AMERISERV FINANCIAL, INC. The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company including the related notes thereto, included elsewhere herein.
RESULTS OF OPERATIONS FOR THE YEARS ENDEDDECEMBER 31, 2022 , 2021, AND 2020
2022 SUMMARY OVERVIEW:
During a period of extreme economic volatility in 2022, characterized by the highest inflation in almost 40 years and a more than 4% increase in short-term interest rates by theFederal Reserve , the Company was able to achieve its highest earnings per share (EPS) performance in over 20 years and a 15% increase in dividend payments to shareholders. The Company is proud of the hard work of the AmeriServ bankers that made this success happen and allowed us to get mostly back to normal when it comes to customer service. These efforts included overcoming the challenges created by the pandemic and we are deeply grateful to our very patient customers and staff members who have been more than willing to go the extra mile. Turning back to financial performance: Net income for 2022 totaled$7,448,000 , or$0.43 diluted earnings per share, which represented a 4.9% increase over the full year of 2021. On an adjusted non-GAAP basis, excluding the impact of pension settlement charges which are not reflective of the operations of the Company, adjusted net income totaled$9,470,000 , or$0.55 adjusted diluted earnings per share( 1 )( 2 ). This represented an even stronger 12% increase in EPS from the adjusted 2021 full year results. The improved earnings performance for 2022, on both an actual and adjusted basis, reflects the full benefit of several important strategic actions that the Company executed in 2021 to reduce our cost of funding, the successful management of our asset quality throughout the pandemic, and effective balance sheet management. While 2021 was a year with near record loan demand, 2022 was still very active but less strong. A late year surge in lending permitted AmeriServ to report good loan totals in December and end the year on a positive note. We hope this continues into 2023, and we believe we have the capacity for our loan portfolio to reach$1 billion for the first time as our lending continues to be an important economic driver in the communities where we operate. The media has perpetuated the narrative that, as theFederal Reserve continues to raise interest rates, loans may become scarce. However, here in westernPennsylvania , more folks are savers than spenders. This means that our friends and neighbors have provided us with more stable deposits to continue to focus on growing the loan portfolio. AmeriServ will continue to be active in lending, but we also will continue to be rigorous in our loan underwriting standards. This will permit us to grow loans while maintaining a high-quality portfolio. Wealth management is involved in a day-to-day struggle with the turmoil in securities markets. The bear market in equities and bonds has been punishing individual estate plans. There have been market value losses even in the AmeriServ Pathroad portfolio. However, our team of professionals have taken their customary stop loss actions. Our clients understand the Pathroad investment logic and are patiently watching the markets for any signs of an impending turnaround. Fortunately, the Pathroad logic has been tested by similar recessions over the years and it has always proven to keep losses below other investment strategies. We note that not only has the number of clients involved in the Pathroad logic remained virtually stable during this market but also, the number of new clients has increased as investors have taken notice of the Pathroad records. We believe our clients' biggest concern is about the duration of this bear market. History tells us that the most significant market value gains often occur during the beginning of a turnaround. It is our job to monitor for that turnaround and be ready to take the appropriate actions for our clients. Our Board, management group, and team of banking and investment professionals are studying and working hard every day. We support their efforts and have the utmost confidence in their strategies. Understanding westernPennsylvania as we do, it is not difficult for us to build the kind of banking and investment strategies needed by our
(1) Non-GAAP financial information, see "Reconciliation of Non-GAAP Financial Measures" later in this MD&A.
(2) Adjusted for pension settlement charge.
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customers. It is also our goal to offer a solid stock that continues to build value for all our shareholders. Our stock currently has a 3% dividend yield and an active trading market.
PERFORMANCE OVERVIEW. The following table summarizes some of the Company's key profitability performance indicators for each of the past three years.
YEAR ENDED DECEMBER 31,
2022 2021 2020
(IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Net income $ 7,448 $ 7,072 $ 4,598
Net income, adjusted (1)(2) 9,470 8,471 4,598
Diluted earnings per share 0.43 0.41 0.27Diluted earnings per share, adjusted (1)(2) 0.55 0.49
0.27
Return on average assets 0.55 % 0.52 % 0.37 % Return on average assets, adjusted (1)(2) 0.70 0.63
0.37
Return on average equity 6.83 6.48
4.52
Return on average equity, adjusted (1)(2) 8.69 7.76
4.52
The Company reported net income of$7,448,000 , or$0.43 per diluted common share, in 2022. This represents a 4.9% increase in earnings per share from the full year of 2021 when net income totaled$7,072,000 , or$0.41 per diluted common share. On an adjusted basis, eliminating the impact of the pension settlement charge, diluted earnings per share for the 2022 year increased by 12% to$0.55 ( 1 )( 2 ), while adjusted net income improved to$9,470,000 (1)(2). Due to the effects of eliminating the pension settlement charge, the Company's return on average assets (ROA) in 2022 would improve from 0.55% to an adjusted ROA of 0.70%(1)(2). Further, the Company's return on average equity (ROE) in 2022 would improve from 6.83% to an adjusted ROE of 8.69%(1)(2). The improved earnings performance for the 2022 year, on both an actual and adjusted basis, reflects the full benefit of several important strategic actions that the Company executed in 2021, the successful management of our asset quality throughout the pandemic, and effective balance sheet management. Overall, the increase in net interest income, along with a reduced loan loss provision, more than offset a lower level of non-interest income and higher non-interest expense resulting in an improved earnings performance in 2022. Finally, the Company's tangible book value per share ended 2022 at$5.40 (1) a decrease of 10.3% from 2021. The decline in tangible book value per share in 2022 reflects a decrease in the fair value of the Company's available for sale investment securities due to higher interest rates. The Company continued to maintain strong capital ratios that exceed the regulatory defined well capitalized status. The Company reported net income of$7.1 million , or$0.41 per diluted common share, for 2021. This represented a 51.9% increase in earnings per share from 2020 when net income totaled$4.6 million , or$0.27 per diluted common share. During 2021, earnings demonstrated meaningful improvement as the Company realized the benefit of several important strategic actions that were executed during the year. Overall, increased net interest income, a growing level of non-interest income, and a reduced loan loss provision more than offset a higher level of non-interest expense resulting in an improved earnings performance. The Company reported net income of$4.6 million , or$0.27 per diluted common share, for 2020. This represented a 22.9% decrease in earnings per share from 2019 when net income totaled$6.0 million , or$0.35 per diluted common share. During 2020, the Company dealt with the many unexpected challenges resulting from the COVID-19 pandemic. We continued our conservative risk management posture and prudently built our allowance for loan losses to address increased credit risk in certain sectors of our loan portfolio which was a primary factor causing the decline in earnings between years. NET INTEREST INCOME AND MARGIN. The Company's net interest income represents the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. Net interest income is a primary source of the Company's earnings; it is affected by interest rate fluctuations as well as changes in the amount
(1) Non-GAAP financial information, see "Reconciliation of Non-GAAP Financial Measures" later in this MD&A.
(2) Adjusted for pension settlement charge.
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and mix of earning assets and interest bearing liabilities. The following table
summarizes the Company's net interest income performance for each of the past
three years:
YEAR ENDED DECEMBER 31,
2022 2021 2020
(IN THOUSANDS, EXCEPT RATIOS)
Interest income $ 49,058 $ 46,669 $ 46,882
Interest expense 8,495 7,586 10,515
Net interest income 40,563 39,083 36,367
Net interest margin 3.27 % 3.15 % 3.19 %
2022 NET INTEREST PERFORMANCE OVERVIEW. The Company's net interest income for the full year of 2022 increased by$1.5 million , or 3.8%, when compared to the full year of 2021. The Company's net interest margin was 3.27% for the full year of 2022 representing a 12 basis point improvement from the full year of 2021. Net interest income demonstrated an increasing trend through the first three quarters of 2022 as interest income increased to a higher level than the increase in interest expense. However, this positive trend reversed in the fourth quarter as interest expense increased to a higher level than the increase in interest income. The Company benefitted from the higherU.S. Treasury yield curve as interest rates increased due to theFederal Reserve's action to tighten monetary policy in their effort to tame decades high inflation. The higher interest rate environment along with increased investment in the securities portfolio more than offset a reduced level of Paycheck Protection Program (PPP) loan fee income and caused total interest income to increase for the full year of 2022 when compared to last year. The increased national interest rates also resulted in total deposit and borrowing costs increasing in 2022. However, the increase in deposit interest expense was partially offset by a 26% reduction in total borrowings interest expense, as the strategic actions taken by management in 2021 to lower funding costs favorably impacted financial performance. Overall, in 2022, the average balance of total interest earning assets was consistent with the full year 2021 average, totaling$1.2 billion . Specifically, total loans averaged$978 million in 2022 which is$11.2 million , or 1.1%, lower than the 2021 full year average. Short-term investments including commercial paper averaged$23.2 million in 2022 which is$24.1 million , or 50.9%, lower than the 2021 full year average. Total investment securities averaged$245.2 million in 2022 which is$35.3 million , or 16.8%, higher than the 2021 full year average. Despite the balance of total average interest earning assets remaining relatively unchanged from the prior year, total interest income increased by$2.4 million , or 5.1%, between years due to an increase in the yield on earning assets, which increased from 3.76% to 3.95%. Total deposits, including non-interest bearing demand deposits, averaged$1.156 billion for the full year of 2022, which was$1.9 million , or 0.2%, higher than the$1.154 billion average for the full year of 2021. The 2022 full year average of short-term and FHLB borrowed funds was$43 million , which represented a decrease of$7.2 million , or 14.5%. Overall, the cost of total interest bearing liabilities increased from 0.75% to 0.84%. COMPONENT CHANGES IN NET INTEREST INCOME: 2022 VERSUS 2021. Regarding the separate components of net interest income, the Company's total interest income in 2022 increased by$2.4 million , or 5.1%, when compared to 2021. Total average earning assets remained consistent in 2022 as there was a decreased level of average total loans and short-term investments which were offset by an increased level of average total investment securities. Despite this, interest income was favorably impacted by an increase in the earning asset yield which improved by 19 basis points from 3.76% to 3.95%. All categories within the earning asset base demonstrated an interest income increase between years. The average total loan portfolio yield increased by 14 basis points from 4.11% to 4.25% in 2022 while the average yield on total investment securities increased by 13 basis points from 2.87% to 3.00%. Total average loans for the full year of 2022 were$11.2 million , or 1.1%, lower than the 2021 full year average. Strong loan pipelines resulted in 2022 production more than offsetting a higher than typical level of payoff activity during the year. Excluding PPP loans, total average loans for the full year of 2022 exceeded the 2021 full year average by$30.1 million , or 3.2%, as growth of commercial real estate (CRE) and home equity loans along with a higher volume of residential mortgage loans more than offset a decrease in the level of commercial & industrial loans. Of the approximately$100 million of PPP loans originated from the government stimulus programs, only one very small PPP loan remains on the balance sheet, reflecting the Company's successful efforts working with our customers through theSmall Business Administration (SBA) to complete the forgiveness process. Overall, the higher interest rate environment along with the higher average volumes of CRE, residential mortgages and home equity loans, resulted in total loan 17
