What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 114 added, 153 removed, 742 unchanged (26% of the section changed)

26 unchanged sentences

Net Interest and Dividend Income 42,935 40,152 41,904

(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

Provision (Recovery) for Loan Losses 3,784 (1,125) 4,000

Net Interest and Dividend Income After Provision (Recovery) for Loan Losses 39,151 41,277 37,904

Noninterest Income 9,820 16,280 9,471

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Common Shares Outstanding 5,100,189 5,260,672 5,434,374

At or For the Year Ended December 31, 2022 2021 2020

Selected Financial Ratios:

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Nonperforming Assets to Total Assets 0.41 0.51 1.04

At or For the Year Ended December 31, 2021 2020 2019

Capital Ratios:

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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.

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.

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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.

Cash payments received on impaired loans that are considered nonaccrual 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

as interest income.

If no charge-off exists, then once the recorded investment has been fully collected, any future amounts collected would be recognized 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.

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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.

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.

10 unchanged sentences

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 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.

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.

If, 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.

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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 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.

2 unchanged sentences

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.

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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).

The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive 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

be realized or sustained upon examination, the term more likely than not means a likelihood of more than 50%;

Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will 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.

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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

5 unchanged sentences

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.

The reduction of interest rates to near zero in response to the effects of the COVID-19 pandemic were gradually reversed over the course of 2022 with increases totaling 425 bps due to FRB concerns with respect to inflation.

The FRB has indicated it is committed to reducing inflation to its 2% objective.

The magnitude and timing of further interest rate action is unknown.

Explanation of Use of Non-GAAP Financial Measures

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Comparison of Financial Condition at December 31, 2022 and 2021

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.

Total assets decreased $16.5 million, or 1.2%, to $1.41 billion at December 31, 2022, compared to $1.43 billion at December 31, 2021.

Cash and Due From Banks.

Cash and due from banks decreased $16.0 million, or 13.3%, to $103.7 million at December 31, 2022, compared to $119.7 million at December 31, 2021.

The change is primarily related to securities purchases and sale of branches, partially offset by net repayments on loans.

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.

The change is primarily related to net funding of loans.

Securities decreased $34.9 million, or 15.5%, to $190.1 million at December 31, 2022, compared to $225.0 million at December 31, 2021.

The securities balance was negatively impacted by a $32.3 million decrease in market value of the debt securities portfolio, primarily due to the increase in market interest rates.

The current period activity included $26.8 million of purchases, $29.2 million of paydowns, and no sales.

The purchases were made to improve yield on excess cash.

In addition there was a $168,000 loss in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Securities Portfolio.

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Total Debt Securities $ 244 2.61 % $ 11,559 1.53 % $ 61,383 1.81 % $ 114,174 1.87 % $ 187,360 1.83 %

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.

Total loans increased $29.1 million, or 2.8%, to $1.05 billion at December 31, 2022 compared to $1.02 billion at December 31, 2021.

Excluding the net decline of $24.4 million in PPP loans in the current period, loans increased $53.5 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.

2022 loan growth was experienced through net funding of $44.7 million in commercial real estate loans and $24.8

million in consumer loans, partially offset by the completion of $40.1 million in construction loans .

Average loans for the year ended December 31, 2022 increased $4.7 million compared to the year ended December 31, 2021.

46 unchanged sentences

Total Loans $ 741,258 $ 247,832 $ 989,090

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.

Total liabilities increased $6.4 million, or 0.5%, to $1.30 billion at December 31, 2022 compared to $1.29 billion at December 31, 2021.

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.

Total deposits increased $41.9 million to $1.27 billion as of December 31, 2022 compared to $1.23 billion at December 31, 2021.

Noninterest bearing demand deposits, NOW accounts and savings accounts increased $4.6 million, $39.3 million and $8.5 million, respectively, partially offset by a decrease of $27.6 million in time deposits.

The increase in interest-bearing demand deposits is primarily the result of the transition of customer deposits from securities sold under agreements to repurchase product, 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.

The following table sets forth the distribution of our average deposit accounts, by account type, for the years indicated.

