EDGAR 10-K Filing

Company CIK: 1590799
Filing Year: 2021
Filename: 1590799_10-K_2021_0001193125-21-077350.json

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ITEM 1. BUSINESS
Item 1.
Business.
General
Riverview Financial Corporation (the “Company” or “Riverview”) was formed in 2013 as a bank holding company incorporated under the laws of Pennsylvania. The Company is regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”). The Company provides a full range of financial services through its wholly-owned bank subsidiary, Riverview Bank (the “Bank”), which is its sole operating segment. The Company had approximately 221 employees as of December 31, 2020.
The Bank is a state-chartered bank and trust company regulated by the Pennsylvania Department of Banking and Securities (“DOB”) and the Federal Deposit Insurance Corporation (“FDIC”) that offers financial services through 27 community banking offices and three limited purpose offices. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
Unless the context indicates otherwise, all references in this annual report to the “Company”, “Bank”, “we”, “us” and “our” refer to Riverview Financial Corporation, its direct and indirect subsidiaries and its and their respective predecessors.
We primarily generate income through interest income derived from our loan and securities portfolios. Other income is generated primarily from transaction fees, trust and wealth management fees, mortgage banking fees and service charges on deposit accounts. Our primary costs are interest paid on deposits and borrowings and general operating expenses. We provide a variety of commercial and retail banking and financial services to businesses, non-profit
organizations, governmental and municipal agencies, professional customers, and retail customers, on a personalized basis.
Market Areas
The Bank’s market area consists of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties in Central Pennsylvania.
Products and Services
The Bank offers a variety of consumer and commercial banking products and services throughout its market area. Our primary lending products are real estate, commercial and consumer loans. Our primary deposit products are NOW, demand deposit accounts, and certificate of deposit accounts. We also offer ATM access, investment accounts, trust department services and other various lending, depository and related financial services.
Lending Activities
We provide a full range of retail and commercial lending products designed to meet the borrowing needs of consumers and small- and medium-sized
businesses in our market area. A significant amount of our loans are made to customers located within our market area. We have no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board. Although we participate in loans originated by other banks, we have originated the majority of the loans in our portfolio.
Our primary commercial products are loans to small- and medium- sized businesses. Our consumer products include one-to-four
family residential mortgages, consumer, automobile, home equity, educational and lines of credit loans. Our retail lending products include the following types of loans, among others: residential real estate; automobiles; manufactured housing; personal; student; and home equity. Our commercial lending products include the following types of loans, among others: commercial real estate; working capital; equipment and other commercial needs; construction; and agricultural and mineral rights. The terms offered on a loan vary depending on the type of loan and credit-worthiness of the borrower. We fund our loans, primarily, from our various deposit products which include certificates of deposits, savings, money market and various demand deposit accounts that are offered to both consumer and commercial customers.
Payment risk is a function of the economic climate in which our lending activities are conducted. Economic downturns in the economy generally, or in a particular sector, could cause cash flow problems for our customers, impairing their ability to repay loans we make to them. We attempt to minimize this risk by avoiding loan concentrations to a single customer or a group of similar customer types, the loss of any one or more of whom would have a materially adverse effect on our financial condition. One element of interest rate risk arises from making fixed rate loans in an environment of changing interest rates. We attempt to mitigate this risk by making adjustable rate loans and by limiting repricing terms to five years or less for commercial customers requiring fixed rate loans.
Our lending activity also exposes us to the risk that any collateral we take as security is not adequate. We attempt to manage collateral risk by avoiding loan concentrations to particular types of borrowers, by perfecting liens on collateral and by obtaining appraisals on property prior to extending loans. We attempt to mitigate our exposure to these and other types of lending risks by stratifying authorization requirements by loan size and complexity.
We are not dependent upon a single customer, or a few customers, the loss of one or more of which would have a materially adverse effect on our operations. In the ordinary course of our business, our operations and earnings are not materially affected by seasonal changes or by Federal, state or local environmental laws or regulations.
We intend to continue to evaluate commercial real estate, commercial business and governmental lending opportunities, including small business lending. We continue to proactively monitor and manage existing credit relationships.
We have not engaged in sub-prime
residential mortgage lending, which is defined as mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their credit history. We focus our lending efforts within our market area.
Deposit Activities
Our primary source of funds is the cash flow provided by our financing activities, mainly deposit gathering. We offer a variety of deposit accounts with a range of interest rates and terms, including, among others: money market accounts; NOW accounts; savings accounts; certificates of deposit; individual retirement accounts, and demand deposit accounts. These deposits are primarily obtained from areas surrounding our branch offices. We rely primarily on marketing, product innovation, technology, service and long-standing relationships with customers to attract and retain deposits. Other deposit related services include: mobile and online banking; remote deposit capture; automatic clearing house transactions; cash management services; automated teller machines; point of sale transactions; safe deposit boxes; night depository services; direct deposit; and official check services.
Trust, Wealth Management and Brokerage Services
Through our trust department, we offer a broad range of fiduciary and investment services. Our trust and investment services include:
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investment management;
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IRA trustee services;
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estate administration;
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living trusts;
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trustee under will;
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guardianships;
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life insurance trusts;
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custodial services / IRA custodial services;
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corporate trusts; and
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pension and profit sharing plans.
We provide a comprehensive array of wealth management products and services through Riverview’s Wealth Management and Trust Management divisions to individuals, small businesses and nonprofit entities. These products and services include the following, among others: investment portfolio management; brokerage; estate planning assistance; annuities; business succession planning; insurance; education funding strategies; and tax planning assistance.
We have a third-party marketing agreement with a broker-dealer that allows us to offer a full range of securities, brokerage services and annuity sales to our customers. We have three dedicated locations that provide such investor services as well as accommodating customer meetings by appointment within our retail banking offices. Through these divisions, our clients have access to a wide array of financial products including stocks, bonds, mutual funds, annuities and insurance.
Competition
The banking and financial services industries are highly competitive. Within its geographic region, the Bank faces direct competition from other commercial banks, varying in size from local community banks to larger regional and nationwide banks, credit unions and non-bank
entities. As a result of the wide availability of electronic delivery channels, the Bank also faces competition from financial institutions that do not have a physical presence in its geographic markets.
Many of our competitors are substantially larger in terms of assets and available resources. Certain of these institutions have significantly higher lending limits than we do and may provide various services to their customers that we presently do not. In addition, we experience competition for deposits from mutual funds and broker dealers, while consumer discount, mortgage and insurance companies compete with us for various types of loans. Credit unions, finance companies and mortgage companies enjoy certain competitive advantages over us, as they are not subject to the same regulatory restrictions and taxation as commercial banks. Principal methods of competing for bank products, permitted nonbanking services and financial activities include price, nature of product, quality of service, convenience of location, and availability of banking convenience technology, including telephone, mobile and web-based
banking services.
In our market area, interest rates on deposits, especially time deposits, and interest rates and fees charged to customers on loans are very competitive. In the current economic environment, we are experiencing increased competition in view of our loan demand and deposit gathering.
We believe that our most significant competitive advantage originates from our business philosophy, which includes offering direct access to senior management and other officers, providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures, and consistently applied credit policies. In addition, our success has been, and will continue to be, a result of our emphasis on community involvement and customer relationships. With consolidation continuing in the financial industry, and particularly in our market area, smaller community banks like us are gaining opportunities to increase market share as larger institutions reduce their emphasis on, or exit, the markets.
Seasonality
Generally, our operations are not seasonal in nature. Our deposit activities, however, have been somewhat influenced by fiscal funding appropriations related to municipalities and school districts in our market areas, which are to some extent seasonal in nature.
Supervision and Regulation
We are extensively regulated and examined under federal and state laws. Generally, these laws and regulations are intended to protect consumers, not shareholders. The following is a summary description of certain provisions of law that affect the regulation of bank holding companies and banks. This discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in laws and regulations may have a material effect on our business and prospects.
The Company is a bank holding company within the meaning of the Bank Holding Company Act (“BHCA”) and is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”). We are required to file annual and quarterly reports with the FRB and to provide the FRB with such additional information as the FRB may require. The FRB also conducts periodic examinations of the Company. In addition, under the Pennsylvania Banking Code of 1965 of the Pennsylvania Department of Banking and Securities (“DOB”), the DOB has the authority to examine the books, records and affairs of the Company and to require any documentation deemed necessary to ensure compliance with the Pennsylvania Banking Code.
With certain limited exceptions, we are required to obtain prior approval from the FRB before acquiring direct or indirect ownership or control of more than 5% of any voting securities or substantially all assets of a bank or bank holding company, or before merging or consolidating with another bank holding company. Additionally, with certain exceptions, any person or entity proposing to acquire control through direct or indirect ownership of 25% or more of our voting securities (or 10% or more under certain circumstances) is required to give 60 days’ written notice of the acquisition to the FRB, which may prohibit the transaction, and to publish notice to the public.
The Bank is primarily regulated by the DOB and the FDIC. The DOB may prohibit an institution, over which it has supervisory authority, from engaging in activities or investments that the agency believes constitute unsafe or unsound banking practices. Federal banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to constitute unsafe or unsound practices.
Enforcement actions may include:
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the appointment of a conservator or receiver;
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the issuance of a cease and desist order;
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the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution affiliated parties;
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the issuance of directives to increase capital;
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the issuance of formal and informal agreements and orders;
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the removal of or restrictions on directors, officers, employees and institution-affiliated parties; and
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the enforcement of any such mechanisms through restraining orders or any other court actions.
We are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons which generally require that such credit extensions be made on substantially the same terms as are available to third parties dealing with us, and do not involve more than the normal risk of repayment or present other unfavorable features. Other laws limit the maximum amount that we may loan to any one customer as a percentage of our capital levels.
Permitted Non-Banking
Activities
Generally, a bank holding company may not engage in any activities other than banking, managing or controlling its bank and other authorized subsidiaries, or providing service to those subsidiaries. With prior approval from the FRB, we may acquire more than 5% of the assets or outstanding shares of a company engaging in non-bank
activities determined by the FRB to be closely related to the business of banking or of managing or controlling banks. The FRB provides expedited procedures for expansion into approved categories of non-bank
activities. A bank holding company that meets certain specified criteria may elect to be regulated as a “financial holding company” and thereby engage in a broader array of nonbanking financial activities, including insurance and investment banking.
Limitations on Dividends and Other Payments and Transactions
Our ability to pay dividends is largely dependent upon the receipt of dividends from the Bank. The Company relies on dividends from the Bank for its own ability to pay dividends to shareholders. Both federal and state laws impose restrictions on the ability of both the Company and the Bank to pay dividends.
Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions on extensions of credit to the bank holding company or its subsidiaries, and on the use of their securities as collateral for loans. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for the payment of dividends, interest and operating expenses. Further, subject to certain exceptions, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements relating to any extension of credit, the lease or sale of property, or furnishing of services.
Under FRB regulations, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to make capital injections into a troubled subsidiary bank. The FRB may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required capital injection may be called for at a time when the holding company does not have the resources to provide it. In addition, depository institutions insured by the FDIC can be held liable for any losses incurred, or reasonably anticipated to be incurred, in connection with the default of or assistance provided to a commonly controlled FDIC-insured depository institution. Such cross-guarantee liabilities generally are superior in priority to the obligation of the depository institutions to its shareholders, due solely to their status as shareholders, and obligations to other affiliates.
Pennsylvania Law
As a Pennsylvania bank holding company, the Company is subject to various restrictions on its activities as set forth in Pennsylvania law. This is in addition to those restrictions set forth in federal law. Under Pennsylvania law, a bank holding company that desires to acquire a bank or bank holding company that has its principal place of business in Pennsylvania must obtain permission from the DOB.
Risk-Based Capital Requirements
The federal banking regulators have adopted risk-based capital regulations to facilitate assessing capital adequacy of a bank’s operations for assets reported on the balance sheet and transactions, such as letters of credit and recourse agreements, which are recorded as off-balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit-equivalent amounts of off-balance
sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain US Treasury securities, to 100% or more for assets with relatively high credit risk.
A bank’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance-sheet
items, against both total qualifying capital, Common Equity Tier 1 capital, and Tier 1 capital.
“Common Equity Tier 1 Capital” includes common equity and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions and retained earnings.
“Tier 1”, or core capital, includes common equity, non-cumulative
preferred stock and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions.
“Tier 2”, or supplementary capital, includes, among other things, limited life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations less restricted deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.
The Basel III regulatory capital requirements are as follows:
A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.
A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
A minimum ratio of total capital to risk-weighted assets of 8%.
A minimum leverage ratio of 4%.
In addition, FDIC-insured banks must hold a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all insured banks. If a bank fails to hold capital above the minimum capital ratios and the capital conservation buffer, it is subject to certain restrictions on capital distributions and discretionary bonus payments to executives.
Under the rules, community banks were permitted to make a one-time
election not to include Accumulated Other Comprehensive Income (“AOCI”) in regulatory capital and instead use the previously existing treatment that excluded most AOCI components from regulatory capital. The opt-out
election was required to be made in the first call filed after the institution became subject to the final rule. The Bank “opted-out”
of the inclusion of the components of AOCI in regulatory capital.
Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions including:
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limitations on its ability to pay dividends;
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the issuance by the applicable regulatory authority of a capital directive to increase capital;
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or the termination of deposit insurance by the FDIC, as well as the measures described under FDICIA as applicable to undercapitalized institutions under the prompt corrective action regulation.