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interest income improving by$899,000 , or 2.2%, for 2022 when compared to last year. This results from the favorable impact of the higher volume of traditional loans and the higher interest rate environment being partially offset by a$1.8 million , or 80.9%, reduction in PPP loan fee related income. Finally, on an end of period basis atDecember 31, 2022 and excluding total PPP loans, the total loan portfolio is approximately$22.1 million , or 2.3%, higher than theDecember 31, 2021 level. Total investment securities averaged$245.2 million for the full year of 2022 which is$35.3 million , or 16.8%, higher than the$209.9 million average for the twelve months of last year. The increase in theU.S. Treasury yield curve resulted in a more favorable market for securities purchasing activity in 2022. The two-year to ten-year portion of the yield curve increased by approximately 225 to 363 basis points since the beginning of the year, with shorter yields in that range increasing to a higher degree than the longer yields, resulting in yield curve inversion. Overall, the higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio. Management purchased more of these investments by redeploying the cash flow from the excess payoff activity from the loan portfolio and profitably utilizing the increased short-term liquidity on our balance sheet. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipals and corporate securities to maintain a well-diversified portfolio. Due to a combination of increased investment in securities, loan growth and total deposits modestly declining, short-term investments decreased throughout the year and are now at pre-pandemic levels before government stimulus impacted the economy. Total short-term investments including commercial paper averaged$23.2 million in 2022, which is$24.1 million , or 50.9%, lower than the 2021 average. Despite this decline, the Company's liquidity position remains strong. We will continue to carefully monitor our liquidity position and short-term investments as we expect deposits related to government stimulus programs to continue to decline in 2023. On the liability side of the balance sheet, total average deposits for 2022 are relatively consistent with the 2021 full year average, exceeding by$1.9 million , or 0.2%. Total deposits continued to demonstrate stability over the past year despite a$16.3 million , or 1.4%, decrease in total average deposits when comparing the 2022 fourth quarter to last year's fourth quarter. Deposit volumes continue to reflect the favorable impact of government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. However, the quarterly decrease reflects a portion of the funds from the government stimulus programs leaving the balance sheet and also reflects greater pricing competition in the market to retain deposits because of the increasing national interest rates. Overall, the loan to deposit ratio averaged 85.4% in the fourth quarter of 2022, which indicates that the Company has ample capacity to continue to grow its loan portfolio and is strongly positioned to support our customers and our community during times of economic volatility. Total interest expense for the full year of 2022 increased by$909,000 , or 12.0%, when compared to the full year of 2021, due to higher deposit and short-term borrowings interest expense. Deposit interest expense was higher by$1.6 million , or 33.7%, despite the full year average volume of total deposits remaining relatively consistent with the 2021 full year average. The impact that the higher national interest rates had on deposit costs combined with increased market competition to retain and attract deposits became more evident during the fourth quarter of 2022. In 2022, the Company benefitted from management's decision to allow a high-cost, institutional deposit to mature during the third quarter of 2021 which proved to be beneficial since the interest rate on this particular deposit was indexed to the market and would have become more expensive with the rising national interest rates experienced this year. This large institutional deposit was replaced by the additional low cost, fixed rate deposits from theSomerset County branch acquisition and resulted in significant interest expense savings. The rising national interest rates this year did result in certain deposit products, particularly public funds, that are tied to a market index, repricing upward with the move in national interest rates and causing interest expense to increase. Specifically, total deposit cost averaged 0.56% in 2022, which is 14 basis points higher than total deposit cost of 0.42% in 2021. Total borrowings interest expense decreased by$709,000 , or 25.5%, when comparing the full year of 2022 to the full year of 2021. The decrease results from the favorable impact of theAugust 2021 subordinated debt offering which was used to replace higher cost debt. This transaction effectively lowered debt cost on these long-term funds by nearly 4.0%. This savings is recognized even though the size of the new subordinated debt is$7.0 million higher than the debt instruments it replaced. Note that included in 2021 borrowings interest expense is$202,000 of additional interest expense that the Company had to recognize from the write-off of the unamortized issuance costs from the original debt instruments that the new sub-debt replaced. Borrowings interest expense was favorably impacted by reduced interest 18
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expense fromFederal Home Loan Bank (FHLB) term borrowings, which declined by$322,000 , or 36.8%, for the year. The average balance of FHLB term borrowings was lower in 2022 by$16.1 million , or 32.6%, as strength of the Company's liquidity position allowed management to let FHLB term advances mature and not be replaced. 2021 NET INTEREST PERFORMANCE OVERVIEW. The Company's net interest income for the full year of 2021 increased by$2.7 million , or 7.5%, when compared to the full year of 2020. The Company's net interest margin was 3.15% for the full year of 2021 which represented a four basis point decline from the full year of 2020. Financial results when comparing 2021 to 2020 were indicative of an improving economic environment as well as the Company's execution of strategies to effectively meet the challenge presented by the low interest rate environment. This included the execution of several strategies to reduce our cost of funds. However, the emergence of the omicron variant, high inflation and supply chain issues reminded us that many risks remained. AmeriServ has proven to be resilient given the complex challenges we have confronted. The Company continued to adapt in the fluid environment and prioritized the well-being of our employees and the communities we serve. The Company demonstrated significantly higher than historical levels of both total average loans and total average deposits during 2021. This growth was due to successful business development efforts, the impact from the government stimulus programs and the 2021 Somerset County branch acquisition. Net interest income improved due to (i) the positive impact of commercial real estate and residential mortgage loan growth, (ii) significant interest expense savings from the issuance of the subordinated debt during the third quarter of 2021, which was used to retire higher cost existing subordinated debt and trust preferred securities, and (iii) the utilization of acquired low-cost core deposits to replace higher cost institutional deposits that were on our balance sheet. The combination of these three factors more than offset the unfavorable impact of net interest margin pressure from lower earning asset yields. The significant decrease to total interest expense in 2021 was the primary driver for net interest income increasing compared to the prior year. Total average earning assets increased by$102.9 million , or 9.0%, in 2021. Specifically, total loans averaged$989 million in 2021 which is$65.5 million , or 7.1%, higher than the 2020 full year average. Short-term investments and commercial paper averaged$47 million in 2021 which was$15.3 million , or 48.0%, higher than the 2020 full year average. Total investment securities averaged$210 million in 2021 which was$22.1 million , or 11.8%, higher than the 2020 full year average. These increases were largely offset by decreases in the yield on earning assets. Total deposits, including non-interest bearing demand deposits, averaged$1.154 billion for the full year of 2021, which was$119.6 million , or 11.6%, higher than the$1.035 billion average for the full year of 2020. The Company's loan to deposit ratio averaged 85.5% in the fourth quarter of 2021. The 2021 full year average of short-term and FHLB borrowed funds was$50 million , which represented a decrease of$19.3 million , or 27.9%. Overall, the cost of total interest bearing liabilities decreased from 1.10% to 0.75%. COMPONENT CHANGES IN NET INTEREST INCOME: 2021 VERSUS 2020. Regarding the separate components of net interest income, the Company's total interest income in 2021 decreased by$213,000 , or 0.5%, when compared to 2020. Total average earning assets increased by$102.9 million , or 9.0%, in 2021 as there was an increased level of average total loans, short-term investments, and total investment securities. Despite the growth in average earning assets, interest income was unfavorably impacted by a decrease in the earning asset yield which declined by 35 basis points from 4.11% to 3.76%. All categories within the earning asset base demonstrated an interest income decrease between years. The average total loan portfolio yield decreased by 29 basis points from 4.40% to 4.11% in 2021 while the average yield on total investment securities decreased by 33 basis points from 3.20% to 2.87%. Total investment securities averaged$210 million for the full year of 2021, which was$22.1 million , or 11.8%, higher than the$188 million average in 2020. The Company continued to be selective in 2021 when purchasing securities due to the low interest rate environment. Specifically, the steeperU.S. Treasury yield curve resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds. Once this occurred, management purchased more of those investments for our portfolio. This provided us with the opportunity to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio as opposed to leaving the funds in low yielding federal funds sold. This redeployment of funds contributed to total securities growing between years. Management also continued to purchase taxable municipal and corporate securities to maintain a well-diversified portfolio. The economic recovery had been evident in our lending activity as we continued to experience good loan production throughout 2021. Commercial loan pipelines returned to pre-COVID levels early in the year. The overall total loan portfolio volume stabilized during the second half of the year as additional loan growth was offset by a high level of 19 Table of Contents early payoff activity, particularly during the fourth quarter. Also, PPP loans continued to decline as they completed the forgiveness process. Overall, when compared to the pre-pandemic year of 2019, total loan production was over$79 million , or 31.2%, higher in 2021. Although reduced from its peak in 2020, strong residential mortgage loan production continued throughout 2021. Residential mortgage loan production totaled$90.5 