3 unchanged sentences

(Dollars in Thousands)

Non-Interest Bearing

Demand Deposits

$ 378,374 29.8 % — % $ 313,858 26.8 % — %

Non-Interest Bearing Demand Deposits $ 389,553 31.4 % — % $ 378,374 29.8 % — %

NOW Accounts 282,850 22.8 0.48 272,256 21.4 0.09

13 unchanged sentences

2.49% to 2.99% 12,779 13,427

3.00% to 3.99% 16,210 21,531

4.00% or Greater 143 159

11 unchanged sentences

2.49% to 2.99% 12,298 95 386 — — — 12,779 11.7

3.00% to 3.99% 15,852 285 73 — — — 16,210 14.9

4.00% or Greater 143 — — — — — 143 0.1

14 unchanged sentences

At December 31, 2022 and December 31, 2021, 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.

A majority of the decrease was due to accounts that were transitioned into other deposit products and account for most of the interest-bearing demand deposit increase.

◦ 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.

Other borrowed funds decreased $3.0 million to $14.6 million at December 31, 2022 due to $3.0 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.

1 unchanged sentence

Stockholders’ equity decreased $23.0 million, or 17.3%, to $110.2 million at December 31, 2022, compared to $133.1 million at December 31, 2021.

• Accumulated other comprehensive loss increased $25.3 million primarily due to market interest rate conditions in the current period on the Bank’s available-for-sale debt securities.

• Net income was $11.2 million for the year ended December 31, 2022.

• 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 $4.9 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.

• Primarily as part of the Company’s $10.0 million stock repurchase program previously announced in April 2022, and the completion of the $7.5 million repurchase program announced in June 2021, the Company repurchased 195,033 shares of common stock totaling $4.8 million in the current year.

In connection with the current program, the Company purchased a total of 62,178 shares of the Company’s common stock at an average price of $22.47 per share, with $8.6 million remaining in the program.

• Book value per share was $21.60 at December 31, 2022 compared to $25.31 at December 31, 2021, a decrease of $3.71.

Tangible book value per share (Non-GAAP) decreased $3.45, or 15.4%, to $19.00 compared to $22.45 at December 31, 2021.

Refer to “Explanation of Use of Non-GAAP Financial Measures” at the end of this section.

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2022 Annual Results were impacted by the following significant items:

• Recurring Fed interest rate increases during 2022 resulted in an increase in net interest income of $2.8 million.

• There was a commercial loan charge off in the second quarter and resulted in a $3.8 million provision.

2021 Annual Results were impacted by the following significant non-recurring 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.

2 unchanged sentences

• 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

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.

Net interest income increased $2.8 million, or 6.9%, to $42.9 million for the year ended December 31, 2022 compared to $40.2 million for the year ended December 31, 2021.

Net interest margin (Non-GAAP FTE) increased 31 bps to 3.25% for the year ended December 31, 2022 compared to 2.94% the year ended December 31, 2021.

Net interest margin (GAAP) increased to 3.24% for the year ended December 31, 2022 compared to 2.92% for the year ended December 31, 2021.

The net interest margin increased primarily due to the higher interest rate environment increasing yields on loans more than the yield on interest-bearing deposits.

Interest and dividend income increased $4.2 million, or 9.5%, to $47.7 million for the year ended December 31, 2022 compared to $43.6 million for the year ended December 31, 2021.

• Interest income on loans increased $2.2 million, or 5.6%, to $41.9 million for the year ended December 31, 2022 compared to $39.7 million for the year ended December 31, 2021.

Average loans increased $4.7 million while the loan yield for the year ended December 31, 2022 increased 20 bps to 4.12% for the year ended December 31, 2022 compared to 3.92% for the year ended December 31, 2021 due to the increases of market interest rates this year compared to a 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 $734,000 for the year ended December 31, 2022 and contributed 5 bps to loan yield, compared to $2.2 million for the year ended December 31, 2021, which contributed loan yield 4 bps in the prior period.