In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the Company.
At December 31, 2020, the Bank complied with the foregoing requirements with a common equity tier 1 risk-based capital ratio of 12.9%, tier 1 leverage capital ratio of 9.8%, tier 1 risk-based capital ratio of 12.9% and a total capital ratio of 14.2%.
Legislation enacted in 2018 required the federal banking agencies, including the FDIC, to establish a “community bank leverage ratio” of between 8 to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions
with capital meeting the specified requirements and electing to follow the alternative framework are deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements. In November 2019, the federal regulators issued a final rule that set the optional “community bank leverage ratio” at 9%, effective January 1, 2020. Institutions with capital meeting the specified requirement and electing to follow the community bank leverage ratio framework would be deemed to comply with the applicable regulatory capital requirements, including the risk-based capital requirements.
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act lowered the community bank leverage ratio to 8%, with federal regulation making the reduced ratio effective beginning with the second quarter of 2020 until the end of 2020. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter. The Bank has not elected to follow the community bank leverage ratio framework at December 31, 2020. We are currently evaluating the election to use the community bank leverage ratio framework and may make such an election in the future.
Prompt Corrective Action Regulations
Under prompt corrective action regulations, the FDIC is authorized and, under certain circumstances, required, to take supervisory actions against undercapitalized banks. The extent of supervisory action depends upon the degree of the institution’s undercapitalization. For this purpose, a bank is placed in one of the following five categories based on its capital level:
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well-capitalized (at least 5% leverage capital, 8% Tier 1 risk-based capital, 10% total risk-based capital and 6.5% common equity Tier 1 risk-based capital);
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adequately capitalized (at least 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital and 4.5% common equity Tier 1 risk-based capital);
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undercapitalized (less than 4% leverage capital, 6% Tier 1 risk-based capital, 8% total risk-based capital or 4.5% common equity Tier 1 risk-based capital);
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significantly undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital, 6% total risk-based capital or 3% common equity Tier 1 risk-based capital); and
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critically undercapitalized (less than 2% tangible capital).
The regulations provide that a capital restoration plan must be filed with the FDIC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by the FDIC, or the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the FDIC notifies the bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC has the authority to require payment and collect payment under the guarantee. Various restrictions, including on growth and capital distributions, also apply to “undercapitalized” institutions. If an “undercapitalized” institution fails to submit an acceptable capital plan, it is treated as “significantly undercapitalized.” “Significantly undercapitalized” institutions must comply with one or more additional restrictions including, but not limited to, an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator within specified timeframes.
At December 31, 2020, the Bank met the criteria for being considered “well-capitalized”.
The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital requirement provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.
Interest Rate Risk
Regulatory agencies include in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management includes a measurement of board of directors and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate to the circumstances of the specific banking organization. We utilize internal interest rate risk models to measure and monitor interest rate risk. Finally, regulatory agencies, as part of the scope of their periodic examinations, evaluate our interest rate risk.
Commercial Real Estate Guidance
In December 2015, the federal banking agencies released a statement entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”). In the CRE Statement, the agencies express concerns with institutions that ease commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The agencies previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”, which states that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where total commercial real estate loans represents 300% or more of its total capital and the outstanding balance of such institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
Deposit Insurance
The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is $250,000.
The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, institutions deemed less risky for failure pay lower assessments. Assessments for institutions with less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years.
The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.
Community Reinvestment Act (“CRA”)
Under the CRA, the Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including low-
and moderate-income areas. CRA is designed to create a system for bank regulatory agencies to evaluate a depository institution’s record in meeting the credit needs of its community. Assessment by bank regulators of CRA compliance focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans, including community development loans in its designated assessment areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals, areas and small businesses; and (iii) a service test, to evaluate the institution’s delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The Bank had its last completed CRA compliance examination conducted November 4, 2019 and received a “satisfactory” rating.
Bank Secrecy Act, USA Patriot Act of 2001 (“Patriot Act”), and Related Rules and Regulations
The Patriot Act contained anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Among other requirements, the Patriot Act and the related regulations imposed the following requirements with respect to financial institutions:
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Establishment of anti-money laundering programs;
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Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;
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Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; and
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Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.
Failure to comply with the Patriot Act’s requirements could have serious legal, financial, regulatory and reputational consequences. In addition, bank regulators will consider a holding company’s effectiveness in combating money laundering when ruling on BHCA and Bank Merger Act applications.
In 2018, a Financial Crimes Enforcement Network rule requiring banks to implement strengthened customer due diligence requirements took effect. Among other requirements, the rules contain explicit customer due diligence requirements and require banks to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.
Consumer Lending Laws
Bank regulatory agencies are increasingly focusing attention on consumer protection laws and regulations. Such laws and regulations include:
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Truth-In-Lending
Act, governing disclosures of credit terms to consumer borrowers;
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Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-
to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Lending laws;
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Unfair or Deceptive Acts or Practices laws and regulations;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
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Truth in Savings Act.
The operations of the Bank are further subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
CARES Act
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19)
and stimulate the economy. The law had several provisions relevant to depository institutions, including:
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Allowing institutions not to characterize loan modifications relating to the COVID-19
pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;
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As previously noted, temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;
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The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly to the COVID-19
pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19
emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day
period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day
period beginning March 18, 2020, extended by federal mortgage-backing agencies to at least December 31, 2020;
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The ability of a borrower of a multi-family federally-backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the
COVID-19
emergency. A forbearance would be granted for up to 30 days, which could be extended for up to two additional 30-day
periods upon the request of the borrower. Later extensions were made available, for a total of six months, for certain federally-backed multi-family mortgage loans. During the time of the forbearance, the multi-family borrower could not evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multi-family borrower that received a forbearance could not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provided the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
The Paycheck Protection Program
The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act provided $659 billion to fund loans by depository institutions to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans are 100% federally guaranteed (principal and interest). An eligible business could apply under the Paycheck Protection Program (“PPP”) during the applicable covered period and receive a loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year
loan term (or five-year loan term for loans made after June 5, 2020) to maturity; and (c) principal and interest payments deferred until the date on which the SBA remits the loan forgiveness amount to the borrower’s lender or, alternatively, notifies the lender no loan forgiveness is allowed. If the borrower did not submit a loan forgiveness application to the lender within 10 months following the end of the 24-week
loan forgiveness covered period (or the 8-week
loan forgiveness covered period with respect to loans made prior to June 5, 2020 if such covered period is elected by the borrower), the borrower would begin paying principal and interest on the PPP loan immediately after the 10-month
period. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be fully reduced by the loan forgiveness amount under the PPP so long as, during the applicable loan forgiveness covered period, employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “Relief Act”) became law and provides an additional $284 billion for the PPP and extends the PPP through March 31, 2021. PPP changes as a result of the Relief Act include: (1) an opportunity for a second PPP forgivable loan for small businesses and nonprofits with 300 or fewer employees that can demonstrate a loss of 25 percent of gross receipts in any quarter during 2020 compared to the same quarter in 2019; (2) allowing qualified borrowers to apply for a PPP loan up to 2.5 times (or 3.5 times for small businesses in the restaurant and hospitality industries) the borrower’s average monthly payroll costs in the one-year
period prior to the date on which the loan is made or calendar year 2019, limited to a loan amount of $2.0 million; (3) the addition of personal protective equipment expenses, costs associated with outdoor dining, uninsured costs related to property damaged and vandalism or looting due to 2020 public disturbances and supplier costs as eligible and forgivable expenses; (4) simplifying the loan forgiveness process for loans of $150,000 or less; and (5) eliminating the requirement that Economic Injury Disaster Loan (EIDL) Advances will reduce the borrower’s PPP loan forgiveness amount. Additionally, expenses paid with the proceeds of PPP loans that are forgiven are now tax-deductible,
reversing previous guidance from the U.S. Department of the Treasury and the Internal Revenue Service, which did not allow deductions on expenses paid for with PPP loan proceeds.
Holding Company Capital Regulations
Federal law required the Federal Reserve Board to apply consolidated capital requirements to bank holding companies that are no less stringent than those applicable to the institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to bank holding companies as of January 1, 2015. However, legislation enacted in May 2018 required the FRB to raise the threshold of its “small holding company” exception to the applicability of consolidated holding company capital requirements from $1 billion of consolidated assets to $3 billion of consolidated assets. That change became effective in August 2018. Consequently, holding companies with less than $3 billion of consolidated assets, including the Company, are generally not subject to the requirements unless otherwise advised by the FRB.
Dividends and Stock Repurchases
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend. The guidance also provides for prior regulatory review where the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company
to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such equity instruments outstanding as of the end of a quarter compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Federal Reserve System
FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). The FRB announced they were reducing the reserve requirement ratio to zero percent across all deposit tiers as of March 26, 2020. This comes as the COVID-19
pandemic continues to impact much of the way financial institutions both operate and serve their customers.
Prior to this regulatory change, The Bank was required to a maintain a reserve of 3% against aggregate transaction accounts, (subject to adjustment annually by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total excess transaction accounts. Account balances below certain levels of otherwise reservable balances (subject to adjustment by the FRB) were exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements.
Required reserves must be maintained in the form of vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the FRB. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institution required and excess reserve balances.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the FRB has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution.
There is a presumption of control upon the acquisition of 10% or more of a class of voting stock if the holding company involved has its shares registered under the Securities Exchange Act of 1934, or, of the holding company involved does not have its shares registered under the Securities Exchange Act of 1934, if no other persons will own, control or hold the power to vote a greater percentage of that class of voting security after the acquisition.
The Federal Reserve Board has adopted a final rule, effective September 30, 2020, that revises its framework for determining whether a company, under the Bank Holding Company Act, has a “controlling influence” over a bank or savings and loan holding company.
Future Legislation
Proposed legislation is introduced in almost every legislative session that would dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted nor if adopted how it would affect our business. History has demonstrated that new legislation or changes to existing laws or regulations usually results in greater compliance burden and therefore generally increases the cost of doing business.
Employees and Human Capital Disclosure
At December 31, 2020, we employed 221 individuals, nearly all of whom are full-time and of which approximately 77% are women. At December 31, 2019, we employed 276 individuals. The Company employs a business model that combines high-touch service, new technologies and relationship-based focus of a community bank with extensive suite of banking and innovative financial services to businesses and individuals embracing the new digital banking era. We seek to hire well-qualified employees who are also a good fit for our value system. Our selection and promotion processes are without bias and include the active recruitment of minorities and women.
Training and Development.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by promotion and transfer from within the organization. The training and development of our employees is a priority. Annually, we invest more than $70,000 in tools, training programs and continuing education to help our employees build their knowledge, skills and experience. We provide in-house
training to employees on topics including leadership and professional development, cybersecurity, risk and compliance and technology. During the year ended December 31, 2020, we provided approximately 5,966 hours of training to our employees.
Safety, Health and Welfare.
The safety, health and wellness of our employees is a top priority. During the COVID-19
pandemic, we continued to responsibly serve the needs of our customers while prioritizing the health and safety of our employees. The Company identified the potential threat of COVID-19
in February 2020, activated its Pandemic Plan in March 2020, and had a fully remote workforce for its corporate office by early April 2020 as COVID-19
began to affect our primary market. The activation of the established Pandemic Plan allowed the Bank to react in a disciplined manner to a rapidly changing situation. The Bank is monitoring conditions in its local community and the surrounding areas and will re-evaluate
the work assignments of its employees as conditions improve. The Bank requires certain health protocols to be followed by all employees including, but not limited to, daily temperature checks prior to entering the common workspace, office cleaning measures, social distancing practices and the use of face coverings in all common areas.
The Bank’s actions ensured, and continue to ensure, the Bank’s uninterrupted operational effectiveness, while safeguarding the health and safety of our customers and employees. The Pandemic Plan incorporates guidance from the regulatory and health communities, is defined by the Bank’s Pandemic Team and incorporates the actions to be taken from the business lines up through the Board of Directors. The Bank’s branch network continues to serve the local community and its online platforms facilitate alternate methods for its customers to meet their financial needs. While COVID-19
has resulted in widespread disruption to the lives and businesses of the Bank’s customers and employees, the Bank’s Pandemic Plan has enabled the Bank to remain focused on assisting customers and ensuring that the Bank remains fully operational.
Benefits
. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance. Our benefits package includes health care coverage, retirement benefits, life and disability insurance, wellness programs, paid time off and leave policies.
Retention.
Employee retention helps us operate efficiently and offers continuity to our customers and the community. We believe our concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable benefits aids in retention of our employees. At December 31, 2020, 42% of our current staff have been with us for at least five years.
Community Involvement.
We support a multitude of diverse, worthy, community-based organizations through a comprehensive grants program, as well as through the by encouraging our employees to volunteer.
Availability of Securities Filings
Effective February 11, 2015, the Company became a reporting company and was required to file certain periodic reports under the Securities and Exchange Act of 1934 as required by Section 15(d) of that act. Effective August 10, 2018, the Company registered its stock under Section 12(b) of the Exchange Act and thereby became required to file certain additional periodic reports under the Exchange Act. We file the required annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov
.
