CB Financial Services, Inc. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the audited consolidated financial statements, which appear in this Report. You should read the information in this section in conjunction with the business and financial information the Company provided in this Report. Cautionary Statement Concerning Forward-Looking Statements See the first page of this Report for information regarding forward-looking statements. Selected Financial Data The following tables set forth selected historical financial and other data of the Company at and for the years ended December 31, 2021, 2020 and 2019. The information at December 31, 2021 and 2020, and for the years ended December 31, 2021 and 2020 is derived in part from, and should be read together with, the Company's audited consolidated financial statements and notes included in this Report and should be read together therewith. The information at December 31, 2019 and for the year ended December 31, 2019 is derived in part from audited financial statements that are not included in this Report. December 31, 2021 2020 2019 (Dollars in Thousands) Selected Financial Condition Data: Assets $ 1,425,479 $ 1,416,720 $ 1,321,537 Cash and Due From Banks 119,674 160,911 80,217 Securities 224,974 145,400 197,385 Loans, Net 1,009,214 1,031,982 942,629 Deposits 1,226,613 1,224,569 1,118,359 Short-Term Borrowings 39,266 41,055 30,571 Other Borrowings 17,601 8,000 14,000 Stockholders’ Equity 133,124 134,530 151,097 26 Year Ended December 31, 2021 2020 2019 (Dollars in Thousands) Selected Operating Data: Interest and Dividend Income $ 43,557 $ 47,467 $ 51,031 Interest Expense 3,405 5,563 7,857 Net Interest and Dividend Income 40,152 41,904 43,174 (Recovery) Provision for Loan Losses (1,125) 4,000 725 Net Interest and Dividend Income After (Recovery) Provision for Loan Losses 41,277 37,904 42,449 Noninterest Income 16,280 9,471 8,567 Noninterest Expense 42,862 56,767 34,960 Income (Loss) Before Income Tax Expense 14,695 (9,392) 16,056 Income Tax Expense 3,125 1,248 1,729 Net Income (Loss) $ 11,570 $ (10,640) $ 14,327 At or For the Year Ended December 31, 2021 2020 2019 Per Common Share Data: Earnings (Loss) Per Common Share - Basic $ 2.15 $ (1.97) $ 2.64 Earnings (Loss) Per Common Share - Diluted 2.15 (1.97) 2.63 Dividends Per Common Share 0.96 0.96 0.96 Dividend Payout Ratio (1) 44.65 % (48.73) % 36.50 % Book Value Per Common Share $ 25.31 $ 24.76 $ 27.65 Common Shares Outstanding 5,260,672 5,434,374 5,463,828 Selected Financial Ratios: Return on Average Assets 0.79 % (0.77) % 1.09 % Return on Average Equity 8.66 (7.18) 9.89 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 145.44 139.89 134.08 Average Equity to Average Assets 9.12 10.75 11.05 Net Interest Rate Spread (2) 2.81 3.13 3.40 Net Interest Rate Spread (Non-GAAP) (2)(4) 2.82 3.15 3.42 Net Interest Margin (3) 2.92 3.30 3.62 Net Interest Margin (Non-GAAP) (3)(4) 2.94 3.32 3.64 Net Charge-Offs to Average Loans 0.01 0.11 0.05 Noninterest Expense to Average Assets 2.93 4.12 2.67 Efficiency Ratio (5) 75.95 110.50 67.57 Asset Quality Ratios: Allowance for Loan Losses to Total Loans 1.13 % 1.22 % 1.04 % Allowance for Loan Losses to Nonperforming Loans 159.40 88.15 183.33 Allowance for Loan Losses to Nonaccrual Loans 233.37 117.28 340.12 Delinquent and Nonaccrual Loans to Total Loans 0.78 1.50 0.89 Nonperforming Loans to Total Loans 0.71 1.39 0.57 Nonperforming Loans to Total Assets 0.51 1.02 0.41 Nonperforming Assets to Total Assets 0.51 1.04 0.42 27 At or For the Year Ended December 31, 2021 2020 2019 Capital Ratios: Common Equity Tier 1 Capital to Risk-Weighted Assets (6) 11.95 % 11.79 % 11.43 % Tier 1 Capital to Risk-Weighted Assets (6) 11.95 11.79 11.43 Total Capital to Risk-Weighted Assets (6) 13.18 13.04 12.54 Tier 1 Leverage Capital to Adjusted Total Assets (6) 7.76 7.81 7.85 Other: Number of Branch Offices 14 22 24 Number of Full-Time Equivalent Employees 200 257 266 (1) Represents dividends per share divided by net income per share. (2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities. (3) Represents net interest income as a percentage of average interest-earning assets. (4) Fully taxable-equivalent (FTE) yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for the years ended December 31, 2021, 2020 and 2019. Refer to Explanation of Use of Non-GAAP Financial Measures in Item 7 of this Report for the calculation of the measure and reconciliation to the most comparable GAAP measure. . (5) Represents noninterest expense divided by the sum of net interest income and noninterest income. (6) Capital ratios are for Community Bank only. Critical Accounting Policies and Use of Critical Accounting Estimates Critical accounting policies are those that involve significant judgments, estimates and assumptions by management and that have, or could have, a material impact on the Company’s income or the carrying value of its assets. Allowance for Loan Losses. The allowance for loan losses (“allowance”) is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance based on potential losses in the current loan portfolio, which includes an assessment of economic conditions, changes in the nature and volume of the loan portfolio, loan loss experience, volume and severity of past due, classified and nonaccrual loans as well as other loan modifications, quality of the Company’s loan review system, the degree of oversight by the Company’s Board, existence and effect of any concentrations of credit and changes in the level of such concentrations, effect of external factors, such as competition and legal and regulatory requirements, and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making evaluations. Additions are made to the allowance through periodic provisions charged to income and recovery of principal and interest on loans previously charged-off. Losses of principal are charged directly to the allowance when a loss occurs or when a determination is made that the specific loss is probable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due for principal and interest according to the original contractual terms of the loan agreement. Generally, management considers all substandard-, doubtful-, and loss-rated loans, nonaccrual loans, and TDRs for impairment. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The maximum period without payment that typically can occur before a loan is considered for impairment is 90 days. Impairment is measured based on the present value of expected future cash flows discounted at a loan’s effective interest rate, or as a practical expedient, the observable market price, or, if the loan is collateral dependent, the fair value of the underlying collateral. When the measurement of an impaired loan is less than the recorded investment in the loan, the impairment is recorded in a specific valuation allowance. This specific valuation allowance is periodically adjusted for significant changes in the amount or timing of expected future cash flows, observable market price or fair value of the collateral. The specific valuation allowance, or allowance for impaired loans, is part of the total allowance for loan losses. Cash payments received on impaired loans that are considered non-accrual are recorded as a direct reduction of the recorded investment in the loan. When the recorded investment has been fully collected, receipts are recorded as recoveries to the allowance for loan losses until the previously charged-off principal is fully recovered. Subsequent amounts collected are recognized as interest income. If no charge-off exists, then once the recorded investment has been fully collected, any future amounts collected would be recognized 28 as interest income. Impaired loans are not returned to accrual status until all amounts due, both principal and interest, are current and a sustained payment history has been demonstrated. The general allowance component covers pools of homogeneous loans by loan class. Management determines historical loss experience for each segment of loans using the five-year rolling average of the net charge-off data within each segment. Qualitative and environmental factors are also considered that are likely to cause estimated credit losses associated with the Bank’s existing portfolio to differ from historical loss experience, and include levels and trends in delinquency and impaired loans; levels and trends in net charge-offs, trends in volume and terms of loans; change in underwriting, policies, procedures, practices and key personnel; national and local economic trends; industry conditions, and effects of changes in high-risk credit circumstances. The qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in the portfolio and economy. An unallocated component, which is a part of the general allowance component, is maintained to cover uncertainties that could affect the Company’s estimate of probable losses. Our allowance is sensitive to a number of inputs, most notably the qualitative factors and historical loss experience by loan segment. Given the dynamic relationship between the inputs, it is difficult to estimate the impact of a change in any one individual variable on the allowance. Although management believes that it uses the best information available to establish the allowance, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral value cannot be predicted with certainty, there can be no assurance that the existing allowance is adequate or that increases will not be necessary should the quality of assets deteriorate as a result of the factors discussed previously. Any increase in the allowance may adversely affect our financial condition and results of operations. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Fair Value Measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A three-level of fair value hierarchy prioritizes the inputs used to measure fair value: Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The Company attempts to maximize observable inputs and limit the use of unobservable inputs when developing fair value measurements, Fair value measurements for assets where there exists limited or no observable market data and that are based primarily upon the Company’s or other third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive environment and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique where changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations. Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100% of the goodwill to the Community Banking reporting unit. Determining the fair value of a reporting unit under the goodwill impairment test is judgmental and often involves the use of significant estimates and assumptions. In 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, 29 after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a step one impairment test is unnecessary. An entity also has the option to bypass the qualitative assessment for any reporting unit and proceed directly to the first step of impairment testing. Two basic approaches to determine the fair value of an entity are the income approach and market approach or a combination of the two. The income approach uses valuation techniques to convert future earnings or cash flows to present value to arrive at a value that is indicated by market expectations about future amounts. The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities. The fair value measure is based on the value that those transactions indicate. These approaches involve significant estimates and assumptions In the application of the income approach, fair value of a reporting unit is determined using a discounted cash flow (“DCF”) analysis. The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value. Fair value is determined by converting anticipated benefits into a present single value. Once the benefit or benefits are selected, an appropriate discount or capitalization rate is applied to each benefit. These rates are calculated using the appropriate measure for the size and type of company, using financial models and market data as required. A discount rate may be derived based on a modified capital asset pricing model. which is comprised of a risk-free rate of return, an equity risk premium, a size premium and a factor covering the systemic market risk and a company specific risk premium. The values for the factors applied are determined primarily using external sources of information. The DCF model also uses prospective financial information. Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments. Under the market approach, Level 1 and 2 inputs are used when measuring fair value. In the application of the market approach, the Guideline Public Company ("GPC") method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity. A value multiple or ratio relates a stock’s market price to the reported accounting data such as revenue, earnings, and book value. These ratios provide an objective basis for measuring the market’s perception of a stock’s fair value. Value ratios generally reflect the trends in growth, performance and stability of the financial results of operations. In this way, the business and financial risks exhibited by an industry or group of companies can be viewed in relation to market values. Value ratios also reflect the market’s outlook for the economy as a whole. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the company being valued. The Company analyzes the relationships between the guideline companies' asset size, profitability, asset quality and capital ratios and applies a control premium to the selected guideline company multiples. The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of synergies and other benefits that flow from control of the entity. The GPC method using trading activity of publicly traded companies that are most similar to the Company may also be considered when the banking industry has a sufficient level of mergers and acquisitions activity The results of the income and market approaches may be weighted to determine the concluded fair value of the reporting unit. The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology. Estimating the fair value involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods and require management to further evaluate goodwill for impairment. As a result of a quantitative goodwill impairment test and in connection with the preparation of the consolidated financial statements, the Company concluded that goodwill was impaired in 2020. Accordingly, the Company recorded a goodwill impairment charge of $18.7 million for the year ended December 31, 2020 as the Company's estimated fair value was less than its book value. If the Company determines a triggering event occurs in the future, changes in the judgments, assumptions and inputs noted above could result in additional goodwill impairment. Other-Than-Temporary Impairment. In estimating other-than-temporary impairment of securities, securities are evaluated on at least a quarterly basis to determine whether a decline in their value is other-than-temporary. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Company intends to sell or expect that it is more likely than not that it will be required to sell the security before an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Deferred Tax Assets. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will 30 be realized or sustained upon examination, the term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date, and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company did not have a deferred tax asset valuation allowance as of December 31, 2021 and December 31, 2020. Recent Accounting Pronouncements and Developments New accounting pronouncements that were adopted in the current period or will be adopted in a future period are discussed in Note 1 – Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, which is included in Part IV, Item 15 of this Report. Branch Optimization and Operational Efficiency Initiative In 2021, the Company announced the implementation of branch optimization and operational efficiency strategic initiatives to improve the Bank’s financial performance and operations in order to position the Bank for continued profitable growth through the optimization of its branch network while expanding technology and infrastructure investments in its remaining locations. The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts. The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance. This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments and the Bank is in process of implementing operational efficiencies related to individualized processes within its branch network and operating environment. The Bank has substantially completed these initiatives through the consolidation of six branches that was completed on June 30, 2021. In addition, CB Financial, Community Bank, and Citizens Bank of West Virginia, Inc. (“Citizens Bank”) executed a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Citizens Bank agreed to purchase certain loans and other assets, and assume certain deposits and other liabilities, of the branch offices of Community Bank located in Buckhannon, West Virginia, and New Martinsville, West Virginia. The divestiture of two branches in December 2021 resulted in the sale of $102.8 million of deposits, $6.1 million of loans and $795,000 of premises and equipment and the recognition of a $5.2 million pre-tax gain on sale from a 5.0% premium paid by Citizens Bank on the assumed deposits. The branch optimization initiative reduced the Bank's branch network to 14 branches. The Company anticipates $3.0 million of ongoing pre-tax cost savings as a result of the branch optimization initiatives. The majority of the process improvements have been implemented with the remaining items to be implemented in 2022. The Company anticipates cost savings from the operational efficiency initiative ranging from approximately $2.5 million to $3.5 million in 2022, as well as expected enhanced revenue and fee generating capacity in future years. COVID-19 Pandemic Although many health and safety restrictions have been lifted and vaccine distribution has increased, the ongoing COVID-19 pandemic has negatively impacted local, national and global economies and financial markets since March 2020. Economic activity and demand for goods and services, alongside labor shortages and supply chain complications, has also contributed to rising inflationary pressures. The extent to which the COVID-19 pandemic continues to impact our business, financial condition, liquidity, and results of operations will depend on future developments, which are highly uncertain and are difficult to predict In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve took a number of actions that significantly affected the financial markets, including actions intended to result in substantial decreases in market interest rates. On March 15, 2020, the FRB reduced the target federal funds range by 100 basis points to 0% to 0.25% and have held the target federal funds rate in that range for the remainder of 2020 and throughout 2021. These reductions in interest rates, among other actions of the FRB and the Federal government generally, adversely affected our net interest income, compressed our margins and impacted our overall profitability. We expect that the reduction of interest rates to near zero in response to the effects of the COVID-19 pandemic will gradually be reversed over the course of the next year with the FRB now signaling its concerns with respect to inflation and announcing that it will begin to taper its purchase of mortgage and other bonds. The timing and impact of the expected reversal in interest rate trends is unknown. 