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 JuneSeptember 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
9,281,015 at July 3October 
029
, 2020.
 
 
 
Table of Contents
RIVERVIEW FINANCIAL CORPORATION
FORM
10-Q
For the Quarter Ended JuneSeptember 30, 2020
 
Contents
Page No.
PART I.
FINANCIAL INFORMATION:
    
Page No.
PART I.
FINANCIAL INFORMATION:
Item 1.
Financial Statements (Unaudited)
  
 
Consolidated Balance Sheets at JuneSeptember 30, 2020 and December 31, 2019
3
Consolidated Statements of Income and Comprehensive Income for the Three and SixNine Months Ended JuneSeptember 30, 2020 and 2019
4
Consolidated Statements of Changes in Stockholders’ Equity for the Three and SixNine Months Ended JuneSeptember 30, 2020 and 2019
5
Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2020 and 2019
6
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
Item 4.
Controls and Procedures
42
PART II
OTHER INFORMATION:
   42 
Item 4.
Controls and Procedures42
PART II
OTHER INFORMATION:
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
Defaults upon Senior Securities
42
Item 4.
Mine Safety Disclosures
42
Item 5.
Other Information
42
Item 6.
Exhibits
43
Signatures
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: 0 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 
  
 
 
  
 
 
 
   
September 30,
2020
  
December 31,
2019
 
Assets:
   
Cash and due from banks
  $10,646  $11,838 
Interest-bearing deposits in other banks
   21,312   38,510 
Investment securities
available-for-sale
   98,846   91,247 
Loans held for sale
   4,547   81 
Loans, net
   1,163,442   852,109 
Less: allowance for loan losses
   11,624   7,516 
  
 
 
  
 
 
 
Net loans
   1,151,818   844,593 
Premises and equipment, net
   18,419   17,852 
Accrued interest receivable
   3,218   2,414 
Goodwill
    24,754 
Intangible assets
   2,227   2,736 
Other assets
   45,739   45,929 
  
 
 
  
 
 
 
Total assets
  $1,356,772  $1,079,954 
  
 
 
  
 
 
 
Liabilities:
   
Deposits:
   
Noninterest-bearing
  $178,168  $147,405 
Interest-bearing
   853,145   793,075 
  
 
 
  
 
 
 
Total deposits
   1,031,313   940,480 
Short-term borrowings
Long-term debt
   217,031   6,971 
Accrued interest payable
   591   435 
Other liabilities
   12,413   13,958 
  
 
 
  
 
 
 
Total liabilities
   1,261,348   961,844 
  
 
 
  
 
 
 
Stockholders’ equity:
   
Common stock: 0 par value, authorized 20,000,000 shares; September 30, 2020, issued and outstanding 9,279,503 shares; December 31, 2019, issued and outstanding 9,216,616 shares
   102,672   102,206 
Capital surplus
   190   112 
Retained earnings (accumulated deficit)
   (8,040)   16,140 
Accumulated other comprehensive income (loss)
   602   (348) 
  
 
 
  
 
 
 
Total stockholders’ equity
   95,424   118,110 
  
 
 
  
 
 
 
Total liabilities and stockholders’ equity
  $1,356,772  $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 
   
Three Months Ended
  
Nine Months Ended
 
September 30,
  
2020
   
2019
  
2020
  
2019
 
Interest income:
      
Interest and fees on loans:
      
Taxable
  $11,265   $12,283  $31,649  $34,651 
Tax-exempt
   223    259   704   722 
Interest and dividends on investment securities
available-for-sale:
      
Taxable
   360    641   1,291   2,113 
Tax-exempt
   71    43   176   159 
Interest on interest-bearing deposits in other banks
   11    200   112   647 
  
 
 
   
 
 
  
 
 
  
 
 
 
Total interest income
   11,930    13,426   33,932   38,292 
  
 
 
   
 
 
  
 
 
  
 
 
 
Interest expense:
      
Interest on deposits
   1,200    2,027   4,384   6,199 
Interest on short-term borrowings
       28  
Interest on long-term debt
   304    127   652   392 
  
 
 
   
 
 
  
 
 
  
 
 
 
Total interest expense
   1,504    2,154   5,064   6,591 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net interest income
   10,426    11,272   28,868   31,701 
Provision for loan losses
   1,844    1,049   5,656   2,250 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net interest income after provision for loan losses
   8,582    10,223   23,212   29,451 
  
 
 
   
 
 
  
 
 
  
 
 
 
Noninterest income:
      
Service charges, fees and commissions
   1,099    1,129   3,491   3,497 
Commission and fees on fiduciary activities
   246    314   669   855 
Wealth management income
   220    226   636   709 
Mortgage banking income
   401    151   900   357 
Bank owned life insurance investment income
   192    193   578   574 
Net gain (loss) on sale of investment securities
available-for-sale
     (53)   815   (95) 
  
 
 
   
 
 
  
 
 
  
 
 
 
Total noninterest income
   2,158    1,960   7,089   5,897 
  
 
 
   
 
 
  
 
 
  
 
 
 
Noninterest expense:
      
Salaries and employee benefits expense
   5,411    5,232   15,452   18,572 
Net occupancy and equipment expense
   1,428    1,041   3,676   3,174 
Amortization of intangible assets
   170    194   509   582 
Goodwill impairment
       24,754  
Net cost (benefit) of operation of other real estate owned
   51    (15)   40   20 
Other expenses
   2,918    2,979   8,713   9,531 
  
 
 
   
 
 
  
 
 
  
 
 
 
Total noninterest expense
   9,978    9,431   53,144   31,879 
  
 
 
   
 
 
  
 
 
  
 
 
 
Income (loss) before income taxes
   762    2,752   (22,843)   3,469 
Income tax expense (benefit)
   67    486   (49)   456 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss)
   695    2,266   (22,794)   3,013 
  
 
 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss):
      
Unrealized (gain) loss on investment securities
available-for-sale
   114    (256)   2,007   2,703 
Reclassification adjustment for net (gain) loss on sale of investment securities
available-for-sale
included in net income (loss)
     53   (815)   95 
Net change in derivative fair value
   49     11  
  
 
 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss)
   163    (203)   1,203   2,798 
Income tax expense (benefit) related to other comprehensive income
   35    (42)   253   588 
  
 
 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss), net of income taxes
   128    (161)   950   2,210 
  
 
 
   
 
 
  
 
 
  
 
 
 
Comprehensive income (loss)
  $823   $2,105  $(21,844)  $5,223 
  
 
 
   
 
 
  
 
 
  
 
 
 
Per share data:
      
Net income (loss):
      
Basic
  $0.08   $0.25  $(2.46)  $0.33 
Diluted
  $0.08   $0.25  $(2.46)  $0.33 
Average common shares outstanding:
      
Basic
   9,273,666    9,173,901   9,248,856   9,159,281 
Diluted
   9,273,666    9,181,076   9,248,856   9,172,015 
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 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
For the nine months ended September 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
 (loss)
      (22,794)    (22,794) 
Other comprehensive income
 (loss)
,
 net of income taxes
       950   950 
Issuance under ESPP, 401k and Dividend Reinvestment plans: 62,887 shares
   466       466 
Stock based compensation
     78     78 
Dividends declared, $0.15 per share
      (1,386)    (1,386) 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, September 30, 2020
  $102,672   $190  $(8,040)  $602  $95,424 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, January 1, 2019
  $101,134   $332  $15,063  $(2,619)  $113,910 
Net income
 (loss)
      3,013    3,013 
Other comprehensive income (loss), net of income taxes
       2,210   2,210 
Issuance under ESPP, 401k and Dividend Reinvestment plans: 42,518 shares
   474       474 
Exercise of stock options: 18,492 shares
   199    (32)     167 
Dividends declared, $0.28 per shares
      (2,519)    (2,519) 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, September 30, 2019
  $101,807   $300  $15,557  $(409)  $117,255 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
For the three months ended September 30,
  
Common
Stock
   
Capital
Surplus
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Total
 
Balance, July 1, 2020
  $102,552   $161  $(8,735)  $474  $94,452 
Net income
 (loss)
      695    695 
Other comprehensive income
 (loss)
,
 net of income taxes
       128   128 
Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,806 shares
   120       120 
Stock based compensation
     29     29 
Dividends declared, $0.00 per share
      
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, September 30, 2020
  $102,672   $190  $(8,040)  $602  $95,424 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, July 1, 2019
  $101,644   $304  $13,978  $(248)  $115,678 
Net income
 (loss)
      2,266    2,266 
Other comprehensive income (loss), net of income taxes
       (161)   (161) 
Issuance under ESPP, 401k and Dividend Reinvestment plans: 14,534 shares
   159       159 
Exercise of stock options: 361 shares
   4    (4)    
Dividends declared, $0.08 per shares
      (687)    (687) 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
Balance, September 30, 2019
  $101,807   $300  $15,557  $(409)  $117,255 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
 
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 
  
 
 
  
 
 
 
For the Nine Months Ended September 30,
  
2020
  
2019
 
Cash flows from operating activities:
   
Net income (loss)
  $(22,794)  $3,013 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
   
Depreciation and amortization of premises and equipment
   952   874 
Provision for loan losses
   5,656   2,250 
Stock based compensation
   78  
Net amortization of investment securities
available-for-sale
   559   576 
Net cost (benefit) of operation of other real estate owned
   40   20 
Net (gain) loss on sale of investment securities
available-for-sale
   (815)   95 
Amortization of purchase adjustment on loans
   (592)   (2,868) 
Amortization of intangible assets
   509   582 
Amortization of assumed discount on long-term debt
   63   59 
Impairment of goodwill
   24,754  
Deferred income taxes
   (779)   273 
Proceeds from sale of loans originated for sale
   26,921   10,335 
Net gain on sale of loans originated for sale
   (900)   (357) 
Loans originated for sale
   (30,487)   (9,677) 
Bank owned life insurance investment income
   (578)   (574) 
Net change in:
   
Accrued interest receivable
   (804)   259 
Other assets
   2,107   (1,651) 
Accrued interest payable
   156   (52) 
Other liabilities
   (1,545)   (715) 
  
 
 
  
 
 
 
Net cash provided by (used in) operating activities   2,501   2,442 
  
 
 
  
 
 
 
Cash flows from investing activities:
   
Investment securities
available-for-sale:
   
Purchases
   (42,151)   (32,058) 
Proceeds from repayments
   8,832   12,458 
Proceeds from sales
   27,168   19,767 
Proceeds from the sale of other real estate owned
   355   728 
Net (increase) decrease in restricted equity securities
   (837)   (12) 
Net (increase) decrease in loans
   (312,627)   10,931 
Purchases of premises and equipment
   (1,519)   (1,321) 
Premium paid on bank owned life insurance
   (22)   (22) 
  
 
 
  
 
 
 
Net cash provided by (used in) investing activities   (320,801)   10,471 
  
 
 
  
 
 
 
Cash flows from financing activities:
   
Net increase (decrease) in deposits
   90,833   (35,010) 
Proceeds from long-term debt
   209,997  
Issuance under ESPP, 401k and DRP plans
   466   474 
Proceeds from exercise of stock options
    167 
Cash dividends paid
   (1,386)   (2,519) 
  
 
 
  
 
 
 
Net cash provided by (used in) financing activities   299,910   (36,888) 
  
 
 
  
 
 
 
Net increase in cash and cash equivalents   (18,390)   (23,975) 
Cash and cash equivalents—beginning
   50,348   53,816 
  
 
 
  
 
 
 
Cash and cash equivalents—ending
  $31,958  $29,841 
  
 
 
  
 
 
 
Supplemental disclosures:
   
Cash paid during the period for:
   
Interest
  $4,908  $6,643 
  
 
 
  
 
 
 
Noncash items from operating activities:
   
Operating lease
right-of-use
assets and liabilities
   $4,529 
  
 
 
  
 
 
 
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  $114 
  
 
 
  
 
 
 
See notes to consolidated financial statements.
 
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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 sixnine months ended as of JuneSeptember 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 conditionscondition 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 paymentpayments 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
some
locations to
drive-up
and ATM services, with lobby access available by appointment only, reduced hours of operation at some
 
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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 inon 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.
2020. 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.
 
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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.
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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.
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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 JuneSeptember 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) 
  
 
 
   
 
 
 
   
September 30,
2020
   
December 31,
2019
 
Net unrealized
gain (
loss
)
on investment securities
available-for-sale
  $1,868   $676 
Income tax expense
   392    142 
  
 
 
   
 
 
 
Net of income taxes
   1,476    534 
  
 
 
   
 
 
 
Benefit plan adjustments
   (1,117)    (1,117) 
Income tax benefit
   (235)    (235) 
  
 
 
   
 
 
 
Net of income taxes
   (882)    (882) 
  
 
 
   
 
 
 
Derivative fair value adjustment
   11   
Income tax benefit
   3   
  
 
 
   
 
 
 
Net of income taxes
   8   
  
 
 
   
 
 
 
Accumulated other comprehensive income (loss)
  $602   $(348) 
  
 
 
   
 
 
 
 
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Other comprehensive income (loss) and related tax effects for the three and sixnine months ended JuneSeptember 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 
  
 
 
   
 
 
 
Three months ended September 30,
  
2020
   
2019
 
Unrealized gain (loss) on investment securities
available-for-sale
  $114   $(256) 
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
     53 
Net change in derivative fair value
   49   
  
 
 
   
 
 
 
Other comprehensive income (loss) before taxes
   163    (203) 
Income tax expense (benefit)
   35    (42) 
  
 
 
   
 
 
 
Other comprehensive income (loss)
  $128   $(161) 
  
 
 
   
 
 
 
 
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 
  
 
 
   
 
 
 
Nine months ended September 30,
  
2020
   
2019
 
Unrealized gain on investment securities
available-for-sale
  $2,007   $2,703 
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
   (815)    95 
Net change in derivative fair value
   11   
  
 
 
   
 
 
 
Other comprehensive income before taxes
   1,203    2,798 
Income tax expense
   253    588 
  
 
 
   
 
 
 
Other comprehensive income
  $950   $2,210 
  
 
 
   
 
 
 
 
(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 sixnine months ended JuneSeptember 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 
Three months ended September 30,
  
2020
   
2019
 
Numerator:
    
Net income
  $695   $2,266 
  
 
 
   
 
 
 
Denominator:
    
Basic
   9,273,666    9,173,901 
Dilutive options
     7,175 
  
 
 
   
 
 
 
Diluted
   9,273,666    9,181,076 
  
 
 
   
 
 
 
Earnings per share:
    
Basic
  $0.08   $0.25 
Diluted
  $0.08   $0.25 
 
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 
Nine months ended September 30,
  
2020
   
2019
 
Numerator:
    
Net income (loss)
  $(22,794)   $3,013 
  
 
 
   
 
 
 
Denominator:
    
Basic
   9,248,856    9,159,281 
Dilutive options
     12,734 
  
 
 
   
 
 
 
Diluted
   9,248,856    9,172,015 
  
 
 
   
 
 
 
Earnings per share:
    
Basic
  $(2.46)   $0.33 
Diluted
  $(2.46)   $0.33 
 
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For the three and sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2019, there were 43,35059,350 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 JuneSeptember 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 
  
 
 
   
 
 
   
 
 
   
 
 
 
September 30, 2020
  
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
State and municipals:
        
Taxable
  $20,483   $392   $34   $20,841 
Tax-exempt
   20,523    358    44    20,837 
Mortgage-backed securities:
        
U.S. Government agencies
   26,792    835      27,627 
U.S. Government-sponsored enterprises
   23,180    505    20    23,665 
Corporate debt obligations
   6,000    9    133    5,876 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $96,978   $2,099   $231   $98,846 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
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 JuneSeptember 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 
  
 
 
 
September 30, 2020
  
Fair
Value
 
Within one year
  $543 
After one but within five years
   5,623 
After five but within ten years
   11,290 
After ten years
   30,099 
  
 
 
 
   47,555 
Mortgage-backed securities
   51,291 
  
 
 
 
Total
  $98,846 
  
 
 
 
Securities with a fair value of $57,865$68,604 and $63,389 at JuneSeptember 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 JuneSeptember 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.
 
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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 JuneSeptember 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
 
September 30, 2020
  
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
State and municipals:
            
Taxable
  $6,082   $33   $280   $1   $6,362   $34 
Tax-exempt
   9,040    44        9,040    44 
Mortgage-backed securities:
            
U.S. Government agencies
                    
U.S. Government-sponsored enterprises   5,312    20        5,312    20 
Corporate debt obligations
       3,367    133    3,367    133 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $20,434   $97   $3,647   $134   $24,081   $231 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
   
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 422 investment securities, consisting of 35 taxable state and municipal obligations,
13 tax-exempt state and municipal obligations,
3 U.S. Government
-sponsored enterprises
 and 1 corporate debt obligation that were in unrealized loss positions at JuneSeptember 30, 2020. Of these securities, one1 taxable
state and
municipal
obligations
and 1 corporate debt obligation waswere 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 JuneSeptember 30, 2020. There was no OTTI recognized for the three and sixnine months ended JuneSeptember 30, 2020 and 2019.
The Company had 22 investment securities, consisting of 2 taxable state and municipal obligations, 19 mortgage-backed securities and 1 corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, 4 mortgage-backed securities and 1 corporate obligation were in a continuous unrealized loss position for twelve months or more.
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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 JuneSeptember 30, 2020 and December 31, 2019 are summarized as follows. Net deferred loan fees were $6,183$5,264 at JuneSeptember 30, 2020 and net deferred loan costs were $1,129 at December 31, 2019.
 
