Company Quick10K Filing
Riverview Financial
Price11.50 EPS0
Shares9 P/E35
MCap106 P/FCF43
Net Debt7 EBIT10
TEV113 TEV/EBIT11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
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RIVE 10Q Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 d909506dex311.htm
EX-31.2 d909506dex312.htm
EX-32.1 d909506dex321.htm
EX-32.2 d909506dex322.htm

Riverview Financial Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 d909506d10q.htm FORM 10-Q Form 10-Q
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 March 31, 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: 9,240,492 at April 29, 2020.

 

 

 


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2020

 

Contents

       Page No.  

PART I.

 

FINANCIAL INFORMATION:

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets at March 31, 2020 and December  31, 2019

     3  
 

Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2020 and 2019

     4  
 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

     5  
 

Consolidated Statements of Cash Flows for the Three Months Ended March  31, 2020 and 2019

     6  
 

Notes to Consolidated Financial Statements

     7  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     40  

Item 4.

 

Controls and Procedures

     40  

PART II

 

OTHER INFORMATION:

  

Item 1.

 

Legal Proceedings

     40  

Item 1A.

 

Risk Factors

     40  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     40  

Item 3.

 

Defaults upon Senior Securities

     40  

Item 4.

 

Mine Safety Disclosures

     40  

Item 5.

 

Other Information

     40  

Item 6.

 

Exhibits

     41  
 

Signatures

     42  

 


Table of Contents

Riverview Financial Corporation

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per share data)

 

     March 31,
2020
    December 31,
2019
 

Assets:

    

Cash and due from banks

   $ 12,128     $ 11,838  

Interest-bearing deposits in other banks

     61,107       38,510  

Investment securities available-for-sale

     68,402       91,247  

Loans held for sale

     272       81  

Loans, net

     887,449       852,109  

Less: allowance for loan losses

     8,251       7,516  
  

 

 

   

 

 

 

Net loans

     879,198       844,593  

Premises and equipment, net

     18,875       17,852  

Accrued interest receivable

     2,589       2,414  

Goodwill

     24,754       24,754  

Intangible assets

     2,566       2,736  

Other assets

     47,152       45,929  
  

 

 

   

 

 

 

Total assets

   $ 1,117,043     $ 1,079,954  
  

 

 

   

 

 

 

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 148,633     $ 147,405  

Interest-bearing

     809,870       793,075  
  

 

 

   

 

 

 

Total deposits

     958,503       940,480  

Short-term borrowings

    

Long-term debt

     26,992       6,971  

Accrued interest payable

     424       435  

Other liabilities

     12,683       13,958  
  

 

 

   

 

 

 

Total liabilities

     998,602       961,844  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock: no par value, authorized 20,000,000 shares; March 31, 2020, issued and outstanding 9,236,039 shares; December 31, 2019, issued and outstanding 9,216,616 shares

     102,386       102,206  

Capital surplus

     134       112  

Retained earnings

     16,081       16,140  

Accumulated other comprehensive loss

     (160     (348
  

 

 

   

 

 

 

Total stockholders’ equity

     118,441       118,110  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,117,043     $ 1,079,954  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

For the three months ended March 31,

   2020     2019  

Interest income:

    

Interest and fees on loans:

    

Taxable

   $ 9,782     $ 10,688  

Tax-exempt

     245       230  

Interest on investment securities available-for-sale:

    

Taxable

     535       740  

Tax-exempt

     37       69  

Interest on interest-bearing deposits in other banks

     89       231  

Interest on federal funds sold

    
  

 

 

   

 

 

 

Total interest income

     10,688       11,958  
  

 

 

   

 

 

 

Interest expense:

    

Interest on deposits

     1,789       2,073  

Interest on short-term borrowings

     5    

Interest on long-term debt

     123       134  
  

 

 

   

 

 

 

Total interest expense

     1,917       2,207  
  

 

 

   

 

 

 

Net interest income

     8,771       9,751  

Provision for loan losses

     1,800       583  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     6,971       9,168  
  

 

 

   

 

 

 

Noninterest income:

    

Service charges, fees and commissions

     1,381       1,053  

Commission and fees on fiduciary activities

     213       260  

Wealth management income

     220       247  

Mortgage banking income

     108       106  

Bank owned life insurance investment income

     193       187  

Net gain (loss) on sale of investment securities available-for-sale

     815       (42
  

 

 

   

 

 

 

Total noninterest income

     2,930       1,811  
  

 

 

   

 

 

 

Noninterest expense:

    

Salaries and employee benefits expense

     5,056       7,510  

Net occupancy and equipment expense

     1,180       1,089  

Amortization of intangible assets

     170       194  

Net cost (benefit) of operation of other real estate owned

     (11     127  

Other expenses

     2,817       3,044  
  

 

 

   

 

 

 

Total noninterest expense

     9,212       11,964  
  

 

 

   

 

 

 

Income (loss) before income taxes

     689       (985

Income tax expense (benefit)

     56       (298
  

 

 

   

 

 

 

Net income (loss)

     633       (687
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized gain (loss) on investment securities available-for-sale

   $ 1,053     $ 1,023  

Reclassification adjustment for net (gain) loss on sale of investment securities available-for-sale included in net income

     (815     42  

Income tax expense related to other comprehensive income

     50       224  
  

 

 

   

 

 

 

Other comprehensive income, net of income taxes

     188       841  
  

 

 

   

 

 

 

Comprehensive income

   $ 821     $ 154  
  

 

 

   

 

 

 

Per share data:

    

Net income (loss):

    

Basic

   $ 0.07     $ (0.08

Diluted

   $ 0.07     $ (0.08

Average common shares outstanding:

    

Basic

     9,223,445       9,143,316  

Diluted

     9,233,060       9,143,316  

Dividends declared

   $ 0.08     $ 0.10  

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)

 

     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

          633         633  

Other comprehensive income, net of income taxes

            188       188  

Issuance under ESPP, 401k and Dividend Reinvestment plans: 19,423 shares

     180              180  

Stock based compensation

        22           22  

Dividends declared, $0.08 per share

          (692       (692
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2020

   $ 102,386      $ 134     $ 16,081     $ (160   $ 118,441  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2019

   $ 101,134      $ 332     $ 15,063     $ (2,619   $ 113,910  

Net income (loss)

          (687       (687

Other comprehensive income, net of income taxes

            841       841  

Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,223 shares

     175              175  

Exercise of stock options: 17,821 shares

     191        (25         166  

Dividends declared, $0.10 per share

          (915       (915
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

   $ 101,500      $ 307     $ 13,461     $ (1,778   $ 113,490  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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 Three Months Ended March 31,

   2020     2019  

Cash flows from operating activities:

    

Net income (loss)

   $ 633     $ (687

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization of premises and equipment

