false2020Q2Riverview Financial Corp0001590799--12-31PA9263739The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU No. 2016-01 where the fair value of loans as of June 30, 2020 and December 31, 2019 was measured using an exit price notion. 0001590799 2020-06-30 0001590799 2019-12-31 0001590799 2020-04-01 2020-06-30 0001590799 2019-04-01 2019-06-30 0001590799 2020-01-01 2020-06-30 0001590799 2019-01-01 2019-06-30 0001590799 2019-06-30 0001590799 2019-01-01 2019-12-31 0001590799 2020-01-01 2020-03-31 0001590799 2020-07-30 0001590799 2020-03-31 0001590799 2018-12-31 0001590799 2019-03-31 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxableMember 2020-06-30 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxExemptMember 2020-06-30 0001590799 rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember 2020-06-30 0001590799 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2020-06-30 0001590799 us-gaap:CorporateDebtSecuritiesMember 2020-06-30 0001590799 us-gaap:PassMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:SpecialMentionMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:SubstandardMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 rive:RealEstateConstructionMember us-gaap:PassMember 2020-06-30 0001590799 rive:RealEstateConstructionMember us-gaap:SpecialMentionMember 2020-06-30 0001590799 rive:RealEstateConstructionMember 2020-06-30 0001590799 rive:RealEstateCommercialMember us-gaap:PassMember 2020-06-30 0001590799 rive:RealEstateCommercialMember us-gaap:SpecialMentionMember 2020-06-30 0001590799 rive:RealEstateCommercialMember us-gaap:SubstandardMember 2020-06-30 0001590799 rive:RealEstateCommercialMember 2020-06-30 0001590799 rive:RealEstateResidentialMember us-gaap:PassMember 2020-06-30 0001590799 rive:RealEstateResidentialMember us-gaap:SpecialMentionMember 2020-06-30 0001590799 rive:RealEstateResidentialMember us-gaap:SubstandardMember 2020-06-30 0001590799 rive:RealEstateResidentialMember 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember us-gaap:PassMember 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:PassMember 2020-06-30 0001590799 us-gaap:SpecialMentionMember 2020-06-30 0001590799 us-gaap:SubstandardMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember 2020-06-30 0001590799 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2020-06-30 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:PerformingAndNonAccrualLoansMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2020-06-30 0001590799 rive:PerformingAndNonAccrualLoansMember us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:RealEstateCommercialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 rive:RealEstateCommercialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxableMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:USStatesAndPoliticalSubdivisionsTaxableMember 2020-06-30 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxExemptMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:USStatesAndPoliticalSubdivisionsTaxExemptMember 2020-06-30 0001590799 rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember 2020-06-30 0001590799 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2020-06-30 0001590799 us-gaap:CorporateDebtSecuritiesMember us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member us-gaap:CorporateDebtSecuritiesMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2020-06-30 0001590799 rive:RealEstateConstructionMember rive:PerformingAndNonAccrualLoansMember 2020-06-30 0001590799 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2020-06-30 0001590799 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2020-06-30 0001590799 us-gaap:FairValueInputsLevel1Member 2020-06-30 0001590799 us-gaap:FairValueInputsLevel2Member 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-06-30 0001590799 rive:PurchasedCreditImpairedLoansMember 2020-06-30 0001590799 us-gaap:MortgageBackedSecuritiesMember 2020-06-30 0001590799 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2020-06-30 0001590799 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2020-06-30 0001590799 us-gaap:FairValueInputsLevel3Member 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:ConstructionLoansMember 2020-06-30 0001590799 us-gaap:CommercialRealEstatePortfolioSegmentMember 2020-06-30 0001590799 us-gaap:ResidentialPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2020-06-30 0001590799 us-gaap:UnusedLinesOfCreditMember 2020-06-30 0001590799 us-gaap:ConstructionLoansMember 2020-06-30 0001590799 us-gaap:UnfundedLoanCommitmentMember 2020-06-30 0001590799 rive:DepositOverdraftMember 2020-06-30 0001590799 us-gaap:FinancialStandbyLetterOfCreditMember 2020-06-30 0001590799 rive:ValuationAllowanceMember 2020-06-30 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxableMember 2019-12-31 0001590799 rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember 2019-12-31 0001590799 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-12-31 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxExemptMember 2019-12-31 0001590799 us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001590799 us-gaap:PassMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:SpecialMentionMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:SubstandardMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:PassMember rive:RealEstateConstructionMember 2019-12-31 0001590799 us-gaap:SpecialMentionMember rive:RealEstateConstructionMember 2019-12-31 0001590799 rive:RealEstateConstructionMember 2019-12-31 0001590799 rive:RealEstateCommercialMember us-gaap:PassMember 2019-12-31 0001590799 rive:RealEstateCommercialMember us-gaap:SpecialMentionMember 2019-12-31 0001590799 rive:RealEstateCommercialMember us-gaap:SubstandardMember 2019-12-31 0001590799 rive:RealEstateCommercialMember 2019-12-31 0001590799 rive:RealEstateResidentialMember us-gaap:PassMember 2019-12-31 0001590799 rive:RealEstateResidentialMember us-gaap:SpecialMentionMember 2019-12-31 0001590799 rive:RealEstateResidentialMember us-gaap:SubstandardMember 2019-12-31 0001590799 rive:RealEstateResidentialMember 2019-12-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember us-gaap:PassMember 2019-12-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:PassMember 2019-12-31 0001590799 us-gaap:SpecialMentionMember 2019-12-31 0001590799 us-gaap:SubstandardMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember 2019-12-31 0001590799 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:PerformingAndNonAccrualLoansMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 rive:PerformingAndNonAccrualLoansMember us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:RealEstateConstructionMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 rive:RealEstateConstructionMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:RealEstateCommercialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 rive:RealEstateCommercialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 rive:RealEstateResidentialMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables30To59DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivables60To89DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 rive:PerformingAndNonAccrualLoansMember 2019-12-31 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxableMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:USStatesAndPoliticalSubdivisionsTaxableMember 2019-12-31 0001590799 rive:USStatesAndPoliticalSubdivisionsTaxExemptMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:USStatesAndPoliticalSubdivisionsTaxExemptMember 2019-12-31 0001590799 rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member rive:MortgageBackedSecuritiesIssuedByUSGovernmentAgenciesMember 2019-12-31 0001590799 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-12-31 0001590799 us-gaap:CorporateDebtSecuritiesMember us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member us-gaap:CorporateDebtSecuritiesMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsRecurringMember us-gaap:FairValueInputsLevel2Member 2019-12-31 0001590799 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-12-31 0001590799 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-12-31 0001590799 us-gaap:FairValueInputsLevel1Member 2019-12-31 0001590799 us-gaap:FairValueInputsLevel2Member 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-12-31 0001590799 rive:PurchasedCreditImpairedLoansMember 2019-12-31 0001590799 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-12-31 0001590799 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-12-31 0001590799 us-gaap:FairValueInputsLevel3Member 2019-12-31 0001590799 us-gaap:MortgageBackedSecuritiesMember 2019-12-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:ConstructionLoansMember 2019-12-31 0001590799 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-12-31 0001590799 us-gaap:ResidentialPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-12-31 0001590799 us-gaap:UnusedLinesOfCreditMember 2019-12-31 0001590799 us-gaap:ConstructionLoansMember 2019-12-31 0001590799 us-gaap:UnfundedLoanCommitmentMember 2019-12-31 0001590799 rive:DepositOverdraftMember 2019-12-31 0001590799 us-gaap:FinancialStandbyLetterOfCreditMember 2019-12-31 0001590799 rive:ValuationAllowanceMember 2019-12-31 0001590799 rive:RealEstateResidentialMember 2020-04-01 2020-06-30 0001590799 rive:RealEstateCommercialMember 2020-04-01 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2020-04-01 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2020-04-01 2020-06-30 0001590799 rive:RealEstateConstructionMember 2020-04-01 2020-06-30 0001590799 us-gaap:UnallocatedFinancingReceivablesMember 2020-04-01 2020-06-30 0001590799 us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-04-01 2020-06-30 0001590799 us-gaap:CommonStockMember 2020-04-01 2020-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2020-04-01 2020-06-30 0001590799 us-gaap:DepositAccountMember 2020-04-01 2020-06-30 0001590799 us-gaap:FiduciaryAndTrustMember 2020-04-01 2020-06-30 0001590799 us-gaap:AssetManagement1Member 2020-04-01 2020-06-30 0001590799 us-gaap:MortgageBankingMember 2020-04-01 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-04-01 2019-06-30 0001590799 rive:RealEstateResidentialMember 2019-04-01 2019-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-04-01 2019-06-30 0001590799 rive:RealEstateCommercialMember 2019-04-01 2019-06-30 0001590799 rive:RealEstateConstructionMember 2019-04-01 2019-06-30 0001590799 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0001590799 us-gaap:CommonStockMember 2019-04-01 2019-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0001590799 us-gaap:DepositAccountMember 2019-04-01 2019-06-30 0001590799 us-gaap:FiduciaryAndTrustMember 2019-04-01 2019-06-30 0001590799 us-gaap:AssetManagement1Member 2019-04-01 2019-06-30 0001590799 us-gaap:MortgageBankingMember 2019-04-01 2019-06-30 0001590799 rive:RealEstateCommercialMember 2020-01-01 2020-06-30 0001590799 rive:RealEstateResidentialMember 2020-01-01 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2020-01-01 2020-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2020-01-01 2020-06-30 0001590799 rive:RealEstateConstructionMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:RetainedEarningsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MinimumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MaximumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:WeightedAverageMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 srt:MinimumMember us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 srt:MaximumMember us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 srt:WeightedAverageMember us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MinimumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MaximumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:WeightedAverageMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MinimumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MaximumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:WeightedAverageMember rive:FairValueInputsLevel3LiquidationExpensesMember 2020-01-01 2020-06-30 0001590799 us-gaap:CommonStockMember 2020-01-01 2020-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-06-30 0001590799 us-gaap:DepositAccountMember 2020-01-01 2020-06-30 0001590799 us-gaap:FiduciaryAndTrustMember 2020-01-01 2020-06-30 0001590799 us-gaap:AssetManagement1Member 2020-01-01 2020-06-30 0001590799 us-gaap:MortgageBankingMember 2020-01-01 2020-06-30 0001590799 srt:MinimumMember 2020-01-01 2020-06-30 0001590799 srt:MaximumMember 2020-01-01 2020-06-30 0001590799 rive:RealEstateResidentialMember 2019-01-01 2019-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-01-01 2019-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-01-01 2019-06-30 0001590799 rive:RealEstateCommercialMember 2019-01-01 2019-06-30 0001590799 rive:RealEstateConstructionMember 2019-01-01 2019-06-30 0001590799 us-gaap:UnallocatedFinancingReceivablesMember 2019-01-01 2019-06-30 0001590799 us-gaap:RetainedEarningsMember 2019-01-01 2019-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0001590799 us-gaap:CommonStockMember 2019-01-01 2019-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-06-30 0001590799 us-gaap:DepositAccountMember 2019-01-01 2019-06-30 0001590799 us-gaap:FiduciaryAndTrustMember 2019-01-01 2019-06-30 0001590799 us-gaap:AssetManagement1Member 2019-01-01 2019-06-30 0001590799 us-gaap:MortgageBankingMember 2019-01-01 2019-06-30 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MinimumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MaximumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:WeightedAverageMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MinimumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:MaximumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:OtherRealEstateOwnedMember srt:WeightedAverageMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MinimumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MaximumMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:WeightedAverageMember rive:FairValueInputsLevel3AppraisalAdjustmentsMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MinimumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:MaximumMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 us-gaap:FairValueMeasurementsNonrecurringMember rive:ImpairedLoanMember srt:WeightedAverageMember rive:FairValueInputsLevel3LiquidationExpensesMember 2019-01-01 2019-12-31 0001590799 rive:RealEstateResidentialMember 2019-01-01 2019-12-31 0001590799 rive:RealEstateCommercialMember 2019-01-01 2019-12-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-01-01 2019-12-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-06-30 0001590799 rive:RealEstateCommercialMember 2019-06-30 0001590799 rive:RealEstateResidentialMember 2019-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2020-03-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2020-03-31 0001590799 rive:RealEstateConstructionMember 2020-03-31 0001590799 rive:RealEstateCommercialMember 2020-03-31 0001590799 rive:RealEstateResidentialMember 2020-03-31 0001590799 us-gaap:UnallocatedFinancingReceivablesMember 2020-03-31 0001590799 us-gaap:CommonStockMember 2020-03-31 0001590799 us-gaap:AdditionalPaidInCapitalMember 2020-03-31 0001590799 us-gaap:RetainedEarningsMember 2020-03-31 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-31 0001590799 us-gaap:CommonStockMember 2020-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2020-06-30 0001590799 us-gaap:RetainedEarningsMember 2020-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-06-30 0001590799 us-gaap:CommercialPortfolioSegmentMember 2019-03-31 0001590799 rive:RealEstateConstructionMember 2019-03-31 0001590799 rive:RealEstateCommercialMember 2019-03-31 0001590799 rive:RealEstateResidentialMember 2019-03-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-03-31 0001590799 rive:RealEstateConstructionMember 2019-06-30 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2019-06-30 0001590799 us-gaap:CommonStockMember 2019-03-31 0001590799 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001590799 us-gaap:RetainedEarningsMember 2019-03-31 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001590799 us-gaap:CommonStockMember 2019-06-30 0001590799 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0001590799 us-gaap:RetainedEarningsMember 2019-06-30 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0001590799 us-gaap:CommonStockMember 2019-12-31 0001590799 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001590799 us-gaap:RetainedEarningsMember 2019-12-31 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001590799 us-gaap:CommercialPortfolioSegmentMember 2018-12-31 0001590799 rive:RealEstateConstructionMember 2018-12-31 0001590799 rive:RealEstateCommercialMember 2018-12-31 0001590799 rive:RealEstateResidentialMember 2018-12-31 0001590799 us-gaap:ConsumerPortfolioSegmentMember 2018-12-31 0001590799 us-gaap:UnallocatedFinancingReceivablesMember 2018-12-31 0001590799 us-gaap:CommonStockMember 2018-12-31 0001590799 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001590799 us-gaap:RetainedEarningsMember 2018-12-31 0001590799 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 iso4217:USD xbrli:shares xbrli:pure iso4217:USD xbrli:shares rive:Office rive:Securities rive:Contract rive:Location
Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
Form
10-Q
 
 
 
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2020
or
 
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from
                    
001-38627
(Commission File Number)
 
 
RIVERVIEW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Pennsylvania
  
38-3917371
(State of incorporation)
  
(IRS Employer
Identification Number)
3901 North Front Street, Harrisburg, PA
  
17110
(Address of principal executive offices)
  
(Zip code)
(717)
957-2196
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months or for such shorter period that the registrant was required to submit such files.  Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or a smaller reporting company as defined in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer   ☒
Non-accelerated filer   ☐    Smaller reporting company   ☒
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company as defined in Rule
12b-2
of the Exchange Act.  Yes  ☐    No  ☒
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock
  
RIVE
  
Nasdaq Global Market
Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date:
9,263,739
at July 3
0
, 2020.
 