million in 2021 which declined by 36.5% from the production level of$142.5 million achieved in 2020. Despite the decline between years, this was the second highest level of residential mortgage loan production during the most recently completed eight-year period. The Company revised strategy in 2021 and retained a higher percentage of our residential mortgage loan production in the loan portfolio as opposed to selling into the secondary market. This strategic change allowed us to more profitably deploy a portion of the increased liquidity that we had on our balance sheet. As stated previously, total loans continued to be significantly higher than historical levels and averaged$989 million for the full year of 2021, which was$65.5 million , or 7.1%, higher than the 2020 full year average. The growth experienced in our commercial real estate portfolio resulted in traditional loan fee income increasing by$465,000 , or 41.9%, for the full year of 2021 when compared to the prior year. Total PPP loans averaged$23.4 million for the fourth quarter of 2021, decreasing by$41.4 million , or 63.9%, from the prior year's fourth quarter average as we continued to work with our customers through the forgiveness process. The Company recorded a total of$2.3 million of processing fee income and interest income from PPP lending activity in 2021, which was$398,000 , or 21.2%, higher than the 2020 level. Finally, on an end of period basis, excluding total PPP loans, the total loan portfolio grew by approximately$48.7 million , or 5.3%, since the end of the fourth quarter of 2020. Similar to what was occurring across the banking industry, our liquidity position continued to be strong due to the significant influx of deposits. During the first quarter of 2021, the President signed into law another round of economic stimulus as part of the American Rescue Plan Act of 2021. The stimulus checks delivered to most Americans and the financial assistance provided to municipalities and school districts as part of the program contributed to total deposits increasing significantly. Our deposit balances were also positively impacted in the second quarter of 2021 by theSomerset County branch acquisition, which provided approximately$42 million of additional deposits. The challenges the increased liquidity presented were twofold. First, there was the uncertainty regarding the duration that these increased funds would remain on the balance sheet which would be determined by customer behavior as economic conditions changed. The second challenge was to profitably deploy the increased liquidity given the low yields on short-term investment products. As a result, short-term investment and commercial paper balances averaged$47.3 million for the full year of 2021, which remained high by historical standards. Late in the third quarter of 2021, the Company benefitted from utilizing a significant portion of our increased liquidity to allow a$33 million , high-cost, institutional deposit to mature. This resulted in total short-term investments declining to a more manageable level. Total interest expense for the twelve months of 2021 decreased by$2.9 million , or 27.9%, when compared to 2020, due to lower levels of both deposit andFederal Home Loan Bank (FHLB) borrowings interest expense. Specifically, deposit interest expense in 2021 was lower by$2.8 million , or 37.0%, despite the previously mentioned increase in deposits that occurred between years. The deposit growth reflected new deposit inflows as well as the loyalty of the bank's core deposit base. The previously mentioned late third quarter 2021 maturity of a$33 million institutional deposit that had an annual cost of 2.95% resulted in approximately$240,000 of interest expense savings during the fourth quarter. Additionally, management continued to effectively execute several deposit product pricing reductions to address the net interest margin challenges presented by the low interest rate environment. As a result, the Company experienced deposit cost relief. Specifically, our total deposit cost averaged 0.42% for the full year of 2021 compared to 0.74% in 2020, which represented a meaningful decrease of 32 basis points. Note that total deposit cost in the fourth quarter of 2021 averaged 0.31%. Total FHLB borrowings interest expense for the full year of 2021 was lower by$252,000 , or 22.3%, compared to 2020. The strong liquidity position allowed the Company to paydown short-term and FHLB advances, which typically cost more than similar term deposit products. AtDecember 31, 2021 , total short-term and FHLB advances were$42.7 million , which was$47 million , or 52.4%, lower than theDecember 31, 2020 level. The Company completed a private placement of$27 million in fixed-to-floating rate subordinated notes onAugust 26, 2021 . The notes have a fixed annual interest rate of 3.75%, payable untilSeptember 1, 2026 . From and includingSeptember 1, 2026 , the interest rate will reset quarterly to the then-current three-month Secured Overnight Financing Rate (SOFR) plus 3.11%. The Company used approximately$20 million of the net proceeds to retire its existing subordinated debt and trust preferred securities that had a weighted average cost of 7.73%. This strategy favorably reduced fourth quarter 2021 interest expense by$147,000 . The remainder of the proceeds were utilized for general corporate purposes, including the downstream of$3.5 million of capital to the bank which supported additional loan growth. Long-term debt interest expense was higher for the full year of 2021 when compared to 2020 because the Company was required to immediately write off the remaining portion of the unamortized
issuance costs from both
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original debt instruments which generated
The table that follows provides an analysis of net interest income on a tax-equivalent basis (non-GAAP) setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the years endedDecember 31, 2022 , 2021, and 2020 was 13,000, 18,000, and 24,000, respectively, which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material. YEAR ENDED DECEMBER 31, 2022 2021 2020 INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE (IN THOUSANDS, EXCEPT PERCENTAGES) Interest earning assets: Loans, net of unearned income$ 977,541 $ 41,497 4.25 %$ 988,761 $ 40,603 4.11 %$ 923,269 $ 40,652 4.40 % Short-term investments and bank deposits 23,213 209 0.90 46,977 58 0.12 19,955 100 0.50 Commercial paper - - - 329 2 0.52 12,013 146 1.21 Investment securities: Available for sale 185,710 5,610 3.02 159,458 4,543 2.85 145,788 4,591 3.15 Held to maturity 59,516 1,755 2.95
50,434 1,481 2.94 41,994 1,417 3.37 Total investment securities 245,226 7,365 3.00 209,892 6,024 2.87 187,782 6,008 3.20 TOTAL INTEREST EARNING ASSETS/ INTEREST INCOME
1,245,980 49,071 3.95 1,245,959 46,687 3.76 1,143,019 46,906 4.11
Non-interest earning assets:
Cash and due from banks 17,602 18,736 18,091
Premises and equipment 17,498 17,749 18,439
Other assets 77,194 77,806 70,867
Allowance for loan losses (11,895) (11,919) (9,732)
TOTAL ASSETS $ 1,346,379 $ 1,348,331 $ 1,240,684
Interest bearing
liabilities:
Interest bearing deposits:
Interest bearing demand $ 227,838 $ 1,198 0.53 % $ 213,736$ 248 0.12 %$ 175,088 $ 483 0.28 % Savings 137,845 135 0.10 126,050 173 0.14 104,442 148 0.14 Money market 289,674 2,008 0.69 297,844 673 0.23 234,771 1,031 0.44 Other time 285,760 3,083 1.08 305,251 3,712 1.22 345,228 5,972 1.73 Total interest bearing deposits 941,117 6,424 0.68
942,881 4,806 0.51 859,529 7,634 0.89 Federal funds purchased and other short-term borrowings
9,268 364 3.97 389 1 0.37 4,947 29 0.58
Advances from Federal Home
Loan Bank 33,253 553 1.66 49,328 875 1.77 64,046 1,099 1.72
Guaranteed junior
subordinated deferrable
interest debentures - - - 9,741 944 9.69 13,085 1,121 8.57
Subordinated debt 27,000 1,054 3.90 15,079 854 5.66 7,650 520 6.80
Lease liabilities 3,446 100 2.89 3,729 106 2.86 3,949 112 2.84
TOTAL INTEREST BEARING
LIABILITIES/INTEREST EXPENSE 1,014,084 8,495 0.84 1,021,147 7,586 0.75 953,206 10,515 1.10
Non-interest bearing
liabilities:
Demand deposits 215,196 211,557 175,336
Other liabilities 8,113 6,446 10,340
Stockholders' equity 108,986 109,181 101,802
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,346,379 $ 1,348,331 $ 1,240,684
Interest rate spread 3.11 3.01 3.01
Net interest income/netinterest margin (non-GAAP) 40,576 3.27 % 39,101 3.15 % 36,391 3.19 % Tax-equivalent adjustment (13) (18) (24) Net interest income (GAAP)$ 40,563 $ 39,083 $ 36,367
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The table below sets forth
an analysis of volume and rate changes in net interest income on a
tax-equivalent basis. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates. Changes in
net
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interest income that could not be specifically identified as either a rate or
volume change were allocated proportionately to changes in volume and changes in
rate.
2022 vs. 2021 2021 vs. 2020
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
(IN THOUSANDS)
INTEREST EARNED ON:
Loans, net of unearned income $ (468) $ 1,362 $ 894 $ 2,750 $ (2,799) $ (49)
Short-term investments and bank
deposits (42) 193 151 70 (112) (42)
Commercial paper (1) (1) (2) (91) (53) (144)
Investment securities:
Available for sale 783 284 1,067 410 (458) (48)
Held to maturity 269 5 274 260 (196) 64
Total investment securities 1,052 289 1,341 670 (654) 16
Total interest income 541 1,843 2,384 3,399 (3,618) (219)
INTEREST PAID ON:
Interest bearing demand deposits 18 932 950 91 (326) (235) Savings deposits 16 (54) (38) 25 - 25 Money market (19) 1,354 1,335 226 (584) (358) Other time deposits (225) (404) (629) (637) (1,623) (2,260) Federal funds purchased and other short-term borrowings 255 108 363 (20) (8) (28) Advances from Federal Home Loan Bank (270) (52) (322) (256) 32 (224) Guaranteed junior subordinated deferrable interest debentures (472) (472) (944) (311) 134 (177) Subordinated debt 524 (324) 200 434 (100) 334 Lease liabilities (7) 1 (6) (7) 1 (6) Total interest expense (180) 1,089 909
(455) (2,474) (2,929)
Change in net interest income
LOAN QUALITY. The Company's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding any loan. After the loan has been approved and funded, continued periodic credit review is required. The Company's policy is to individually review, as circumstances warrant, each of its commercial and commercial mortgage loans to determine if a loan is impaired. At a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of$1,000,000 within a 12-month period. The Company has also identified three pools of small dollar value homogeneous loans which are evaluated collectively for impairment. These separate pools are for small business relationships with aggregate balances of$250,000 or less, residential mortgage loans and consumer loans. Individual loans within these pools are reviewed and removed from the pool if factors such as significant delinquency in payments of 90 days or more, bankruptcy, or other negative economic concerns indicate impairment. Overall, the Company continues to maintain good asset quality. The continued successful ongoing problem credit resolution efforts of the Company is demonstrated as levels of non-accrual loans, non-performing assets, and loan delinquency are well below 1% of total loans. Overall, we believe that non-performing assets remain well controlled totaling$5.2 million , or 0.53% of total loans, atDecember 31, 2022 which is an increase from theDecember 31, 2021 total of$3.3 million , or 0.34% of total loans. The increase in non-performing assets, as well as non-accrual loans, reflects the partial charge-down and transfer of one commercial real estate loan relationship into non-accrual status while the borrower pursues the sale of the property. Total classified loans increased$6.8 million since the prior year-end and now total$23.8 million . The increase in classified loans is the result of the risk rating downgrade of a large commercial real estate loan as well as a commercial and industrial loan relationship which were partially offset by the payoff of a substandard credit and the previously mentioned partial charge-down of a substandard credit during 2022. We also continue to closely monitor the loan portfolio given the number of relatively large-sized commercial and commercial real estate loans within the portfolio. As ofDecember 31, 2022 , the 25 largest credits represented 21.7% of total loans outstanding, which represents a decrease fromDecember 31, 2021
when
it was 22.3%.
