UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form
10-Q
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended June 30, 2021
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-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 ☐ No ☒
12b-2
of the Exchange Act. YesSecurities 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: 9,361,967 at July 29, 2021.
RIVERVIEW FINANCIAL CORPORATION
FORM
10-Q
For the Quarter Ended June 30, 2021
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
June 30, 2021 | December 31, 2020 | |||||||
Assets: | ||||||||
Cash and due from banks | $ | 9,849 | $ | 13,511 | ||||
Interest-bearing deposits in other banks | 47,659 | 36,270 | ||||||
Investment securities available-for-sale | 148,048 | 103,695 | ||||||
Loans held for sale | 180 | 4,338 | ||||||
Loans, net | 948,740 | 1,139,239 | ||||||
Less: allowance for loan losses | 10,867 | 12,200 | ||||||
Net loans | 937,873 | 1,127,039 | ||||||
Premises and equipment, net | 17,448 | 18,147 | ||||||
Accrued interest receivable | 3,532 | 4,216 | ||||||
Intangible assets | 1,654 | 1,918 | ||||||
Other assets | 48,498 | 48,420 | ||||||
Total assets | $ | 1,214,741 | $ | 1,357,554 | ||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 183,893 | $ | 173,600 | ||||
Interest-bearing | 860,622 | 841,860 | ||||||
Total deposits | 1,044,515 | 1,015,460 | ||||||
Short-term borrowings | ||||||||
Long-term debt | 51,956 | 228,765 | ||||||
Accrued interest payable | 504 | 1,038 | ||||||
Other liabilities | 13,401 | 14,859 | ||||||
Total liabilities | 1,110,376 | 1,260,122 | ||||||
Stockholders’ equity: | ||||||||
Common stock: 0 par value, authorized 20,000,000 shares; June 30, 2021, issued and outstanding 9,361,967 shares; December 31, 2020, issued and outstanding 9,306,442 shares | 103,058 | 102,662 | ||||||
Capital surplus | 292 | 292 | ||||||
Retained earnings (accumulated deficit) | 1,383 | (6,457 | ) | |||||
Accumulated other comprehensive income (loss) | (368 | ) | 935 | |||||
Total stockholders’ equity | 104,365 | 97,432 | ||||||
Total liabilities and stockholders’ equity | $ | 1,214,741 | $ | 1,357,554 | ||||
See notes to consolidated financial statements.
3
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Interest income: | ||||||||||||||||
Interest and fees on loans: | ||||||||||||||||
Taxable | $ | 11,529 | $ | 10,602 | $ | 21,877 | $ | 20,384 | ||||||||
Tax-exempt | 182 | 236 | 358 | 481 | ||||||||||||
Interest and dividends on investment securities available-for-sale: | ||||||||||||||||
Taxable | 553 | 396 | 1,047 | 931 | ||||||||||||
Tax-exempt | 144 | 68 | 296 | 105 | ||||||||||||
Interest on interest-bearing deposits in other banks | 15 | 12 | 24 | 101 | ||||||||||||
Total interest income | 12,423 | 11,314 | 23,602 | 22,002 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on deposits | 822 | 1,395 | 1,745 | 3,184 | ||||||||||||
Interest on short-term borrowings | 23 | 28 | ||||||||||||||
Interest on long-term debt | 585 | 225 | 1,231 | 348 | ||||||||||||
Total interest expense | 1,407 | 1,643 | 2,976 | 3,560 | ||||||||||||
Net interest income | 11,016 | 9,671 | 20,626 | 18,442 | ||||||||||||
(Recovery of) provision for loan losses | (735 | ) | 2,012 | (735 | ) | 3,812 | ||||||||||
Net interest income after (recovery of) provision for loan losses | 11,751 | 7,659 | 21,361 | 14,630 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service charges, fees and commissions | 2,755 | 1,011 | 4,229 | 2,392 | ||||||||||||
Commission and fees on fiduciary activities | 294 | 210 | 554 | 423 | ||||||||||||
Wealth management income | 238 | 196 | 452 | 416 | ||||||||||||
Mortgage banking income | 185 | 391 | 336 | 499 | ||||||||||||
Bank owned life insurance investment income | 196 | 193 | 374 | 386 | ||||||||||||
Net gain on sale of investment securities available-for-sale | 27 | 273 | 815 | |||||||||||||
Total noninterest income | 3,695 | 2,001 | 6,218 | 4,931 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits expense | 5,494 | 4,985 | 9,961 | 10,041 | ||||||||||||
Net occupancy and equipment expense | 854 | 1,068 | 2,044 | 2,248 | ||||||||||||
Amortization of intangible assets | 132 | 169 | 264 | 339 | ||||||||||||
Goodwill impairment | 24,754 | 24,754 | ||||||||||||||
Net cost (benefit) of operation of other real estate owned | 7 | (22 | ) | (11 | ) | |||||||||||
Other expenses | 3,037 | 2,978 | 5,664 | 5,795 | ||||||||||||
Total noninterest expense | 9,524 | 33,954 | 17,911 | 43,166 | ||||||||||||
Income (loss) before income taxes | 5,922 | (24,294 | ) | 9,668 | (23,605 | ) | ||||||||||
Income tax expense (benefit) | 1,142 | (172 | ) | 1,828 | (116 | ) | ||||||||||
Net income (loss) | 4,780 | (24,122 | ) | 7,840 | (23,489 | ) | ||||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gain (loss) on investment securities available-for-sale | 1,279 | 840 | (1,750 | ) | 1,893 | |||||||||||
Reclassification adjustment for net gain on sale of investment securities available-for-sale | (27 | ) | (273 | ) | (815 | ) | ||||||||||
Net change in cash flow hedge | (284 | ) | (38 | ) | 373 | (38 | ) | |||||||||
Other comprehensive income (loss) | 968 | 802 | (1,650 | ) | 1,040 | |||||||||||
Income tax expense (benefit) related to other comprehensive income | 203 | 168 | (347 | ) | 218 | |||||||||||
Other comprehensive income (loss), net of income taxes | 765 | 634 | (1,303 | ) | 822 | |||||||||||
Comprehensive income (loss) | $ | 5,545 | $ | (23,488 | ) | $ | 6,537 | $ | (22,667 | ) | ||||||
Per share data: | ||||||||||||||||
Net income (loss): | ||||||||||||||||
Basic | $ | 0.51 | $ | (2.61 | ) | $ | 0.84 | $ | (2.54 | ) | ||||||
Diluted | $ | 0.51 | $ | (2.61 | ) | $ | 0.84 | $ | (2.54 | ) | ||||||
Average common shares outstanding: | ||||||||||||||||
Basic | 9,357,153 | 9,249,184 | 9,349,266 | 9,236,314 | ||||||||||||
Diluted | 9,366,651 | 9,249,184 | 9,354,161 | 9,236,314 |
See notes to consolidated financial statements.
4
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
For the six months ended June 30, | Common Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||
Balance, January 1, 2021 | $ | 102,662 | $ | 292 | $ | (6,457 | ) | $ | 935 | $ | 97,432 | |||||||||
Net income | 7,840 | 7,840 | ||||||||||||||||||
Other comprehensive income, net of income taxes | (1,303 | ) | (1,303 | ) | ||||||||||||||||
Issuance under ESPP, 401k and Dividend Reinvestment plans | 266 | 266 | ||||||||||||||||||
Stock based compensation | 130 | 130 | ||||||||||||||||||
Balance, June 30, 2021 | $ | 103,058 | $ | 292 | $ | 1,383 | $ | (368 | ) | $ | 104,365 | |||||||||
Balance, January 1, 2020 | $ | 102,206 | $ | 112 | $ | 16,140 | $ | (348 | ) | $ | 118,110 | |||||||||
Net income | (23,489 | ) | (23,489 | ) | ||||||||||||||||
Other comprehensive income, net of income taxes | 822 | 822 | ||||||||||||||||||
Issuance under ESPP, 401k and Dividend Reinvestment plans | 346 | 346 | ||||||||||||||||||
Stock based compensation | 49 | 49 | ||||||||||||||||||
Dividends declared, $0.15 per share | (1,386 | ) | (1,386 | ) | ||||||||||||||||
Balance, June 30, 2020 | $ | 102,552 | $ | 161 | $ | (8,735 | ) | $ | 474 | $ | 94,452 | |||||||||
For the three months ended June 30, | Common Stock | Capital Surplus | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||
Balance, April 1, 2021 | $ | 102,861 | $ | 292 | $ | (3,397 | ) | $ | (1,133 | ) | $ | 98,623 | ||||||||
Net income | 4,780 | 4,780 | ||||||||||||||||||
Other comprehensive income, net of income taxes | 765 | 765 | ||||||||||||||||||
Issuance under ESPP, 401k and Dividend Reinvestment plans | 132 | 132 | ||||||||||||||||||
Stock based compensation | 65 | 65 | ||||||||||||||||||
Balance, June 30, 2021 | $ | 103,058 | $ | 292 | $ | 1,383 | $ | (368 | ) | $ | 104,365 | |||||||||
Balance, April 1, 2020 | $ | 102,386 | $ | 134 | $ | 16,081 | $ | (160 | ) | $ | 118,441 | |||||||||
Net income | (24,122 | ) | (24,122 | ) | ||||||||||||||||
Other comprehensive income, net of income taxes | 634 | 634 | ||||||||||||||||||
Issuance under ESPP, 401k and Dividend Reinvestment plans | 166 | 166 | ||||||||||||||||||
Stock based compensation | 27 | 27 | ||||||||||||||||||
Dividends declared, $0.08 per share | (694 | ) | (694 | ) | ||||||||||||||||
Balance, June 30, 2020 | $ | 102,552 | $ | 161 | $ | (8,735 | ) | $ | 474 | $ | 94,452 | |||||||||
See notes to consolidated financial statements.
