Quarterly Report (10-q)

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

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

For the transition period from ____________ to_____________

Commission File Number 0-11204

AmeriServ Financial, Inc.

(Exact name of registrant as specified in its charter)


	Pennsylvania	25-1424278
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Main & Franklin Streets, P.O. Box 430, Johnstown, PA		15907-0430
(Address of principal executive offices)		(Zip Code)

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

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


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

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

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

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

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

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

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

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


Class		Outstanding at November 1, 2022
Common Stock, par value $0.01		17,114,617

Table of Contents

AmeriServ Financial, Inc.

INDEX


	Page No.

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

Table of Contents

Item 1. Financial Statements

AmeriServ Financial, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
ASSETS
Cash and due from depository institutions	$	24,383	$	24,748
Interest bearing deposits		4,133		10,942
Short-term investments		—		5,411
Cash and cash equivalents		28,516		41,101
Investment securities:
Available for sale, at fair value		174,300		163,171
Held to maturity (fair value $55,788 on September 30, 2022 and $55,516 on December 31, 2021)		62,567		53,751
Loans held for sale		—		983
Loans		979,843		985,880
Less: Unearned income		393		826
Less: Allowance for loan losses		10,672		12,398
Net loans		968,778		972,656
Premises and equipment:
Operating lease right-of-use asset		645		667
Financing lease right-of-use asset		2,480		2,684
Other premises and equipment, net		14,450		14,082
Accrued interest income receivable		4,620		3,984
Intangible assets:
Goodwill		13,611		13,611
Core deposit intangible		135		158
Bank owned life insurance		39,016		38,842
Net deferred tax asset		4,339		—
Federal Home Loan Bank stock		3,907		2,692
Federal Reserve Bank stock		2,125		2,125
Other assets		30,559		25,053
TOTAL ASSETS	$	1,350,048	$	1,335,560
LIABILITIES
Non-interest bearing deposits	$	214,547	$	211,106
Interest bearing deposits		938,266		928,272
Total deposits		1,152,813		1,139,378
Short-term borrowings		26,274		—
Advances from Federal Home Loan Bank		28,522		42,653
Operating lease liabilities		658		682
Financing lease liabilities		2,736		2,899
Subordinated debt		26,634		26,603
Total borrowed funds		84,824		72,837
Net deferred tax liability		—		934
Other liabilities		10,824		5,862
TOTAL LIABILITIES		1,248,461		1,219,011
SHAREHOLDERS' EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,741,436 shares issued and 17,112,617 shares outstanding on September 30, 2022; 26,710,319 shares issued and 17,081,500 shares outstanding on December 31, 2021		267		267
Treasury stock at cost, 9,628,819 shares on September 30, 2022 and December 31, 2021		(83,280)		(83,280)
Capital surplus		146,198		146,069
Retained earnings		65,052		60,005
Accumulated other comprehensive loss, net		(26,650)		(6,512)
TOTAL SHAREHOLDERS' EQUITY		101,587		116,549
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	1,350,048	$	1,335,560

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans	$	10,691	$	9,830	$	29,912	$	30,440
Interest bearing deposits		9		2		11		6
Short-term investments		63		26		143		41
Investment securities:
Available for sale		1,490		1,133		3,917		3,392
Held to maturity		447		381		1,272		1,100
Total Interest Income		12,700		11,372		35,255		34,979
INTEREST EXPENSE
Deposits		1,720		1,189		3,472		3,897
Short-term borrowings		36		—		39		1
Advances from Federal Home Loan Bank		127		217		459		681
Financing lease liabilities		25		26		76		80
Guaranteed junior subordinated deferrable interest debentures		—		383		—		944
Subordinated debt		263		331		789		591
Total Interest Expense		2,171		2,146		4,835		6,194
Net Interest Income		10,529		9,226		30,420		28,785
Provision (credit) for loan losses		500		350		(225)		850
Net Interest Income after Provision (Credit) for Loan Losses		10,029		8,876		30,645		27,935
NON-INTEREST INCOME
Wealth management fees		2,813		3,137		8,954		9,031
Service charges on deposit accounts		289		260		824		685
Net gains on loans held for sale		53		15		183		632
Mortgage related fees		27		81		92		310
Net realized gains on investment securities		—		—		—		84
Bank owned life insurance		329		221		769		771
Other income		815		702		1,977		1,916
Total Non-Interest Income		4,326		4,416		12,799		13,429
NON-INTEREST EXPENSE
Salaries and employee benefits		7,071		6,910		21,439		20,718
Net occupancy expense		698		651		2,136		1,980
Equipment expense		393		390		1,205		1,183
Professional fees		1,656		1,379		4,490		4,089
Supplies, postage and freight		172		158		481		486
Miscellaneous taxes and insurance		350		318		1,022		922
Federal deposit insurance expense		125		170		400		480
Branch acquisition costs		—		87		—		390
Other expense		1,262		1,457		4,143		4,615
Total Non-Interest Expense		11,727		11,520		35,316		34,863