The impact of the accretion of the credit mark on acquired loan portfolios was $239,000 for the year ended December 31, 2022 compared to $468,000 for the year ended December 31, 2021, or 2 bps in the current period compared to 4 bps in the prior period.

• Interest income on taxable investment securities increased $862,000, or 28.8%, to $3.9 million for the year ended December 31, 2022 compared to $3.0 million for the year ended December 31, 2021.

While average investment securities increased $57.8 million, there was a 9 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.

There were sales of securities in 2021 that were higher-interest securities, which were replaced by lower-interest securities that decreased the yield year over year.

• Interest income on tax-exempt investment securities decreased $76,000, or 26.3%, to $213,000 for the year ended December 31, 2022 compared to $289,000 for the year ended December 31, 2021 primarily driven by a decrease of $3.4 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 from other interest-earning assets, which primarily consists of interest-earning cash, increased $1.1 million, or 232.0% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Interest and dividend income earned on other interest-earning assets, which is primarily composed of restricted stock, decreased $32,000.

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.

Average interest bearing deposits at other banks decreased $107.0 million, primarily related to funds received from deposit and loan activity, there was however a $1.1 million increase in interest income due to an increase in Fed interest rates that resulted in a 191 bps increase in average yield.

Interest expense increased $1.4 million, or 40.4%, to $4.8 million for the year ended December 31, 2022 compared to $3.4 million for the year ended December 31, 2021.

• Interest expense on deposits increased $900,000, or 28.8%, to $4.0 million for the year ended December 31, 2022 compared to $3.1 million for the year ended December 31, 2021.

While average interest-bearing deposits decreased $42.9 million, interest rate increases for all products driven by post-pandemic Fed interest rate increases resulting in a 12 bps increase in average cost compared to the year ended December 31, 2021.

• Interest expense on short-term borrowings decreased $35,000, or 35.7%, to $63,000 for the year ended December 31, 2022 compared to $98,000 for the year ended December 31, 2021 primarily due to the transition of sweep accounts into other deposit products.

• Interest expense on other borrowed funds increased $511,000, or 280.8%, to $693,000 for the year ended December 31, 2022 compared to $182,000 for the year ended December 31, 2021 primarily due to the issuance of $15.0 million in subordinated debt, partially offset by a $3.0 million payoff of an FHLB borrowing, which resulted in a $10.4 million increase in average balances.

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.

The provision for loan losses was $3.8 million for the year ended December 31, 2022, compared to a $1.1 million recovery for the year ended December 31, 2021.

Net charge-offs for the year ended December 31, 2022 were $2.5 million primarily from one commercial and industrial loan that impacted the loss history for the category.

The prior year recovery was the result of improvement in overall economic conditions thereby improving corresponding qualitative factors that were previously negatively impacted by the COVID-19 pandemic.

Noninterest Income .

6 unchanged sentences

Net Gain on Sales of Loans — 1,143 (1,143) (100.0) %

Net Gain on Securities 526 233 293 125.8 %

Net (Loss) Gain on Securities (168) 526 (694) (131.9) %

Net Gain on Purchased Tax Credits 57 70 (13) (18.6) %

Gain on Sale of Branches — 5,203 (5,203) (100.0) %

Net Loss on Disposal of Fixed Assets (3) (61) 58 95.1 %

Net Gain (Loss) on Disposal of Fixed Assets 431 (3) 434 14466.7 %

Income from Bank-Owned Life Insurance 561 553 8 1.4 %

Other Income (Loss) 320 (274) 594 216.8 %

Other Income 176 320 (144) (45.0) %

Total Noninterest Income $ 9,820 $ 16,280 $ (6,460) (39.7) %

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.

Noninterest income decreased $6.5 million, or 39.7%, to $9.8 million for the year ended December 31, 2022, compared to $16.3 million for the year ended December 31, 2021.

• Insurance commissions increased $318,000, or 5.7%, to $5.9 million for the year ended December 31, 2022, compared to $5.6 million for the year ended December 31, 2021 due to an increase in core business, including both personal and commercial lines.

• There was no net gain on sales of loans for the year ended December 31, 2022 compared to $1.1 million for the year ended December 31, 2021 due to a change in strategy to keep all loans made in 2022.