     320       300  

Provision for loan losses

     1,800       583  

Stock based compensation

     22    

Net amortization of investment securities available-for-sale

     169       216  

Net cost (benefit) of operation of other real estate owned

     (11     127  

Net (gain) loss on sale of investment securities available-for-sale

     (815     42  

Amortization of purchase adjustment on loans

     (132     (439

Amortization of intangible assets

     170       194  

Amortization of assumed discount on long-term debt

     21       20  

Deferred income taxes

     53       (61

Proceeds from sale of loans originated for sale

     2,791       4,443  

Net gain on sale of loans originated for sale

     (108     (106

Loans originated for sale

     (2,874     (4,395

Bank owned life insurance investment income

     (193     (187

Net change in:

    

Accrued interest receivable

     (175     (8

Other assets

     (2     (2,613

Accrued interest payable

     (11     (9

Other liabilities

     (1,275     1,363  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     383       (1,217
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investment securities available-for-sale:

    

Purchases

     (7,317     (7,647

Proceeds from repayments

     3,878       3,707  

Proceeds from sales

     27,168       8,740  

Proceeds from the sale of other real estate owned

     68       133  

Net (increase) decrease in restricted equity securities

     (867     46  

Net (increase) decrease in loans

     (36,594     15,108  

Purchases of premises and equipment

     (1,343     (447
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (15,007     19,640  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     18,023       (3,564

Net decrease in short-term borrowings

    

Repayment of long-term debt

    

Proceeds from long-term debt

     20,000    

Issuance under ESPP, 401k and DRP plans

     180       175  

Proceeds from exercise of stock options

       166  

Cash dividends paid

     (692     (915
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     37,511       (4,138
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     22,887       14,285  

Cash and cash equivalents—beginning

     50,348       53,816  
  

 

 

   

 

 

 

Cash and cash equivalents—ending

   $ 73,235     $ 68,101  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 1,928     $ 2,216  
  

 

 

   

 

 

 

Noncash items from operating activities:

    

Operating lease right-of-use assets and liabilities

     $ 3,719  
  

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities:

    

Other real estate acquired in settlement of loans

   $ 321    
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

Riverview Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of Operations

Riverview Financial Corporation, (the “Company” or “Riverview”), a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).

Riverview Bank, with twenty seven (27) full service offices and four (4) 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 months ended as of March 31, 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 recent outbreak of the Coronavirus (“COVID-19”) pandemic which may adversely affect the Company’s business results of operations and financial conditions for an indefinite period.

Beginning in the first quarter of 2020, the COVID-19 pandemic has caused disruption in economic and social activity, both globally and in the United States. The spread of COVID-19, and the related government actions to mandate or encourage quarantines and social distancing, have caused severe disruptions in the U.S. economy, which has and will likely continue to, in turn, disrupt the business, activities, and operations of our customers, as well as our own business and operations.

The national public health crisis arising from the COVID-19 pandemic and public expectations about it, combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in which Riverview operates. The resulting impacts of the pandemic on consumers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services Riverview offers, as well as the creditworthiness of potential and current borrowers. The significant decrease in commercial activity associated with the pandemic, both nationally and in Riverview’s markets, may cause customers, vendors, and counterparties to be unable to meet existing payment or other obligations to Riverview and the Bank.

Riverview’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. Riverview expects the pandemic to limit, at least for a period of time, customer demand for many banking activities. Many companies and residents in our market area are subject to mandatory “non-essential business” shut-downs and “stay at home” orders, which have reduced banking activity across our market area. In response to these mandates, Riverview has temporarily limited most locations to drive-up and ATM services, with lobby access available by appointment only, reduced hours

 

7


Table of Contents

of operation at some 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 continue to be broad concerns related to the potential effects of the COVID-19 pandemic. Even after government mandated stay at home orders expire, the aftereffects of the pandemic may continue 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 Riverview’s 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 the coronavirus and the actions by the Federal Reserve with respect to interest rates. We believe that we may experience a material adverse effect in our business, results of operations and financial condition as a result of the COVID-19 pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans or deferred taxes.

As of the March 31, 2020, the Company does not believe there exists any impairment to our goodwill, intangible assets, long-lived assets, right of use assets, or available-for-sale investment securities due to the COVID-19 pandemic. The Company assessed goodwill and concluded there was no impairment present based on the results of a qualitative test as of March 31, 2020. It is uncertain whether prolonged effects of the COVID-19 pandemic will result in future impairment charges related to any of the aforementioned assets.

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

 

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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.

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.

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 adjustments.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at March 31, 2020 and December 31, 2019 is as follows:

 

     March 31,
2020
     December 31,
2019
 

Net unrealized loss on investment securities available-for-sale

   $ 914      $ 676  

Income tax benefit

     192        142  
  

 

 

    

 

 

 

Net of income taxes

     722        534  
  

 

 

    

 

 

 

Benefit plan adjustments

     (1,117      (1,117

Income tax benefit

     (235      (235
  

 

 

    

 

 

 

Net of income taxes

     (882      (882
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (160    $ (348
  

 

 

    

 

 

 

 

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Other comprehensive income (loss) and related tax effects for the three months ended March 31, 2020 and 2019 is as follows:

 

Three months ended March 31,

   2020      2019  

Unrealized gain (loss) on investment securities available-for-sale

   $ 1,053      $ 1,023  

Net loss (gain) on the sale of investment securities available-for-sale (1)

     (815      42  
  

 

 

    

 

 

 

Other comprehensive gain (loss) before taxes

     238        1,065  

Income tax expense (benefit)

     50        224  
  

 

 

    

 

 

 

Other comprehensive gain (loss)

   $ 188      $ 841  
  

 

 

    

 

 

 

 

(1) 

Represents amounts reclassified out of accumulated other comprehensive income and included in net loss (gain) 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 months ended March 31, 2020 and 2019:

 

Three months ended March 31,

   2020      2019  

Numerator:

     

Net income (loss)

   $ 633      $ (687
  

 

 

    

 

 

 

Denominator:

     

Basic

     9,223,445        9,143,316  

Dilutive options

     9,615     
  

 

 

    

 

 

 

Diluted

     9,233,060        9,143,316  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.07      $ (0.08

Diluted

   $ 0.07      $ (0.08

For the three months ended March 31, 2020, there were 37,200 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. None of the outstanding stock options for the three months ended March 31, 2019 were included in the diluted earnings per share calculation because the Company recognized a net loss for the quarter.

4. Investment securities:

The amortized cost and fair value of investment securities available-for-sale aggregated by investment category at March 31, 2020 and December 31, 2019 are summarized as follows:

 

March 31, 2020

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

State and municipals:

           

Taxable

   $ 9,736      $ 423      $ 6      $ 10,153  

Tax-exempt

     8,448        36        142        8,342  

Mortgage-backed securities:

           

U.S. Government agencies

     28,508        800           29,308  

U.S. Government-sponsored enterprises

     17,296        546           17,842  

Corporate debt obligations

     3,500           743        2,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 67,488      $ 1,805      $ 891      $ 68,402  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 March 31, 2020, is summarized as follows:

 

March 31, 2020

   Fair
Value
 

Within one year

   $ 477  

After one but within five years

     5,423  

After five but within ten years

     6,486  

After ten years

     8,866  
  

 

 

 
     21,252  

Mortgage-backed securities

     47,150  
  

 

 

 

Total

   $ 68,402  
  

 

 

 

Securities with a fair value of $46,152 and $63,389 at March 31, 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 March 31, 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.

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 March 31, 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  

March 31, 2020

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

State and municipals:

                 

Taxable

   $ 785      $ 6      $        $        $ 785      $ 6  

Tax-exempt

                 

Mortgage-backed securities:

                 

U.S. Government agencies

     4,094        142              4,094        142  

U.S. Government-sponsored enterprises

                 

Corporate debt obligation

           2,757        743        2,757        743  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,879      $ 148      $ 2,757      $ 743      $ 7,636      $ 891  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     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 10 investment securities, consisting of two taxable state and municipal obligations, seven mortgage-backed securities, and one corporate debt obligation that were in unrealized loss positions at March 31, 2020. Of these securities, one corporate debt obligation was in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities resulting from changes in interest rates to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at March 31, 2020. There was no OTTI recognized for the three months ended March 31, 2020 and 2019.

The Company had 22 investment securities, consisting of two taxable state and municipal obligations, 19 mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, four mortgage-backed securities and one corporate obligation were in a continuous unrealized loss position for twelve months or more.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2020 and December 31, 2019 are summarized as follows. Net deferred loan costs were $885 and $1,129 at March 31, 2020 and December 31, 2019.

 

     March 31,
2020
     December 31,
2019
 

Commercial

   $ 121,128      $ 118,658  

Real estate:

     

Construction

     72,580        61,831  

Commercial

     476,573        455,901  

Residential

     209,749        207,354  

Consumer

     7,419        8,365  
  

 

 

    

 

 

 

Total

   $ 887,449      $ 852,109  
  

 

 

    

 

 

 

The change in the allowance for loan losses account by major loan classifications for the three months ended March 31, 2020 and 2019 is summarized as follows:

 

           Real Estate                     

March 31, 2020

   Commercial     Construction      Commercial     Residential     Consumer     Unallocated      Total  

Allowance for loan losses:

                

Beginning Balance, January 1, 2020

   $ 1,953     $ 473      $ 3,115     $ 1,820     $ 155        $ 7,516  

Charge-offs

     (899        (95       (130        (1,124

Recoveries

     2          1         56          59  

Provisions

     615       222        896       (107     71     $ 103        1,800  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 1,671     $ 695      $ 3,917     $ 1,713     $ 152     $ 103      $ 8,251  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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           Real Estate                     

March 31, 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

     (376             (144       (520

Recoveries

     5         1        1        68         75  

Provisions

     232       (123     160        279        183       (148     583  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,023     $ 281     $ 3,459      $ 1,566      $ 157     $       $ 6,486  
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2020 and December 31, 2019 is summarized as follows:

 

            Real Estate                       

March 31, 2020

   Commercial      Construction      Commercial      Residential      Consumer      Unallocated      Total  

Allowance for loan losses:

                    

Ending balance

   $ 1,671      $ 695      $ 3,917      $ 1,713      $ 152      $ 103      $ 8,251  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     29           87                 116  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     1,642        695        3,830        1,713        152        103        8,135  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $        $        $        $        $        $        $    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Ending balance

   $ 121,128      $ 72,580      $ 476,573      $ 209,749      $ 7,419      $        $ 887,449  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     1,218           1,405        2,062              4,685  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     119,909        72,580        473,656        207,456        7,419           881,020  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $ 1      $        $ 1,512      $ 231      $        $        $ 1,744  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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            Real Estate                       

December 31, 2019

   Commercial      Construction      Commercial      Residential      Consumer      Unallocated      Total  

Allowance for loan losses:

                    

Ending balance

   $ 1,953      $ 473      $ 3,115      $ 1,820      $ 155      $                $ 7,516  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     712           218                 930  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     1,241        473        2,897        1,820        155           6,586  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $        $        $        $        $        $        $    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Ending balance

   $ 118,658      $ 61,831      $ 455,901      $ 207,354      $ 8,365      $        $ 852,109  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     2,260           1,224        2,085              5,569  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     116,390        61,831        453,156        205,026        8,365           844,768  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $ 8      $        $ 1,521      $ 243      $        $        $ 1,772  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

 

   

Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.

 

   

Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

 

   

Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

   

Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future.

 

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Table of Contents

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at March 31, 2020 and December 31, 2019:

 

March 31, 2020

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 111,111      $ 5,964      $ 4,053      $                $ 121,128  

Real estate:

              

Construction

     71,454        1,126              72,580  

Commercial

     453,374        8,430        14,769           476,573  

Residential

     205,926        1,418        2,405           209,749  

Consumer

     7,419                 7,419  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 849,284      $ 16,938      $ 21,227      $        $ 887,449  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.

 

     Accrual Loans                

March 31, 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

   $ 385      $ 15      $ 23      $ 423      $ 119,917      $ 787      $ 121,127  

Real estate:

                    

Construction

     584        978           1,562        71,018           72,580  

Commercial

     9,577        1,361           10,938        463,481        642        475,061  

Residential

     5,062        137        652        5,851        203,048        619        209,518  

Consumer

     65        17        16        98        7,321           7,419  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,673      $ 2,508      $ 691      $ 18,872      $ 864,785      $ 2,048      $ 885,705  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       1,744  
                    

 

 

 

Total Loans

                     $ 887,449  
                    

 

 

 

 

16


Table of Contents
     Accrual Loans      Nonaccrual
Loans
     Total Loans  

December 31, 2019

   30-59 Days
Past Due
     60-89 Days
Past Due
     90 or More
Days Past
Due
     Total Past
Due
     Current  

Commercial

   $ 137      $        $        $ 137      $ 117,354      $ 1,159      $ 118,650  

Real estate:

                    

Construction

     9              9        61,822           61,831  

Commercial

     147              147        453,774        459        454,380  

Residential

     3,402        820        18        4,240        202,202        669        207,111  

Consumer

     84        14        27        125        8,240           8,365  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,779      $ 834      $ 45      $ 4,658      $ 843,392      $ 2,287      $ 850,337  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       1,772  
                    

 

 

 

Total Loans

                     $ 852,109  
                    

 

 

 

The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2020 and 2019, and as of and for the year ended, December 31, 2019 by major loan classification:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     This Quarter  

March 31, 2020

   Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

              

Commercial

   $ 1,098      $ 1,208         $ 873      $ 68  

Real estate:

              

Construction

              

Commercial

     2,550        2,550           2,837        47  

Residential

     2,292        2,422           2,345        25  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,940        6,180           6,055        140  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

     121        121      $ 29        653     

Real estate:

              

Construction

              

Commercial

     367        367        87        513        4  

Residential

              45     

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     488        488        116        1,211        4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     1,219        1,329        29        1,526        68  