31 Explanation of Use of Non-GAAP Financial Measures In addition to traditional measures presented in accordance with generally accepted accounting principles (“GAAP”), we use, and this Report contains or references, certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein. Refer to the "Reconciliations of Non-GAAP Financial Measures to GAAP" within this Item 7 for further information. Comparison of Financial Condition at December 31, 2021 and 2020 Assets. Total assets increased $8.8 million, or 0.6%, to $1.43 billion at December 31, 2021, compared to $1.42 billion at December 31, 2020. Cash and Due From Banks. Cash and due from banks decreased $41.2 million, or 25.6%, to $119.7 million at December 31, 2021, compared to $160.9 million at December 31, 2020. The change is primarily related to securities purchases and sale of branches, partially offset by net repayments on loans. Securities. Securities increased $79.6 million, or 54.7%, to $225.0 million at December 31, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $135.0 million of purchases, $38.4 million of paydowns, and $12.0 million of sales, primarily of mortgage-backed securities, which resulted in the recognition of a $231,000 gain. The sales recognized gains on higher-interest securities with faster prepayment speeds. The purchases were made to earn a higher yield on excess cash. In addition, there was a $5.5 million decrease in the market value of the debt securities portfolio and a $295,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks. Securities Portfolio. The following table sets forth the composition of our securities portfolio at the dates indicated. 2021 2020 December 31, Amortized Cost Fair Value Amortized Cost Fair Value (Dollars in Thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 53,992 $ 52,561 $ 41,994 $ 41,411 Obligations of States and Political Subdivisions 17,951 18,955 20,672 21,993 Mortgage-Backed Securities - Government-Sponsored Enterprises 55,373 56,559 75,900 79,493 Collateralized Mortgage Obligations - Government Sponsored Enterprises 88,493 86,583 — — Corporate Debt 7,481 7,450 — — Total Available-for-Sale Debt Securities $ 223,290 222,108 $ 138,566 142,897 Equity Securities: Mutual Funds 990 1,019 Other 1,876 1,484 Total Equity Securities 2,866 2,503 Total Securities $ 224,974 $ 145,400 32 Securities Portfolio Maturities and Yields. The composition and maturities of the debt securities portfolio at December 31, 2021, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The weighted average yield for each security category is determined by the security's book yield and calculating the interest earned divided by the carrying value. For tax free obligations of states and political subdivision, the book yield is the tax free yield. One Year or Less More than One Year Through Five Years More than Five Years Through Ten Years More than Ten Years Total Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield Fair Value Weighted Average Yield (Dollars in Thousands) U.S. Government Agencies $ — — % $ 2,945 0.82 % $ 49,616 1.21 % $ — — % $ 52,561 1.19 % Obligations of States and Political Subdivisions 2,604 2.55 1,023 2.97 11,644 3.24 3,684 3.09 18,955 3.10 Mortgage Backed Securities - Government-Sponsored Enterprises — — 489 1.91 13,879 2.23 42,191 2.08 56,559 2.12 Collateralized Mortgage Obligations - Government-Sponsored Enterprises — — — — — — 86,583 1.40 86,583 1.40 Corporate Debt Securities — — — — 2,500 2.96 4,950 2.30 7,450 2.53 Total Debt Securities $ 2,604 2.55 % $ 4,457 1.41 % $ 77,639 1.73 % $ 137,408 1.68 % $ 222,108 1.70 % Loans. Total loans decreased $24.0 million, or 2.3%, to $1.02 billion at December 31, 2021 compared to $1.04 billion at December 31, 2020. Excluding the net decline of $30.6 million in PPP loans in the current period, loans increased $6.6 million. 2021 loan growth was experienced through net funding of $18.6 million in commercial real estate loans, $12.4 million in construction loans and $8.3 million in consumer loans. Average loans for the year ended December 31, 2021 increased $6.0 million compared to the year ended December 31, 2020. Loan Portfolio Composition. The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated. The Company did not have loans held for sale at the dates indicated below. 2021 2020 December 31, Amount Percent Amount Percent (Dollars in Thousands) Real Estate: Residential $ 320,798 31.4 % $ 344,142 32.9 % Commercial 392,124 38.5 373,555 35.9 Construction 85,028 8.3 72,600 6.9 Commercial and Industrial 89,010 8.7 126,813 12.1 Consumer 122,152 12.0 113,854 10.9 Other 11,684 1.1 13,789 1.3 Total Loans 1,020,796 100.0 % 1,044,753 100.0 % Allowance for Loan Losses (11,582) (12,771) Loans, Net $ 1,009,214 $ 1,031,982 33 Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2021. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. For construction-to-permanent loans in the construction category, the maturity date is the date the loan matures once it is in permanent repayment status. Consumer loans consist primarily of indirect automobile loans whereby a portion of the rate is prepaid to the dealer and accrued in a prepaid dealer reserve account. Therefore, the true yield for the consumer loan portfolio is significantly less than the note rate disclosed below. Real Estate Residential Commercial Construction Commercial and Industrial Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) One Year or Less $ 16,246 3.51 % $ 8,144 3.97 % $ 11,428 2.99 % $ 19,679 3.68 % After One Year Through Five Years 6,058 4.22 47,354 4.01 39,658 2.97 41,359 2.15 After Five Years Through 15 Years 116,624 3.84 322,324 3.62 25,164 3.63 20,892 3.36 After 15 Years 181,870 3.80 14,302 3.88 8,778 3.20 7,080 2.76 Total $ 320,798 3.81 % $ 392,124 3.68 % $ 85,028 3.19 % $ 89,010 2.81 % Consumer Other Total Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) One Year or Less $ 6,162 4.85 % $ 1,074 2.90 % $ 62,733 3.65 % After One Year Through Five Years 67,380 4.50 337 2.68 202,146 3.56 After Five Years Through 15 Years 46,878 4.28 7,902 3.02 539,784 3.70 After 15 Years 1,732 5.29 2,371 4.00 216,133 3.75 Total $ 122,152 4.43 % $ 11,684 3.20 % $ 1,020,796 3.68 % The following table sets forth at December 31, 2021, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2022. Due After December 31, 2022 Fixed Adjustable Total (Dollars in Thousands) Real Estate: Residential $ 265,136 $ 39,416 $ 304,552 Commercial 202,646 181,334 383,980 Construction 49,374 24,225 73,599 Commercial and Industrial 54,786 14,545 69,331 Consumer 115,938 54 115,992 Other 7,268 3,341 10,609 Total Loans $ 695,148 $ 262,915 $ 958,063 34 PPP Loans. The following table presents PPP loan activity segregated by loans originated in 2020 and 2021. 2020 2021 Total Number of Loans Principal Balance Net Deferred Origination Fees Number of Loans Principal Balance Net Deferred Origination Fees Number of Loans Principal Balance Net Deferred Origination Fees (Dollars in Thousands) PPP Loans Originated 639 $ 71,057 $ 2,202 218 $ 34,617 $ 1,268 857 $ 105,674 $ 3,470 PPP Loan Forgiveness Through December 31, 2021 605 69,374 2,152 97 11,027 478 702 80,401 2,630 Principal Payments or Net Deferred Origination Fees Recognized on Unforgiven PPP Loans — 70 33 — 2 129 — 72 162 PPP Loans Remaining at December 31, 2021 34 $ 1,613 $ 17 121 $ 23,588 $ 661 155 $ 25,201 $ 678 PPP Loans Remaining, Net of Deferred Fees at December 31, 2021 $ 1,596 $ 22,927 $ 24,523 Net deferred origination fees on PPP loans totaled $3.5 million, of which $1.7 million and $1.1 million was recognized during the years ended December 31, 2021 and 2020. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee. Liabilities. Total liabilities increased $10.2 million, or 0.8%, to $1.29 billion at December 31, 2021 compared to $1.28 billion at December 31, 2020. Deposits. Despite the impact of the sale of $102.8 million of deposits from the sale of two branches completed in December 2021, total deposits increased $2.0 million to $1.23 billion as of December 31, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $45.2 million, $12.6 million and $4.4 million, respectively, partially offset by a decrease of $53.3 million in time deposits. The following table sets forth the distribution of our average deposit accounts, by account type, for the years indicated. 2021 2020 Year Ended December 31, Average Balance Percent Weighted Average Rate Average Balance Percent Weighted Average Rate (Dollars in Thousands) Non-Interest Bearing Demand Deposits $ 378,374 29.8 % — % $ 313,858 26.8 % — % NOW Accounts 272,256 21.4 0.09 240,372 20.5 0.25 Savings Accounts 247,864 19.5 0.04 227,277 19.4 0.08 Money Market Accounts 201,222 15.8 0.14 187,095 16.0 0.38 Time Deposits 171,805 13.5 1.46 203,128 17.3 1.81 Total Deposits $ 1,271,521 100.0 % 0.25 % $ 1,171,730 100.0 % 0.44 % 35 The following table sets forth time deposits classified by interest rate as of the dates indicated. December 31, 2021 2020 (Dollars in Thousands) Less than 0.25% $ 39,573 $ 14,818 0.25% to 0.49% 20,568 28,729 0.50% to 0.99% 10,943 17,787 1.00% to 1.49% 11,110 24,616 1.50% to 1.99% 7,561 19,564 2.00% to 2.49% 11,841 40,169 2.49% to 2.99% 13,427 19,037 3.00% or Greater 21,690 25,293 Total Time Deposits $ 136,713 $ 190,013 The following table sets forth, by interest rate ranges and scheduled maturity, information concerning our time deposits at the date indicated. Period to Maturity December 31, 2021 Less Than Or Equal to One Year More Than One to Two Years More Than Two to Three Years More Than Three to Four Years More Than Four to Five Years More Than Five Years Total Percent of Total (Dollars in Thousands) Less than 0.25% $ 27,991 $ 10,223 $ 1,050 $ 250 $ 59 $ — $ 39,573 29.0 % 0.25% to 0.49% 10,786 1,678 796 1,555 5,753 — 20,568 15.0 0.50% to 0.99% 3,266 751 668 4,485 145 1,628 10,943 8.0 1.00% to 1.49% 4,650 3,004 1,374 1,608 200 274 11,110 8.1 1.50% to 1.99% 2,592 1,378 838 853 1,615 285 7,561 5.5 2.00% to 2.49% 3,713 4,909 1,908 171 31 1,109 11,841 8.7 2.49% to 2.99% 651 12,385 — 391 — — 13,427 9.8 3.00% or Greater 5,830 15,479 310 71 — — 21,690 15.9 Total $ 59,479 $ 49,807 $ 6,944 $ 9,384 $ 7,803 $ 3,296 $ 136,713 100.0 % As of December 31, 2021 and 2020, the aggregate estimated amount of outstanding deposits in amounts uninsured by the FDIC, or that were not secured by the Bank through the pledging of securities, FHLB letters of credit or other means, was approximately $337.9 million and $290.2 million respectively. The estimates are based on the same methodologies and assumptions used for the Bank's regulatory reporting requirements. Of the amount at December 31, 2021, an estimated $8.6 million are uninsured time deposits and the following table sets forth their maturity. December 31, 2021 (Dollars in Thousands) Three Months or Less $ 164 Over Three Months to Six Months 1,250 Over Six Months to One Year 1,791 Over One Year 5,372 Total $ 8,577 Borrowed Funds ◦ Short-term borrowings. Short-term borrowings decreased $1.8 million, or 4.4%, to $39.3 million at December 31, 2021, compared to $41.1 million at December 31, 2020. At December 31, 2021 and December 31, 2020, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase. 36 ◦ Other borrowed funds. Other borrowed funds increased $9.6 million to $17.6 million at December 31, 2021 due to the issuance of subordinated debt in December 2021 with net proceeds of $14.6 million partially offset by $5.0 million of Federal Home Loan Bank borrowings that matured in the current period. The Company intends to utilize the subordinated debt proceeds to continue to proactively repurchase shares or for other general corporate matters. Stockholders’ Equity. Stockholders’ equity decreased $1.4 million, or 1.0%, to $133.1 million at December 31, 2021, compared to $134.5 million at December 31, 2020. • Net income was $11.6 million for the year ended December 31, 2021. • Accumulated other comprehensive income decreased $4.3 million primarily due to market interest rate conditions in the current period on the Bank’s available-for-sale debt securities. • The Company paid $5.2 million in dividends to common stockholders in the current year. • Primarily as part of the Company’s $7.5 million stock repurchase program previously announced in June 2021, the Company repurchased 178,252 shares of common stock totaling $4.1 million in the current year. The Company completed this stock repurchase program in February 2022. In connection with the program, the Company purchased a total of 308,996 shares of the Company’s common stock at an average price of $24.27 per share. • Book value per share was $25.31 at December 31, 2021 compared to $24.76 at December 31, 2020, an increase of $0.55. Tangible book value per share (Non-GAAP) increased $1.03, or 4.8%, to $22.45 compared to $21.42 at December 31, 2020. Refer to “Explanation of Use of Non-GAAP Financial Measures” at the end of this section. Comparison of Operating Results for the Years Ended December 31, 2021 and 2020 Overview. 2021 Annual Results were impacted by the following significant items: • The branch optimization and operational efficiency initiatives resulted in $7.5 million of restructuring-related and other expenses for the year ended December 31, 2021. The non-recurring expenses include a $2.3 million writedown on premises and equipment and $1.2 million impairment of intangible assets associated with the branch sales. The Company also incurred $4.1 million of expenses related to contracted services, employee severance costs, branch lease impairment, professional fees, data processing fees, charitable donations, legal and other expenses for the year ended December 31, 2021 related to these initiatives. • The Company recognized a $5.2 million pre-tax gain on sale of branches related to the 5.0% premium paid by Citizens Bank on the assumed deposits. 2020 Annual Results were impacted by the following significant non-recurring items: • The Company conducted a goodwill impairment analysis at September 30, 2020 and determined that $18.7 million of goodwill was deemed impaired and written off for the year ended December 31, 2020, reducing goodwill to $9.7 million at December 31, 2020. This non-cash charge was deemed non-core and had no impact on the Company’s tangible equity, cash flows, liquidity or regulatory capital. • The Company incurred a pre-tax non-cash impairment of fixed assets of $1.1 million for the year ended December 31, 2020 as a result of the previously announced Monessen branch closure. The property was written down by $884,000 to its fair value of $240,000 in the third quarter of 2020 and was subsequently donated in the fourth quarter of 2020 with the remaining $240,000 written off. Net Interest Income. Net interest income decreased $1.8 million, or 4.2%, to $40.2 million for the year ended December 31, 2021 compared to $41.9 million for the year ended December 31, 2020. Net interest margin (Non-GAAP FTE) decreased 38 bps to 2.94% for the year ended December 31, 2021 compared to 3.32% the year ended December 31, 2020. Net interest margin (GAAP) decreased to 2.92% for the year ended December 31, 2021 compared to 3.30% for the year ended December 31, 2020. While the Company has further controlled its deposit cost structure and benefited from nonrenewal or repricing of higher cost time deposits, the net interest margin decreased primarily due to the low interest rate environment decreasing yields on loans and securities. Interest and dividend income decreased $3.9 million, or 8.2%, to $43.6 million for the year ended December 31, 2021 compared to $47.5 million for the year ended December 31, 2020. • Interest income on loans decreased $3.2 million, or 7.4%, to $39.7 million for the year ended December 31, 2021 compared to $42.9 million for the year ended December 31, 2020. Although average loans increased $6.0 million, the loan yield for the year ended December 31, 2021 decreased 35 bps to 3.92% for the year ended December 31, 2021 compared to 4.27% for the year ended December 31, 2020 due to the full year impact of the COVID-19 pandemic-related declines in market interest rates beginning in March 2020. Interest and fee income on PPP loans was $2.2 million for the year ended December 31, 2021 and contributed 4 bps to loan yield, compared to $1.5 million for the year ended December 31, 2020, which decreased loan yield 4 bps in the prior period. The impact of the accretion of 37 the credit mark on acquired loan portfolios was $468,000 for the year ended December 31, 2021 compared to $434,000 for the year ended December 31, 2020, or 4 bps in the current period compared to 5 bps in the prior period. • Interest income on taxable investment securities decreased $629,000, or 17.4%, to $3.0 million for the year ended December 31, 2021 compared to $3.6 million for the year ended December 31, 2020. While average investment securities increased $25.0 million, there was a 79 bps decrease in average yield. The Federal Reserve pandemic-driven decision to drop the benchmark interest rate in March 2020 resulted in significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in the declining rate environment, which, in combination with excess liquidity, were replaced by lower-yielding securities. In addition, the sales of securities in 2021 recognized gains on higher-interest securities with faster prepayment speeds. Prior period yield benefited from approximately $231,000 in discount accretion from U.S. government agency calls. • Interest income on tax-exempt investment securities decreased $80,000, or 21.7%, to $289,000 for the year ended December 31, 2021 compared to $369,000 for the year ended December 31, 2020 primarily driven by a decrease of $2.4 million in average balance from municipal