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 ENDED
2020 SUMMARY OVERVIEW:
AmeriServ Financial, Inc.'s fourth quarter 2020 net income was$692,000 , or$0.04 per diluted common share. This represents an increase of$23,000 , or 3.4%, from the fourth quarter of 2019 when net income was$669,000 , or also$0.04 per diluted common share. For the year endedDecember 31, 2020 , net income was$4,598,000 or$0.27 per diluted share. This performance represented a decline of 22.9% from the full year of 2019, when net income was$6,028,000 , or$0.35 per common share. Admittedly, this has been, and in many ways continues to be, a difficult time for many of us, both in this nation and globally. But we believe the fundamental strength and resolve of the average citizen of theseUnited States has emerged through the many challenges. The national lockdown was a shock to the fiber of our society. However, the limited re-openings that began in mid-summer were important. By the beginning of the fourth quarter, those commercial enterprises who re-opened began to revive commercial loan demand. AmeriServ experienced a growth in traditional loan products of nearly$39 million in net loans outstanding in the fourth quarter. This quickening pace we regard as a positive sign that recovery, while slow, has begun. We have also noticed the changed behavior of the American consumer as the pandemic event spread across all fifty states. All levels of government embarked on economic stimulus programs, introducing growth in the money supply for both businesses and consumers. But much of that stimulus funding went into debt reduction and even more to increase the level of deposits in banks across theU.S. Americans were unsure about the future and almost overnight, the nation of spenders became a nation of savers. AmeriServ alone found that fromDecember 31, 2019 toDecember 31, 2020 , its total deposits increased by$94 million , or approximately 10%, a record high for AmeriServ. The banking system was more liquid than it has been in sometime as businesses and consumers alike were concerned about an increased level of risk. Other positive changes began occurring. TheFederal Reserve reduced interest rates and ignited a boom in home buying and residential mortgages. In 2020,AmeriServ Financial Bank closed$142 million of residential mortgage loans as compared with$60 million in the 12 months of 2019. This flood of new stimulus funds also found its way into equity markets permitting AmeriServ's Wealth Management complex to increase the market value of its clients' funds under management or administration, by$243 million or 11%. This total closing at$2.48 billion , was an historic record for the Wealth Management complex at AmeriServ. These positive developments were encouraging but we continued to be alert and active in the interests of those businesses or consumers who were struggling. Our commercial loan group actively supported certain borrowers in certain industries who remained closed or restricted. AmeriServ also participated in the Federal Payroll Protection Loan Program (PPP) in 2020 making 477 loans totaling$68.7 million to small businesses throughout the region. AmeriServ additionally has modified the payment terms for 19 commercial borrowers with loans totaling$47 million in order to assist these borrowers struggling with the pandemic event and conditions beyond their control. We monitor these borrowers continuously, along with guidance from theFederal Reserve , our primary regulator. Just as any knowledgeable team of money lenders would do, we have continued to build our allowance for loan losses to protect this Company. The PPP loans are relatively riskless because of a governmental guarantee. AmeriServ is monitoring the payment deferral loans and reporting in detail to the full Board of Directors monthly. Our goal is to provide reasonable assistance to all of our struggling customers, but also to protect the safety and soundness of this important regional franchise. This Company continues to exceed all regulatory capital requirements. We continue to service the payment requirements of our Trust Preferred shares and our subordinated debt issue. Our quarterly common stock dividend remains in effect, but we have ceased common stock repurchases based upon guidance provided by regulatory authorities. Additionally, we are preserving capital to support the balance sheet growth that we have experienced. Daily, we are faced with the task of balancing risk with reward. However, the risk implicit today is not primarily economic risk but rather the total impact of the pandemic, which created unplanned and new economic risks. In such times, we 18
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naturally fall back into the time tested financial norms of the community bank business model. This is what we believe in and is exactly what good times and bad times have trained us to do. We are encouraged by the recent positive developments which we reviewed herein. We do not believe the difficulties are over. The pandemic is still with us every day. Therefore, this Board and this Management Team must continue to be vigilant and alert. There are still too many unknowns to be explored and mitigated.
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,
2020 2019 2018
(IN THOUSANDS, EXCEPT
PER SHARE DATA AND RATIOS)
Net income $ 4,598 $ 6,028 $ 7,768
Diluted earnings per share 0.27 0.35 0.43
Return on average assets 0.37 % 0.51 % 0.67 %
Return on average equity 4.52 6.02 8.08
The Company reported net income of $4,598,000 , or $0.27 per diluted common
share, in 2020. This represents a 22.9% decrease in earnings per share from the
full year of 2019 when net income totaled $6,028,000 , or $0.35 per diluted
common share. The Company's return on average equity declined to 4.52% for the
2020 year from 6.02% in 2019. The resiliency of our community bank
customer-focused business model was evident in 2020 as the Company dealt with
the many unexpected challenges resulting from the COVID-19 pandemic. The Company
experienced record levels of both loans and deposits as we served as an
important financial resource to small businesses and consumers in our
marketplace. Continuing our conservative risk management posture, we 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. The good diversification of the Company's revenue was
evident as 31% of our total revenue in 2020 came from non-interest income
sources which included record contributions from our strong wealth management
business and active residential mortgage operation. Finally, the Company
increased tangible book value(1) per share by 6.7% during 2020.
The Company reported net income of $6.0 million , or $0.35 per diluted common
share, for 2019. This represented an 18.6% decrease in earnings per share from
2018 when net income totaled $7.8 million , or $0.43 per diluted common share.
The decline in 2019 earnings was caused by an increased loan loss provision
primarily related to one large commercial loan and an impairment charge
recognized on a Community Reinvestment Act (CRA) related investment.
The Company reported net income of $7.8 million , or $0.43 per diluted common
share, for 2018. This represented an 139% increase in earnings per share from
2017 where net income totaled $3.3 million , or $0.18 per diluted common share.
The strong growth in earnings resulted from a favorable combination of lower
income tax expense, outstanding asset quality, and well controlled non-interest
expense.
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(1) See reconciliation of non-GAAP tangible book value later in this MD&A.