There were no gains from sales of mortgage loans for the year ended December 31, 2022 compared to $1.1 million for the year ended December 31, 2021.

• Net loss on securities was $168,000 for the year ended December 31, 2022, compared to a gain of $526,000 for the year ended December 31, 2021.

There were no sales of securities in the current period compared to sales that resulted in a gain of $231,000 in the prior period.

The Company’s equity securities, which are primarily comprised of bank

stocks, reflected a decline in value of $168,000 for the current period compared to a gain of $295,000 in value in the prior period primarily from a change in market value of these securities as a result of changes in interest rates.

• The Company recorded a $431,000 net gain on disposal of fixed assets in the current year, resulting from the sale of two former branch locations.

• The Company recognized a $5.2 million pre-tax gain on sale of branches in the prior period related to the 5.0% premium paid by Citizens Bank on the assumed deposits.

• There was a $144,000 decrease in other income primarily due to a $99,000 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.

Noninterest Expense.

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Noninterest expense decreased $8.0 million, or 18.6%, to $34.9 million for the year ended December 31, 2022 compared to $42.9 million for the year ended December 31, 2021.

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

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.

This was primarily impacted by $7.5 million of expenses associated with the branch optimization and operational efficiency initiatives in the prior year, which included writedown on premises and equipment of $2.3 million and intangible asset impairment of $1.2 million.

• Salaries and employee benefits decreased $1.5 million to $18.5 million for the year ended December 31, 2022 compared to $19.9 million for the year ended December 31, 2021.

The decrease was primarily related to the branch optimization that included the consolidation of six branches and the divestiture of two in the prior year.

• Occupancy expense increased $79,000 to remain constant at $3.0 million for the years ended December 31, 2022 and 2021 respectively.

The increase was related to building maintenance costs and utilities, partially offset by the prior year recognition of a $227,000 lease impairment related to the branch optimization initiative.

• Equipment expense decreased $295,000 to $739,000 for the year ended December 31, 2022 compared to $1.0 million for the year ended December 31, 2021 as the result of a decrease in repairs and maintenance.

• FDIC assessment expense decreased $376,000 to $638,000 for the year ended December 31, 2022 compared to $1.0 million for the year ended December 31, 2021.

The decrease in assessment was due to an increase in nonperforming loans negatively impacting the quarterly assessment rates in the prior period.

• Contracted services decreased $2.4 million to $1.6 million for the year ended December 31, 2022 compared to $4.0 million for the year ended December 31, 2021.

The prior period had activity of $2.8 million, and included expense

related to 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..

This was partially offset by $319,000 of employee recruiter fees and $203,000 of core conversion consultant fees.

• Legal fees and professional fees increased $243,000 to $1.2 million for the year ended December 31, 2022 compared to $994,000 for the year ended December 31, 2021 due to increases in consultant services related to regulatory reporting and validation of the CECL model, and the FDICIA control project to strengthen the Company's internal control structure.

• Advertising decreased $222,000 to $527,000 for the year ended December 31, 2022 compared to $749,000 for the year ended December 31, 2021 due to a decrease in marketing initiatives in the prior year during the pandemic.

• Other real estate owned income decreased $32,000 to $151,000 for the year ended December 31, 2022 compared to $183,000 for the year ended December 31, 2021 primarily due to an $80,000 gain on sale of a property sold in the prior period.

• Amortization of intangible assets decreased $144,000 to $1.8 million for the year ended December 31, 2022 compared to $1.9 million for the year ended December 31, 2021 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.

• Within other noninterest expense, charitable contributions decreased $150,000 due to the prior year donation of a former branch office location.

Loan expenses increased $148,000 primarily due to appraisal fees and credit reports related to an increase in indirect loan volume in the current period.

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.

Income tax expense decreased $292,000 to $2.8 million for the year ended December 31, 2022, compared to $3.1 million for the year ended December 31, 2021 and is primarily attributed to a write down in premises and equipment and intangible assets.

Average Balances and Yields.