securities calls. • Interest from other interest-earning assets, which primarily consists of interest-earning cash, decreased $27,000, or 5.2% for the year ended December 31, 2021 compared to the year ended December 31, 2020. Interest and dividend income earned on other interest-earning assets, which is primarily composed of restricted stock, decreased $60,000. Average interest bearing deposits at other banks increased $76.0 million, primarily related to funds received from deposit and loan activity, resulting in a $33,000 increase in interest income even though declines in interest rates resulted in a 6 bp decrease in average yield. Interest expense decreased $2.2 million, or 38.8%, to $3.4 million for the year ended December 31, 2021 compared to $5.6 million for the year ended December 31, 2020. • Interest expense on deposits decreased $2.0 million, or 39.6%, to $3.1 million for the year ended December 31, 2021 compared to $5.2 million for the year ended December 31, 2020. While average interest-bearing deposits increased $35.3 million, interest rate declines for all products driven by pandemic-related interest rate cuts, nonrenewal or repricing of higher cost time deposits, and overall efforts to control pricing resulted in a 25 bp decrease in average cost compared to the year ended December 31, 2020. • Interest expense on short-term borrowings decreased $39,000, or 28.5%, to $98,000 for the year ended December 31, 2021 compared to $137,000 for the year ended December 31, 2020 primarily due to a 14 bp decrease in average cost on securities sold under agreements to repurchase. • Interest expense on other borrowed funds decreased $72,000, or 28.3%, to $182,000 for the year ended December 31, 2021 compared to $254,000 for the year ended December 31, 2020 primarily due to maturity of FHLB long-term advances in the current year that were not replaced, which resulted in a $4.2 million decrease in average balance. Provision for Loan Losses. The provision for loan losses had a $1.1 million recovery for the year ended December 31, 2021, compared to a $4.0 million provision for the year ended December 31, 2020. The pandemic resulted in a dramatic increase in unemployment and recessionary economic conditions in the prior year. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased at the onset of the pandemic, primarily related to economic trends and industry conditions, because of vulnerable industries such as hospitality, oil and gas, retail and restaurants and resulted in the prior year provision. The prior year also included the impacts from an increase in specific reserves primarily due to two commercial real estate loans secured by hotels that were impacted by the COVID-19 pandemic. Those qualitative factors were decreased as the economic impacts of the pandemic eased. In addition, a decrease in specific reserves on impaired loans and improving economic and industry condition contributed to the recovery of provision in the current period. 38 Noninterest Income . The breakdown of noninterest income for the year ended December 31, 2021 compared to year ended December 31, 2020 is as follows: Year Ended December 31, 2021 2020 Dollar Change Percent Change (Dollars in Thousands) Service Fees 2,331 2,206 125 5.7 % Insurance Commissions 5,616 4,878 738 15.1 % Other Commissions 521 479 42 8.8 % Net Gain on Sales of Loans 1,143 1,391 (248) (17.8) % Net Gain on Securities 526 233 293 125.8 % Net Gain on Purchased Tax Credits 70 62 8 12.9 % Gain on Sale of Branches 5,203 — 5,203 — % Net Loss on Disposal of Fixed Assets (3) (61) 58 95.1 % Income from Bank-Owned Life Insurance 553 557 (4) (0.7) % Other Income (Loss) 320 (274) 594 216.8 % Total Noninterest Income 16,280 9,471 6,809 71.9 % Noninterest income increased $6.8 million, or 71.9%, to $16.3 million for the year ended December 31, 2021, compared to $9.5 million for the year ended December 31, 2020. • Service fees increased $125,000 to $2.3 million for the year ended December 31, 2021, compared to $2.2 million for the year ended December 31, 2020 due to an increase in customer account usage compared to the prior year period when shelter-in-place orders occurred at the onset of the COVID-19 pandemic. • Insurance commissions increased $738,000, or 15.1%, to $5.6 million for the year ended December 31, 2021, compared to $4.9 million for the year ended December 31, 2020 due to an increase in contingency fees as well as commercial-related insurance policy revenue. Contingency fees are profit sharing commissions that are contingent upon several factors including, but not limited to, eligible written premiums, incurred losses, policy cancellations and stop loss charges. • Net gain on sales of loans was $1.1 million for the year ended December 31, 2021 compared to $1.4 million for the year ended December 31, 2020 primarily due to decreased mortgage loan production from refinances in 2020 that were driven by reduced market interest rates. Gains from sales of mortgage loans decreased to $323,000 for the year ended December 31, 2021 compared to $1.4 million for the year ended December 31, 2020. In the current year, the Bank sold a substandard-rated commercial real estate loan secured by a hotel, which was partially charged-off $931,000 in 2020, that resulted in the recognition of an $897,000 gain on sale, and also sold a substandard-rated commercial and industrial loan, which resulted in the recognition of a $77,000 loss on sale. • Net gain on securities was $526,000 for the year ended December 31, 2021, compared to $233,000 for the year ended December 31, 2020. Net gain on sales of securities was $231,000 in the current period primarily to recognize gains on higher-interest securities with faster prepayment speeds compared to $500,000 in the prior period. The Company’s equity securities, which are primarily comprised of bank stocks, reflected an increase in value of $295,000 for the current period compared to a $267,000 net loss in value in the prior period primarily from the impact of COVID-19 on the banking industry. • The Company recorded a $61,000 net loss on disposal of fixed assets in the prior year, of which $48,000 related to the sale of the former EU headquarters. • The Company recognized a $5.2 million pre-tax gain on sale of branches in the current period related to the 5.0% premium paid by Citizens Bank on the assumed deposits. • There was a $594,000 increase in other income (loss) primarily due to a $274,000 valuation allowance adjustment on mortgage servicing rights in the current period as a result of a decrease in prepayment speeds resulting in an increase in the fair value of the serviced mortgage portfolio, compared to a $302,000 temporary impairment in the prior period due to a decline in the interest rate environment that caused increased prepayment speeds in 2020. 39 Noninterest Expense. The breakdown of noninterest expense for the year ended December 31, 2021 compared to year ended December 31, 2020 is as follows: Year Ended December 31, 2021 2020 Dollar Change Percent Change (Dollars in Thousands) Salaries and Employee Benefits 19,938 19,809 129 0.7 % Occupancy 2,968 2,797 171 6.1 % Equipment 1,034 935 99 10.6 % Data Processing 2,154 1,843 311 16.9 % FDIC Assessment 1,014 837 177 21.1 % PA Shares Tax 887 1,313 (426) (32.4) % Contracted Services 4,011 2,048 1,963 95.8 % Legal and Professional Fees 994 752 242 32.2 % Advertising 749 664 85 12.8 % Other Real Estate Owned (Income) (183) (69) (114) 165.2 % Amortization of Intangible Assets 1,926 2,128 (202) (9.5) % Intangible Assets and Goodwill Impairment 1,178 18,693 (17,515) (93.7) % Writedown of Premises and Equipment 2,293 1,124 1,169 104.0 % Other 3,899 3,893 6 0.2 % Total Noninterest Expense 42,862 56,767 (13,905) (24.5) % Noninterest expense decreased $13.9 million, or 24.5%, to $42.9 million for the year ended December 31, 2021 compared to $56.8 million for the year ended December 31, 2020. This was primarily impacted by $7.5 million of expenses associated with the branch optimization and operational efficiency initiatives in the current year, which included writedown on premises and equipment of $2.3 million and intangible asset impairment of $1.2 million. The prior period included goodwill impairment of $18.7 million goodwill impairment and writedown on fixed assets of $1.1 million. • Salaries and employee benefits increased $129,000 to $19.9 million for the year ended December 31, 2021 compared to $19.8 million for the year ended December 31, 2020. Activity in the current period included an increase in employee benefit expenses primarily attributed to the prior period impact from a $407,000 one-time payment that offset employee benefits related to the transition from a self-funded to a fully insured health insurance plan, the recognition of $335,000 in severance related to the branch optimization initiative, and an increase in employee incentive expense. The Company also recognized a greater benefit in the prior period from deferred employee-related loan origination costs primarily associated with PPP loans. The prior period was also impacted by the recognition of approximately $560,000 of one-time payments and related taxes and benefits from the transition and retention of a permanent CEO and approximately $388,000 of expenses associated with the Community Bank Cares 10% premium pay during the pandemic. • Occupancy