22
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ALLOWANCE AND PROVISION FOR LOAN LOSSES. As described in more detail in the
Critical Accounting Policies and Estimates section of this MD&A, the Company
uses a comprehensive methodology and procedural discipline to maintain an ALL to
absorb inherent losses in the loan portfolio. The Company believes this is a
critical accounting policy since it involves significant estimates and
judgments. The following table sets forth changes in the ALL and certain ratios
for the periods ended.
YEAR ENDED DECEMBER 31,
2022 2021 2020
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Loans and loans held for sale, net of
unearned income:
Average for the year:
Commercial $ 225,487 $ 275,795 $ 294,630
Commercial loans secured by non-owner
occupied real estate 443,406 424,765 378,781
Real estate - residential mortgage 295,528 274,016 242,823
Consumer 14,218 15,796 17,131
Total loans and loans held for sale, net
of unearned income 977,541 988,761 923,269
At December 31, 990,825 986,037 978,345
As a percent of average loans:
Net charge-offs (recoveries):
Commercial 0.04 % 0.02 % 0.04 %
Commercial loans secured by non-owner
occupied real estate 0.30 (0.01) (0.01)
Real estate - residential mortgage - (0.01) 0.07
Consumer 1.88 0.46 0.44
Total loans and loans held for sale, net
of unearned income 0.17 - 0.03
Provision (credit) for loan losses 0.01 0.11 0.26
Allowance, as a percent of each of the
following:
Total loans, net of unearned income 1.08 1.26 1.16
Total accruing delinquent loans (past due
30 to 89 days) 170.63 195.68 206.12
Total non-accrual loans 208.16 373.10 453.80
Total non-performing assets 206.60 373.10 340.59
Allowance, as a multiple of net
charge-offs 6.30x 263.79x 36.72x
Non-accrual loans, as a percentage of
total loans, net of unearned income 0.52 % 0.34 % 0.26 %
For 2022, the Company recorded a $50,000 provision expense for loan losses
compared to a $1.1 million provision expense in 2021. The $1,050,000 favorable
comparison for total provision expense for the full year of 2022 reflects
improved credit quality for the overall portfolio due to several loan upgrades
and increased payoff and paydown activity of criticized loans. As demonstrated
historically, the Company continues its strategic conviction that a strong
allowance for loan losses is needed, which has proven to be essential given the
support provided to certain borrowers as they fully recover from the COVID-19
pandemic. Note that the Small Business Administration guarantees 100% of the PPP
loans made to eligible borrowers which minimizes the level of credit risk
associated with these loans. As a result, such loans are assigned a 0% risk
weight for purposes of calculating the Bank's risk-based capital ratios.
Therefore, it was deemed appropriate to not allocate any portion of the loan
loss reserve for the PPP loans.
Overall non-performing assets remain well controlled totaling $5.2 million , or
0.53% of total loans, on December 31, 2022 . The Company experienced net loan
charge-offs of $1.7 million , or 0.17% of total average loans, for the 2022 year
and is higher than net loan charge-offs of $47,000 , which equates to 0.00% of
total average loans, for the full year of 2021. The higher level of net
charge-offs in 2022 is primarily related to the partial charge-down and transfer
of one non-owner occupied commercial real estate loan relationship into
non-accrual status while the borrower pursues the sale of the property. In
summary, the allowance for loan losses provided 207% coverage of non-performing
assets, and 1.08% of total loans, on December 31, 2022 , compared to 373%
coverage of non-performing assets, and 1.26% of total loans, on December 31,
2021 .
For 2021, the Company recorded a $1.1 million provision expense for loan losses
compared to a $2.4 million provision expense in 2020. The lower 2021 provision
reflected an improved credit quality outlook for the overall portfolio due to
several loan upgrades as well as reduced criticized asset levels and delinquent
loan balances
23
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demonstrating improvement during the year. This was reflective of the Company's
loan officers working effectively with our customers as the economy improved and
as businesses returned to normal operations with limited restrictions. The
Company continued to grow the allowance for loan losses given the portfolio
growth achieved during 2021, specifically in the non-owner occupied commercial
real estate and residential mortgage portfolios, which was dampened by a decline
in the commercial portfolio. The need to fund the allowance for portfolio growth
was somewhat eased by numerous upgrades, which occurred during 2021. The Company
experienced low net loan charge-offs of $47,000 , which equates to 0.00% of total
loans, in 2021 and compared favorably to net loan charge-offs of $309,000 , or
0.03% of total loans, in 2020. Overall, non-performing assets totaled
$3.3 million , or 0.34% of total loans, at December 31, 2021 . In summary, the
allowance for loan losses provided 373% coverage of non-performing assets, and
1.26% of total loans, at December 31, 2021 , compared to 341% coverage of
non-performing assets, and 1.16% of total loans, at December 31, 2020 .
The following schedule sets forth the allocation of the ALL among various loan
categories. This allocation is determined by using the consistent quarterly
procedural discipline that was previously discussed. The entire ALL is available
to absorb future loan losses in any loan category.
AT DECEMBER 31,
2022 2021 2020 2019 2018
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
(IN THOUSANDS, EXCEPT PERCENTAGES)
Commercial $ 2,653 23.1 % $ 3,071 25.5 % $ 3,472 31.4 % $ 3,951 30.1 % $ 3,057 29.0 %
Commercial loans
secured by non-owner
occupied real estate 5,972 45.5 6,392 43.8 5,373 41.2 3,119 41.2 3,389 41.4
Real
estate - residential
mortgage 1,380 30.1 1,590 29.2 1,292 25.7 1,159 26.6 1,235 27.6
Consumer 85 1.3 113 1.5 115 1.7 126 2.1 127 2.0
Allocation to
general risk 653 - 1,232 - 1,093 - 924 - 863 -
Total $ 10,743 100.0 % $ 12,398 100.0 % $ 11,345 100.0 % $ 9,279 100.0 % $ 8,671 100.0 %
Even though residential real estate mortgage loans comprise 30.1% of the
Company's total loan portfolio, only $1.4 million , or 12.8%, of the total ALL is
allocated against this loan category. The residential real estate mortgage loan
allocation is based upon the Company's three-year historical average of actual
loan charge-offs experienced in that category and other qualitative factors. The
disproportionately higher allocations for commercial loans and commercial loans
secured by non-owner occupied real estate reflect the increased credit risk
associated with those types of lending, the Company's historical loss experience
in these categories, and other qualitative factors.
Based on the Company's current ALL methodology and the related assessment of the
inherent risk factors contained within the Company's loan portfolio, we believe
that the ALL is adequate at December 31, 2022 to cover losses within the
Company's loan portfolio.
NON-INTEREST INCOME. Non-interest income for 2022 totaled
a
lower level of residential mortgage loan production which reflects a reduced
level of mortgage loan refinance activity because of the rapid escalation of
? interest rates since the beginning of 2022. Residential mortgage loan
production through twelve months in 2022 totaled
level of mortgage loan production also caused mortgage related fees to decline
by
a
impact of the declining equity markets as well as the unfavorable impact that
? the move in the bond market is having on wealth management asset values, both
of which were partially offset by new customer business growth. The fair market
value of wealth management assets declined since the fourth quarter of 2021 by
24
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? a
consumers are more active this year, increasing their spending habits; and
? the Company recognized an
compared to this year when no such gain was recognized.
Non-interest income for 2021 totaled$17.8 million , an increase of$1.5 million , or 9.1%, from 2020. Factors contributing to this higher level of non-interest income in 2021 included:
a
wealth management group had performed exceptionally well through the pandemic,
? actively working for clients to increase the value of their holdings in the
financial markets and adding new business. The fair market value of wealth
management assets totaled
fair market value low point on
an
lower level of mortgage loan refinance activity in 2021 and the Company's
? revised strategy to retain a higher percentage of our residential mortgage loan
production in the portfolio as opposed to selling into the secondary market.
The Company had retained 79% of all residential mortgage loan originations into
the loan portfolio in 2021 compared to 40% in 2020;
a
? the receipt of
impacted by a financial floor taking hold which caused increased earnings and a
higher rate of return on certain policies; a$291,000 , or 12.7%, increase in other income primarily due to higher
interchange fee income that resulted from increased usage of debit cards as the
pandemic caused consumers to increase online purchases and many businesses to
? implement contactless services by not accepting cash due to health safety
concerns. Also, service charges on deposit accounts increased by
6.9%, in 2021 as consumers became more active and increased their spending
habits;
? a
residential mortgage loan production; and
? the Company recognized an
compared to 2020 when no securities were sold.
NON-INTEREST EXPENSE. The Company has demonstrated good expense control in this inflationary environment as non-interest expense for 2022 totaled$48.0 million and increased by$1.0 million , or 2.2%, from 2021. Factors contributing to the higher non-interest expense in 2022 included:
the Company was required to recognize a settlement charge in connection with
its defined benefit pension plan in 2022, which is explained in Note 17,
? Employee Benefit Plans. The amount of the 2022 charge was
in 2021;
a
total salaries and benefits expense, salaries cost increased by
or 7.8%, due to merit increases and a higher level of full-time equivalent
employees as the Company has been able to fill certain open positions this
? year. Also, contributing to the higher salaries and employee benefits costs
were additional increases to health care, payroll taxes and other employee
benefits. Partially offsetting these higher costs within salaries and benefits
expense was lower incentive compensation by
reduced level of loan production and no performance related executive incentive
payments in 2022;
? a
legal costs within our wealth management group;
? no additional costs related to the branch acquisition were recognized in 2022
after$389,000 was recognized in 2021; 25 Table of Contents
a
? additional costs from our core data provider and increased costs related to
monitoring our computing and network environment;
a
? utilities cost along with maintenance and repair expense which was primarily
related to the new branch office;
other expense was favorably impacted by a
? commitment reserve after
resulting in a
? a
The Company anticipates that costs related to its ongoing proxy contest will impact the level of non-interest expense during 2023.
Non-interest expense for 2021 totaled
a
recognition of a
? Company's defined benefit pension plan. Also, contributing to the higher level
of other expense was the Company recognizing
with the unfunded commitment reserve in 2021 which represented a
unfavorable shift from 2020; a$457,000 , or 1.7%, increase in salaries and employee benefits expense.
