AMERISERV FINANCIAL, INC. …..2021 FIRST QUARTER SUMMARY OVERVIEW….. AmeriServ reported first quarter 2021 net income of$2,081,000 , or$0.12 per diluted common share. This represents a 47.7%, or$672,000 , increase from the first quarter of 2020 when net income totaled$1,409,000 , or$0.08 per share. It also represents an increase of$1,389,000 or almost 300% above the fourth quarter of 2020. The first quarter of 2021 did not resemble any previous first quarter in the history of AmeriServ. Normally, first quarters are a challenge because of the weather issues common to theLaurel Highlands ofWestern Pennsylvania . It is always a shorter quarter on the calendar than the other three because of February and its 28 days. We have learned over the years to use this quarter to prepare for the more active quarters when the snow and cold have finally disappeared but in 2021 the issue of primary concern was not the weather but the pandemic. There have been varying levels of governmental restrictions to incorporate into the business of banking. There has been the impact of the pandemic on entire industries and on individual enterprises within those industries. One of the major challenges has been the need to adjust policies and procedures to maintain an acceptable level of safety and soundness with many staff members functioning on a remote basis solely through computer access. There have been questions that have never been asked before and answers that changed time-tested routine procedures. However, the goals remained fixed, that is to provide professional banking services, to continue to provide the availability of credit in each of AmeriServ's markets, and to pledge the soundness of AmeriServ as an important financial resource for both consumers and commercial businesses. For example, during the first quarter, AmeriServ has been very active in the second round of the Federal government sponsored Payroll Protection Program (PPP.) This program assists both small and medium-sized businesses. The hundreds of loans that AmeriServ has entered into this program have been essential in saving more than 16,000 jobs. Paradoxically though, it may seem due to this program, AmeriServ's total level of outstanding loans onMarch 31, 2021 was at an all-time record for the franchise. Also, many AmeriServ customers have been recipients of the various governmental stimulus funding programs. However, the very wise AmeriServ customers have not performed as the learned economists predicted. These stimulus funds appear not to have been spent but are being managed with great care. Spending is being deemphasized, debts are being paid down and many Americans are building their own personal "rainy day fund." During 2020, the level of AmeriServ customer deposits increased by almost$100 million . From the period ofJanuary 1, 2021 to the end of the first quarter, an additional growth of$62 million in customer deposits has occurred. It is these deposit increases that have made the loan increases possible and further strengthened the entire American community banking industry. However, there is yet more - so as to counter the economic negatives brought about by the pandemic, theFederal Reserve Board has deemed essentially zero interest rates to be necessary. This action has reduced the profitability of community bank loan portfolios but also created a strong mortgage refinancing boom. Many thoughtful Americans have seized on these low rates to reduce their very important cost of housing. AmeriServ continues to work extremely hard to meet demand for mortgages at these low rates. 2020 was a very busy year for mortgages and 2021 could rival it. We have also seen projections that 25-30% of the consumer stimulus money is being invested in financial markets. Since AmeriServ wealth management is active in these markets, it continues to increase its total asset values. In 2020, it grew by over$200 million and has added another$37 million already in 2021. This growth centers in retirement planning and in the use of any capital appreciation dollars to help fund those retirement plans.
In these volatile times, rest assured for prudency, we have continued to strengthen our allowance for loan losses and maintain close contact with any commercial borrowers who are challenged.
But while the pandemic has been with us, there has also been time for other
things. In
33--------------------------------------------------------------------------------
Table of Contents
County. It is yet another sign that AmeriServ can respond to a pandemic today but also can plan for tomorrow's growth as part of our Banking for Life pledge.
We are encouraged by the financial results in the first quarter however, we are not celebrating. The pandemic and its challenges remain. We thank our staff for their dedication and our customers for their confidence in us.
THREE MONTHS ENDED
…..PERFORMANCE OVERVIEW…..The following table summarizes some of the Company's key performance indicators (in thousands, except per share and ratios).
Three months ended Three months ended
March 31, 2021 March 31, 2020
Net income $ 2,081 $ 1,409
Diluted earnings per share 0.12 0.08
Return on average assets (annualized) 0.65 % 0.48 %
Return on average equity (annualized) 8.04 % 5.69 %
The Company reported net income of $2,081,000 , or $0.12 per diluted common
share. This earnings performance represented a $672,000 , or 47.7%, increase from
the first quarter of 2020 when net income totaled $1,409,000 , or $0.08 per
diluted common share. The benefits of our community bank customer-focused
business model and the diversification of our revenue streams contributed to
AmeriServ Financial's best earnings quarter since the third quarter of 2018. We
continued to achieve record levels of both loans and deposits as we served as an
important financial resource to small businesses and consumers in our
marketplace. Additionally, 32% of total revenue in the first quarter of 2021
came from non-interest income sources which included record contributions from
our strong wealth management business and active residential mortgage operation.