expense increased $171,000 to $3.0 million for the year ended December 31, 2021 compared to $2.8 million for the year ended December 31, 2020. The increase was due to the recognition of a $227,000 lease impairment related to the consolidation of a branch as part of the branch optimization initiative in the current period compared to an $84,000 early lease termination payment from a branch closure in the prior period. • Equipment expense increased $99,000 to $1.0 million for the year ended December 31, 2021 compared to $935,000 for the year ended December 31, 2020 as the result of an increase in repairs and maintenance. • Data processing increased $311,000 to $2.2 million for the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020 primarily due to $110,000 in deconversion costs associated with the branch sales as well as other technology investments associated with the branch optimization and efficiency initiative. • FDIC assessment expense increased $177,000 to $1.0 million for the year ended December 31, 2021 compared to $837,000 for the year ended December 31, 2020. The increase in assessment was due to net losses recognized during 40 the assessment period and an increase in nonperforming loans negatively impacting the quarterly assessment rates in the current period. • Contracted services increased $2.0 million to $4.0 million for the year ended December 31, 2021 compared to $2.0 million for the year ended December 31, 2020, primarily due to to $2.8 million of expenses associated with the engagement of a third-party expert to improve workflow as well as implement more effective sales management techniques designed to improve operational efficiencies in the near and long-term and engagement of other third party specialists to assist in core platform improvements and efficiencies. The prior period included expense related to the hiring of temporary employees to assist with PPP loan processing, consultants used to assist in infrastructure improvements, and $177,000 of consulting fees associated with the search for a permanent CEO. • Legal fees and professional fees increased $242,000 to $994,000 for the year ended December 31, 2021 compared to $752,000 for the year ended December 31, 2020 due to a $209,000 investment banker success-based fee and legal fees related to the branch sales. The prior period included fees associated with the retention of a permanent CEO. • Advertising increased $85,000 to $749,000 for the year ended December 31, 2021 compared to $664,000 for the year ended December 31, 2020 due to a decrease in marketing initiatives in the prior year during the pandemic. • Other real estate owned income increased $114,000 to $183,000 for the year ended December 31, 2021 compared to $69,000 for the year ended December 31, 2020 primarily due to an $80,000 gain on sale of a property sold in the current period. • Amortization of intangible assets decreased $202,000 to $1.9 million for the year ended December 31, 2021 compared to $2.1 million for the year ended December 31, 2020 primarily due to current period impairment in core deposit intangible asset from the branch sales, which reduced the remaining amount of intangible assets to amortize. • Within other noninterest expense, charitable contributions increased $195,000 due to greater outreach in the communities served by the Bank. Loan expenses decreased $172,000 primarily due to an increase in mortgage refinance costs in the prior year from the decline in market interest rates. Income Tax Expense. Income tax expense increased $1.9 million to $3.1 million for the year ended December 31, 2021, compared to $1.2 million for the year ended December 31, 2020 and is primarily attributed to an increase in pre-tax income. 41 Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the years indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2021 and 2020. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances only. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. 2021 2020 Year Ended December 31, Average Balance Interest and Dividends Yield/ Cost Average Balance Interest and Dividends Yield/ Cost (Dollars in Thousands) Assets: Interest-Earning Assets: Loans, Net (1) $ 1,014,405 $ 39,799 3.92 % $ 1,008,401 $ 43,013 4.27 % Securities Taxable 162,987 2,990 1.83 138,015 3,619 2.62 Tax Exempt 11,829 366 3.09 14,244 450 3.16 Equity Securities 2,657 84 3.16 2,585 79 3.06 Interest Bearing Deposits at Other Banks 177,768 219 0.12 101,774 186 0.18 Other Interest-Earning Assets 3,733 271 7.26 3,814 331 8.68 Total Interest-Earning Assets 1,373,379 43,729 3.18 1,268,833 47,678 3.76 Noninterest-Earning Assets 91,075 109,241 Total Assets $ 1,464,454 $ 1,378,074 Liabilities and Stockholders' equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 272,256 232 0.09 % $ 240,372 590 0.25 % Savings 247,864 98 0.04 227,277 188 0.08 Money Market 201,222 281 0.14 187,095 708 0.38 Time Deposits 171,805 2,514 1.46 203,128 3,686 1.81 Total Interest-Bearing Deposits 893,147 3,125 0.35 857,872 5,172 0.60 Short-term Borrowings: Securities Sold Under Agreement to Repurchase 43,988 98 0.22 37,819 137 0.36 Other Borrowed Funds 7,172 182 2.54 11,328 254 2.24 Total Interest-Bearing Liabilities 944,307 3,405 0.36 907,019 5,563 0.61 Noninterest-Bearing Demand Deposits 378,374 313,858 Other Liabilities 8,168 9,065 Total Liabilities 1,330,849 1,229,942 Stockholders' Equity 133,605 148,132 Total Liabilities and Stockholders' Equity $ 1,464,454 $ 1,378,074 Net Interest Income (FTE) (Non-GAAP) (2) $ 40,324 $ 42,115 Net Interest Rate Spread (FTE) (Non-GAAP) (2)(3) 2.82 3.15 Net Interest-Earning Assets (4) $ 429,072 $ 361,814 Net Interest Margin (FTE) (Non-GAAP) (2)(5) 2.94 3.32 Return on Average Assets 0.79 (0.77) Return on Average Equity 8.66 (7.18) Average Equity to Average Assets 9.12 10.75 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 145.44 139.89 PPP Loans $ 45,905 $ 2,189 4.77 $ 45,694 $ 1,537 3.36 (1) Net of the allowance for loan losses and includes nonaccrual loans with a zero yield (2) Refer to Explanation of Use of Non-GAAP Financial Measures in this Report for the calculation of the measure and reconciliation to the most comparable GAAP measure. (3) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. Net interest rate spread (GAAP) was 2.81% and 3.13% for the year ended December 31, 2021 and 2020, respectively (4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (5) Net interest margin represents net interest income divided by average total interest-earning assets. Net interest margin (GAAP) was 2.92% and 3.30% for the year ended December 31, 2021 and 2020, respectively 42 Rate/Volume Analysis The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. There were no out of period items that occurred this past year. Year Ended December 31, 2021 Compared To Year Ended December 31, 2020 Increase (Decrease) Due to Volume Rate Total (Dollars in Thousands) Interest and Dividend Income: Loans, net $ 335 $ (3,549) $ (3,214) Securities: Taxable 584 (1,213) (629) Tax-Exempt (74) (10) (84) Equity Securities 2 3 5 Interest Bearing Deposits at Other Banks 108 (75) 33 Other Interest-Earning Assets (7) (53) (60) Total Interest-Earning Assets 948 (4,897) (3,949) Interest Expense: Deposits 178 (2,225) (2,047) Short-Term Borrowings: Securities Sold Under Agreements to Repurchase 20 (59) (39) Other Borrowed Funds (103) 31 (72) Total Interest-Bearing Liabilities 95 (2,253) (2,158) Change in Net Interest Income $ 853 $ (2,644) $ (1,791) Asset Quality Nonperforming Assets and Delinquent Loans. The Company reviews its loans on a regular basis and generally places loans on nonaccrual status when either principal or interest is 90 days or more past due. In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest, principal or both. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Loans that are 90 days or more past due may still accrue interest if they are well secured and in the process of collection. Payments received on nonaccrual loans are applied against principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, and current and future payments are reasonably assured. Management monitors all past due loans and nonperforming assets. Such loans are placed under close supervision, with consideration given to the need for additions to the allowance for loan losses and (if appropriate) partial or full charge-off. Management believes the volume of nonperforming assets can be partially attributed to unique borrower circumstances as well as the economy in general. We have an experienced chief credit officer, collections and credit departments that monitor the loan portfolio and seek to prevent any deterioration of asset quality. Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses. Any further write-down of real estate owned is charged against earnings. 