  
June 30,

2020
   
December 31,

2019
   
September 30,

2020
   
December 31,

2019
 
Commercial
  $380,998   $118,658   $382,518   $118,658 
Real estate:
        
Construction
   79,299    61,831    64,322    61,831 
Commercial
   494,642    455,901    507,795    455,901 
Residential
   203,752    207,354    202,132    207,354 
Consumer
   6,762    8,365    6,675    8,365 
  
 
   
 
   
 
   
 
 
Total
  $1,165,453   $852,109   $1,163,442   $852,109 
  
 
   
 
   
 
   
 
 
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Table of Contents
The Company participated in the
Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”), PPP,Paycheck Protection Program (“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 JuneSeptember 30, 2020, the Company originated 1,273
had
1,274 PPP loans totaling $274,313 under the PPP.$
273,813
. 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 sixnine months ended JuneSeptember 30, 2020 and 2019 is summarized as follows:
 
    
Real Estate
           
Real Estate
         
June 30, 2020
  
Commercial
 
Construction
   
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
 
September 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 
Beginning Balance, July 1, 2020
  $1,685  $741   $5,078  $2,070  $162  $    $9,736 
Charge-offs
       (501)   (2)   (71)    (574)         (42)     (42) 
Recoveries
   7     2   1   37    47    2      57     27      86 
Provisions
   7   46    1,660   358   44   (103)   2,012    173   145    1,015   490   21     1,844 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
   
 
 
Ending balance
  $1,685  $741   $5,078  $2,070  $162  $   $9,736   $1,860  $886   $6,150  $2,560  $168  $    $11,624 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
   
 
 
    
Real Estate
           
Real Estate
         
June 30, 2020
  
Commercial
 
Construction
   
Commercial
 
Residential
 
Consumer
 
Unallocated
 
Total
 
September 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   $1,953  $473   $3,115  $1,820  $155  $    $7,516 
Charge-offs
   (899)     (595)   (2)   (201)    (1,697)    (899)     (595)   (2)   (243)     (1,739) 
Recoveries
   9     2   1   93    105    11      59   1   120      191 
Provisions
   622   268    2,556   251   115    3,812    795   413    3,571   741   136     5,656 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
   
 
 
Ending balance
  $1,685  $741   $5,078  $2,070  $162  $   $9,736   $1,860  $886   $6,150  $2,560  $168  $    $11,624 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
   
 
  
 
   
 
  
 
  
 
  
 
   
 
 
    
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 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
 
      
Real Estate
           
September 30, 2019
  
Commercial
  
Construction
   
Commercial
  
Residential
  
Consumer
  
Unallocated
   
Total
 
Allowance for loan losses:
          
Beginning Balance, July 1, 2019
  $1,117  $491   $3,591  $1,649  $154  $    $
 
 
7,002 
Charge-off
   (759)     (110)   (5)   (111)     (985) 
Recoveries
   1        2       28        31 
Provisions
   876   30    95   (28)   74   2    1,049 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
Ending balance
  $1,235  $521   $3,578  $1,616  $145  $2   $7,097 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
      
Real Estate
          
September 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
   (1,148)     (110)   (25)   (364)    (1,647) 
Recoveries
   12        4   4   126       146 
Provisions
   1,209   117    386   351   333   (146)   2,250 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Ending balance
  $1,235  $521   $3,578  $1,616  $145  $2  $7,097 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
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 JuneSeptember 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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
       
Real Estate
             
September 30, 2020
  
Commercial
   
Construction
   
Commercial
   
Residential
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
              
Ending balance
  $1,860   $886   $6,150   $2,560   $168   $    $11,624 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
individually evaluated for impairment
   32      1          33 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
collectively evaluated for impairment
   1,828    886    6,149    2,560    168      11,591 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
purchased credit impaired loans
  $    $    $    $    $    $    $  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Loans receivable:
              
Ending balance
  $382,518   $64,322   $507,795   $202,132   $6,675   $    $1,163,442 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
individually evaluated for impairment
   1,853      7,545    2,480        11,878 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
collectively evaluated for impairment
   380,665    64,322    498,902    199,480    6,675      1,150,044 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance:
              
purchased credit impaired loans
  $    $    $1,348   $172   $    $    $1,520 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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
Non-homogeneous
loans are individually analyzed forfo
r
 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. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance.
 
1
6
16
Table of Contents
The following tables present the major classificationclassifications 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 JuneSeptember 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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
September 30, 2020
  
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial
  $374,721   $3,319   $4,478   $    $382,518 
Real estate:
          
Construction
   55,072    8,252    998      64,322 
Commercial
   452,958    30,048    24,789      507,795 
Residential
   197,405    1,570    3,157      202,132 
Consumer
   6,675          6,675 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $1,086,831   $43,189   $33,422   $    $1,163,442 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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 JuneSeptember 30, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
 
  
Accrual Loans
           
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
 
September 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   $20   $78   $108   $206   $381,521   $791   $382,518 
Real estate:
                            
Construction
              79,299      79,299      208       208    64,114      64,322 
Commercial
   160         160    491,778    1,307    493,245            505,216    1,231    506,447 
Residential
   363    448    170    981    201,476    1,115    203,572    650    219      869    199,888    1,203    201,960 
Consumer
   33    21    13    67    6,695      6,762    20    1      21    6,654      6,675 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total
  $633   $494   $183   $1,310   $1,159,325   $3,241   $1,163,876   $690   $506   $108   $1,304   $1,157,393   $3,225   $1,161,922 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Purchased credit impaired loans
               1,577                1,520 
              
 
               
 
 
Total Loans
              $1,165,453               $1,163,442 
              
 
               
 
 
  
Accrual Loans
   
Nonaccrual

Loans
   
Total Loans
   
Accrual Loans
         
December 31, 2019
  
30-59 Days

Past Due
   
60-89 Days

Past Due
   
90 or More

Days Past

Due
   
Total Past

Due
   
Current
   
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
  $137   $    $    $137   $117,354   $1,159   $118,650   $137   $    $    $137   $117,354   $1,159   $118,650 
Real estate:
                            
Construction
   9        9    61,822      61,831    9        9    61,822      61,831 
Commercial
   147        147    453,774    459    454,380    147        147    453,774    459    454,380 
Residential
   3,402    820    18    4,240    202,202    669    207,111    3,402    820    18    4,240    202,202    669    207,111 
Consumer
   84    14    27    125    8,240      8,365    84    14    27    125    8,240      8,365 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Total
  $3,779   $834   $45   $4,658   $843,392   $2,287   $850,337   $3,779   $834   $45   $4,658   $843,392   $2,287   $850,337 
  
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Purchased credit impaired loans
               1,772                1,772 
              
 
               
 
 
Total Loans
              $852,109               $852,109 
              
 
               
 
 
17
Table of Contents
The following tables summarize information concerning impaired loans as of and for the three and sixnine months ended JuneSeptember 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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
               
This Quarter
   
Year-to-Date
 
September 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
  $1,732   $1,842     $1,896   $154   $1,630   $354 
Real estate:
              
Construction
              
Commercial
   3,124    3,510      6,141    10    4,944    76 
Residential
   2,652    2,782      2,700    12    2,564    118 
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   7,508    8,134      10,737    176    9,138    548 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
With an allowance recorded:
              
Commercial
   121    121   $32    121      121   
Real estate:
              
Construction
              
Commercial
   5,769    5,769    1    2,885    61    2,045    65 
Residential
              
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   5,890    5,890    33    3,006    61    2,166    65 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Commercial
   1,853    1,963    32    2,017    154    1,751    354 
Real estate:
              
Construction
              
Commercial
   8,893    9,279    1    9,026    71    6,989    141 
Residential
   2,652    2,782      2,700    12    2,564    118 
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $13,398   $14,024   $33   $13,743   $237   $11,304   $613 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
   
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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
               
This Quarter
   
Year-to-Date
 
September 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
  $1,617   $2,256     $871   $96   $399   $604 
Real estate:
              
Construction
             29   
Commercial
   2,048    2,048      3,135    1,204    3,882    1,408 
Residential
   2,178    2,178      2,189    33    2,247    158 
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   5,843    6,482      6,195    1,333    6,557    2,170 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
With an allowance recorded:
              
Commercial
   121    121   $29    448      767   
Real estate:
              
Construction
              
Commercial
   785    939    251    579    4    468    12 
Residential
   177    315    45    178    2    179    5 
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
   1,083    1,375    325    1,205    6    1,414    17 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Commercial
   1,738    2,377    29    1,319    96    1,166    604 
Real estate:
              
Construction
             29   
Commercial
   2,833    2,987    251    3,714    1,208    4,350    1,420 
Residential
   2,355    2,493    45    2,367    35    2,426    163 
Consumer
              
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $6,926   $7,857   $325   $7,400   $1,339   $7,971   $2,187 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
For the three and sixnine months ended JuneSeptember 30, interest income related to impaired loans, would have been $35$33 and $56$89 in 2020 and $25$48 and $85$133 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$9,893 at JuneSeptember 30, 2020, $2,701 at December 31, 2019 and $2,753$2,729 at JuneSeptember 30, 2019.
There were 90 loans modified as troubled debt restructures during the secondthird quarter of 2020 and 9 loans modified during the sixnine months ended JuneSeptember 30, 2020
totaling $7,817. There were 0 loans modified as troubled debt restructures during the secondthird quarter of 2019 and 1 loan modified during the sixnine months ended JuneSeptember 30, 2019.
19
Table of Contents
During the three months ended JuneSeptember 30, 2020, there were 0 defaults on loans restructured and 1 default on a restructured loan totaling $368 during the sixnine months ended JuneSeptember 30, 2020. During the three months ended JuneSeptember 30, 2019, there were 0 defaults on loans restructured and 1 default on a restructured loan totaling $223$222 during the sixnine months ended JuneSeptember 30, 2019.
19
Table of Contents
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 
  
 
 
   
 
 
 
   
September 30,
2020
   
December 31,
2019
 
Unused portions of lines of credit
  $93,694   $81,665 
Construction loans
   26,216    41,168 
Commitments to extend credit
   13,086    24,954 
Deposit overdraft protection
   22,231    23,730 
Standby and performance letters of credit
   3,973    4,726 
  
 
 
   
 
 
 
Total
  $159,200   $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 JuneSeptember 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 JuneSeptember 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 
  
 
 
   
 
 
 
   
September 30,
2020
   
December 31,
2019
 
Other real estate owned
  $25   $82 
Bank owned life insurance
   31,247    30,647 
Restricted equity securities
   1,827    990 
Deferred tax assets
   4,798    4,272 
Lease
right-of-use
assets
   3,336    3,856 
Other assets
   4,506    6,082 
  
 
 
   
 
 
 
Total
  $45,739   $45,929 
  
 
 
   
 
 
 
7. Leases:
On JuneSeptember 30, 2020, the Company leased 1413 locations. The Company’s operating lease
right-of-use
(“ROU”) assets and related lease liabilities were $3,508$3,336 and $3,562,$3,397, respectively, and have remaining terms ranging from 1 to 3433 years, including extension options that the Company is reasonably certain will be exercised. For the three and sixnine months ended JuneSeptember 30, 2020, operating lease cost totaled $200$346 and $399,$954, respectively. On JuneSeptember 30, 2019 the Company’s lease ROU assets and related lease liabilities were $4,205$4,136 and $4,223,$4,165, respectively. For the three and sixnine months ended JuneSeptember 30, 2019, operating lease cost totaled $188$203 and $335,$538, respectively.
 
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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% 
  
Nine Months Ended
September 30, 2020
  
Nine Months Ended
September 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities:
  
Operating cash flows from operating leases
 $584  $465 
ROU assets obtained in exchange for lease liabilities
  $4,529 
Weighted average remaining lease term—operating leases, in years
  9.12   10.46 
Weighted average discount rate—operating leases
  3.04%   3.06% 
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 
  
 
 
 
2020
  $187 
2021
   754 
2022
   697 
2023
   485 
2024
   317 
Thereafter
   1,568 
  
 
 
 
Total lease payments
   4,008 
Less imputed interest
   611 
  
 
 
 
   
$3,397
 
  
 
 
 
For the sixnine months ended JuneSeptember 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.
 
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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 JuneSeptember 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
 
September 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
  $20,841     $20,841   
Tax-exempt
   20,837      20,837   
Mortgage-backed securities:
        
U.S. Government agencies
   27,627      27,627   
U.S. Government-sponsored enterprises
   23,665      23,665   
Corporate debt obligations
   5,876      3,876   $2,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $98,846     $96,846   $2,000 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
   
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   
  
 
 
   
 
 
   
 
 
   
 
 
 
   
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
 
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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 JuneSeptember 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 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
Fair Value Measurement Using
 
September 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
  $25       $25 
Impaired loans, net of related allowance
   5,857        5,857 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $5,882       $5,882 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
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 JuneSeptember 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
 
September 30, 2020
  
Fair Value
Estimate
   
Valuation Techniques
   
Unobservable Input
   
Range
(Weighted Average)
 
Other real estate owned
  $25    Appraisal of collateral    Appraisal adjustments    60.0% to 60.0% (60.0)% 
       Liquidation expenses    10.0% to 10.0% (10.0)% 
Impaired loans
  $5,857    Appraisal of collateral    Appraisal adjustments    15.0% to 20.0% (15.0)% 
       Liquidation expenses    7.0% to 7.0% (7.0)% 
 
   
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)% 
   
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)% 
 
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The carrying and fair values of the Company’s financial instruments at JuneSeptember 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
   
   
Carrying
Amount
   
Fair Value Hierarchy
 
September 30, 2020
  
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
  $31,958   $31,958   $31,958     
Investment securities
   98,846    98,846     $96,846   $2,000 
Loans held for sale
   4,547    4,547      4,547   
Net loans
(1)
   1,151,818    1,142,187        1,142,187 
Accrued interest receivable
   3,218    3,218      406    2,812 
Financial liabilities:
          
Deposits
  $1,031,313   $989,122     $989,122   
Long-term debt
   217,031    218,150      218,150   
Accrued interest payable
   591    591      591   
 
       
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   
   
Carrying
Amount
   
Fair Value Hierarchy
 
December 31, 2019
  
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)
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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020:
 
Balance, January 1, 2020
  
$
24,754
 
Less: Goodwill impairment
  
 
24,754
 
 
  
 
 
 
Balance, June 30, 2020
  
$
 
 
  
 
 
 
Balance, January 1, 2020
  $24,754 
Less: Goodwill impairment
   24,754 
  
 
 
 
Balance, September 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.
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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
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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:
On October 6,
 2020, 
the Company announced the completion of its private placement of 
$
25 million of
 its 
5.75%
In orderFixed to mitigate financial stress broughtFloating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The Notes will have a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until
October 15, 2025
. Commencing on bythat date, the onset of the
COVID-19
pandemic, the Company formulated a cost reduction strategy subsequentinterest rate applicable 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 whichoutstanding principal amount due will be recognizedreset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus
563 basis points
, payable quarterly until maturity. The Company may redeem the Notes at par, 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 decidedwhole or in part, at its option, anytime beginning 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.
October 15, 2025.
 
2
5
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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.
2020
.
2
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Operating Environment:
Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 33.1% in the third quarter of 2020. This more than offset the decline in the second quarter when the economy decreased at an annualized rate of 32.9%31.4%. The strong bounce back in GDP was in dimension and character much as
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expected. The strongest rebounds were in business equipment spending, residential investment and consumer spending, while government spending and nonresidential structures investment declined. A cessation of inventory reduction resulted in a strong addition to output growth, while overall growth was tempered by a deterioration in the second quartertrade deficit. The annualized rate of 2020. The decline in second quarter GDP was primarily in response togrowth declined only 2.9% over the spread of
COVID-19,
as government
“stay-at-home”
orders issued in March and April were partially lifted in some areaspast twelve month ended September 30, 2020 despite the major headwinds caused by the onset 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.pandemic.
The impact of the virus has been felt nationally and within our primary market area as unemployment rates have begun to escalate. Unemploymentbeen elevated. The unemployment rate declined sharply in the United States to 7.9% in the third quarter of 2020 from 11.1% in the second quarter of 2020 but was 11.1% and 3.7%still elevated compared to 3.5% in June 2020 andthe third quarter of 2019. respectively. With respect to the markets we serve, the unemployment rate increaseddecreased in all the counties in which we have office locations.locations comparing the third and second quarters of 2020. The average unemployment rate for counties in our market area increasedimproved to 6.8% in September 2020 compared to 12.0% in June 2020 compared to 4.4% in June 2019.2020. The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, is expected tohas cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affecthas affected 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 couldhas also resultresulted 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 quarterquarterly results.
Inflationary pressure has reversed,increased, as reflected by the Personal Consumption Expenditures (“PCE”) Price Index,
decreasingincreasing at a rate of 1.9%3.7% in the third quarter of 2020, as compared with a decrease of 1.6% in the second quarter. Excluding food and energy prices, the PCE price index increased 3.5 percent in the third quarter of 2020, compared with an increasein contrast to a decrease of 1.3%0.8 percent in the firstprior quarter. The Consumer Price Index
(“CPI-U”)
increased 0.6%0.2% in JuneSeptember on a seasonally adjusted basis after declinesincreasing 0.4% in the prior three months.month. Over the last 12 months, the
CPI-U
increased 0.6%1.4% 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$276,818 to $1,346,800$1,356,772 at JuneSeptember 30, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to $1,165,453$1,163,442 at JuneSeptember 30, 2020, compared to $852,109 at December 31, 2019, an increase of $313,344.$311,333. The origination of $274,313$273,813 under the PPP was primarily responsible for the increase in loans. Business lending, including commercial and commercial real estate loans, increased $301,081,$
315,754
, retail lending, including residential mortgages and consumer loans, decreased $5,205,$6,912, and construction lending increased $17,468$
2,491
 during the sixnine months ended JuneSeptember 30, 2020. Investment securities decreased $17,113,increased $7,599, or 18.8%8.3%, in the sixnine months ended JuneSeptember 30, 2020. Noninterest-bearing deposits increased $26,162,$30,763, while interest-bearing deposits increased $56,511$60,070 during the sixnine months ended JuneSeptember 30, 2020. Total stockholders’ equity decreased $23,658,$22,686, to $94,452$95,424 at JuneSeptember 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 sixnine months ended JuneSeptember 30, 2020, total assets averaged $1,189,086,$1,244,576, an increase of $60,828$122,066 from $1,128,258$1,122,510 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$98,846 at JuneSeptember 30, 2020, a decreasean increase of $17,113,$7,599, or 18.8%8.3%, 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 sixnine months ofended September 30, 2020 compared to a net loss of $42 recognized in the first six months of 2019.$95
 
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recognized for the same period last year. In order to employ excess funds and meet pledging requirements, we purchased $42,151 in investment securities
available-for-sale
in 2020. These purchases consisted of $11,506 of taxable state and municipal obligations, $16,925 of
tax-exempt
state and municipal obligations, $2,500 of corporate debt obligations and $11,220 of U.S. Government agencies and U.S. Government-sponsored enterprise mortgage-backed securities. The weighted average
tax-equivalent
yield was 2.06% on these purchases.
For the sixnine months ended JuneSeptember 30, 2020, the investment portfolio averaged $74,350,$75,193, a decrease of $30,829$25,885 compared to $105,179$101,078 for the same period last year. The
tax-equivalent
yield on the investment portfolio decreased 2237 basis points to 2.88%2.69% for the sixnine months ended JuneSeptember 30, 2020, from 3.10%3.06% 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 componentgains of stockholders’ equity of $1,386, net of$1,868, deferred income taxestax of $368$392, and accumulated comprehensive income of $1,476 at JuneSeptember 30, 2020. This compares with a net unrealized holding gaingains of $534, net of$676, deferred income taxes of $142, and accumulated comprehensive income of $534 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$1,163,442 at JuneSeptember 30, 2020 from $852,109 at December 31, 2019, an increase of $313,344,$311,333, or 36.8%36.5%. Business loans, including commercial and commercial real estate loans, increased $301,081,$315,754, or 52.4%55.0%, to $875,640$890,313 at JuneSeptember 30, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, decreased $5,205,$6,912, or 2.4%3.2%, to $210,514$208,807 at JuneSeptember 30, 2020 from $215,719 at December 31, 2019. Construction lending increased $17,468,$2,491, or 28.3%4.0%, to $79,299$64,322 at JuneSeptember 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 $39,031the remainder generated primarily from new markets.
For the sixnine months ended JuneSeptember 30, 2020, loans averaged $975,152,$1,039,258, an increase of $87,721$153,446 compared to $887,431$885,812 for the same period in 2019. The
tax-equivalent
yield on the loan portfolio was 4.33%4.18% for the sixnine months ended JuneSeptember 30, 2020, an
89-basis
a 119 basis point decrease from 5.22%5.37% 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 sixnine months of 2020 related to acquired loans was $292$592 compared to $1,495$2,868 for the same period in 2019. The yield earned on PPP loans from interest and fees was 2.45%2.46% for the sixnine months ended JuneSeptember 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 JuneSeptember 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% 
  
 
 
   
   
September 30, 2020
 
Industry:
  
Amount
   
% of Total
Loans
 
Mining, Quarry, Oil and Gas
  $4,214    0.40% 
Construction-Land Subdivision
   23,316    2.00% 
Manufacturing
   13,163    1.10% 
Wholesale Trade
   4,767    0.40% 
Automobile Dealers
   7,062    0.60% 
Non-Residential
Rentals and Leasing
   261,575    22.50% 
Residential Rental and Leasing
   114,451    9.80% 
Health Care
   15,897    1.40% 
Arts, Entertainment and Recreation
   5,229    0.40% 
Hospitality
   65,968    5.70% 
Restaurants
   8,374    0.70% 
  
 
 
   
  $524,016    45.04% 
  
 
 
   
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
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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
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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 PPPas of September 30, 2020 had originated 1,274 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$273,813. 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 JuneSeptember 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 
  
 
 
   
 
 
 
   
September 30,
2020
   
December 31,
2019
 
Unused portions of lines of credit
  $93,694   $81,665 
Construction loans
   26,216    41,168 
Commitments to extend credit
   13,086    24,954 
Deposit overdraft protection
   22,231    23,730 
Standby and performance letters of credit
   3,973    4,726 
  
 
 
   
 
 
 
Total
  $159,200   $176,243 
  
 
 
   
 
 
 
Asset Quality:
National, Pennsylvania and our market area unemployment rates at JuneSeptember 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% 
   
2020
  
2019
 
United States
   7.9%   3.5% 
Pennsylvania
   7.7%   3.9% 
Berks County
   7.5%   4.2% 
Blair County
   6.6%   4.2% 
Bucks County
   7.1%   3.7% 
Centre County
   4.5%   3.3% 
Clearfield County
   6.9%   4.6% 
Cumberland County
   5.4%   3.3% 
Dauphin County
   7.5%   4.1% 
Huntingdon County
   8.3%   5.1% 
Lebanon County
   6.5%   3.8% 
Lehigh County
   8.1%   4.4% 
Lycoming County
   7.5%   4.5% 
Perry County
   5.2%   3.3% 
Schuylkill County
   7.5%   5.1% 
Somerset County
   7.1%   4.5% 
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%6.8% in 2020 from 4.4%4.2% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was 8.4%4.5% which was in Centre County, and the highest recorded rate being 14.3%8.3% in LehighHuntingdon 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.
 
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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 sixnine months ended JuneSeptember 30, 2020. Nonperforming assets increased $8,299, or 163.4%,$7,926 to $13,379$13,006 at JuneSeptember 30, 2020, from $5,080 at December 31, 2019. We experienced increases in all major categories of nonperforming assets in the first halfnine months 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%1.12% at JuneSeptember 30, 2020 compared to 0.60% at December 31, 2019.
Loans on nonaccrual status increased $954$938 to $3,241$3,225 at JuneSeptember 30, 2020 from $2,287 at December 31, 2019. The increase in nonaccrual loans was due to increases of $848$772 in commercial real estate loans and $446$534 in residential loans partially offset by decreases of $340$368 in commercial loans. Accruing loans past due 90 days or more increased $138,$63, and other real estate owned increased $281decreased $57 during the sixnine months ended JuneSeptember 30, 2020.
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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 creditscredit` 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,$6,982, to $9,592$9,648 at JuneSeptember 30, 2020 from $2,666 at December 31, 2019.
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As of JuneSeptember 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 501204 loans with outstanding balances totaling $256,422,$130,682, or 22.0%11.2%, of total loans.loans were currently deferring loan payments. 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 madeloans actively deferring payments under the above described modification program as of JuneSeptember 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 
  
 
 
   
 
 
      
 
 
   
 
 
 
   
Number
of
Loans
   
Amount
   
% of
Outstanding
Including
PPP Loans
  
% of
Outstanding

Excluding
PPP Loans
  
Weighted Average

Loan to Value
  
Aggregate Deferred Payments
 
  
% of Total
Loan
Classification
  
% of
Loans
Modified
  
Principal
   
Interest
 
Commercial
   23   $11,764    3.08%   10.25%    $270   $249 
Construction:
            
Commercial
   2    246    0.67%    66.26%   74.08%   3    8 
Hospitality
   4    19,788    71.23%    67.07%   70.23%   55    527 
  
 
 
   
 