Real estate:

              

Construction

              

Commercial

     2,917        2,917        87        3,350        51  

Residential

     2,292        2,422           2,390        25  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,428      $ 6,668      $ 116      $ 7,266      $ 144  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     This Quarter  

March 31, 2019

   Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

              

Commercial

   $ 189      $ 189         $ 169      $ 23  

Real estate:

              

Construction

     85        85           43     

Commercial

     4,257        4,257           4,271        100  

Residential

     2,217        2,217           2,342        91  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,748        6,748           6,825        214  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

     841        841      $ 77        1,045     

Real estate:

              

Construction

              

Commercial

     371        371        91        453        4  

Residential

     180        318        55        181        1  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,392        1,530        223        1,679        5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     1,030        1,030        77        1,214        23  

Real estate:

              

Construction

     85        85           43     

Commercial

     4,628        4,628        91        4,724        104  

Residential

     2,397        2,535        55        2,523        92  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,140      $ 8,278      $ 223      $ 8,504      $ 219  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, interest income related to impaired loans, would have been $21 in 2020 and $60 in 2019 had the loans been current and the terms of the loans not been modified.

 

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Table of Contents

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 $2,680 at March 31, 2020, $2,701 at December 31, 2019 and $2,765 at March 31, 2019.

There were no loans modified as troubled debt restructures for the three months ended March 31, 2020. There was one loan modified as a troubled debt restructure for the three months ended March 31, 2019.

During the three months ended March 31, 2020, there was one default for a commercial real estate loan totaling $368 on loans restructured. During the three months ended March 31, 2019 there was one default on a restructured residential loan.

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.

Unused portions of off-balance sheet commitments at March 31, 2020, totaled $160,714, consisting of $85,796 in lines of credit, $32,263 in construction loans, $14,395 in commitments to extend credit, $23,745 in deposit overdraft protection and $4,515 in standby letters of credit. In comparison, unused portions of off-balance sheet commitments, at December 31, 2019, totaled $176,243, consisting of $81,665 in lines of credit, $41,168 in construction loans, $24,954 in commitments to extend credit, $23,730 in deposit overdraft protection and $4,726 in standby letters of credit.

6. Other assets:

The components of other assets at March 31, 2020 and December 31, 2019 are summarized as follows:

 

     March 31,
2020
     December 31,
2019
 

Other real estate owned

   $ 346      $ 82  

Bank owned life insurance

     30,840        30,647  

Restricted equity securities

     1,857        990  

Deferred tax assets

     4,169        4,272  

Lease right-of-use assets

     3,678        3,856  

Other assets

     6,262        6,082  
  

 

 

    

 

 

 

Total

   $ 47,152      $ 45,929  
  

 

 

    

 

 

 

7. Leases:     

On March 31, 2020, the Company leased 14 of its 31 locations. The Company’s operating lease right-of-use (“ROU”) assets and related lease liabilities were $3,678 and $3,723, respectively, and have remaining terms ranging from 1 to 34 years, including extension options that the Company is reasonably certain will be exercised. For the three months ended March 31, 2020, operating lease cost totaled $199. On March 31, 2019 the Company’s lease ROU assets and related lease liabilities were $3,606 and $3,616, respectively. For the quarter ended March 31, 2019, operating lease cost totaled $147.

 

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Table of Contents

The table below summarizes other information related to our operating leases:

 

     Three Months Ended
March 31, 2020
    Three Months Ended
March 31, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:

    

Operating cash flows from operating leases

   $ 199     $ 136  

ROU assets obtained in exchange for lease liabilities

   $ —       $ 3,719  

Weighted average remaining lease term—operating leases, in years

     9.13       12.10  

Weighted average discount rate—operating leases

     3.01     3.29

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

   $ 572  

2021

     754  

2022

     697  

2023

     485  

2024

     317  

Thereafter

     1,567  
  

 

 

 

Total lease payments

     4,392  

Less imputed interest

     669  
  

 

 

 
   $ 3,723  
  

 

 

 

For the three months ended March 31, 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.

 

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Table of Contents
   

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.

 

   

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 March 31, 2020 and December 31, 2019 are summarized as follows:

 

     Fair Value Measurement Using  

March 31, 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

   $ 10,153                          $ 10,153                      

Tax-exempt

     8,342           8,342     

Mortgage-backed securities:

           

U.S. Government agencies

     29,308           29,308     

U.S. Government-sponsored enterprises

     17,842           17,842     

Corporate debt obligations

     2,757           2,757     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,402         $ 68,402     
  

 

 

    

 

 

    

 

 

    

 

 

 
     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.

 

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Table of Contents

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 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 March 31, 2020 and December 31, 2019 are summarized as follows:

 

     Fair Value Measurement Using  

March 31, 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

   $ 346                                              $ 346  

Impaired loans, net of related allowance

     372              372  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 718            $ 718  
  

 

 

    

 

 

    

 

 

    

 

 

 
     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 March 31, 2020 and December 31, 2019.

 

     Quantitative Information about Level 3 Fair Value Measurements  

March 31, 2020

   Fair Value
Estimate
    

Valuation Techniques

  

Unobservable Input

   Range
(Weighted Average)
 

Other real estate owned

   $ 346     

Appraisal of collateral

  

Appraisal adjustments

     46.0% to 60.0% (47.0)%  
        

Liquidation expenses

     10.0% to 10.0% (10.0)%  

Impaired loans

   $ 372     

Appraisal of collateral

  

Appraisal adjustments

     10.0% to 50.0% (32.0)%  
        

Liquidation expenses

     0.0% to 12.3% (5.7)%  
     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 March 31, 2020 and December 31, 2019 and their placement within the fair value hierarchy are as follows:

 

     Carrying
Amount
     Fair Value Hierarchy  

March 31, 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

   $ 73,235      $ 73,235      $ 73,235        

Investment securities

     68,402        68,402         $ 68,402     

Loans held for sale

     272        272           272     

Net loans (1)

     879,198        860,456              860,456  

Accrued interest receivable

     2,589        2,589           345        2,244  

Financial liabilities:

              

Deposits

   $ 958,503      $ 962,450         $ 962,450     

Long-term debt

     26,992        26,575           26,575     

Accrued interest payable

     424        424           424     
     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) 

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 March 31, 2020 and December 31, 2019 was measured using an exit price notion.

9. Subsequent Events:

In December 2019, COVID-19 surfaced in Wuhan, China, and has since spread around the world, resulting in significant business and social disruption. COVID-19 was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020. The operations and business results of the Company are being materially affected by the pandemic. As of April 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 355 loans with outstanding balances totaling $185,188, or 20.9%, of total loans. The deferral of interest payments on these loans total $2,024. The Company has also participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, 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. Through April 30, 2020, the Company has submitted 1,534 PPP loans totaling $297,400, most of which have been approved and await customer execution of the loan documents. 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 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.

 

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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.