In addition, we maintain an Internet website at www.riverviewbankpa.com
. We make available, free of charge, through the “Investor Relations” link on our Internet website, our annual report on Form 10-K,
quarterly reports on Form 10-Q,
current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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ITEM 1A. RISK FACTORS
Item 1A.
Risk Factors.
Not required for smaller reporting companies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.
Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2.
Properties.
Our corporate headquarter is located at 3901 North Front Street, Harrisburg, Pennsylvania, and includes our executive offices as well as portions of our finance, information services, credit, and branch administration departments. Portions of our deposit operations, human resource administration, as well as trust service offices are located at 2638 Woodglen Road, Pottsville, Pennsylvania. Portions of our loan operations, credit administration, Bank Secrecy Act (“BSA”) compliance and IT departments are located at 200 Front Street, Marysville, Pennsylvania. Additionally, compliance and portions of finance operations, human resource administration and operations, loan and deposit operations, credit administration and trust operations and services are located at 11 North Second Street, Clearfield, Pennsylvania. Each of these facilities is owned by the Bank.
The Bank operates 27 community banking offices and three limited purpose offices within Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties in Pennsylvania. Eleven of the branch offices are leased by the Bank, while the remaining facilities are owned. All retail banking offices have ATMs and are equipped with closed circuit security monitoring.
We consider our properties to be suitable and adequate for our current and immediate future purposes.

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ITEM 3. LEGAL PROCEEDINGS
Item 3.
Legal Proceedings.
In the opinion of the Company, after review with legal counsel, as of December 31, 2020, there were no proceedings pending to which the Company is party to or to which its property is subject, which, if determined to be adverse to the Company, would be material in relation to the Company’s consolidated financial condition. In addition, as of December 31, 2020, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
As of February 28, 2021, there were approximately 1,030 registered holders of our common stock, no par value. Our common stock trades on the Nasdaq Global Market under the symbol “RIVE”.
Regulatory bodies recently issued guidance reminding bank management of the importance of taking capital preservation actions in these uncertain economic times and encouraging management to remain vigilant on how the current environment impacts their organization’s financial performance, need for capital, and ability to serve customers and communities throughout this crisis. The Company has paid quarterly cash dividends since its formation in 2008 and paid a cash dividend of $0.075 per shares for each of the first two quarters in 2020. However, in response to recent regulatory guidance, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital. The payment of future dividends is dependent upon earnings, financial position, appropriate restrictions under applicable laws and other factors relevant at the time our board of directors considers any declaration of dividends. For information relating to dividend restrictions applicable to the Company and the Bank, refer to the consolidate financial statements and notes to these statements as Item 8 to this report and incorporated in their entirety by reference under this Item 5.
The Company did not repurchase any shares of its common stock during the year ended December 31, 2020.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.
Selected Financial Data.
Not required for smaller reporting companies

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis
(Dollars in thousands, except per share data)
Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements contained in this Annual Report on Form 10-K.
Forward-Looking Discussion:
In addition to the historical information contained in this document, the discussion presented may contain and, from time to time, may make, certain statements that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. These statements are not historical facts, but instead represent the current expectations, plans or forecasts of the Company and its subsidiary regarding its future operating results, financial position, asset quality, credit reserves, credit losses, capital levels, dividends, liquidity, service charges, cost savings, effective tax rate, impact of changes in fair value of financial assets and liabilities, impact of new accounting and regulatory guidance, legal proceedings and other matters relating to us and the securities that we may offer from time to time. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict, change over time and are often beyond our control. Actual outcomes and results may differ materially from those expressed in, or implied by, 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 the Coronavirus (“COVID-19”)
had and may continue to have a material adverse effect on significant estimates, operations and business results of Riverview. For a discussion of the risks and potential impacts of the COVID-19
refer to Note 1 entitled “Summary of significant accounting policies-Basis of presentation” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
You should not place undue reliance on any forward-looking statements, which speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. 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.
Critical Accounting Policies:
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.
For a discussion of the recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”), refer to Note 1 entitled “Summary of significant accounting policies - Recent accounting standards”, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
An accounting estimate requires assumptions about uncertain matters that could have a material effect on the consolidated financial statements if a different amount within a range of estimates was used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change within the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets and the impairment of goodwill. Actual amounts could differ from those estimates.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.
The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for loss contingencies on those loans collectively evaluated. The unallocated element, if any, is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.
We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance as necessary through normal operations. This ongoing evaluation reduces potential differences between estimates and actual observed losses. The determination of the level of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, management cannot ensure that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required, resulting in an adverse impact on operating results.
Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the beginning of the second quarter of 2020, a triggering event occurred as a result of the onset of the COVID-19
pandemic as the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was more-likely-than-not
the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.
The Company utilized multiple valuations approaches, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the quantitative test, the Company recognized an impairment charge equal to the total amount of its recorded goodwill on the balance sheet at June 30, 2020 of $24.8 million.
For a further discussion of our critical accounting policies refer to Note 1 entitled “Summary of significant accounting policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report. This Note lists the significant accounting policies used by us in the development and presentation of the consolidated financial statements. This MD&A, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary to understand and evaluate our financial position, results of operations and cash flows.
Operating Environment:
The banking industry operating performance declined in 2020 as net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks totaled $147.9 billion, a decrease of $84.9 billion, or 36.5%, from 2019. The leading factors for the decline were shrinking net interest margins and elevated loan loss provisions. Concerns about the spread of the virus and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the FOMC to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50-basis
point reduction on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In response, the yield curve declined causing the net interest margin for all banks to decline 54 basis points to 2.82% in 2020 from 3.36% in 2019. The FOMC’s action was caused entirely by the pandemic as inflationary concerns abated in 2020. The FOMC’s preferred measure of inflation, the Personal Consumption Expenditures (“PCE”) price index excluding food and energy was 1.4% in 2020, well below the FOMC’s inflation benchmark of 2.0%. Despite the recent increase in slope of the yield curve, the FOMC appears to be committed to an accommodative monetary stance for some time in order to continue to support the economy and the flow of credit to U.S. households and businesses. In their most recent announcement, the FOMC stated the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the
economic outlook. As a result, banks continue to build reserves for potential credit losses in response to their concerns about the impact that the pandemic will have on the ability of borrowers to service debt. Loan loss provisions for all FDIC banks were up $77.1 billion, or 140.0%, over the prior year.
Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, decreased at an annualized rate of 3.5% in 2020 compared to an increase of 2.2% in 2019. The decrease in GDP in 2020 reflected decreases in PCE, exports, private inventory investment, nonresidential fixed investment, and state and local government that were partly offset by increases in federal government spending and residential fixed investment. During 2020, the economy grew in the third and fourth quarters following declines in the first and second quarters due to government mandated closures of nonessential businesses.
The impact of the virus has been felt nationally and within our primary market area as unemployment rates have been elevated throughout 2020. Despite the United States unemployment rate decline in the fourth quarter to 6.5% at December 31, 2020 from the high point of 14.8% recorded at April 30, 2020, the rate continues to be higher compared to 3.6% at year end 2019. Similarly, the unemployment rate in Pennsylvania increased to 6.4% at the end of 2020 from 4.5% at the end of 2019. With respect to the markets we serve, we saw a similar result in the average unemployment rate for all the counties in which we have office locations increasing to 6.1% at December 31, 2020 from 4.4% at December 31, 2019.
National, Pennsylvania and our market area’s non-seasonally
adjusted annual unemployment rates at December 31, 2020 and 2019 are summarized as follows:
United States
6.5 %
3.6 %
Pennsylvania
6.4
4.5
Berks County
6.0
4.2
Blair County
6.3
4.4
Bucks County
5.3
3.7
Centre County
4.4
3.1
Clearfield County
7.0
5.1
Cumberland County
4.5
3.3
Dauphin County
6.1
4.1
Huntingdon County
7.9
5.8
Lebanon County
5.5
3.8
Lehigh County
6.4
4.2
Lycoming County
7.2
4.6
Perry County
4.4
3.7
Schuylkill County
6.6
5.7
Somerset County
7.4
5.3
The COVID-19
pandemic had a profound effect on 2020 causing tremendous human and economic hardship across the United States, and in particular, locally for our customers and communities served. As a result, the Company implemented certain initiatives in attempt to mitigate the impact of the pandemic in the markets we serve, including but not limited to the following:
•
Approximately one third of our work force is currently working from home.
•
Strategic temporary closure of offices and successfully consolidating customer traffic into nearby offices or online and/or mobile banking applications.
•
Operating lobby hours by appointment only and conducting business primarily through drive up facilities in all locations that remain open.
•
Providing payment relief to borrowers experiencing financial stress due to COVID-19,
including loan payment modifications for periods up to six months under guidelines established by regulatory agencies, avoiding a significant increase in troubled debt restructure classifications for eligible customers.
•
Waiving late charges on loans and overdrafts on deposit accounts, upon request, for customers experiencing COVID-19
related financial hardship.
•
Permitting penalty free early withdrawals from Certificates of Deposits, within certain parameters.
•
Permitting customers to exceed the maximum monthly transaction count for non-demand
deposit accounts subject to Regulation DD, as permitted by the temporary removal of this monthly limit by regulatory agencies.
•
Created a low cost, unsecured consumer loan program for customers experiencing financial hardship as a direct result of COVID-19.
•
Participated in the CARES Act approved Paycheck Protection Program (“PPP”) administered by the SBA as an SBA approved 7(a) lender in both rounds of program funding, successfully delivering PPP loan approvals to every eligible bank customer that applied for PPP funding with Riverview Bank.
•
Established teams working in various shifts or cycles to avoid contact one with another, helping to ensure the safety of our employees and continuity of service to our customers.
•
Providing latex gloves and masks for all customer contact employees to help ensure the safety of both our customers and employees.
•
Implementation of appropriate cleaning and sanitization protocols throughout the organization.
•
Donated $15,000 to the Central PA Food Bank, which services multiple local food banks throughout our footprint.
•
Temporarily eliminating NSF, ATM and other service charge fees.
The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, has caused changes in consumer and business spending, borrowing needs and saving habits, which has affected the demand for loans and other products and services we offer, as well as the creditworthiness of potential and current borrowers and delinquency rates. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase in the near term and will likely adversely affect borrowers’ ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn may influence the recognition of credit losses in our loan portfolios and has increased our allowance for loan losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers’ businesses has also resulted in declines in, among other things, trust and wealth management revenue. These developments, as a consequence of the pandemic, materially impacting our business, the businesses of our customers and may continue to have a material adverse effect on the results of our operations and financial condition for an indefinite period.
Review of Financial Position:
Riverview Financial Corporation, (“Riverview” or the “Company”), 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 27 community banking offices and three limited purpose offices, is a full-service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities and small to medium sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties.
The Bank is state-chartered under the jurisdiction of the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. The Bank’s primary product is loans to small- and medium-sized
businesses. Other lending products include one-to-four
family residential mortgages and consumer loans. The Bank primarily funds its loans by offering interest-bearing transaction accounts to commercial enterprises and individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts. The Bank offers a broad range of financial advisory, investment and fiduciary services through its wealth management and trust operating divisions.
The wealth management and trust divisions did not meet the quantitative thresholds for required segment disclosure in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Bank’s 27 community banking offices, all similar with respect to economic characteristics, share a majority of the following aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the northern, central, southwestern and southeastern Pennsylvania markets, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.
The Company and the Bank are subject to regulations of certain federal and state regulatory agencies and undergo periodic examinations.
Total assets, loans and deposits were $1.4 billon, $1.1 billion and $1.0 billion, respectively, at December 31, 2020. Comparatively, total assets, loans and deposits were $1.1 billon, $852.1 million and $940.5 million, respectively, at December 31, 2019. Construction lending increased $11.6 million, business lending, including commercial and commercial real estate increased $287.0 million, and retail lending, including residential mortgages and consumer loans decreased $11.5 million during 2020. Investment securities increased $12.5 million, or 13.7%, in 2020. Noninterest-bearing deposits increased $26.2 million, and interest-bearing deposits increased $48.8 million in 2020.
The loan portfolio consisted of $861.6 million of business loans, including commercial and commercial real estate loans, $73.4 million in construction loans, and $204.2 million in retail loans, including residential mortgage and consumer loans at December 31, 2020. Total investment securities were $103.7 million at December 31, 2020, all of which were classified as available-for
sale. Total deposits consisted of $173.6 million in noninterest-bearing deposits and $841.9 million in interest-bearing deposits at December 31, 2020.
Stockholders’ equity equaled $97.4 million, or $10.47 per share, at December 31, 2020, and $118.1 million or $12.81 per share, at December 31, 2019. Dividends declared for 2020 amounted to $0.15 per share, representing an annual yield of 1.6% based on the closing price of the Company’s common stock of $9.15 per share on December 31, 2020.
Nonperforming assets equaled $11,962, or 1.05%, of loans, net and foreclosed assets at December 31, 2020, compared to $5,080, or 0.60%, at December 31, 2019. The allowance for loan losses equaled $12,200, or 1.07%, of loans, net, at December 31, 2020, compared to $7,516, or 0.88%, of loans, net at year-end
2019. Loans charged-off,
net of recoveries equaled $1,598, or 0.15%, of average loans in 2020, compared to $1,238, or 0.14%, of average loans in 2019.
Investment Portfolio:
Our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging requirements. At December 31, 2020, our portfolio consisted primarily of taxable and tax-exempt
state and municipal bonds and mortgage-backed securities, which provide a source of income and liquidity.
Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.
Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since our entire investment portfolio is designated as available-for-sale
and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.
Concerns about the spread of COVID-19
and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the FOMC to aggressively cut the target Federal Funds rate by 150-basis
points in the first half of 2020. This action had a profound impact on the yield curve and consequently the fair value of and return on our investment portfolio. Our
investment portfolio consists primarily of fixed-rate bonds. As a result, changes in general market interest rates have a significant influence on the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year
and 7-year
U.S. Treasury securities. The yield on the 2-year
U.S. Treasury note affects the values of our U.S. Government agency and U.S. Governments-sponsored enterprises mortgage-backed securities, whereas the 7-year
U.S. Treasury note influences the value of taxable and tax-exempt
state and municipal obligations. The yield on the 2-year
U.S. Treasury decreased to 0.13% at year end 2020 from 1.58% at year end 2019. The yield on the 7-year
U.S. Treasury decreased 118 basis points to 0.65% at December 31, 2020 from 1.83% at December 31, 2019. Since bond prices move inversely to yields, we reported net unrealized holding gains, included as a separate component of stockholders’ equity of $1,550, net of income taxes of $412, at December 31, 2020, compared to net unrealized holding losses, included as a separate component of stockholders’ equity of $534, net of income taxes of $142, at December 31, 2019.
In order to monitor the potential effects that interest rate fluctuations could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted on our portfolio at December 31, 2020, indicated that should there be a parallel increase in the yield curve over one year by 100, 200 and 300 basis points, we would anticipate declines of 4.1%, 8.4% and 12.8% in the market value of our portfolio.
The carrying values of the major classifications of investment securities and their respective percentages of total investment securities for the past three years are summarized as follows:
Distribution of investment securities
December 31
Amount
%
Amount
%
Amount
%
State and municipals:
Taxable
$ 22,574
21.77 %
$ 24,824
27.20 %
$ 33,278
31.79 %
Tax-exempt
18,395
17.74
4,333
4.75
12,776
12.21
Mortgage-backed securities:
U.S. Government agencies
26,991
26.03
36,134
39.60
23,670
22.61
U.S. Government-sponsored enterprises
25,052
24.16
22,645
24.82
26,195
25.02
Corporate debt obligations
10,683
10.30
3,311
3.63
8,758
8.37
Total
$ 103,695
100.00 %
$ 91,247
100.00 %
$ 104,677
100.00 %
Investment securities increased $12.5 million to $103.7 million at December 31, 2020 from $91.2 million at December 31, 2019. At December 31, 2020, the entire investment portfolio was classified as available-for-sale.
The onset of COVID-19
caused a reduction in general market rates which increased the value of fixed rate securities and lowered the yield on adjustable-rate securities. This provided the opportunity to aid in funding loan demand and reduce exposure to falling interest rates through the sale of investment securities at a net gain. Investment purchases totaled $53.3 million in 2020 as compared with $32.1 million in 2019. Repayments of investment securities totaled $14.3 million in 2020 and $17.3 million in 2019. Proceeds from the sale of investment securities available-for-sale
totaled $27.8 million in 2020 and consisted of 16 taxable municipal securities and 28 adjustable rate mortgage-backed government agency securities. This compares to proceeds from the sale of investment securities available-for-sale
totaling $30.2 million in 2019, consisting of five U.S. Treasury securities, three corporate bonds, 16 taxable municipal securities, 10 tax-exempt
municipal securities and three mortgage-backed government agency securities. Gross gains of $826 and gross losses of $11, resulted in a net gain of $815 that was recognized from the sale of investment securities in 2020. Gross gains of $321 and gross losses of $343, resulted in a net loss of $22, which was recognized from the sale of investment securities in 2019.
The composition of the investment portfolio changed during 2020. U.S. Government agency and U.S. Government-sponsored enterprise mortgage-backed securities comprised 50.2% of the total portfolio at year-end
2020 compared to 64.4% at the end of 2019. Tax-exempt
municipal obligations increased as a percentage of the total portfolio to 17.7% at year-end
2020 from 4.8% at the end of 2019, while taxable municipal securities decreased to 21.8% of the total portfolio at year-end
2020 from 27.2% at the end of 2019. Corporate debt comprised 10.3% of the portfolio at the end of 2020 from 3.6% at year ended 2019. As a result of the changes that occurred within the portfolio during 2020, the average life and the modified duration of the investment portfolio increased to 5.1 years and 4.6 years, respectively, at December 31, 2020 as compared with 3.7 years and 3.4 years at December 31, 2019.
There were no other-than-temporary impairments (“OTTI”) recognized for the years ended December 31, 2020 and 2019. For additional information related to OTTI refer to Note 3 entitled “Investment securities” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Investment securities averaged $81.2 million and equaled 6.8% of average earning assets in 2020, compared to $99.9 million and equaled 9.8% of average earning assets in 2019. The tax-equivalent
yield on the investment portfolio decreased 44 basis points to 2.55% in 2020 from 2.99% in 2019. In addition to measuring our performance using the book yield, we monitor and evaluate our investment portfolio with respect to total return in comparison to national benchmarks. Total return is a comprehensive industry-wide approach measuring investment portfolio performance. This measure is superior to measuring performance strictly on the basis of yield since it not only considers income earned similar to the yield approach, but also includes the reinvestment income on repayments and capital gains and losses, whether realized or unrealized. The total return of our investment portfolio declined to 1.35% at December 31, 2020 from 2.53% at December 31, 2019.
At December 31, 2020 and 2019, there were no securities of any individual issuer, except for U.S. Government agencies and U.S. Government-sponsored enterprises, that exceeded 10.0% of stockholders’ equity.
The maturity distribution based on amortized cost, fair value and weighted-average, tax-equivalent
yield of the investment portfolio at December 31, 2020, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed for tax-exempt
state and municipals on a tax-equivalent
basis using the prevailing federal statutory tax rate. The distributions are based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity distribution of investment securities
Within one year
After one but
within five years
After five but
within ten years
After ten years
Total
December 31, 2020
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amortized Cost:
State and municipals:
Taxable
$
5.59 %
$
3.01 %
$ 6,816
3.40 %
$ 14,413
2.07 %
$ 22,317
2.62 %
Tax-exempt
4,159
3.68
3.75
13,329
1.56
17,988
2.11
Mortgage-backed securities:
U.S. Government agencies
17,786
2.43
8,265
1.37
26,051
2.09
U.S. Government-sponsored enterprises
8,831
2.46
13,318
1.00
2,478
0.35
24,627
1.46
Corporate debt obligations
3,500
0.86
7,250
4.63
10,750
3.40
Total
$
5.59 %
$ 16,756
2.44 %
$ 45,670
2.52 %
$ 38,485
1.63 %
$ 101,733
2.20 %
Fair Value:
State and municipals:
Taxable
$
$
$ 7,082
$ 14,357
$ 22,574
Tax-exempt
4,416
13,478
18,395
Mortgage-backed securities:
U.S. Government agencies
18,413
8,578
26,991
U.S. Government-sponsored enterprises
9,020
13,530
2,502
25,052
Corporate debt obligations
3,378
7,305
10,683
Total
$
$ 17,109
$ 46,831
$ 38,915
$ 103,695
Loan Portfolio:
Economic factors and how they affect loan demand are important to us and the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue for us. Similar to the investment portfolio, there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks, which influence loan demand, the composition of the loan portfolio and profitability of the lending function.
The composition of the loan portfolio at year-end
for the past five years is summarized as follows:
Distribution of loan portfolio
December 31
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Commercial
$ 359,080
31.52 %
$ 118,658
13.93 %
$ 122,919
13.76 %
$ 140,116
14.65 %
$ 51,166
12.50 %
Real estate:
Construction
73,402
6.44
61,831
7.26
39,556
4.43
34,405
3.60
8,605
2.10
Commercial
502,495
44.11
455,901
53.50
497,597
55.71
526,230
55.05
212,550
51.93
Residential
197,596
17.34
207,354
24.33
221,115
24.76
240,626
25.17
130,874
31.97
Consumer
6,666
0.59
8,365
0.98
11,997
1.34
14,594
1.53
6,148
1.50
Loans, net
1,139,239
100.00 %
852,109
100.00 %
893,184
100.00 %
955,971
100.00 %
409,343
100.00 %
Less: allowance for loan loss
12,200
7,516
6,348
6,306
3,732
Net loans
$ 1,127,039
$ 844,593
$ 886,836
$ 949,665
$ 405,611
Loans, net increased $287.1 million in 2020 to $1,139.2 million at December 31, 2020 from $852.1 million at December 31, 2019. The increase in the loan portfolio was attributable to the origination of Paycheck Protection Program (“PPP”) loans included in commercial loans, along with the remainder generated primarily from new markets. PPP loans net of unearned loan fees of $5.1 million totaled $251.8 million at December 31, 2020. Excluding the growth from PPP loans, we were still able to record net organic loan growth of $25.1 million, or 2.9%, in 2020 despite the decline in economic activity. Business loans, including commercial loans and commercial real estate loans, were $861.6 million, or 75.6%, of loans, net at December 31, 2020, and $574.6 million, or 67.4%, at year-end
2019. Construction lending was $73.4 million, or 6.4% of loans, net at December 31, 2020 and $61.8 million, or 7.3% of loans, net at December 31, 2019. Residential mortgages and consumer loans totaled $204.3 million, or 17.9%, of loans, net at year-end
2020 and $215.7 million, or 25.3%, at year-end
2019. Loan balance increases of $35.3 million in the first quarter and $278.0 million in the second quarter were partially offset by decreases of $2.0 million in the third quarter and $24.2 million in the fourth quarter.
There have been a number of initiatives instituted by the Federal Government in 2020 aimed at offsetting the adverse impact on the growth and asset quality of our loan portfolio. In response to the economic slowdown caused by COVID-19,
President Donald Trump signed into law the CARES Act on March 27, 2020, which included numerous provisions including the institution of the establishment of the PPP. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production due to the COVID-19
pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employment-sustaining payroll costs and benefits, as well as other significant costs including the small businesses’ rent, mortgage, and utilities. There has been considerable demand for PPP loans implemented by the CARES Act. As a U.S. Small Business Administration (“SBA”) lender, we have been participating in the PPP and originated 1,274 loans totaling $273.8 million in 2020. The FDIC, Federal Reserve and OCC created the Paycheck Protection Program Liquidity Facility (“PPPLF”) to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We have utilized the liquidity relief offered by the PPPLF to the extent needed and as a result our participation in the PPP has not negatively impacted on our liquidity position, capital resources, financial condition or results of operations. Offsetting the positive influence offered by the PPP is the fact that most states, including the Commonwealth of Pennsylvania, have placed significant restrictions on non-essential
businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
Loans averaged $1,070.0 million in 2020 compared to $879.3 million in 2019. Taxable loans averaged $1,037.7 million, while tax-exempt
loans averaged $32.3 million in 2020. The loan portfolio continues to play a prominent role in our earning asset mix. As a percentage of average earning assets, loans equaled 90.0% in 2020 as compared with 86.7% in 2019.
The prime rate decreased 150 basis points in 2020 to 3.25% at year end from 4.75% at the beginning of the year. This reduction had a material impact on the yield of our loan portfolio specifically related to adjustable rate loans, originations of new loans and refinancing activities. The tax-equivalent
yield on our loan portfolio decreased 111 basis points to 4.13% in 2020 from 5.24% in 2019. In addition, the decrease in loan yield was impacted by a $2,272 reduction in the recognition of loan accretion on acquired loans and lower yields on originated PPP loans. Loan accretion included in loan interest income for the year ended December 31, 2020 related to acquired loans was $973 compared to $3,245 for the same period in 2019. The yield earned on PPP loans from interest and fees was 2.46% for the year ended December 31, 2020.
The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2020 is summarized as follows:
Maturity distribution and interest sensitivity of loan
December 31, 2020
Within one
year
After one but
within five years
After five
years but within
15 years
Total
Maturity schedule:
Commercial
$ 122,694
$ 171,339
$ 65,047
$ 359,080
Real estate:
Construction
13,185
5,872
54,345
73,402
Commercial
27,272
125,672
349,551
502,495
Residential
19,007
52,605
125,984
197,596
Consumer
1,349
1,865
3,452
6,666
Total
$ 183,507
$ 357,353
$ 598,379
$ 1,139,239
Predetermined interest rates
$ 139,863
$ 235,245
$ 54,103
$ 429,211
Floating or adjustable interest rates
43,644
122,108
544,276
710,028
Total
$ 183,507
$ 357,353
$ 598,379
$ 1,139,239
As previously mentioned, there are numerous risks inherent in the mortgage loan portfolio. We manage the portfolio by employing sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we utilize private mortgage insurance (“PMI”) to mitigate credit risk in the loan portfolio.
In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. As a result of the historically low interest rate environment and the potential for rates to rise in the future, we continued to place emphasis on originating short term fixed-rate and adjustable-rate loans. Fixed-rate loans represented 37.7% of the loan portfolio at December 31, 2020, compared to floating or adjustable-rate loans at 62.3%. Approximately 16.1% of the loan portfolio is expected to reprice within the next 12 months.
Additionally, our secondary market mortgage banking program provides us with an additional source of liquidity and a means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four
family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked in at the time of commitment, thereby greatly reducing our exposure to IRR.