 
 
Table of Contents
RIVERVIEW FINANCIAL CORPORATION
FORM
10-Q
For the Quarter Ended June 30, 2020
 
Contents
  
 
  
Page No.
 
PART I.
  
FINANCIAL INFORMATION:
  
      
Item 1.
  
Financial Statements (Unaudited)
  
      
 
  
  
 
3
 
 
  
  
 
4
 
 
  
  
 
5
 
 
  
  
 
6
 
 
  
  
 
7
 
Item 2.
  
  
 
26
 
Item 3.
  
  
 
42
 
Item 4.
  
  
 
42
 
PART II
  
OTHER INFORMATION:
  
      
Item 1.
  
  
 
42
 
Item 1A.
  
  
 
42
 
Item 2.
  
  
 
42
 
Item 3.
  
  
 
42
 
Item 4.
  
  
 
42
 
Item 5.
  
  
 
42
 
Item 6.
  
  
 
43
 
 
  
  
 
44
 
Table of Contents
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
 
    
June 30,

2020
    
December 31,

2019
  
Assets:
     
Cash and due from banks
    $ 10,195     $ 11,838  
Interest-bearing deposits in other banks
      33,033       38,510  
Investment securities
available-for-sale
      74,134       91,247  
Loans held for sale
      4,252       81  
Loans, net
      1,165,453       852,109  
Less: allowance for loan losses
      9,736       7,516  
  
 
 
    
 
 
  
Net loans
      1,155,717       844,593  
Premises and equipment, net
      18,668       17,852  
Accrued interest receivable
      1,826       2,414  
Goodwill
          24,754  
Intangible assets
      2,397       2,736  
Other assets
      46,578       45,929  
  
 
 
    
 
 
  
Total assets
    $ 1,346,800     $ 1,079,954  
  
 
 
    
 
 
  
Liabilities:
     
Deposits:
     
Noninterest-bearing
    $ 173,567     $ 147,405  
Interest-bearing
      849,586       793,075  
  
 
 
    
 
 
  
Total deposits
      1,023,153       940,480  
Short-term borrowings
   
Long-term debt
      217,010       6,971  
Accrued interest payable
      457       435  
Other liabilities
      11,728       13,958  
  
 
 
    
 
 
  
Total liabilities
      1,252,348       961,844  
  
 
 
    
 
 
  
Stockholders’ equity:
     
Common stock: no par value, authorized 20,000,000 shares; June 30, 2020, issued and outstanding 9,263,697 shares; December 31, 2019, issued and outstanding 9,216,616 shares
      102,552       102,206  
Capital surplus
      161       112  
Retained earnings (accumulated deficit)
      (8,735 )      16,140  
Accumulated other comprehensive
income (
loss
)
      474       (348 ) 
  
 
 
    
 
 
  
Total stockholders’ equity
      94,452       118,110  
  
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 1,346,800     $ 1,079,954  
  
 
 
    
 
 
  
See notes to consolidated financial statements.
 
3
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
 
    
Three Months Ended
    
Six Months Ended
  
June 30,
   
2020
    
2019
    
2020
    
2019
  
Interest income:
         
Interest and fees on loans:
         
Taxable
    $ 10,602     $ 11,680     $ 20,384     $ 22,368  
Tax-exempt
      236       233       481       463  
Interest and dividends on investment securities
available-for-sale:
         
Taxable
      396       732       931       1,472  
Tax-exempt
      68       47       105       116  
Interest on interest-bearing deposits in other banks
      12       216       101       447  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total interest income
      11,314       12,908       22,002       24,866  
  
 
 
    
 
 
    
 
 
    
 
 
  
Interest expense:
         
Interest on deposits
      1,395       2,099       3,184       4,172  
Interest on short-term borrowings
      23         28    
Interest on long-term debt
      225       131       348       265  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total interest expense
      1,643       2,230       3,560       4,437  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income
      9,671       10,678       18,442       20,429  
Provision for loan losses
      2,012       618       3,812       1,201  
  
 
 
    
 
 
    
 
 
    
 
 
  
Net interest income after provision for loan losses
      7,659       10,060       14,630       19,228  
  
 
 
    
 
 
    
 
 
    
 
 
  
Noninterest income:
         
Service charges, fees and commissions
      1,011       1,315       2,392       2,368  
Commission and fees on fiduciary activities
      210       281       423       541  
Wealth management income
      196       236       416       483  
Mortgage banking income
      391       100       499       206  
Bank owned life insurance investment income
      193       194       386       381  
Net gain (loss) on sale of investment securities
available-for-sale
          815       (42 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest income
      2,001       2,126       4,931       3,937  
  
 
 
    
 
 
    
 
 
    
 
 
  
Noninterest expense:
         
Salaries and employee benefits expense
      4,985       5,830       10,041       13,340  
Net occupancy and equipment expense
      1,068       1,044       2,248       2,133  
Amortization of intangible assets
      169       194       339       388  
Goodwill impairment
      24,754         24,754    
Net cost (benefit) of operation of other real estate owned
          (92 )      (11 )      35  
Other expenses
      2,978       3,508       5,795       6,552  
  
 
 
    
 
 
    
 
 
    
 
 
  
Total noninterest expense
      33,954       10,484       43,166       22,448  
  
 
 
    
 
 
    
 
 
    
 
 
  
Income before income taxes
      (24,294 )      1,702       (23,605 )      717  
Income tax expense (benefit)
      (172 )      268       (116 )      (30 ) 
  
 
 
    
 
 
    
 
 
    
 
 
  
Net income (loss)
      (24,122 )      1,434       (23,489 )      747  
  
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive income:
         
Unrealized gain on investment securities
available-for-sale
      840       1,936       1,893       2,959  
Reclassification adjustment for net (gain) loss on sale of investment securities
available-for-sale
included in net income (loss)
              (815 )      42  
Net change in derivative fair value
      (38 )        (38 )   
  
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive income
      802       1,936       1,040       3,001  
Income tax expense related to other comprehensive income
      168       406       218       630  
  
 
 
    
 
 
    
 
 
    
 
 
  
Other comprehensive income, net of income taxes
      634       1,530       822       2,371  
  
 
 
    
 
 
    
 
 
    
 
 
  
Comprehensive income (loss)
    $ (23,488 )    $ 2,964     $ (22,667 )    $ 3,118  
  
 
 
    
 
 
    
 
 
    
 
 
  
Per share data:
         
Net income (loss):
         
Basic
    $ (2.61 )    $ 0.16     $ (2.54 )    $ 0.08  
Diluted
    $ (2.61 )    $ 0.16     $ (2.54 )    $ 0.08  
Average common shares outstanding:
         
Basic
      9,249,184       9,160,290       9,236,314       9,151,850  
Diluted
      9,249,184       9,172,992       9,236,314       9,167,409  
See notes to consolidated financial statements.
 
4
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the six months ended June 30,
   
Common

Stock
     
Capital

Surplus
    
Retained

Earnings
    
Accumulated

Other

Comprehensive

Income (Loss)
    
Total
  
Balance, January 1, 2020
    $ 102,206      $ 112     $ 16,140     $ (348 )    $ 118,110  
Net income
           (23,489 )        (23,489 ) 
Other comprehensive income, net of income taxes
             822       822  
Compensation cost of option grants
                
Issuance under ESPP, 401k and Dividend Reinvestment plans: 47,081 shares
      346              346  
Exercise of stock options
                  
Stock based compensation
         49           49  
Dividends declared, $0.15 per share
           (1,386 )        (1,386 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, June 30, 2020
    $ 102,552      $ 161     $ (8,735 )    $ 474     $ 94,452  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, January 1, 2019
    $ 101,134      $ 332     $ 15,063     $ (2,619 )    $ 113,910  
Net income
           747         747  
Other comprehensive income (loss), net of income taxes
             2,371       2,371  
Compensation cost of option grants
            
Issuance under ESPP, 401k and Dividend Reinvestment plans: 27,984 shares
      316              316  
Exercise of stock options: 18,131 shares
      194        (28 )          166  
Dividends declared, $0.20 per shares
           (1,832 )        (1,832 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, June 30, 2019
    $ 101,644      $ 304     $ 13,978     $ (248 )    $ 115,678  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
 
For the three months ended June 30,
   
Common

Stock
     
Capital

Surplus
    
Retained

Earnings
    
Accumulated

Other

Comprehensive

Income (Loss)
    
Total
  
Balance, April 1, 2020
    $ 102,386      $ 134     $ 16,081     $ (160 )    $ 118,441  
Net income
           (24,122 )        (24,122 ) 
Other comprehensive income, net of income taxes
             634       634  
Compensation cost of option grants
            
I
ssuance under ESPP, 401k and Dividend Reinvestment plans:
27,658 shares
      166              166  
Exercise of stock options
                  
Stock based compensation
         27           27  
Dividends declared, $0.08 per share
           (694 )        (694 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, June 30, 2020
    $ 102,552      $ 161     $ (8,735 )    $ 474     $ 94,452  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, April 1, 2019
    $ 101,500      $ 307     $ 13,461     $ (1,778 )    $ 113,490  
Net income
           1,434         1,434  
Other comprehensive income (loss), net of income taxes
             1,530       1,530  
Compensation cost of option grants
            
Issuance under ESPP, 401k and Dividend Reinvestment plans:
12,761 shares
      141              141  
Exercise of stock options: 310 shares
      3        (3 )       
Dividends declared, $0.10 per shares
           (917 )        (917 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, June 30, 2019
    $ 101,644      $ 304     $ 13,978     $ (248 )    $ 115,678  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
5
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the Six Months Ended June 30,
  
2020
 
 
2019
 
Cash flows from operating activities:
     
Net income (loss)
    $ (23,489 )    $ 747  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
     
Depreciation and amortization of premises and equipment
      640       589  
Provision for loan losses
      3,812       1,201  
Stock based compensation
      49    
Net amortization of investment securities
available-for-sale
      312       399  
Net cost (benefit) of operation of other real estate owned
      (11 )      35  
Net (gain) loss on sale of investment securities
available-for-sale
      (815 )      42  
Amortization of purchase adjustment on loans
      (292 )      (1,495 ) 
Amortization of intangible assets
      339       388  
Amortization of assumed discount on long-term debt
      42       40  
Impairment of goodwill
      24,754    
Deferred income taxes
      (465 )      (111 ) 
Proceeds from sale of loans originated for sale
      13,557       7,599  
Net gain on sale of loans originated for sale
      (499 )      (206 ) 
Loans originated for sale
      (17,229 )      (6,926 ) 
Bank owned life insurance investment income
      (386 )      (381 ) 
Net change in:
     
Accrued interest receivable
      588       140  
Other assets
      1,028       (1,169 ) 
Accrued interest payable
      22       (39 ) 
Other liabilities
      (2,230 )      1,107  
  
 
 
    
 
 
  
Net cash provided by (used in) operating activities
      (273 )      1,960  
  
 
 
    
 
 
  
Cash flows from investing activities:
     
Investment securities
available-for-sale:
     
Purchases
      (14,215 )      (10,485 ) 
Proceeds from repayments
      5,741       8,728  
Proceeds from sales
      27,168       8,740  
Proceeds from the sale of other real estate owned
      68       627  
Net (increase) decrease in restricted equity securities
      (779 )      119  
Net (increase) decrease in loans
      (314,982 )      4,800  
Purchases of premises and equipment
      (1,456 )      (1,065 ) 
Premium paid on bank owned life insurance
      (22 )      (22 ) 
  
 
 
    
 
 
  
Net cash provided by (used in) investing activities
      (298,477 )      11,442  
  
 
 
    
 
 
  
Cash flows from financing activities:
     
Net increase (decrease) in deposits
      82,673       (24,893 ) 
Proceeds from long-term debt
      209,997    
Issuance under ESPP, 401k and DRP plans
      346       316  
Proceeds from exercise of stock options
        166  
Cash dividends paid
      (1,386 )      (1,832 ) 
  
 
 
    
 
 
  
Net cash provided by (used in) financing activities
      291,630       (26,243 ) 
  
 
 
    
 
 
  
Net increase in cash and cash equivalents
      (7,120 )      (12,841 ) 
Cash and cash equivalents—beginning
      50,348       53,816  
  
 
 
    
 
 
  
Cash and cash equivalents—ending
    $ 43,228     $ 40,975  
  
 
 
    
 
 
  
Supplemental disclosures:
     
Cash paid during the period for:
     
Interest
    $ 3,538     $ 4,476  
  
 
 
    
 
 
  
Noncash items from operating activities:
     
Operating lease
right-of-use
assets and liabilities
      $ 4,612  
  
 
 
    
 
 
  
Noncash items from investing activities:
     
Transfer of owned properties to available for sale
      $ 540  
  
 
 
    
 
 
  
Supplemental schedule of noncash investing and financing activities:
     
Other real estate acquired in settlement of loans
    $ 338     $ 27  
  
 
 
    
 
 
  
See notes to consolidated financial statements.
 
6
Table of Contents
Riverview Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Summary of significant accounting policies:
Nature of Operations
Riverview Financial Corporation, (the “Company” or “Riverview”), a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).
Riverview Bank, with twenty seven (27) full service offices and three (3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities and
small-to-medium
sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to
Form 10-Q
and Article 8 of
Regulation S-X.
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on
Form 10-K,
filed on March 16, 2020.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.
The operating results and financial position of the Company for the three and six months ended as of June 30, 2020, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus
(“COVID-19”)
pandemic which may adversely affect the Company’s business results of operations and financial conditions for an indefinite period.
Beginning in the first quarter of 2020, the
COVID-19
pandemic has caused disruption in economic and social activity, both globally and in the United States. The spread of
COVID-19,
and the related government actions to mandate or encourage quarantines and social distancing, have caused severe disruptions in the U.S. economy, which has and will likely continue to, in turn, disrupt the business, activities, and operations of our customers, as well as our own business and operations.
The national public health crisis arising from the
COVID-19
pandemic and public expectations about it, combined with certain
pre-existing
factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in which Riverview operates. The resulting impacts of the pandemic on consumers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services Riverview offers, as well as the creditworthiness of potential and current borrowers. The significant decrease in commercial activity associated with the pandemic, both nationally and in Riverview’s markets, may cause customers, vendors, and counterparties to be unable to meet existing payment or other obligations to Riverview and the Bank.
Riverview’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. Riverview expects the pandemic to limit, at least for a period of time, customer demand for many banking activities. Many companies and residents in our market area are subject to mandatory
“non-essential
business” shut-downs and “stay at home” orders, which have reduced banking activity across our market area. In response to these mandates, Riverview has temporarily limited most locations to
drive-up
and ATM services, with lobby access available by appointment only, reduced hours of operation at some
 
7
Table of Contents
locations and encouraged our customers to use electronic banking platforms. We expect these measures to remain in place for an undetermined period of time. In addition, the use of quarantines and social distancing methods to curtail the spread of
COVID-19
—whether mandated by governmental authorities or recommended as a public health practice — may adversely affect Riverview’s operations as key personnel, employees and customers avoid physical interaction. The continued spread of
COVID-19
could also negatively impact the business and operations of third-party service providers who perform critical services for Riverview’s business. It is not yet known what impact these operational changes may have on Riverview’s financial performance.
There continues to be broad concerns related to the potential effects of the
COVID-19
pandemic. The pandemic continues to have an adverse effect on, among other things, (i) our ability to attract customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services and/or (iv) unemployment rates, financial markets, real estate markets or economic growth.
The outbreak of
COVID-19
has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including a reduction in interest rates by the Federal Reserve. These reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability.
The
COVID-19
pandemic and its impact on the economy heighten the risks related to economic conditions in our market areas, interest rates, loan losses and reliance on our executives and third-party service providers. For example, borrower loan defaults that adversely affect Riverview’s earnings correlate with deteriorating economic conditions, which, in turn, may impact borrowers’ creditworthiness. If our borrowers are unable to meet their payment obligations to us, we will be required to increase our allowance for the losses through provisions for credit losses. In addition, loan programs adopted by the federal government, such as the Paycheck Protection Program (“PPP”), while intended to lessen the impact of the pandemic on businesses, may result in a decreased demand for Riverview’s loan products.
The impact of the pandemic on Riverview’s financial results is evolving and uncertain. The Company expects its net interest income and
non-interest
income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to
COVID-19
and the actions by the Federal Reserve with respect to interest rates. We believe that we may experience a material adverse effect in our business, results of operations and financial condition as a result of the
COVID-19
pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans or deferred taxes.
The Company determined a triggering event occurred as a result of the onset of the
COVID-19
pandemic causing management to evaluate goodwill for impairment as of June 30, 2020. The result of the quantitative testing concluded that the Company recognized an impairment charge of $24,754 at
June 30, 202
0.
 
The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity and the Company’s cash balances.
 
It is
uncertain whether a prolonged effect of the
COVID-19
pandemic will result in future impairment charges related to intangible assets, long-lived assets, right of use assets or available for sale investment securities.
Accounting Standards Adopted in 2020
In August 2016, the FASB issued ASU
No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting guidance became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
In January 2017, the FASB issued ASU
No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new guidance on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations or disclosures.
In August 2018, the FASB issued ASU
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update improve the effectiveness of fair value measurement disclosures by modifying the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The ASU became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
 
8
Table of Contents
In August 2018, the FASB issued ASU
No. 2018-15,
“Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining
internal-use
software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to
internal-use
software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., prepaid expense). The new guidance provides that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This update became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recent Accounting Standards
In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No.
2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU
No. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans and
available-for-sale
debt securities. In November 2018, the FASB issued ASU No.
2018-19—Codification
Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU
No. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU
No. 2016-13
to allow companies to irrevocably elect, upon adoption of ASU No,
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
held-to-maturity
debt securities. Entities are required to make this election on an
instrument-by-instrument
basis. In November 2019, the FASB issued ASU
No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic
805-20.
In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any
day-one
regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a
one-time
cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity.
In August 2018, the FASB issued ASU
No. 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General
(Subtopic 715-20)
— Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”.
Subtopic 715-20
addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
 
9
Table of Contents
In December 2019, the FASB issued ASU
No. 2019-12,
“Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU
No. 2019-12
improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
In March 2020, the FASB issued ASU
No. 2020-04,
“Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU
2020-04
provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU
2020-04
also provides numerous optional expedients for derivative accounting. ASU
2020-04
is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU
2020-04
for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have a material effect on our business operations and consolidated financial statements.
2. Other comprehensive income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities
available-for-sale
and benefit plan and derivative adjustments.
The components of accumulated other comprehensive income (loss) included in stockholders’ equity at June 30, 2020 and December 31, 2019 is as follows:
 
    
June 30,

2020
     
December 31,

2019
  
Net unrealized loss on investment securities
available-for-sale
    $ 1,754      $ 676  
Income tax expense
      368        142  
  
 
 
     
 
 
  
Net of income taxes
      1,386        534  
  
 
 
     
 
 
  
Benefit plan adjustments
      (1,117 )       (1,117 ) 
Income tax benefit
      (235 )       (235 ) 
  
 
 
     
 
 
  
Net of income taxes
      (882 )       (882 ) 
  
 
 
     
 
 
  
Derivative fair value adjustment
      (38 )    
Income tax benefit
      (8 )      
  
 
 
     
 
 
  
Net of income taxes
      (30 )    
  
 
 
     
 
 
  
Accumulated other comprehensive income (loss)
    $ 474      $ (348 ) 
  
 
 
     
 
 
  
 
10
Table of Contents
Other comprehensive income (loss) and related tax effects for the three and six months ended June 30, 2020 and 2019 is as follows:
 
Three months ended June 30,
   
2020
     
2019
  
Unrealized gain (loss) on investment securities
available-for-sale
    $ 840      $ 1,936  
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
      
Net change in derivative fair value
      (38 )    
  
 
 
     
 
 
  
Other comprehensive income before taxes
      802        1,936  
Income tax expense
      168        406  
  
 
 
     
 
 
  
Other comprehensive income
    $ 634      $ 1,530  
  
 
 
     
 
 
  
 
Six months ended June 30,
   
2020
     
2019
  
Unrealized gain (loss) on investment securities
available-for-sale
    $ 1,893      $ 2,959  
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
      (815 )       42  
Net change in derivative fair value
      (38 )    
  
 
 
     
 
 
  
Other comprehensive income before taxes
      1,040        3,001  
Income tax expense
      218        630  
  
 
 
     
 
 
  
Other comprehensive income
    $ 822      $ 2,371  
  
 
 
     
 
 
  
 
(1)
 
Represents amounts reclassified out of accumulated other comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.
3. Earnings per share:
Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and six months ended June 30, 2020 and 2019:
 
Three months ended June 30,
   
2020
     
2019
  
Numerator:
      
Net income (loss)
    $ (24,122)      $ 1,434  
  
 
 
     
 
 
  
Denominator:
      
Basic
      9,249,184        9,160,290  
Dilutive options
           12,702  
  
 
 
     
 
 
  
Diluted
      9,249,184        9,172,992  
  
 
 
     
 
 
  
Earnings per share:
      
Basic
    $ (2.61
)
 		    $ 0.16  
Diluted
    $ (2.61
)
    $ 0.16  
 
Six months ended June 30,
   
2020
     
2019
  
Numerator:
      
Net income (loss)
    $ (23,489 )     $ 747  
  
 
 
     
 
 
  
Denominator:
      
Basic
      9,236,314        9,151,850  
Dilutive options
           15,559  
  
 
 
     
 
 
  
Diluted
      9,236,314        9,167,409  
  
 
 
     
 
 
  
Earnings per share:
      
Basic
    $ (2.54 )     $ 0.08  
Diluted
    $ (2.54 )     $ 0.08  
 
11
Table of Contents
For the three and six months ended June 30, 2020 there were 172,964 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and six months ended June 30, 2019, there were 43,350 outstanding stock
options
that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.
4. Investment securities:
The amortized cost and fair value of investment securities
available-for-sale
aggregated by investment category at June 30, 2020 and December 31, 2019 are summarized as follows:
 
June 30, 2020
   
Amortized

Cost
     
Gross

Unrealized

Gains
     
Gross

Unrealized

Losses
     
Fair

Value
  
State and municipals:
            
Taxable
    $ 9,491      $ 288      $ 6      $ 9,773  
Tax-exempt
      8,430        361           8,791  
Mortgage-backed securities:
            
U.S. Government agencies
      27,740        755           28,495  
U.S. Government-sponsored enterprises
      23,219        584           23,803  
Corporate debt obligations
      3,500           228        3,272  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 72,380      $ 1,988      $ 234      $ 74,134  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2019
   
Amortized

Cost
     
Gross

Unrealized

Gains
     
Gross

Unrealized

Losses
     
Fair

Value
  
State and municipals:
            
Taxable
    $ 24,365      $ 466      $ 7      $ 24,824  
Tax-exempt
      4,260        73           4,333  
Mortgage-backed securities:
            
U.S. Government agencies
      36,024        294        184        36,134  
U.S. Government-sponsored enterprises
      22,422        265        42        22,645  
Corporate debt obligations
      3,500           189        3,311  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 90,571      $ 1,098      $ 422      $ 91,247  
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as
available-for-sale
at June 30, 2020, is summarized as follows:
 
June 30, 2020
   
Fair

Value
  
Within one year
    $ 251  
After one but within five years
      5,734  
After five but within ten years
      6,909  
After ten years
      8,942  
  
 
 
  
     21,836  
Mortgage-backed securities
      52,298  
  
 
 
  
Total
    $ 74,134  
  
 
 
  
Securities with a fair value of $57,865 and $63,389 at June 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a
case-by-case
basis. At June 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.
 
12
Table of Contents
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at June 30, 2020 and December 31, 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
 
    
Less Than 12 Months
     
12 Months or More
     
Total
  
June 30, 2020
   
Fair

Value
     
Unrealized

Losses
     
Fair

Value
     
Unrealized

Losses
     
Fair

Value
     
Unrealized

Losses
  
State and municipals:
                  
Taxable
    $ 1,347      $ 6      $        $        $ 1,347      $ 6  
Tax-exempt
                  
Mortgage-backed securities:
                  
U.S. Government agencies
                          
U.S. Government-sponsored enterprises
                  
Corporate debt obligation
            3,273        228        3,273        228  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,347      $ 6      $ 3,273      $ 228      $ 4,619      $ 234  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Less Than 12 Months
     
12 Months or More
     
Total
  
December 31, 2019
   
Fair

Value
     
Unrealized

Losses
     
Fair

Value
     
Unrealized

Losses
     
Fair

Value
     
Unrealized

Losses
  
State and municipals:
                  
Taxable
    $ 1,280      $ 7      $        $        $ 1,280      $ 7  
Tax-exempt
                  
Mortgage-backed securities:
                  
U.S. Government agencies
      15,799        184              15,799        184  
U.S. Government-sponsored enterprises
            3,245        42        3,245        42  
Corporate debt obligations
            3,311        189        3,311        189  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 17,079      $ 191      $ 6,556      $ 231      $ 23,635      $ 422  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company had four investment securities, consisting of three taxable state and municipal obligations, and one corporate debt obligation that were in unrealized loss positions at June 30, 2020. Of these securities, one corporate debt obligation was in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities resulting from changes in interest rates to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2020. There was no OTTI recognized for the three and six months ended June 30, 2020 and 2019.
The Company had 22 investment securities, consisting of two taxable state and municipal obligations, 19 mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, four mortgage-backed securities and one corporate obligation were in a continuous unrealized loss position for twelve months or more.
 
13
Table of Contents
5. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2020 and December 31, 2019 are summarized as follows. Net deferred loan fees were $6,183 at June 30, 2020 and net deferred loan costs were $1,129 at December 31, 2019.
 
    
June 30,

2020
     
December 31,

2019
  
Commercial
    $ 380,998      $ 118,658  
Real estate:
      
Construction
      79,299        61,831  
Commercial
      494,642        455,901  
Residential
      203,752        207,354  
Consumer
      6,762        8,365  
  
 
 
     
 
 
  
Total
    $ 1,165,453      $ 852,109  
  
 
 
     
 
 
  
The Company participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), PPP, a multi-billion dollar specialized
low-interest
loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of June 30, 2020, the Company originated 1,273 PPP loans totaling $274,313 under the PPP. The Company is utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to meet the funding needs of its borrowers of PPP loans.
The change in the allowance for loan losses account by major loan classifications for the three and six months ended June 30, 2020 and 2019 is summarized as follows:
 
          
Real Estate
                    
June 30, 2020
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
    
Total
  
Allowance for loan losses:
                
Beginning Balance, April 1, 2020
    $ 1,671     $ 695      $ 3,917     $ 1,713     $ 152     $ 103     $ 8,251  
Charge-offs
             (501 )      (2 )      (71 )        (574 ) 
Recoveries
      7          2       1       37         47  
Provisions
      7       46        1,660       358       44       (103 )      2,012  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $ 1,685     $ 741      $ 5,078     $ 2,070     $ 162     $       $ 9,736  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
          
Real Estate
                    
June 30, 2020
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
    
Total
  
Allowance for loan losses:
                
Beginning Balance, January 1, 2020
    $ 1,953     $ 473      $ 3,115     $ 1,820     $ 155     $       $ 7,516  
Charge-offs
      (899 )         (595 )      (2 )      (201 )        (1,697 ) 
Recoveries
      9          2       1       93         105  
Provisions
      622       268        2,556       251       115         3,812  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $ 1,685     $ 741      $ 5,078     $ 2,070     $ 162     $       $ 9,736  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
          
Real Estate
                    
June 30, 2019
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
    
Total
  
Allowance for loan losses:
                
Beginning Balance, April 1, 2019
    $ 1,023     $ 281      $ 3,459     $ 1,566     $ 157     $       $ 6,486  
Charge-off
      (13 )           (20 )      (109 )        (142 ) 
Recoveries
      6          1       2       31         40  
Provisions
      101       210        131       101       75         618  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $ 1,117     $ 491      $ 3,591     $ 1,649     $ 154     $       $ 7,002  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
14
Table of Contents
          
Real Estate
                    
June 30, 2019
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
    
Total
  
Allowance for loan losses:
                
Beginning Balance, January 1, 2019
  
$
1,162
 
 
$
404
 
  
$
3,298
 
 
$
1,286
 
 
$
50
 
 
$
148
 
 
$
6,348
 
Charge-offs
      (389 )             (20 )      (253 )        (662 ) 
Recoveries
      11          2       3       99         115  
Provisions
      333       87        291       380       258       (148 )      1,201  
Ending balance
    $ 1,117     $ 491      $ 3,591     $ 1,649     $ 154     $       $ 7,002  
 
The allocation of the allowance for loan losses and related loans by classifications of loans at June 30, 2020 and December 31, 2019 is summarized as follows:
 
           
Real Estate
                       
June 30, 2020
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                     
Ending balance
    $ 1,685      $ 741      $ 5,078      $ 2,070      $ 162      $        $ 9,736  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      29                         29  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      1,656        741        5,078        2,070        162           9,707  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $        $        $        $        $    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loans receivable:
                     
Ending balance
    $ 380,998      $ 79,299      $ 494,642      $ 203,752      $ 6,762      $        $ 1,165,453  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      2,180           7,761        2,568              12,509  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      378,818        79,299        485,484        201,004        6,762           1,151,367  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $ 1,397      $ 180      $        $        $ 1,577  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
15
Table of Contents
           
Real Estate
                       
December 31, 2019
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                     
Ending balance
    $ 1,953      $ 473      $ 3,115      $ 1,820      $ 155      $        $ 7,516  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      712           218                 930  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      1,241        473        2,897        1,820        155           6,586  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $        $        $        $        $    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loans receivable:
                     
Ending balance
    $ 118,658      $ 61,831      $ 455,901      $ 207,354      $ 8,365      $        $ 852,109  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      2,260           1,224        2,085              5,569  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      116,390        61,831        453,156        205,026        8,365           844,768  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $ 8      $        $ 1,521      $ 243      $        $        $ 1,772  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
 
 
•
 
Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.
 
 
•
 
Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.
 
 
•
 
Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
 
 
•
 
Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
 
•
 
Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future.
 
1
6
Table of Contents
The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2020 and December 31, 2019:
 
June 30, 2020
   
Pass
     
Special

Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 369,429      $ 5,411      $ 6,158      $        $ 380,998  
Real estate:
               
Construction
      78,153        1,146              79,299  
Commercial
      453,072        26,775        14,795           494,642  
Residential
      198,363        2,182        3,207           203,752  
Consumer
      6,762                 6,762  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,105,779      $ 35,514      $ 24,160      $        $ 1,165,453  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
December 31, 2019
   
Pass
     
Special

Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 109,190      $ 5,992      $ 3,476      $        $ 118,658  
Real estate:
               
Construction
      61,678        153              61,831  
Commercial
      430,771        9,271        15,859           455,901  
Residential
      203,381        1,437        2,536           207,354  
Consumer
      8,365                 8,365  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 813,385      $ 16,853      $ 21,871      $        $ 852,109  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
 
    
Accrual Loans
                
June 30, 2020
   
30-59 Days

Past Due
     
60-89 Days

Past Due
     
90 or More

Days Past

Due
     
Total Past

Due
     
Current
     
Nonaccrual

Loans
     
Total Loans
  
Commercial
    $ 77      $ 25      $        $ 102      $ 380,077      $ 819      $ 380,998  
Real estate:
                     
Construction
                        79,299           79,299  
Commercial
      160                160        491,778        1,307        493,245  
Residential
      363        448        170        981        201,476        1,115        203,572  
Consumer
      33        21        13        67        6,695           6,762  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 633      $ 494      $ 183      $ 1,310      $ 1,159,325      $ 3,241      $ 1,163,876  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                        1,577  
                    
 
 
  
Total Loans
                      $ 1,165,453  
                    
 
 
  
    
Accrual Loans
     
Nonaccrual

Loans
     
Total Loans
  
December 31, 2019
   
30-59 Days

Past Due
     
60-89 Days

Past Due
     
90 or More

Days Past

Due
     
Total Past

Due
     
Current
  
Commercial
    $ 137      $        $        $ 137      $ 117,354      $ 1,159      $ 118,650  
Real estate:
                     
Construction
      9              9        61,822           61,831  
Commercial
      147              147        453,774        459        454,380  
Residential
      3,402        820        18        4,240        202,202        669        207,111  
Consumer
      84        14        27        125        8,240           8,365  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 3,779      $ 834      $ 45      $ 4,658      $ 843,392      $ 2,287      $ 850,337  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                        1,772  
                    
 
 
  
Total Loans
                      $ 852,109  
                    
 
 
  
 
17
Table of Contents
The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2020 and 2019, and as of and for the year ended, December 31, 2019 by major loan classification:
 
                         
This Quarter
     
Year-to-Date
  
June 30, 2020
   
Recorded

Investment
     
Unpaid

Principal

Balance
     
Related

Allowance
     
Average

Recorded

Investment
     
Interest

Income

Recognized
     
Average

Recorded

Investment
     
Interest

Income

Recognized
  
With no related allowance:
                       
Commercial
    $ 2,059      $ 2,169      $        $ 1,579      $ 132      $ 1,603      $ 200  
Real estate:
                     
Construction
                           
Commercial
      9,158        9,659           5,854        19        5,561        66  
Residential
      2,748        2,878           2,520        81        2,539        106  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      13,965        14,706           9,953        232        9,703        372  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                     
Commercial
      121        121        29        121           621     
Real estate:
                     
Construction
                     
Commercial
                     184             391        4  
Residential
                               
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      121        121        29        305             1,012        4  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      2,180        2,290        29        1,700        132        2,224        200  
Real estate:
                     
Construction
                           
Commercial
      9,158        9,659             6,038        19        5,952        70  
R
esidential
      2,748        2,878           2,520        81        2,539        106  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      14,086      $ 14,827      $ 29      $ 10,258      $ 232      $ 10,715      $ 376  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Recorded

Investment
     
Unpaid

Principal

Balance
     
Related

Allowance
     
For the Year Ended
  
December 31, 2019
   
Average

Recorded

Investment
     
Interest

Income

Recognized
  
With no related allowance:
               
Commercial
    $ 1,147      $ 1,257         $ 648      $ 660  
Real estate:
               
Construction
               
Commercial
      1,963        1,963           3,124        1,456  
Residential
      2,329        2,467           2,397        173  
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,439        5,687           6,169        2,289  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
               
Commercial
      1,121        1,121      $ 712        685     
Real estate:
               
Construction
               
Commercial
      782        936        218        658        17  
Residential
               91     
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      1,903        2,057        930        1,434        17  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      2,268        2,378        712        1,333        660  
Real estate:
               
Construction
               
Commercial
      2,745        2,899        218        3,782        1,473  
Residential
      2,329        2,467           2,488        173  
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 7,342      $ 7,744      $ 930      $ 7,603      $ 2,306  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
18
Table of Contents
                         
This Quarter
     
Year-to-Date
  
June 30, 2019
   
Recorded

Investment
     
Unpaid

Principal

Balance
     
Related

Allowance
     
Average

Recorded

Investment
     
Interest

Income

Recognized
     
Average

Recorded

Investment
     
Interest

Income

Recognized
  
With no related allowance:
                         
Commercial
    $ 125      $ 125      $        $ 157      $ 485      $ 163      $ 508  
Real estate:
                         
Construction
                   43           43       
Commercial
      4,222        4,222           4,240        104        4,255        204  
Residential
      2,201        2,201           2,209        34        2,276        125  
Consumer
                         
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      6,548        6,548           6,649        623        6,737        837  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                         
Commercial
      774        774        103        808           926       
Real estate:
                         
Construction
                         
Commercial
      373        373        92        372        4        413        8  
Residential
      178        316        50        179        2        180        3  
Consumer
                         
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      1,325        1,463        245        1,359        6        1,519        11  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      899        899        103        965        485        1,089        508  
Real estate:
                         
Construction
                   43           43       
Commercial
      4,595        4,595        92        4,612        108        4,668        212  
Residential
      2,379        2,517        50        2,388        36        2,456        128  
Consumer
                         
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 7,873      $ 8,011      $ 245      $ 8,008      $ 629      $ 8,256      $ 848  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
For the three and six months ended June 30, interest income related to impaired loans, would have been $35 and $56 in 2020 and $25 and $85 in 2019 had the loans been current and the terms of the loans not been modified.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
 
  •  
Rate Modification—A modification in which the interest rate is changed to a below market rate.
 
  •  
Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed.
 
  •  
Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time.
 
  •  
Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
 
  •  
Combination Modification—Any other type of modification, including the use of multiple categories above.
Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled $9,988 at June 30, 2020, $2,701 at December 31, 2019 and $2,753 at June 30, 2019.
There were nine loans modified as troubled debt restructures during the second quarter of 2020 and nine loans modified during the six months ended June 30, 2020
 
totaling $7,817. There were no loans modified as troubled debt restructures during the second quarter of 2019 and one loan modified during the six months ended June 30, 2019.
 
19
Table of Contents
During the three months ended June 30, 2020, there were no defaults on loans restructured and one default on a restructured loan totaling $368 during the six months ended June 30, 2020. During the three months ended June 30, 2019, there were no defaults on loans restructured and one default on a restructured loan totaling $223 during the six months ended June 30, 2019.
The Company is a party to financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk over and above the amount recognized in the consolidated balance sheets.
Distribution of
off-balance
sheet commitments
 
    
June 30,

2020
     
December 31,

2019
  
Unused portions of lines of credit
    $ 89,916      $ 81,665  
Construction loans
      28,764        41,168  
Commitments to extend credit
      20,841        24,954  
Deposit overdraft protection
      23,964        23,730  
Standby and performance letters of credit
      4,743        4,726  
  
 
 
     
 
 
  
Total
    $ 168,228      $ 176,243  
  
 
 
     
 
 
  
We record a valuation allowance for
off-balance
sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $95 at June 30, 2020 and $89 at December 31, 2019. We do not anticipate that losses, if any, that may occur as a result of funding
off-balance
sheet commitments, would have a material adverse effect on our operating results or financial position.
6. Other assets:
The components of other assets at June 30, 2020 and December 31, 2019 are summarized as follows:
 
    
June 30,

2020
     
December 31,

2019
  
Other real estate owned
    $ 363      $ 82  
Bank owned life insurance
      31,055        30,647  
Restricted equity securities
      1,769        990  
Deferred tax assets
      4,519        4,272  
Lease
right-of-use
assets
      3,508        3,856  
Other assets
      5,364        6,082  
  
 
 
     
 
 
  
Total
    $ 46,578      $ 45,929  
  
 
 
     
 
 
  
7. Leases:
On June 30, 2020, the Company leased 14 locations. The Company’s operating lease
right-of-use
(“ROU”) assets and related lease liabilities were $3,508 and $3,562, respectively, and have remaining terms ranging from 1 to 34 years, including extension options that the Company is reasonably certain will be exercised. For the three and six months ended June 30, 2020, operating lease cost totaled $200 and $399, respectively. On June 30, 2019 the Company’s lease ROU assets and related lease liabilities were $4,205 and $4,223, respectively. For the three and six months ended June 30, 2019, operating lease cost totaled $188 and $335, respectively.
 
20
Table of Contents
The table below summarizes other information related to our operating leases:
 
    
Six Months Ended

June 30, 2020
    
Six Months Ended

June 30, 2019
  
Cash paid for amounts included in the measurement of lease liabilities:
     
Operating cash flows from operating leases
    $ 391     $ 273  
ROU assets obtained in exchange for lease liabilities
    $     $ 4,612  
Weighted average remaining lease term—operating leases, in years
      9.11       10.65  
Weighted average discount rate—operating leases
      3.02 %      3.07 % 
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconcilement to the Company’s current lease liability.
 
2020
    $ 380  
2021
      754  
2022
      697  
2023
      485  
2024
      317  
Thereafter
      1568  
  
 
 
  
Total lease payments
      4,201  
Less imputed interest
      639  
  
 
 
  
  
$
3,562
 
  
 
 
  
For the six months ended June 30, 2020, the Company did not enter into any new lease arrangements.
8. Fair value estimates:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
 
  •  
Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
  •  
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
21
Table of Contents
  •  
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.
The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:
Investment securities:
The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019 are summarized as follows:
 
    
Fair Value Measurement Using
  
June 30, 2020
   
Amount
     
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
     
Significant

Other Observable

Inputs

(Level 2)
     
Significant

Unobservable

Inputs

(Level 3)
  
State and Municipals:
            
Taxable
    $ 9,773         $ 9,773     
Tax-exempt
      8,791           8,791     
Mortgage-backed securities:
            
U.S. Government agencies
      28,495           28,495     
U.S. Government-sponsored enterprises
      23,803           23,803     
Corporate debt obligations
      3,272           3,272     
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 74,134         $ 74,134     
  
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Fair Value Measurement Using
  
December 31, 2019
   
Amount
     
Quoted Prices in

Active Markets for

Identical Assets

(Level 1)
     
Significant

Other Observable

Inputs

(Level 2)
     
Significant

Unobservable

Inputs

(Level 3)
  
State and municipals:
            
Taxable
    $ 24,824         $ 24,824     
Tax-exempt
      4,333           4,333     
Mortgage-backed securities:
            
U.S. Government agencies
      36,134           36,134     
U.S. Government-sponsored enterprises
      22,645           22,645     
Corporate debt obligations
      3,311           3,311     
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 91,247         $ 91,247     
  
 
 
     
 
 
     
 
 
     
 
 
  
Other real estate owned
: Assets acquired through loan foreclosure are recorded at fair value less estimated costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a
charge-off.
If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of other real estate owned is not
re-measured
to fair value on a recurring basis but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals, current sale value assessments by real estate agents or pending offers to acquire by independent buyers and is updated at least annually. The Company classifies other real estate owned in level 3 of the fair value hierarchy.
Impaired loans
: The fair value of impaired loans is specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may include but is not necessarily limited to real estate, personal or business assets including vehicles, equipment, inventory, accounts receivable or marketable securities. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial
 
22
Table of Contents
statements. Likewise, values for inventory, accounts receivable or marketable security collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate or custodian account statements (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income (Loss).
Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2020 and December 31, 2019 are summarized as follows:
 
    
Fair Value Measurement Using
  
June 30, 2020
   
Amount
     
(Level 1)

Quoted Prices

in Active

Markets for

Identical

Assets
     
(Level 2)

Significant

Other

Observable

Inputs
     
(Level 3)

Significant

Unobservable

Inputs
  
Other real estate owned
    $ 363            $ 363  
Impaired loans, net of related allowance
      92              92  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 455            $ 455  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Fair Value Measurement Using
  
December 31, 2019
   
Amount
     
(Level 1)

Quoted Prices

in Active

Markets for

Identical

Assets
     
(Level 2)

Significant

Other

Observable

Inputs
     
(Level 3)

Significant

Unobservable

Inputs
  
Other real estate owned
    $ 82            $ 82  
Impaired loans, net of related allowance
      973              973  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,055            $ 1,055  
  
 
 
     
 
 
     
 
 
     
 
 
  
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at June 30, 2020 and December 31, 2019.
 
    
Quantitative Information about Level 3 Fair Value Measurements
June 30, 2020
   
Fair Value

Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range

(Weighted Average)
Other real estate owned
    $ 363        Appraisal of collateral        Appraisal adjustments        22.0% to 60.0%  (47.0)% 
           Liquidation expenses        10.0% to 10.0%  (10.0)% 
Impaired loans
    $ 92        Appraisal of collateral        Appraisal adjustments        50.0% to 50.0%  (50.0)% 
           Liquidation expenses        0.0% to 0.0%  (0.0)% 
 
    
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019
   
Fair Value

Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range

(Weighted Average)
Other real estate owned
    $ 82        Appraisal of collateral        Appraisal adjustments        42.0% to 60.0%  (52.0)% 
           Liquidation expenses        10.0% to 10.0%  (10.0)% 
Impaired loans
    $ 973        Appraisal of collateral        Appraisal adjustments        10.0% to 50.0%  (22.0)% 
           Liquidation expenses        9.5% to 12.3%  (8.8)% 
 
23
Table of Contents
The carrying and fair values of the Company’s financial instruments at June 30, 2020 and December 31
,
2019 and their placement within the fair value hierarchy are as follows:
 
           
Fair Value Hierarchy
  
June 30, 2020
   
Carrying

Amount
     
Fair Value
     
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
     
Significant

Other

Observable

Inputs

(Level 2)
     
Significant

Unobservable

Inputs

(Level 3)
  
Financial assets:
               
Cash and cash equivalents
    $ 43,228     
$
 43,228     
$
 43,228        
Investment securities
      74,134        74,134        
$
 74,134     
Loans held for sale
      4,252        4,252          
4,252
     
Net loans
(1)
      1,155,717        1,146,533           
$
 1,146,533  
Accrued interest receivable
      1,826        1,826           356        1,470  
Financial liabilities:
               
Deposits
   
$
 1,023,153     
$
 980,672             
Long-term debt
      217,010        216,810             
Accrued interest payable
      457        457          
457
     
 
           
Fair Value Hierarchy
  
December 31, 2019
   
Carrying

Amount
     
Fair Value
     
Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)
     
Significant

Other

Observable

Inputs

(Level 2)
     
Significant

Unobservable

Inputs

(Level 3)
  
Financial assets:
               
Cash and cash equivalents
   
$
 50,348     
$
 50,348     
$
 50,348        
Investment securities
available-for-sale
      91,247        91,247        
$
 91,247     
Loans held for sale
      81        81           81     
Net loans
(1)
      844,593        836,074           
$
 836,074  
Accrued interest receivable
      2,414        2,414           461        1,953  
Financial liabilities:
               
Deposits
   
$
 940,480     
$
 940,546        
$
 940,546     
Long-term debt
      6,971        6,971           6,971     
Accrued interest payable
                435                  435           435     
 
 
1)
The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU
No. 2016-01
where the fair value of loans as of June 30, 2020 and December 31, 2019 was measured using an exit price notion
9. Goodwill
The following table summarizes activity related to the carrying value of goodwill for the six months ended June 30, 2020:
 
Balance, January 1, 2020
  
$
24,754
 
Less: Goodwill impairment
  
 
24,754
 
 
  
 
 
 
Balance, June 30, 2020
  
$
 
 
  
 
 
 
Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the end of the first quarter of 2020, as a result of the onset of the
COVID-19
pandemic, the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was
more-likely-than-not
the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.
 
24
Table of Contents
The Company utilized multiple valuations
approaches
, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the quantitative test, the Company recognized an impairment charge equal to the entire amount of its recorded goodwill on the balance sheet at June 30, 2020 totaling $24,754.
10. Subsequent Events:
In order to mitigate financial stress brought on by the onset of the
COVID-19
pandemic, the Company formulated a cost reduction strategy subsequent to the end of the second quarter of 2020 aimed at substantially lowering operating costs. This plan implemented in August 2020 is expected to lower salaries and benefits expense by $3,431 annually, effective beginning September 1, 2020. The cost associated with severance and furlough expenses related to such action which will be recognized in the third quarter of 2020 is expected to be approximately $454. In another major action instituted to counteract the effects of the pandemic, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital as a result of recognizing certain material nonrecurring expenses in the first half of 2020. Regulatory bodies recently issued guidance reminding bank management of the importance of taking capital preservation actions in these uncertain economic times and encouraging management to remain vigilant on how the current environment impacts their organization’s financial performance, need for capital, and ability to serve customers and communities throughout this crisis.
The extent to which the coronavirus may impact business activity or financial results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others.
 
2
5
Table of Contents
Riverview Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on
Form 10-K
for the year ended December 31, 2019.
Cautionary Note Regarding Forward-Looking Statements:
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Riverview Financial Corporation and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: our ability to achieve the intended benefits of acquisitions and integration of previously acquired businesses; restructuring initiatives; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; and inability of third party service providers to perform. Most recently, the risk factors associated with the onset of
COVID-19
could have a material adverse effect on significant estimates, operations and business results of Riverview. For a discussion of the risks and potential impacts of the
COVID-19
refer to Note 1 entitled “Summary of Significant Accounting Policies-Basis of presentation” in the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Riverview Financial Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform with the current year’s presentation and did not have any effect on the operating results or financial position of the Company.
Critical Accounting Policies:
Disclosure of our significant accounting policies are included in Note 1 to the Consolidated Financial Statements of the Annual Report on
Form 10-K
for the year ended December 31, 2019. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in Note 1 to the consolidated financial statements in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 
31
,
2019
, as filed with the Securities and Exchange Commission on March 16
,
2020
.
 
2
6
Table of Contents
Operating Environment:
Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, decreased at an annualized rate of 32.9% in the second quarter of 2020. The decline in second quarter GDP was primarily in response to the spread of
COVID-19,
as government
“stay-at-home”
orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses. This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted or redirected their spending. The decrease in GDP in the second quarter reflected decreases in personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending.
The impact of the virus has been felt nationally and within our primary market area as unemployment rates have begun to escalate. Unemployment in the United States was 11.1% and 3.7% in June 2020 and 2019. respectively. With respect to the markets we serve, the unemployment rate increased in all the counties in which we have office locations. The average unemployment rate for counties in our market area increased to 12.0% in June 2020 compared to 4.4% in June 2019. The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services we offer, as well as the creditworthiness of potential and current borrowers and delinquency rates. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect borrowers’ ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn may influence the recognition of credit losses in our loan portfolios and has increased our allowance for loan losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers’ businesses could also result in declines in, among other things, trust and wealth management revenue. These developments, as a consequence of the pandemic, are materially impacting our business, the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our first and second quarter results.
Inflationary pressure has reversed, as reflected by the Personal Consumption Expenditures Price Index,
decreasing at a rate of 1.9% in the second quarter of 2020, compared with an increase of 1.3% in the first quarter. The Consumer Price Index
(“CPI-U”)
increased 0.6% in June on a seasonally adjusted basis after declines in the prior three months. Over the last 12 months, the
CPI-U
increased 0.6% as prices have recovered after sharp declines in the first quarter of 2020. Concerns about the spread of the virus and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, including a
50-basis
point reduction on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. Accordingly, these monetary policy actions have already adversely impacted and may continue to impact our net interest margin if we are unable to reduce fund costs at the same magnitude or pace as repricing earning assets. Based on the aforementioned economic conditions, we believe that we may experience a material adverse effect in our business, results of operations and financial condition as a result of the
COVID-19
pandemic for an indefinite period.
Review of Financial Position:
Total assets increased $266,846 to $1,346,800 at June 30, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to $1,165,453 at June 30, 2020, compared to $852,109 at December 31, 2019, an increase of $313,344. The origination of $274,313 under the PPP was primarily responsible for the increase in loans. Business lending, including commercial and commercial real estate loans, increased $301,081, retail lending, including residential mortgages and consumer loans, decreased $5,205, and construction lending increased $17,468 during the six months ended June 30, 2020. Investment securities decreased $17,113, or 18.8%, in the six months ended June 30, 2020. Noninterest-bearing deposits increased $26,162, while interest-bearing deposits increased $56,511 during the six months ended June 30, 2020. Total stockholders’ equity decreased $23,658, to $94,452 at June 30, 2020 from $118,110 at
year-end
2019. The decrease in stockholders’ equity was caused primarily by the recognition of a goodwill impairment charge of $24,754 at the end of the second quarter 2020. For the six months ended June 30, 2020, total assets averaged $1,189,086, an increase of $60,828 from $1,128,258 for the same period in 2019.
Investment Portfolio:
The Company’s entire investment portfolio is held as
available-for-sale,
which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when favorable market opportunities exist. Investment securities
available-for-sale
totaled $74,134 at June 30, 2020, a decrease of $17,113, or 18.8%, from $91,247 at December 31, 2019. The onset of
COVID-19
caused a marked reduction in general market rates which increased the value of fixed rate securities and lowered the yield on adjustable rate securities. This provided the opportunity to aid in funding loan demand and reduce exposure to falling interest rates through the sale of investment securities at a net gain. Accordingly, we sold $27,168 in investment securities
available-for-sale
which consisted of equal portions of longer-term municipal obligations and adjustable rate US Government mortgage backed securities. The net gain on the sale amounted to $815 in the first six months of 2020 compared to a net loss of $42 recognized in the first six months of 2019.
 
27
Table of Contents
For the six months ended June 30, 2020, the investment portfolio averaged $74,350, a decrease of $30,829 compared to $105,179 for the same period last year. The
tax-equivalent
yield on the investment portfolio decreased 22 basis points to 2.88% for the six months ended June 30, 2020, from 3.10% for the comparable period of 2019.
Securities
available-for-sale
are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported a net unrealized holding gain, included as a separate component of stockholders’ equity of $1,386, net of deferred income taxes of $368 at June 30, 2020. This compares with a net unrealized holding gain of $534, net of deferred income taxes of $142, at December 31, 2019. The increase in the unrealized holding gain was the result of reductions in general market rates.
Loan Portfolio:
Loans, net, increased to $1,165,453 at June 30, 2020 from $852,109 at December 31, 2019, an increase of $313,344, or 36.8%. Business loans, including commercial and commercial real estate loans, increased $301,081, or 52.4%, to $875,640 at June 30, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, decreased $5,205, or 2.4%, to $210,514 at June 30, 2020 from $215,719 at December 31, 2019. Construction lending increased $17,468, or 28.3%, to $79,299 at June 30, 2020 from $61,831 at December 31, 2019. The increase in the loan portfolio was attributable to the origination of $274,313 in PPP loans along with net loan growth of $39,031 generated primarily from new markets.
For the six months ended June 30, 2020, loans averaged $975,152, an increase of $87,721 compared to $887,431 for the same period in 2019. The
tax-equivalent
yield on the loan portfolio was 4.33% for the six months ended June 30, 2020, an
89-basis
point decrease from 5.22% for the comparable period last year. The decrease in loan yield was caused by declines in general market rates, reductions in loan accretion and lower yield on originated PPP loans. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate by
150-basis
points in the first half of 2020. Loan accretion included in loan interest income in the first six months of 2020 related to acquired loans was $292 compared to $1,495 for the same period in 2019. The yield earned on PPP loans from interest and fees was 2.45% for the six months ended June 30, 2020.
The economic slowdown associated with
COVID-19
may have an adverse impact on the growth and asset quality of our loan portfolio, especially those industry segments being severely impacted by the pandemic. Specifically, we have identified the following industries, by the amount of aggregate loans and percentage of total loans as of June 30, 2020 in our loan portfolio that may have increased exposure to this pandemic event:
 
    
June 30, 2020
  
Industry:
   
Amount
     
% of Total

Loans
  
Mining, Quarry, Oil and Gas
    $ 1,620        0.14 % 
Construction-Land Subdivision
      22,336        1.92 % 
Manufacturing
      13,598        1.17 % 
Wholesale Trade
      4,832        0.41 % 
Automobile Dealers
      7,116        0.61 % 
Non-Residential
Rentals and Leasing
      261,321        22.42 % 
Residential Rental and Leasing
      112,053        9.61 % 
Health Care
      14,699        1.26 % 
Arts, Entertainment and Recreation
      5,457        0.47 % 
Hospitality
      65,754        5.64 % 
Restaurants
      8,753        0.75 % 
  
 
 
     
   $ 517,539        44.41 % 
  
 
 
     
There have been a number of initiatives recently instituted by the Federal Government that may help offset the adverse impact on the growth and asset quality of our loan portfolio. In response to the economic slowdown caused by
COVID-19,
President Donald Trump signed into law the CARES Act on March 27, 2020 which included numerous provisions including the institution of the establishment of the PPP. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production due to the
COVID-19
pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives
 
28
Table of Contents
for borrowers that utilize the loan proceeds to cover employment-sustaining payroll costs and benefits, as well as other significant costs including the small businesses’ rent, mortgage, and utilities. There has been considerable demand for PPP loans implemented by the CARES Act. As a U.S. Small Business Administration (“SBA”) lender, we have been participating in the PPP and were able to approve 296 PPP loans totaling $39,700 in the first round of government funding. On April 24, 2020, the President signed into law a second round of PPP funding. We continue to actively participate in the PPP and as of June 30, 2020 we originated 1,273 loans totaling $274,313. On April 9, 2020, the FDIC, Federal Reserve and OCC created the PPPLF to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We have utilized the liquidity relief offered by the PPPLF to the extent needed and as a result, do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations. Offsetting the positive influence offered by the PPP is the fact that most states, including the Commonwealth of Pennsylvania, have placed significant restrictions on
non-essential
businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments with
off-balance
sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as
on-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements. With the onset of the
COVID-19
pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans.
The contractual amounts of
off-balance
sheet commitments at June 30, 2020 and December 31, 2019 are summarized as follows:
 
    
June 30,

2020
     
December 31,

2019
  
Unused portions of lines of credit
    $ 89,916      $ 81,665  
Construction loans
      28,764        41,168  
Commitments to extend credit
      20,841        24,954  
Deposit overdraft protection
      23,964        23,730  
Standby and performance letters of credit
      4,743        4,726  
  
 
 
     
 
 
  
Total
    $ 168,228      $ 176,243  
  
 
 
     
 
 
  
Asset Quality:
National, Pennsylvania and our market area unemployment rates at June 30, 2020 and 2019 are summarized as follows:
 
    
2020
    
2019
  
United States
      11.1 %      3.7 % 
Pennsylvania
      13.1 %      4.0 % 
Berks County
      13.1 %      4.4 % 
Blair County
      11.8 %      4.7 % 
Bucks County
      12.7 %      3.7 % 
Centre County
      8.4 %      3.6 % 
Clearfield County
      11.6 %      4.9 % 
Cumberland County
      9.9 %      3.6 % 
Dauphin County
      13.3 %      4.2 % 
Huntingdon County
      13.9 %      5.1 % 
Lebanon County
      11.8 %      4.0 % 
Lehigh County
      14.3 %      4.4 % 
Lycoming County
      12.2 %      4.6 % 
Perry County
      9.6 %      3.8 % 
Schuylkill County
      12.9 %      5.4 % 
Somerset County
      12.4 %      5.0 % 
Employment conditions deteriorated in 2020 for the Nation, Commonwealth of Pennsylvania and within every county in which we have branch locations. The average unemployment rate for all our counties increased to 12.0% in 2020 from 4.4% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was 8.4% which was in Centre County, and the highest recorded rate being 14.3% in Lehigh County. High levels or increases in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality.
 
29
Table of Contents
We currently have in place a number of processes, procedures and monitoring tools to manage credit risk that will assist us in navigating our Company through this pandemic, including but not limited to:
 
  •  
Approval Process – No single approval authorities. All loans are approved by two authorized officers with higher exposures approved by a committee process.
 
  •  
Concentration Management – Concentration limits by industry are established by policy and monitored and reported to the Board of Directors quarterly.
 
  •  
CRE Stress Testing – CRE Stress testing is conducted at the individual transaction level for new loans and with annual reviews of existing relationships. The credit department utilizes a cash flow analysis to stress individual loans for increased interest rate, decreased occupancy, and a combination of these two scenarios. In addition, a break-even interest rate and break-even occupancy level is calculated.
CRE Stress Testing is also conducted quarterly at the portfolio level with results reported to the Board of Directors. The stress testing includes a mild and severe stress test. The stress test factors include: Interest rate shocks for both fixed and variable rate loans; changes or declines in net operating income; and declines in collateral value. Asset quality is quantified by analyzing
loan-to-value
and debt service coverage ratios. Stress testing is commensurate with our current and projected credit risk profile. Management will revisit stress testing procedures in the event our risk profile changes. Changes in the risk profile may stem from the introduction of a new product, changes in economic conditions both locally and nationally, or other internal or external factors that may affect credit quality.
A CRE market summary report is prepared and reported to the Board of Directors quarterly. The report provides a detailed analysis of CRE activity for each of the Bank’s geographic markets, and for each property type within each market. Job growth, employment statistics, demographic statistics, supply and demand, absorption rates, vacancy rates, rental and expense data and market sales history are all considered.
 
  •  
Loan Quality Review – A Commercial Loan Quality Review meeting is conducted quarterly by the Chief Credit Officer and Chief Lending Officer. Commercial account officers, the Credit Manager and the Special Assets Manager are required to attend. This process is intended to ensure the accuracy and timeliness of risk ratings, and to provide a framework for monitoring and managing problem accounts. Credits reviewed include all Pass/Watch rated loans over $750, and all Special Mention and all Substandard rated loans over $25.
 
  •  
Collection Committee – The Collection Committee consist of the President and Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Strategy Officer, and Special Assets Manager. The Collection Committee meets
bi-weekly,
or more often if necessary. The Collection Committee reviews all delinquent accounts, all
non-
accrual accounts, all bankruptcies and workouts in process. The committee is responsible to approve all charge off recommendations, placement of accounts into and out of nonaccrual status, troubled debt restructurings, OREO transactions and sale of OREO, and other actions to be taken on problem loans.
 
  •  
External Loan Review – The Bank engages an outside independent firm on at least an annual basis to conduct a full scope loan review. The scope of review is determined and structured to ensure that the number of loans and percentage of dollar coverage of the commercial loan and commercial mortgage portfolios reviewed will be sufficient to achieve the below-stated objectives and conform to regulatory standards. The objectives of the review are as follows: (i) to identify, evaluate and appropriately grade loans that have potential or existing credit weaknesses; (ii) to determine the overall quality of commercial and industrial loan and commercial real estate mortgage portfolios, including the effect of any concentrations of credit and the changes in the level of such concentrations; (iii) to identify exceptions in financial, loan and collateral documentation; (iv) to evaluate compliance with laws, regulations and internal policies relating to commercial lending activities, and; (v) to provide recommendations on policies, procedures and practices, if appropriate.
Our asset quality deteriorated in the six months ended June 30, 2020. Nonperforming assets increased $8,299, or 163.4%, to $13,379 at June 30, 2020, from $5,080 at December 31, 2019. We experienced increases in all major categories of nonperforming assets in the first half of 2020 with the majority of this increase coming in the form of accruing troubled debt restructured loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.15% at June 30, 2020 compared to 0.60% at December 31, 2019.
Loans on nonaccrual status increased $954 to $3,241 at June 30, 2020 from $2,287 at December 31, 2019. The increase in nonaccrual loans was due to increases of $848 in commercial real estate loans and $446 in residential loans partially offset by decreases of $340 in commercial loans. Accruing loans past due 90 days or more increased $138, and other real estate owned increased $281 during the six months ended June 30, 2020.
 
30
Table of Contents
In response to the
COVID-19
pandemic and its economic impact to our customers, we implemented short-term modification programs that comply with regulatory and accounting guidance to provide temporary payment relief to those borrowers directly impacted by
COVID-19
who were not more than 30 days past due at the time we implemented our modification programs. These programs allow for a deferral of principal, or principal and interest payments for a maximum of 180 days on a cumulative and successive basis. The deferred payments, including interest accrued during the deferral period, if applicable, result in the extension of the loan due date by the number of months deferred.
In March 2020, a joint statement was issued by federal and state regulatory agencies to clarify that short-term loan modifications are not troubled debt restructurings (“TDR”) if made on a good-faith basis in response to
COVID-19
to borrowers who were current prior to the implementation of our deferral programs. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification programs were implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program, and the modifications will not impact a borrower’s repayment history for credit repayment reporting purposes. The Company reevaluates these credits granted deferrals under this guidance each quarter under its existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR. As a result of this reevaluation in the second quarter of 2020, accruing troubled debt restructured loans increased $6,926, to $9,592 at June 30, 2020 from $2,666 at December 31, 2019.
As of June 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 501 loans with outstanding balances totaling $256,422, or 22.0%, of total loans. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes information concerning loan modifications made as of June 30, 2020, by loan classification:
 
                        
Weighted Average

Loan to Value
    
Aggregate Deferred Payments
  
    
Number
of
Loans
     
Amount
     
% of
Outstanding
    
% of Total
Loan
Classification
    
% of
Loans
Modified
    
Principal
     
Interest
  
Commercial
      110      $ 25,858        6.79 %        $ 905      $ 382  
Construction:
                  
Commercial
      11        10,635        20.13 %      71.86 %      73.10 %      528        127  
Hospitality
      4        18,851        71.19 %      66.47 %      69.01 %      55        299  
  
 
 
     
 
 
           
 
 
     
 
 
  
Total
      15        29,486        37.18 %          583        426  
  
 
 
     
 
 
           
 
 
     
 
 
  
Commercial Real Estate:
                  
Multi Family
      25        15,656        26.42 %      66.46 %      75.49 %      146        149  
Owner Occupied
      92        41,784        33.46 %      63.00 %      63.37 %      832        436  
Non-Owner
Occupied
      53        76,439        31.46 %      62.53 %      64.69 %      2,228        710  
Hospitality
      9        24,688        67.40 %      64.81 %      59.57 %      424        443  
Agricultural
      21        12,156        39.31 %      53.99 %      60.39 %      243        284  
  
 
 
     
 
 
           
 
 
     
 
 
  
Total
      200        170,723        34.51 %          3,873        2,022  
  
 
 
     
 
 
           
 
 
     
 
 
  
Residential Real Estate
      161        30,043        14.74 %          445        452  
Consumer
      15        312        4.61 %          11        8  
  
 
 
     
 
 
           
 
 
     
 
 
  
Total
      501      $ 256,422        22.00 %        $ 5,817      $ 3,290  
  
 
 
     
 
 
           
 
 
     
 
 
  
 
31
Table of Contents
The following table summarizes information concerning loan modifications with expired deferrals as of June 30, 2020 by loan classification:
 
Loans Modified with Expired Deferrals
  
     Returning to Repayment      Approved
for Additional Deferral		      Aggregate Deferred Payments
for Loans Approved for
Additional Deferral		  
     Number of
Loans		      Amount      Number of
Loans		      Amount      Principal      Interest  
Commercial
      63      $ 10,643        8      $ 1,352      $ 88      $ 26  
Construction:
                  
Commercial
      5        5,550              
Hospitality
      1        5,912        1        4,947           97  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      6        11,462        1        4,947           97  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial Real Estate:
                  
Multi Family
      13        5,763              
Owner Occupied
      58        26,441        4        3,458        108        73  
Non-Owner
Occupied
      41        87,234        1        1,278        26        25  
Hospitality
      4        10,504        2        8,381        252        158  
Agricultural
      3        1,891        1        100        3        2  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      119        131,833        8        13,217        389        258  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Residential Real Estate
      44        9,410        1        513        14        8  
Consumer
                  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      232      $ 163,348        18      $ 20,029      $ 491      $ 389  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account.
Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables”, for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies”, for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, the Chief Credit Officer identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing standard criteria. Grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events. However, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. We continue to evaluate risks which may impact our loan portfolios. As a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of
COVID-19
on each segment and established specific qualitative adjustment factors. As we weigh additional information on the potential impact of this event on our overall economic prospects coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised as needed, and these revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses”, in the Notes to Consolidated Financial Statements to this Quarterly Report.
The allowance for loan losses increased $2,220 to $9,736 at June 30, 2020, from $7,516 at the end of 2019. The increase in the allowance was a result of the provision for loan losses of $3,812 for the first six months of 2020 exceeding net charge-offs for the period. The provision for loan losses totaled $2,012 for the quarter ended June 30, 2020, compared to $618 for the same period in
 