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 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,
2020 2019 2018
(IN THOUSANDS, EXCEPT RATIOS)
Interest income $ 46,882 $ 49,767 $ 47,094
Interest expense 10,515 14,325 11,600
Net interest income 36,367 35,442 35,494
Net interest margin 3.19 % 3.29 % 3.31 %
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2020 NET INTEREST PERFORMANCE OVERVIEW. The Company's net interest income for the full year of 2020 increased by$925,000 , or 2.6%, when compared to the full year of 2019. The Company's net interest margin was 3.19% for the full year of 2020 representing a ten basis point decline from the full year of 2019. Our net interest margin performance was challenged throughout 2020 as a result of the low interest rate environment and the economic uncertainty and volatility caused by the COVID-19 pandemic. As COVID-19 cases surged, government officials recommended the implementation of certain safety measures and restrictions on businesses and individuals. As a result, AmeriServ had to close its lobbies to customer traffic two separate times during the year for an extended period of time, but continued to service customers through drive up access. In spite of these pandemic related challenges, our balance sheet experienced robust growth in 2020 which caused the increase in net interest income despite the decline in the net interest margin due to pressures from the low interest rate environment. Total average earning assets increased by$62.2 million , or 5.8%, in 2020. Specifically, total loans averaged$923 million in 2020 which is$48.1 million , or 5.5%, higher than the 2019 full year average. Short-term investments averaged$29 million in 2020 which is$18.3 million , or 173.2%, higher than the 2019 full year average. Slightly offsetting the higher level of average loans and short-term investments was a decrease in average investment securities. Total investment securities averaged$188 million in 2020 which is$6.2 million , or 3.2%, lower than the 2019 full year average. Total deposits, including non-interest bearing demand deposits, averaged$1.035 billion for the full year of 2020, which was$55.2 million , or 5.6%, higher than the$980 million average for the full year of 2019. The 2020 full year average of short-term and FHLB borrowed funds was$69 million , which represented an increase of$5.6 million , or 8.8%. Overall, the Company's loan to deposit ratio averaged 90.9% in the fourth quarter of 2020 which we believe indicates that the Company has ample capacity to continue to grow its loan portfolio and is well positioned to continue assisting our customers and the community given the impact that the COVID-19 pandemic is having on the economy. COMPONENT CHANGES IN NET INTEREST INCOME: 2020 VERSUS 2019. Regarding the separate components of net interest income, the Company's total interest income in 2020 decreased by$2.9 million , or 5.8%, when compared to 2019. Total average earning assets increased by$62.2 million , or 5.8%, in 2020 as the increased level of average total loans and short term investments more than offset the lower level of average 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 50 basis points from 4.61% to 4.11%. All categories within the earning asset base demonstrated an interest income decrease between years. The average total loan portfolio yield decreased by 51 basis points from 4.91% to 4.40% in 2020 while the average yield on total investment securities decreased by 16 basis points from 3.36% to 3.20%. Total investment securities averaged$188 million for the full year of 2020 which is$6.2 million , or 3.2%, lower than the$194 million average in 2019. The Company was selective in 2020 when purchasing the more typical types of securities that have been purchased historically as the market was less favorable for purchases, offering a lower return given the differences in the position and shape of theU.S. Treasury yield curve from last year. To somewhat offset the unfavorable market for the more traditional types of purchases, the Company has been active since March of 2020 purchasing corporate securities, particularly subordinated debt issued by other financial institutions along with taxable municipal securities. Subordinated debt offers higher yields than the typical types of securities in which we invest and is particularly attractive given the current low interest rate environment and modestly positive slope of the yield curve. Management believes it to be acceptable to increase our investments in bank subordinated debt in a gradual and diversified manner, given the heavily regulated nature of the industry combined with our intensive due diligence process and adherence to our internal guidelines for these types of investments. Total loans reached a new record level and averaged$923 million for the full year of 2020 which is$48.1 million , or 5.5%, higher than the 2019 full year average. The growth between years was primarily related to AmeriServ's early participation in theSmall Business Administration's (SBA) 100% guraranteed Paycheck Protection Program (PPP) which remained on the balance sheet from the time of their inception through year end. During 2020, the Company processed 477 PPP loans totaling$68.7 million to assist small businesses and our community in this difficult economy. Also, the Company recorded a total of$1.9 million of processing fee income and interest income from PPP lending activity. The remaining portion of PPP processing fees totals approximately$755,000 and is being amortized into income over the time period that the loans remain on our balance sheet or until the PPP loan is forgiven at which time the remaining fee will be recognized immediately as income. Note that the level of PPP loans did decrease by approximately$10 million during the fourth quarter as we work through the forgiveness process with our customers. In lateDecember 2020 , the Federal Government passed a new$900 billion pandemic relief bill which includes$284.5 billion for the re-opening of the SBA Paycheck Protection Program. The Company is participating in this new 2021 program to continue to provide assistance to our business customers. Normal commercial lending production improved 20
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during the final four months of the year with commercial loan pipelines also improving to pre-COVID levels. Overall, on an end of period basis and excluding total PPP loans, the total loan portfolio grew by approximately$39.1 million sinceSeptember 30, 2020 . Residential mortgage loan production continued to be exceptionally strong throughout the year and reached a record level given the lower interest rate environment. For the full year of 2020, residential mortgage loan production totaled$142 million and was 139% higher than the production level of$60 million achieved for the full year of 2019. Even though total average loans increased compared to last year and loan interest income was enhanced by the PPP revenue, loan interest and fee income declined by$2.3 million , or 5.4%, for the full year. The lower loan interest income reflects the challenges that this record low interest rate environment has created. New loans are being originated at lower yields and certain loans tied to LIBOR or the prime rate reprice downward as both of these indices have moved down with theFederal Reserve's decision to decrease the target federal funds interest rate by a total of 225 basis points since June of 2019. Our liquidity position continues to be strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty. As a result, short-term investments averaged$29 million for the full year of 2020 which is$18.3 million , or 173.2%, higher than the 2019 full year average. The challenge of profitably deploying this excess liquidity resulted in management initially investing in high quality commercial paper given their short maturities and higher rates of return. However, as 2020 progressed, the yields on commercial paper experienced a steady decline, once again creating pressure to find a suitable return for our excess liquidity. This pressure was eased during the fourth quarter given the loan growth that occurred which resulted in short term investment balances returning to a more normal. Total interest expense for the twelve months of 2020 decreased by$3.8 million , or 26.6%, when compared to 2019, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense in the full year of 2020 was lower by$3.6 million , or 31.8%. Total average deposits reached a record level, averaging$1.035 billion for the year, which is$55.2 million , or 5.6%, higher than the 2019 full year average reflecting the benefit of government stimulus programs and reduced consumer spending in 2020. In addition, the Company's loyal core deposit base continues to be a source of strength for the Company during periods of market volatility. Management continued to effectively execute several deposit product pricing decreases given the low interest rate environment and the downward pressure that the low interest rates are having on the net interest margin. As a result, the Company experienced deposit cost relief. Overall, total deposit cost, including demand deposits, averaged 0.74% in 2020 compared to 1.14% in 2019, or a meaningful decrease of 40 basis points. The Company experienced a$255,000 , or 8.1%, decrease in the interest cost of borrowings in the full year of 2020 when compared to the full year of 2019. The decline is a result of theFederal Reserve's actions to decrease interest rates and the impact that these rate decreases have on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. The total 2020 full year average term advance borrowings balance increased by approximately$11.7 million , or 22.4%, when compared to the full year of 2019 as the Company took advantage of the lower yield curve to prudently extend borrowings. The rate on certain FHLB term advances is lower than the rate on overnight borrowings. As a result, the combined growth of average FHLB term advances and total average deposits resulted in less reliance on overnight borrowed funds, which decreased between years by$6.1 million . Overall, the 2020 full year average of total short-term and FHLB borrowed funds was$69.0 million , which represents an increase of$5.6 million , or 8.8%, from 2019. 2019 NET INTEREST PERFORMANCE OVERVIEW. The Company's net interest income for the full year of 2019 decreased by$52,000 , or 0.1%, when compared to the full year of 2018. The Company's net interest margin was 3.29% for the full year of 2019 which represented a two basis point decline from the full year of 2018. Our net interest margin performance was challenged throughout 2019 as theU.S. Treasury Yield Curve shifted downward, flattened and became inverted in certain segments, at various times during the year. The lower interest rate environment along with a lower full year average total loan portfolio balance resulted in the modest year over year unfavorable comparison for net interest income. Positively impacting net interest income during 2019 was a favorable shift experienced in the mix of total average interest bearing liabilities as the amount of total interest bearing deposits increased and resulted in less reliance on higher cost borrowings to fund interest earning assets. Total average earning assets increased by$6.7 million , or 0.6%, in 2019. Specifically, total investment securities averaged$194 million in 2019 which is$9.5 million , or 5.1%, higher than the 2018 full year average. Total loans averaged$875 million in 2019 which is$6.6 million , or 0.7%, lower than the 2018 full year average. 21