In addition to the risks inherent in our portfolio in the normal course of business, we are also 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, and may involve, to varying degrees, elements of credit risk and IRR in excess of the amount recognized in the consolidated financial statements.
Credit risk is the principal risk associated with these instruments. Our involvement and exposure to credit loss in the event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit, we employ the same credit quality and collateral policies in making commitments that we use in other lending activities.
We evaluate each customer’s creditworthiness on a case-by-case
basis, and if deemed necessary, obtain collateral and personal guarantees. The amount and nature of the collateral obtained, or personal guarantees are based on our credit evaluation and overall assessment of risk.
In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments with off-balance
sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements. With the onset of the COVID-19
pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans.
The contractual amounts of off-balance
sheet commitments at year-end
for the past three years are summarized as follows:
Distribution of off-balance
sheet commitments
December 31
Commitments to extend credit
$ 70,474
$ 105,403
$ 96,431
Unused portions of lines of credit
75,517
66,114
59,512
Standby and performance letters of credit
6,577
4,726
5,789
Total
$ 152,568
$ 176,243
$ 161,732
We record a valuation allowance for off-balance
sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $93 and $89 at December 31, 2020 and 2019, respectively. We do not anticipate that losses, if any, that may occur as a result of funding off-balance
sheet commitments, would have a material adverse effect on our operating results or financial position.
Asset Quality:
We are committed to developing and maintaining sound, quality assets through our credit risk management policies and procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their loan agreement. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed to foster sound lending practices. These policies include certain standards that assist lenders in making judgments regarding the character, capacity, cash flow, capital structure and collateral of the borrower.
With regard to managing our exposure to credit risk, we have established maximum loan-to-value
ratios for commercial mortgage loans not to exceed 80.0% of the lower of cost or appraised value. With regard to residential mortgages, customers with loan-to-value
ratios between 80.0% and 100.0% are generally required to obtain PMI. The 80.0% loan-to-value
threshold provides a cushion in the event the property is devalued. PMI is used to protect us from loss in the event loan-to-value
ratios exceed 80.0% and the customer defaults on the loan. Appraisals are performed by an independent appraiser engaged by us, not the customer, who is either state certified or state licensed depending upon collateral type and loan amount.
With respect to lending procedures, loan relationship managers, centralized underwriters, working with independent credit department analysts in the case of self-employed borrowers or commercial entities, must determine the borrower’s ability to repay the credit based on prevailing and expected market conditions prior to requesting approval for the loan. The Board of Directors establishes and reviews, at least annually, the lending authority for all approving authorities. Credits beyond centralized underwriting or joint officer signature authorities are elevated to an Officer’s Loan Committee and, if necessary, to a Director’s Loan Committee, for approval. All credit decisions attempt to assure the quality of the loan portfolio through careful analysis of credit applications, adherence to credit policies, and the examination of outstanding loans and delinquencies. These procedures assist in the early detection and timely follow-up
of problem loans.
Credit risk is also managed by quarterly loan quality reviews of our loan portfolio by the asset quality committee as well as an annual loan portfolio review conducted by an independent loan review company. These reviews aid us in identifying deteriorating financial conditions of borrowers, allowing us to proactively develop plans to either assist customers in remedying these situations or exit a relationship.
We currently have in place a number of processes, procedures and monitoring tools to manage credit risk that have assisted us in navigating our Company through this pandemic, including but not limited to:
•
Approval Process - No single approval authorities. All loans are approved by two authorized officers with higher exposures approved by a committee process.
•
Concentration Management - Concentration limits by industry are established by policy and monitored and reported to the Board of Directors quarterly.
•
CRE Stress Testing - CRE Stress testing is conducted at the individual transaction level for new loans and with annual reviews of existing relationships. The credit department utilizes a cash flow analysis to stress individual loans for increased interest rate, decreased occupancy, and a combination of these two scenarios. In addition, a break-even interest rate and break-even occupancy level is calculated.
CRE Stress Testing is also conducted quarterly at the portfolio level with results reported to the Board of Directors. The stress testing includes a mild and severe stress test. The stress test factors include: Interest rate shocks for both fixed and variable rate loans; changes or declines in Net Operating Income; and declines in collateral value. Asset quality is quantified by analyzing Loan-to-Value
and Debt Service Coverage ratios. Stress testing is commensurate with our current and projected credit risk profile. Management will revisit stress testing procedures in the event our risk profile changes. Changes in the risk profile may stem from the introduction of a new product, changes in economic conditions both locally and nationally, or other internal or external factors that may affect credit quality.
A CRE market summary report is prepared and reported to the Board of Directors quarterly. The report provides a detailed analysis of CRE activity for each of the Bank’s geographic markets, and for each property type within each market. Job growth, employment statistics, demographic statistics, supply and demand, absorption rates, vacancy rates, rental and expense data and market sales history are all considered.
•
Loan Quality Review - A Commercial Loan Quality Review meeting is conducted quarterly by the Chief Credit Officer and Chief Lending Officer. Commercial account officers, the Credit Manager and the Special Assets Manager are required to attend. This process is intended to ensure the accuracy and timeliness of risk ratings, and to provide a framework for monitoring and managing problem accounts. Credits reviewed include all Pass/Watch rated loans over $750, and all Special Mention and all Substandard rated loans over $25.
•
Collection Committee - The Collection Committee consist of the President and Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Strategy Officer, and Special Assets Manager. The Collection Committee meets bi-weekly,
or more often if necessary. The Collection Committee reviews all delinquent accounts, all non-
accrual accounts, all bankruptcies and workouts in process. The committee is responsible to approve all charge off recommendations, placement of accounts into and out of nonaccrual status, troubled debt restructurings, OREO transactions and sale of OREO, and other actions to be taken on problem loans.
•
External Loan Review - The Bank engages an external independent firm on at least an annual basis to conduct a full scope loan review. During 2020 as a result of heightened asset quality concerns due to the uncertainty of the impact of the pandemic on borrowers, the Bank had this firm perform its review during the second and fourth quarters of 2020. The scope of review is determined and structured to ensure that the number of loans and percentage of dollar coverage of the commercial loan and commercial mortgage portfolios reviewed will be sufficient to achieve the below-stated objectives and conform to regulatory standards. The objectives of the review are as follows: (i) to identify, evaluate and appropriately grade loans that have potential or existing credit weaknesses; (ii) to determine the overall quality of commercial and industrial loan and commercial real estate mortgage portfolios, including the effect of any concentrations of credit and the changes in the level of such concentrations; (iii) to identify exceptions in financial, loan and collateral documentation; (iv) to evaluate compliance with laws, regulations and internal policies relating to commercial lending activities, and; (v) to provide recommendations on policies, procedures and practices, if appropriate.
The economic slowdown associated with COVID-19
may have an adverse impact on the growth and asset quality of our loan portfolio, especially those industry segments being severely impacted by the pandemic. Specifically, we have identified the following industries, by the amount of aggregate loans and percentage of total loans as of December 31, 2020 in our loan portfolio that may have increased exposure to this pandemic event:
December 31, 2020
Industry:
Amount
% of Total
Loans
Mining, Quarry, Oil and Gas
$ 4,043
0.35 %
Construction-Land Subdivision
22,113
1.94 %
Manufacturing
12,788
1.12 %
Wholesale Trade
4,069
0.36 %
Automobile Dealers
1,995
0.18 %
Non-Residential
Rentals and Leasing
260,887
22.90 %
Residential Rental and Leasing
117,454
10.31 %
Health Care
19,247
1.69 %
Arts, Entertainment and Recreation
5,064
0.44 %
Hospitality
66,597
5.85 %
Restaurants
8,339
0.73 %
$
522,596
45.87
%
In response to the COVID-19
pandemic and its economic impact to our customers, we implemented short-term modification programs that comply with regulatory and accounting guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19
who were not more than 30 days past due at the time we implemented our modification programs. These programs allow for a deferral of principal, or principal and interest payments for a maximum of 180 days on a cumulative and successive basis. The deferred payments, including interest accrued during the deferral period, if applicable, result in the extension of the loan due date by the number of months deferred.
As of December 31, 2020, 19 loans with outstanding balances totaling $21.9 million, or 1.92%, of total loans were currently deferring loan payments. 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 $256.4 million, or 22.0%, of total loans. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes loans actively deferring payments under the above described modification program as of December 31, 2020, by loan classification:
Number
of
Loans
Amount
% of
Outstanding
Including
PPP Loans
% of
Outstanding
Excluding
PPP Loans
Weighted Average
Loan to Value
Aggregate Deferred Payments
% of Total
Loan
Classification
% of
Loans
Modified
Principal
Interest
Commercial
$
0.05 %
0.17 %
$
$
Construction:
Commercial
1,136
2.52 %
Hospitality
7,318
25.77 %
66.89 %
77.85 %
Total
8,454
11.52 %
Commercial Real Estate:
Multi Family
Owner Occupied
Non-Owner
Occupied
Hospitality
12,285
34.61 %
66.16 %
67.48 %
Agricultural
1.29 %
Total
12,644
2.52 %
Residential Real Estate
0.29 %
Consumer
Total
$ 21,854
1.92 %
2.46 %
$
$
Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans, troubled debt restructured loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled, “Summary of significant accounting policies - Nonperforming assets,” and “Loans, net and allowance for loan losses” in the Notes to Consolidated Financial Statements to this Annual Report.
Information concerning nonperforming assets for the past five years is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.
Distribution of nonperforming assets
December 31
Nonaccruing loans:
Commercial
$
$ 1,159
$ 1,141
$
$
Real estate:
Construction
Commercial
Residential
1,307
Consumer
Total
1,421
2,287
2,729
1,745
1,386
Accruing troubled debt restructured loans:
Commercial
1,047
Real estate:
Construction
Commercial
6,444
2,670
3,229
Residential
2,472
1,989
2,054
2,106
1,959
Consumer
Total
9,963
2,666
2,913
5,478
5,805
Accruing loans past due 90 days or more:
Commercial
Real estate:
Construction
Commercial
Residential
Consumer
Total
Total nonperforming loans
11,540
4,998
6,481
7,915
7,550
Other real estate owned
Total nonperforming assets
$ 11,962
$ 5,080
$ 7,202
$ 8,151
$ 8,175
Ratios:
Nonperforming loans to total loans, net
1.01 %
0.59 %
0.73 %
0.83 %
1.84 %
Nonperforming assets to total loans, net and OREO
1.05 %
0.60 %
0.81 %
0.85 %
1.99 %
We experienced an increase in nonperforming assets of $6,882 to $11,962, or 1.05%, of loans, net of unearned income and foreclosed assets at December 31, 2020, from $5,080, or 0.60%, of loans, net of unearned income and foreclosed assets at December 31, 2019. The increase resulted from increases of $7,297 in accruing troubled debt restructured loans, $340 in other real estate owned, and $111 in accruing loans past due 90 days or more, partially offset by a decrease of $866 in nonaccrual loans. Nonperforming loans at December 31, 2020 and December 31, 2019 exclude $540 and $1,772, respectively, of loans acquired with deteriorated credit quality, which were recorded at their fair value at acquisition. For further discussion of assets classified as nonperforming assets, refer to the note entitled, “Loans, net and the allowance for loan losses”, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
In March 2020, a joint statement was issued by federal and state regulatory agencies to clarify that short-term loan modifications are not troubled debt restructurings (“TDR”) if made on a good-faith basis in response to COVID-19
to borrowers who were current prior to the implementation of our deferral programs in accordance with certain provisions of the CARES Act. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification programs were implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For all borrowers who enroll in these loan modification programs offered as a result of COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program, and the modifications will not impact a borrower’s repayment history for credit repayment reporting purposes. The Company reevaluates the credit granted deferrals under this guidance each quarter under its existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR. As a result of this reevaluation, accruing troubled debt restructured loans increased $7,297, to $9,963 at December 31, 2020 from $2,666 at December 31, 2019.
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions. We employ the FFIEC 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 for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, 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 our Chief Credit Officer identifies those loans to be individually evaluated for impairment and those to be collectively evaluated for impairment utilizing a standard criterion. Internal risk ratings are assigned quarterly to loans identified to be individually evaluated. We segment 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. 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 to assure directional consistency of the allowance for loan loss account. Regulators, in reviewing the loan portfolio as part of the scope of a regulatory examination, may require us to increase our allowance for loan losses or take other actions that would require increases to our allowance for loan losses.
For a further discussion of our accounting policies for determining the amount of the allowance and a description of the systematic analysis and procedural discipline applied, refer to the note entitled, “Summary of significant accounting policies - Allowance for loan losses”, in the Notes to Consolidated Financial Statements to this Annual Report.