32
Table of Contents
2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors and changes in qualitative factors related to the reserve build associated with the effects of
COVID-19
as of the balance sheet date. For the six months ended June 30, net charge-offs were $1,592, or 0.33%, of average loans outstanding in 2020 compared to $547, or 0.12%, of average loans outstanding for the same period in 2019. The increase in net charge-offs was primarily due to charge off of one large unsecured commercial loan in the amount of $899 and two related commercial real estate loans in the amount of $501, that were charged off due to deterioration in their financial conditions.
Deposits:
We attract the majority of our deposits from within our
14-county
market area by offering various deposit products including demand deposit accounts, NOW accounts, business checking accounts, money market deposit accounts, savings accounts, club accounts and time deposits, including certificates of deposit and IRA’s. For the six months ended June 30, 2020, total deposits increased $82,673 to $1,023,153 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased $26,162, while interest-bearing accounts increased $56,511. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $67,586 and time deposits, including certificates of deposit and individual retirement accounts decreased $11,075 in the six months ended June 30, 2020.
For the six months ended June 30, interest-bearing deposits averaged $816,298 in 2020 compared to $832,327 in 2019. The cost of interest-bearing deposits was 0.78% in 2020 compared to 1.01% in 2019. Consistent with recent FOMC actions to lower short-term rates due to the onset of
COVID-19,
we also took actions to lower deposit rates to fend off net interest margin contraction due to changes in yields on floating and adjustable rate loans. We anticipate deposit costs to continue to decrease in the short term based on the market rate impact of recent actions of the FOMC to lower its target federal funds rate in the latter part of March 2020.
We expect core deposits to decrease in the coming months as unemployment benefits, PPP funds, and loan deferrals come to an end. Many consumers are working from home or temporarily unemployed but still receiving income through unemployment insurance programs that have provided liquidity for ongoing expenses. Additional liquidity that was created through the advancement of funds through the PPP program should enter the end of their lifespan at the same time companies that deferred loan payments begin making monthly payments again, which should lead to reductions in accumulated funds.
Borrowings:
The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.
Short-term borrowings are generally used to meet temporary funding needs and consist of federal funds purchased, securities sold under agreements to repurchase, and overnight and short-term borrowings from the Atlantic Community Bankers Bank (“ACBB”), Pacific Community Bankers Bank and the FHLB. At June 30, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.
Long-term debt totaled $217,010 at June 30, 2020 as compared to $6,971 at December 31, 2019. For the six months ended June 30, long-term debt averaged $67,346 in 2020 and $6,912 in 2019. The large increase in long-term debt is attributable to advances taken through the Federal Reserve’s PPPLF whereby loans originated through the PPP program can be pledged as security to facilitate advancements made through the program. As of June 30, 2020, we had outstanding borrowing through the program of $189,719 at a rate of 0.35%. At the end of March 2020, we borrowed $20,000 of term debt from the FHLB to take advantage of reductions in general market rates. These funds were used to bolster our liquidity position and provide necessary funding for new loans. The amount of the term debt was spread equally over three, five and seven-year maturities. The FHLB borrowing had a weighted average rate of 0.90% and weighted average life of five years. As a FHLB member, we are required to buy a portion of stock in FHLB for each advance. The adjusted weighted average cost of the borrowing decreases to 0.57% considering the addition of the dividend rate on the FHLB stock at the time the borrowing was granted. The average cost of long-term debt was 1.04% for the six months ended June 30, 2020, a decrease from 7.73% for the same period last year.
As a result of the significant reduction in market rates during the first half of 2020, the Company took advantage of the historically low interest rate environment by entering into a fixed interest rate swap on $9,279 of trust preferred securities at a
10-year
weighted average rate of 2.99%. Prior to entering into the swap arrangement, the interest rate on these securities adjusted quarterly base on three-month LIBOR plus a spread of 2.95% on $5,155 and 1.54% on $4,124 of trust preferred securities.
 
33
Table of Contents
Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and
off-balance
sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.
As a result of the FOMC’s recent actions to lower short-term interest rates in order to mitigate the impact of the
COVID-19
pandemic on the economy, it has become increasing more challenging to manage IRR. IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program that is overseen by the Board of Directors and senior management, which involves a comprehensive risk management process to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in a bank’s risk management process or high-risk exposure relative to capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of a bank’s risk management process is a determining factor when evaluating capital adequacy.
The Asset Liability Committee (“ALCO”), comprised of members of our senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. Conversely, a negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.
Our cumulative
one-year
RSA/RSL ratio equaled 1.43 at June 30, 2020. Given the recent monetary policy actions of the FOMC based on uncertainty surrounding the timing of the recovery from the pandemic and the potential for rates to remain at these low levels, the focus of ALCO has been to reduce our exposure to the effects of repricing assets.
The current position at June 30, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a slight decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.
As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending June 30, 2021, would increase 2.94% and decrease 4.61% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.
 
34
Table of Contents
Liquidity:
Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:
 
  •  
Funding new and existing loan commitments;
 
  •  
Payment of deposits on demand or at their contractual maturity;
 
  •  
Repayment of borrowings as they mature;
 
  •  
Payment of lease obligations; and
 
  •  
Payment of operating expenses.
These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted, and strategies are developed to ensure adequate liquidity at all times.
Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, when compared to other types of funding sources. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.
As a result of the onset of the
COVID-19
pandemic, we have placed increased emphasis on solidifying, monitoring and managing our liquidity position. We believe our liquidity position is strong. At June 30, 2020, we had available liquidity of $43,228 from cash and interest-bearing balances with other banks. Our investment securities portfolio is comprised primarily of highly liquid U.S. Government and Government-Sponsored Enterprises and high credit quality municipal securities. At June 30, 2020,
available-for-sale
investment securities totaled $74,134, and had a net unrealized holding gain of $1,754. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Community Bankers Bank (“ACBB”), Pacific Coast Bankers Bank (“PCBB”), and through a relationship with StoneCastle Partners, LLC, a third party financial institution who provides cash management services to institutional investors. At June 30, 2020, our available borrowing capacity was $351,388 at the FHLB, and was $10,000 each at ACBB and PCBB. StoneCastle provides deposits to community banks up to 15% of their total assets, which would amount to additional liquidity of $202,020 for us based on June 30, 2020. As aforementioned, we intend to utilize the liquidity relief offered by the PPPLF to the extent needed and as such do not expect our participation in the PPP to have a negative impact on our liquidity position.
With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe and extreme scenarios, we have instituted a formalized presentation monthly using various metrics to assist the entire Board of Directors in assessing our liquidity position. With the changes in the industry related to
COVID-19,
we have focused on maintaining greater liquidity. We believe liquidity needs should be greater during this volatile time within the industry and markets. Based upon this volatility, we took steps to maintain a greater balance of cash and cash equivalents on the balance sheet through the sale of investment securities
available-for-sale
and borrowing from the FHLB.
We employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2020. Our noncore funds at June 30, 2020 were comprised of time deposits in denominations of $250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. At June 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 16.01%, while our net short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 0.98%. Comparatively, our net noncore dependence ratio was
-1.03%
while our net short-term noncore funding ratio was 1.54% at
year-end.
The increase in the net noncore funding dependence ratio is associated with borrowing to fund investment in PPP loans and is anticipated to reduce substantially as these loans enter the forgiveness stage. In addition, as compared to peer levels, our reliance on short-term noncore funds remains low.
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $7,120 during the six months ended June 30, 2020 as compared with a decrease of $12,841 for the same period last year. For the six months ended June 30, 2020, we realized net cash outflows of $273 from operating activities and $298,477 from investing activities offset partially by a net cash inflow of $291,630 from financing activities. For the same period of 2019, we recognized net cash inflows of $1,960 from operating activities and $11,442 from investing activities, offset by a net cash outflow of $26,243 from financing activities.
 
35
Table of Contents
Operating activities used net cash of $273 for the six months ended June 30, 2020 compared to generating $1,960 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as goodwill impairment, depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations.
Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $298,477 for the six months ended June 30, 2020. For the comparable period in 2019, investing activities provided net cash of $11,442. For the six months ended June 30, 2020, loan originations of $274,313 from PPP loans were the primary factor for the net increase in loans of $314,982. For the comparable period of 2019, payments and prepayments on loans exceeding loan originations was the primary factor causing the net cash inflow from investing activities.
Financing activities provided net cash of $291,630 for the six months ended June 30, 2020 and used net cash of $26,243 for the same period last year. Liquidity associated with financing PPP loans was generated through funds from deposit gathering and long-term debt. During the six months ended June 30, deposits increased $82,673 in 2020 versus a decrease of $24,893 in 2019, while proceeds from long-term debt were $209,997 for the first six months of 2020.
We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds are expected to enable us to meet all cash obligations as they come due.
Capital:
Stockholders’ equity totaled $94,452, or $10.20 per share, at June 30, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net decrease in stockholders’ equity in the six months ended June 30, 2020 was a result of the recognition of a net loss of $23,489 and the payout of cash dividends of $1,386, offset by the issuance of common stock through Riverview’s ESPP, 401k and dividend reinvestment plans of $346, stock-based compensation of $49 and the recognition of a change in other comprehensive income of $822.
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance.
The Bank’s capital ratios and the minimum ratios required for capital adequacy purposes and to be considered well capitalized under the prompt corrective action provisions are summarized below for the periods ended June 30, 2020 and December 31, 2019:
 
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    
Well Capitalized under
Basel III
  
June 30, 2020:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total risk-based capital (to risk-weighted assets)
    $ 106,468        12.2 %    $ 91,857     
³
 10.5 %    $ 87,483     
³
 10.0 % 
Tier 1 capital (to risk-weighted assets)
      96,637        11.1       74,361     
³
 8.5       69,987     
³
 8.0  
Common equity tier 1 risk-based capital (to risk-weighted assets)
      96,637        11.1       61,238     
³
 7.0       56,864     
³
 6.5  
Tier 1 capital (to average total assets)
      96,637        8.1       47,727     
³
 4.0       59,659     
³
 5.0  
 
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    
Well Capitalized under
Basel III
  
December 31, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total risk-based capital (to risk-weighted assets)
    $ 104,010        12.4 %    $ 88,132     
³
 10.5 %    $ 83,936     
³
 10.0 % 
Tier 1 capital (to risk-weighted assets)
      96,405        11.5       71,345     
³
 8.5       67,148     
³
 8.0  
Common equity tier 1 risk-based capital (to risk-weighted assets)
      96,405        11.5       58,755     
³
 7.0       54,558     
³
 6.5  
Tier 1 capital (to average total assets)
      96,405        9.1       42,489     
³
 4.0       53,112     
³
 5.0  
 
36
Table of Contents
In light of the recent pandemic crisis and its potential adverse impact on capital adequacy within the financial industry, maintaining a high level of capital is of extreme importance to federal regulators as well as our management and Board of Directors. Our asset liability committee continually reviews our capital position. As part of its review, the ALCO considers:
 
  •  
The current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;
 
  •  
The market value of our securities and the resulting effect on capital;
 
  •  
Nonperforming asset levels and the effect deterioration in asset quality will have on capital;
 
  •  
Any planned asset growth;
 
  •  
The anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates;
 
  •  
The source and timing of additional funds to fulfill future capital requirements.
Based on the heightened level of stress on capital caused by the recent events, management maintains a capital plan approved by the Board of Directors. Our capital plan consists of the following areas of focus, among others:
 
  •  
Comprehensive risk assessment including consideration of the following risk elements, among others: credit; liquidity; earnings; economic value of equity; concentration; and economic, both national and local;
 
  •  
Assessing current regulatory capital adequacy levels;
 
  •  
Monitoring procedures consisting of stress testing, using both scenarios of previous historic data of financial crisis periods and the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”), and certain triggering events that would call into question the need to raise additional capital;
 
  •  
Identifying realistic and readily available alternative sources for augmenting capital if higher capital levels are required;
 
  •  
Evaluating dividend levels, and;
 
  •  
Providing a
ten-year
financial projection for analyzing capital adequacy.
In a major action instituted to counteract the effects of the pandemic, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital as a result of recognizing certain material nonrecurring expenses in the first half of 2020. Regulatory bodies recently issued guidance reminding bank management of the importance of taking capital preservation actions in these uncertain economic times and encouraging management to remain vigilant on how the current environment impacts their organization’s financial performance, need for capital, and ability to serve customers and communities throughout this crisis. In concert with this guidance, the Company is in the process of pursuing the issuance of subordinated debt in the amount of $15,000 at the bank holding company that will be down streamed to the Bank in the form of capital. This issuance is expected to be completed by the end of the third quarter of 2020.
Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at June 30, 2020 and December 31, 2019. There are no conditions or negative events since this notification that we believe have changed the Bank’s well capitalized status.
Review of Financial Performance:
We reported a net loss of $23,489, or $(2.54) per basic and diluted weighted average common share, for the first six months of 2020, compared to a net income of $747, or $0.08 per basic and diluted weighted average common share, for the first six months of 2019. The major factor impacting earnings in the second quarter of 2020 was the recognition of goodwill impairment of $24,754. The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity and the Company’s cash balances.
Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the end of the first quarter of 2020 as a result of the onset of the
COVID-19
pandemic, the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was
more-likely-than-not
the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.
 