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Total average interest bearing liabilities increased by$31.5 million , or 3.6%, as a lower level of total average FHLB borrowings was more than offset by a higher level of interest bearing deposits. Total interest bearing deposits averaged$828 million in 2019 and increased when compared to the 2018 average by$42.7 million , or 5.4%. The 2019 full year average of FHLB borrowed funds was$63.4 million , which represented a decrease of$14.7 million , or 18.8%. Total deposits, including non-interest bearing demand deposits, averaged$980 million for the full year of 2019, which was$19.9 million , or 2.1%, higher than the$960 million average for the full year of 2018. Overall, the Company's loan to deposit ratio averaged 89.1% in the fourth quarter of 2019 which we believe indicated that the Company had ample capacity to grow its loan portfolio. COMPONENT CHANGES IN NET INTEREST INCOME: 2019 VERSUS 2018. Regarding the separate components of net interest income, the Company's total interest income in 2019 increased by$2.7 million , or 5.7%, when compared to 2018. Total average earning assets increased by$6.7 million , or 0.6%, in 2019 as a lower level of total average loans were more than offset by an increased level of total investment securities. Also contributing to the higher level of interest income was the earning asset yield increasing by 22 basis points from 4.39% to 4.61%. All categories within the earning asset base demonstrated an interest income increase between years. The average total loan portfolio yield increased by 25 basis points from 4.66% to 4.91% in 2019 while the yield on total investment securities increased by 19 basis points from 3.17% to 3.36%. Total investment securities averaged$194 million for the full year of 2019 which was$9.5 million , or 5.1%, higher than the$185 million average in 2018. The growth in the investment securities portfolio occurred primarily as the year progressed during 2018 and was the result of management taking advantage of the rising interest rate environment experienced during 2018 which provided an attractive market for additional security purchases. Purchases primarily focused on federal agency mortgage backed securities due to the ongoing cash flow that these securities provide. Also, management continued its portfolio diversification strategy through purchases of high quality corporate and taxable municipal securities. Investment security purchase activity slowed significantly during 2019 as the interest rate market was less favorable. Total loans averaged$875 million for the full year of 2019 which was$6.6 million , or 0.7%, lower than the 2018 full year average. Overall, total loan originations in 2019 exceeded the prior year's level by$50.4 million and also exceeded another strong level of loan payoffs during the year. However, because of the high level of loan payoffs received late in 2018, the full year average comparison between years was unfavorable. Loan pipelines remained strong throughout 2019. Loan interest income increased by$1.9 million , or 4.6%, between the full year of 2019 and the full year of 2018. The higher loan interest income primarily reflected theFederal Reserve increasing the federal funds interest rate in 2018. This resulted in new loans originating at higher yields throughout 2018 and during the first half of 2019 and also caused the upward repricing of certain loans tied to LIBOR or the prime rate as both of these indices moved up with the federal funds rate increases in 2018. Certain floating rate loans, however, did reprice down in the second half of 2019 as theFederal Reserve reduced the federal funds rate by a total of 75 basis points in the second half of 2019. Also, included in the favorable year over year loan interest income increase was a higher level of loan fee income by$325,000 , due primarily to prepayment fees collected on certain early loan payoffs. Total interest expense for the twelve months of 2019 increased by$2.7 million , or 23.5%, when compared to 2018, due to higher levels of deposit interest expense which more than offset a slight decrease in borrowings interest expense. Deposit interest expense in 2019 was higher by$2.7 million , or 32.5%, for the full the year which reflected the higher level of total average interest bearing deposits and certain indexed money market accounts repricing upward due to the impact of theFederal Reserve increasing interest rates during 2018. The full year average cost of total interest bearing deposits increased between years by 28 basis points from 1.07% in 2018 to 1.35% in 2019. Even though total average interest bearing deposit cost increased for the full year of 2019, the Company did experience deposit pricing relief during the third and fourth quarters of 2019 because of theFederal Reserve easing interest rates late in July, September and October of 2019. Specifically, the Company's cost of interest bearing deposits declined by 10 basis points between the third and fourth quarters of 2019. However, the Company continued to experience competitive market pressure to retain existing deposit customers and attract new customer deposits. Customer product preference changed as well in 2019 resulting in movement of funds from non-interest bearing demand deposit accounts and lower yielding money market accounts into higher yielding certificates of deposits. Overall, total deposits grew during the year and averaged$980 million for the full year of 2019, which was$19.9 million , or 2.1%, higher than the 2018 full year average. The Company experienced a$21,000 , or 0.7%, decrease in the interest cost of borrowings for the full year of 2019. The decline was a result of the lower total average borrowings balance between years combined with the impact from theFederal Reserve's action to decrease interest rates three times in 2019 and the immediate impact that those rate decreases 22
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had on the cost of overnight borrowed funds and the replacement of matured FHLB term advances. The total full year average term advance borrowings balance increased by approximately$7.3 million , or 16.3%, when compared to the full year 2018. This increase was due to the inversion demonstrated by theU.S. Treasury Yield Curve in 2019 and resulted in certain term advances costing less than overnight borrowed funds. Overall, the 2019 full year average of FHLB borrowed funds was$63.4 million , which represented a decrease of$14.7 million , or 18.8%, due to the increase in total average deposits. The table that follows provides an analysis of net interest income on a tax-equivalent basis setting forth (i) average assets, liabilities, and stockholders' equity, (ii) interest income earned on interest earning assets and interest expense paid on interest bearing liabilities, (iii) average yields earned on interest earning assets and average rates paid on interest bearing liabilities, (iv) interest rate spread (the difference between the average yield earned on interest earning assets and the average rate paid on interest bearing liabilities), and (v) net interest margin (net interest income as a percentage of average total interest earning assets). For purposes of this table, loan balances include non-accrual loans, and interest income on loans includes loan fees or amortization of such fees which have been deferred, as well as interest recorded on certain non-accrual loans as cash is received. Regulatory stock is included within available for sale investment securities for this analysis. Additionally, a tax rate of 21% was used to compute tax-equivalent interest income and yields (non-GAAP). The tax equivalent adjustments to interest income on loans and municipal securities for the years endedDecember 31, 2020 , 2019, and 2018 was 24,000, 24,000, and 21,000, respectively, which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material. YEAR ENDED DECEMBER 31, 2020 2019 2018 INTEREST INTEREST INTEREST AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE (IN THOUSANDS, EXCEPT PERCENTAGES) Interest earning assets: Loans, net of unearned income$ 923,269 $ 40,652 4.40 %$ 875,198 $ 42,957 4.91 %$ 881,767 $ 41,049 4.66 % Deposits with banks 3,137 15 0.46 1,018 24 2.32 1,023 20 1.90 Short-term investments 28,831 231 0.80 10,552 293 2.77 6,725 201 3.00 Investment securities: Available for sale 145,788 4,591 3.15 153,458 5,090 3.32 145,162 4,527 3.12 Held to maturity 41,994 1,417 3.37
40,553 1,427 3.52 39,388 1,318 3.35 Total investment securities 187,782 6,008 3.20 194,011 6,517 3.36 184,550 5,845 3.17 TOTAL INTEREST EARNING ASSETS/ INTEREST INCOME
1,143,019 46,906 4.11 1,080,779 49,791 4.61 1,074,065 47,115 4.39
Non-interest earning assets:
Cash and due from banks 18,091 20,239 23,067
Premises and equipment 18,439 17,928 12,480
Other assets 70,867 64,083 62,040
Allowance for loan losses (9,732) (8,404) (9,866)
TOTAL ASSETS $ 1,240,684 $ 1,174,625 $ 1,161,786
Interest bearing
liabilities:
Interest bearing deposits:
Interest bearing demand $ 175,088 $ 483 0.28 % $ 170,326$ 1,595 0.94 %$ 138,572 $ 1,134 0.82 % Savings 104,442 148 0.14 96,783 162 0.17 98,035 163 0.17 Money market 234,771 1,031 0.44 234,387 2,525 1.08 249,618 2,183 0.87 Other time 345,228 5,972 1.73 326,867 6,907 2.11 299,391 4,963 1.66 Total interest bearing deposits 859,529 7,634 0.89
828,363 11,189 1.35 785,616 8,443 1.07 Federal funds purchased and other short-term borrowings
4,947 29 0.58 11,088 288 2.59 33,126 720 2.17
Advances from Federal Home
Loan Bank 64,046 1,099 1.72 52,309 1,090 2.09 44,974 797 1.77
Guaranteed junior
subordinated deferrable
interest debentures 13,085 1,121 8.57 13,085 1,121 8.57 13,085 1,120 8.57
Subordinated debt 7,650 520 6.80 7,650 520 6.80 7,650 520 6.80
Lease liabilities 3,949 112 2.84 3,444 117 3.40 - - -
TOTAL INTEREST BEARING
LIABILITIES/INTEREST EXPENSE 953,206 10,515 1.10 915,939 14,325 1.56 884,451 11,600 1.31
Non-interest bearing
liabilities:
Demand deposits 175,336 151,292 174,108
Other liabilities 10,340 7,271 7,077
Stockholders' equity 101,802 100,123 96,150
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,240,684 $ 1,174,625 $ 1,161,786
Interest rate spread 3.01 3.05 3.08
Net interest income/net
interest margin 36,391 3.19 % 35,466 3.29 % 35,515 3.31 %
Tax-equivalent adjustment (24) (24) (21)
Net interest income $ 36,367 $ 35,442 $ 35,494 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-
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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 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.