…..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, and 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 compares the Company's net interest income
performance for the first quarter of 2021 to the first quarter of 2020 (in
thousands, except percentages):
Three Three
months ended months ended
March 31, 2021 March 31, 2020 $ Change % Change
Interest income $ 11,769 $ 11,944 $ (175) (1.5) %
Interest expense 2,077 3,193 (1,116) (35.0)
Net interest income $ 9,692 $ 8,751 $ 941 10.8
Net interest margin 3.23 % 3.21 % 0.02 % N/M
--------------------------------------------------------------------------------
N/M - not meaningful
The Company's net interest income in the first quarter of 2021 increased by$941,000 , or 10.8%, from the prior year's first quarter while the net interest margin of 3.23% was two basis points higher than the net interest margin of 3.21% for the first quarter of 2020. The first quarter of 2021 results were indicative of the Company's continuing response to the challenges presented by the pandemic, including the current low interest rate environment as well as economic uncertainty and volatility. The economy has been demonstrating some improvement due to the positive impact of the COVID-19 vaccine distribution and the gradual easing of social restrictions that businesses and consumers have been operating under. The Company continues to experience robust balance sheet growth as, both, total loans and total deposits reached new record levels due to business development efforts and the government implementing new stimulus programs during the quarter. Net interest income improved as net interest margin pressure from the low interest rate environment was offset by fee income from existing Paycheck Protection Program (PPP) loan forgiveness and new fee 34
--------------------------------------------------------------------------------
Table of Contents
income from the most recent second round of PPP loans implemented earlier in the quarter. The low interest rate environment is also positively impacting deposit and borrowings interest expense cost. The average balance of total interest earning assets for the first quarter of 2021 continued to grow and is now$119 million , or 10.9%, higher than the first quarter of 2020. Likewise, on the liability side of the balance sheet, total average deposits increased by$121 million , or 12.3%, since last year primarily because of government stimulus and consumers/businesses changing their spending habits because of the pandemic. Overall, total interest expense decreased significantly more than the decrease in total interest income, resulting in net interest income increasing for the first quarter of 2021 compared to last year's first quarter. As stated previously, total loans reached a new record level and averaged$982 million in the first quarter of 2021 which is$105 million , or 11.9%, higher than the$877 million average for the first quarter of 2020. The slowly improving economy was evident in our lending activity as we continued to experience commercial loan growth during the first quarter of 2021 along with commercial loan pipelines returning to pre-COVID levels. Additionally, the strong level of residential mortgage loan production experienced in 2020 continued into the first quarter of 2021. Residential mortgage loan production totaled$29.7 million in the first quarter of 2021 and was 64.0% higher than the production level of$18.1 million achieved in last year's first quarter. Along with continued robust residential mortgage loan production and additional normal commercial loan growth, loan volumes were positively impacted by the second round of the 100% guaranteed PPP loans, which was announced in lateDecember 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and implemented during the middle ofJanuary 2021 . Note that there were no PPP loans on the balance sheet in the first quarter of 2020 as the initial round of the program was not implemented until the second quarter of 2020. The Company, again, elected to participate in this renewed program to assist small businesses in our community in this difficult economy. During the first quarter of 2021, the Company processed 219 PPP loans totaling$30.8 million . Also, the Company recorded a total of$897,000 of processing fee income and interest income from PPP lending activity in the first quarter of 2021. Finally, on an end of period basis, excluding total PPP loans, the total loan portfolio grew by approximately$41.9 million , or 4.8%, since the end of the first quarter of 2020. Total investment securities averaged$190 million for the first quarter of 2021 which is$1.6 million , or 0.8%, higher than the$189 million average for the first quarter of 2020. The Company continues to be selective when purchasing securities due to the low interest rate environment. However, the yield curve began to steepen during the latter part of the first quarter as the long end of theU.S. Treasury yield curve increased while the short end of the curve remained relatively stable. This resulted in improved yields for federal agency mortgage-backed securities and federal agency bonds, and management decided to add more of these investments to our portfolio. The Company also continues to purchase 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. Later in the first quarter, the President signed into law another round of economic stimulus as part of the American Rescue Plan Act of 2021. The stimulus checks delivered to most Americans and the financial assistance provided