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Nonperforming loans decreased $1.5 million to $5.8 million at December 31, 2022 compared to $7.3 million at December 31, 2021.

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.

The respective decreases are primarily attributable to the full payoff in the current year of one of the Bank’s larger nonperforming commercial and industrial relationships.

The following table presents the components of the ratio of nonaccrual loans to total loans at the dates indicated.

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Nonaccrual loans decreased $1.0 million to $4.0 million at December 31, 2022 compared to $5.0 million at December 31, 2021.

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.

Nonaccrual commercial real estate loans decreased $244,000 to $1.8 million at December 31, 2022 compared to $2.1 million at December 31, 2021 primarily related to the full payoff in the current year of one of the Bank’s nonperforming commercial and industrial relationships.

Loans in Forbearance.

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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.

There were no loans in forbearance as of December 31, 2022.

At December 31, 2021, there was one loan in forbearance for 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, 2022 and 2021, respectively, and designated as a nonaccrual loan in 2021.

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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,

on the basis of current conditions and facts, is highly improbable.

Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, 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.

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The total amount of special mention and classified loans decreased $12.4 million, or 17.5%, to $58.7 million at December 31, 2022, compared to $71.2 million at December 31, 2021.

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.

The decrease of $570,000 in the substandard category as of December 31, 2022 compared to December 31, 2021 was mainly from the full payoff in the current year of one of the Bank’s nonperforming commercial and industrial loan relationships.

The decrease of $11.8 million in the special mention loan category is primarily due to commercial real estate and commercial and industrial loan upgrades and payoffs, and a $2.7 million commercial and industrial charge-off.

Allowance for Loan Losses.

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Net Charge-offs to Average Loans 0.25 0.01

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 allowance for loan losses increased $1.2 million, or 10.7%, to $12.8 million at December 31, 2022, compared to $11.6 million at December 31, 2021.

Allowance for loan losses to total loans increased 9 basis points to 1.22% at December 31, 2022 compared to 1.13% at December 31, 2021.

There was a large charge-off of one loan in the commercial and industrial pool that affected the loss rates, and caused an additional provision to be recorded.

These factors primarily resulted in a $3.8 million of provision for loan losses for the year ended December 31, 2022 compared to a $1.1 million recovery for loan losses for the year ended December 31, 2021.

The ratio of allowance for loan losses to nonaccrual loans ratio increased to 320.64% at December 31, 2022, compared to 233.37% at December 31, 2021.

Nonaccrual loans decreased $1.0 million to $4.0 million at December 31, 2022 compared to $5.0 million at December 31, 2021.

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.

Net charge-offs were $2.5 million or 0.25% to average loans, during 2022 compared to $64,000, or 0.01% to average loans, during 2021.

The decrease was primarily related to the $2.9 million commercial and industrial loan charge-off in the current year.

The following table presents the ratio of net charge-offs (recoveries) as a percent of average loans for the periods indicated.

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(Dollars in Thousands)

Interest Income per Consolidated Statements of Income (Loss) (GAAP) $ 43,557 $ 47,467

Interest Income per Consolidated Statements of Income (GAAP) $ 47,716 $ 43,557

Adjustment to FTE Basis 134 172

Interest Income (FTE) (Non-GAAP) 47,850 43,729

Interest Expense per Consolidated Statements of Income (Loss) (GAAP) 3,405 5,563

Interest Expense per Consolidated Statements of Income (GAAP) 4,781 3,405

Net Interest Income (FTE) (Non-GAAP) $ 43,069 $ 40,324

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credit arrangement with the FHLB with a maximum borrowing limit of approximately $435.3 million and available borrowing capacity of $407.4 million as of December 31, 2022.

$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.

$26.2 million was utilized toward standby letters of credit to collateralize public deposits in excess of the level insured by the FDIC.

This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $602.5 million of residential and commercial mortgage loans and the Bank’s investment in FHLB stock.

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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 Bank’s primary investing activities are the origination of loans.

For the year ended December 31, 2022 the Bank had net loan originations of $31.4 million.

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.

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At December 31, 2022 and 2021, 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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis