AMERISERV FINANCIAL, INC. …..2020 SECOND QUARTER SUMMARY OVERVIEW…..AmeriServ reported second quarter 2020 net income of$1,419,000 , or$0.08 per share. This represents a 20.8%, or$373,000 , decrease from the second quarter of 2019 when net income totaled$1,792,000 , or$0.10 per share. AmeriServ's second quarter of 2020 was stable with the first quarter of 2020 when we reported net income of$1,409,000 , or also$0.08 per diluted share. The second quarter of 2020 was perhaps one of the most unique in the history of this community financial institution. The economy was in a lockdown environment in April and May due to the coronavirus pandemic event. Then, in mid-June, a partial reopening of the economy began in a controlled fashion. We believe that AmeriServ has responded quite positively to this recent series of unusual events. AmeriServ has participated fully in the Paycheck Protection Program (PPP) which theU.S. Treasury has developed. The bank has closed approximately$67 million of PPP loans to small and mid-sized businesses, which we believe supports over 11,000 jobs throughout the region. This effort by the AmeriServ team required long hours and close coordination with the borrowers to obtain the official guaranty acceptance of theSmall Business Administration . While guaranteed by the federal government, the funds have been provided by AmeriServ's depositors resulting in a more than$40 million increase in AmeriServ's loan portfolio sinceDecember 31, 2019 . We are very proud of the work of the AmeriServ team during this pandemic and have numerous notes of appreciation from these often struggling borrowers. The Administration,Congress , andFederal Reserve System have introduced a number of economic stimulus programs. The result has been an increase in AmeriServ's deposit totals in excess of$70 million sinceDecember 31, 2019 . These additional deposits are available to support economic recovery wherever AmeriServ is active and also serves to strengthen the liquidity base of AmeriServ. It is also important to remember that AmeriServ'sTrust Company subsidiary serves as the Trustee for the Employee Real Estate Construction Trust Funds. Better known as the ERECT Funds, the funds have been quite active inWestern Pennsylvania andEastern Ohio . In just the first six months of 2020 they have activated real estate development projects valued at over$76 million . These projects are providing craft union jobs which generate nearly$27 million in estimated wages and benefits. AmeriServ has continued to provide premier banking and wealth management products and services wherever the AmeriServ sign hangs. During the lockdown period, customers were able to be served through drive-up facilities and automated teller machines. A surprising number of customers of all ages elected to use AmeriServ's online banking services. Finally, in June, after providing a suitable and safe personal health environment for both customers and employees, bank lobbies began to reopen. There continues to be restrictions but it does seem that almost everyone is recognizing the need for unusual care while the pandemic event continues. The AmeriServ residential mortgage function has been extremely busy during the second quarter. TheFederal Reserve action to reduce interest rates has resulted in this busy time. Customer and prospective customer interest is very strong throughout AmeriServ's retail banking offices but also in our mortgage underwriting system which services thePennsylvania State Education Association (PSEA) members throughout the state ofPennsylvania . The result is that in the first half of 2020 the AmeriServ mortgage team has closed over$55 million of new mortgages, which is an increase of 155% over the first half of 2019. This is an important positive, for a much needed economic recovery to further strengthen the communities we serve. AmeriServ's wealth management subsidiary continued to demonstrate strong performance as total assets under management and administration continued to grow during the second quarter of 2020. These have been volatile times in the equity and fixed income markets but by combining the latest in technology with time tested investment market knowledge this subsidiary grows stronger each year. Following two consecutive record years, our wealth management subsidiary has now finished the quarter with the second strongest first six months of after tax net income on record. 36