5
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
For the Six Months Ended June 30, | 2021 | 2020 | ||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 7,840 | $ | (23,489 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization of premises and equipment | 682 | 640 | ||||||
(Recovery of) provision for loan losses | (735 | ) | 3,812 | |||||
Stock based compensation | 130 | 49 | ||||||
Net amortization of investment securities available-for-sale | 825 | 312 | ||||||
Net benefit of operation of other real estate owned | (22 | ) | (11 | ) | ||||
Net gain on sale of investment securities available-for-sale | (273 | ) | (815 | ) | ||||
Premium on sale of deposits | (1,602 | ) | ||||||
Amortization of purchase adjustment on loans | (58 | ) | (292 | ) | ||||
Amortization of intangible assets | 264 | 339 | ||||||
Amortization of assumed discount on long-term debt | 44 | 42 | ||||||
Amortization of long-term debt insurance costs | 51 | |||||||
Impairment of goodwill | 24,754 | |||||||
Deferred income taxes | 633 | (465 | ) | |||||
Proceeds from sale of loans originated for sale | 15,241 | 13,557 | ||||||
Net gain on sale of loans originated for sale | (336 | ) | (499 | ) | ||||
Loans originated for sale | (10,747 | ) | (17,229 | ) | ||||
Bank owned life insurance investment income | (374 | ) | (386 | ) | ||||
Net change in: | ||||||||
Accrued interest receivable | 684 | 588 | ||||||
Other assets | 411 | 1,028 | ||||||
Accrued interest payable | (534 | ) | 22 | |||||
Other liabilities | (1,458 | ) | (2,230 | ) | ||||
Net cash provided by (used in) operating activities | 10,666 | (273 | ) | |||||
Cash flows from investing activities: | ||||||||
Investment securities available-for-sale: | ||||||||
Purchases | (74,503 | ) | (14,215 | ) | ||||
Proceeds from repayments | 8,056 | 5,741 | ||||||
Proceeds from sales | 19,519 | 27,168 | ||||||
Proceeds from the sale of other real estate owned | 225 | 68 | ||||||
Net increase in restricted equity securities | (209 | ) | (779 | ) | ||||
Net (increase) decrease in loans | 189,959 | (314,982 | ) | |||||
Purchases of premises and equipment | (145 | ) | (1,456 | ) | ||||
Proceeds from sale of premises and equipment | 162 | |||||||
Premium paid on bank owned life insurance | (22 | ) | (22 | ) | ||||
Net cash provided by (used in) investing activities | �� | 143,042 | (298,477 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 30,657 | 82,673 | ||||||
Repayment of long-term debt | (176,904 | ) | ||||||
Proceeds from long-term debt | 209,997 | |||||||
Issuance under ESPP, 401k and DRP plans | 266 | 346 | ||||||
Cash dividends paid | (1,386 | ) | ||||||
Net cash provided by (used in) financing activities | (145,981 | ) | 291,630 | |||||
Net increase (decrease) in cash and cash equivalents | 7,727 | (7,120 | ) | |||||
Cash and cash equivalents—beginning | 49,781 | 50,348 | ||||||
Cash and cash equivalents—ending | $ | 57,508 | $ | 43,228 | ||||
Supplemental disclosures: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 3,510 | $ | 3,538 | ||||
Federal income taxes | $ | 500 | $ | |||||
Supplemental schedule of noncash investing and financing activities: | ||||||||
Other real estate acquired in settlement of loans | $ | 338 | ||||||
Transfer of deposits in sale | $ | 42,191 | ||||||
See notes to consolidated financial statements.
6
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 23 full-service offices and 3 (3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities, andsized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, and Schuylkill Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
small-to-medium
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 ofRegulation 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, 2020 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 2020 Annual Report onForm 10-K,
filed on March 11, 2021.The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.
The operating results and financial position of the Company for the three and six months ended as of June 30, 2021, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus
(“COVID-19”)
pandemic which may adversely affect the Company’s business results of operations and financial condition for an indefinite period.The impact of the pandemic on Riverview’s financial results is evolving and uncertain. Net interest income and
non-interest
income may decrease, and credit-related losses may increase in the future if economic activity slows due toCOVID-19.
We believe that we may experience a material adverse effect on our business, results of operations and financial condition as a result of theCOVID-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.Accounting Standards Adopted in 2021
In August 2018, the FASB issued ASU
No. 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic715-20)
— Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”. Subtopic715-20
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 guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.7
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, ASUNo. 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 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 ASUdebt securities. In November 2018, the FASB issued ASU No.debt securities. Entities are required to make this election on anbasis. In November 2019, 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. ASUNo. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans, andavailable-for-sale
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 Subtopic326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASUNo. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASUNo. 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 ASC326-20
if the instruments are eligible for the fair value option under ASC825-10.
The fair value option election does not apply toheld-to-maturity
instrument-by-instrument
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 Subtopic805-20.
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 anyday-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 allowance for credit losses (“ACL”) 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 aone-time
cumulative effect adjustment to increase the ACL with an offsetting reduction to the retained earnings component of equity.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. ASU2020-04
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. ASU2020-04
also provides numerous optional expedients for derivative accounting. ASU2020-04
is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU2020-04
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. In January 2021, the FASB issued ASU2021-01,
“Reference Rate Reform (Topic 848): Scope.” ASU2021-01
clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU2021-01
also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU2021-01
was effective upon issuance and generally can be applied through December 31, 2022. The adoption of the guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.8
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 securitiesand benefit plan and derivative adjustments.
available-for-sale
The components of accumulated other comprehensive income (loss) included in stockholders’ equity at June 30, 2021 and December 31, 2020 is as follows:
June 30, 2021 | December 31, 2020 | |||||||
Net unrealized gain (loss) on investment securities available-for-sale | $ | (61 | ) | $ | 1,962 | |||
Income tax expense (benefit) | (13 | ) | 412 | |||||
Net of income (loss) taxes | (48 | ) | 1,550 | |||||
Benefit plan adjustments | (951 | ) | (951 | ) | ||||
Income tax benefit | (200 | ) | (200 | ) | ||||
Net of income taxes | (751 | ) | (751 | ) | ||||
Derivative fair value adjustment | 545 | 172 | ||||||
Income tax benefit | 114 | 36 | ||||||
Net of income taxes | 431 | 136 | ||||||
Accumulated other comprehensive income (loss) | $ | (368 | ) | $ | 935 | |||
Other comprehensive income (loss) and related tax effects for the three and six months ended June 30, 2021 and 2020 is as follows:
Three months ended June 30, | 2021 | 2020 | ||||||
Unrealized gain (loss) on investment securities available-for-sale | $ | 1,279 | $ | 840 | ||||
Net (gain) loss on the sale of investment securities available-for-sale (1) | (27 | ) | ||||||
Net change in derivative fair value | (284 | ) | (38 | ) | ||||
Other comprehensive income before taxes | 968 | 802 | ||||||
Income tax expense | 203 | 168 | ||||||
Other comprehensive income | $ | 765 | $ | 634 | ||||
Six months ended June 30, | 2021 | 2020 | ||||||
Unrealized gain (loss) on investment securities available-for-sale | $ | (1,750 | ) | $ | 1,893 | |||
Net (gain) loss on the sale of investment securities available-for-sale (1) | (273 | ) | (815 | ) | ||||
Net change in derivative fair value | 373 | (38 | ) | |||||
Other comprehensive income (loss) before taxes | (1,650 | ) | 1,040 | |||||
Income tax expense | (347 | ) | 218 | |||||
Other comprehensive income (loss) | $ | (1,303 | ) | $ | 822 | |||
(1) | Represents amounts reclassified out of accumulated other comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income. |
9
3. Earnings per share:
Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and six months ended June 30, 2021 and 2020:
Three months ended June 30, | 2021 | 2020 | ||||||
Numerator: | ||||||||
Net income (loss) | $ | 4,780 | $ | (24,122 | ) | |||
Denominator: | ||||||||
Basic | 9,357,153 | 9,249,184 | ||||||
Dilutive options | 9,498 | |||||||
Diluted | 9,366,651 | 9,249,184 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.51 | $ | (2.61 | ) | |||
Diluted | $ | 0.51 | $ | (2.61 | ) |
Six months ended June 30, | 2021 | 2020 | ||||||
Numerator: | ||||||||
Net income (loss) | $ | 7,840 | $ | (23,489 | ) | |||
Denominator: | ||||||||
Basic | 9,349,266 | 9,236,314 | ||||||
Dilutive options | 4,895 | |||||||
Diluted | 9,354,161 | 9,236,314 | ||||||
Earnings per share: | ||||||||
Basic | $ | 0.84 | $ | (2.54 | ) | |||
Diluted | $ | 0.84 | $ | (2.54 | ) |
For the three and six months ended June 30, 2021 there were 37,200 and 93,935 outstanding stock options, respectively, that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and six months ended June 30, 2020 there were 172,964 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.
4. Investment securities:
The amortized cost and fair value of investment securitiesaggregated by investment category at June 30, 2021 and December 31, 2020 are summarized as follows:
available-for-sale
June 30, 2021 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Treasury securities | $ | 9,810 | $ | $ | 121 | $ | 9,689 | |||||||||
State and municipals: | ||||||||||||||||
Taxable | 23,260 | 311 | 358 | 23,213 | ||||||||||||
Tax-exempt | 44,398 | 90 | 601 | 43,887 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
U.S. Government agencies | 37,593 | 678 | 181 | 38,090 | ||||||||||||
U.S. Government-sponsored enterprises | 17,798 | 204 | 57 | 17,945 | ||||||||||||
Corporate debt obligations | 15,250 | 82 | 108 | 15,224 | ||||||||||||
Total | $ | 148,109 | $ | 1,365 | $ | 1,426 | $ | 148,048 | ||||||||
10
December 31, 2020 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
State and municipals: | ||||||||||||||||
Taxable | $ | 22,317 | $ | 400 | $ | 143 | $ | 22,574 | ||||||||
Tax-exempt | 17,988 | 423 | 16 | 18,395 | ||||||||||||
Mortgage-backed securities: | ||||||||||||||||
U.S. Government agencies | 26,051 | 940 | 26,991 | |||||||||||||
U.S. Government-sponsored enterprises | 24,627 | 442 | 17 | 25,052 | ||||||||||||
Corporate debt obligations | 10,750 | 56 | 123 | 10,683 | ||||||||||||
Total | $ | 101,733 | $ | 2,261 | $ | 299 | $ | 103,695 | ||||||||
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified asat June 30, 2021, is summarized as follows:
available-for-sale
June 30, 2021 | Fair Value | |||
Within one year | $ | 55 | ||
After one but within five years | 1,244 | |||
After five but within ten years | 30,714 | |||
After ten years | 60,000 | |||
92,013 | ||||
Mortgage-backed securities | 56,035 | |||
Total | $ | 148,048 | ||
Securities with a fair value of $97,577 and $71,676 at June 30, 2021 and December 31, 2020, 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 abasis. At June 30, 2021 and December 31, 2020, 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.
case-by-case
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
June 30, 2021 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
U.S. Treasury securities | $ | 9,689 | $ | 121 | $ | 9,689 | $ | 121 | ||||||||||||||||
State and municipals: | ||||||||||||||||||||||||
Taxable | 14,258 | 358 | 14,258 | 358 | ||||||||||||||||||||
Tax-exempt | 34,972 | 601 | 34,972 | 601 | ||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
U.S. Government agencies | 14,127 | 181 | 14,127 | 181 | ||||||||||||||||||||
U.S. Government-sponsored enterprises | 5,373 | 57 | 5,373 | 57 | ||||||||||||||||||||
Corporate debt obligations | 10,142 | 108 | 10,142 | 108 | ||||||||||||||||||||
Total | $ | 88,561 | $ | 1,426 | $ | 88,561 | $ | 1,426 | ||||||||||||||||
11
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2020 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
State and municipals: | ||||||||||||||||||||||||
Taxable | $ | 11,586 | $ | 143 | $ | $ | $ | 11,586 | $ | 143 | ||||||||||||||
Tax-exempt | 1,737 | 16 | 1,737 | 16 | ||||||||||||||||||||
Mortgage-backed securities: | ||||||||||||||||||||||||
U.S. Government agencies | 5,960 | 17 | 5,960 | 17 | ||||||||||||||||||||
U.S. Government-sponsored enterprises | ||||||||||||||||||||||||
Corporate debt obligations | 3,378 | 123 | 3,378 | 123 | ||||||||||||||||||||
Total | $ | 19,283 | $ | 176 | $ | 3,378 | $ | 123 | $ | 22,661 | $ | 299 | ||||||||||||
The Company had 62 investment securities, consisting of one U.S. Treasury securities, 12 taxable state and municipal obligations, 33
tax-exempt
state and municipal obligations, 4 U.S. Government agencies, 4 U.S. Government-sponsored enterprises and 8 corporate debt obligation that were in unrealized loss positions at June 30, 2021. Of these securities, none of the securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, resulting from changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at June 30, 2021. There was no OTTI recognized for the three and six months ended June 30, 2021 and 2020.The Company had 16 investment securities, consisting of 9 taxable state municipal obligations, 3
tax-exempt
state municipal obligations, 3 mortgage-backed securities and 1 corporate obligation that were in unrealized loss positions at December 31, 2020. Of these securities, one corporate obligation was 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 June 30, 2021 and December 31, 2020 are summarized as follows. Net deferred loan costs were $745 at June 30, 2021 and net deferred loan costs were $701 at December 31, 2020.
June 30, 2021 | December 31, 2020 | |||||||
Commercial | $ | 197,287 | $ | 359,080 | ||||
Real estate: | ||||||||
Construction | 55,500 | 73,402 | ||||||
Commercial | 502,471 | 502,495 | ||||||
Residential | 187,479 | 197,596 | ||||||
Consumer | 6,003 | 6,666 | ||||||
Total | $ | 948,740 | $ | 1,139,239 | ||||
The Company participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program (“PPP”), a multi-billion dollar specialized
low-interest
loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of June 30, 2021, the Company had PPP loans totaling $82,404, net of unearned loan fees of $2,737, included in commercial loans. PPP loans totaled $251,810, net of unearned fees of $5,075 as of December 31, 2020.12
The change in the allowance for loan losses account by major loan classifications for the three and six months ended June 30, 2021 and 2020 is summarized as follows:
Real Estate | ||||||||||||||||||||||||||||
June 30, 2021 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance, April 1, 2021 | $ | 1,393 | $ | 1,134 | $ | 6,793 | $ | 2,236 | $ | 127 | $ | 457 | $ | 12,140 | ||||||||||||||
Charge-offs | (201 | ) | (373 | ) | (37 | ) | (611 | ) | ||||||||||||||||||||
Recoveries | 57 | 2 | 14 | 73 | ||||||||||||||||||||||||
Provisions | 167 | (381 | ) | (57 | ) | (378 | ) | 7 | (93 | ) | (735 | ) | ||||||||||||||||
Ending balance | $ | 1,416 | $ | 753 | $ | 6,365 | $ | 1,858 | $ | 111 | $ | 364 | $ | 10,867 | ||||||||||||||
Real Estate | Real | |||||||||||||||||||||||||||
June 30, 2021 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance, January 1, 2021 | $ | 1,705 | $ | 1,117 | $ | 6,494 | $ | 2,427 | $ | 142 | $ | 315 | $ | 12,200 | ||||||||||||||
Charge-offs | (210 | ) | (37 | ) | (373 | ) | (85 | ) | (705 | ) | ||||||||||||||||||
Recoveries | 57 | 3 | 2 | 45 | 107 | |||||||||||||||||||||||
Provisions | (136 | ) | (327 | ) | 241 | (571 | ) | 9 | 49 | (735 | ) | |||||||||||||||||
Ending balance | $ | 1,416 | $ | 753 | $ | 6,365 | $ | 1,858 | $ | 111 | $ | 364 | $ | 10,867 | ||||||||||||||
Real Estate | ||||||||||||||||||||||||||||
June 30, 2020 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance, April 1, 2020 | $ | 1,671 | $ | 695 | $ | 3,917 | $ | 1,713 | $ | 152 | $ | 103 | $ | 8,251 | ||||||||||||||
Charge-offs | (501 | ) | (2 | ) | (71 | ) | (574 | ) | ||||||||||||||||||||
Recoveries | 7 | 2 | 1 | 37 | 47 | |||||||||||||||||||||||
Provisions | 7 | 46 | 1,660 | 358 | 44 | (103 | ) | 2,012 | ||||||||||||||||||||
Ending balance | $ | 1,685 | $ | 741 | $ | 5,078 | $ | 2,070 | $ | 162 | $ | $ | 9,736 | |||||||||||||||
Real Estate | ||||||||||||||||||||||||||||
June 30, 2020 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Beginning Balance, January 1, 2020 | $ | 1,953 | $ | 473 | $ | 3,115 | $ | 1,820 | $ | 155 | $ | $ | 7,516 | |||||||||||||||
Charge-offs | (899 | ) | (595 | ) | (2 | ) | (201 | ) | (1,697 | ) | ||||||||||||||||||
Recoveries | 9 | 2 | 1 | 93 | 105 | |||||||||||||||||||||||
Provisions | 622 | 268 | 2,556 | 251 | 115 | 3,812 | ||||||||||||||||||||||
Ending balance | $ | 1,685 | $ | 741 | $ | 5,078 | $ | 2,070 | $ | 162 | $ | $ | 9,736 | |||||||||||||||
13
The allocation of the allowance for loan losses and related loans by classifications of loans at June 30, 2021 and December 31, 2020 is summarized as follows:
Real Estate | ||||||||||||||||||||||||||||
June 30, 2021 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance | $ | 1,416 | $ | 753 | $ | 6,365 | $ | 1,858 | $ | 111 | $ | 364 | $ | 10,867 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | 95 | 95 | ||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for | 1,416 | 753 | 6,270 | 1,858 | 111 | 364 | 10,772 | |||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
purchased credit impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||
Ending balance | $ | 197,287 | $ | 55,500 | $ | 502,471 | $ | 187,479 | $ | 6,003 | $ | $ | 948,740 | |||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | 974 | 957 | 6,284 | 2,355 | 10,570 | |||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | 196,313 | 54,543 | 495,870 | 184,978 | 6,003 | 937,707 | ||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
purchased credit impaired loans | $ | $ | $ | 317 | $ | 146 | $ | $ | $ | 463 | ||||||||||||||||||
14
Real Estate | ||||||||||||||||||||||||||||
December 31, 2020 | Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending balance | $ | 1,705 | $ | 1,117 | $ | 6,494 | $ | 2,427 | $ | 142 | $ | 315 | $ | 12,200 | ||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | ||||||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | 1,705 | 1,117 | 6,494 | 2,427 | 142 | 315 | 12,200 | |||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
purchased credit impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Loan’s receivable: | ||||||||||||||||||||||||||||
Ending balance | $ | 359,080 | $ | 73,402 | $ | 502,495 | $ | 197,596 | $ | 6,666 | $ | $ | 1,139,239 | |||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
individually evaluated for impairment | 1,565 | 6,444 | 2,494 | 10,503 | ||||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
collectively evaluated for impairment | 357,515 | 73,402 | 495,674 | 194,939 | 6,666 | 1,128,196 | ||||||||||||||||||||||
Ending balance: | ||||||||||||||||||||||||||||
purchased credit impaired loans | $ | $ | $ | 377 | $ | 163 | $ | $ | $ | 540 | ||||||||||||||||||
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.