A reconciliation of the allowance for loan losses and an illustration of charge-offs and recoveries by major loan category for the past five years are summarized as follows:
Reconciliation of allowance for loan losses
December 31
Allowance for loan losses at beginning of year
$ 7,516
$ 6,348
$ 6,306
$ 3,732
$ 4,365
Loans charged-off:
Commercial
1,128
Real estate:
Construction
Commercial
Residential
Consumer
Total
1,839
1,884
1,174
Loan recovered:
Commercial
Real estate:
Construction
Commercial
Residential
Consumer
Total
Net loans charged-off
1,598
1,238
1,086
Provision for loan losses
6,282
2,406
2,734
Allowance for loan losses at end of year
$ 12,200
$ 7,516
$ 6,348
$ 6,306
$ 3,732
Net charge-offs to average loans
0.15 %
0.14 %
0.06 %
0.03 %
0.27 %
Allowance for loan losses to total loans, net
1.07 %
0.88 %
0.71 %
0.66 %
0.91 %
The allowance for loan losses increased $4,684 to $12,200 at December 31, 2020, from $7,516 at the end of 2019. The increase resulted from a provision for loan losses of $6,282, which was partially offset by net loans charged-off
of $1,598. The provision for loan losses increased to $6,282 in 2020 from $2,406 in 2019 The increase in the provision for loan losses is the combined result of organic loan growth, excluding 100% SBA guaranteed PPP loans, and changes in qualitative factors used in our ALLL model, accounting for increased economic risks and the direct impact on our customers resulting from the COVID-19
pandemic as of December 31, 2020. The allowance for loan losses, as a percentage of loans, net of unearned income, was 1.07% at the end of 2020, compared to 0.88% at the end of 2019.
Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent recoveries are credited to the allowance account. Net loans charged-off
increased $360 to $1,598 in 2020 from $1,238 in 2019. Net charge-offs, as a percentage of average loans outstanding, equaled 0.15% in 2020 and 0.14% in 2019.
Allocation of the allowance for loan losses
The allocation of the allowance for loan losses compared to the percentage of loans by major loan category for the past five years is summarized as follows:
December 31
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Allocated allowance:
Specific:
Commercial
$ 0.14 %
$
0.27 %
$
0.16 %
$
0.14 %
$
0.24 %
Real Estate:
Construction
Commercial
0.60
0.32
0.54
1.04
0.96
Residential
0.23
0.27
0.30
0.37
0.61
Consumer
Total specific
0.97
0.86
1.00
1.55
1.81
Formula:
Commercial
1,705
31.38
1,241
13.66
13.60
1,150
14.52
12.26
Real Estate:
Construction
1,117
6.44
7.26
4.43
3.60
2.10
Commercial
6,494
43.51
2,897
53.18
3,220
55.17
2,887
54.00
1,970
50.97
Residential
2,427
17.11
1,820
24.06
1,258
24.46
1,248
24.80
31.36
Consumer
0.59
0.98
1.34
1.53
1.50
Total formula
11,885
99.03
6,586
99.14
5,712
99.00
5,701
98.45
3,584
98.19
Total allocated allowance
11,885
100.00 %
7,516
100.00 %
6,200
100.00 %
5,925
100.00 %
3,732
100.00 %
Unallocated
allowance
Total
$ 12,200
$ 7,516
$ 6,348
$ 6,306
$ 3,732
The allocated element of the allowance for loan losses account increased $4,369 to $11,885 at December 31, 2020, compared to $7,516 at December 31, 2019. The specific portion of the allowance for loan losses decreased and the formula portion of the allowance for loan losses increased from the end of 2019. There was no specific portion of the allowance for impairment of loans individually evaluated under FASB ASC 310 at December 31, 2020, compared to $930 at December 31, 2019. The results of the evaluation of specifically identified and individually evaluated loans indicated that the recorded investment for each loan exceeded the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan was collateral dependent at December 31, 2020. The formula portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450, increased $5,299 to $11,885 at December 31, 2020, from $6,586 at December 31, 2019. There was an unallocated reserve balance of $315 at December 31, 2020 and no unallocated element at December 31, 2019. The unallocated balance is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using the above impairment evaluation methodology due to limitations in the process. One such limitation is the imprecision of accurately estimating the impact current economic conditions will have on historical loss rates. Variations in the
magnitude of impact may cause estimated credit losses associated with the current portfolio to differ from historical loss experience, resulting in an allowance that is higher or lower than the anticipated level. Management establishes the unallocated element of the allowance by considering a number of environmental risks similar to those used to determine the qualitative factors. Management continually monitors trends in historical and qualitative factors, including trends in the volume, composition and credit quality within the portfolio. The reasonableness of the unallocated element is evaluated through monitoring trends in its level to determine if changes from period to period are directionally consistent with changes in the loan portfolio.
The coverage ratio, the allowance for loan losses account as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 105.7% at December 31, 2020 and 150.4% at December 31, 2019. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2020.
Deposits:
Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual and commercial customers. Total deposits increased $75.0 million in 2020. Noninterest-bearing deposits increased $26.2 million, and interest-bearing deposits increased $48.8 million in 2020. Noninterest-bearing deposits represented 17.1% of total deposits, while interest-bearing deposits accounted for 82.9% of total deposits at December 31, 2020. Total deposits increased $18.0 million, or 1.9%, in the first quarter, $64.7 million, or 6.7%, in the second quarter, $8.2 million, or 0.8%, in the third quarter offset by a decrease of $15.9 million, or 1.5%, in the fourth quarter.
Interest-bearing transaction accounts, which include money market accounts, NOW accounts, and savings accounts, increased $99.5 million in 2020. The increase in interest-bearing transaction accounts during 2020 consisted of increases of $29.4 million in money market accounts, $44.0 million in NOW accounts, and $26.1 million in savings accounts. Total time deposits decreased $50.8 million to $235.0 million at December 31, 2020 from $285.8 million at December 31, 2019. The increase in deposits was primarily due to uncertainty in equity markets and customer indifference in investment alternatives compared to the safety of insured deposits.
The average amount of, and the rate paid on major classifications of deposits for the past three years are summarized as follows:
Deposit distribution
Year ended December 31
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Interest-bearing:
Money market accounts
$ 120,506
0.28 %
$ 112,536
0.91 %
$ 118,175
0.94 %
NOW accounts
297,890
0.23
272,323
0.65
273,953
0.62
Savings accounts
145,760
0.10
133,087
0.14
148,441
0.08
Time deposits
269,313
1.57
300,103
1.70
316,418
1.34
Total interest-bearing
833,469
0.65 %
818,049
0.99 %
856,987
0.84 %
Noninterest-bearing
166,335
156,925
159,751
Total deposits
$ 999,804
$ 974,974
$ 1,016,738
Total deposits averaged $999.8 million in 2020, increasing $24.8 million, or 2.5%, compared to 2019. Average noninterest-bearing deposits increased $9.4 million, while average interest-bearing accounts increased $15.4 million. Average interest-bearing transaction deposits, including money market, NOW and savings accounts, increased $46.2 million, and average total time deposits decreased $30.8 million comparing 2020 with 2019.
Our cost of interest-bearing deposits decreased 34 basis points to 0.65% in 2020 from 0.99% in 2019. Specifically, the cost of interest-bearing transaction accounts decreased 37 basis points to 0.21%, and the cost of time deposits decreased 13 basis points to 1.57% comparing 2020 and 2019. Consistent with the FOMC actions to lower short-term rates due to the onset of COVID-19,
we also took action to lower deposit rates to fend off net interest margin contraction due to reductions in yields on floating and adjustable rate loans and the lack of suitable investment alternatives providing a reasonable return. We anticipate deposit costs to continue to decrease in the short term based on the continuation of the FOMC’s monetary policy posture to keep interest rates low to support the economy and flow of credit to U.S. households and businesses.
Core deposits may decrease in the coming months as unemployment benefits, PPP funds, and loan deferrals come to an end. Many consumers are working from home or temporarily unemployed but still receiving income through unemployment insurance programs that have provided liquidity for ongoing expenses. Additional liquidity that was created through the advancement of funds through the PPP program should decrease despite the newly announced stimulus package at the same time companies that deferred loan payments begin making monthly payments again, which may lead to reductions in accumulated funds and our deposit volumes. In addition, the path of our deposit volumes may depend on the course of the virus, including positive progress on vaccinations which may increase consumer spending and have a corresponding decrease in our deposit base.
Volatile deposits, defined as time deposits $100 or more, averaged $101.4 million in 2020, a decrease of $9.0 million, or 8.2%, from $110.4 million in 2019. Our average cost of these funds decreased 14 basis points to 1.59% in 2020 from 1.73% in 2019. This type of funding is considered to be volatile since it is susceptible to withdrawal by the depositor as they are particularly price sensitive and are therefore not considered to be a reliable source of long-term liquidity.
Maturity distribution of time deposits $100 or more
December 31
Within three months
$ 13,969
$ 17,410
$ 9,044
After three months but within six months
10,702
18,992
10,308
After six months but within twelve months
19,340
21,627
19,316
After twelve months
41,954
49,656
77,394
Total
$ 85,965
$ 107,685
$ 116,062
In addition to deposit gathering, we have in place secondary sources of liquidity to fund operations through exercising existing credit arrangements with the Federal Home Loan Bank of Pittsburgh (“FHLB-Pgh”),
Atlantic Community Bankers Bank and Pacific Coast Bankers Bank. For a further discussion of our borrowings and their terms, refer to the notes entitled, “Short-term borrowings” and “Long-term debt,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
On January 15, 2021, the Company announced the execution of a definitive agreement whereby AmeriServ Financial, Inc. will acquire Citizens Neighborhood Bank’s (“CNB”), an operating division of Riverview Bank, branch and deposit customers in Meyersdale, as well as the deposit customers of CNB’s leased branch in the Borough of Somerset. The transaction is expected to close in the second quarter of 2021, subject to regulatory approval and other customary closing conditions. As December 31, 2020, the related deposits total $47.9 million and will be acquired for a 3.71% deposit premium and are considered as held for assumption within total deposits.
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.
Concerns about the spread of the virus and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the FOMC to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, from 1.75% at December 31, 2019. The FOMC is expected to maintain its accommodative stance until such time when threats to the economy from the pandemic have mitigated. As a result, the timing and the magnitude of future monetary policy actions that will impact the current interest rate environment are uncertain. Given these conditions, IRR and the ability to effectively manage it are extremely critical to both bank management and regulators. The FFIEC, through its advisory guidance, reiterates the importance of effective corporate governance, policies and procedures, risk measuring and monitoring systems, stress testing and internal controls related to the IRR exposure of depository institutions. According to the guidance, bank regulators believe the current financial market and economic conditions present significant risk management challenges to all financial institutions. Although bank regulators recognize that some degree of IRR is inherent in banking, they expect institutions to have sound risk management practices in place to measure, monitor
and control IRR exposure. The guidance states that the adequacy and effectiveness of an institution’s IRR management process, and the level of IRR exposure, are critical factors in the bank regulators’ evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy. Material weaknesses in risk management processes or high levels of IRR exposure relative to capital will require corrective action. We believe our risk management practices regarding IRR were suitable and adequate given the level of IRR exposure at December 31, 2020.
The Asset/Liability Committee (“ALCO”), comprised of members of executive and 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 utilizing several 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”), rate sensitive liabilities (“RSL”) and overall operating results and financial position.
With respect to evaluating our exposure to IRR on earnings, we utilize a gap analysis model that considers repricing frequencies of RSA and RSL. 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 an RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by an RSA/RSL ratio 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 interest rate sensitivity gap position, illustrating RSA and RSL at their related carrying values, is summarized as follows. The distributions in the table are based on a combination of maturities, call provisions, repricing frequencies and prepayment patterns. Adjustable-rate assets and liabilities are distributed based on the repricing frequency of the instrument. Mortgage instruments are distributed in accordance with estimated cash flows, assuming there is no change in the current interest rate environment.
Interest rate sensitivity
December 31, 2020
Due within
three months
Due after
three months
but within
twelve months
Due after
one year
but within
five years
Due after
five years
Total
Rate-sensitive assets:
Interest-bearing deposits in other banks
$ 36,270
$ 36,270
Investment securities
8,080
$ 11,316
$ 46,537
$ 37,762
103,695
Loans held for sale
4,338
4,338
Loans, net
354,869
311,545
424,931
47,894
1,139,239
Total rate-sensitive assets
$ 403,557
$ 322,861
$ 471,468
$ 85,656
$ 1,283,542
Rate-sensitive liabilities:
Money market accounts
$ 130,769
$ 130,769
NOW accounts
6,908
$ 20,724
$ 110,531
$ 179,612
317,775
Savings accounts
2,473
7,420
39,573
108,827
158,293
Time deposits
34,246
80,439
114,584
5,754
235,023
Long-term debt
176,904
13,500
38,361
228,765
Total rate-sensitive liabilities
$ 174,396
$ 285,487
$ 278,188
$ 332,554
$ 1,070,625
Rate-sensitivity gap:
Period
$ 229,161
$ 37,374
$ 193,280
$ (246,898 )
Cumulative
$ 229,161
$ 266,535
$ 459,815
$ 212,917
$ 212,917
RSA/RSL ratio:
Period
2.31
1.13
1.69
0.26
Cumulative
2.31
1.58
1.62
1.20
1.20
Our cumulative one-year
RSA/RSL ratio equaled 1.58 at December 31, 2020. Given the recent monetary policy actions of the FOMC based on uncertainty surrounding the timing of the recovery from the pandemic and the potential for rates to remain at these low levels, the focus of ALCO has been to reduce our exposure to the effects of repricing assets. The current position at December 31, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a slight decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
Static gap analysis, although a credible 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 and variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table. For example, the conservative nature of our Asset/Liability Management Policy assigns money market accounts to the “Due within three months” repricing interval. In reality, these accounts may reprice less frequently and in different magnitudes than changes in general market interest rate levels.
