deposit. In addition, the Company’s loyal core deposit base continues to prove to be a source of strength for the Company during periods of market volatility. As a result, through nine months, total average deposits are $7.9 million, or 0.7%, higher compared to the first nine months of 2021. Deposit volumes remain at a high level by historical standards and 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 have demonstrated stabilization 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 the first nine months of 2022, but continue to be higher than they have been historically. Although eased somewhat by the additional investment in the securities portfolio, the challenge remains as to the uncertainty regarding the duration that these increased funds 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 remains a priority. Continued loan growth and prudent investment in securities are critical to achieve the best return on the remaining 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. 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% in the third quarter of 2022, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to

Table of Contents

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 million from December 31, 2021, to $28.5 million at September 30, 2022, due to $38.6 million of net cash used in investing activities which more than offset $24.1 million of net cash provided by financing activities and $1.9 million of net cash provided by operating activities. Within investing activities, cash advanced for new loans originated totaled $163.7 million and was $4.5 million lower than the $168.2 million of cash received from loan principal payments. Within financing activities, total FHLB borrowings decreased by $14.1 million while total deposits increased by $13.5 million. Within operating activities, $8.2 million of mortgage loans held for sale were originated while $9.4 million of mortgage loans were sold into the secondary market.

The holding company had $9.2 million of cash, short-term investments, and investment securities at September 30, 2022, which represents a $104,000 decrease from the holding company’s cash position since the end of the fourth quarter of 2021. Dividend payments from our subsidiaries also provide ongoing cash to the holding company. At September 30, 2022, our subsidiary Bank had $14.1 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 million and $41.1 million at September 30, 2022 and December 31, 2021, respectively. Maturing and repaying loans, as well as the monthly cash flow associated with mortgage-backed securities and security maturities are other significant sources of asset liquidity for the Company.

Liability liquidity can be met by attracting deposits with competitive rates, using repurchase agreements, buying federal funds, or utilizing the facilities of the Federal Reserve or the FHLB systems. The Company utilizes a variety of these methods of liability liquidity. Additionally, the Company’s subsidiary bank is a member of the FHLB, which provides the opportunity to obtain short-term to longer-term advances based upon the Company’s investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. At September 30, 2022, the Company had $355 million of overnight borrowing availability at the FHLB, $42 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%, the tier 1 capital ratio was 10.44%, and the total capital ratio was 13.92% at September 30, 2022. The Company’s tier 1 leverage ratio was 8.56% at September 30, 2022. We anticipate that we will maintain our strong capital ratios throughout the remainder of 2022. 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% of regulatory capital at September 30, 2022. We currently believe that we have sufficient capital and earnings power to continue to pay our common stock cash dividend at its increased rate of $0.03 per quarter. At September 30, 2022, 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

Table of Contents

requirements, including the CCB, and continue to be committed to maintaining strong capital levels that exceed regulatory requirements while also supporting balance sheet growth and providing a return to our shareholders.

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


			MINIMUM CAPITAL RATIO
	MINIMUM		PLUS CAPITAL
	CAPITAL RATIO		CONSERVATION BUFFER
Common equity tier 1 capital to risk-weighted assets	4.5	%	7.0	%
Tier 1 capital to risk-weighted assets	6.0		8.5
Total capital to risk-weighted assets	8.0		10.5
Tier 1 capital to total average consolidated assets	4.0

…..INTEREST RATE SENSITIVITY…..The following table presents an analysis of the sensitivity inherent in the Company’s net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company’s base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis points. 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
200 bp increase	(0.5)	%	(0.9)	%
100 bp increase	(0.2)		0.8
100 bp decrease	0.1		(4.6)
200 bp decrease	(0.9)		(15.2)

The Company believes that its overall interest rate risk position is well controlled. Based on the slight change in the variability of net interest income in the various interest rate scenarios, the Company is well positioned to sustain either a rate increase or decrease. The fed funds rate is currently at a targeted range of 3.00% to 3.25% as the Federal Reserve took action several times in 2022 to increase the rate a total of 300 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 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 million and standby letters of credit of $12.0 million as of September 30, 2022. 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.

…..CRITICAL ACCOUNTING POLICIES AND ESTIMATES…..The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles (GAAP) and conform to general practices within the banking industry. Accounting and reporting policies for the pension liability, allowance for loan losses, intangible assets, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company’s financial position or results of operation.

Table of Contents

ACCOUNT — Pension liability

BALANCE SHEET REFERENCE — Other assets

INCOME STATEMENT REFERENCE — Salaries and employee benefits and Other expense

DESCRIPTION

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

ACCOUNT — Allowance for Loan Losses

BALANCE SHEET REFERENCE — Allowance for loan losses

INCOME STATEMENT REFERENCE — Provision (credit) for loan losses

DESCRIPTION

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

Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan losses. Approximately $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 losses may be required that would adversely impact earnings in future periods.

ACCOUNT — Intangible assets

BALANCE SHEET REFERENCE — Intangible assets

INCOME STATEMENT REFERENCE — Other expense

DESCRIPTION

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

The fair value of acquired assets and liabilities, including the resulting goodwill and core deposit intangible, was based either on quoted market prices or provided by other third party sources, when available. When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are

Table of Contents

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

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

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

ACCOUNT — Income Taxes

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

INCOME STATEMENT REFERENCE — Provision for income taxes

DESCRIPTION

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

In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As of September 30, 2022, 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.

Table of Contents

ACCOUNT — Investment Securities

BALANCE SHEET REFERENCE — Investment securities

INCOME STATEMENT REFERENCE — Net realized gains on investment securities

DESCRIPTION

Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and the Company’s intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. At September 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 in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value.

…..FORWARD LOOKING STATEMENT…..

THE STRATEGIC FOCUS:

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

●

Shareholders — We strive to increase earnings per share; identifying and managing revenue growth and expense control; and 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 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

Table of Contents

meet the needs of the next generation of AmeriServ customers without abandoning the needs of our existing demographic.

●

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

●

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

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

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

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

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

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

Table of Contents

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

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

Part II Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not Applicable

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Table of Contents

Item 6. Exhibits


3.1	Amended and Restated Articles of Incorporation as amended through August 11, 2011 (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-8 (File No. 333-176869) filed on September 16, 2011).
3.2	Bylaws, as amended and restated on April 2, 2020 (Incorporated by reference to Exhibit 3.1 to the Current report on Form 8-K filed on April 6, 2020).
15.1	Report of S.R. Snodgrass, P.C. regarding unaudited interim financial statement information.
15.2	Awareness Letter of S.R. Snodgrass, P.C.
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101	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 30, 2022, 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 (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 10, 2022	/s/ Jeffrey A. Stopko
	Jeffrey A. Stopko
	President and Chief Executive Officer

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

AmeriServ Financial (ASRV) 10-Q2022 Q3 Quarterly report

Content analysis