Factors causing the increase included greater incentive compensation primarily
due to commissions earned as a result of strong performance in the wealth
? management businesses and continued good residential mortgage and commercial
loan production. Also, contributing to the higher salaries and employee
benefits expense was increased health care costs which were partially offset by
the Company's basic salary expense declining due to fewer employees;
? the Company recognized costs for the branch acquisition totaling
2021;
a
? increased costs from our core data provider and increased software related
expenses;
a
? increase in the asset assessment base and the benefit of the
Assessment Credit being fully utilized in the first quarter of 2020;
? a
additional costs related to the branch acquisition; and
a
? majority of the personal protective equipment to protect our employees and
customers during the pandemic were purchased in 2020.
INCOME TAX EXPENSE. The Company recorded an income tax expense of$1.8 million , or an effective tax rate of 19.1%, in 2022, compared to income tax expense of$1.7 million , or a 19.4% effective tax rate, in 2021, and compared to income tax expense of$1.2 million , or a 20.9% effective tax rate, in 2020. The higher effective tax rate in 2020 resulted from the write-off of a deferred tax asset related to the dissolution of the Company's former small life insurance subsidiary. The Company's deferred tax asset was$2.8 million atDecember 31, 2022 compared to a deferred tax liability of$934,000 atDecember 31, 2021 , resulting primarily from the decrease in the fair value of the available for sale investment securities portfolio. SEGMENT RESULTS. The community banking segment reported a net income contribution of$12.4 million in 2022 which improved from the$12.1 million contribution in 2021 and also increased from the$10.1 million contribution in 2020. The improvement between years is due to a higher level of net interest income and a reduced loan loss provision which more than offset decreased non-interest income and an increased level of non-interest expense. Net interest income improved between years as the increase in total interest income more than offset the increase to total interest expense. Total loan interest income improved by$901,000 , or 2.2%, and resulted from the favorable impact of higher total loan volumes and the higher interest rate environment which more than offset a$1.8 million , or 80.9%, reduction in PPP loan fee related income and a$550,000 , or 34.9%, reduction in total loan charge income. This segment 26
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benefitted from the continued strong production of commercial real estate loans in 2022 and the residential real estate loan production that occurred throughout 2021, which resulted in the 2022 full year average balance for both of these loan categories exceeding the 2021 full year average by$32.1 million . This segment also benefitted from a greater level of production of home equity loans, as the 2022 full year average for this loan category exceeds the 2021 full year average by$6.2 million . Total interest income from CRE, residential mortgage, and home equity loans was$2.9 million higher in 2022 when compared to 2021. Deposit interest expense was higher by$1.6 million , or 33.7%, despite the full year average volume of total deposits remaining relatively consistent with the 2021 full year average. The increased deposit interest expense occurred due to the impact that the higher national interest rates had on deposit costs combined with increased market competition to retain and attract deposits. The rising national interest rates resulted in certain deposit products, particularly public funds, that are tied to a market index, repricing upward with the move in national interest rates and causing interest expense to increase. This segment did benefit from management's decision to allow a high-cost institutional deposit to mature during 2021, which was indexed to the market, and replaced by the low cost deposits from theSomerset County branch acquisition (discussed previously in the MD&A). Overall, total deposit cost of 56 basis points in 2022 was 14 basis points higher than total deposit cost in 2021. The Company recorded a$50,000 provision expense for loan losses in 2022 compared to a$1,100,000 provision in 2021. This also was discussed previously in the Allowance and Provision for Loan Losses section within this document. Non-interest income was unfavorably impacted by by a reduced level of loan sale gain income by$456,000 due to the lower level of residential mortgage loan production in 2022, which also caused mortgage related fees to decline by$243,000 . Overall, these unfavorable items more than offset the favorable impact of higher service charges on deposit accounts by$143,000 . Non-interest expense in 2022 compares unfavorably to 2021 results due to higher total employee costs and occupance expense which more than offset lowerFDIC insurance expense and miscellaneous expense. Total employee costs were unfavorably impacted by higher salaries and increased pension costs that were related to the higher settlement charge recognized on the defined benefit pension obligation in 2022. This is explained in Note 17. Both of these items more than offset reduced incentive compensation. Within miscellaneous expense, the Company had$389,000 of additional costs for the the branch acquisition in 2021 while there was very minimal costs in 2022. Also, the Company recognized a credit to the unfunded commitment reserve of$243,000 after$117,000 of expense was recognized last year, resulting in a$360,000 favorable shift. The wealth management segment's net income contribution was$2.2 million in 2022 compared to$2.9 million in 2021 and$2.0 million in 2020. The decrease reflects the unfavorable impact of the declining equity markets on wealth management fee income as well as the unfavorable impact that the move in the bond market is having on wealth management asset values. Both unfavorable items were partially offset by new customer business growth. Also contributing to the decline in 2022, were higher levels of legal fees, total employee costs and meals & travel related expenses for business development. Overall, the fair market value of wealth management assets declined since the end of 2021 by$398.3 million , or 14.7%, and totaled$2.3 billion atDecember 31, 2022 . The investment/parent segment reported a net loss of$7.1 million in 2022, which was lower than the net loss of$7.8 million in 2021 and$7.5 million in 2020. The reduced loss results from lower borrowings interest expense primarily due to the favorable impact of the 2021 subordinated debt offering which was used to replace higher cost debt. This transaction effectively lowered debt cost on long-term funds by nearly 4.0%, resulting in$744,000 of reduced interest expense on long term borrowings. The remaining portion of the favorable variance in borrowings interest expense between years is due to reduced interest expense fromFederal Home Loan Bank (FHLB) borrowings. Finally, and also contributing to the reduced loss in this segment, was an increase in interest income from the securities portfolio due to the higher average volume of total securities. The increase to theU.S. Treasury yield curve resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds making purchases of these investments more attractive. Therefore, management was able to more profitably deploy a portion of the increased liquidity on our balance sheet into the securities portfolio. BALANCE SHEET. The Company's total consolidated assets of$1.364 billion atDecember 31, 2022 increased by$28.3 million , or 2.1%, from the$1.336 billion level atDecember 31, 2021 . This change was related, primarily, to increased levels of investment securities, loans, and other assets which were partially offset by a decrease in cash and cash equivalents. Specifically, total investment securities increased$24.5 million , or 11.3%, as the increase in theU.S. Treasury yield curve resulted in a more favorable market for securities purchasing activity in 2022. The higher rates resulted in yields for new federal agency mortgage-backed securities and federal agency bonds improving and exceeding the overall average yield of the existing securities portfolio. As a result, management purchased more of these types of securities. The Company also continued to purchase corporate and taxable municipal securities to maintain a well-diversified portfolio. Loans, net of unearned fees, and loans held for sale modestly increased by$4.8 million , or 0.5%. Strong loan pipelines resulted in 2022 production more than offsetting a higher than typical level of payoff
activity
27
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during the year as growth of commercial real estate and home equity loans along
with a higher volume of residential mortgage loans more than offset a decrease
in the level of commercial and industrial loans. Other assets increased $8.8
million , or 35.1%, as a result of an increase in the positive balance of the
accrued pension liability, which totaled $21.3 million and $19.5 million as of
December 31, 2022 and 2021, respectively. Due to the positive (debit) balance of
the accrued pension liability, it was reclassified to other assets on the
Consolidated Balance Sheets as of December 31, 2022 and 2021. The positive value
of the accrued pension liability increased as a result of the $4.0 million
contribution made in 2022 and the revaluation of the obligation due to the
recognition of the settlement charge. In addition, the balance of other assets
was impacted by a $5.8 million increase in the fair value of the interest rate
swap agreements. These increases were partially offset by a decrease of $18.1
million , or 44.1%, in cash and cash equivalents. Due to a combination of
increased investment in securities, loan growth, and total deposits modestly
declining, cash and cash equivalents decreased throughout the year and are now
at pre-pandemic levels. Despite this decline, the Company's liquidity position
remains strong.
Total deposits decreased by $30.8 million , or 2.7%, during 2022. Deposit volumes
continue to reflect the favorable impact of government stimulus which provided
support to many Americans and financial assistance to municipalities and school
districts during the pandemic. However, the decrease reflects a portion of the
funds from the government stimulus programs leaving the balance sheet and also
reflects greater pricing competition in the market to retain deposits because of
the increasing national interest rates. As of December 31, 2022 , the 25 largest
depositors represented 18.8% of total deposits and remained relatively unchanged
from December 31, 2021 when it was 18.9%. Total borrowings have increased $65.5
million , or 90.0%, since year-end 2021. This change was driven by an increase in
short-term borrowings which was partially offset by a decrease in FHLB term
advances. Specifically, short-term borrowings totaled $88.6 million at December
31, 2022 compared to no short-term borrowings being outstanding at December 31,
2021 . In addition, FHLB term advances decreased by $22.9 million , or 53.7%, and
totaled $19.8 million at December 31, 2022 . The current strong liquidity
position has allowed the Company to let higher cost FHLB term advances mature
and not be replaced. However, the Company does continue to utilize the FHLB term
advances to help manage interest rate risk.
The Company's total shareholders' equity decreased by $10.4 million , or 8.9%,
since year-end 2021. Capital was increased during 2022 by the Company's $7.4
million of net income and the $316,000 positive impact on accumulated other
comprehensive loss from the recording of the settlement charge in connection
with the defined benefit pension plan and the revaluation of the pension
obligation. More than offsetting these increases was the $2.0 million common
stock cash dividend and the $16.3 million negative impact experienced due to the
reduced market value of the available for sale investment securities portfolio.
The Company returned approximately 26% of our 2022 earnings to our shareholders
through the quarterly common stock cash dividend. The Company continues to be
considered well capitalized for regulatory purposes with a risk based capital
ratio of 13.87% and an asset leverage ratio of 8.52% at December 31, 2022 . The
Company's book value per common share was $6.20 , its tangible book value per
common share was $5.40 (1) and its tangible common equity to tangible assets
ratio was 6.85%(1) at December 31, 2022 . The decline in the Company's book value
and tangible book value per share in 2022 reflects a decrease in the fair value
of the Company's available for sale investment securities due to higher interest
rates.
(1) Non-GAAP financial information, see "Reconciliation of Non-GAAP Financial Measures" later in this MD&A.