Non-homogeneous
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. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance. |
15
The following tables present the major classifications of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at June 30, 2021 and December 31, 2020:
June 30, 2021 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Commercial | $ | 193,190 | $ | 2,763 | $ | 1,334 | $ | $ | 197,287 | |||||||||||
Real estate: | ||||||||||||||||||||
Construction | 47,732 | 7,768 | 55,500 | |||||||||||||||||
Commercial | 450,523 | 26,162 | 25,786 | 502,471 | ||||||||||||||||
Residential | 183,751 | 1,122 | 2,606 | 187,479 | ||||||||||||||||
Consumer | 6,003 | 6,003 | ||||||||||||||||||
Total | $ | 881,199 | $ | 30,047 | $ | 37,494 | $ | $ | 948,740 | |||||||||||
December 31, 2020 | Pass | Special Mention | Substandard | Doubtful | Total | |||||||||||||||
Commercial | $ | 353,758 | $ | 3,147 | $ | 2,175 | $ | $ | 359,080 | |||||||||||
Real estate: | ||||||||||||||||||||
Construction | 63,838 | 1,817 | 7,747 | 73,402 | ||||||||||||||||
Commercial | 451,190 | 29,180 | 22,125 | 502,495 | ||||||||||||||||
Residential | 191,775 | 2,670 | 3,151 | 197,596 | ||||||||||||||||
Consumer | 6,666 | 6,666 | ||||||||||||||||||
Total | $ | 1,067,227 | $ | 36,814 | $ | 35,198 | $ | $ | 1,139,239 | |||||||||||
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2021 and December 31, 2020. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
Accrual Loans | ||||||||||||||||||||||||||||
June 30, 2021 | 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 | $ | 82 | $ | 15 | $ | $ | 97 | $ | 196,856 | $ | 334 | $ | 197,287 | |||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | 54,543 | 957 | 55,500 | |||||||||||||||||||||||||
Commercial | 92 | 283 | 375 | 501,592 | 187 | 502,154 | ||||||||||||||||||||||
Residential | 598 | 275 | 87 | 960 | 185,455 | 918 | 187,333 | |||||||||||||||||||||
Consumer | 24 | 7 | 4 | 35 | 5,968 | 6,003 | ||||||||||||||||||||||
Total | $ | 796 | $ | 580 | $ | 91 | $ | 1,467 | $ | 944,414 | $ | 2,396 | $ | 948,277 | ||||||||||||||
Purchased credit impaired loans | 463 | |||||||||||||||||||||||||||
Total Loans | $ | 948,740 | ||||||||||||||||||||||||||
Accrual Loans | ||||||||||||||||||||||||||||
December 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 | $ | 64 | $ | 1 | $ | $ | 65 | $ | 358,496 | $ | 519 | $ | 359,080 | |||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | 73,402 | 73,402 | ||||||||||||||||||||||||||
Commercial | 1,238 | 4,063 | 5,301 | 496,785 | 32 | 502,118 | ||||||||||||||||||||||
Residential | 2,125 | 2,993 | 146 | 5,264 | 191,299 | 870 | 197,433 | |||||||||||||||||||||
Consumer | 22 | 20 | 10 | 52 | 6,614 | 6,666 | ||||||||||||||||||||||
Total | $ | 3,449 | $ | 7,077 | $ | 156 | $ | 10,682 | $ | 1,126,596 | $ | 1,421 | $ | 1,138,699 | ||||||||||||||
Purchased credit impaired loans | 540 | |||||||||||||||||||||||||||
Total Loans | $ | 1,139,239 | ||||||||||||||||||||||||||
16
The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2021 and 2020, and as of and for the year ended, December 31, 2020 by major loan classification:
This Quarter | Year-to-Date | |||||||||||||||||||||||||||
June 30, 2021 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||
With no related allowance: | ||||||||||||||||||||||||||||
Commercial | $ | 974 | $ | 974 | $ | 1,326 | $ | 9 | $ | 1,473 | $ | 50 | ||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | 957 | 957 | 964 | 726 | ||||||||||||||||||||||||
Commercial | 671 | 671 | 793 | 8 | 2,322 | 42 | ||||||||||||||||||||||
Residential | 2,501 | 2,631 | 2,521 | 29 | 2,560 | 62 | ||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | 5,103 | 5,233 | 5,604 | 46 | 7,081 | 154 | ||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||
Commercial | 5,930 | 5,930 | $ | 95 | 5,950 | 95 | 4,476 | 143 | ||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | 5,930 | 5,930 | 95 | 5,950 | 95 | 4,476 | 143 | |||||||||||||||||||||
Commercial | 974 | 974 | 1,326 | 9 | 1,473 | 50 | ||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | 957 | 957 | 964 | 726 | ||||||||||||||||||||||||
Commercial | 6,601 | 6,601 | 95 | 6,743 | 103 | 6,798 | 185 | |||||||||||||||||||||
Residential | 2,501 | 2,631 | 2,521 | 29 | 2,560 | 62 | ||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | $ | 11,033 | $ | 11,163 | $ | 95 | $ | 11,554 | $ | 141 | $ | 11,557 | $ | 297 | ||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | For the Year Ended | |||||||||||||||||
December 31, 2020 | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||
With no related allowance: | ||||||||||||||||||||
Commercial | $ | 1,565 | $ | 1,675 | $ | 1,356 | $ | 416 | ||||||||||||
Real estate: | ||||||||||||||||||||
Construction | ||||||||||||||||||||
Commercial | 6,821 | 6,821 | 4,392 | 311 | ||||||||||||||||
Residential | 2,657 | 2,787 | 2,493 | 146 | ||||||||||||||||
Consumer | ||||||||||||||||||||
Total | 11,043 | 11,283 | 8,241 | 873 | ||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||
Commercial | 561 | |||||||||||||||||||
Real estate: | ||||||||||||||||||||
Construction | ||||||||||||||||||||
Commercial | 391 | 65 | ||||||||||||||||||
Residential | ||||||||||||||||||||
Consumer | �� | |||||||||||||||||||
Total | 952 | 65 | ||||||||||||||||||
Commercial | 1,565 | 1,675 | 1,917 | 416 | ||||||||||||||||
Real estate: | ||||||||||||||||||||
Construction | ||||||||||||||||||||
Commercial | 6,821 | 6,821 | 4,783 | 376 | ||||||||||||||||
Residential | 2,657 | 2,787 | 2,493 | 146 | ||||||||||||||||
Consumer | ||||||||||||||||||||
Total | $ | 11,043 | $ | 11,283 | $ | 9,193 | $ | 938 | ||||||||||||
17
This Quarter | Year-to-Date | |||||||||||||||||||||||||||
June 30, 2020 | Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||||||||||
With no related allowance: | ||||||||||||||||||||||||||||
Commercial | $ | 2,059 | $ | 2,169 | $ | $ | 1,579 | $ | 132 | $ | 1,603 | $ | 200 | |||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||
Commercial | 9,158 | 9,659 | 5,854 | 19 | 5,561 | 66 | ||||||||||||||||||||||
Residential | 2,748 | 2,878 | 2,520 | 81 | 2,539 | 106 | ||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | 13,965 | 14,706 | 9,953 | 232 | 9,703 | 372 | ||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||
Commercial | 121 | 121 | 29 | 121 | 621 | |||||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||
Commercial | 184 | 391 | 4 | |||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | 121 | 121 | 29 | 305 | 1,012 | 4 | ||||||||||||||||||||||
Commercial | 2,180 | 2,290 | 29 | 1,700 | 132 | 2,224 | 200 | |||||||||||||||||||||
Real estate: | ||||||||||||||||||||||||||||
Construction | ||||||||||||||||||||||||||||
Commercial | 9,158 | 9,659 | 6,038 | 19 | 5,952 | 70 | ||||||||||||||||||||||
Residential | 2,748 | 2,878 | 2,520 | 81 | 2,539 | 106 | ||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||
Total | $ | 14,086 | $ | 14,827 | $ | 29 | $ | 10,258 | $ | 232 | $ | 10,715 | $ | 376 | ||||||||||||||
For the three and six months ended June 30, interest income related to impaired loans, would have been $21 and $49 in 2021 and $35 and $56 in 2020 had the loans been current and the terms of the loans not been modified.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
• | Rate Modification—A modification in which the interest rate is changed to a below market rate. |
• | Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed. |
• | Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time. |
• | Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. |
• | Combination Modification—Any other type of modification, including the use of multiple categories above. |
Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled $9,295 at June 30, 2021, $9,985 at December 31, 2020 and $9,988 at June 30, 2020.
There were0 loans modified as troubled debt restructures during the three and six months ended June 30, 2021. There were 9 loans modified as troubled debt restructures during the second quarter of 2020 and 9 loans modified during the six months ended June 30, 2020 totaling $7,817.
During the three and six months ended June 30, 2021, there were 0 defaults on restructured loans. During the three months ended June 30, 2020, there were 0 defaults on loans restructured and 1 default on a restructured loan totaling $368 during the six months ended June 30, 2020.
18
The Company is a party to financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk over and above the amount recognized in the consolidated balance sheets.Distribution of
off-balance
sheet commitmentsJune 30, 2021 | December 31, 2020 | |||||||
Unused portions of lines of credit | $ | 102,141 | $ | 92,848 | ||||
Construction loans | 14,320 | 24,751 | ||||||
Commitments to extend credit | 12,797 | 10,275 | ||||||
Deposit overdraft protection | 18,031 | 18,117 | ||||||
Standby and performance letters of credit | 7,274 | 6,577 | ||||||
Total | $ | 154,563 | $ | 152,568 | ||||
The Company’s exposure to credit loss in the event of nonperformance by the other party to the
off-balance
sheet financial instruments is represented by the contractual amounts of those instruments. The Company follows the same credit policies in making commitments and conditional obligations as it does foron-balance
sheet instruments. We record a valuation allowance foroff-balance
sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $93 at June 30, 2021 and December 31, 2020, respectively. We do not anticipate that losses, if any, that may occur as a result of fundingoff-balance
sheet commitments, would have a material adverse effect on our operating results or financial position.6. Other assets:
The components of other assets at June 30, 2021 and December 31, 2020 are summarized as follows:
June 30, 2021 | December 31, 2020 | |||||||
Other real estate owned | $ | 219 | $ | 422 | ||||
Bank owned life insurance | 31,821 | 31,425 | ||||||
Restricted equity securities | 1,968 | 1,759 | ||||||
Deferred tax assets | 3,621 | 3,907 | ||||||
Lease right-of-use | 1,598 | 2,278 | ||||||
Other assets | 9,271 | 8,629 | ||||||
Total | $ | 48,498 | $ | 48,420 | ||||
7. 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.