PRETAX INCOME		2,628		1,772		8,128		6,501
Provision for income taxes		526		341		1,627		1,281
NET INCOME	$	2,102	$	1,431	$	6,501	$	5,220
PER COMMON SHARE DATA:
Basic:
Net income	$	0.12	$	0.08	$	0.38	$	0.31
Average number of shares outstanding		17,111		17,075		17,105		17,071
Diluted:
Net income	$	0.12	$	0.08	$	0.38	$	0.31
Average number of shares outstanding		17,145		17,114		17,146		17,114

See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
COMPREHENSIVE (LOSS) INCOME
Net income	$	2,102	$	1,431	$	6,501	$	5,220
Other comprehensive (loss) income
Pension obligation change for defined benefit plan		(59)		2,422		(4,577)		8,190
Income tax effect		12		(509)		961		(1,720)
Unrealized holding losses on available for sale securities arising during period		(8,064)		(589)		(20,915)		(1,362)
Income tax effect		1,694		123		4,393		286
Reclassification adjustment for net realized gains on available for sale securities included in net income		—		—		—		(84)
Income tax effect		—		—		—		18
Other comprehensive (loss) income		(6,417)		1,447		(20,138)		5,328
Comprehensive (loss) income	$	(4,315)	$	2,878	$	(13,637)	$	10,548

See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except share and per share data)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
COMMON STOCK
Balance at beginning of period	$	267	$	267	$	267	$	267
New common shares issued for exercise of stock options (3,520 shares for the three months ended September 30, 2022 and 31,117 and 14,856 shares for the nine months ended September 30, 2022 and 2021, respectively)		—		—		—		—
Balance at end of period		267		267		267		267
TREASURY STOCK
Balance at beginning of period		(83,280)		(83,280)		(83,280)		(83,280)
Treasury stock purchased		—		—		—		—
Balance at end of period		(83,280)		(83,280)		(83,280)		(83,280)
CAPITAL SURPLUS
Balance at beginning of period		146,175		146,025		146,069		145,969
New common shares issued for exercise of stock options (3,520 shares for the three months ended September 30, 2022 and 31,117 and 14,856 shares for the nine months ended September 30, 2022 and 2021, respectively)		11		—		91		39
Stock option expense		12		13		38		30
Balance at end of period		146,198		146,038		146,198		146,038
RETAINED EARNINGS
Balance at beginning of period		63,463		57,577		60,005		54,641
Net income		2,102		1,431		6,501		5,220
Cash dividend declared on common stock ($0.030 amd $0.025 per share for the three months ended September 30, 2022 and 2021, respectively and $0.085 amd $0.075 per share for the nine months ended September 30, 2022 and 2021, respectively)		(513)		(427)		(1,454)		(1,280)
Balance at end of period		65,052		58,581		65,052		58,581
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
Balance at beginning of period		(20,233)		(9,317)		(6,512)		(13,198)
Other comprehensive (loss) income		(6,417)		1,447		(20,138)		5,328
Balance at end of period		(26,650)		(7,870)		(26,650)		(7,870)
TOTAL SHAREHOLDERS’ EQUITY	$	101,587	$	113,736	$	101,587	$	113,736

See accompanying notes to unaudited consolidated financial statements.

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AmeriServ Financial, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine months ended
	September 30,
	2022		2021
OPERATING ACTIVITIES
Net income	$	6,501	$	5,220
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		(225)		850
Depreciation and amortization expense		1,531		1,508
Amortization expense of core deposit intangible		23		11
Amortization of fair value adjustment on acquired time deposits		(83)		(58)
Net amortization of investment securities		98		189
Net realized gains on investment securities — available for sale		—		(84)
Net gains on loans held for sale		(183)		(632)
Net amortization of deferred loan fees		(486)		(967)
Origination of mortgage loans held for sale		(8,239)		(10,467)
Sales of mortgage loans held for sale		9,405		17,349
(Increase) decrease in accrued interest receivable		(636)		148
Decrease in accrued interest payable		(571)		(731)
Earnings on bank-owned life insurance		(769)		(771)
Deferred income taxes		601		1,023
Stock compensation expense		38		30
Net change in operating leases		(69)		(71)
Other, net		(5,082)		(4,968)
Net cash provided by operating activities		1,854		7,579
INVESTING ACTIVITIES
Purchase of investment securities — available for sale		(49,372)		(48,951)
Purchase of investment securities — held to maturity		(11,104)		(15,272)
Proceeds from maturities of investment securities — available for sale		15,755		30,314
Proceeds from maturities of investment securities — held to maturity		2,244		5,490
Proceeds from sales of investment securities — available for sale		1,519		960
Purchase of regulatory stock		(4,405)		(1,245)
Proceeds from redemption of regulatory stock		3,190		2,842
Long-term loans originated		(163,679)		(232,781)
Principal collected on long-term loans		168,215		209,771
Purchases of premises and equipment		(1,621)		(834)
Proceeds from sale of other real estate owned and repossessed assets		14		—
Cash acquired in branch acquisition, net		—		40,431
Proceeds from life insurance policies		670		645
Net cash used in investing activities		(38,574)		(8,630)
FINANCING ACTIVITIES
Net increase in deposit balances		13,518		47,097
Net increase (decrease) in other short-term borrowings		26,274		(24,702)
Principal repayments on advances from Federal Home Loan Bank		(14,131)		(21,336)
Principal payments on financing lease liabilities		(163)		(156)
Redemption of guaranteed junior subordinated deferrable interest debentures		—		(13,085)
Subordinated debt issuance, net		—		26,597
Redemption of subordinated debt		—		(7,650)
Stock options exercised		91		39
Common stock dividend paid		(1,454)		(1,280)
Net cash provided by financing activities		24,135		5,524
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(12,585)		4,473
CASH AND CASH EQUIVALENTS AT JANUARY 1		41,101		31,504
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30	$	28,516	$	35,977