 
       
 
 
   
 
 
 
Total
   6    20,034    31.15%      58    535 
  
 
 
   
 
 
       
 
 
   
 
 
 
Commercial Real Estate:
            
Multi Family
   5    7,965    13.85%    66.28%   75.68%   99    143 
Owner Occupied
   21    10,809    8.74%    78.63%   60.12%   319    133 
Non-Owner
Occupied
   16    33,507    12.67%    63.14%   64.39%   1,855    452 
Hospitality
   6    16,554    51.75%    66.17%   65.01%   336    367 
Agricultural
   19    11,332    37.59%    53.62%   60.29%   234    274 
  
 
 
   
 
 
       
 
 
   
 
 
 
Total
   67    80,167    15.79%      2,843    1,369 
  
 
 
   
 
 
       
 
 
   
 
 
 
Residential Real Estate
   95    18,666    9.23%      273    393 
Consumer
   13    51    7.60%      10    3 
  
 
 
   
 
 
       
 
 
   
 
 
 
Total
   204   $130,682    11.23%   14.59%    $3,454   $2,549 
  
 
 
   
 
 
       
 
 
   
 
 
 
 
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The following table summarizes information concerning loan modifications with expired deferrals as of June 30,the latest practicable date October 23, 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 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  Number of
Loans		  Amount  % of
Outstanding
Including
PPP Loans		  % of
Outstanding
Excluding
PPP Loans		  Aggregate Deferred Payments  Loans with Second Deferrals    
  Principal  Interest  Number of
Loans		  Amount  % of
Outstanding
Including
PPP Loans		  % of
Outstanding
Excluding
PPP Loans		 
Commercial
  10  $3,003   0.78%   2.61%  $141  $77     
Construction:
          
Commercial
  2   246   0.64%    3   8     
Hospitality
  2   13,468   48.42%    55   398   1   6,755   24.29%  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
  4   13,714   20.65%    58   406   1   6,755   10.17%  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Commercial Real Estate:
          
Multi Family
  3   7,709   13.43%    95   136   1   1,053   1.84%  
Owner Occupied
  9   4,745   3.77%    204   95   1   1,088   0.86%  
Non-Owner
Occupied
  5   24,962   9.46%    1,681   334   1   1,541   0.58%  
Hospitality
  5   14,232   46.07%    325   226   2   3,998   12.94%  
Agricultural
  16   10,133   35.02%    210   248     
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
  38   61,781   12.19%    2,.515   1,039   5   7,680   1.51%
1
 		 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential Real Estate
  40   4,813   2.37%    119   135   4   1.660   0.82%  
Consumer
  5   10   0.15%    4   1     
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
  97  $83,321   7.14%   9.28%  $2,837  $1,658   10  $16,095   1.38%   1.79% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
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$4,108 to $9,736$11,624 at JuneSeptember 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$5,656 for the first sixnine months ofended September 30, 2020 exceeding net charge-offs for the period. The provision for loan losses totaled $2,012$1,844 for the quarter ended JuneSeptember 30, 2020, compared to $618$1,049 for the same period in
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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 sixnine months ended JuneSeptember 30, net charge-offscharge offs were $1,592,$1,548, or 0.33%0.20%, of average loans outstanding in 2020 compared to $547,$1,501, or 0.12%0.23%, of average loans outstanding for the same period in 2019. The increase in net charge-offs was primarily due to charge off
32
Table 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.Contents
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 sixnine months ended JuneSeptember 30, 2020, total deposits increased $82,673$90,833 to $1,023,153$1,031,313 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased $26,162,$30,763, while interest-bearing accounts increased $56,511.$60,070. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $67,586increase d $94,045 and time deposits, including certificates of deposit and individual retirement accounts decreased $11,075 in$33,975 for the sixnine months ended JuneSeptember 30, 2020.
For the sixnine months ended JuneSeptember 30, interest-bearing deposits averaged $816,298$828,884 in 2020 compared to $832,327$824,948 in 2019. The cost of interest-bearing deposits was 0.78%0.71% in 2020 compared to 1.01%1.00% in 2019. Consistent with recent FOMC actions to lower short-term rates due to the onset of
COVID-19,
we also took actionsaction 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 continued market rate impact of recentFOMC actions of the FOMC to lower its target federal funds rate in the latter part of March 2020.
We expect coreCore deposits tomay 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 shouldmay lead to reductions in accumulated funds.funds and our deposit volumes.
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 JuneSeptember 30, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.
Long-term debt totaled $217,010$217,031 at JuneSeptember 30, 2020 as compared to $6,971 at December 31, 2019. For the sixnine months ended June 30,September 30th, long-term debt averaged $67,346$117,602 in 2020 and $6,912$6,922 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 JuneSeptember 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%0.74% for the sixnine months ended JuneSeptember 30, 2020, a decrease from 7.73%7.57% for the same period last year.
As a result of the significant reduction in market rates during the first halfnine months 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
On October 6, 2020, the Company announced the completion of its private placement of $25 million of its 5.75% Fixed to entering into the swap arrangement,Floating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The Notes will have a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus 563 basis points, payable quarterly until maturity. The Company may redeem the Notes at par, in whole or in part, at its option, anytime beginning on these securities adjusted quarterly base on three-month LIBOR plus a spreadOctober 15, 2025. The primary purpose of 2.95% on $5,155the offering is to enhance the safety and 1.54% on $4,124soundness of trust preferred securities.the Bank’s capital position given the uncertain impact of the
COVID-19
pandemic and to support growth, for general corporate purposes and to take advantage of potential strategic opportunities.
 
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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 bankBank 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 1.431.45 at JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2021, would increase 2.94%7.9% and decrease 4.61%4.8% 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.
 
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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 JuneSeptember 30, 2020, we had available liquidity of $43,228$31,958 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 JuneSeptember 30, 2020,
available-for-sale
investment securities totaled $74,134,$98,846, and had a net unrealized holding gain of $1,754.$1,868. 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 JuneSeptember 30, 2020, our available borrowing capacity was $351,388$426,045 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$203,509 for us based on JuneSeptember 30, 2020. As aforementioned, we intend to utilize the liquidity relief offered by the PPPLFissuance of $25 million of Subordinated Notes subsequent to the extent needed and as such do not expect our participation inend of the PPP to have a negative impact on ourthird quarter of 2020 will further strengthen the Company’s 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 monthly 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 JuneSeptember 30, 2020. Our noncore funds at JuneSeptember 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 JuneSeptember 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 16.01%16.47%, while our net short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 0.98%0.85%. Comparatively, our net noncore dependence ratio was
-1.03%
(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$18,390 during the sixnine months ended JuneSeptember 30, 2020 as compared with a decrease of $12,841$23,975 for the same period last year. For the sixnine months ended JuneSeptember 30, 2020, we realized a net cash outflowsoutflow of $273 from operating activities and $298,477$320,801 from investing activities offset partially by a net cash inflowinflows of $291,630$2,501 from operating activities and $299,910 from financing activities. For the same period of 2019, we recognized net cash inflows of $1,960$2,442 from operating activities and $11,442$10,471 from investing activities, offset by a net cash outflow of $26,243$36,888 from financing activities.
 
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Operating activities usedprovided net cash of $273$2,501 for the sixnine months ended JuneSeptember 30, 2020 compared to generating $1,960$2,442 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$320,801 for the sixnine months ended JuneSeptember 30, 2020. For the comparable period in 2019, investing activities provided net cash of $11,442.$10,471. For the sixnine months ended JuneSeptember 30, 2020, loan originations of $274,313$273,813 from PPP loans were the primary factor for the net increase in loans of $314,982.$312,627. 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$299,910 for the sixnine months ended JuneSeptember 30, 2020 and used net cash of $26,243$36,888 for the same period last year. Liquidity associated with financing PPP loans was generated through funds from deposit gathering and through long-term debt.debt which primarily utilized the Fed’s PPPLF secured borrowing arrangement to borrow $189,713 for the purpose of financing PPP loans. During the sixnine months ended JuneSeptember 30, deposits increased $82,673$90,833 in 2020 versus a decrease of $24,893$35,010 in 2019, while proceeds from long-term debt were $209,997 for the first six months of 2020.2019.
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,$95,424, or $10.20$10.28 per share, at JuneSeptember 30, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net decrease in stockholders’ equity in the sixnine months ended JuneSeptember 30, 2020 was a result of the recognition of a net loss of $23,489$22,794 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,$466, stock-based compensation of $49$78 and the recognition of a change in other comprehensive income of $822.$950.
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 JuneSeptember 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   ³10.5%  $87,483   ³10.0% 
Tier 1 capital (to risk-weighted assets)
   96,637    11.1   74,361   ³8.5   69,987   ³8.0 
Common equity tier 1 risk-based capital (to risk-weighted assets)
   96,637    11.1   61,238   ³7.0   56,864   ³6.5 
Tier 1 capital (to average total assets)
   96,637    8.1   47,727   ³4.0   59,659   ³5.0 
   
Actual
  
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
  
Well Capitalized under
Basel III
 
September 30, 2020:
  
Amount
   
Ratio
  
Amount
   
Ratio
  
Amount
   
Ratio
 
Total risk-based capital (to risk-weighted assets)
  $108,601    12.4%  $92,065   ³10.5%  $87,681   ³10.0% 
Tier 1 capital (to risk-weighted assets)
   97,631    11.1   74,529   ³8.5   70,145   ³8.0 
Common equity tier 1 risk-based capital (to risk-weighted assets)
   97,631    11.1   61,377   ³7.0   56,993   ³6.5 
Tier 1 capital (to average total assets)
   97,631    8.4   46,419   ³4.0   58,024   ³5.0 
 
   
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   ³10.5%  $83,936   ³10.0% 
Tier 1 capital (to risk-weighted assets)
   96,405    11.5   71,345   ³8.5   67,148   ³8.0 
Common equity tier 1 risk-based capital (to risk-weighted assets)
   96,405    11.5   58,755   ³7.0   54,558   ³6.5 
Tier 1 capital (to average total assets)
   96,405    9.1   42,489   ³4.0   53,112   ³5.0 
 
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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 response to this guidance, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital. In concert with this guidance, on October 6, 2020, the Company is in the process of pursuingcompleted the issuance of $25 million in subordinated debt in the amount of $15,000 at the bank holding company thatwhich will be down streamedused to support the Bank on an
as-needed
basis. Subsequent to the issuance in the fourth quarter of 2020, management determined to downstream $15 million of the available $25 million from the bank holding company to the Bank in the form of additional 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 JuneSeptember 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,$22,794, or $(2.54)$2.46 per basic and diluted weighted average common share, for the first sixnine months ofended September 30, 2020, compared to a net income of $747,$3,013, or $0.33 per basic and diluted weighted average common share, for the same period last year. For the third quarter ended September 30, net income was $695 or $0.08 per basic and diluted weighted average common share for the first six months ofin 2020 and $2,266 or $0.25 per basic and diluted weighted average common share in 2019.
The major factor impacting earnings in the second quarter of 2020 was the recognition of goodwill impairment of $24,754.$24,754 in the second quarter of 2020. The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity andor 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.
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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 ofnine months ended September 30, 2020 was a provision for loan losses of $3,812,$5,656, an increase of $2,611$3,406 compared to the same period last year. The increase in the year over year provision for loan losses wasis the combined result of year to date 2020 organic loan growth, increases in historical loss factors,excluding 100% SBA guaranteed PPP Loans, and changes in qualitative factors related toused in our ALLL model, accounting for increased economic risks and the reserve build associated withdirect impact on our customers resulting from the effects of
COVID-19
pandemic as of the balance sheet date.September 30, 2020. 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 sixnine months of 2020 was the recognition of $1,221$2,311 less of net accretion on acquired assets and assumed liabilities as compared to the first sixnine months of 2019.
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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 Company also recognized interest and fees on origination of loans pursuant to the PPP of $2,776 during the nine months ended September 30, 2020.
The Company began implemented cost reduction strategies beginning in 2019, and those efforts continued subsequent to the end of the second quarter of 2020 by implementing additional efficiency initiatives aimed at substantially lowering operating costs. This action implemented on September 1, 2020 is expected to lower salaries and benefits expense by $3.4 million annually on a
pre-tax
basis. The results for the first sixnine months of 2019ended September 30, included the first quarter recognition of$637 in nonrecurring severance expense in 2020 compared to $2,218 in nonrecurring executive separation expenses along with theand $456 in severance charges recorded in the second quarter. 2019 related to these actions.
If the
COVID-19
pandemic persists, it will continue to have a severe effect on economic activity and willmay 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, which is 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 sixnine months ended JuneSeptember 30,
tax-equivalent
net interest income decreased $1,985$2,833 to $18,598$29,102 in 2020 from $20,583$31,935 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 sixnine months ended JuneSeptember 30 was 3.43%3.37% in 2020 compared to 4.03%4.18% in 2019. The net interest spread decreased to 3.29%3.25% for the sixnine months ended JuneSeptember 30, 2020 from 3.83%3.98% for the sixnine months ended JuneSeptember 30, 2019. The
tax-equivalent
yield on the loan portfolio decreased to 4.33%4.18% in 2020 compared to 5.22%5.37% 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.loans Also influencing the decline was recognizing the lower yield of 2.46% earned equating to 2.45% on the addition of PPP loans in the second quarter of 2020. The addition of PPP
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loans provided a net benefit of $1,022 to net interest income in the first half of 2020. Loan accretion recognized from merger related to purchase accounting marks from mergers declined $2,276 in 2020. Partially offsetting the negative impact of the reduction in the first six monthsnet interest margin was $292a net increase in 2020 and $1,495the volume of average earning assets as compared to the increase in 2019.average interest-bearing liabilities. Overall, average earning assets increased $59,358$130,549 while average interest-bearing liabilities increased $59,108 in$124,382 comparing the first sixnine months ofended September 30, 2020 withand 2019.
For the sixnine months ended JuneSeptember 30,
tax-equivalent
interest income decreased $2,862,$4,360, to $22,158$34,166 in 2020 from $25,020$38,526 in 2019. An unfavorable rate variance due to thereductions in market rates, lower yield earned on PPP loans and reductionsdecreases in market ratesloan accretion income more than offset a favorable volume variance primarily caused by the addition of PPP loans. Interest and fee accretion generated from the PPP program was $2,776 while loan accretion income was $592 for the nine months of 2020 compared to $2,868 for the same period in 2019. Specifically, the overall yield on earning assets, on a fully
tax-equivalent
basis, decreased for the sixnine months ended JuneSeptember 30, to 3.96% in 2020 to 4.09% as compared to 4.90% for the six months ended June 30,from 5.04% in 2019. With respect to the volume variance, average earning assets increased $59,358$130,549 to $1,088,834 for the first six months of$1,153,448 in 2020 from $1,029,476 for the same period$1,022,899 in 2019.
Tax-equivalent
loan income decreased $1,961 comparing the first half of 2020 and 2019.$3,025 in 2020. The increase in average loans of $87,721$153,446 was more than offset by an
89-basis
a 119 basis point decline in yield. The decrease in average investments of $30,829$25,885 in 2020 was the primary cause of the $555$800 reduction in
tax-equivalent
interest income on investments.
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Total interest expense decreased $877$1,527 to $3,560$5,064 for the sixnine months ended JuneSeptember 30, 2020 from $4,437$6,591 for the sixnine months ended JuneSeptember 30, 2019. Reductions in fund costs more than offset increases in average volumes on interest-bearing liabilities. Comparing the first sixnine months of 2020 and 2019, the weighted average cost of funds decreased 2735 basis points to 0.80%0.71% from 1.07%1.06% while the average volume of interest-bearing liabilities increased $59,108$124,382 to $898,347$956,252 from $839,239.$831,870. Money market and NOW account costs declined 5863 and 3843 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 sixnine months ended JuneSeptember 30, 2020 were $67,346$117,602 and 1.04%0.74%, compared to $6,912$6,922 and 7.73%7.57% for the same comparison period fromin 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 JuneSeptember 30,
tax-equivalent
net interest income decreased $1,001$848 to $9,752$10,504 in 2020 from $10,753$11,352 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$271,312 while average earning liabilities increased $152,879$253,431 comparing the secondthird quarters of 2020 and 2019. The
tax-equivalent
net interest margin for the three months ended JuneSeptember 30, was 3.29%3.26% in 2020 compared to 4.20%4.46% in 2019. The net interest spread decreased to 3.18%3.17% for the three months ended JuneSeptember 30, 2020 from 4.00%4.26% for the three months ended JuneSeptember 30, 2019. Net accretion decreased to $213$325 from $1,119$1,415 comparing the secondthird quarters of 2020 and 2019. Net interest income generated from PPP loans amounted to $1,022$1,479 in the secondthird quarter of 2020.
For the three months ended JuneSeptember 30,
tax-equivalent
interest income decreased $1,588,$1,498, to $11,395$12,008 in 2020 from $12,983$13,506 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 158 basis points for the three months ended JuneSeptember 30, 20192020 to 3.85%3.73% as compared to 5.07%5.31% for the three months ended JuneSeptember 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$283,450 comparing the secondthird quarters of 2020 and 2019.2019 primarily due to PPP loans. The
tax-equivalent
yield on the loan portfolio was 4.08%3.94% for the three months ended JuneSeptember 30, 2020 compared to 5.41%5.67% 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.$1,064. The yield earned on investments decreased 2063 basis points for the secondthird quarter of 2020 to 2.91%2.33% from 3.11%2.96% for the secondthird quarter of 2019. This coupled with average investments decreasing to $66,672$76,861 for the quarter ended JuneSeptember 30, 2020 compared to $102,135$93,010 for the same period in 2019, resulted in a decrease in
tax-equivalent
interest income of $310.$245. Overall
tax-equivalent
interest earned on investments was $482$450 for the three-month periodthree months ended JuneSeptember 30, 2020 compared to $792$695 for the same period in 2019.
Total interest expense decreased $587$650 to $1,643$1,504 for the three months ended JuneSeptember 30, 2020 from $2,230$2,154 for the three months ended JuneSeptember 30, 2019. A favorable rate variance more than offset an unfavorable volume variance and caused interest expensesexpense to decrease. The cost of funds decreased to 0.67%0.56% for the three months ended JuneSeptember 30, 2020 as compared to 1.07%1.05% for the same period in 2019. The average volume of interest-bearing liabilities increased to $988,804$1,070,803 for the three months ended JuneSeptember 30, 2020, from $835,925$817,372 for the three months ended JuneSeptember 30, 2019. Average interest-bearing deposits increased $8,509$43,352 to $837,512$853,782 for the secondthird quarter of 2020 from $829,003$810,430 for the same period last year. Average long-term debt increased to $112,875$217,021 for the secondthird quarter of 2020 from $6,922$6,942 for the same period last year to provide funding for PPP loans.
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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.
 