to municipalities and school districts as part of this program contributed to total deposits increasing significantly and reaching a record level. The challenges this excess liquidity presents are twofold. First, there is uncertainty regarding the duration that these excess funds will remain on the balance sheet which will be determined by customer behavior as the economic conditions change. The second challenge is to profitably deploy this excess liquidity given the current low yields on short-term investment products. As a result, short-term investment balances averaged$31 million in the first quarter of 2021 which remains high by historical standards. Therefore, future loan growth and continued prudent investment in securities is critical to achieve the best return on the excess funds. The low interest rate environment resulted in interest income on total investments decreasing between the first quarter of 2021 and the first quarter of 2020. Overall, total interest income on both loans and investments decreased by$175,000 , or 1.5%, between years despite increased volume. Total interest expense for the first quarter of 2021 decreased by$1.1 million , or 35.0%, when compared to the first quarter of 2020, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense was lower by$1.1 million , or 43.0%, despite the previously mentioned record increase in deposits that occurred during the first quarter of 2021 reflecting new deposit inflows as well as the loyalty of the bank's core deposit base. Management continues to effectively execute several deposit product pricing reductions in order to address the net interest margin 35
--------------------------------------------------------------------------------
Table of Contents
challenges presented by the low interest rate environment. As a result, the Company experienced some deposit cost relief. Specifically, our total deposit cost averaged 0.52% in the first quarter of 2021 compared to 1.01% in the first quarter of 2020, representing a meaningful decrease of 49 basis points. Overall, the Company's loan to deposit ratio averaged 89.0% in the first quarter of 2021, 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 to recover from the impact that the COVID-19 pandemic is having on our local economy. The Company experienced a$60,000 , or 8.2%, decrease in the interest cost of borrowings in the first quarter of 2021 when compared to the first quarter of 2020. 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 2021 first quarter average term advance borrowings balance increased by approximately$3.7 million , or 6.6%, when compared to the first quarter of 2020. As a result of the combined growth of average FHLB term advances and total average deposits there was less reliance on overnight borrowed funds, which decreased between years by$1.7 million , or 59.4%, for the quarter. The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods endedMarch 31, 2021 and 2020 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) the Company's 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) the Company's 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 three months endedMarch 31, 2021 and 2020 was$5,000 and$7,000 ,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. 36
--------------------------------------------------------------------------------
Table of Contents
Three months ended
2021 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Interest earning assets:
Loans and loans held for sale,
net of unearned income $ 981,877 $ 10,332 4.22 % $ 877,097 $ 10,339 4.68 %
Short-term investments and bank
deposits 30,852 8 0.10 18,527 76 1.63
Investment securities - AFS 145,917 1,088 2.98 147,656 1,183 3.27
Investment securities - HTM 44,529 346 3.11 41,224 353 3.43
Total investment securities 190,446 1,434 3.01 188,880 1,536 3.31
Total interest earning
assets/interest income 1,203,175 11,774 3.93 1,084,504 11,951 4.40
Non-interest earning assets:
Cash and due from banks 18,071 19,087
Premises and equipment 17,983 18,593
Other assets 70,260 65,146
Allowance for loan losses (11,582) (9,317)
TOTAL ASSETS $ 1,297,907 $ 1,178,013
Interest bearing liabilities:
Interest bearing deposits:
Interest bearing demand $ 195,972 $ 60 0.12 % $167,066$ 242 0.60 % Savings 115,632 38 0.13 97,166 41 0.17 Money markets 246,895 172 0.28 229,838 464 0.81 Time deposits 349,605 1,132 1.31 341,948 1,711 2.01 Total interest bearing deposits 908,104 1,402 0.63 836,018 2,458 1.18 Short-term borrowings 1,180 1 0.39 2,908 12 1.67 Advances from Federal Home Loan Bank 58,949 237 1.63 55,292 284 2.07 Guaranteed junior subordinated deferrable interest debentures 13,085 280 8.57 13,085 280 8.57 Subordinated debt 7,650 130 6.80 7,650 130 6.80 Lease liabilities 3,841 27 2.83 3,993 29 2.86 Total interest bearing liabilities/interest expense 992,809 2,077 0.85 918,946 3,193 1.40 Non-interest bearing liabilities: Demand deposits 195,305 146,840 Other liabilities 4,862 12,615 Shareholders' equity 104,931 99,612 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY$ 1,297,907 $ 1,178,013 Interest rate spread 3.08 3.00 Net interest income/ Net interest margin (non-GAAP) 9,697 3.23 % 8,758 3.21 % Tax-equivalent adjustment (5) (7) Net Interest Income (GAAP)$ 9,692 $ 8,751 …..PROVISION FOR LOAN LOSSES…..The Company recorded a$400,000 provision expense for loan losses in the first quarter of 2021 as compared to a$175,000 provision expense in the first quarter of 2020. Although higher than the first quarter of 2020 by$225,000 , an improved credit quality outlook for the overall portfolio resulted in a lower loan loss provision in the first quarter of 2021 after three consecutive quarters of a provision increase. The Company, however, continues to believe that a strong allowance for loan losses is needed given the overall economic climate and the uncertainty that remains because of the impact that the COVID-19 pandemic is having on certain borrowers. The first 37