LIQUIDITY. The Company's liquidity position continues to be strong. Deposit volumes remain at a high level by historical standards and continue to reflect the favorable impact of government stimulus which provided support to many Americans and financial assistance to municipalities and school districts during the pandemic. Deposit volumes have been positively impacted due to effective business development efforts as well as management's ability to retain the significant influx of deposits that resulted from the government stimulus programs. Also, deposit levels were positively impacted in the second quarter of 2021 by theSomerset County branch acquisition which more than offset the third quarter 2021 maturity of the high cost, institutional deposit. In addition, the Company's loyal core deposit base continues to prove to be a source of strength for the Company during periods of market volatility. Overall, total deposits continued to demonstrate stability during 2022 despite a modest decrease during the fourth quarter of 2022 reflecting the greater pricing competition in the market to retain deposits because of the increasing national interest rates. Total average deposits for the full year of 2022 were$1.9 million , or 0.2%, higher compared to the full year of 2021. The core deposit base is adequate to fund the Company's operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth when needed.
Due to a combination of increased investment in securities, loan growth and total deposits modestly declining in the fourth quarter of 2022, short-term investments decreased throughout 2022 and are now at pre-pandemic levels before
28
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government stimulus impacted the economy. The challenge remains as to the
uncertainty regarding the duration that the existing government stimulus funds
will remain on the balance sheet which will be determined by customer behavior
as the economic conditions change. Diligent monitoring and management of our
short-term investment position remains a priority. Continued loan growth and
prudent investment in securities are critical to achieve the best return on the
remaining liquid funds. On an end of period basis, at December 31, 2022 , total
interest bearing deposits and short-term investments decreased by $12.2 million
since December 31, 2021 . Given the increase to national interest rates
experienced in 2022, a portion of the increased balance sheet liquidity was
invested in additional securities to more profitably deploy these funds. Loan
production during 2022 more than offset a higher than typical level of payoff
activity causing total loans and loans held for sale to increase since the end
of 2021 by $4.8 million . We strive to operate our loan to deposit ratio in a
range of 80% to 100%. The Company's loan to deposit ratio averaged 85.4% in the
fourth quarter of 2022, which indicates that the Company has ample capacity to
continue to grow its loan portfolio and is well positioned to support our
customers and our community during times of economic volatility. We are also
well positioned to service our existing loan pipeline and grow our loan to
deposit ratio while remaining within our guideline parameters.
Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash
Flows. Cash and cash equivalents decreased by $18.1 million from December 31,
2021 , to $22.9 million at December 31, 2022 , due to $56.3 million of net cash
used in investing activities which more than offset $32.9 million of net cash
provided by financing activities and $5.2 million of net cash provided by
operating activities. Within investing activities, cash advanced for new loans
originated totaled $223.7 million and was $6.9 million higher than the $216.8
million of cash received from loan principal payments. Within financing
activities, total short-term borrowings increased by $88.6 million , total FHLB
borrowings decreased by $22.9 million and total deposits decreased by $30.7
million . Within operating activities, $9.4 million of mortgage loans held for
sale were originated while $10.6 million of mortgage loans were sold into the
secondary market.
The holding company had $9.6 million of cash, short-term investments, and
investment securities at December 31, 2022 , which represents a $300,000 increase
from the holding company's cash position since December 31, 2021 . Dividend
payments from our subsidiaries also provide ongoing cash to the holding company.
At December 31, 2022 , our subsidiary Bank had $14.4 million of cash available
for immediate dividends to the holding company under applicable regulatory
formulas. Management follows a policy that limits dividend payments from the
Trust Company to 75% of annual net income. Overall, we believe that the holding
company has sufficient liquidity to meet its subordinated debt interest
payments, and its dividend payout level with respect to its common stock.
Financial institutions must maintain liquidity to meet day-to-day requirements
of depositors and borrowers, take advantage of market opportunities, and provide
a cushion against unforeseen needs. Liquidity needs can be met by either
reducing assets or increasing liabilities. Sources of asset liquidity are
provided by short-term investments, interest bearing deposits with banks, and
federal funds sold. These assets totaled $23.0 million and $41.1 million at
December 31, 2022 and December 31, 2021 , respectively. Maturing and repaying
loans, as well as the monthly cash flow associated with mortgage-backed
securities and security maturities are other significant sources of asset
liquidity for the Company.
Liability liquidity can be met by attracting deposits with competitive rates,
using repurchase agreements, buying federal funds, or utilizing the facilities
of the Federal Reserve or the FHLB systems. The Company utilizes a variety of
these methods of liability liquidity. Additionally, the Company's subsidiary
bank is a member of the FHLB, which provides the opportunity to obtain
short-term to longer-term advances based upon the Company's investment in
certain residential mortgage, commercial real estate, and commercial and
industrial loans. At December 31, 2022 , the Company had $302 million of
overnight borrowing availability at the FHLB, $41 million of short-term
borrowing availability at the Federal Reserve Bank and $35 million of unsecured
federal funds lines with correspondent banks. The Company believes it has ample
liquidity available to fund outstanding loan commitments if they were fully
drawn upon.
CAPITAL RESOURCES. The Bank meaningfully exceeds all regulatory capital ratios
for each of the periods presented and is considered well capitalized. The
Company's common equity tier 1 capital ratio was 10.41%, the tier 1 capital
ratio was 10.41%, and the total capital ratio was 13.87% at December 31, 2022 .
The Company's tier 1 leverage ratio was 8.52% at December 31, 2022 . We
anticipate that we will maintain our strong capital ratios throughout 2023.
Capital generated from earnings will be utilized to pay the common stock cash
dividend and will support controlled balance sheet growth. Our common dividend
payout ratio for the full year 2022 was 26.7%. Total Parent Company cash was
$9.6 million at December 31, 2022 . There is a particular emphasis on ensuring
that the subsidiary bank has appropriate levels of capital to support its
non-owner occupied commercial real estate loan concentration, which stood at
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350% of regulatory capital at December 31, 2022 . It should be noted that this
ratio weakened slightly from 347% at December 31, 2021 due to growth in total
non-owner occupied commercial real estate loans between years.
Our focus is on preserving capital to support customer lending and allow the
Company to take advantage of business opportunities as they arise. We currently
believe that we have sufficient capital and earnings power to continue to pay
our common stock cash dividend at its current rate of $0.03 per quarter. While
the Company has frequently executed common stock buyback programs in the past,
we presently do not have one in place due to the drop in our tangible common
equity ratio to 6.85%(1) as a result of the decline in value of our AFS
securities portfolio in 2022. At December 31, 2022 , the Company had
approximately 17.1 million common shares outstanding.
The Basel III capital standards establish the minimum capital levels in addition
to the well capitalized requirements under the federal banking regulations
prompt corrective action. The capital rules also impose a 2.5% capital
conservation buffer (CCB) on top of the three minimum risk-weighted asset
ratios. Banking institutions that fail to meet the effective minimum ratios once
the CCB is taken into account will be subject to constraints on capital
distributions, including dividends and share repurchases, and certain
discretionary executive compensation. The severity of the constraints depends on
the amount of the shortfall and the institution's "eligible retained income"
(four quarter trailing net income, net of distributions and tax effects not
reflected in net income). The Company and the Bank meet all capital
requirements, including the CCB, and continue to be committed to maintaining
strong capital levels that exceed regulatory requirements while also supporting
balance sheet growth and providing a return to our shareholders.
Under the Basel III capital standards, the minimum capital ratios are:
MINIMUM CAPITAL RATIO
MINIMUM PLUS CAPITAL
CAPITAL RATIO CONSERVATION BUFFER
Common equity tier 1 capital to risk-weighted
assets 4.5 % 7.0 %
Tier 1 capital to risk-weighted assets 6.0 8.5
Total capital to risk-weighted assets 8.0
10.5
Tier 1 capital to total average consolidated assets 4.0
(1) Non-GAAP financial information, see "Reconciliation of Non-GAAP Financial Measures" later in this MD&A.
INTEREST RATE SENSITIVITY. Asset/liability management involves managing the
risks associated with changing interest rates and the resulting impact on the
Company's net interest income, net income and capital. The management and
measurement of interest rate risk at the Company is performed by using the
following tools: (i) simulation modeling, which analyzes the impact of interest
rate changes on net interest income, net income and capital levels over specific
future time periods. The simulation modeling forecasts earnings under a variety
of scenarios that incorporate changes in the absolute level of interest rates,
the shape of the yield curve, prepayments and changes in the volumes and rates
of various loan and deposit categories. The simulation modeling incorporates
assumptions about reinvestment and the repricing characteristics of certain
assets and liabilities without stated contractual maturities; (ii) market value
of portfolio equity sensitivity analysis; and (iii) static GAP analysis, which
analyzes the extent to which interest rate sensitive assets and interest rate
sensitive liabilities are matched at specific points in time. The overall
interest rate risk position and strategies are reviewed by senior management and
the Company's Board of Directors on an ongoing basis.