Operating Environment:

Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, decreased at an annualized rate of 4.8% in the first quarter of 2020. The decline in first quarter GDP was primarily in response to the spread of COVID-19, as governments issued “stay-at-home” orders in March. This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted or redirected their

 

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spending. The decrease in GDP in the first quarter reflected negative contributions from personal consumption expenditures (“PCE”), nonresidential fixed investment, exports, and private inventory investment that were partly offset by positive contributions from residential fixed investment, federal government spending, and state and local government spending. The decrease in PCE reflected decreases in services, led by health care and travel, and goods, led by motor vehicles and parts and services.

The impact of the virus has been felt nationally and within our primary market area as unemployment rates have begun to escalate. Unemployment in the United States was 4.4% and 3.8% in March 2020 and 2019. respectively. With respect to the markets we serve, the unemployment rate increased in all the counties in which we have office locations. The average unemployment rate for counties in our market area increased to 6.3% in March 2020 compared to 4.5% in March 2019. The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services we offer, as well as the creditworthiness of potential and current borrowers and delinquency rates. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect borrowers’ ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn may influence the recognition of credit losses in our loan portfolios and has increased our allowance for loan losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers’ businesses could also result in declines in, among other things, trust and wealth management revenue. These developments, as a consequence of the pandemic, are materially impacting our business, the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our first quarter results.

Inflationary pressure was tempered as reflected by the PCE price index increasing at a lower rate of 1.3 percent, compared with an increase of 1.4 percent. The Consumer Price Index (“CPU”) declined 0.4 percent in March on a seasonally adjusted basis, the largest monthly decline since January 2015. Over the last 12 months, the CPU increased 1.5 percent caused primarily by a sharp decline in gasoline prices along with decreases in airline fares, lodging and apparel costs. 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 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 $37,089 to $1,117,043 at March 31, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to $887,449 at March 31, 2020, compared to $852,109 at December 31, 2019, an increase of $35,340. Business lending, including commercial and commercial real estate loans, increased $23,142, retail lending, including residential mortgages and consumer loans, increased $1,449, and construction lending increased $10,749 during the three months ended March 31, 2020. Investment securities decreased $22,845, or 25.0%, in the three months ended March 31, 2020. Noninterest-bearing deposits increased $1,228, while interest-bearing deposits increased $16,795 during the three months ended March 31, 2020. Total stockholders’ equity increased $331, to $118,441 at March 31, 2020 from $118,110 at year-end 2019. For the three months ended March 31, 2020, total assets averaged $1,085,345, a decrease of $44,305 from $1,129,650 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 $68,402 at March 31, 2020, a decrease of $22,845, or 25.0%, from $91,247 at December 31, 2019. During 2019, management put into action a strategic initiative to reconstitute the footprint of its distribution channel from underperforming markets to regions with greater growth and profit potential. As part of this plan, we hired a number of established and seasoned commercial relationship managers to operate in these new markets during the latter part of 2019. As a result, we experienced significant loan growth in the first quarter of 2020. 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 us the opportunity to partially fund our loan demand and reduce our 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 quarter of 2020 compared to a net loss recognized of $42 in the first quarter of 2019.

 

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For the three months ended March 31, 2020, the investment portfolio averaged $82,028, a decrease of $26,228, compared to $108,256 for the same period last year. The tax-equivalent yield on the investment portfolio decreased 25 basis points to 2.85% for the three months ended March 31, 2020, from 3.10% for the comparable period of 2019.

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported a net unrealized holding gain, included as a separate component of stockholders’ equity of $722, net of deferred income taxes of $192 at March 31, 2020. This compares with a net unrealized holding gain of $534, net of deferred income taxes of $142, at December 31, 2019. The increase in the unrealized holding gain was the result of reductions in general market rates.

Loan Portfolio:

Loans, net, increased to $887,449 at March 31, 2020 from $852,109 at December 31, 2019, an increase of $35,340, or 4.1%. Business loans, including commercial and commercial real estate loans, increased $23,142, or 4.0%, to $597,701 at March 31, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, increased $1,449, or 0.7%, to $217,168 at March 31, 2020 from $215,719 at December 31, 2019. Construction lending increased $10,749, or 17.4%, to $72,580 at March 31, 2020 from $61,831 at December 31, 2019. Construction loans consisted of $10,005 for residential homes and rental properties and $62,575 for land development loans at March 31, 2020. Residential construction loans included $4,684 for loans to individuals to build personal residences and $5,231 for loans to finance builders of residential properties. Land development loans consisted of $8,285 for residential land developments, $52,129 for commercial land developments and $2,161 for consumer land loans. The increase in loan growth was due to originations in new and existing markets and from the addition of relationship managers hired in the latter part of 2020.

For the three months ended March 31, 2020, loans, net averaged $874,420, a decrease of $12,393 compared to $886,813 for the same period in 2019. The tax-equivalent yield on the loan portfolio was 4.64% for the three months ended March 31, 2020, a 38-basis point decrease from 5.02% for the comparable period last year. Loan accretion included in loan interest income in the first three months of 2020 related to acquired loans was $132 compared to $439 for the same period in 2019.

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 March 31, 2020 in our loan portfolio that may have increased exposure to this pandemic event:

 

     March 31, 2020  

Industry:

   Amount      % of Total
Loans
 

Mining, Quarry, Oil and Gas

   $ 1,706        0.2

Construction-Land Subdivision

     20,232        2.3

Manufacturing

     12,606        1.4

Wholesale Trade

     4,999        0.6

Automobile Dealers

     7,086        0.8

Non-Residential Rentals and Leasing

     259,240        29.2

Residential Rental and Leasing

     110,028        12.4

Health Care

     11,915        1.3

Arts, Entertainment and Recreation

     5,683        0.6

Hospitality

     56,750        6.4

Restaurants

     8,873        1.0
  

 

 

    
   $ 499,118        56.2
  

 

 

    

There have been a number of initiatives recently instituted by the Federal Government that may help offset the adverse impact on the growth and asset quality of our loan portfolio. In response to the economic slowdown caused by COVID-19, President Donald Trump signed into law the CARES Act on March 27, 2020 which included numerous provisions including the institution of the establishment of the PPP. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production as a result of the COVID-19 pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employment-sustaining payroll costs and benefits, as well as other significant costs including the small businesses’ rent, mortgage, and utilities. There has been considerable demand for PPP loans implemented by the CARES Act. As a U.S. Small Business Administration (“SBA”) lender, we have been participating in the PPP and were able to approve 296 PPP loans totaling $39,700 in the first round of government funding. On April 24, 2020, the President signed into law a second round of PPP funding. We continue to actively participate in the PPP and as

 

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of April 30, 2020 have submitted 1,238 additional applications approximating $257,700 to the SBA in the second round of funding, most of which have been approved and await customer execution of the loan documentation. On April 9, 2020, the FDIC, Federal Reserve and OCC created the PPPLF to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We intend to utilize 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.