--------------------------------------------------------------------------------
Table of Contents
quarter 2021 provision expense primarily reflects an increased allocation on two commercial loan relationships transferred into non-accrual status during the quarter and the rating downgrade of a loan in the health care industry. As a result, non-performing assets, while still well controlled, totaled$4.2 million , or 0.43% of total loans, atMarch 31, 2021 compared to$3.3 million , or 0.34% of total loans, atDecember 31, 2020 . The Company experienced low net loan charge-offs of$114,000 , or 0.05% of total loans, in the first quarter of 2021 which was comparable to net loan charge-offs of$120,000 , or 0.06% of total loans, in the first quarter of 2020. In summary, the allowance for loan losses provided 274% coverage of non-performing assets, and 1.18% of total loans, atMarch 31, 2021 , compared to 341% coverage of non-performing assets, and 1.16% of total loans, atDecember 31, 2020 . The reserve coverage of total loans, excluding PPP loans, was 1.27% (non-GAAP) atMarch 31, 2021 . See the reconciliation of the non-GAAP measure of the reserve coverage of total loans, excluding PPP loans, within the Allowance for Loan Losses Section of the MD&A. …..NON-INTEREST INCOME….. Non-interest income for the first quarter of 2021 totaled$4.6 million and increased by$782,000 , or 20.4%, from the first quarter of 2020 performance. Factors contributing to the higher level of non-interest income for the quarter included:
a
division has been resilient since the pandemic began and is performing well
managing client accounts and adding new business despite the major market value
? decline that occurred in late
assets is now in excess of
from the pre-pandemic valuation, exceeding the
27%;
a
? secondary market due to a higher level of residential mortgage loan production
along with an improved gain on sale in the first quarter of 2021;
a
?
earnings and a higher rate of return on certain policies; and
? an
overdraft fees due to customers maintaining higher deposit balances.
…..NON-INTEREST EXPENSE….. Non-interest expense for the first quarter of 2021 totaled$11.3 million and increased by$672,000 , or 6.3%, from the prior year's first quarter. Factors contributing to the higher level of non-interest expense for the quarter included:
a
factors, including incentive compensation and health care costs. Incentive
compensation increased by
result of the strong residential mortgage loan production and incentives earned
? from the good performance in the wealth management division. Also contributing
to the higher salaries & employee benefits expense was increased health care
costs by
employee benefits were lower salaries expense by
full time equivalent employees being lower by five;
a
? outside professional services related costs, increased fees due to the
significantly higher level of residential mortgage loan production and PPP
activity, and higher legal fees;
a
? asset assessment base along with the benefit of the Small Bank Assessment
Credit being fully utilized in the first quarter of 2020; and
a
to the unfunded commitment reserve along with
? related to the upcoming branch acquisition from
offsetting these increased items and favorably impacting other expense was a
lower level of meals & travel costs that is related to travel restrictions from
the pandemic.
38
--------------------------------------------------------------------------------
Table of Contents
…..INCOME TAX EXPENSE…..The Company recorded an income tax expense of$520,000 , or an effective tax rate of 20.0%, in the first quarter of 2021. This compares to an income tax expense of$366,000 , or an effective tax rate of 20.6%, for the first quarter of 2020. …..SEGMENT RESULTS.….. The community banking segment reported a net income contribution of$3,320,000 in the first quarter of 2021 which was higher by$796,000 from the first quarter of last year. The improvement between years is due to a higher level of total revenue which more than offset an increased level of non-interest expense as well as a higher provision exense for loan losses. Net interest income improved between years as the reduction to total interest expense more than offset the reduction to total interest income. The additional processing fee income and interest income that the Company recorded from PPP lending activity, which totaled$897,000 for the first quarter, nearly offset the unfavorable impact that the lower interest rate environment had on the Company's earning asset margin performance. As a result, total loan interest income remained relatively consistent between years. Also favorably impacting net interest 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 a record level which is described previously in the MD&A. Also favorably impacting net income from this segment was a greater level of non-interest income. The exceptionally strong level of residential mortgage loan activity in 2021 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. This segment also benefitted from the greater level of Bank Owned Life Insurance (BOLI) revenue. These favorable items were