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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   
    
 
 
      
 
 
   
   
Nine months ended
 
   
September 30, 2020
  
September 30, 2019
 
   
Average
Balance
   
Interest
   
Yield/
Rate
  
Average
Balance
   
Interest
   
Yield/
Rate
 
Assets:
           
Earning assets:
           
Loans:
           
Taxable
  $1,005,344   $31,649    4.21%  $849,959   $34,651    5.45% 
Tax exempt
   33,914    891    3.51%   35,853    914    3.41% 
Investments:
           
Taxable
   67,222    1,291    2.57%   93,423    2,113    3.02% 
Tax exempt
   7,971    223    3.74%   7,655    201    3.51% 
Interest bearing deposits
   38,997    112    0.38%   36,009    647    2.40% 
Federal funds sold
           
  
 
 
   
 
 
    
 
 
   
 
 
   
Total earning assets
   1,153,448    34,166    3.96%   1,022,899    38,526    5.04% 
Less: allowance for loan losses
   8,431       6,636     
Other assets
   99,559       106,247     
  
 
 
      
 
 
     
Total assets
  $1,244,576      $1,122,510     
  
 
 
      
 
 
     
Liabilities and Stockholders’ Equity:
           
Interest bearing liabilities:
           
Money market accounts
  $116,504   $288    0.33%  $112,598   $806    0.96% 
NOW accounts
   291,182    574    0.26%   273,199    1,415    0.69% 
Savings accounts
   142,385    117    0.11%   133,347    127    0.13% 
Time deposits
   278,813    3,405    1.63%   305,804    3,851    1.68% 
Short term borrowings
   9,766    28    0.38%      
Long-term debt
   117,602    652    0.74%   6,922    392    7.57% 
  
 
 
   
 
 
    
 
 
   
 
 
   
Total interest-bearing liabilities
   956,252    5,064    0.71%   831,870    6,591    1.06% 
Non-interest-bearing
demand deposits
   163,886       158,384     
Other liabilities
   12,952       16,842     
Stockholders’ equity
   111,486       115,414     
  
 
 
      
 
 
     
Total liabilities and stockholders’ equity
  $1,244,576      $1,122,510     
  
 
 
      
 
 
     
Net interest income/spread
    $29,102    3.25%    $31,935    3.98% 
    
 
 
      
 
 
   
Net interest margin
       3.37%       4.18% 
Tax-equivalent
adjustments:
           
Loans
    $187      $192   
Investments
     47       42   
    
 
 
      
 
 
   
Total adjustments
    $234      $234   
    
 
 
      
 
 
   
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 JuneSeptember 30, 2020.
The provision for loan losses totaled $5,656 for the nine months ended September 30, 2020, compared to $2,250 in 2019. For the quarter ended September 30, the provision for loan losses was $1,844 in 2020 compared to $1,049 in 2019. The increase in the
 
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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 wasis the combined result of organic loan growth, increases in historical loss factorsexcluding 100% SBA guaranteed PPP loans, and changes in qualitative factors related toused in our ALLL model, accounting for increased economic risks and the reserve build associated withdirect impact on our customers resulting from the effects of
COVID-19
pandemic as of the balance sheet date.September 30, 2020. 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 sixnine months ended JuneSeptember 30, noninterest income totaled $4,931$7,089 in 2020, an increase of $994$1,192 from $3,937$5,897 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$95 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$543 for the sixnine months ended JuneSeptember 30, 2020 as compared to the same period in 2019 as borrowers took advantage of lowdue to an increase in refinancing activity brought on by reductions in mortgage interest rates. Partially offsetting these positive influences were reductions in service charges, commissions and fees on fiduciary activities and wealth management income. Service charges, fees and commissions decreased due to
COVID-19
induced suspensions and reductions to service charges along with reductions in customer activity. Specifically, the Company experienced reductions in overdraft fee income, ATM income, and reduced late charge fee income as it proactively worked with customers and noncustomers alike in an effort to minimize the financial impact of
COVID-19
within the communities served. Trust and wealth management income declined for the first sixnine months ofended September 30, 2020 by $118$186 and $67$73 compared to the first six monthssame period of 2019 due primarily to a marked slowdown in activities brought ondriven partially by the impact ofthat
COVID-19.COVID-19
has had upon equity market valuations in 2020.
For the quarter ended JuneSeptember 30, noninterest income totaled $2,001$2,158 in 2020, a decreasean increase of $125$198 from $2,126$1,960 in 2019. The decreaseAn increase of $250 in noninterestmortgage banking income for the quarter was duepartially offset primarily toby reductions in services charges, fees and commissions of $304,$30 and trust income of $71 and wealth management income of $40 partially offset by increases in mortgage banking income of $291.$68.
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%,$21,265, to $43,166$53,144 for the sixnine months ended JuneSeptember 30, 2020, from $22,448$31,879 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,$3,489, or 18.0%10.9%, comparing the sixnine months ended JuneSeptember 30, 2020 and 2019. For the nine months ended September 30, salaries and employee benefit expenses decreased $3,120, or 16.8%, to $15,452 in 2020 from $18,572 in 2019 due primarily to
one-time
charges of $2,218 taken in 2019 related to a separation agreement. Net occupancy expense increased $115,$502, or 5.4%15.8%, to $2,248$3,676 in 2020 from $3,174 in 2019. The primary cause for the first six months of 2020 from $2,133increase in cost was a $356
one-time
charge for the same period last year. Higher costs related to building and equipment maintenance and repairs caused the increase.acceleration of lease expense on a closed office. Other expenses decreased $757,$818, or 11.6%8.6%, to $5,795$8,713 in the first six months of 2020 compared to $6,552 for the same period last year.$9,531 in 2019. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.
For the three months ended JuneSeptember 30, 2020, noninterest expense increased $23,470,$547, to $33,954$9,978 from $10,484$9,431 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$5,411 for the quarter ended JuneSeptember 30, 2020, a decreasean increase of $845$179 over the same period in 2019 due to previously implemented efficiency initiatives.the recognition of severance and furlough expenses. Net occupancy expense increased $387, to $1,428 in the third quarter of 2020 as compared to $1,041 in the third quarter of 2019 caused by the lease acceleration expense. For the secondthird quarter, other expenses decreased to $2,978$2,918 in 2020 from $3,508$2,979 in 2019, or 15.1%.2019.
Income Taxes:
We recorded an income tax benefit of $116$49 for the sixnine months ended JuneSeptember 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$456 for the nine months ended September 30, 2019. For the three months ended September 30, we recorded income tax expense of $67 in 2020 compared to $486 in 2019.
 
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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 JuneSeptember 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 JuneSeptember 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.
 
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Item 6.
Exhibits.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§1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2  Chief Financial Officer’s §1350§1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101  Interactive Data File (XBRL).
104Cover Page Interactive Data File (embedded within the Inline XBRL document).
 
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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,November 5, 2020
 
By: /s/ Scott A. Seasock
 Scott A. Seasock
 Chief Financial Officer
 (Principal Financial Officer)
Date: August 10,November 5, 2020
 
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