19
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
• | Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
• | Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
• | 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:
Interest rate swap hedges
Assets and liabilities measured at fair value on a recurring basis at June 30, 2021 and December 31, 2020 are summarized as follows:
Fair Value Measurement Using | ||||||||||||||||
June 30, 2021 | Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
U.S. Treasury securities | $ | 9,689 | $ | 9,689 | $ | |||||||||||
State and Municipals: | ||||||||||||||||
Taxable | 23,213 | 23,213 | ||||||||||||||
Tax-exempt | 43,887 | 43,887 | ||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
U.S. Government agencies | 38,090 | 38,090 | ||||||||||||||
U.S. Government-sponsored enterprises | 17,945 | 17,945 | ||||||||||||||
Corporate debt obligations | 15,224 | 15,224 | ||||||||||||||
Total | $ | 148,048 | $ | 9,689 | $ | 138,359 | ||||||||||
Interest rate swap hedge | $ | 545 | $ | 545 | ||||||||||||
December 31, 2020 | Fair Value Measurement Using | |||||||||||||||
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 | $ | 22,574 | $ | 22,574 | ||||||||||||
Tax-exempt | 18,395 | 18,395 | ||||||||||||||
Mortgage-backed securities: | ||||||||||||||||
U.S. Government agencies | 26,991 | 26,991 | ||||||||||||||
U.S. Government-sponsored enterprises | 25,052 | 25,052 | ||||||||||||||
Corporate debt obligations | 10,683 | 10,683 | ||||||||||||||
Total | $ | 103,695 | $ | 103,695 | ||||||||||||
Interest rate swap hedge | $ | 172 | $ | 172 | ||||||||||||
Other real estate owned
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 changes20
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
Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2021 and December 31, 2020 are summarized as follows:
Fair Value Measurement Using | ||||||||||||||||
June 30, 2021 | 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 | $ | 219 | $ | 219 | ||||||||||||
Impaired loans, net of related allowance | 5,835 | 5,835 | ||||||||||||||
Total | $ | 6,054 | $ | 6,054 | ||||||||||||
December 31, 2020 | Fair Value Measurement Using | |||||||||||||||
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 | $ | 422 | $ | 422 | ||||||||||||
Total | $ | 422 | $ | 422 | ||||||||||||
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at June 30, 2021 and December 31, 2020.
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
June 30, 2021 | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||||||||
Other real estate owned | $219 | Appraisal of collateral | Appraisal adjustments | 0.0% to 3.0% (3.0%) | ||||||||||||
Liquidation expenses | 10.0% to 10.0% (10.0%) | |||||||||||||||
Impaired loans | 5,835 | Appraisal of collateral | Appraisal adjustments | 0.0% to 0.0% (0.0%) | ||||||||||||
Liquidation expenses | 7.0% to 7.0% (7.0%) | |||||||||||||||
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
December 31, 2020 | Fair Value Estimate | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||||||||
Other real estate owned | $422 | Appraisal of collateral | Appraisal adjustments | 20.0% to 14.0% (8.4%) | ||||||||||||
Liquidation expenses | 10.0% to 10.0% (10.0%) |
21
The carrying and fair values of the Company’s financial instruments at June 30, 2021 and December 31, 2020 and their placement within the fair value hierarchy are as follows:
Carrying Amount | Fair Value Hierarchy | |||||||||||||||||||
June 30, 2021 | 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 | $ | 57,508 | $ | 57,508 | $ | 57,508 | ||||||||||||||
Investment securities | 148,048 | 148,048 | 9,689 | $ | 138,359 | |||||||||||||||
Loans held for sale | 180 | 180 | 180 | |||||||||||||||||
Net loan s | 937,873 | 921,600 | $ | 921,600 | ||||||||||||||||
Accrued interest receivable | 3,532 | 3,532 | 911 | 2,621 | ||||||||||||||||
Restricted equity securities | 1,968 | 1,968 | ||||||||||||||||||
Interest rate swap hedges | 545 | 545 | 545 | |||||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 1,044,515 | $ | 1,046,218 | $ | 1,046,218 | ||||||||||||||
Long-term debt | 51,956 | 54,970 | 54,970 | |||||||||||||||||
Accrued interest payable | 504 | 504 | 504 | |||||||||||||||||
Carrying Amount | Fair Value Hierarchy | |||||||||||||||||||
December 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 | $ | 49,781 | $ | 49,781 | $ | 49,781 | ||||||||||||||
Investment securities available-for-sale | 103,695 | 103,695 | $ | 103,695 | ||||||||||||||||
Loans held for sale | 4,338 | 4,338 | 4,338 | |||||||||||||||||
Net loan s | 1,127,039 | 1,116,618 | $ | 1,116,618 | ||||||||||||||||
Accrued interest receivable | 4,216 | 4,216 | 578 | 3,638 | ||||||||||||||||
Restricted equity securities | 1,759 | 1,759 | ||||||||||||||||||
Interest rate swap hedges | 172 | 172 | 172 | |||||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 1,015,460 | $ | 1,018,529 | $ | 1,018,529 | ||||||||||||||
Long-term debt | 228,765 | 231,748 | 231,748 | |||||||||||||||||
Accrued interest payable | 1,038 | 1,038 | 1,038 |
8. Subsequent Events:
In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred from the date of the financial statements through the date these consolidated financial statements were issued. On June 30, 2021, Riverview entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid Penn Bancorp, Inc. (“Mid Penn”) pursuant to which Riverview will merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. Upon consummation of the Merger, Riverview Bank, a wholly-owned subsidiary of Riverview, will be merged with and into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn, with Mid Penn Bank being the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the boards of directors of Mid Penn and Riverview. The Merger is expected to close in the fourth quarter of 2021.
22
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, 2020.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 continue to have a material adverse effect on significant estimates, operations, and business results of Riverview.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, 2020. 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 onForm 10-K
for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 11, 2021.Operating Environment:
Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 6.5% in the second quarter of 2021. This was an increase over the 6.3% growth realized in the first quarter of 2021 and shows a continued recovery from
COVID-19
related contractions indicating government stimulus programs continue to provide forward momentum. Increases were seen in personal consumption expenditures, nonresidential fixed investment, exports, and state and local government spending that were partly offset by decreases in private inventory investment, residential fixed investment and federal government spending.23
The impact of the virus has been felt nationally and within our primary market area as unemployment rates had been elevated but have since returned to more historically normal levels. The unemployment rate is now substantially lower for the United States and the Commonwealth of Pennsylvania and was 5.9% and 6.4%, respectively, in June 2021 compared to 11.1% and 13.2%, respectively, in June 2020. The average unemployment rate for counties in our market area decreased to 6.2% in June 2021 compared to 12.2% in June 2021. The resulting impacts of the pandemic and subsequent government stimulus programs on consumer and business customers has caused changes in consumer and business spending, borrowing needs, and saving habits. This has also affected the demand for loans and other products and services we offer, as well as the creditworthiness of potential and current borrowers and delinquency rates. Our business and consumer customers continue to experience varying degrees of financial distress, but overall, there has been continued improvement and stability in credit quality metrics associated with our loan portfolio.
Inflationary pressures continue to increase even as Federal stimulus programs reduce economic impact payments which had provided funds to the personal and business sectors. The Personal Consumption Expenditures (“PCE”) index, excluding food and energy prices, increased 6.4% in the second quarter of 2021 compared to 2.7% in the first quarter of 2021. While stimulus payments have helped to increase demand by providing cash to consumers and businesses, supply-side limitations have reduced availability of goods and have helped increase prices on certain goods, all which will have an impact on future Federal Open Market Committee (“FOMC”) actions related to short-term interest rates. Prior year monetary policy actions by the FOMC to decrease the target Federal Funds rate to a range of 0% to 0.25% have adversely impacted the Company’s net interest margin and will continue to compress earnings on earning assets.
On June 30, 2021, Riverview entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid Penn Bancorp, Inc. (“Mid Penn”) pursuant to which Riverview will merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. Upon consummation of the Merger, Riverview Bank, a wholly-owned subsidiary of Riverview, will be merged with and into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn, with Mid Penn Bank being the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the boards of directors of Mid Penn and Riverview. The Merger is expected to close in the fourth quarter of 2021. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each share of common stock of Riverview will be converted into 0.4833 shares of Mid Penn common stock, subject to the payment of cash in lieu of fractional shares. For additional information related to the Merger and Merger Agreement refer to the Securities and Exchange Commission Report filed by Riverview on July 2, 2021.
Review of Financial Position:
Total assets decreased $142,813 to $1,214,741 at June 30, 2021, from $1,357,554 at December 31, 2020. Loans, net, decreased to $948,740 at June 30, 2021, compared to $1,139,239 at December 31, 2020, a decrease of $190,499. The decrease in loans was due primarily to SBA forgiveness payments on PPP loans. Approximately 75.0%, amounting to $188,866 of outstanding PPP loans at December 31, 2020, were forgiven in the first half of 2021. Business lending, including commercial and commercial real estate loans, decreased $161,817, retail lending, including residential mortgages and consumer loans, decreased $10,780, and construction lending decreased $17,902 during the six months ended June 30, 2021. Investment securities increased $44,353, or 42.8%, in the six months ended June 30, 2021. Noninterest-bearing deposits increased $10,293, while interest-bearing deposits increased $18,762 during the six months ended June 30, 2021. Total stockholders’ equity increased $6,933, to $104,365 at June 30, 2021 from $97,432 at
year-end
2020. The increase in stockholders’ equity was caused primarily by the recognition of net income offset partially by a change in accumulated other comprehensive income. For the six months ended June 30, 2021, total assets averaged $1,338,729, an increase of $149,643 from $1,189,086 for the same period in 2020.Investment Portfolio:
The Company’s entire investment portfolio is held aswhich allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when favorable market opportunities exist. Investment securitiestotaled $148,048 at June 30, 2021, an increase of $44,353, or 42.8%, from $103,695 at December 31, 2020. Activity in the investment portfolio during the first half of 2021, included purchases of $74,503, sales of $19,519 and repayments of $8,056. As a result of modest loan demand in the first six months of 2021, excess funds from SBA forgiveness were utilized to increase the investment portfolio. Purchases consisted of $19,391 of U.S. Treasury securities, $8,000 of corporate bonds, and $14,553 of U. S. Government mortgage-backed securities and $32,559 of state and municipal obligations. The
available-for-sale,
available-for-sale
tax-equivalent
yield on the bonds purchased in the first six months of 2021 was 1.73%. In an effort to reduce interest rate risk, we sold $9,622 of U.S. Treasury securities, $3,482 of corporate bonds, $4,334 oftax-exempt
state and municipal obligations and $2,081 of U.S. Government-sponsored enterprises. The net gain on the sale amounted to $273 in the six months ended June 30, 2021 compared to a net gain of $815 recognized for the same period last year.For the six months ended June 30, 2021, the investment portfolio averaged $141,404, an increase of $67,054 compared to $74,350 for the same period last year. The
tax-equivalent
yield on the investment portfolio decreased 85 basis points to 2.03% for the six months ended June 30, 2021, from 2.88% for the comparable period of 2020.Securitiesare 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 net unrealized losses of $61, net of deferred income tax of $13 at June 30, 2021, and net unrealized gains of $1,962, net of deferred income taxes of $412 at December 31, 2020. The change in the unrealized holding gain was the result of increases in general market rates.