partially offset by the Company recording a$400,000 provision expense for loan losses for the first quarter of 2021 compared to a$175,000 provision expense in the first quarter of 2020. This was discussed previously in the Provision for Loan Losses section within this document. Finally, and also unfavorably impacting net income were higher expenses for total employee costs, professional fees,FDIC insurance expense and additional costs associated with our upcoming branch acquisition. The wealth management segment's net income contribution was$662,000 in the first quarter of 2021 which was$175,000 higher than the first quarter of 2020. The increase is due to wealth management fees increasing as the entire wealth management division has been resilient since the pandemic began and is performing well managing client accounts and adding new business despite the major market value decline that occurred in lateMarch 2020 . The wealth management division 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 and incentive compensation. Overall, the fair market value of trust assets under administration totaled$2.518 billion atMarch 31, 2021 , an increase of$534 million , or 26.9%, from theMarch 31, 2020 total of$1.984 billion . The investment/parent segment reported a net loss of$1,901,000 in the first quarter of 2021 which is a greater loss by$299,000 than the first quarter of 2020. 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 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. …..BALANCE SHEET…..The Company's total consolidated assets were$1.3 billion atMarch 31, 2021 , which increased by$31.7 million , or 2.5%, from theDecember 31, 2020 asset level. This change was related, primarily, to increased levels of cash and cash equivalents, investment securities, and loans. Specifically, cash and cash equivalents increased$5.7 million , or 18.2%, as the Company experienced a significant influx of deposits resulting from the government stimulus program and financial assistance provided to municipalities and school districts. Total investment securities increased$15.8 million , or 8.4%, as the steepening of theU.S. Treasury yield curve in the latter part of the first quarter improved the yield for federal agency mortgage-backed securities and federal agency bonds, making these types of securities more attractive for purchase. The Company also continued to purchase corporate securities, particularly subordinated debt issued by other financial institutions, along with taxable municipal securities. In addition, loans, net of unearned fees, and loans held for sale increased by$8.2 million , or 0.8%, as a result of the Company's participation in the PPP and higher levels of residential mortgage loan production. Total deposits increased by$62.2 million , or 5.9%, in the first three months of 2021. This robust growth is the result of government stimulus and consumers/businesses changing their spending habits because of the COVID-19 pandemic. Looking into the near future, we expect that our deposit balances will be positively impacted in the second quarter of 39
--------------------------------------------------------------------------------
Table of Contents
2021 by the acquisition of two branch offices fromRiverview Bank , which we anticipate should provide approximately$45 million of additional deposits. This branch acquisition is described in our Current Report on Form 8-K filed onJanuary 15, 2021 . As ofMarch 31, 2021 , the 25 largest depositors represented 22.0% of total deposits, which is a slight increase fromDecember 31, 2020 when it was 21.1%. Total borrowings have decreased by$34.6 million , or 30.3%, since year-end 2020. The decrease was driven, primarily, by a lower level of both short-term borrowings and FHLB term advances. Specifically, atMarch 31, 2021 , the Company had no short-term borrowings outstanding as compared to$24.7 million atDecember 31, 2020 . In addition, FHLB term advances decreased by$9.8 million , or 15.1%, and totaled$55.1 million atMarch 31, 2021 . The Company has utilized the FHLB term advances to help manage interest rate risk. The Company's total shareholders' equity increased by$932,000 over the first three months of 2021 due to the retention of earnings more than offsetting our common stock dividend payments to shareholders. Additionally, the value of the investment securities portfolio decreased during the first quarter which had an unfavorable impact on accumulated other comprehensive loss. The Company continues to be considered well capitalized for regulatory purposes with a total capital ratio of 13.03%, and a common equity tier 1 capital ratio of 10.15% atMarch 31, 2021 . See the discussion of the Basel III capital requirements under the Capital Resources section below. As ofMarch 31, 2021 , the Company's book value per common share was$6.17 and its tangible book value per common share was$5.47 (non-GAAP). When compared toDecember 31, 2020 , book value per common share and tangible book value per common share each improved by$0.05 per common share. The tangible common equity to tangible assets ratio was 7.19% (non-GAAP) atMarch 31, 2021 and declined by 10 basis points when compared toDecember 31, 2020 . The tangible common equity ratio and tangible book value per share are considered to be non-GAAP measures and are calculated by dividing tangible equity by tangible assets or shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures, and, because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. The following table sets forth the calculation of the Company's tangible common equity ratio and tangible book value per share atMarch 31, 2021 andDecember 31, 2020 (in thousands, except share and ratio data): March 31, December 31, 2021 2020 Total shareholders' equity$ 105,331 $ 104,399 Less: Goodwill 11,944 11,944 Tangible equity 93,387 92,455 Total assets 1,311,412 1,279,713 Less: Goodwill 11,944 11,944 Tangible assets 1,299,468 1,267,769 Tangible common equity ratio (non-GAAP) 7.19 % 7.29 % Total shares outstanding 17,069,000 17,060,144