2020 vs. 2019 2019 vs. 2018
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 $ 2,587 $ (4,892) $ (2,305) $ (308) $ 2,216 $ 1,908
Deposits with banks (15) 6 (9) - 4 4
Short-term investments (105) 43 (62) 106 (14) 92
Investment securities:
Available for sale (246) (253) (499) 265 298 563
Held to maturity 50 (60) (10) 40 69 109
Total investment securities (196) (313) (509) 305 367 672
Total interest income 2,271 (5,156) (2,885) 103 2,573 2,676
INTEREST PAID ON:
Interest bearing demand deposits 46 (1,158) (1,112) 281 180 461
Savings deposits 11 (25) (14) (1) - (1)
Money market 4 (1,498) (1,494) (116) 458 342
Other time deposits 424 (1,359) (935) 492 1,452 1,944
Federal funds purchased and
other short-term borrowings (108) (151) (259) (609) 177 (432)
Advances from Federal Home Loan
Bank 43 (34) 9 139 154 293
Guaranteed junior subordinated
deferrable interest debentures - - - - 1 1
Lease liabilities (6) 1 (5) 117 - 117
Total interest expense 414 (4,224) (3,810) 303 2,422 2,725
Change in net interest income $ 1,857 $ (932) $ 925 $ (200) $ 151 $ (49)
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,
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bankruptcy, or other negative economic concerns indicate impairment. The following table sets forth information concerning the Company's loan delinquency and other non-performing assets.
AT DECEMBER 31,
2020 2019 2018
(IN THOUSANDS,
EXCEPT PERCENTAGES)
Total accruing loans past due 30 to 89 days $ 5,504 $ 2,956 $ 4,752
Total non-accrual loans 2,500 1,487 1,221
Total non-performing assets including TDRs (1) 3,331 2,339
1,378
Loan delinquency as a percentage of total loans, net of unearned income 0.56 % 0.33 % 0.55 % Non-accrual loans as a percentage of total loans, net of unearned income 0.26 0.17
0.14
Non-performing assets as a percentage of total loans, net of unearned income, and other real estate owned 0.34 0.26
0.16
Non-performing assets as a percentage of total assets 0.26 0.20
0.12
Total classified loans (loans rated substandard or doubtful) (2)$ 11,829 $ 16,338 $ 4,302
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Non-performing assets are comprised of (i) loans that are on a non-accrual (1) basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments, (iii) performing loans classified as
troubled debt restructuring and (iv) other real estate owned.
(2) Total includes residential real estate and consumer loans that are considered
non-performing.
Overall, the Company continues to maintain good asset quality. The continued
successful ongoing problem credit resolution efforts of the Company is
demonstrated in the table above as levels of non-accrual loans, non-performing
assets, and loan delinquency are well below 1% of total loans. Accruing loan
delinquency increased $2.5 million since the prior year-end and now totals $5.5
million . This increase is the result of several commercial and commercial real
estate loan borrowers demonstrating delinquency during the fourth quarter of
2020. Slightly offsetting this increase in commercial loan delinquency during
the fourth quarter was a decrease in residential mortgage loan delinquency. In
addition, the Company experienced an increase in non-accrual loans due,
primarily, to higher non-accrual residential mortgage loans which also led to an
increase in non-performing assets in 2020. The Company did experience a decrease
in classified loans during 2020 due to the upgrade of certain commercial loans
from substandard.
In 2020, the Company, as suggested by the Federal Reserve , granted loan payment
modifications to customers experiencing difficulty during this tough economic
time. Requested modifications primarily consist of the deferral of principal
and/or interest payments for a period of three to six months and maturity date
extensions. Initially, the balance of loan modifications related to COVID-19
that were granted to our customers totaled $200 million . At December 31, 2020 ,
loans totaling approximately $49.1 million , or 5.3% of total loans, were on a
payment modification plan, most of which are borrowers who were granted a second
loan payment deferral. Included within this total were 19 commercial borrowers
with loans totaling $47 million . Management is carefully monitoring asset
quality with a particular focus on customers that have requested these payment
deferrals. As we reached the end of the initial deferral time periods, deferral
extension requests were considered based upon the customer's needs and their
impacted industry, borrower and guarantor capacity to service debt as well as
issued regulatory guidance. See the disclosures regarding COVID-19 related
modifications within the Non-Performing Assets Including Troubled Debt
Restructurings footnote.
We also continue to closely monitor the loan portfolio given the number of
relatively large-sized commercial and commercial real estate loans within the
portfolio. As of December 31, 2020 , the 25 largest credits represented 22.6% of
total loans outstanding, which represents a decrease from December 31, 2019 when
it was 24.3%.
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
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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,
2020 2019 2018 2017 2016
(IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES)
Balance at beginning of year $ 9,279 $ 8,671 $ 10,214 $ 9,932 $ 9,921
Charge-offs:
Commercial (111) (9) (574) (311) (3,662)
Commercial loans secured by
non-owner occupied real estate - (63) - (132) (82)
Real estate - residential
mortgage (233) (98) (380) (313) (208)
Consumer (143) (262) (251) (172) (344)
Total charge-offs (487) (432) (1,205) (928) (4,296)
Recoveries:
Commercial 4 22 31 27 169
Commercial loans secured by
non-owner occupied real estate 44 48 51 56 58
Real estate - residential
mortgage 62 118 119 207 100
Consumer 68 52 61 120 30
Total recoveries 178 240 262 410 357
Net charge-offs (309) (192) (943) (518) (3,939)
Provision (credit) for loan
losses 2,375 800 (600) 800 3,950
Balance at end of year $ 11,345 $ 9,279 $ 8,671 $ 10,214 $ 9,932
Loans and loans held for sale,
net of unearned income:
Average for the year $ 923,269 $ 875,198 $ 881,767 $ 893,849 $ 887,679
At December 31, 978,345 887,574 863,129 892,758 886,858
As a percent of average loans:
Net charge-offs 0.03 % 0.02 % 0.11 % 0.06 % 0.44 %
Provision (credit) for loan
losses 0.26 0.09 (0.07) 0.09 0.44
Allowance as a percent of each
of the following:
Total loans, net of unearned
income 1.16 1.05 1.00 1.14 1.12
Total accruing delinquent loans
(past due 30 to 89 days) 206.12 313.90 182.47 124.90 302.99
Total non-accrual loans 453.80 624.01 710.16 338.66 619.59
Total non-performing assets 340.59 396.71 629.25 336.65 611.58
Allowance as a multiple of net
charge-offs 36.72x 48.33x 9.20x 19.72x 2.52x
For 2020, the Company recorded a $2,375,000 provision expense for loan losses
compared to an $800,000 provision expense in 2019. The Company continues to
build the allowance for loan losses given the overall economic climate and the
uncertainty that exists because of the COVID-19 pandemic. The 2020 provision
reflects management strengthening certain qualitative factors within the
allowance for loan losses calculation and downgrades of loan relationships that
are reflective of the industries that have been especially negatively impacted
from the pandemic and are demonstrating a slow pace of recovery. Earlier in
2020, several loans from the hotel industry were downgraded. Additionally during
the fourth quarter, the downgrade of a hospitality related credit and a large
transportation related credit, as well as the loan growth experienced also
resulted in the provision increasing. The recovery efforts of many of these
borrowers experiencing a downgrade stalled during the fourth quarter due to the
rise in COVID cases which caused additional safety measures and restrictions to
be put in place on their businesses. While these borrowers will need additional
time to recover, we remain encouraged by their efforts to work through the
pandemic and signs of improvement in their operations. The Company experienced
net loan charge-offs of $309,000 , or 0.03% of total loans, in 2020 compared to
net loan charge-offs of $192,000 , or 0.02% of total loans, in 2019. As a result
of the provision expense sharply exceeding net loan charge-offs, the balance in
the allowance for loan losses increased by over $2 million in 2020.