43 Nonaccrual Loans and Nonperforming Assets. The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings, which are loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. December 31, 2021 2020 (Dollars in Thousands) Nonaccrual loans: Real Estate: Residential $ 1,393 $ 1,841 Commercial 2,058 7,102 Commercial and Industrial 1,496 1,897 Consumer 16 49 Total Nonaccrual Loans 4,963 10,889 Accruing Loans Past Due 90 Days or More: Consumer — 8 Total Accruing Loans 90 Days or More Past Due — 8 Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due 4,963 10,897 Troubled Debt Restructurings, Accruing Real Estate Residential 613 650 Commercial 1,674 2,861 Commercial and Industrial 16 80 Total Troubled Debt Restructurings, Accruing 2,303 3,591 Total Nonperforming Loans 7,266 14,488 Real Estate Owned: Residential 36 — Commercial — 208 Total Real Estate Owned 36 208 Total Nonperforming Assets $ 7,302 $ 14,696 Nonaccrual Loans to Total Loans 0.49 % 1.04 % Nonperforming Loans to Total Loans 0.71 1.39 Nonperforming Assets to Total Assets 0.51 1.04 At December 31, 2021, we had no loans 90 days or more past due that were still accruing interest. At December 31, 2021, we had no loans that were not classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings. Nonperforming assets decreased $7.4 million to $7.3 million at December 31, 2021, compared to $14.7 million at December 31, 2020. Nonperforming loans decreased $7.2 million to $7.3 million at December 31, 2021 compared to $14.5 million at December 31, 2020. The respective decreases are primarily attributable to the sale and full payoff in the current year of two of the Bank’s larger nonperforming commercial real estate loans that were secured by hotels totaling $6.7 million. 44 The following table presents the components of the ratio of nonaccrual loans to total loans at the dates indicated. 2021 2020 December 31, Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans (Dollars in Thousands) Real Estate: Residential $ 1,393 $ 320,798 0.43 % $ 1,841 $ 344,142 0.53 % Commercial 2,058 392,124 0.52 7,102 373,555 1.90 Construction — 85,028 — — 72,600 — Commercial and Industrial 1,496 89,010 1.68 1,897 126,813 1.50 Consumer 16 122,152 0.01 49 113,854 0.04 Other — 11,684 — — 13,789 — Total $ 4,963 $ 1,020,796 0.49 % $ 10,889 $ 1,044,753 1.04 % Nonaccrual loans decreased $5.9 million to $5.0 million at December 31, 2021 compared to $10.9 million at December 31, 2020. Nonaccrual commercial real estate loans decreased $5.0 million to $2.1 million at December 31, 2021 compared to $7.1 million at December 31, 2020 primarily related to the sale and full payoff in the current year of two of the Bank’s nonperforming commercial real estate loans that were secured by hotels totaling $6.7 million. Loans in Forbearance. Section 4013 of the CARES Act and regulatory guidance promulgated by federal banking regulators provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. The Company worked with its borrowers impacted by COVID-19 to defer payments. The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing: (a) deferral of three- to six-months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months. In certain circumstances, additional deferral periods were granted. At December 31, 2020, there were 31 loans in forbearance totaling $24.1 million, or 2.3% of total loans, for borrowers impacted by the COVID-19 pandemic, including $19.8 million of commercial real estate loans. All loans exited forbearance in 2021 except a $1.9 million commercial real estate loan secured by a hotel, which was considered a troubled debt restructuring upon providing an additional forbearance period and modified payment terms. The loan was substandard rated at December 31, 2021 and 2020, respectively, and designated as a nonaccrual loan in 2021. Classified Assets. Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets is not warranted. The Company designates an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention. The Company uses an eight-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are not considered criticized and are aggregated as “pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are below average quality, resulting in an undue credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, 45 on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectible and of such little value that continuance as an asset is not warranted. As part of the periodic exams of the Bank by the FDIC and the Pennsylvania Department of Banking and Securities, the staff of such agencies reviews our classifications and determines whether such classifications are adequate. Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management. The following table shows the principal amount of special mention and classified loans at December 31, 2021 and 2020. December 31, 2021 2020 (Dollars in Thousands) Special Mention $ 55,579 $ 46,515 Substandard 15,069 27,042 Doubtful 512 609 Loss — — Total $ 71,160 $ 74,166 The total amount of special mention and classified loans decreased $3.0 million, or 4.1%, to $71.2 million at December 31, 2021, compared to $74.2 million at December 31, 2020. The decrease of $12.0 million in the substandard category as of December 31, 2021 compared to December 31, 2020 was mainly from the sale or full payoff in the current year of two of the Bank’s nonperforming commercial real estate loans that were secured by hotels totaling $6.7 million and a $1.9 million commercial and industrial loan. The increase of $9.1 million in the special mention loan category is primarily due to pandemic-related cash flow issues on construction loan projects and downgrade of commercial and industrial loans in the senior housing industry partially offset by a decrease of commercial real estate loans secured by hotels that were upgraded to a pass rating due to improved occupancy rates from an increase in travel in 2021 as the COVID-19 vaccine rollout occurred. Allowance for Loan Losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance based on losses in the current loan portfolio, which includes an assessment of economic conditions, changes in the nature and volume of the loan portfolio, loan loss experience, volume and severity of past due, classified and nonaccrual loans as well as other loan modifications, quality of the Company’s loan review system, the degree of oversight by the Company’s Board, existence and effect of any concentrations of credit and changes in the level of such concentrations, effect of external factors, such as competition and legal and regulatory requirements and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making evaluations. Additions are made to the allowance through periodic provisions charged to income and recovery of principal and interest on loans previously charged-off. Losses of principal are charged directly to the allowance when a loss occurs or when a determination is made that the specific loss is probable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. Although we maintain our allowance for loan losses at a level that we consider to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the future. Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation. Management will continue to periodically review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. 46 Analysis of the Allowance for Loan Losses. The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated and additions to the allowance for loan losses, which have been charged to operations. Loans acquired in connection with mergers were recorded at their estimated fair value at the acquisition date and did not include a carryover of the pre-merger allowance for loan losses. Year Ended December 31, 2021 2020 (Dollars in Thousands) Balance at Beginning of Year $ 12,771 $ 9,867 Provision for Loan Losses (1,125) 4,000 Charge-offs: Real Estate: Residential (13) (65) Commercial (40) (931) Construction — — Commercial and Industrial — — Consumer (213) (329) Other — — Total Charge-offs (266) (1,325) Recoveries: Real estate: Residential 17 6 Commercial — 28 Construction — — Commercial and Industrial 43 33 Consumer 142 162 Other — — Total Recoveries 202 229 Net Charge-offs (64) (1,096) Balance at End of Year $ 11,582 $ 12,771 Allowance for Loan Losses to Total Loans 1.13 % 1.22 % Allowance for Loan Losses to Nonaccrual Loans 233.37 117.28 Allowance for Loan Losses to Nonperforming Loans 159.40 88.15 Net Charge-offs to Average Loans 0.01 0.11 The allowance for loan losses decreased $1.2 million, or 9.3%, to $11.6 million at December 31, 2021, compared to $12.8 million at December 31, 2020. Allowance for loan losses to total loans decreased 9 basis points to 1.13% at December 31, 2021 compared to 1.22% at December 31, 2020. The COVID-19 pandemic resulted in an increase in unemployment and recessionary economic conditions in 2020. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased in 2020 primarily related to economic trends and industry conditions as a result of the pandemic and vulnerable industries such as hospitality and retail. In addition, an increase in commercial real estate loans combined with an increase in the historical loss factor primarily related to a $931,000 commercial real estate loan charge-off resulted in an increase in commercial real estate loan loss reserves in 2020. The combination of these factors primarily resulted in a $4.0 million provision for loan losses for the year ended December 31, 2020. There was a net recovery of $1.1 million of provision for loan losses for the year ended December 31, 2021. Improving economic and industry conditions resulting in a decrease in qualitative factors, as well as a decrease in specifically impaired loans, contributed to the net recovery in the current period. The ratio of allowance for loan losses to nonaccrual loans ratio increased to 233.37% at December 31, 2021, compared to 117.28% at December 31, 2020. Nonaccrual loans decreased $5.9 million to $5.0 million at December 31, 2021 compared to $10.9 million at December 31, 2020. Nonaccrual commercial real estate loans decreased $5.0 million to $2.1 million at December 31, 2021 compared to $7.1 million at December 31, 2020 primarily related to the sale and full payoff in the current year of two of the Bank’s nonperforming commercial real estate loans that were secured by hotels totaling $6.7 million. 