Tangible book value per share (non-GAAP)
40
--------------------------------------------------------------------------------
Table of Contents
…..LOAN QUALITY…..The following table sets forth information concerning the
Company's loan delinquency, non-performing assets, and classified assets (in
thousands, except percentages):
March 31, December 31, March 31,
2021 2020 2020
Total accruing loan delinquency (past due 30 to
89 days) $ 1,443 $ 5,504 $ 8,525
Total non-accrual loans 4,172 2,500 1,437
Total non-performing assets including TDRs* 4,245 3,331 2,244
Accruing loan delinquency, as a percentage of total loans, net of unearned income
0.15 % 0.56 % 0.97 % Non-accrual loans, as a percentage of total loans, net of unearned income
0.42 0.26 0.16
Non-performing assets, as a percentage of total
loans, net of unearned income, and other real
estate owned 0.43 0.34 0.26
Non-performing assets as a percentage of total
assets 0.32 0.26 0.19
As a percent of average loans, net of unearned
income:
Annualized net charge-offs 0.05 0.03 0.06
Annualized provision for loan losses 0.17 0.26 0.08
Total classified loans (loans rated substandard or doubtful)**
$ 12,320 $
11,829
--------------------------------------------------------------------------------
Non-performing assets are comprised of (i) loans that are on a non-accrual * basis, (ii) loans that are contractually past due 90 days or more as to
interest and principal payments, (iii) performing loans classified as a
troubled debt restructuring and (iv) other real estate owned.
** Total classified loans include non-performing residential mortgage and
consumer loans.
Overall, the Company continued to maintain good asset quality in the first three months of 2021 as evidenced by low levels of non-accrual loans, non-performing assets, and loan delinquency levels that continue to be below 1% of total loans. The increase in non-accrual loans is the result of two commercial loan relationships, one of which was previously designated as a troubled debt restructure (TDR), being transferred into non-accrual status during the first quarter of 2021. Additionally, the Company experienced a substantial decrease in accruing loan delinquency primarily attributable to the curing of commercial account delinquency during the quarter. The Company remains committed to prudently working with and supporting our borrowers that have been hardest hit by the pandemic by granting them loan payment modifications. Management continues to carefully monitor asset quality with a particular focus on customers that have requested payment deferrals.The Asset Quality Task Force meets at least monthly to review these particular relationships, receiving input from the business lenders regarding their ongoing discussions with the borrowers. Deferral extension requests are considered based upon the customer's needs and their impacted industry, borrower and guarantor capacity to service debt and issued regulatory guidance. See the disclosures regarding COVID-19 related modifications within the Non-Performing Assets Including Troubled Debt Restructurings (TDR) 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 ofMarch 31, 2021 , the 25 largest credits represented 21.9% of total loans outstanding, which represents a decrease from the first quarter of 2020 when it was 24.2%. 41
--------------------------------------------------------------------------------
Table of Contents
…..ALLOWANCE FOR LOAN LOSSES…..The following table sets forth the allowance for
loan losses and certain ratios for the periods ended (in thousands,
except percentages):
March 31, December 31, March 31,
2021 2020 2020
Allowance for loan losses $ 11,631 $ 11,345 $ 9,334
Allowance for loan losses as
a percentage of each of the following:
total loans, net of unearned income 1.18 % 1.16 % 1.06 %
total accruing delinquent loans
(past due 30 to 89 days) 806.03 206.12 109.49
total non-accrual loans 278.79 453.80 649.55
total non-performing assets 273.99 340.59 415.94
The Company recorded a $400,000 provision expense for loan losses in the first
three months of 2021 compared to a $175,000 provision expense in the first
three months of 2020. As mentioned previously, the Company continues to believe
that a strong allowance for loan losses is needed given the overall economic
climate and the uncertainty that remains because of the impact that the COVID-19
pandemic is having on certain borrowers. As a result of the provision expense
sharply exceeding net loan charge-offs over the last 12 months, the balance in
the allowance for loan losses increased by $2.3 million , or 24.6%, to $11.6
million at March 31, 2021 . The Company's asset quality continues to remain
strong as evidenced by low levels of net loan charge-offs and non-performing
assets. Note that the reserve coverage to total loans, excluding PPP loans, is
1.27% (non-GAAP) at March 31, 2021 .
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 the 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), at March 31,
2021 (in thousands, except percentages).