Nonperforming assets totaled $3.3 million , or 0.34% of total loans, at
December 31, 2020 . Management is carefully monitoring asset quality with a
particular focus on loan customers that have requested a second payment deferral
during this difficult economic time. The Asset Quality Task Force is meeting at
least monthly to review these particular
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relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. In summary, the allowance for loan losses provided 341% coverage of non-performing assets, and 1.16% of total loans, atDecember 31, 2020 , compared to 397% coverage of non-performing assets, and 1.05% of total loans, atDecember 31, 2019 . Note that the reserve coverage to total loans, excluding PPP loans, is 1.23% (non-GAAP) atDecember 31, 2020 . Management believes that this non-GAAP measure provides a greater understanding of ongoing operations and enhances comparability of results of operations with prior periods. The Company believes that investors may use this non-GAAP measure to analyze the Company's financial condition without impact of unusual items or events that may obscure trends in the Company's underlying financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. The following table sets forth the calculation of the Company's allowance for loan loss reserve coverage to total loans (GAAP) and the reserve coverage to total loans, excluding PPP loans (non-GAAP), atDecember 31, 2020 (in thousands, except percentages).DECEMBER 31, 2020 Allowance for loan losses $
11,345
Total loans, net of unearned income(1) 978,345
Reserve coverage 1.16 %
Reserve coverage to total loans, excluding PPP loans:
Allowance for loan losses $ 11,345
Total loans, net of unearned income(1) 978,345
PPP loans (58,344)
920,001
Non-GAAP reserve coverage 1.23 %
(1) Includes loans and loans held for sale
For 2019, the Company recorded an$800,000 provision expense for loan losses compared to a$600,000 provision recovery in 2018 which resulted in a net unfavorable shift of$1.4 million between years. The rating downgrade of a$6.5 million performing commercial loan to substandard as a result of the unexpected death of a borrower caused a$675,000 increase in fourth quarter 2019 provision expense. This rating action was prudent due to the inherent uncertainties associated with a large estate liquidation. The Company experienced net loan charge-offs of only$192,000 , or 0.02% of total loans, in 2019 compared to net loan charge-offs of$943,000 , or 0.11% of total loans, in 2018. Overall, nonperforming assets totaled$2.3 million , or only 0.26% of total loans, atDecember 31, 2019 . In summary, the allowance for loan losses provided 397% coverage of non-performing assets, and 1.05% of total loans, atDecember 31, 2019 , compared to 629% coverage of non-performing assets, and 1.00% of total loans, atDecember 31, 2018 . The following schedule sets forth the allocation of the ALL among various loan categories. This allocation is determined by using the consistent quarterly procedural discipline that was previously discussed. The entire ALL is available to absorb future loan losses in any loan category. AT DECEMBER 31, 2020 2019 2018 2017 2016 PERCENT PERCENT PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS (IN THOUSANDS, EXCEPT PERCENTAGES) Commercial$ 3,472 31.4 %$ 3,951 30.1 %$ 3,057 29.0 %$ 4,298 28.0 %$ 4,041 29.8 % Commercial loans secured by non-owner occupied real estate 5,373 41.2 3,119 41.2 3,389 41.4 3,666 42.0 3,584 40.2 Real estate - residential mortgage 1,292 25.7 1,159 26.6 1,235 27.6 1,102 27.8 1,169 27.8 Consumer 115 1.7 126 2.1 127 2.0 128 2.2 151 2.2 Allocation to general risk 1,093 - 924 -
863 - 1,020 - 987 - Total$ 11,345 100.0 %$ 9,279 100.0 %$ 8,671 100.0 %$ 10,214 100.0 %$ 9,932 100.0 % 27
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Even though residential real estate mortgage loans comprise 25.7% of the Company's total loan portfolio, only$1.3 million , or 11.4%, 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 atDecember 31, 2020 to cover losses within the Company's loan portfolio.
NON-INTEREST INCOME. Non-interest income for 2020 totaled
a
? into the secondary market due to the strong level of residential mortgage loan
production. The higher level of residential mortgage loan production also
resulted in mortgage related fees increasing by
the Company recognized a
? Act (CRA) related investment in 2019 and there was no charge in 2020 since the
full investment was written off last year;
a
improved level of fee income from the financial services business unit, the
entire wealth management division has been resilient and performed well in
? spite of the major market value decline that occurred in late March. The market
value of wealth management assets recovered and improved from the pre-pandemic
valuation, exceeding the
the market value as of
a
? consumer spending activity-based fees such as deposit service charges, which
include overdraft fees, decreased significantly with the shutdown of the
economy and has been slow to improve given the pace of the economic recovery;
a
? the receipt of a
caused increased earnings and a higher rate of return on certain policies; and
? no investment security sale activity occurred in 2020 after the Company
recognized a
Non-interest income for 2019 totaled
the Company recognized a
related to a Community Reinvestment Act (CRA) investment.
? Administration (SBA) provided formal notice that the managing company of this
particular fund was placed into receivership which caused us to write off the
full investment;
net gains on loans held for sale increased by
due to increased residential mortgage loan sales in the secondary market as the
lower interest rate environment in the second half of 2019 resulted in a
? greater level of residential mortgage loan production. In addition to increased
residential mortgage originations, the full year favorable comparison in 2019
was also due to the sale of the guaranteed portion of a SBA guaranteed loan
that resulted in a$197,000 gain; the Company recognized a net realized gain on investment securities of
? existed to capture gains on certain securities that demonstrated higher than
typical market appreciation in the low interest rate environment. The 2018 net
loss resulted from the Company repositioning a portion of the investment
portfolio for stronger future returns;
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? a
primarily to a reduced level of overdraft fee income;
? a
level of residential mortgage loan production;
a
? credit fees and increased revenue from check supply sales as a result of a
favorable vendor contract renegotiation; and
a
? Company benefitting from a continuing increase in market values for assets
under management as well as management's effective execution of managing client
accounts.