available-for-sale
24
Loan Portfolio:
Loans, net, decreased to $948,740 at June 30, 2021 from $1,139,239 at December 31, 2020, a decrease of $190,499, or 16.7%. The decrease in the loan portfolio was attributable to forgiveness payments on PPP loans totaling $188,866 and a decrease in organic loan growth of $21,093, offset partially by the origination of PPP loans of $19,460. Business loans, including commercial and commercial real estate loans, decreased $161,817, or 18.8%, to $699,758 at June 30, 2021 from $861,575 at December 31, 2020. Retail loans, including residential real estate and consumer loans, decreased $10,780, or 5.3%, to $193,482 at June 30, 2021 from $204,262 at December 31, 2020. Construction lending decreased $17,902, or 24.4%, to $55,500 at June 30, 2021 from $73,402 at December 31, 2020. PPP loans, net of unearned loan fees, totaled $82,404 at June 30, 2021 and $251,810 at December 31, 2020.
For the six months ended June 30, 2021, loans averaged $1,074,211, an increase of $99,059 compared to $975,152 for the same period in 2020. The
tax-equivalent
yield on the loan portfolio was 4.19% for the six months ended June 30, 2021, a 14 basis point decrease from 4.33% for the comparable period last year. The continuation of the low interest rate environment caused a decline in loan yield as higher yields from payments and prepayments on existing loans are replaced by lower yields originated on new and refinanced loans. Concerns about the spread ofCOVID-19
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 by150-basis
points in the first half of 2020. Loan accretion included in loan interest income in the first six months of 2021 related to acquired loans was $58 compared to $292 for the same period in 2020. The yield earned on PPP loans from interest and fees increased to 4.47% for the six months ended June 30, 2021 due an acceleration in the recognition in fees from higher levels of loan forgiveness as compared to 2.48% for the same period in 2020.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 ason-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements. With the onset of theCOVID-19
pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans.The contractual amounts of
off-balance
sheet commitments at June 30, 2021 and December 31, 2020 are summarized as follows:June 30, 2021 | December 31, 2020 | |||||||
Unused portions of lines of credit | $ | 102,141 | $ | 92,848 | ||||
Construction loans | 14,320 | 24,751 | ||||||
Commitments to extend credit | 12,797 | 10,275 | ||||||
Deposit overdraft protection | 18,031 | 18,117 | ||||||
Standby and performance letters of credit | 7,274 | 6,577 | ||||||
Total | $ | 154,563 | $ | 152,568 | ||||
Asset Quality:
National, Pennsylvania and our market area unemployment rates at June 30, 2021 and 2020 are summarized as follows:
2021 | 2020 | |||||||
United States | 5.9 | % | 11.1 | % | ||||
Pennsylvania | 6.4 | % | 13.2 | % | ||||
Berks County | 6.7 | % | 13.9 | % | ||||
Blair County | 6.0 | % | 11.6 | % | ||||
Bucks County | 5.3 | % | 12.8 | % | ||||
Centre County | 5.2 | % | 8.5 | % | ||||
Clearfield County | 7.0 | % | 11.6 | % | ||||
Dauphin County | 6.4 | % | 13.5 | % | ||||
Huntingdon County | 6.7 | % | 13.8 | % | ||||
Lebanon County | 5.6 | % | 12.0 | % | ||||
Lehigh County | 7.1 | % | 14.7 | % | ||||
Lycoming County | 6.5 | % | 11.5 | % | ||||
Perry County | 4.7 | % | 9.6 | % | ||||
Schuylkill County | 6.6 | % | 12.7 | % |
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Unemployment rates have improved substantially since the onset of the pandemic and are significantly better at the end of the second quarter of 2021 compared to the end of second quarter of 2021 for the Nation, Commonwealth of Pennsylvania and within every county in which we have branch locations. The average unemployment rate for all our counties decreased to 5.5% in June 2021 from 12.2% in June 2020. The lowest unemployment rate in 2021 for all the counties we serve was 4.7% which was in Perry County, and the highest recorded rate being 7.1% in Lehigh County. High levels or increases in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality.
Nonperforming assets increased $20 to $11,982 at June 30, 2021 from $11,962 at December 31, 2020. The increase resulted from a $975 increase in nonaccrual loans, which was offset by reductions of $687 in accruing restructured loans, $203 in other real estate owned and $65 in accruing loans past due 90 days or more. The increase in nonaccrual loans was due to increases of $155 in commercial real estate loans, $957 in construction loans, and $48 in residential loans partially offset by a reduction of $185 in commercial loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.26% at June 30, 2021 compared to 1.05% at December 31, 2020. Nonperforming assets decreased $1,169 in the second quarter of 2021 due to reductions of $432 in nonaccrual loans, $663 in accruing restructured loans and $74 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 byCOVID-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 June 30, 2021, seven loans with outstanding balances totaling $5,956, or 0.6% of total loans, were deferring loan payments compared to 19 loans with outstanding balances totaling $21,854, or 1.9% of total loans at December 31, 2020. We have experienced significant reductions in the number and amount of modified loans under this program since its inception in the second quarter of 2020. In comparison, as of June 30, 2020, we had outstanding modifications to consumer and commercial customers for 501 loans totaling $256,422, or 22.0%, of total loans. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments.
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 decreased $1,333 to $10,867 at June 30, 2021, from $12,200 at the end of 2020 as a result of recognizing a recovery of provision for loan losses and net charge offs. We recognized a $735 recovery of provision for loan losses in the second quarter of 2021 due to experiencing continued stability in the credit quality of the loan portfolio since the onset of the pandemic, as well as evidence of an overall mitigation of related risks factors. As a result of the uncertainty of the magnitude and longevity of the impact of
COVID-19,
the Company bolstered its allowance for loan losses through additional provisions totaling26
$6,282 in 2020 due primarily to increased qualitative factors for the economy and concentrations in industries specifically affected by the virus. Current national and local economic conditions reflect a more stable economic climate in 2021 compared with the previous year. The Company was able to decrease its qualitative factors in the second quarter based on the remaining low number of CARES Act payment deferrals, improvements in industries most likely to be affected by the pandemic, and continued stability in the credit quality metrics of the loan portfolio. For the six months ended June 30, net charge offs were $598, or 0.11% of average loans outstanding in 2021 compared to $1,592, or 0.33% of average loans outstanding for the same period in 2020.
Deposits:
We attract the majority of our deposits from within our
12-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 individual retirement accounts. For the six months ended June 30, 2021, total deposits increased $29,055 to $1,044,515 from $1,015,460 at December 31, 2020. The increase was due to the successful acquisition of a municipal relationship in the first six months of 2021. Noninterest-bearing transaction accounts increased $10,293, while interest-bearing accounts increased $18,762. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $47,700 and time deposits, including certificates of deposit and individual retirement accounts decreased $28,938 for the six months ended June 30, 2021.For the six months ended June 30, interest-bearing deposits averaged $871,397 in 2021 compared to $816,298 in 2020. The cost of interest-bearing deposits was 0.40% in 2021 compared to 0.78% in 2020. Consistent with recent FOMC actions to keep short-term rates at a historically low level due to the onset of
COVID-19,
we took action to lower deposit rates to fend off net interest margin contraction due to changes in loan yields as payments on higher earning existing loans are replaced by lower yields originated on new and refinanced loans. We anticipate deposit costs to continue to decrease in the short term based on the continued market rate impact of FOMC actions.On May 21, 2021, Riverview Bank, the wholly-owned subsidiary of Riverview Financial Corporation, completed its previously announced branch sale to AmeriServ Financial Bank, whereby AmeriServ Financial Bank acquired the branch office and deposit customers of Citizens Neighborhood Bank (“CNB”), an operating division of Riverview Bank, located in Meyersdale, Pennsylvania, as well as the deposit customers of CNB’s leased branch office in the Borough of Somerset, Pennsylvania. The transferred deposits totaled $42,191 and were acquired for a 3.71% deposit premium amounting to $1,602.
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 Atlantic Community Bankers Bank (“ACBB”), Pacific Community Bankers Bank (“PCBB”) and the FHLB. At June 30, 2021 and December 31, 2020, we did not have any short-term borrowings outstanding.
Long-term debt totaled $51,956 at June 30, 2021 as compared to $228,765 at December 31, 2020. The large decrease in long-term debt is attributable to the payoff of all existing advances taken through the Federal Reserve Bank’s PPPLF, whereby loans originated through the PPP program were pledged as security to facilitate advancements made through the program. For the six months ended June 30, long-term debt averaged $167,378 in 2021 and $67,346 in 2020. The average cost of long-term debt was 1.48% for the six months ended June 30, 2021, an increase from 1.04% 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.27
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 1.68 at June 30, 2021. Given the recent monetary policy actions of the FOMC based on uncertainty surrounding the timing of the recovery from the pandemic and the potential for rates to remain at these low levels, the focus of ALCO has been to reduce our exposure to the effects of repricing assets.The current position at June 30, 2021, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a slight decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending June 30, 2021, would increase 6.2% and decrease 5.0% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.