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The following table presents a summary of the Company's static GAP positions atDecember 31, 2022 : OVER OVER 3 MONTHS 6 MONTHS 3 MONTHS OR THROUGH THROUGH OVER
INTEREST SENSITIVITY PERIOD LESS 6 MONTHS 1 YEAR
1 YEAR TOTAL
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
RATE SENSITIVE ASSETS:Loans and loans held for sale$ 275,555 $ 46,331 $ 98,507
$ 570,432 $ 990,825 Investment securities 28,427 5,721 13,454 193,784 241,386 Short-term assets 4,132 - - - 4,132 Regulatory stock 5,754 - - 2,125 7,879 Bank owned life insurance - - 38,895 - 38,895 Total rate sensitive assets$ 313,868 $ 52,052 $ 150,856 $ 766,341 $ 1,283,117 RATE SENSITIVE LIABILITIES: Deposits: Non-interest bearing demand deposits $ - $ - $ -$ 195,123 $ 195,123 Interest bearing demand deposits 79,611 730 1,461 154,944 236,746 Savings 730 730 1,460 132,876 135,796 Money market 82,930 7,099 14,199 150,640 254,868 Certificates of deposit 116,578 26,792 39,688 102,946 286,004 Total deposits 279,849 35,351 56,808 736,529 1,108,537 Borrowings 98,563 4,790 1,142 33,878 138,373 Total rate sensitive liabilities$ 378,412 $ 40,141 $ 57,950 $ 770,407 $ 1,246,910 INTEREST SENSITIVITY GAP: Interval (64,544) 11,911 92,906 (4,066) - Cumulative$ (64,544) $ (52,633) $ 40,273 $ 36,207 $ 36,207 Period GAP ratio 0.83X 1.30X 2.60X 0.99X Cumulative GAP ratio 0.83 0.87 1.08 1.03 Ratio of cumulative GAP to total assets (4.73) % (3.86) % 2.95 % 2.65 % WhenDecember 31, 2022 is compared toDecember 31, 2021 , the Company's cumulative GAP ratio through six months indicates that the Company's balance sheet is liability sensitive, representing a shift from an asset sensitivity position at the end of 2021. The shift results from an increased level of short-term borrowings, which are immediately impacted by changes to national interest rates. The Comppany also experienced an increase balance of deposits that have an interest rate that is indexed to the market. Customers have shifted funds into money market type accounts in order to benefit from the rising interest rates in the economy. We continue to see loan customer preference for fixed rate loans given the expectation for additional futures national interest rate increases. The Company's interest rate sensitivity position shifts from being liability to an asset sensitive position over six months and beyond as more of our loans begin to reprice. Finally, even though the balance of FHLB term advances atDecember 31, 2022 decreased$22.9 million , or 53.7%, from the prior year, the Company continues to utilize such advances to help manage our interest rate risk position. Management places primary emphasis on simulation modeling to manage and measure interest rate risk. The Company's asset/liability management policy seeks to limit net interest income variability over the first twelve months of the forecast period to -5.0% and -7.5%, which include interest rate movements of 100 and 200 basis points, respectively. Additionally, the Company also uses market value sensitivity measures to further evaluate the balance sheet exposure to changes in interest rates. The Company monitors the trends in market value of portfolio equity sensitivity analysis on a quarterly basis.
The following table presents an analysis of the sensitivity inherent in the Company's net interest income and market value of portfolio equity. The interest rate scenarios in the table compare the Company's base forecast, which was prepared using a flat interest rate scenario, to scenarios that reflect immediate interest rate changes of 100 and 200 basis
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points. Each rate scenario contains unique prepayment and repricing assumptions that are applied to the Company's existing balance sheet that was developed under the flat interest rate scenario.
VARIABILITY OF CHANGE IN
NET INTEREST MARKET VALUE OF
INTEREST RATE SCENARIO INCOME PORTFOLIO EQUITY
200 bp increase (2.3) % (3.8) %
100 bp increase (1.2) (1.1)
100 bp decrease 0.7 (2.7)
200 bp decrease 0.8 (10.1)
The Company believes that its overall interest rate risk position is well
controlled. The variability of net interest income is negative in the upward
rate shocks due to the increased short-term borrowings position and increased
level of deposit balances that have rates indexed to market interest rates. This
is partially offset by the Company's shorter duration investment securities
portfolio and the scheduled repricing of loans tied to an index, such as SOFR or
prime. Also, the Company has effectively utilized interest rate swaps for
interest rate risk management purposes. The interest rate swaps allow our
customers to lock in fixed interest rates while the Company retains the benefit
of interest rates moving with the market. Regarding interest bearing
liabilities, management continues its disciplined approach to price its core
term deposit accounts in a controlled but competitive manner. The variability of
net interest income is positive in the downward rate scenarios as the Company
has more exposure to short-term liabilities repricing downward to a greater
extent than assets. As of December 31, 2022 , the fed funds rate is at a targeted
range of 4.25% to 4.50% as the Federal Reserve took action several times in 2022
to increase the rate a total of 425 basis points. Further, there is an
expectation of additional short-term interest rate increases by the Federal
Reserve during 2023. Subsequent to year-end, the Company executed a $50 million
swap to fix the cost of certain deposits that are indexed and move with
short-term interest rates. This transaction brought the Company's variability of
net interest income to a more neutral position. The market value of portfolio
equity decreases in the upward rate shocks due to the fact that the improved
value of the Company's core deposit base was more than offset by the downward
movement in the market value of the AFS investment securities portfolio and
loans. Negative variability of market value of portfolio equity occurs in the
downward rate shocks due to a reduced value for core deposits.
Within the investment securities portfolio at December 31, 2022 , 76.2% of the
portfolio is classified as available for sale and 23.8% as held to maturity. The
available for sale classification provides management with greater flexibility
to manage the securities portfolio to better achieve overall balance sheet rate
sensitivity goals and provide liquidity if needed. The mark to market of the
available for sale securities does inject more volatility in the book value of
equity, but has no impact on regulatory capital. There are 426 securities that
are temporarily impaired at December 31, 2022 . The Company reviews its
securities quarterly and has asserted that at December 31, 2022 , the impaired
value of securities represents temporary declines due to movements in interest
rates and the Company does have the ability and intent to hold those securities
to maturity or to allow a market recovery. Furthermore, it is the Company's
intent to manage its long-term interest rate risk by continuing to sell a
portion of newly originated fixed-rate 30-year mortgage loans into the secondary
market (excluding construction and any jumbo loans). The Company sells 15-year
fixed-rate mortgage loans into the secondary market as well, depending on market
conditions. For the year 2022, 41.8% of all residential mortgage loan production
was sold into the secondary market.
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The amount of loans outstanding by category as ofDecember 31, 2022 , which are due in (i) one year or less, (ii) more than one year through five years, (iii) more than five years through 15 years, and (iv) over 15 years, are shown in the following table. MORE MORE THAN ONE THAN FIVE ONE YEAR YEARS YEAR OR THROUGH THROUGH OVER 15 TOTAL LESS FIVE YEARS 15 YEARS YEARS LOANS (IN THOUSANDS, EXCEPT RATIOS) Commercial and industrial$ 30,392 $ 73,036 $ 19,872 $ 30,098 $ 153,398 Paycheck Protection Program (PPP) - 22 - - 22 Commercial loans secured by owner occupied real estate 5,313 8,196 60,867 782 75,158 Commercial loans secured by
non-owner occupied real estate 33,512 129,958 277,381
9,893 450,744
Real estate - residential
mortgage 10,934 44,060 136,496 106,540 298,030
Consumer 4,784 3,315 1,061 4,313 13,473
Total $ 84,935 $ 258,587 $ 495,677 151,626 $ 990,825
Loans with fixed-rate $ 27,218 $ 158,018 $ 217,288 70,172 $ 472,696
Loans with floating-rate 57,717 100,569 278,389 81,454 518,129
Total $ 84,935 $ 258,587 $ 495,677 151,626 $ 990,825 Percent composition of maturity 8.6 % 26.1 % 50.0 %
15.3 % 100.0 %
Fixed-rate loans as
a percentage of total loans 47.7 %
Floating-rate loans as
a percentage of total loans 52.3 %
The loan maturity information is based upon original loan terms and is not adjusted for principal paydowns and rollovers. In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount at interest rates prevailing at the date of renewal.
The following table presents the total loans due after one year that have predetermined (fixed) interest rates and floating interest rates as ofDecember 31, 2022 . FIXED-RATE FLOATING-RATE LOANS LOANS TOTAL (IN THOUSANDS) Commercial and industrial$ 90,306 $ 32,700 $ 123,006 Paycheck Protection Program (PPP) 22 - 22 Commercial loans secured by owner occupied real estate 3,416 66,429 69,845 Commercial loans secured by non-owner occupied real estate 119,957 297,275 417,232 Real estate - residential mortgage 227,567
59,529 287,096
Consumer 4,210 4,479 8,689
Total $ 445,478 $ 460,412 $ 905,890 OFF BALANCE SHEET ARRANGEMENTS. The Company incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Such commitments and standby letters of credit involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to these commitments to extend credit and standby letters of credit is represented by their contractual amounts. The Company uses the same credit and collateral policies in making commitments and conditional obligations as for all other lending. The Company had various outstanding commitments to extend credit approximating$227.6 million and standby letters of credit of$9.0 million as ofDecember 31, 2022 . The Company can also use various interest rate contracts, such as interest rate swaps, caps, floors and swaptions to help manage interest rate and market valuation risk exposure, which is incurred in normal recurrent banking activities. As ofDecember 31, 2022 , the Company had$130.9 million in the notional amount of interest rate swaps outstanding, with a fair value of$7.0 million . In addition, the Company entered into a risk participation agreement (RPA) with the lead bank of a commercial real estate loan arrangement. As a participating bank, the Company 33
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guarantees the performance on a borrower-related interest rate swap contract.