See accompanying notes to unaudited consolidated financial statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Principles of Consolidation

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

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

2. Basis of Preparation

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

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

3. Recent Accounting Pronouncements

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

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

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

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

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

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

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

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments of ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments of ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations which will be adopted with ASU 2016-13 effective January 1, 2023.

4. Revenue Recognition

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

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

●

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

●

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

●

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

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


	Three months ended				Nine months ended
	September 30,				September 30,
	2022		2021		2022		2021
Non-interest income:
In-scope of Topic 606
Wealth management fees	$	2,813	$	3,137	$	8,954	$	9,031
Service charges on deposit accounts		289		260		824		685
Other		538		548		1,521		1,510
Non-interest income (in-scope of topic 606)		3,640		3,945		11,299		11,226
Non-interest income (out-of-scope of topic 606)		686		471		1,500		2,203
Total non-interest income	$	4,326	$	4,416	$	12,799	$	13,429

5. Earnings Per Common Share

Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares

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in the calculation. Treasury shares are excluded for earnings per share purposes. For the three month periods ending September 30, 2022 and 2021, options to purchase 22,000 common shares, with an exercise price of $4.00 to $4.22, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. For the nine month periods ending September 30, 2022 and 2021, options to purchase 12,000 common shares, with an exercise price of $4.19 to $4.22, and options to purchase 22,000 common shares, with an exercise price of $4.00 to $4.22, respectively, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive.


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

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

6. Consolidated Statement of Cash Flows

On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits and short-term investments in both money market funds and commercial paper. The Company made $950,000 in income tax payments in the first nine months of 2022 compared to $200,000 in the same 2021 period. The Company made total interest payments of $5,407,000 in the first nine months of 2022 compared to $6,898,000 in the same 2021 period. The Company had $53,000 non-cash transfers to other real estate owned (OREO) and repossessed assets in the first nine months of 2022 compared to $8,000 non-cash transfers in the same 2021 period. During the first nine months of 2022, the Company entered into a new operating lease related to an office location and recorded a right-of-use asset and lease liability of $45,000. During the first nine months of 2021, the Company did not enter into any new lease agreements.

7. Investment Securities

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

Investment securities available for sale (AFS):

September 30, 2022

GROSS

UNREALIZED

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

11,349

—

(1,312)

10,037

U.S. Agency mortgage-backed securities

101,389

(13,377)

88,026

Municipal

21,438

—

(1,799)

19,639

Corporate bonds

59,284

(2,722)

56,598

Total

193,460

(19,210)

174,300

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Investment securities held to maturity (HTM):

September 30, 2022

GROSS

UNREALIZED

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

2,500

—

(439)

2,061

U.S. Agency mortgage-backed securities

19,354

(2,343)

17,022

Municipal

34,206

(3,818)

30,394

Corporate bonds and other securities

6,507

—

(196)

6,311

Total

62,567

(6,796)

55,788

Investment securities available for sale (AFS):


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

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

Investment securities held to maturity (HTM):


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

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

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

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

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

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

Total investment securities:

September 30, 2022

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED

VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES

U.S. Agency

5,917

(432)

6,181

(1,319)

12,098

(1,751)

U.S. Agency mortgage-backed securities

65,965

(6,084)

37,261

(9,636)

103,226

(15,720)

Municipal

43,069

(4,327)

5,796

(1,290)

48,865

(5,617)

Corporate bonds and other securities

46,988

(2,416)

5,898

(502)

52,886

(2,918)

Total

161,939

(13,259)

55,136

(12,747)

217,075

(26,006)

Total investment securities:


	December 31, 2021
	LESS THAN 12 MONTHS				12 MONTHS OR LONGER				TOTAL
	FAIR		UNREALIZED		FAIR		UNREALIZED		FAIR		UNREALIZED
	VALUE		LOSSES		VALUE		LOSSES		VALUE		LOSSES
U.S. Agency	$	7,419	$	(81)	$	—	$	—	$	7,419	$	(81)
U.S. Agency mortgage-backed securities		45,422		(972)		6,691		(314)		52,113		(1,286)
Municipal		7,832		(128)		—		—		7,832		(128)
Corporate bonds and other securities		14,558		(92)		2,439		(61)		16,997		(153)
Total	$	75,231	$	(1,273)

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