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 December 31, 2021, would increase 2.9% and decrease 4.9% 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.
We will continue to monitor our IRR position throughout 2021 and employ deposit and loan pricing strategies, as well as directing the reinvestment of loan and investment cash flow 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 our asset/liability management program.
Liquidity:
Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:
•
Funding new and existing loan commitments;
•
Payment of deposits on demand or at their contractual maturity;
•
Repayment of borrowings as they mature;
•
Payment of lease obligations; and
•
Payment of operating expenses.
These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted, and strategies are developed to ensure adequate liquidity at all times.
Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, when compared to other types of funding sources. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.
As a result of the onset of the COVID-19
pandemic, we have placed increased emphasis on solidifying, monitoring and managing our liquidity position. We believe our liquidity position is strong. At December 31, 2020, we had available liquidity of $49,781 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 December 31, 2020, available-for-sale
investment securities totaled $103.7 million, and had a net unrealized holding gain of $2.0 million. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Community Bankers Bank (“ACBB”), Pacific Coast Bankers Bank (“PCBB”), and through a relationship with StoneCastle Partners, LLC, a third party financial institution who provides cash management services to institutional investors. At December 31, 2020, our available borrowing capacity was $415.5 million at the FHLB and $10.0 million at ACBB and $50.0 million at PCBB. StoneCastle provides deposits to community banks up to 15% of their total assets. In order to further bolster our liquidity position, we issued $25.0 million of subordinated debentures in the fourth quarter of 2020.
We maintain a Contingency Funding Plan to address liquidity in the event of a funding crisis. Examples of some of the causes of a liquidity crisis include, among others, natural disasters, war, events causing reputational harm, and severe and prolonged asset quality
problems. The plan recognizes the need to provide alternative funding sources in times of crisis that go beyond our core deposit base. As a result, we have created a funding program that ensures the availability of various alternative wholesale funding sources that can be used whenever appropriate. Identified alternative funding sources include:
•
FHLB-Pgh
advances;
•
Federal Reserve Bank discount window;
•
Repurchase agreements;
•
Brokered deposits; and
•
Federal funds purchased.
Based on our liquidity position at December 31, 2020, we do not anticipate the need to have a material reliance on any of these sources in the near term.
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 believe liquidity needs should be greater during this volatile time within the industry and markets. Based upon this volatility, we took steps to maintain a greater balance of cash and cash equivalents on the balance sheet through the sale of investment securities available-for-sale
and borrowing from the FHLB.
We employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after December 31, 2020. Our noncore funds at December 31, 2020 were comprised of time deposits in denominations of $250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. At December 31, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 14.6%, while our net short-term noncore funding ratio, noncore funds maturing within one-year,
less short-term investments to assets equaled 0.94%. Comparatively, our net noncore dependence ratio was (1.03)% while our net short-term noncore funding ratio was 1.54% at year-end
2019. The increase in the net noncore funding dependence ratio is associated with borrowing to fund investment in PPP loans and is anticipated to reduce substantially as these loans enter the forgiveness stage. In addition, as compared to peer levels, our reliance on short-term noncore funds remains low.
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $567 during the year ended December 31, 2020 as compared with a decrease of $3,468 for the same period last year. For the year ended December 31, 2020, we realized a net cash outflow of $301,629 from investing activities offset partially by net cash inflows of $5,257 from operating activities and $295,805 from financing activities. For the year ended 2019, we recognized net cash inflows of $5,256 from operating activities and $57,746 from investing activities, offset by a net cash outflow of $66,470 from financing activities.
Operating activities provided net cash of $5,257 for the year ended December 31, 2020 compared to $5,256 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as goodwill impairment, depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations.
Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $301,629 for the year ended December 31, 2020. For the comparable period in 2019, investing activities provided net cash of $57,746. For the year ended December 31, 2020, loan originations of $273,813 from PPP loans were the primary factor for the net increase in loans of $288,516. For the comparable period of 2019, payments and prepayments on loans exceeding loan originations was the primary factor causing the net cash inflow from investing activities.
Financing activities provided net cash of $295,805 for the year ended December 31, 2020 and used net cash of $66,470 for the same period last year. Liquidity was generated through funds from deposit gathering and through long-term debt which primarily utilized the Fed’s PPPLF secured borrowing arrangement to borrow $189,719 for the purpose of financing PPP loans. During the year ended December 31, deposits increased $74,980 in 2020 and decreased $64,113 in 2019.
We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds are expected to enable us to meet all cash obligations as they come due.
Capital Adequacy:
We believe a strong capital position is essential to our continued growth and profitability. We strive to maintain a relatively high level of capital to provide our depositors and stockholders with a margin of safety. In addition, a strong capital base allows us to take advantage of profitable opportunities, support future growth and provide protection against any unforeseen losses.
In light of the recent pandemic crisis and its potential adverse impact on capital adequacy within the financial industry, maintaining a high level of capital is of extreme importance to federal regulators as well as our management and Board of Directors. Our asset liability committee continually reviews our capital position. As part of its review, the ALCO considers:
•
The current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;
•
The market value of our securities and the resulting effect on capital;
•
Nonperforming asset levels and the effect deterioration in asset quality will have on capital;
•
Any planned asset growth;
•
The anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates;
•
The source and timing of additional funds to fulfill future capital requirements.
Based on the heightened level of stress on capital caused by the recent events, management maintains a capital plan approved by the Board of Directors. Our capital plan consists of the following areas of focus, among others:
•
Comprehensive risk assessment including consideration of the following risk elements, among others: credit; liquidity; earnings; economic value of equity; concentration; and economic, both national and local;
•
Assessing current regulatory capital adequacy levels;
•
Monitoring procedures consisting of stress testing, using both scenarios of previous historic data of financial crisis periods and the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”), and certain triggering events that would call into question the need to raise additional capital;
•
Identifying realistic and readily available alternative sources for augmenting capital if higher capital levels are required;
•
Evaluating dividend levels, and;
•
Providing a ten-year
financial projection for analyzing capital adequacy.
On August 30, 2018, the Federal Reserve enacted changes to Regulation Y to increase the threshold to qualify as a small holding company from $1 billion to $3 billion. As a result, and for the foreseeable future, the Company will not be subject to capital ratio computations and limitations on dividends.
Our ability to declare and pay dividends in the future is based on our operating results, financial and economic conditions, capital and growth objectives, appropriate dividend restrictions and other relevant factors. We rely on dividends received from our subsidiary, Riverview Bank, for payment of dividends to stockholders. The Bank’s ability to pay dividends is subject to federal and state regulations. For a further discussion on our ability to declare and pay dividends in the future and dividend restrictions, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
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 million in subordinated debt at the bank holding company which was 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 million of the available $25 million from the bank holding company to the Bank in the form of additional capital.
Risk-based capital rules became effective January 1, 2015 requiring us to maintain a “capital conservation buffer” of 250 basis points in excess of the “minimum capital ratio.” The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer was phased in over four years beginning on January 1, 2016, with a maximum buffer
of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. The phased in minimum ratios for 2019 include a common equity Tier 1 to risk-weighted assets ratio of 7.0%, Tier 1 capital to risk-weighted assets ratio of 8.5% and a Total capital to risk-weighted assets ratio of 10.5%. For a further discussion of the incorporation of the revised regulatory requirements into the prompt corrective action framework, refer to the section entitled, “Supervision and Regulatory - Risk-Based Capital Requirements,” in Part I of this Annual Report.
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of depositors’ accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. The Bank’s Tier I and total risk-based capital ratios are strong and have consistently exceeded the well capitalized regulatory capital ratios of 8.0% and 10.0% required for well capitalized institutions. The Bank’s ratio of Tier 1 capital to risk-weighted assets and off-balance
sheet items was 12.9% at December 31, 2020, and 11.5% at December 31, 2019. The total risk-based capital ratio was 14.2% at December 31, 2020 and 12.4% at December 31, 2019. In addition, the Bank is required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio in order to be considered well capitalized of 6.5%. The Bank’s common equity Tier I capital to risk-weighted assets ratio was 12.8% at December 31, 2020 and 11.5% at December 31, 2019. The Bank’s Leverage ratio, which equaled 9.8% at December 31, 2020, and 9.1% at December 31, 2019, exceeded the minimum of 5.0% for well capitalized adequacy purposes. Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at December 31, 2020 and 2019. There are no conditions or negative events since this notification that we believe have changed the Bank’s category. For a further discussion of these risk-based capital standards and supervisory actions for noncompliance, refer to the note entitled, “Regulatory matters,” in the Notes to Consolidated Financial Statements in Part II Item 8 of this Annual Report.
In November 2019, the Federal Financial Institution Examination Council published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet
exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter
grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9%
leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We are currently evaluating the election to use the community bank leverage ratio framework and may make such an election in the future.
Stockholders’ equity was $97.4 million, or $10.47 per share, at December 31, 2020, and $118.1 million, or $12.81 per share, at December 31, 2019. Stockholders’ equity decreased primarily due to the recognition of a $21.2 million net loss during 2020 primarily resulting from the recognition of goodwill impairment of $24.8 million in the second quarter of 2020. Average stockholders’ equity to average total assets equaled 8.45% in 2020 and 10.41% in 2019. We declared dividends of $0.15 per share in 2020 and $0.35 in 2019.
Review of Financial Performance:
We reported a net loss of $21,211, or $(2.29) per basic and diluted weighted average common share, for the year ended December 31, 2020, compared to net income of $4,286, or $0.47 per basic and diluted weighted average common share, for the same period last year.
The decrease in the earnings for the year ended December 31, 2020 as compared to the same period in 2019 was primarily the result of a non-cash
charge related to the recognition of goodwill impairment and an increase in the provision for loan losses, both stemming from the COVID-19
pandemic. The goodwill impairment of $24,754 had no impact on tangible book value, regulatory capital ratios, liquidity or the Company’s cash balances. For the year ended December 31, 2020, the provision for loan losses totaled $6,282 compared to $2,406 for the comparable period in 2019. The increase in the year over year provision for loan losses is the combined result of year to date 2020 organic loan growth, excluding 100% SBA guaranteed PPP loans, and changes in qualitative factors used in our ALLL model, accounting for increased economic risks and the direct impact on our customers resulting from the COVID-19
pandemic as of December 31, 2020. As the Company continues to evaluate the impact of the COVID-19
pandemic on our overall financial performance and operations, including its effects on our loan portfolio, our provision for loan losses may increase in future periods, which could adversely affect our results of operations. The Company’s earnings were further impacted by a $2,352 reduction of net accretion on acquired assets and assumed liabilities during the year ended December 31, 2020, as compared to the same period
last year. Also impacting 2020 results was the recognition of write downs of fair values on certain held for sale properties along with lease payments and write offs of certain property and equipment on closed offices totaling $1,532. In addition, the Company recognized $572 in costs associated with severance and furlough expenses related to the implementation of a cost reduction strategy aimed at substantially lowering ongoing operating costs.
The impact of these reductions was offset by the recognition of interest and fees on the origination of loans pursuant to the PPP of $4,407 in 2020. In addition, the Company recognized $815 thousand net gain on the sale of investment securities to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities in the first quarter of 2020.
The COVID-19
pandemic continues to place additional pressure on bank earnings, causing increased emphasis on the need to improve operational efficiency as a means to mitigate margin compression and noninterest income reductions. The Company began implementing cost reduction strategies in 2019 in order to improve our operating efficiency, and those efforts continued subsequent to the end of the second quarter of 2020 by implementing additional efficiency initiatives aimed at substantially lowering operating costs. This action effective on September 1, 2020 is expected to lower salaries and benefits expense by $3,400 annually on a pre-tax
basis. In addition, during the fourth quarter of 2020, we continued to evaluate our branch network by utilizing retail branch performance and resource allocation analytics. After evaluating the results, we determined to divest four additional offices by closing two and selling two branch offices. With respect to the sale, on January 15, 2021, the Company announced the execution of a definitive agreement whereby AmeriServ Financial, Inc. will acquire Citizens Neighborhood Bank’s (“CNB”), an operating division of Riverview Bank, branch and deposit customers in Meyersdale, as well as the deposit customers of CNB’s leased branch in the Borough of Somerset. The transaction is expected to close in the second quarter of 2021, subject to regulatory approval and other customary closing conditions. As of the agreement date, the related deposits total approximately $47,856 and will be acquired for a 3.71% deposit premium.
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.
Net Interest Income:
Net interest income is the fundamental source of earnings for commercial banks. Moreover, 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, 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 and 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 interest rates; and
•
The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of average earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt
loans and investments carry pretax yields lower than their taxable counterparts. Therefore, to make the analysis of net interest income more comparable, tax-exempt
income and yields are reported in this analysis on a tax-equivalent
basis using the prevailing federal statutory tax rate of 21% in 2020 and 2019, respectively.
Similar to all banks, we consider the maintenance of an adequate net interest margin to be of primary concern. The current economic environment has been challenging for the banking industry with respect to historically low interest rates and competition. No assurance can be given as to how general market conditions will change or how such changes will affect net interest income. Therefore, we believe through prudent deposit and loan pricing practices, careful investing, and constant monitoring of nonperforming assets, our net interest margin will remain strong.