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All of this is not to say that there are not more than a few challenges to address. We do understand the strategy of theFederal Reserve in reducing interest rates. Their goal is to keep markets functioning and to lessen the debt service requirements of all levels of government. However, the strategy is not without victims. The victims include the thrifty consumers who are denied an appropriate level of interest on their savings, on pension funds who are challenged in meeting their obligations to retirees and, of course, community banks by shrinking net interest income thus limiting growth in internally generated capital. The real negative in this strategy is the continuing decline in the number of healthy community banks in America, for it is the community banks that keepMain Street healthy while the mega banks supportWall Street . AmeriServ has chosen to maintain a relatively conservative balance sheet. AmeriServ's capital ratios are well aboveFederal Reserve requirements. As mentioned previously, the governmental economic stimulus programs have resulted in increased liquidity. This increase enables AmeriServ to respond to borrowers needs when the opportunity arises. It has been customary for AmeriServ's business lenders to maintain rigorous underwriting standards. The emphasis on quality lending opportunities has enabled AmeriServ to experience a lower level of loan charge offs than the banking industry averages reveal. All of this says very simply that in volatile times like these, it is best to adhere to the time tested rules for community financial institutions. We do have concern for our stakeholders, including our core customer group, many of whom are suffering from forces far beyond their ability to control. We do believe that every strong local community financial institution is a vital part of this dynamic and widespread total economy. The Board, management team and every AmeriServ banker understands today's challenges. THREE MONTHS ENDEDJUNE 30, 2020 VS. THREE MONTHS ENDEDJUNE 30, 2019 …..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 June 30, 2020 June 30, 2019 Net income$ 1,419 $ 1,792 Diluted earnings per share 0.08 0.10 Return on average assets (annualized) 0.46%
0.61%
Return on average equity (annualized) 5.63%
7.24%
The Company reported net income of$1,419,000 , or$0.08 per diluted common share. This earnings performance represents a$373,000 , or 20.8%, decrease from the second quarter of 2019 when net income totaled$1,792,000 , or$0.10 per diluted common share.AmeriServ Financial, Inc. again reported sound earnings in the second quarter of 2020 while navigating through the challenges presented by the COVID-19 pandemic and the resultant economic shutdown. The decline in earnings between years is due to our decision to further strengthen our allowance for loan losses given the economic uncertainty resulting from the pandemic. …..NET INTEREST INCOME AND MARGIN…..The Company's net interest income represents the amount by which interest income on average earning assets exceeds interest paid on average interest bearing liabilities. Net interest income is a primary source of the Company's earnings, and it is effected by interest rate fluctuations as well as changes in the amount and mix of average earning assets and average interest bearing liabilities. The following table compares the Company's net interest income performance for the second quarter of 2020 to the second quarter of 2019 (in thousands, except percentages): Three Three months ended months ended June 30, 2020 June 30, 2019 $ Change % Change Interest income$ 12,061 $ 12,765 $ (704) (5.5)% Interest expense 2,588 3,704 (1,116) (30.1) Net interest income$ 9,473 $ 9,061 $ 412 4.5 Net interest margin 3.30% 3.30% 0.00% N/M N/M - not meaningful 37
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The Company's net interest income in the second quarter of 2020 increased by$412,000 , or 4.5%, from the prior year's second quarter. The Company's net interest margin of 3.30% for the second quarter of 2020 remained unchanged from the second quarter of 2019. The second quarter of 2020 represented the first full quarter's impact of the COVID-19 pandemic in the financial services industry. An economic shut down experienced for the majority of the second quarter along with a record low interest rate environment continued to pressure earning asset margins. The unfavorable impact to the net interest margin was somewhat offset by a sharply higher level of loan fees and interest income due to the Company's participation in the Payroll Protection Program (PPP), which was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The PPP initiative along with other government sponsored programs established to stimulate the economy resulted in the Company experiencing robust growth on both sides of the balance sheet as total loans and total deposits are at record levels. Note that without the impact of the additional income from the PPP lending activity and the corresponding increase to total deposits from the government related assistance programs, the net interest margin would have been approximately 3.10% (non-GAAP) in the second quarter of 2020, which clearly reflects the net interest margin challenges that this record low interest rate environment has created. The following table sets forth the calculation of this non-GAAP financial measure (in thousands, except percentages). Three months ended June 30, 2020 Tax-equivalent net interest income(1)$ 37,606 Average earning assets 1,140,275 Net interest margin 3.30%
Net interest margin, excluding PPP lending activity and corresponding increase in total deposits from government related assistance programs: Tax-equivalent net interest income(1)
$ 37,606 PPP loan income(1) (4,123) Borrowings expense to fund PPP loans(1) 353 Non-GAAP tax-equivalent net interest income 33,836 Average earning assets 1,140,275 Average PPP loans (48,610) Non-GAAP average earning assets 1,091,665 Non-GAAP net interest margin 3.10% (1) Value is annualized Total interest earning assets increased in the second quarter of 2020 due to growth in total loans and short-term investments which more than offset total investment securities decreasing. Both non-interest and interest bearing deposits increased resulting in less reliance on higher cost borrowed funds. Effective management of our funding costs along with the downward repricing of certain interest bearing liabilities tied to market indexes resulted in total interest expense decreasing between years. The decrease to total interest expense more than offset the decrease in total interest income resulting in the increase to net interest income. Total loans reached a record level and averaged$913 million in the second quarter of 2020 which was$29.2 million , or 3.3%, higher than the$883 million average for the second quarter of 2019. The growth in total loans was due primarily to the Company's participation in the Paycheck Protection Program as normal commercial lending activity decreased significantly due to the economic shutdown. Overall, as ofJune 30, 2020 , the Company has processed 437 PPP loans totaling$67 million to assist small businesses and our markets in this difficult economy. The Company has recorded a total of$1.0 million of processing fee income and interest income from PPP lending activity in the second quarter. Residential mortgage loan activity is exceptionally strong given the lower interest rate environment. Total residential mortgage loan production was more than double the production level achieved in the second quarter of 2019, increasing by 38
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151%. In addition, the Company is also encouraged that commercial loan pipelines have recently rebounded and are currently approaching levels that are similar to where they were prior to the pandemic. Even though total average loans increased compared to the same period last year and loan interest income was enhanced by the PPP revenue, loan interest and fee income decreased by$546,000 , or 5.0%, between the second quarter of 2020 and last year's second quarter. The lower loan interest income reflects the challenges presented from the lower interest rate environment as new loans originated at lower yields and certain loans tied to LIBOR or the prime rate repriced downward as both of these indices have moved down with theFederal Reserve's decision to decrease the target federal funds interest rate three times in the second half of 2019, and more significantly, twice in March of this year. Total investment securities averaged$187 million in the second quarter of 2020 which is$12.3 million , or 6.1%, lower than the$200 million average for the second quarter of 2019. The Company continues to be selective when purchasing the more typical types of securities that have been purchased historically as the market is less favorable given the differences in the position and shape of theU.S. Treasury yield curve from the prior year. The Company was active during the second quarter of 2020 purchasing corporate securities, particularly subordinated debt issued by other financial institutions. 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 flat shape of the yield curve. Management believes it to be prudent to increase our investments in bank subordinated debt in a gradual and diversified manner given our familiarity with the banking industry and the heavily regulated nature of the industry combined with our intensive due diligence process. Interest income on investment securities decreased between the second quarter of 2020 and the second quarter of 2019 by$191,000 , or 11.2%. Our liquidity position is exceptionally strong due to the significant influx of deposits that resulted from the government stimulus programs and reduced customer spending activity due to the shutdown of the economy. As a result, average short-term investments increased by$31.4 million in the second quarter of 2020 when compared to the second quarter of 2019. Therefore, the challenge existed to profitably deploy this excess in short-term assets, to which management has responded by utilizing the commercial paper market. Interest income on short-term investments increased$37,000 , or 62.7%. Overall, total interest income decreased by$704,000 , or 5.5%, between the second quarter of 2020 and the second quarter of 2019. Total interest expense for the second quarter of 2020 decreased by$1.1 million , or 30.1%, when compared to the second quarter of 2019, due to lower levels of both deposit and borrowing interest expense. Deposit interest expense in the second quarter of 2020 was lower by$998,000 , or 34.8%, compared to the second quarter of 2019. Total deposits grew significantly during the second quarter of 2020 to reach a record level, averaging$1.036 billion for the quarter, which is$55.5 million , or 5.7%, higher than the 2019 second quarter average. This robust growth between years is the result of consumers' behavior to: 1.) deposit their PPP funds into deposit accounts, 2.) deposit government stimulus checks into the bank and 3.) keep higher balances in their accounts since they are not able to spend as much as they otherwise would because of the COVID-19 pandemic's impact to the economy and our community. 