Unused portions of off-balance sheet commitments at March 31, 2020, totaled $160,714, consisting of $85,796 in lines of credit, $32,263 in construction loans, $14,395 in commitments to extend credit, $23,745 in deposit overdraft protection and $4,515 in standby letters of credit. In comparison, unused portions of off-balance sheet commitments, at December 31, 2019, totaled $176,243, consisting of $81,665 in lines of credit, $41,168 in construction loans, $24,954 in commitments to extend credit, $23,730 in deposit overdraft protection and $4,726 in standby letters of credit.

With the onset of the COVID-19 pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans. Unused portions of lines of credit totaled $85,796 at March 31, 2020, consisting of $52,694 of commercial lines of credit and $33,102 of consumer lines of credit. Comparatively, subsequent to quarter end, unused portions of lines of credit totaled $88,653 at April 30, 2020, consisting of $55,260 of commercial lines of credit and $33,393 of consumer lines of credit. Unused portions of construction loans totaled $32,263 at March 31, 2020 consisting of $29,022 of commercial construction loans and $3,241 of consumer construction loans. In comparison, at April 30, 2020 unused portions of construction loans totaled $24,373 consisting of $22,398 of commercial construction loans and $1,975 of consumer construction loans.

Asset Quality:

National, Pennsylvania and our market area unemployment rates at March 31, 2020 and 2019 are summarized as follows:

 

     2020     2019  

United States

     4.4     3.8

Pennsylvania

     6.0     4.3

Berks County

     5.9     4.2

Blair County

     6.2     4.3

Bucks County

     5.2     3.8

Centre County

     4.4     3.0

Clearfield County

     8.0     5.6

Cumberland County

     4.3     3.1

Dauphin County

     5.3     3.7

Huntingdon County

     9.4     6.6

Lebanon County

     5.2     3.7

Lehigh County

     6.0     4.5

Lycoming County

     7.4     5.2

Perry County

     5.0     3.7

Schuylkill County

     7.1     5.5

Somerset County

     8.2     5.8

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 6.3% in 2020 from 4.5% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was 4.3% which was in Cumberland County, and the highest recorded rate being 9.4% in Huntingdon County. An increase 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 slightly in the three months ended March 31, 2020. Nonperforming assets increased $651, or 12.8%, to $5,731 at March 31, 2020, from $5,080 at December 31, 2019. We experienced increases in other real estate owned and accruing loans past due 90 days or more partially offset by decreases in nonaccrual loans and accruing troubled debt restructured loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 0.65% at March 31, 2020 compared to 0.60% at December 31, 2019.

 

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Loans on nonaccrual status decreased $239 to $2,048 at March 31, 2020 from $2,287 at December 31, 2019. The decrease in nonaccrual loans was due to decreases of $372 in commercial loans and $50 in residential loans, offset partially by an increase of $183 in commercial real loans. Accruing troubled debt restructured loans declined $20, to $2,646 at March 31, 2020 from $2,666 at December 31, 2019. Accruing loans past due 90 days or more increased $646, and other real estate owned increased $264 during the three months ended March 31, 2020.

Nonperforming assets decreased $226 to $5,731 at March 31, 2020 from $5,957 at March 31, 2019. Decreases in nonaccrual loans, accruing troubled debt restructured loans and other real estate owned were partially offset by an increase in accruing loans past due 90 days or more.

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. As of March 31, 2020, we had not granted any deferral of payments under these programs.

As of April 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 355 loans with outstanding balances totaling $185,188, or 20.9%, of total loans. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes information concerning loan modifications made as of April 30, 2020, by loan classification:

 

     Number
of
Loans
     Amount      % of
Outstanding
    Aggregate Deferred Payments  
    Principal      Interest  

Commercial

     83      $ 24,522        20.2   $ 631      $ 315  

Construction:

             

Commercial

     14        10,013        18.3     50        128  

Hospitality

     3        15,761        88.9     55        185  
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

     17        25,774        35.5     105        313  
  

 

 

    

 

 

      

 

 

    

 

 

 

Commercial Real Estate:

             

Multi Family

     13        4,786        8.4     74        44  

Owner Occupied

     69        30,897        24.5     623        322  

Non-Owner Occupied

     29        48,413        21.8     1,481        304  

Hospitality

     7        21,930        56.6     241        276  

Agricultural

     10        6,725        20.5     102        124  
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

     128        112,751        23.7     2,521        1,070  
  

 

 

    

 

 

      

 

 

    

 

 

 

Residential Real Estate

     116        21,897        10.4     307        320  

Consumer

     11        244        3.3     8        6  
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

     355      $ 185,188        20.9   $ 3,572      $ 2,024  
  

 

 

    

 

 

      

 

 

    

 

 

 

 

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In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, 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. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our 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.

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 $735 to $8,251 at March 31, 2020, from $7,516 at the end of 2019. The increase in the allowance was a result of the provision for loan losses of $1,800 for the first three months of 2020 exceeding net charge-offs for the period. The provision for loan losses totaled $1,800 for the quarter ended March 31, 2020, compared to $583 for the same period in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors primarily due to the charge-off of one large unsecured credit, and changes in qualitative factors related to the reserve build associated with the effects of COVID-19 as of the balance sheet date. During the first quarter of 2020, the economy experienced a significant deterioration in the macroeconomic environment driven by the COVID-19 pandemic, which impacted our allowance for loan losses. Our qualitatively determined allowance associated with deterioration in the macroeconomic outlook from COVID-19 resulted in a $477 additional provision expense for credit losses. For the three months ended March 31, net charge-offs were $1,065, or 0.49%, of average loans outstanding in 2020 compared to $445, or 0.20%, of average loans outstanding for the same period in 2019. The increase in net charge-offs was primarily due to one commercial account relationship, totaling $899, and one commercial real estate loan, totaling $95, that were charged off due to deterioration in their financial conditions.

 

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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 three months ended March 31, 2020, total deposits increased $18,023 to $958,503 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased $1,228 while interest-bearing accounts increased $16,795. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $10,806 and time deposits, including certificates of deposit and individual retirement accounts increased $5,989 in the three months ended March 31, 2020.

For the three months ended March 31, interest-bearing deposits averaged $795,084 in 2020 compared to $835,687 in 2019. The cost of interest-bearing deposits was 0.90% in 2020 compared to 1.01% in 2019. Consistent with recent FOMC actions to lower short-term rates due to the onset of COVID-19, we also took actions to lower deposit rates to fend off net interest margin contraction due to changes in yields on floating and adjustable rate loans. We anticipate deposit costs to continue to decrease in the short term based on the impact of recent actions of the FOMC to lower its target federal funds rate in the latter part of March 2020.

We expect core deposits to increase in the coming months. Many consumers are working from home or temporarily unemployed but still receiving income through unemployment insurance. Additionally, many Americans are receiving their tax refunds for the 2019 filing year and stimulus payments from the CARES Act. Since consumers have fewer ways to spend their money during the stay at home orders and social distancing practices brought on by the COVID-19 pandemic, we expect our retail deposit base to increase, until such time, as the threat from the virus dissipates and states are allowed to open their businesses once again. The increases due to these factors may be offset by deposit decreases as a result of individuals utilizing savings due to job losses along with school districts decreasing reserves.