37
Table of Contents
The Company utilized multiple valuations approaches, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Also impacting net income for the first half of 2020 was a provision for loan losses of $3,812, an increase of $2,611 compared to the same period last year. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors, and changes in qualitative factors related to the reserve build associated with the effects of
COVID-19
as of the balance sheet date. As the Company weighs additional information on the potential impact of this event on our overall economic prospects, coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised, as needed. These revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. Another factor influencing the level of earnings in the first six months of 2020 was the recognition of $1,221 less of net accretion on acquired assets and assumed liabilities as compared to the first six months of 2019. Partially offsetting the impact of these reductions to income was the recognition of an $815 net gain on the sale of investment securities in order to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. The results for the first six months of 2019 included the first quarter recognition of $2,218 in nonrecurring executive separation expenses along with the $456 in severance charges recorded in the second quarter. If the
COVID-19
pandemic persists, it will continue to have a severe effect on economic activity and will cause greater negative consequences for our customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
In order to mitigate financial stress brought on by the onset of the
COVID-19
pandemic, the Company formulated a cost reduction strategy subsequent to the end of the second quarter of 2020 aimed at substantially lowering operating costs. This plan implemented in August 2020 is expected to lower salaries and benefits expense by $3,431 annually, effective beginning September 1, 2020. The cost associated with severance and furlough expenses related to such action which will be recognized in the third quarter of 2020 is expected to be approximately $454.
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:
 
  •  
Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;
 
  •  
Changes in general market rates; and
 
  •  
The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities.
Tax-exempt
loans and investments carry
pre-tax
yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable,
tax-exempt
income and yields are reported herein on a
tax-equivalent
basis using the prevailing federal statutory tax rate of 21% in 2020 and 2019, respectively.
For the six months ended June 30,
tax-equivalent
net interest income decreased $1,985 to $18,598 in 2020 from $20,583 in 2019. The decrease in
tax-equivalent
net interest income was primarily attributable to a decline in the
tax-equivalent
loan yield due to reductions in market rates and the addition of lower yielding PPP loans and the realization of lower levels of loan accretion from purchase accounting marks. The
tax-equivalent
net interest margin for the six months ended June 30 was 3.43% in 2020 compared to 4.03% in 2019. The net interest spread decreased to 3.29% for the six months ended June 30, 2020 from 3.83% for the six months ended June 30, 2019. The
tax-equivalent
yield on the loan portfolio decreased to 4.33% in 2020 compared to 5.22% in 2019. The actions taken by the Federal Open Market Committee in March 2020 to reduce its target federal funds rate by 150 basis points impacted the loan portfolio yield as it had a corresponding adverse effect on our floating and adjustable rate loans. Also influencing the decline was recognizing the lower yield earned equating to 2.45% on the addition of PPP loans in the second quarter of 2020. The addition of PPP
 
38
Table of Contents
loans provided a net benefit of $1,022 to net interest income in the first half of 2020. Loan accretion related to purchase accounting marks from mergers declined in the first six months was $292 in 2020 and $1,495 in 2019. Overall, average earning assets increased $59,358 while average interest-bearing liabilities increased $59,108 in comparing the first six months of 2020 with 2019.
For the six months ended June 30,
tax-equivalent
interest income decreased $2,862, to $22,158 in 2020 from $25,020 in 2019. An unfavorable rate variance due to the lower yield earned on PPP loans and reductions in market rates more than offset a favorable volume variance primarily caused by the addition of PPP loans. Specifically, the overall yield on earning assets, on a fully
tax-equivalent
basis, decreased for the six months ended June 30, 2020 to 4.09% as compared to 4.90% for the six months ended June 30, 2019. With respect to the volume variance, average earning assets increased $59,358 to $1,088,834 for the first six months of 2020 from $1,029,476 for the same period in 2019.
Tax-equivalent
loan income decreased $1,961 comparing the first half of 2020 and 2019. The increase in average loans of $87,721 was more than offset by an
89-basis
point decline in yield. The decrease in average investments of $30,829 was the primary cause of the $555 reduction in
tax-equivalent
interest income on investments.
Total interest expense decreased $877 to $3,560 for the six months ended June 30, 2020 from $4,437 for the six months ended June 30, 2019. Reductions in fund costs more than offset increases in average volumes on interest-bearing liabilities. Comparing the first six months of 2020 and 2019, the weighted average cost of funds decreased 27 basis points to 0.80% from 1.07% while the average volume of interest-bearing liabilities increased $59,108 to $898,347 from $839,239. Money market and NOW account costs declined 58 and 38 basis points and were the major cause in lowering interest expense on deposits. The average volume and weighted average yield for long-term debt for the six months ended June 30, 2020 were $67,346 and 1.04%, compared to $6,912 and 7.73% for the same comparison period from 2019. The volume increase was due to liquidity-based borrowings established at FHLB and the Federal Reserve to primarily fund PPP loan originations. We expect that our net interest margin will continue to decrease as our rate sensitive assets decline at a frequency and magnitude greater than our fund costs given the uncertainty in the market as a result of the pandemic.
For the three months ended June 30,
tax-equivalent
net interest income decreased $1,001 to $9,752 in 2020 from $10,753 in 2019. The decrease in
tax-equivalent
net interest income was attributable to a decline in net accretion from purchased assets and assumed liabilities and reduced earnings from general market rates, partially offset by increased net earnings from PPP loans. Average earning assets increased $163,772 while average earning liabilities increased $152,879 comparing the second quarters of 2020 and 2019. The
tax-equivalent
net interest margin for the three months ended June 30, was 3.29% in 2020 compared to 4.20% in 2019. The net interest spread decreased to 3.18% for the three months ended June 30, 2020 from 4.00% for the three months ended June 30, 2019. Net accretion decreased to $213 from $1,119 comparing the second quarters of 2020 and 2019. Net interest income generated from PPP loans amounted to $1,022 in the second quarter of 2020.
For the three months ended June 30,
tax-equivalent
interest income decreased $1,588, to $11,395 in 2020 from $12,983 in 2019. An unfavorable rate variance in interest income of $12,230 was partially offset by favorable gains of $10,642 due to a greater volume of average earning assets compared to average interest-bearing liabilities. The overall yield on earning assets, on a fully
tax-equivalent
basis, decreased for the three months ended June 30, 2019 to 3.85% as compared to 5.07% for the three months ended June 30, 2019. This decrease was a result of the combined impact of lower loan yields from declines in market rates and the addition of low yielding PPP loans along with the effects of reduced accretion on purchased loans. Average loans increased $187,841 comparing the second quarters of 2020 and 2019. The
tax-equivalent
yield on the loan portfolio was 4.08% for the three months ended June 30, 2020 compared to 5.41% for the same period last year. The combined impact of loan rate and volume variances caused an overall decrease in interest earned on loans of $1,074. The yield earned on investments decreased 20 basis points for the second quarter of 2020 to 2.91% from 3.11% for the second quarter of 2019. This coupled with average investments decreasing to $66,672 for the quarter ended June 30, 2020 compared to $102,135 for the same period in 2019, resulted in a decrease in
tax-equivalent
interest income of $310. Overall
tax-equivalent
interest earned on investments was $482 for the three-month period ended June 30, 2020 compared to $792 for the same period in 2019.
Total interest expense decreased $587 to $1,643 for the three months ended June 30, 2020 from $2,230 for the three months ended June 30, 2019. A favorable rate variance more than offset an unfavorable volume variance and caused interest expenses to decrease. The cost of funds decreased to 0.67% for the three months ended June 30, 2020 as compared to 1.07% for the same period in 2019. The average volume of interest-bearing liabilities increased to $988,804 for the three months ended June 30, 2020, from $835,925 for the three months ended June 30, 2019. Average interest-bearing deposits increased $8,509 to $837,512 for the second quarter of 2020 from $829,003 for the same period last year. Average long-term debt increased to $112,875 for the second quarter of 2020 from $6,922 for the same period last year to provide funding for PPP loans.
The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Average balances were calculated using average daily balances. Averages for earning assets include nonaccrual loans. Loan fees are included in interest income on loans. Investment averages include
available-for-sale
securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate.
 
39
Table of Contents
    
Six months ended
  
    
June 30, 2020
    
June 30, 2019
  
    
Average
Balance
     
Interest
     
Yield/
Rate
    
Average
Balance
     
Interest
     
Yield/
Rate
  
Assets:
                 
Earning assets:
                 
Loans
                 
Taxable
    $ 939,993      $ 20,384        4.36 %    $ 852,427      $ 22,368        5.29 % 
Tax exempt
      35,159        609        3.48 %      35,004        586        3.38 % 
Investments
                 
Taxable
      67,815        931        2.76 %      96,305        1,472        3.08 % 
Tax exempt
      6,535        133        4.09 %      8,874        147        3.34 % 
Interest bearing deposits
      39,332        101        0.52 %      36,866        447        2.45 % 
Federal funds sold
                 
  
 
 
     
 
 
       
 
 
     
 
 
     
Total earning assets
      1,088,834        22,158        4.09 %      1,029,476        25,020        4.90 % 
Less: allowance for loan losses
      7,754             6,457        
Other assets
      108,006             105,239        
  
 
 
          
 
 
        
Total assets
      1,189,086           $ 1,128,258        
  
 
 
          
 
 
        
Liabilities and Stockholders’ Equity:
                 
Interest bearing liabilities:
                 
Money market accounts
    $ 109,502      $ 234        0.43 %    $ 113,159      $ 566        1.01 % 
NOW accounts
      281,703        460        0.33 %      276,036        978        0.71 % 
Savings accounts
      138,501        88        0.13 %      131,797        66        0.10 % 
Time deposits
      286,592        2,402        1.69 %      311,335        2,562        1.66 % 
Short term borrowings
      14,703        28        0.38 %         
Long-term debt
      67,346        348        1.04 %      6,912        265        7.73 % 
  
 
 
     
 
 
       
 
 
     
 
 
     
Total interest-bearing liabilities
      898,347        3,560        0.80 %      839,239        4,437        1.07 % 
Non-interest-bearing
demand deposits
      158,065             157,908        
Other liabilities
      13,365             16,975        
Stockholders’ equity
      119,309             114,136        
  
 
 
          
 
 
        
Total liabilities and stockholders’ equity
    $ 1,189,086           $ 1,128,258        
  
 
 
          
 
 
        
Net interest income/spread
       $ 18,598        3.29 %       $ 20,583        3.83 % 
     
 
 
          
 
 
     
Net interest margin
            3.43 %            4.03 % 
Tax-equivalent
adjustments:
                 
Loans
       $ 128           $ 123     
Investments
         28             31     
     
 
 
          
 
 
     
Total adjustments
       $ 156           $ 154     
     
 
 
          
 
 
     
Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2020.
 
40
Table of Contents
The provision for loan losses totaled $3,812 for the six months ended June 30, 2020, compared to $1,201 in 2019. For the quarter ended June 30, the provision for loan losses was $2,012 in 2020 compared to $618 in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors and changes in qualitative factors related to the reserve build associated with the effects of
COVID-19
as of the balance sheet date. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt along with increasing unemployment for those individuals depending on these businesses for income. As a result, our future provisions may increase by the growth of loan delinquencies and charge-offs resulting from
COVID-19
pandemic related financial stress.
Noninterest Income:
For the six months ended June 30, noninterest income totaled $4,931 in 2020, an increase of $994 from $3,937 in 2019. The increase was primarily attributable to recognizing an $815 net gain on the sale of investment securities to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. This compares to a $42 loss from the sale of investment securities recorded in 2019. Service charges, fees and commissions increased $24 as service charge initiative benefits generated in the first quarter of 2020 decreased due to temporary
COVID-19
induced suspensions and reductions to service charges in the second quarter of 2020. Mortgage banking income increased $293 for the six months ended June 30, 2020 as compared to the same period in 2019 as borrowers took advantage of low interest rates. Trust and wealth management income declined for the first six months of 2020 by $118 and $67 compared to the first six months of 2019 due primarily to a marked slowdown in activities brought on by the impact of
COVID-19.
For the quarter ended June 30, noninterest income totaled $2,001 in 2020, a decrease of $125 from $2,126 in 2019. The decrease in noninterest income for the quarter was due primarily to reductions in services charges, fees and commissions of $304, trust income of $71 and wealth management income of $40 partially offset by increases in mortgage banking income of $291.
Noninterest Expenses:
In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies to control the variable expenses.
Noninterest expense increased $20,718, or 92.3%, to $43,166 for the six months ended June 30, 2020, from $22,448 for the same period last year. The increase was primarily due to the writing off of the entire amount of goodwill on the books totaling $24,754. Excluding this nonrecurring charge, noninterest expense would have decreased $4,036, or 18.0%, comparing the six months ended June 30, 2020 and 2019. Net occupancy expense increased $115, or 5.4%, to $2,248 for the first six months of 2020 from $2,133 for the same period last year. Higher costs related to building and equipment maintenance and repairs caused the increase. Other expenses decreased $757, or 11.6%, to $5,795 in the first six months of 2020 compared to $6,552 for the same period last year. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.
For the three months ended June 30, 2020, noninterest expense increased $23,470, to $33,954 from $10,484 for the same period last year. Excluding goodwill impairment of $24,754 realized in the second quarter of 2020, noninterest expense would have decreased $1,284, or 12.2%. Salaries and employee benefit expense was $4,985 for the quarter ended June 30, 2020, a decrease of $845 over the same period in 2019 due to previously implemented efficiency initiatives. For the second quarter, other expenses decreased to $2,978 in 2020 from $3,508 in 2019, or 15.1%.
Income Taxes:
We recorded an income tax benefit of $116 for the six months ended June 30, 2020 as compared to a tax benefit of $30 for the six months ended June 30, 2019. For the three months ended June 30, we recorded a tax benefit of $172 in 2020 as compared to income tax expense of $268 in 2019.
 
41
Table of Contents
Riverview Financial Corporation
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a smaller reporting company.
 
Item 4.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
At June 30, 2020, the end of the period covered by this Quarterly Report on Form
10-Q,
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in
Rule 13a-15(e)
under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at June 30, 2020, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.
(b) Changes in internal control.
There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
In the opinion of the Company, after review with legal counsel, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would have a material effect on the consolidated results of operations or financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of the Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.
 
Item 1A.
Risk Factors
Not required for smaller reporting companies.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
 
Item 3.
Defaults upon Senior Securities
Not applicable.
 
Item 4.
Mine Safety Disclosures
Not applicable.
 
Item 5.
Other Information
Not applicable.
 
42
Table of Contents
Item 6.
Exhibits.
The following Exhibits are incorporated by reference hereto:
 
31.1    Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
31.2    Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
32.1    Chief Executive Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2    Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101    Interactive Data File (XBRL).
 
43
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
By:   /s/ Brett D. Fulk
  Brett D. Fulk
  President and Chief Executive Officer
  (Principal Executive Officer)
Date: August 10, 2020
 
By:   /s/ Scott A. Seasock
  Scott A. Seasock
  Chief Financial Officer
  (Principal Financial Officer)
Date: August 10, 2020
 
44