The notional amount of the RPA outstanding at
As ofDecember 31, 2022 and 2021, municipal deposit letters of credit issued by theFederal Home Loan Bank of Pittsburgh on behalf ofAmeriServ Financial Bank naming applicable municipalities as beneficiaries totaled$72.9 million and$62.2 million , respectively. The letters of credit serve as collateral, in place of pledged securities, for municipal deposits maintained atAmeriServ Financial Bank . RECONCILIATION OF NON-GAAP FINANCIAL MEASURES. This document contains certain financial information determined by methods other than in accordance with generally accepted accounting policies inthe United States (GAAP). These non-GAAP diclosures, which includes adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, and adjusted return on average equity, have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. These non-GAAP measures are used by management in their analysis of the Company's performance or, management believes, facilitate an understanding of the Company's performance. Management also believes that presenting non-GAAP financial measures provides additional information to facilitate comparison of the Company's historical operating results and trends in the underlying operating results. Management considers quantitative and qualitative factors in assessing whether to adjust for the impact of items that may be significant or that could affect an understanding of our ongoing financial and business performance or trends. Currently, the only adjustment included is for non-cash settlement charges in connection with the Company's pension plan distributions. AT DECEMBER 31, 2022 2021 2020 (IN
THOUSANDS, EXCEPT PER SHARE AND RATIO DATA) Adjusted net income and ratios for pension settlement charge Net income (A)
$ 7,448 $ 7,072 $ 4,598
Plus: Pension settlement charge (B) 2,498 1,736 -
Less: Related tax effect (C) 476 337 -
Net income, adjusted (D = A + B - C) 9,470 8,471 4,598
Return on average assets
Average assets (E) $ 1,346,379 $ 1,348,331 $ 1,240,684
Return on average assets (= A / E) 0.55 % 0.52 % 0.37 %
Return on average assets, adjusted (= D / E) 0.70 0.63 0.37
Return on average equity
Average equity (F) $ 108,986 $ 109,181 $ 101,802
Return on average equity (= A / F) 6.83 % 6.48 % 4.52 %
Return on average equity, adjusted (= D / F) 8.69 7.76 4.52
Earnings per common share (EPS)
Diluted average number of common shares outstanding (G) 17,146 17,114 17,063
Diluted EPS (= A / G) $ 0.43 $ 0.41 $ 0.27
Diluted EPS, adjusted (= D / G) 0.55 0.49 0.27
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The tangible common equity ratio and tangible book value per share are
considered to be non-GAAP measures and are calculated by dividing tangible
equity by tangible assets or shares outstanding. The following table sets forth
the calculation of the Company's tangible common equity ratio and tangible book
value per share at December 31, 2022 and 2021 (in thousands, except share and
ratio data):
AT DECEMBER 31,
2022 2021
Total shareholders' equity $ 106,178 $ 116,549
Less: Intangible assets 13,739 13,769
Tangible common equity 92,439 102,780
Total assets 1,363,874 1,335,560
Less: Intangible assets 13,739 13,769
Tangible assets 1,350,135 1,321,791Tangible common equity ratio (non-GAAP) 6.85 % 7.78 % Total shares outstanding
17,117,617 17,081,500
Tangible book value per share (non-GAAP)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES. The accounting and reporting policies of the Company are in accordance with Generally Accepted Accounting Principles (GAAP) and conform to general practices within the banking industry. Accounting and reporting policies for the pension liability, allowance for loan losses, intangible assets, income taxes, and investment securities are deemed critical because they involve the use of estimates and require significant management judgments. Application of assumptions different than those used by the Company could result in material changes in the Company's financial position or results of operation. ACCOUNT - Pension liability
BALANCE SHEET REFERENCE - Other assets
INCOME STATEMENT REFERENCE - Salaries and employee benefits and Other expense
DESCRIPTION
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's pension obligations and future expense. Additionally, pension expense can also be impacted by settlement accounting charges if the amount of employee selected lump sum distributions exceed the total amount of service and interest component costs of the net periodic pension cost in a particular year. Our pension benefits are described further in Note 17 of the Notes to Consolidated Financial Statements.
ACCOUNT - Allowance for loan losses
BALANCE SHEET REFERENCE - Allowance for loan losses
INCOME STATEMENT REFERENCE - Provision for loan losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan losses. Approximately$8.6 million , or 80%, of the total allowance for loan losses atDecember 31, 2022 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, 35 Table of Contents levels of non-performing and troubled debt restructured (TDR) loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods. ACCOUNT - Intangible assets
BALANCE SHEET REFERENCE - Intangible assets
INCOME STATEMENT REFERENCE - Other expense
DESCRIPTION
The Company considers our accounting policies related to goodwill and core deposit intangible to be critical because the assumptions or judgment used in determining the fair value of assets and liabilities acquired in past acquisitions are subjective and complex. As a result, changes in these assumptions or judgment could have a significant impact on our financial condition or results of operations.
The fair value of acquired assets and liabilities, including the resulting goodwill and core deposit intangible, was based either on quoted market prices or provided by other third party sources, when available. When third party information was not available, estimates were made in good faith by management primarily through the use of internal cash flow modeling techniques. The assumptions that were used in the cash flow modeling were subjective and are susceptible to significant changes. The Company routinely utilizes the services of an independent third party that is regarded within the banking industry as an expert in valuing core deposits to monitor the ongoing value and changes in the Company's core deposit base. These core deposit valuation updates are based upon specific data provided from statistical analysis of the Company's own deposit behavior to estimate the duration of these non-maturity deposits combined with market interest rates and other economic factors.Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. The Company's goodwill relates to value inherent in the banking and wealth management businesses, and the value is dependent upon the Company's ability to provide quality, cost-effective services in the face of free competition from other market participants on a regional basis. This ability relies upon continuing investments in processing systems, the development of value-added service features and the ease of use of the Company's services. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted and the loyalty of the Company's deposit and customer base over a longer time frame. The quality and value of a Company's assets is also an important factor to consider when performing goodwill impairment testing. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective value added services over sustained periods can lead to the impairment of goodwill.Goodwill , which has an indefinite useful life, is tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value is more than the estimated fair value. The core deposit intangible, which is a wasting asset, is amortized and reported in other expense for a period of ten years using the sum of the years digits amortization method.
ACCOUNT - Income taxes
BALANCE SHEET REFERENCE - Net deferred tax asset and Net deferred tax liability
INCOME STATEMENT REFERENCE - Provision for income taxes
DESCRIPTION
The provision for income taxes is the sum of income taxes both currently payable
and deferred. The changes in deferred tax assets and liabilities are determined
based upon the changes in differences between the basis of assets and
liabilities for financial reporting purposes and the basis of assets and
liabilities as measured by the enacted tax rates that management estimates will
be in effect when the differences reverse. This income tax review is completed
on a quarterly basis.
In relation to recording the provision for income taxes, management must
estimate the future tax rates applicable to the reversal of tax differences,
make certain assumptions regarding whether tax differences are permanent or
temporary and the related timing of the expected reversal. Also, estimates are
made as to whether taxable operating income in future periods will be sufficient
to fully recognize any gross deferred tax assets. If recovery is not likely, we
must increase our provision for taxes by recording a valuation allowance against
the deferred tax assets that we estimate will
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not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As ofDecember 31, 2022 , we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for income taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
ACCOUNT - Investment securities
BALANCE SHEET REFERENCE - Investment securities
INCOME STATEMENT REFERENCE - Net realized gains on investment securities
DESCRIPTION
Available-for-sale and held-to-maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security's performance, the creditworthiness of the issuer and the Company's intent and ability to hold the security to recovery. A decline in value that is considered to be other-than-temporary is recorded as a loss within non-interest income in the Consolidated Statements of Operations. AtDecember 31, 2022 , the unrealized losses in the available-for-sale security portfolio were comprised of securities issued by government agencies or government sponsored agencies and certain high quality corporate and taxable municipal securities. The Company believes the unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value. FORWARD LOOKING STATEMENTS THE STRATEGIC FOCUS:AmeriServ Financial is committed to increasing shareholder value by striving for consistently improving financial performance; providing our customers with products and exceptional service for every step in their lifetime financial journey; cultivating an employee atmosphere rooted in trust, empowerment and growth; and serving our communities through employee involvement and a philanthropic spirit. We will strive to provide our shareholders with consistently improved financial performance; the products, services and know-how needed to forge lasting banking for life customer relationships; a work environment that challenges and rewards staff; and the manpower and financial resources needed to make a difference in the communities we serve. Our strategic initiatives will focus on these four key constituencies:
Shareholders - We strive to increase earnings per share; identifying and
managing revenue growth and expense control; and managing risk. Our goal is to
increase value for AmeriServ shareholders by growing earnings per share and
narrowing the financial performance gap between AmeriServ and its peer banks.
We try to return earnings to shareholders through a combination of dividends
and share repurchases (none currently authorized) subject to maintaining
sufficient capital to support balance sheet growth and economic uncertainty. We
strive to educate our employee base as to the meaning/importance of earnings
? per share as a performance measure. We will develop a value added combination
for increasing revenue and controlling expenses that is rooted in developing
and offering high-quality financial products and services; an existing branch
network; electronic banking capabilities with 24/7 convenience; and providing
truly exceptional customer service. We will explore branch consolidation
opportunities and further leverage union affiliated revenue streams, prudently
manage the Company's risk profile to improve asset yields and increase
profitability and continue to identify and implement technological
opportunities and advancements to drive efficiency for the holding company and
its affiliates.
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Customers - The Company expects to provide exceptional customer service,
identifying opportunities to enhance the Banking for Life philosophy byproviding products and services to meet the financial needs in every step
through a customer's life cycle, and further defining the role technology plays
in anticipating and satisfying customer needs. We anticipate providing leading
? banking systems and solutions to improve and enhance customers' Banking for
Life experience. We will provide customers with a comprehensive offering of
financial solutions including retail and business banking, home mortgages and
wealth management at one location. We have upgraded and modernized select
branches to be more inviting and technologically savvy to meet the needs of the
next generation of AmeriServ customers without abandoning the needs of our
existing demographic.
Staff - We are committed to developing high-performing employees, establishing
and maintaining a culture of trust and effectively and efficiently managing
staff attrition. We will employ a work force succession plan to manage
? anticipated staff attrition while identifying and grooming high performing
staff members to assume positions with greater responsibility within the
organization. We will employ technological systems and solutions to provide
staff with the tools they need to perform more efficiently and effectively.
Communities - We will continue to promote and encourage employee community
involvement and leadership while fostering a positive corporate image. This
will be accomplished by demonstrating our commitment to the communities we
? serve through assistance in providing affordable housing programs for
low-to-moderate-income families; donations to qualified charities; and the time
and talent contributions of AmeriServ staff to a wide-range of charitable and
civic organizations.
This Form 10-K contains various forward-looking statements and includes assumptions concerning the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, operations, future results, and prospects, including statements that include the words "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "project," "plan" or similar expressions. These forward-looking statements are based upon current expectations, are subject to risk and uncertainties and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Form 10-K, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Form 10-K. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important factors (some of which are beyond the Company's control) which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (i) the effect of changing regional and national economic conditions; (ii) the effects of trade, monetary and fiscal policies and laws, including interest rate policies of theFederal Reserve ; (iii) significant changes in interest rates and prepayment speeds; (iv) inflation, stock and bond market, and monetary fluctuations; (v) credit risks of commercial, real estate, consumer, and other lending activities; (vi) changes in federal and state banking and financial services laws and regulations; (vii) the presence in the Company's market area of competitors with greater financial resources than the Company; (viii) the timely development of competitive new products and services by the Company and the acceptance of those products and services by customers and regulators (when required); (ix) the willingness of customers to substitute competitors' products and services for those of the Company and vice versa; (x) changes in consumer spending and savings habits; (xi) unanticipated regulatory or judicial proceedings; (xii) potential risks and uncertainties also include those relating to the duration of the COVID-19 outbreak and its variants, and actions that may be taken by governmental authorities to contain the outbreak or to treat its impact, including the distribution and effectiveness of COVID-19 vaccines; (xiii) expense and reputational impact on the Company as a result of its ongoing proxy contest, and (xiv) other external developments which could materially impact the Company's operational and financial performance. The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement. 38 Table of Contents
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