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 March 31, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.

Long-term debt totaled $26,992 at March 31, 2020 as compared to $6,971 at December 31, 2019. For the three months ended March 31, long-term debt averaged $11,817 in 2020 and $6,902 in 2019. 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 will bolster our liquidity position and provide necessary funding for loans in the process of being closed. 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 4.19% in the three months ended March 31, 2020, a decrease from 7.87% for the same period last year.

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.

 

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As a result of the FOMC’s recent actions to lower short-term interest rates in order to mitigate the impact of the COVID-19 pandemic on the economy, it has become increasing more challenging to manage IRR. IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program that is overseen by the Board of Directors and senior management, which involves a comprehensive risk management process to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in a bank’s risk management process or high-risk exposure relative to capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of a bank’s risk management process is a determining factor when evaluating capital adequacy.

The Asset Liability Committee (“ALCO”), comprised of members of our senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. Conversely, a negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

Our cumulative one-year RSA/RSL ratio equaled 1.54 at March 31, 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 lower our exposure to the effect of repricing assets.

The current position at March 31, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a 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 March 31, 2021, would increase 2.76% and decrease 5.48% 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 in order 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.

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

 

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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 March 31, 2020, we had available liquidity of $73,235 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 March 31, 2020, available-for-sale investment securities totaled $68,402, and had a net unrealized holding gain of $914. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Coast Bankers Bank (“ACBB”) and 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 March 31, 2020, our available borrowing capacity was $359,350 at the FHLB 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 $167,556 for us based on March 31, 2020. As aforementioned, we intend to utilize the liquidity relief offered by the PPPLF to the extent needed and as such do not expect our participation in the PPP to have a negative impact on our liquidity position.

With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe and extreme scenarios, we have instituted a formalized presentation monthly using various metrics to assist the entire Board of Directors in assessing our liquidity position. With the changes in the industry related to COVID-19, we have focused on maintaining greater liquidity. We believe liquidity needs could 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 a number of 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 March 31, 2020. Our noncore funds at March 31, 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 to be highly volatile. At March 31, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was -1.68%, while our net short-term noncore funding ratio, noncore funds maturing within one-year, less short-term investments to assets equaled 1.56%. Comparatively, our net noncore dependence ratio was -1.03% while our net short-term noncore funding ratio was 1.54% at year-end. 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, increased $22,887 during the three months ended March 31, 2020. Cash and cash equivalents increased $14,285 for the same period last year. For the three months ended March 31, 2020, we realized net cash inflows of $383 from operating activities and $37,511 from financing activities offset partially by net cash outflows of $15,007 from investing activities. For the same period of 2019, we recognized net cash outflows of $1,217 from operating activities and $4,138 from financing activities, offset by net cash inflows of $19,640 from investing activities.

Operating activities provided net cash of $383 for the three months ended March 31, 2020 compared to using $1,217 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as 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 $15,007 for the three months ended March 31, 2020. For the comparable period in 2019, investing activities provided net cash of $19,640. For the three months ended March 31, 2020, loan originations more than offset net proceeds received on the sale of investment securities available-for-sale. 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.

 

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Financing activities provided net cash of $37,511 for the three months ended March 31, 2020 and used net cash of $4,138 for the same period last year. Deposit gathering is a predominant financing activity. During the three months ended March 31, deposits increased $18,023 in 2020 and decreased $3,564 in 2019. In addition, net cash provided by financing activities for the first quarter of 2020 was impacted by the proceeds received from an increase in long-term debt of $20,000.

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 $118,441, or $12.82 per share, at March 31, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net increase in stockholders’ equity in the three months ended March 31, 2020 was a result of the recognition of net income of $633, the issuance of common stock through Riverview’s ESPP, 401k and dividend reinvestment plans of $180, stock-based compensation of $22 and the recognition of a change in other comprehensive income of $188, offset by the payout of cash dividends of $692.

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 March 31, 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
 

March 31, 2020:

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total risk-based capital (to risk-weighted assets)

   $ 104,939        12.1   $ 91,001      ³ 10.5   $ 86,667      ³ 10.0

Tier 1 capital (to risk-weighted assets)

     96,599        11.1       73,667      ³ 8.5       69,334      ³ 8.0  

Common equity tier 1 risk-based capital (to risk-weighted assets)

     96,599        11.1       60,667      ³ 7.0       56,334      ³ 6.5  

Tier 1 capital (to average total assets)

     96,599        9.1       42,295      ³ 4.0       52,869      ³ 5.0  

 

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     Actual     Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    Well Capitalized under
Basel III
 

December 31, 2019:

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total risk-based capital (to risk-weighted assets)

   $ 104,010        12.4   $ 88,132      ³ 10.5   $ 83,936      ³ 10.0

Tier 1 capital (to risk-weighted assets)

     96,405        11.5       71,345      ³ 8.5       67,148      ³ 8.0  

Common equity tier 1 risk-based capital (to risk-weighted assets)

     96,405        11.5       58,755      ³ 7.0       54,558      ³ 6.5  

Tier 1 capital (to average total assets)

     96,405        9.1       42,489      ³ 4.0       53,112      ³ 5.0  

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.

During the first quarter of 2020, Riverview set up a guidance line of credit with a local bank for $10,000 to be utilized as contingency capital funding for the Bank in case of further deterioration of market condition due to COVID-19. This borrowing facility, if drawn upon, could be utilized to increase capital levels of the subsidiary bank through the injection of proceeds as additional paid in capital, if needed.

Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at March 31, 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.

 

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Review of Financial Performance:

We reported net income of $633, or $0.07 per basic and diluted weighted average common share, for the first quarter of 2020, compared to a net loss of $687, or $(0.08) per basic and diluted weighted average common share, for the first quarter of 2019. The major factor impacting earnings in the first quarter of 2020 was the recognition of a $1,800 provision for loan losses. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors primarily due to the charge-off of one large unsecured credit, and changes in qualitative factors related to the reserve build associated with the effects of COVID-19 as of the balance sheet date. 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. These revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. Another major factor influencing the level of earnings in the first quarter of 2020 was the recognition of $315 less of net accretion on acquired assets and assumed liabilities comparing the first quarters of 2020 and 2019. Partially offsetting the impact of these reductions to income was the recognition of a $815 net gain on the sale of investment securities in order to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. The results for the first three months of 2019 included the recognition of a nonrecurring executive separation pre-tax expense totaling $2,218, which primarily contributed to the first quarter net loss. If the COVID-19 pandemic persists, it will continue to have a severe effect on economic activity and will cause greater negative consequences for our customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.

Net Interest Income:

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:

 

   

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

 

   

Changes in general market rates; and

 

   

The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 21% in 2020 and 2019, respectively.