Liquidity:
Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:
• | Funding new and existing loan commitments; |
• | Payment of deposits on demand or at their contractual maturity; |
• | Repayment of borrowings as they mature; |
• | Payment of lease obligations; and |
• | Payment of operating expenses. |
These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted, and strategies are developed to ensure adequate liquidity at all times.
28
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 bothsecurities 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.
available-for-sale
As a result of the onset of theinvestment securities totaled $148,048. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Community Bankers Bank (“ACBB”) and Pacific Coast Bankers Bank (“PCBB”). At June 30, 2021, our available borrowing capacity was $362,318 at the FHLB, $10,000 at ACBB and $50,000 at PCBB.
COVID-19
pandemic, we have placed increased emphasis on solidifying, monitoring, and managing our liquidity position. We believe our liquidity position is strong. At June 30, 2021, we had available liquidity of $57,508 from cash and interest-bearing balances with other banks. Our investment securities portfolio is comprised primarily of highly liquid U.S. Government and Government-Sponsored Enterprises and high credit quality municipal securities. At June 30, 2021,available-for-sale
With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe, and extreme scenarios, we have instituted a formalized monthly presentation using various metrics to assist the 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 employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after June 30, 2021. Our noncore funds at June 30, 2021 were comprised of time deposits in denominations of $250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. At June 30, 2021, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 1.99%, while our net short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 3.71%. Comparatively, our net noncore dependence ratio was 14.60% while our net short-term noncore funding ratio was 0.94% atyear-end.
The decrease in the net noncore funding dependence ratio is associated with reductions in PPPLF borrowing. Although we experienced an increase in the short-term noncore funding ratio, it remains below peers.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 $7,727 during the six months ended June 30, 2021 as compared with a decrease of $7,120 for the same period last year. For the six months ended June 30, 2021, we realized net cash inflows of $10,666 from operating activities and $143,042 from investing activities offset partially by net cash outflows of $145,981 from financing activities. For the six months ended June 30, 2020, we realized net cash outflows of $273 from operating activities and $298,477 from investing activities offset partially by a net cash inflows of $291,630 from financing activities.
Operating activities provided net cash of $10,666 for the six months ended June 30, 2021 compared to the use of net cash $273 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 provided net cash of $143,042 for the six months ended June 30, 2021. For the comparable period in 2020, investing activities used net cash of $298,477. For the six months ended June 30, 2021, loan forgiveness from PPP loans offset by purchases of investment securitieswere the primary factors for the net cash used in investing activities. For the comparable period of 2020, loan originations more than offset net proceeds received on the sale of investment securities
available-for-sale
available-for-sale.
Financing activities used net cash of $145,981 for the six months ended June 30, 2021 and provided net cash of $291,630 for the same period last year. Liquidity generated through funds from deposit gathering were more than offset by repayments on long-term debt from the Federal Reserve Bank’s PPPLF secured borrowing arrangement for the purpose of financing PPP loans in 2021. Proceeds received on borrowings from the PPPLF program was the major factor for the net funds provided from financing activities in 2020. Transfer of deposits in sale totaled $42,191 during the six months ended June 30, 2021 as a noncash item.
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 $104,365, or $11.15 per share, at June 30, 2021, and $97,432, or $10.47 per share, at December 31, 2020. The net increase in stockholders’ equity in the six months ended June 30, 2021 was primarily a result of the recognition of net income offset by a change in other accumulated comprehensive income.
29
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.
On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of the CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9.0% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold and will not be required to calculate and report risk-based capital ratios.
In April 2020, under the CARES Act, the 9.0% leverage ratio threshold was temporarily reduced to 8.0% in response to the
COVID-19
pandemic. The threshold increased to 8.5% in 2021 and will return to 9.0% in 2022. The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following:• | Total assets of less than $10 billion, |
• | Total trading assets plus liabilities of 5.0% or less of consolidated assets, |
• | Total off-balance sheet exposures of 25.0% or less of consolidated assets, |
• | Cannot be an advanced approaches banking organization, and |
• | Leverage ratio greater than 9.0%, or temporarily prescribed threshold established in response to COVID-19. |
As of June 30, 2021 and December 31, 2020, the Bank was categorized as well capitalized. Listed in the table below is a comparison of the Bank’s actual capital amounts with the minimum requirements for well capitalized banks, as defined above.
Actual | Minimum Regulatory Capital Ratios under Basel III | Well Capitalized under Basel III | ||||||||||||||||||||||
June 30, 2021: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
CBLR Framework | ||||||||||||||||||||||||
Tier 1 capital (to average total assets): (i.e., leverage ratio) | $ | 123,876 | 10.0 | % | (1) | (1) | $ | 105,188 | ³ | 8.5 | % | |||||||||||||
Actual | Minimum Regulatory Capital Ratios under Basel III | Well Capitalized under Basel III | ||||||||||||||||||||||
December 31, 2020: | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 126,108 | 14.2 | % | $ | 93,462 | ³ | 10.5 | % | $ | 89,011 | ³ | 10.0 | % | ||||||||||
Tier 1 capital (to risk-weighted assets) | 114,967 | 12.9 | % | 75,659 | ³ | 8.5 | % | 71,209 | ³ | 8.0 | % | |||||||||||||
Common equity tier 1 risk-based capital (to risk-weighted assets) | 114,967 | 12.9 | % | 62,308 | ³ | 7.0 | % | 57,857 | ³ | 6.5 | % | |||||||||||||
Tier 1 capital (to average total assets) | 114,967 | 9.8 | % | 47,102 | ³ | 4.0 | % | 58,877 | ³ | 5.0 | % |
(1) | Under the CBLR Framework, capital adequacy amounts and ratios are not applicable as qualifying depositary institutions are evaluated solely on whether or not they are well capitalized. |
In light of the 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. |
30
Based on the heightened level of stress on capital caused by 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. |
Regulatory bodies recently issued guidance reminding bank management of the importance of taking capital preservation actions in these uncertain economic times and encouraging management to remain vigilant on how the current environment impacts their organization’s financial performance, need for capital, and ability to serve customers and communities throughout this crisis. In response to this guidance, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital. In concert with this guidance, on October 6, 2020, the Company completed the issuance of $25,000 in subordinated debt at the bank holding company, which will be used to support the Bank on an
as-needed
basis. Subsequent to the issuance in the fourth quarter of 2020, management determined to downstream $15,000 of the available $25,000 from the bank holding company to the Bank in the form of additional capital.Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at June 30, 2021 and December 31, 2020. There are no conditions or negative events since this notification that we believe have changed the Bank’s well capitalized status.
Review of Financial Performance:
We reported net income of $7,840, or $0.84 per basic and diluted weighted average common share, for the six months ended June 30, 2021, compared to a net loss of $23,489, or $(2.54) per basic and diluted weighted average common share, for the same period last year. For the second quarter ended June 30, net income was $4,780 or $0.51 per basic and diluted weighted average common share in 2021 as compared to a net loss of $24,122, or $(2.61) per basic and diluted weighted average common share in 2020.
Major factors impacting 2021 earnings included the acceleration of income earned on PPP loans, the recognition of a deposit premium on branch sales and the recovery of provision for loan losses. During the first half of 2021, SBA forgiveness of PPP loans increased causing an acceleration in the recognition of fees as these loans were paid off. Approximately 75.0%, amounting to $188,866 of the outstanding PPP loans at December 31, 2020, were forgiven in the first half of 2021. Net interest income generated from PPP loans totaled $2,724 in the second quarter of 2021 and $4,136 in the first half of 2021. On May 21, 2021, the Company completed the sale of the branch office located in Meyersdale and related liabilities of the Meyersdale and Somerset branches, resulting in the recognition of $1,602 of noninterest income in the form of a deposit premium. As aforementioned, the $735 recapture of the provision for loan losses was a result of waning risk factors associated with the continued recovery from the impact of the pandemic, coupled with credit portfolio performance trends.
The major factors causing the reported net losses of $24,122 for the three months and $23,489 for the six months ended June 30, 2020 were a
non-cash
charge related to the recognition of goodwill impairment and an increase in the provision for loan losses, both stemming from theCOVID-19
pandemic. The goodwill impairment of $24,754 had no impact on tangible book value, regulatory capital ratios, liquidity and the Company’s cash balances. For the three and six months ended June 30, 2020, the provisions for loan losses totaled $2,012 and $3,856, respectively.If the
COVID-19
pandemic persists, it will continue to have a severe effect on economic activity and may cause greater negative consequences for our customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.31
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:
• | Variations in the volume, rate, and composition of earning assets and interest-bearing liabilities; |
• | Changes in general market rates; and |
• | The level of nonperforming assets. |
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, which is net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities.
Tax-exempt
loans and investments carrypre-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 atax-equivalent
basis using the prevailing federal statutory tax rate of 21% in 2021 and 2020, respectively.For the six months ended June 30,
tax-equivalent
net interest income increased $2,202 to $20,800 in 2021 from $18,598 in 2020. The increase intax-equivalent
net interest income was primarily attributable to recognizing interest income of $4,136 in the first half of 2021 on PPP loans as compared to $1,022 for the same period last year. Thetax-equivalent
net interest margin for the six months ended June 30 was 3.31% in 2021 compared to 3.43% in 2020. The net interest spread decreased to 3.21% for the six months ended June 30, 2021 from 3.29% for the six months ended June 30, 2020. Partially offsetting the negative impact of the reduction in the net interest margin was a net increase in the volume of average earning assets as compared to the increase in average interest-bearing liabilities. Overall, average earning assets increased $177,618 while average interest-bearing liabilities increased $140,428 comparing the six months ended June 30, 2021 and 2020.For the six months ended June 30,
tax-equivalent
interest income increased $1,618, to $23,776 in 2021 from $22,158 in 2020. An unfavorable rate variance due to reductions in market rates and decreases in loan accretion income was more than offset by a favorable volume variance primarily caused by the addition of PPP loans. Loan accretion income was $58 for the six months of 2021 compared to $292 for the same period in 2020. Specifically, the overall yield on earning assets, on a fullytax-equivalent
basis, decreased for the six months ended June 30, to 3.79% in 2021 from 4.09% in 2020. With respect to the volume variance, average earning assets increased $177,618 to $1,266,452 in 2021 from $1,088,834 in 2020.Tax-equivalent
loan income increased $1,337 in 2021 due to PPP fee acceleration. The increase in average investments of $67,054 in 2021 was the primary cause of the $358 increase intax-equivalent
interest income on investments.Total interest expense decreased $584 to $2,976 for the six months ended June 30, 2021 from $3,560 for the six months ended June 30, 2020. Reductions in fund costs more than offset increases in average volumes on interest-bearing liabilities. Comparing the first six months of 2021 and 2020, the weighted average cost of funds decreased 22 basis points to 0.58% from 0.80% while the average volume of interest-bearing liabilities increased $140,428 to $1,038,775 from $898,347. Money market, NOW account and time deposit costs declined 32, 23 and 41 basis points, respectively, and were the major causes in lowering interest expense on deposits. The average volume and weighted average yield for long-term debt for the six months ended June 30, 2021 were $167,378 and 1.48%, compared to $67,346 and 1.04% for the same period in 2020.