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 prudently and effectively executed several deposit product pricing decreases given the declining interest rate environment and the corresponding downward pressure that these falling interest rates have on the net interest margin. As a result, the Company experienced deposit cost relief. Specifically, the Company's average cost of interest bearing deposits declined by 51 basis points since the second quarter of 2019 and averaged 0.88% in the second quarter of 2020. Also offsetting a portion of the net interest margin pressure from the lower national interest rates is a significant portion of the deposit growth occurred in non-interest bearing demand deposits. Overall, total deposit cost, including demand deposits, averaged 0.73% in the second quarter of 2020 as compared to 1.19% in the second quarter of 2019. The Company's loan to deposit ratio averaged 88.1% in the second quarter of 2020 which we believe indicates that the Company is well positioned to continue assisting our customers given the impact that the COVID-19 pandemic is having on the economy and has ample capacity to grow its loan portfolio as opportunities arise. The Company experienced a$118,000 , or 14.1%, decrease in the interest cost of borrowings in the second quarter of 2020 when compared to the second quarter of 2019. The decline is a result of lower total average borrowings between years combined with the impact from theFederal Reserve's actions to decrease interest rates since the middle of 2019 and the impact that these rate decreases had on the cost of overnight 39
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borrowed funds and the replacement of matured FHLB term advances. The total 2020 second quarter average term advance borrowings balance increased by approximately$9.2 million , or 18.2%, when compared to the second quarter of 2019 as the Company took advantage of the lower yield curve and its flat shape to prudently extend borrowings. As a result, the combined growth of average FHLB term advances and total average deposits resulted in total average overnight borrowed funds decreasing between years by$16.1 million , or 79.2%, for the quarter. Overall, the 2020 second quarter average of total FHLB borrowed funds was$64.0 million , which represents a decrease of$6.9 million , or 9.7%, from the 2019 second quarter. The table that follows provides an analysis of net interest income on a tax-equivalent basis for the three month periods endedJune 30, 2020 and 2019 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 these tables, 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 endedJune 30, 2020 and 2019 was$6,000 , which is reconciled to the corresponding GAAP measure at the bottom of the table. Differences between the net interest spread and margin from a GAAP basis to a tax-equivalent basis were not material. Three months endedJune 30 (In thousands, except percentages) 2020 2019 Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Interest earning assets: Loans and loans held for sale, net of unearned income$ 912,541 $ 10,454 4.55%$ 883,315 $ 11,000 4.94% Short-term investments and bank deposits 40,446 99 0.97 6,833 66 3.79 Investment securities - AFS 145,579 1,159 3.20 158,579 1,314 3.34 Investment securities - HTM 41,709 355 3.35 40,982 391 3.73 Total investment securities 187,288 1,514 3.24 199,561 1,705 3.42 Total interest earning assets/interest income 1,140,275 12,067 4.22 1,089,709 12,771 4.66 Non-interest earning assets: Cash and due from banks 17,586 19,367 Premises and equipment 18,545 18,795 Other assets 70,657 63,251 Allowance for loan losses (9,373) (8,184) TOTAL ASSETS$ 1,237,690 $ 1,182,938 Interest bearing liabilities: Interest bearing deposits: Interest bearing demand$ 172,786 $ 118 0.29%$ 169,029 $ 424 1.01% Savings 102,505 34 0.13 97,884 41 0.17 Money markets 230,863 212 0.37 235,058 662 1.13 Time deposits 346,314 1,505 1.75 323,080 1,740 2.16 Total interest bearing deposits 852,468 1,869 0.88 825,051 2,867 1.39 Short-term borrowings 4,245 4 0.34 20,363 136 2.64 Advances from Federal Home Loan Bank 59,786 276 1.86 50,571 261 2.07 Guaranteed junior subordinated deferrable interest debentures 13,085 281 8.57 13,085 281 8.60 Subordinated debt 7,650 130 6.80 7,650 130 6.80 Lease liabilities 3,977 28 2.84 4,188 29 2.81 40
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