NON-INTEREST EXPENSE. Non-interest expense for 2020 totaled
a
increased incentive compensation, total salaries, pension expense, and health
care costs. A
primarily due to commissions earned as a result of increased residential
mortgage loan production. Total salaries are higher by
? year primarily due to separation costs related to the elimination of a
management position and annual merit increases. Pension expense increased by
interest rate environment has on the discount rates that are used to revalue
the defined benefit pension obligation each year. In addition, there was a$424,000 , or 13.9%, increase in health care costs;
? normal level after the benefit from the application of the
Assessment Credit regulation expired earlier this year;
a
appraisal fees due to the significantly higher level of residential mortgage
? loan production, higher legal fees related to PPP loan processing, personnel
related matters and an increased level of outside professional services related
costs; and a$215,000 , or 3.8%, decrease in other expense due to reduced outside
processing fees and telephone costs as well as a lower level of meals and
? travel costs that relates to travel restrictions from the pandemic. In
addition, the favorable comparison for other expense also resulted from a
reduction recognized for the unfunded commitment reserve.
Non-interest expense for 2019 totaled
a
annual merit increases, the addition of several employees to address management
? succession planning as well as our expansion into the
market. Increased pension and health care costs also contributed to the higher
employee costs between years;
a
? application of the Small Bank Assessment Credit regulation, the
community banks under
banking industry reserve ratio exceeded its 1.38% target;
a
? for the unfunded commitment reserve as a result of increased loan approvals in
2019, as well as, an increased investment in technology as evidenced by higher
website costs and additional telecommunications expense; and
? a
and other professional fees.
INCOME TAX EXPENSE. The Company recorded an income tax expense of$1.2 million , or an effective tax rate of 20.9%, in 2020, compared to income tax expense of$1.6 million , or a 20.7% effective tax rate, in 2019, and compared to income tax expense of$1.7 million , or a 17.8% effective tax rate, in 2018. The higher effective tax rate in 29
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2020 reflects the recognition of additional income tax expense due to the write-off of a deferred tax asset that will not be realized due to the dissolution of the Company's small life insurance subsidiary. Due to the enactment of the Tax Cuts and Jobs Act late in the fourth quarter of 2017, the Company was able to achieve a greater income tax benefit in the third quarter of 2018 by making a one-time additional contribution to the defined benefit pension plan resulting in a lower effective tax rate for that year. The Company's deferred tax asset was$1.6 million atDecember 31, 2020 . SEGMENT RESULTS. The community banking segment reported a net income contribution of$10.1 million in 2020 which decreased from the$10.9 million contribution in 2019 and also decreased from the$11.1 million contribution in 2018. The primary driver for the lower level of net income in 2020 was the Company recording an$2,375,000 provision expense for loan losses compared to an$800,000 provision in 2019. This is discussed previously in the "Allowance and Provision for Loan Losses" section within this document. The downward shift in theU.S. Treasury yield curve between years along with theFederal Reserve's actions to decrease the fed funds rate three times in the second half of 2019 and by 150 basis points in March of 2020 negatively impacted the Company's earning asset margin performance. As a result, total loan interest income decreased between years. Partially offsetting the unfavorable impact that the lower interest rate environment had on loan interest income was the additional processing fee income and interest income that the Company recorded from PPP lending activity, which totaled$1,873,000 for 2020. The exceptionally stronger level of residential mortgage loan activity in 2020 resulted in this segment recognizing a higher gain on the sale of residential mortgage loans in the secondary market and a corresponding greater level of mortgage related fee income. Also favorably impacting net income was this segment experiencing deposit cost relief as total deposit interest expense decreased between years due to management's action to lower pricing of several deposit products, given the declining interest rate environment. The decrease to total deposit interest expense occurred even though total deposits reached record levels which is described previously in the MD&A. Net income from this segment was also favorably impacted by a higher level of revenue from bank owned life insurance due to the receipt of a death claim received late in the year and a financial floor taking hold which caused increased earnings from a higher rate of return on certain policies. Finally, and unfavorably impacting net income were increases to total employee costs, a higher level ofFDIC insurance expense and increased professional fees. The wealth management segment's net income contribution was$2.0 million in 2020 compared to$1.9 million in 2019 and$1.8 million in 2018. The increase is due to wealth management fees increasing in both time periods as this segment was positively impacted by management's effective execution of managing client accounts. The entire wealth management segment has been resilient and performed well in spite of the volatility of the markets and a major market value decline that occurred in late March. The wealth management segment also benefitted from a lower level of meals & travel related expenses due to travel restrictions from the pandemic. Slightly offsetting these favorable items were higher levels of professional fees, incentive compensation and equipment costs. Overall, the fair market value of trust assets under administration totaled$2.481 billion atDecember 31, 2020 , an increase of$243 million , or 10.9%, from theDecember 31, 2019 total of$2.238 billion . The investment/parent segment reported a net loss of$7.5 million in 2020, which was greater than the net loss of$6.8 million in 2019 and$5.1 million in 2018. The increased loss was due to securities interest income decreasing by a higher amount than the decrease to total short term FHLB borrowings interest expense. Also, short-term investment interest income decreased in 2020 even though the Company experienced exceptionally strong growth in its liquidity position between years from the significant influx of deposits that resulted from the government stimulus programs. The yields on commercial paper decreased significantly during the second half of 2020 and resulted in reduced interest income. The greater net loss at the segment also results from higher employee costs and greater miscellaneous expenses. Finally, and favorably impacting this segment, there were no security sale gains or losses recognized during 2020 after this segment recognized a net loss of$382,000 in 2019 due to an impairment charge on a CRA investment which more than offset net security sale gain income. For greater discussion on the future strategic direction of the Company's key business segments, see "Management's Discussion and Analysis - Forward Looking Statements." For a more detailed analysis of the segment results, see Note 23. BALANCE SHEET. The Company's total consolidated assets of$1.280 billion atDecember 31, 2020 increased by$108.5 million , or 9.3%, from the$1.171 billion level atDecember 31, 2019 . The increase to total consolidated assets was due primarily to a$90.8 million , or 10.2%, increase in total loans, a$6.7 million , or 3.7%, increase in investment securities, and a$9.3 million , or 42.1%, increase in cash balances. Overall, our loan portfolio benefitted from the increasing commercial loan production that began late in the third quarter and continued throughout the fourth quarter. We also continued to experience strong residential mortgage loan production. This commercial and residential mortgage 30
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loan growth combined with AmeriServ's participation in theSmall Business Administration's (SBA) 100% guaranteed Paycheck Protection Program (PPP) resulted in a higher level of loans. The Company was selective in 2020 when purchasing the more typical types of securities that have been purchased historically as the market was less favorable for purchases. To somewhat offset the unfavorable market for the more traditional types of purchases, the Company has been active since March purchasing corporate securities, particularly subordinated debt issued by other financial institutions along with taxable municipal securities. Our liquidity position continues to be strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty. The Company's deposits at period end reached a record level and increased by$94.4 million , or 9.8%, reflecting the benefit of government stimulus programs and reduced consumer spending in 2020. Total short-term and FHLB borrowings increased$13.6 million , or 17.9%. Specifically, total FHLB term advances increased by$11.3 million , or 21.1%, and totaled$65.0 million . The Company has utilized these term advances to help manage interest rate risk and take advantage of the lower yield curve to prudently extend borrowings. During 2020, the rate on certain FHLB term advances was lower than the rate on overnight borrowed funds. Total stockholders' equity increased by$5.8 million , or 5.9%, since year-end 2019. Capital was increased during 2020 by the Company's$4.6 million of net income, the$1.8 million positive impact experienced due to the improved market value of the available for sale investment securities portfolio, and the$1.1 million positive impact from the annual revaluation of the Company's pension obligation. Slightly offsetting these increases, was the$1.7 million common stock cash dividend and$151,000 of common stock repurchases. The Company returned approximately 41% of our 2020 earnings to our shareholders through the accretive common stock repurchases and quarterly common stock cash dividend. The Company continues to be considered well capitalized for regulatory purposes with a risk based capital ratio of 12.93% and an asset leverage ratio of 9.29% atDecember 31, 2020 . The Company's book value per common share was$6.12 , its tangible book value per common share (non-GAAP) was$5.42 and its tangible common equity to tangible assets ratio (non-GAAP) was 7.29% atDecember 31, 2020 . The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. The following table sets forth the calculation of the Company's tangible common equity ratio and tangible book value per share atDecember 31, 2020 , 2019, and 2018 (in thousands, except share and ratio data): AT DECEMBER 31, 2020 2019 2018 Total shareholders' equity$ 104,399 $ 98,614 $ 97,977 Less: Goodwill 11,944 11,944 11,944 Tangible equity 92,455 86,670 86,033 Total assets 1,279,713 1,171,184 1,160,680 Less: Goodwill 11,944 11,944 11,944 Tangible assets 1,267,769 1,159,240 1,148,736 Tangible common equity ratio (non-GAAP) 7.29 % 7.48 % 7.49 % Total shares outstanding 17,060,144