MARCH 31,
2021
Allowance for loan losses $ 11,631
Total loans, net of unearned income(1) 985,249
Reserve coverage 1.18 %
Reserve coverage to total loans, excluding PPP loans: Allowance for loan losses
$ 11,631 Total loans, net of unearned income(1) 985,249 PPP loans (67,253) 917,996 Non-GAAP reserve coverage 1.27 % …..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 reached a record level, averaging$1.103 billion for the first quarter of 2021. 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 presents the challenge of profitably deploying this excess liquidity given the current low yields on short term investment products. An additional challenge is the uncertainty regarding the duration that these excess funds will remain on the balance sheet which will be determined by customer behavior as the economic conditions change. Total average short- 42
--------------------------------------------------------------------------------
Table of Contents
term investments increased by$12.3 million in the first quarter of 2021 compared to the first quarter of 2020. Overall, the significant inflow of deposits are being held in these low yielding products while their durability is assessed. We strive to operate our loan to deposit ratio in a range of 80% to 100%. The Company's loan to deposit ratio averaged 89.0% in the first quarter of 2021. The Company has ample capacity to continue to grow its loan portfolio and is well positioned to continue assisting our customers and the community to recover from the impact that the COVID-19 pandemic is having on our local economy. We are also well positioned to service our existing loan pipeline and grow our loan to deposit ratio while remaining within our guideline parameters. Liquidity can also be analyzed by utilizing the Consolidated Statements of Cash Flows. Cash and cash equivalents increased by$5.7 million fromDecember 31, 2020 , to$37.2 million atMarch 31, 2021 , due to$27.2 million of cash provided by financing activities and$6.8 million of cash provided by operating activities which more than offset$28.2 million of cash used in investing activities. Within financing activities, deposits increased by$62.2 million while total short-term and FHLB borrowings decreased by$34.5 million . Within investing activities, cash advanced for new loans originated totaled$82.7 million and was$12.8 million higher than the$69.9 million of cash received from loan principal payments. Within operating activities,$9.2 million of mortgage loans held for sale were originated while$14.6 million of mortgage loans were sold into the secondary market. The holding company had$6.5 million of cash, short-term investments, and investment securities atMarch 31, 2021 . Additionally, dividend payments from our subsidiaries also provide ongoing cash to the holding company. AtMarch 31, 2021 , our subsidiary Bank had$8.3 million of cash available for immediate dividends to the holding company under applicable regulatory formulas. Management follows a policy that limits dividend payments from theTrust Company to 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$37.2 million and$31.5 million atMarch 31, 2021 andDecember 31, 2020 , 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. AtMarch 31, 2021 , the Company had$377 million of overnight borrowing availability at the FHLB,$33 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 Bank meaningfully exceeds all regulatory capital ratios for each of the periods presented and is considered well capitalized. The Company's common equity tier 1 capital ratio was 10.15%, the tier 1 capital ratio was 11.28%, and the total capital ratio was 13.03% atMarch 31, 2021 . The Company's tier 1 leverage ratio was 9.30% atMarch 31, 2021 . We anticipate that we will maintain our strong capital ratios throughout the remainder of 2021. 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 atMarch 31, 2021 . 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. AtMarch 31, 2021 , the Company had approximately 17.1 million common shares outstanding.
The Basel III capital standards establish the minimum capital levels in addition to the well capitalized requirements under the federal banking regulations prompt corrective action. The capital rules also impose a 2.5% capital conservation buffer ("CCB") on top of the three minimum risk-weighted asset ratios. Banking institutions that fail to meet the
43--------------------------------------------------------------------------------
Table of Contents
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
…..INTEREST RATE SENSITIVITY…..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 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 6.0 % 40.3 %
100 bp increase 3.2 23.6
100 bp decrease (3.0) (3.2)
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.
…..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 had various outstanding
commitments to extend credit approximating $235.0 million and standby letters of
credit of $13.2 million as of March 31, 2021 . 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.
…..REGULATORY UPDATE…..The Coronavirus Aid, Relief, and Economic Security Act
(CARES Act) was enacted into law on March 27, 2020 . Federal, state, and local
governments have adopted various statutes, rules, regulations, orders, and
guidelines in order to address the COVID-19 pandemic and the adverse economic
effects of this pandemic on individuals, families, businesses, and governments.