47 Net charge-offs were $64,000 or 0.01% to average loans, during 2021 compared to $1.1 million, or 0.11% to average loans, during 2020. The decrease was primarily related to the $931,000 commercial real estate loan charge-off of a hotel loan in the prior year. This loan was sold in 2021 and resulted in the recognition of an $897,000 gain on sale. The following table presents the ratio of net charge-offs (recoveries) as a percent of average loans for the periods indicated. Year Ended December 31, 2021 2020 Real Estate: Residential — % 0.02 % Commercial 0.01 0.25 Construction — — Commercial and Industrial (0.04) (0.03) Consumer 0.06 0.14 Other — — Total Loans 0.01 % 0.11 % Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated. The table reflects the allowance for loan losses as a percentage of total loans receivable. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category. 2021 2020 December 31, Amount Percent of Total Loans (1) Amount Percent of Total Loans (1) (Dollars in Thousands) Real Estate: Residential $ 1,420 31.4 % $ 2,249 32.9 % Commercial 5,960 38.5 6,010 35.9 Construction 1,249 8.3 889 6.9 Commercial and Industrial 1,151 8.7 1,423 12.1 Consumer 1,050 12.0 1,283 10.9 Other — 1.1 — 1.3 Total Allocated Allowance 10,830 100.0 11,854 100.0 Unallocated 752 — 917 — Total Allowance for Loan Losses $ 11,582 100.0 % $ 12,771 100.0 % (1) Represents percentage of loans in each category to total loans Reconciliations of Non-GAAP Financial Measures to GAAP Reconciliations of non-GAAP financial measures discussed in this Report to the most directly comparable GAAP financial measures are included in the following tables. Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21 percent. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. 48 Interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21 percent. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated: Year Ended December 31, 2021 2020 (Dollars in Thousands) Interest Income per Consolidated Statements of Income (Loss) (GAAP) $ 43,557 $ 47,467 Adjustment to FTE Basis 172 211 Interest Income (FTE) (Non-GAAP) 43,729 47,678 Interest Expense per Consolidated Statements of Income (Loss) (GAAP) 3,405 5,563 Net Interest Income (FTE) (Non-GAAP) $ 40,324 $ 42,115 Net Interest Income (GAAP) $ 40,152 $ 41,904 Divided by : Average Interest Earning Assets $ 1,373,379 $ 1,268,833 Net Interest Margin (GAAP) 2.92 % 3.30 % Adjustment to FTE Basis 0.02 0.02 Net Interest Margin (FTE) (Non-GAAP) 2.94 % 3.32 % Net Interest Rate Spread (GAAP) 2.81 % 3.13 % Adjustment to FTE Basis 0.01 0.02 Net Interest Rate Spread (FTE) (Non-GAAP) 2.82 % 3.15 % Tangible book value per common share is a non-GAAP measure and is calculated based on tangible common equity divided by period-end common shares outstanding. Tangible common equity to tangible assets is a non-GAAP measure and is calculated based on tangible common equity divided by tangible assets. We believe these non-GAAP measures serve as useful tools to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value. December 31, 2021 2020 (Dollars in Thousands, Except Share and Per Share Data) Stockholders' Equity (GAAP) (Numerator) $ 133,124 $ 134,530 Goodwill and Other Intangible Assets, Net (15,027) (18,131) Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 118,097 $ 116,399 Common Shares Outstanding (Denominator) 5,260,672 5,434,374 Book Value per Common Share (GAAP) $ 25.31 $ 24.76 Tangible Book Value per Common Share (Non-GAAP) $ 22.45 $ 21.42 Liquidity Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds consist of deposit inflows, loan repayments, and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Bank believes that it had sufficient liquidity at December 31, 2021, to satisfy its short- and long-term liquidity needs at that date. The Bank’s most liquid assets are cash and due from banks, which totaled $119.7 million at December 31, 2021. Unpledged securities, which provide an additional source of liquidity, totaled $54.3 million. In addition, the Bank maintains a 49 credit arrangement with the FHLB with a maximum borrowing limit of approximately $427.2 million and available borrowing capacity of $347.1 million as of December 31, 2021. $62.0 million was utilized toward standby letters of credit to collateralize public deposits in excess of the level insured by the FDIC and $3.0 million was utilized for advances. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $573.5 million of residential and commercial mortgage loans and the Bank’s investment in FHLB stock. The Bank also maintains a Borrower-In-Custody of Collateral line of credit agreement with the FRB for $86.3 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $134.6 million of commercial and consumer indirect auto loans. The Bank also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of December 31, 2021. At December 31, 2021, the Bank had funding commitments totaling $175.8 million, consisting primarily of commitments to originate loans, unused lines of credit and letters of credit. At December 31, 2021, certificates of deposit due within one year of that date totaled $59.5 million, or 43.5% of total certificates of deposit. While liquidity levels at December 31, 2021 are currently sufficient, if these certificates of deposit do not remain with the Bank, the Bank may be required to seek other sources of funds. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than it currently pays on these certificates of deposit. The Bank believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Bank can attract and retain deposits by adjusting the interest rates offered. The Bank’s primary investing activities are the origination of loans and the purchase of securities. For the year ended December 31, 2021, the Bank originated $336.0 million in loans, including $34.6 million of PPP loans, compared to $465.7 million, including $71.0 million of PPP loans, for the year ended December 31, 2020. The Company is a separate legal entity from the Bank and must provide for its own liquidity to pay dividends to stockholders, to pay principal and interest on its subordinated debt and for other corporate purposes. At December 31, 2021, the Company (on an unconsolidated basis) had liquid assets of $20.4 million. We are committed to maintaining a strong liquidity position. We monitor our liquidity position daily and anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience and current pricing strategy, we anticipate that a significant portion of maturing time deposits will be retained. Commitments. As a financial services provider, the Company routinely is a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, commitments under unused lines of credit, and commitments under letters of credit. While these contractual obligations represent potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans the Company makes. In addition, the Company enters into commitments to sell mortgage loans. Contractual Obligations. In the ordinary course of its operations, the Company enters into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments. The following tables present certain of our contractual obligations at December 31, 2021. Payment Due by Period Total Less Than Or Equal to One Year More Than One to Three Years More Than Three to Five Years More Than Five Years (Dollars in Thousands) Certificates of deposit $ 136,713 $ 59,479 $ 56,751 $ 17,187 $ 3,296 Other Borrowed Funds 17,601 3,000 — — 14,601 Operating Lease Obligations 978 287 252 120 319 Total $ 155,292 $ 62,766 $ 57,003 $ 17,307 $ 18,216 Capital Resources At December 31, 2021 and 2020, respectively, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action. At December 31, 2021 and 2020, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act. In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility. 50 The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized at the dates indicated. 2021 2020 December 31, Amount Ratio Amount Ratio (Dollars in Thousands) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Actual $ 113,086 11.95 % $ 108,950 11.79 % For Capital Adequacy Purposes 42,571 4.50 41,598 4.50 To Be Well Capitalized 61,491 6.50 60,086 6.50 Tier I Capital (to Risk-Weighted Assets) Actual 113,086 11.95 108,950 11.79 For Capital Adequacy Purposes 56,761 6.00 55,464 6.00 To Be Well Capitalized 75,682 8.00 73,952 8.00 Total Capital (to Risk-Weighted Assets) Actual 124,668 13.18 120,520 13.04 For Capital Adequacy Purposes 75,682 8.00 73,952 8.00 To Be Well Capitalized 94,602 10.00 92,440 10.00 Tier I Leverage Capital (to Adjusted Total Assets) Actual 113,086 7.76 108,950 7.81 For Capital Adequacy Purposes 58,307 4.00 55,765 4.00 To Be Well Capitalized 72,884 5.00 69,706 5.00 Impact of Inflation and Changing Price The consolidated financial statements and related notes of the Company have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, the Company’s assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.