17,057,871 17,619,303
Tangible book value per share (non-GAAP)
LIQUIDITY. The Company's liquidity position continues to be exceptionally strong due to the significant influx of deposits that resulted from the government stimulus programs and as customers continue to be cautious and are demonstrating reduced spending activity due to the economic uncertainty. As a result total deposits onDecember 31, 2020 reached a record level at 1.055 billion. 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. The core deposit base is adequate to fund the Company's operations. Cash flow from maturities, prepayments and amortization of securities is used to help fund loan growth. Average short-term investments were higher than they have been historically which presented the challenge of profitably deploying this excess liquidity given a steady decline in yields on short term investment products as 2020 31
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progressed. The pressure to find a suitable return on these excess liquid funds eased during the fourth quarter given the loan growth that occurred. Due to the loan growth, short term investment balances returned to a more normal, lower level in the fourth quarter of 2020. We strive to operate our loan to deposit ratio in a range of 80% to 100%. AtDecember 31, 2020 , the Company's loan to deposit ratio was 92.7%. Given current commercial loan pipelines, which are now at pre-pandemic levels, we are optimistic that we can grow our loan to deposit ratio and remain within our guideline parameters. Also, we are positioned well to support our local economy and provide the necessary assistance to our community partners during this period of pandemic. Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased by$9.3 million fromDecember 31, 2019 , to$31.5 million atDecember 31, 2020 , due to$106.0 million of cash provided by financing activities which more than offset$95.3 million of cash used in investing activities and$1.4 million of cash used in operating activities. Within financing activities, deposits increased by$94.4 million while total FHLB borrowings also increased as term advances increased by$11.3 million and short-term borrowings increased by$2.3 million . Within investing activities, cash advanced for new loans originated totaled$301.2 million and was$89.0 million higher than the$212.2 million of cash received from loan principal payments. Within operating activities,$87.1 million of mortgage loans held for sale were originated while$87.3 million of mortgage loans were sold into the secondary market. The holding company had$5.9 million of cash, short-term investments, and investment securities atDecember 31, 2020 . Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. AtDecember 31, 2020 , our subsidiary Bank had$12.6 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that dividend payments from theTrust Company approximate 75% of annual net income. Overall, we believe that the holding company has good liquidity to meet its trust preferred debt service requirements, its subordinated debt interest payments, and its common stock dividend. 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, time deposits with banks, and federal funds sold. These assets totaled$31.5 million and$22.2 million atDecember 31, 2020 andDecember 31, 2019 , 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 theFederal 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- to longer-term advances based upon the Company's investment in certain residential mortgage, commercial real estate, and commercial and industrial loans. AtDecember 31, 2020 , the Company had$329 million of overnight borrowing availability at the FHLB,$30 million of short-term borrowing availability at theFederal 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 Company 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 10.06%, the tier 1 capital ratio was 11.20%, and the total capital ratio was 12.93% atDecember 31, 2020 . The Company's tier 1 leverage ratio was 9.29% atDecember 31, 2020 . We anticipate that we will maintain our strong capital ratios throughout 2021. 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 2020 was 37.0%.Total Parent Company cash was$5.9 million atDecember 31, 2020 . 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 348% of regulatory capital atDecember 31, 2020 . While we work through the COVID-19 pandemic, our focus is on preserving capital to support customer lending and managing heightened credit risk due to the downturn in the economy. Additionally, 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$0.025 per quarter. 32
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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 In the first quarter of 2020, the Company completed the common stock repurchase program, which it had announced onApril 16, 2019 , where it bought back 526,000 shares, or 3%, of its common stock over a 12-month period at a total cost of$2.23 million . Specifically, during the first three months of 2020, the Company was able to repurchase 35,962 shares of its common stock and return$151,000 of capital to its shareholders through this program. Evaluation of a new common stock buyback program is on hold. AtDecember 31, 2020 , the Company had approximately 17.1 million common shares outstanding. INTEREST RATE SENSITIVITY. Asset/liability management involves managing the risks associated with changing interest rates and the resulting impact on the Company's net interest income, net income and capital. The management and measurement of interest rate risk at the Company is performed by using the following tools: 1) simulation modeling, which analyzes the impact of interest rate changes on net interest income, net income and capital levels over specific future time periods. The simulation modeling forecasts earnings under a variety of scenarios that incorporate changes in the absolute level of interest rates, the shape of the yield curve, prepayments and changes in the volumes and rates of various loan and deposit categories. The simulation modeling incorporates assumptions about reinvestment and the repricing characteristics of certain assets and liabilities without stated contractual maturities; 2) market value of portfolio equity sensitivity analysis; and 3) static GAP analysis, which analyzes the extent to which interest rate sensitive assets and interest rate sensitive liabilities are matched at specific points in time. The overall interest rate risk position and strategies are reviewed by senior management and the Company's Board of Directors on an ongoing basis. 33
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The following table presents a summary of the Company's static GAP positions atDecember 31, 2020 : OVER OVER 3 MONTHS 6 MONTHS 3 MONTHS OR THROUGH THROUGH OVER INTEREST SENSITIVITY PERIOD LESS 6 MONTHS 1 YEAR 1 YEAR TOTAL (IN THOUSANDS, EXCEPT RATIOS AND PERCENTAGES) RATE SENSITIVE ASSETS: Loans and loans held for sale$ 364,560 $ 76,976 $ 121,841 $ 414,968 $ 978,345 Investment securities 52,860 10,962 18,489 106,076 188,387 Short-term assets 11,077 - - - 11,077 Regulatory stock 4,821 - - 2,125 6,946 Bank owned life insurance - - 39,208 - 39,208 Total rate sensitive assets$ 433,318 $ 87,938 $ 179,538 $ 523,169 $ 1,223,963 RATE SENSITIVE LIABILITIES: Deposits: Non-interest bearing demand deposits $ - $ - $ -$ 177,533 $ 177,533 Interest bearing demand deposits 63,153 950 1,901 134,965 200,969 Savings 482 482 964 110,425 112,353 Money market 56,874 5,491 10,982 146,572 219,919 Certificates of deposit of$100,000 or more 16,919 8,139 20,588 3,285 48,931 Other time deposits 117,587 25,440 36,101 116,087 295,215 Total deposits 255,015 40,502 70,536 688,867 1,054,920 Borrowings 34,617 4,075 10,646 64,742 114,080 Total rate sensitive liabilities$ 289,632 $ 44,577 $ 81,182 $ 753,609 $ 1,169,000 INTEREST SENSITIVITY GAP: Interval 143,686 43,361 98,356 (230,440) - Cumulative$ 143,686 $ 187,047 $ 285,403 $ 54,963 $ 54,963 Period GAP ratio 1.50X 1.97X 2.21X 0.69X Cumulative GAP ratio 1.50 1.56 1.69 1.05 Ratio of cumulative GAP to total assets 11.23 % 14.62 % 22.30 % 4.29 % WhenDecember 31, 2020 is compared toDecember 31, 2019 , the Company's cumulative GAP ratio through one year indicates that the Company's balance sheet is still asset sensitive and the level of asset sensitivity increased between years. We continue to see loan customer preference for fixed rate loans given the low overall level of interest rates. As a result of the government stimulus programs and the impact that the pandemic had on consumer spending activity, both loans and deposits increased to record levels in 2020. The growth experienced in the loan portfolio and short term investments was funded by the increase in total deposits and also a modestly higher level of overnight short term borrowings. Overnight borrowings are immediately impacted by changes to national interest rates. We continue to have a relatively consistent level of term advances with the FHLB to help manage our interest rate risk position. The balance of FHLB term advance borrowings atDecember 31, 2020 is$11.3 million higher than theDecember 31, 2019 balance as the Company took advantage of the lower yield curve to prudently extend borrowings. The rate on certain FHLB term advances is lower than the rate on overnight borrowings. 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 points. Note that we suspended the 200 basis point downward rate shock since it has little value due to the absolute low 34
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level of interest rates. 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 6.8 % 62.3 %
100 bp increase 3.9 35.4
100 bp decrease (1.7) (27.3)
The Company believes that its overall interest rate risk position is well
controlled. The variability of net interest income is positive in the upward
rate shocks due to the Company's short duration investment securities portfolio
and the scheduled repricing of loans tied to LIBOR or prime. Also, the Company
will continue its disciplined approach to price its core deposit accounts in a
controlled but competitive manner. The variability of net interest income is
negative in the 100 basis point downward rate scenario as the Company has more
exposure to assets repricing downward to a greater extent than liabilities due
to the absolute low level of interest rates with the fed funds rate currently at
a targeted range of 0% to 0.25%. The market value of portfolio equity increases
in the upward rate shocks due to the improved value of the Company's core
deposit base. Negative variability of market value of portfolio equity occurs in
the downward rate shock due to a reduced value for core deposits.