Financial institutions, including the Company, are
44--------------------------------------------------------------------------------
Table of Contents
affected by many of these measures, including measures that are broadly applicable to businesses operating in the communities where the Company does business. These measures include "stay-at-home orders" that allow only essential businesses to operate. Financial services firms are generally regarded as "essential businesses" under these orders, but financial services firms, like other essential businesses, are required to operate in a manner that seeks to protect the health and safety of their customers and employees. In addition, the federal banking agencies along with state bank regulators issued an interagency statement onMarch 22, 2020 , addressing loan modifications that are made by financial institutions for borrowers affected by the COVID-19 crisis. The agencies stated that short-term loan modifications made on a good faith basis in response to COVID-19 for borrowers who were current prior to any relief do not need to be categorized as TDRs and that financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. The CARES Act contains a number of provisions that affect banking organizations. The CARES Act provides funding for various programs under which the federal government will lend to, guarantee loans to, or make investments in, businesses. Banking organizations are expected to play a role in some of these programs, and when they do so, they will be subject to certain requirements. One of these programs is the Paycheck Protection Program (PPP), a program administered by theSmall Business Administration (the SBA) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 crisis. The loans can be made by SBA-certified lenders and are 100% guaranteed by the SBA. The loans are eligible to be forgiven if certain conditions are satisfied, in which event the SBA will make payment to the lender for the forgiven amounts. The Bank has participated in the PPP as a lender. The CARES Act also authorizes temporary changes to certain provisions applicable to banking organizations. Among other changes, Section 4013 of the CARES Act gives financial institutions the right to elect to suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs fromMarch 1, 2020 , through the earlier ofDecember 31, 2020 , or 60 days after the COVID-19 national emergency ends. OnApril 7, 2020 , the federal banking agencies, in consultation with state bank regulators, issued an interagency statement clarifying the interaction between (i) their earlier statement discussing whether loan modifications relating to COVID-19 need to be treated as TDRs and (ii) the CARES Act provision on this subject. In this interagency statement, the agencies also said that when exercising supervisory and enforcement responsibility with respect to consumer protection requirements, they will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency and that they do not expect to take a consumer compliance public enforcement action against an institution, provided that the circumstances were related to this emergency and the institution made good faith efforts to support borrowers and comply with the consumer protection requirements and addressed any needed corrective action. The suspension of TDR identification and accounting triggered by the effects of the COVID-19 pandemic was extended by the Consolidated Appropriations Act, 2021, signed into law onDecember 27, 2020 . The period established by Section 4013 of the CARES Act was extended to the earlier ofJanuary 1, 2022 or 60 days after the date on which the national COVID-19 emergency terminates. TheFederal Reserve has established several lending facilities that are intended to support the flow of credit to households, businesses, and governments. One of these facilities is the Paycheck Protection Program Liquidity Facility (PPPLF) which was set up to allow the Federal Reserve Banks to extend credit to financial institutions that originate PPP loans, taking the loans as collateral at face value. OnApril 9, 2020 , the federal banking agencies issued an interim final rule to allow banking organizations to neutralize the effect of PPP loans financed under the PPPLF on the leverage capital ratios of these organizations. Also, in accordance with the CARES Act, a PPP loan will be assigned a risk weight of zero percent under the federal banking agencies' risk-based capital rules. TheFederal Reserve had also announced the creation of main street lending facilities to purchase loan participations, under specified conditions, from banks lending to small and mediumU.S. businesses. The Company has not participated in any of these facilities to date. Additionally, onMarch 15, 2020 , theFederal Reserve reduced the target range for the federal funds rate to 0% to 0.25% and announced that it would increase its holdings ofU.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. TheFederal Reserve has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as ofMarch 26, 2020 . 45
--------------------------------------------------------------------------------
Table of Contents
…..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 18 of the Notes to Unaudited Consolidated Financial Statements.
ACCOUNT - Allowance for Loan Losses
BALANCE SHEET REFERENCE - Allowance for loan losses
INCOME STATEMENT REFERENCE - Provision for loan losses
DESCRIPTION
The allowance for loan losses is calculated with the objective of maintaining reserve levels believed by management to be sufficient to absorb estimated probable credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. However, this quarterly evaluation is inherently subjective as it requires material estimates, including, among others, likelihood of customer default, loss given default, exposure at default, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience. This process also considers economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios. All of these factors may be susceptible to significant change. Also, the allocation of the allowance for credit losses to specific loan pools is based on historical loss trends and management's judgment concerning those trends. Commercial and commercial real estate loans are the largest category of credits and the most sensitive to changes in assumptions and judgments underlying the determination of the allowance for loan losses. Approximately$9.0 million , or 78%, of the total allowance for loan losses atMarch 31, 2021 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
46--------------------------------------------------------------------------------
Table of Contents
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. 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 ofMarch 31, 2021 , 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. 47
--------------------------------------------------------------------------------
Table of Contents
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. AtMarch 31, 2021 , 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 STATEMENT…..
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 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
48
--------------------------------------------------------------------------------
Table of Contents
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-Q 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-Q, 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-Q. 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, including the distribution and effectiveness of COVID-19 vaccines; 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.
© Edgar Online, source