For the three months ended March 31, tax-equivalent net interest income decreased $984 to $8,846 in 2020 from $9,830 in 2019. The decrease in tax-equivalent net interest income was primarily attributable to a decline in the tax-equivalent loan yield and the realization of lower levels of loan accretion from purchase accounting marks. Overall, average earning assets decreased $10,385 more than the decline in average interest-bearing liabilities in comparing the first three months of 2020 with 2019. The tax-equivalent net interest margin for the three months ended March 31, was 3.60% in 2020 compared to 3.86% in 2019. The net interest spread decreased to 3.44% for the three months ended March 31, 2020 from 3.67% for the three months ended March 31, 2019. Net accretion included in interest income in the first three months of 2020 related to purchase accounting marks from mergers was $185 resulting in an increase in the tax-equivalent net interest margin of 7 basis points. For the same period in 2019 net accretion income was $500, resulting in an increase in the tax-equivalent net interest margin of 19 basis points.

For the three months ended March 31, 2020, tax-equivalent interest income decreased $1,274, to $10,763 from $12,037 for the three months ended March 31, 2019. An unfavorable volume variance in interest income of $478 attributable to changes in the average balance of earning assets coupled with an unfavorable rate variance of $796 due to decreased yields on earning assets caused the overall decline. Specifically, the overall yield on earning assets, on a fully tax-equivalent basis, decreased for the three months ended March 31, 2020 to 4.39% as compared to 4.73% for the three months ended March 31, 2019. The decrease in interest income was also impacted by a reduction in average earning assets, which decreased $45,084 to $986,938 for the first three months of 2020 from $1,032,022 for the same period in 2019. The tax-equivalent yield on the loan portfolio decreased 0.38% to 4.64% for the three months ended March 31, 2020 compared to 5.02% for the same period last year and caused interest income to decline $746. Average loans decreased $12,393 comparing the first three months of 2020 and 2019, which caused a decrease in tax-equivalent interest income of $141. Average investments decreased to $82,028 for the three months ended March 31, 2020 compared to $108,256 for the same period in 2019 causing interest income to decrease $302.

 

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Total interest expense decreased $290 to $1,917 for the three months ended March 31, 2020 from $2,207 for the three months ended March 31, 2019. The decrease was caused by both volume and rate variances. The average volume of interest-bearing liabilities decreased to $807,890 for the three months ended March 31, 2020, from $842,589 for the three months ended March 31, 2019 and caused interest expense to decline $79. In addition, the cost of funds decreased to 0.95% in 2020 from 1.06% in 2019 resulting in a decrease in interest expense of $211. Money market and Now account costs declined 38 and 26 basis points and were the major impact on lowering interest expense. Overall the cost of interest-bearing deposits decreased 11 basis points when comparing the first three months of 2020 and 2019. 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.

 

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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.

 

     Three months ended  
     March 31, 2020     March 31, 2019  
     Average
Balance
     Interest      Yield/
Rate
    Average
Balance
     Interest      Yield/
Rate
 

Assets:

                

Earning assets:

                

Loans

                

Taxable

   $ 838,825      $ 9,782        4.69   $ 851,515      $ 10,688        5.09

Tax exempt

     35,595        310        3.50     35,298        291        3.34

Investments

                

Taxable

     77,400        535        2.78     97,041        740        3.09

Tax exempt

     4,628        47        4.08     11,215        87        3.15

Interest bearing deposits

     30,490        89        1.17     36,953        231        2.54

Federal funds sold

                
  

 

 

    

 

 

      

 

 

    

 

 

    

Total earning assets

     986,938        10,763        4.39     1,032,022        12,037        4.73

Less: allowance for loan losses

     7,273             6,377        

Other assets

     105,680             104,005        
  

 

 

         

 

 

       

Total assets

   $ 1,085,345           $ 1,129,650        
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity:

                

Interest bearing liabilities:

                

Money market accounts

   $ 102,072        171        0.67   $ 113,602        293        1.05

NOW accounts

     270,559        319        0.47     281,052        505        0.73

Savings accounts

     133,267        60        0.18     129,259        30        0.09

Time deposits

     289,186        1,239        1.72     311,774        1,245        1.62

Short term borrowings

     989        5        2.03        

Long-term debt

     11,817        123        4.19     6,902        134        7.87
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     807,890        1,917        0.95     842,589        2,207        1.06

Non-interest-bearing demand deposits

     144,630             156,735        

Other liabilities

     13,668             17,006        

Stockholders’ equity

     119,157             113,320        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,085,345           $ 1,129,650        
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income/spread

      $ 8,846        3.44      $ 9,830        3.67
     

 

 

         

 

 

    

Net interest margin

           3.60           3.86

Tax-equivalent adjustments:

                

Loans

      $ 65           $ 61     

Investments

        10             18     
     

 

 

         

 

 

    

Total adjustments

      $ 75           $ 79     
     

 

 

         

 

 

    

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 March 31, 2020.

The provision for loan losses totaled $1,800 for the three months ended March 31, 2020, compared to $583 in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors primarily due to the

 

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charge-off of one large unsecured credit, and changes in qualitative factors related to the reserve build associated with the effects of COVID-19 as of the balance sheet date. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt along with increasing unemployment for those individuals depending on these businesses for income. As a result, our future provisions may increase by the growth of loan delinquencies and charge-offs resulting from COVID-19 pandemic related financial stress.

Noninterest Income:

For the quarter ended March 31, noninterest income totaled $2,930 in 2020, an increase of $1,119 from $1,811 in 2019. The increase was primarily attributable to recognizing a $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. Service charges, fees and commissions increased $328 as a result of recognizing a $130 loan swap fee and reaping the benefits of implementing strategic initiates in the fourth quarter of 2019 to enhance service fee income. Trust and wealth management income declined for the first quarter of 2020 by $47 and $27, respectively, when compared against the first quarter of 2019 due primarily to the impact of COVID-19.

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 in an effort to control the variable expenses.

Noninterest expense decreased $2,752, or 23.0%, to $9,212 for the three months ended March 31, 2020, from $11,964 for the same period last year. The decrease was primarily due to $2,218 in nonrecurring expense from an executive separation agreement recognized in the first quarter of 2019. Net occupancy expense increased $91, or 8.4%, to $1,180 for the first quarter of 2020 from $1,089 for the same period last year. Higher costs related to building and equipment maintenance and repairs caused the increase. Other expenses decreased $227, or 7.5%, to $2,817 in the first quarter of 2020 compared to $3,044 for the same period last year. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.

Income Taxes:

We recorded an income tax expense of $56 for the three months ended March 31, 2020 as compared to an income tax benefit of $298 for the three months ended March 31, 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 March 31, 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 March 31, 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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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: May 8, 2020
By:  

/s/ Scott A. Seasock

  Scott A. Seasock
  Chief Financial Officer
  (Principal Financial Officer)
Date: May 8, 2020

 

 

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