Within the investment portfolio at December 31, 2020 , 76.0% of the portfolio is
classified as available for sale and 24.0% 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 41 securities that
are temporarily impaired at December 31, 2020 . The Company reviews its
securities quarterly and has asserted that at December 31, 2020 , 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 also sells
15-year fixed-rate mortgage loans into the secondary market as well, depending
on market conditions. For the year 2020, 60% of all residential mortgage loan
production was sold into the secondary market.
The amount of loans outstanding by category as of December 31, 2020 , which are
due in (i) one year or less, (ii) more than one year through five years, and
(iii) over five years, are shown in the following table. Loan balances are also
categorized according to their sensitivity to changes in interest rates.
MORE
THAN ONE
ONE YEAR
YEAR OR THROUGH OVER FIVE TOTAL
LESS FIVE YEARS YEARS LOANS
(IN THOUSANDS, EXCEPT RATIOS)
Commercial and industrial $ 30,456 $ 147,223 $ 31,827 $ 209,506
Commercial loans secured by owner
occupied real estate 1,687 18,866 74,933 95,486
Commercial loans secured by non-owner
occupied real estate 38,319 123,198 239,234 400,751
Real estate - residential mortgage 15,948 39,644 200,647 256,239
Consumer 5,816 4,207 6,340 16,363
Total $ 92,226 $ 333,138 $ 552,981 $ 978,345
Loans with fixed-rate $ 50,339 $ 249,623 $ 278,013 $ 577,975
Loans with floating-rate 41,887 83,515 274,968 400,370
Total $ 92,226 $ 333,138 $ 552,981 $ 978,345
Percent composition of maturity 9.4 % 34.1 % 56.5 % 100.0 %
Fixed-rate loans as a percentage of
total loans 59.1 %
Floating-rate loans as a percentage of
total loans 40.9 %
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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.
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$213.9 million and standby letters of credit of$13.3 million as ofDecember 31, 2020 . 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, 2020 , the Company had$93.5 million in the notional amount of interest rate swaps outstanding, with a fair value of$3.3 million . As ofDecember 31, 2020 and 2019, municipal deposit letters of credit issued by theFederal Home Loan Bank of Pittsburgh on behalf ofAmeriServ Financial Bank naming applicable municipalities as beneficiaries totaled$61.3 million and$41.5 million , respectively. The letters of credit serve as collateral, in place of pledged securities, for municipal deposits maintained atAmeriServ Financial Bank . 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, goodwill, 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 liabilities
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 employees 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 (credit) for loan losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of maintaining
reserve levels believed by management to be sufficient to absorb estimated
probable credit losses. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the credit portfolio and other
relevant factors. However, this quarterly evaluation is inherently subjective as
it requires material estimates, including, among others, likelihood of customer
default, loss given default, exposure at default, the amounts and timing of
expected future cash flows on impaired loans, value of collateral, estimated
losses on consumer loans and residential mortgages, and general amounts for
historical loss experience. This process also considers economic conditions,
uncertainties in estimating losses and inherent risks in the various credit
portfolios. All of these factors may be susceptible to significant change. Also,
the allocation of the
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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$8.8 million , or 78%, of the total allowance for loan losses atDecember 31, 2020 has been allocated to these two loan categories. This allocation also considers other relevant factors such as actual versus estimated losses, economic trends, delinquencies, levels of non-performing and troubled debt restructured (TDR) loans, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies and trends in policy, financial information and documentation exceptions. To the extent actual outcomes differ from management estimates, additional provision for loan losses may be required that would adversely impact earnings in future periods. ACCOUNT -Goodwill
BALANCE SHEET REFERENCE -
INCOME STATEMENT REFERENCE -
DESCRIPTION
The Company considers our accounting policies related to goodwill 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, 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.
ACCOUNT - Income Taxes
BALANCE SHEET REFERENCE - Net deferred tax asset
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.
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In relation to recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of tax differences, make certain assumptions regarding whether tax differences are permanent or temporary and the related timing of the expected reversal. Also, estimates are made as to whether taxable operating income in future periods will be sufficient to fully recognize any gross deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. Alternatively, we may make estimates about the potential usage of deferred tax assets that decrease our valuation allowances. As ofDecember 31, 2020 , we believe that all of the deferred tax assets recorded on our balance sheet will ultimately be recovered and that no valuation allowances were needed. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
ACCOUNT -
BALANCE SHEET REFERENCE - Investment securities
INCOME STATEMENT REFERENCE - Net realized gains (losses) 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, 2020 , 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 reduction; 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 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
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Company's risk profile to improve asset yields and increase profitability and
continue to identify and implement technological opportunities and advancements
to drive efficiency for the holding company and its affiliates. Customers - The Company expects to provide exceptional customer service, identifying opportunities to enhance the Banking for Life philosophy by
providing products and services to meet the financial needs in every step
through a customer's life cycle, and further defining the role technology plays
in anticipating and satisfying customer needs. We anticipate providing leading
? banking systems and solutions to improve and enhance customers' Banking for
Life experience. We will provide customers with a comprehensive offering of
financial solutions including retail and business banking, home mortgages and
wealth management at one location. We have upgraded and modernized select
branches to be more inviting and technologically savvy to 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 actions that may be taken by governmental authorities to contain the outbreak or to treat its impact; and (xiii) other external developments which could materially impact the Company's operational and financial performance. The foregoing list of important factors is not exclusive, and neither such list nor any forward-looking statement takes into account the impact that any future acquisition may have on the Company and on any such forward-looking statement. 39
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