For the three months ended June 30,
tax-equivalent
net interest income increased $1,351 to $11,103 in 2021 from $9,752 in 2020. The increase intax-equivalent
net interest income was attributable to an acceleration in the recognition of fees earned on forgiven PPP loans. Average earning assets increased $50,812 while average earning liabilities increased $15,582 comparing the second quarters of 2021 and 2020. Thetax-equivalent
net interest margin for the three months ended June 30, was 3.59% in 2021 compared to 3.29% in 2020. The net interest spread increased to 3.48% for the three months ended June 30, 2021 from 3.18% for the three months ended June 30, 2020.For the three months ended June 30,
tax-equivalent
interest income increased $1,115, to $12,510 in 2021 from $11,395 in 2020. The overall yield on earning assets, on a fullytax-equivalent
basis, increased 19 basis points for the three months ended June 30, 2021 to 4.04% as compared to 3.85% for the three months ended June 30, 2020. This increase was a result of the acceleration in the recognition of fees earned on forgiven PPP loans. Average loans decreased $49,477 comparing the second quarters of 2021 and 2020 primarily due to reductions in PPP loans. Thetax-equivalent
yield on the loan portfolio was 4.60% for the three months ended June 30, 2021 compared to 4.08% for the same period last year. The combined impact of rate and volume variances caused an overall increase of $858 in interest earned on loans. The yield earned on investments decreased 94 basis points for the second quarter of 2021 to 1.97% from 2.91% for the second quarter of 2020. This combined with average investments increasing to $149,724 for the quarter ended June 30, 2021 compared to $66,672 for the same period in 2020, resulted in an increase intax-equivalent
interest income of $254. Overalltax-equivalent
interest earned on investments was $736 for the three months ended June 30, 2021 compared to $482 for the same period in 2020.32
Total interest expense decreased $236 to $1,407 for the three months ended June 30, 2021 from $1,643 for the three months ended June 30, 2020. A favorable rate variance was the primary cause of the improvement in fund costs. The cost of funds decreased to 0.56% for the three months ended June 30, 2021 as compared to 0.67% for the same period in 2020. The average volume of interest-bearing liabilities increased to $1,004,386 for the three months ended June 30, 2021 from $988,804 for the three months ended June 30, 2020. Average interest-bearing deposits increased $41,433 to $878,945 for the second quarter of 2021 from $837,512 for the same period last year. Average long-term debt increased to $125,441 for the second quarter of 2021 from $122,875 for the same period last year.
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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 includesecurities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate.
available-for-sale
Six months ended | ||||||||||||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Earning assets: | ||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||
Taxable | $ | 1,045,249 | $ | 21,877 | 4.22 | % | $ | 939,993 | $ | 20,384 | 4.36 | % | ||||||||||||
Tax exempt | 28,962 | 453 | 3.15 | % | 35,159 | 609 | 3.48 | % | ||||||||||||||||
Investments | ||||||||||||||||||||||||
Taxable | 98,410 | 1,047 | 2.15 | % | 67,815 | 931 | 2.76 | % | ||||||||||||||||
Tax exempt | 42,994 | 375 | 1.76 | % | 6,535 | 133 | 4.09 | % | ||||||||||||||||
Interest bearing deposits | 50,837 | 24 | 0.10 | % | 39,332 | 101 | 0.52 | % | ||||||||||||||||
Total earning assets | 1,266,452 | 23,776 | 3.79 | % | 1,088,834 | 22,158 | 4.09 | % | ||||||||||||||||
Less: allowance for loan losses | 12,144 | 7,754 | ||||||||||||||||||||||
Other assets | 84,421 | 108,006 | ||||||||||||||||||||||
Total assets | 1,338,729 | 1,189,086 | ||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||
Money market accounts | $ | 152,365 | $ | 83 | 0.11 | % | $ | 109,502 | $ | 234 | 0.43 | % | ||||||||||||
NOW accounts | 322,807 | 168 | 0.10 | % | 281,703 | 460 | 0.33 | % | ||||||||||||||||
Savings accounts | 169,319 | 59 | 0.07 | % | 138,501 | 88 | 0.13 | % | ||||||||||||||||
Time deposits | 226,906 | 1,435 | 1.28 | % | 286,592 | 2,402 | 1.69 | % | ||||||||||||||||
Short term borrowings | 14,703 | 28 | 0.38 | % | ||||||||||||||||||||
Long-term debt | 167,378 | 1,231 | 1.48 | % | 67,346 | 348 | 1.04 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,038,775 | 2,976 | 0.58 | % | 898,347 | 3,560 | 0.80 | % | ||||||||||||||||
Non-interest-bearing demand deposits | 185,729 | 158,065 | ||||||||||||||||||||||
Other liabilities | 13,972 | 13,365 | ||||||||||||||||||||||
Stockholders’ equity | 100,253 | 119,309 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,338,729 | $ | 1,189,086 | ||||||||||||||||||||
Net interest income/spread | $ | 20,800 | 3.21 | % | $ | 18,598 | 3.29 | % | ||||||||||||||||
Net interest margin | 3.31 | % | 3.43 | % | ||||||||||||||||||||
Tax-equivalent adjustments: | ||||||||||||||||||||||||
Loans | $ | 95 | $ | 128 | ||||||||||||||||||||
Investments | 79 | 28 | ||||||||||||||||||||||
Total adjustments | $ | 174 | $ | 156 | ||||||||||||||||||||
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Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of June 30, 2021.
We recognized a recovery of provision for loan losses totaling $735 for the six months ended June 30, 2021, compared to a provision for loan losses of $3,812 in 2020. For the quarter ended June 30, the recovery of provision for loan losses was $735 in 2021 compared to a provision for loan losses of $2,012 in 2020. The Company was able to decrease its qualitative factors in 2021 based on the remaining low number of CARES Act payment deferrals, improvements in industries most likely to be affected by the pandemic, and continued stability in the credit quality metrics of the loan portfolio. Despite the improvements brought on by medical advances, government assistance programs and their positive impacts on employment and consumer and business activity, future credit loss provisions are subject to significant uncertainty as the pandemic recovery continues to unfold. Our future provisions may increase due to the growth of loan delinquencies and charge-offs resulting from
COVID-19
related financial stress.Noninterest Income:
For the six months ended June 30, noninterest income totaled $6,218 in 2021, an increase of $1,287 from $4,931 in 2020. The increase was primarily attributable to recognizing a $1,602 deposit premium from the sale of deposits of two branch offices and increases of $131 and $36 from trust and wealth management income. Partially offsetting these positive influences were decreases of $542 in gains from the sale of investment securities and $163 in mortgage banking income. Mortgage banking income decreased for the six months ended June 30, 2021 as compared to the same period in 2020 due to a reduction in residential refinancing mortgage activity.
For the quarter ended June 30, noninterest income totaled $3,695 in 2021, an increase of $1,694 from $2,001 in 2020. The primary contributors to the increase were the premium recorded on the deposit sale and increases of $84 and $42 in trust and wealth management income, respectively. Mortgage banking income decreased $206 in the second quarter of 2021 as compared to the second quarter in 2020 due to a reduction in mortgage activity.
Noninterest Expenses:
In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies to control the variable expenses.
Noninterest expense decreased $25,255, to $17,911 for the six months ended June 30, 2021, from $43,166 for the same period last year. The decrease was primarily due to writing off the entire amount of goodwill on the books totaling $24,754 in 2020. Excluding this nonrecurring charge, noninterest expense would have decreased $501, or 2.7%, comparing the six months ended June 30, 2021 and 2020. For the six months ended June 30, salaries and employee benefit expenses decreased $80, or 0.8%, to $9,961 in 2021 from $10,041 in 2020. Net occupancy expense decreased $204, or 9.1%, to $2,044 in 2021 from $2,248 in 2020. The primary cause for the decrease in cost was due to branch closures and the sale of two branch offices. Other expenses decreased $131, or 2.3%, to $5,664 in 2021 compared to $5,795 in 2020 as a result of implementing cost savings initiatives in the latter part of 2019.
Noninterest expense decreased to $9,524 for the three months ended June 30, 2021, from $33,954 for the same period last year. The overall decrease was primarily due to writing off the entire amount of goodwill on the books totaling $24,754 in the second quarter of 2020.
Income Taxes:
We recorded an income tax expense of $1,828 for the six months ended June 30, 2021 compared to a tax benefit of $116 for the six months ended June 30, 2020. For the three months ended June 30, we recorded income tax expense of $1,142 in 2021 compared to a tax benefit of $172 in 2020. The effective tax rates were 18.9% and 19.3% for the six and three months ended June 30, 2021.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Not applicable to a smaller reporting company.
Item 4. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures.
At June 30, 2021, 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 inRule 13a-15(e)
under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures at June 30, 2021 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.
Item 6. | Exhibits |
The following Exhibits are incorporated by reference hereto:
31.1 | Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). | |
31.2 | Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). | |
32.1 | Chief Executive Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). | |
32.2 | Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). | |
101 | Interactive Data File (XBRL). | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
36
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: July 29, 2021 |
By: | /s/ Scott A. Seasock | |
Scott A. Seasock | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
Date: July 29, 2021 |
37