We analyze interest income and interest expense by segregating rate and volume components of earning assets and interest-bearing liabilities. The impact changes in the interest rates earned and paid on assets and liabilities, along with changes in the volumes of earning assets and interest-bearing liabilities, have on net interest income are summarized as follows. The net change or mix component, attributable to the combined impact of rate and volume changes within earning assets and interest-bearing liabilities’ categories, has been allocated proportionately to the change due to rate and the change due to volume.
Net interest income changes due to rate and volume
2020 vs 2019
Increase (decrease)
attributable to
2019 vs 2018
Increase (decrease)
attributable to
Total
Rate
Volume
Total
Rate
Volume
Interest income:
Loans:
Taxable
$ (1,815 )
$ (10,989 )
$ 9,174
$ (2,866 )
$ (265 )
$ (2,601 )
Tax-exempt
(121 )
(135 )
Investments:
Taxable
(1,033 )
(435 )
(598 )
Tax-exempt
(17 )
(152 )
(251 )
Interest-bearing deposits
(646 )
(698 )
Federal funds sold
(20 )
(20 )
Total interest income
(3,502 )
(12,125 )
8,623
(2,326 )
(2,401 )
Interest expense:
Money market accounts
(688 )
(756 )
(89 )
(35 )
(54 )
NOW accounts
(1,090 )
(1,242 )
(10 )
Savings accounts
(40 )
(57 )
(12 )
Time deposits
(849 )
(363 )
(486 )
1,069
(233 )
Short-term borrowings
(30 )
(30 )
Long-term debt
(830 )
1,652
(232 )
(406 )
Total interest expense
(1,817 )
(3,248 )
1,431
1,380
(745 )
Net interest income
$ (1,685 )
$ (8,877 )
$ 7,192
$ (2,961 )
$ (1,305 )
$ (1,656 )
Tax-equivalent
net interest income decreased $1,685 to $39,575 in 2020 from $41,260 in 2019. The decline was caused by an unfavorable rate variance which more than offset a favorable volume variance. For the year ended December 31, 2020, tax-equivalent
interest income decreased $3,502 compared to a lesser decrease in fund costs of $1,817.
The unfavorable rate variance was caused by a 74 basis point decrease in tax-equivalent
net interest margin to 3.33% in 2020 from 4.07% in 2019. We experienced a similar decrease in the net interest spread to 3.21% in 2020 from 3.87% in 2019. The decrease was primarily attributable to a decline in the tax-equivalent
loan yield due to reductions in market rates, the addition of lower yielding PPP loans, and the realization of lower levels of loan accretion from purchase accounting marks offset partially by declines in fund costs. The tax-equivalent
yield on earning assets declined 101 basis points causing interest income to decrease $12,125 which was partially offset by a 35 basis point decrease in fund costs lowering interest expense $3,248. The tax-equivalent
yield on the loan portfolio decreased to 4.13% in 2020 compared to 5.24% in 2019 and accounted for a $10,975 reduction in interest income. The actions taken by the Federal Open Market Committee in March 2020 to reduce its target federal funds rate by 150 basis points impacted the loan portfolio yield as it had a corresponding adverse effect on our floating and adjustable rate loans and refinancing activities. Also influencing the decline was recognizing the lower yield of 2.46% earned on the addition of PPP loans in 2020. Loan accretion recognized from merger related purchase accounting marks declined $2,272 in 2020. The tax-equivalent
yield on the investment portfolio decreased to 2.55% in 2020 compared to 2.99% in 2019 and accounted for a $452 reduction in interest income. Similar to the decrease in earning asset yields, we experienced a reduction in total fund costs comparing 2020 to 2019. The cost of funds declined 35 basis points to 0.69% in 2020 from 1.04% in 2019 accounting for a $3,248 decrease in interest expense. Interest-bearing deposits decreased to 0.65% in 2020 from 0.99% in 2019 accounting for $2,418 of the total fund costs reduction due to changes in rates.
Partially offsetting the negative impact of the reduction in the net interest margin was a favorable volume variance from 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 $174,602 while average interest-bearing liabilities increased $163,173 comparing the twelve months ended December 31, 2020 and 2019. The growth in average earning assets increased interest income $8,623 which was partially offset by the increase in average interest-bearing liabilities causing interest expense to rise $1,431. The primary influence of the favorable volume variance attributable to earning assets was a $190,733 increase in the average volume of loans accounting for a $9,039 increase in interest income. Long term debt averaged $140,442 higher in 2020 as compared to 2019 due to the increase in financing through the PPPLF. The growth in average long-term debt caused interest expense to increase $1,652. Partially offsetting this increase was a decrease in the average volume of time deposits declining to $269,313 in 2020 from $300,103 in 2019 and accounting for a reduction in interest expense of $486.
We expect that our net interest income and net interest margin will continue to decrease as our yield on earning assets decline at a frequency and magnitude greater than our fund costs given the uncertainty in the market as a result of the pandemic.
The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Average balances were calculated using average daily balances. Averages for earning assets include nonaccrual loans. Loan fees are included in interest income on loans. Investment averages include available-for-sale
securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate
Summary of net interest income
Average
Balance
Interest Income/
Expense
Average
Interest
Rate
Average
Balance
Interest Income/
Expense
Average
Interest
Rate
Assets:
Earning assets:
Loans:
Taxable
$ 1,037,721
$ 43,052
4.15 %
$ 843,080
$ 44,867
5.32 %
Tax-exempt
32,283
1,118
3.46
36,191
1,239
3.42
Investments:
Taxable
70,433
1,702
2.42
92,980
2,735
2.94
Tax-exempt
10,769
3.40
6,968
3.63
Interest-bearing deposits
38,088
0.32
35,473
2.16
Federal funds sold
Total earning assets
1,189,294
46,358
3.90 %
1,014,692
49,860
4.91 %
Less: allowance for loan losses
9,234
6,759
Other assets
95,256
106,450
Total assets
$ 1,275,316
$ 1,114,383
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts
$ 120,506
0.28 %
$ 112,536
1,024
0.91 %
NOW accounts
297,890
0.23
272,323
1,783
0.65
Savings accounts
145,760
0.10
133,087
0.14
Time deposits
269,313
4,239
1.57
300,103
5,088
1.70
Short-term borrowings
7,311
0.38
Long-term debt
147,374
1,336
0.91
6,932
7.41
Total interest-bearing liabilities
988,154
6,783
0.69 %
824,981
8,600
1.04 %
Noninterest-bearing deposits
166,335
156,925
Other liabilities
13,062
16,423
Stockholders’ equity
107,765
116,054
Total liabilities and stockholders’ equity
$ 1,275,316
$ 1,114,383
Net interest income/
spread
$ 39,575
3.21 %
$ 41,260
3.87 %
Net interest margin
3.33 %
4.07 %
Tax-equivalent
adjustments:
Loans
$
$
Investments
Total adjustments
$
$
Average
Balance
Interest Income/
Expense
Average
Interest
Rate
Assets:
Earning assets:
Loans:
Taxable
$ 892,331
$ 47,733
5.35 %
Tax-exempt
36,120
1,177
3.26
Investments:
Taxable
79,731
2,276
2.85
Tax-exempt
14,519
2.79
Interest-bearing deposits
31,307
1.84
Federal funds sold
1,285
1.56
Total earning assets
1,055,293
52,186
4.95 %
Less: allowance for loan losses
6,436
Other assets
104,019
Total assets
$ 1,152,876
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Money market accounts
$ 118,175
1,113
0.94 %
NOW accounts
273,953
1,709
0.62
Savings accounts
148,441
0.08
Time deposits
316,418
4,252
1.34
Short-term borrowings
1,799
1.67
Long-term debt
12,912
5.78
Total interest-bearing liabilities
871,698
7,965
0.91 %
Noninterest-bearing deposits
159,751
Other liabilities
10,692
Stockholders’ equity
110,735
Total liabilities and stockholders’ equity
$ 1,152,876
Net interest income/spread
$ 44,221
4.04 %
Net interest margin
4.19 %
Tax-equivalent
adjustments:
Loans
$
Investments
Total adjustments
$
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 December 31, 2020.
For the year ended December 31, the provision for loan losses was $6,282 in 2020 compared to $2,406 in 2019. The increase in the provision for loan losses is the combined result of organic loan growth, excluding 100% SBA guaranteed PPP loans, and changes in qualitative factors used in our ALLL model, accounting for increased economic risks and the direct impact on our customers resulting from the COVID-19
pandemic as of December 31, 2020. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt along with increasing unemployment for those individuals depending on these businesses for income. As a result, our future provisions may increase by the growth of loan delinquencies and charge-offs resulting from COVID-19
pandemic related financial stress.
Noninterest Income:
For the year ended December 31, noninterest income totaled $8,773 in 2020, an increase of $259 from $8,514 in 2019. The increase was attributable to recognizing an $815 net gain on the sale of investment securities to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. This compares to a $22 loss from the sale of investment securities recorded in 2019. Mortgage banking income increased $666 for the year ended December 31, 2020 as compared to the same period in 2019 due to an increase in refinancing activity brought on by reductions in mortgage interest rates. Offsetting these positive influences were reductions in service charges, which decreased $1,053 due to lower customer activity resulting in reductions in overdraft fee and ATM income and proactively working with customers and noncustomers alike by temporarily suspending certain fees in an effort to minimize the financial impact of COVID-19
within the communities we serve. Trust commissions and fees and wealth management income decreased $119 and $64, respectively, comparing the years ended December 31, 2020 and 2019. These reductions were driven by the impact that the pandemic had on equity market valuations in 2020.
Noninterest Expense:
In general, noninterest expense is categorized into three main groups, salary and employee benefit expense, occupancy and equipment expense and other expenses. Salary and employee benefit expenses are costs associated with providing salaries, employer payroll taxes and benefits to our employees. Occupancy and equipment expenses, or the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, insurance, common area maintenance expenses, and utility costs. Other expenses include general operating expenses such as marketing, other taxes, stationery and supplies, contractual services, insurance, including FDIC assessment and loan collection costs. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.
The major components of noninterest expense for the past three years are summarized as follows:
Noninterest expense
Year ended December 31
Salaries and employee benefits expense:
Salaries and payroll taxes
$ 17,514
$ 20,218
$ 18,759
Employee benefits
2,693
3,627
3,305
Salaries and employee benefits expense
20,207
23,845
22,064
Occupancy and equipment expenses:
Occupancy expense
3,424
2,727
2,472
Equipment expense
1,717
1,630
1,681
Occupancy and equipment expenses
5,141
4,357
4,153
Other expenses:
Amortization of intangible assets
Goodwill impairment
24,754
Net cost of operating other real estate
Advertising
Professional fees
1,335
1,406
FDIC insurance and assessments
Telecommunications and processing fees
4,693
5,039
4,436
Director fees
Bank shares tax
Stationary and supplies
Other
2,959
3,711
3,291
Other expenses
37,360
13,866
12,708
Total noninterest expense
$ 62,708
$ 42,068
$ 38,925
Noninterest expense increased $20,640, to $62,708 for the year ended December 31, 2020, from $42,068 for the same period last year. The increase was primarily due to writing off goodwill totaling $24,754. Excluding this nonrecurring charge, noninterest expense would have decreased $4,114, or 9.8%, comparing the years ended December 31, 2020 and 2019. Salaries and payroll taxes decreased $2,704 while employee benefits expense decreased $934. The decreases were primarily due to the implementation of the reduction in
force initiatives offset partially by incurring nonrecurring severance and furlough costs. Occupancy and equipment expense increased $784, or 18.0%, to $5,141 in 2020 from $4,357 in 2019. Occupancy expense increased $697 while equipment expense rose $87 in 2020. One-time
charges related to branch closures in line with the implementation of our branch repositioning strategy, and lease payments and write offs of certain property and equipment on closed offices impacted the increase in occupancy expense. Other expenses increased $23,494 to $37,360 in 2020 compared to $13,866 in 2019. As aforementioned, the increase is a result of a non-cash
charge related to the recognition of the goodwill impairment charge. Adjusting for this charge, other expenses would have decreased $1,260, or 9.1%, in 2020.
Income Taxes:
Our income tax expense was $257 in 2020 compared to $701 in 2019. The level of income tax expense is primarily related to the amount of taxable income generated. The Company’s tax expense was also influenced by tax-exempt
income on loans and investments and bank owned life insurance investment income, which allowed us to mitigate our tax burden.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of Riverview Financial Corporation
Harrisburg, Pennsylvania
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Riverview Financial Corporation (the “Company”) as of December
31, 2020 and 2019, the related consolidated statements of income (loss) and comprehensive income (loss), stockholders’ equity, and cash flows of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Qualitative factors
As more fully described in Note 1 and Note 4 to the consolidated financial statements, the Company’s allowance for loan losses represents management’s best estimate of probable incurred losses in the loan portfolio.
On collectively evaluated loans, management adjusts historical loss factors by qualitative factors that represent a number of environmental risks that may cause estimated credit losses associated with the current portfolio to differ from historical loss experience. These environmental risks include: (i) changes in lending policies and procedures including underwriting standards and collection, charge-off and recovery practices; (ii) changes in the composition and volume of the portfolio; (iii) changes in national, local and industry conditions, including the effects of such changes on the value of underlying collateral for collateral-dependent loans; (iv) changes in the volume and severity of classified loans including past due, nonaccrual, troubled debt restructures and other loan modifications; (v) changes in the levels of, and trends in, charge-offs and recoveries; (vi) the existence and effect of any concentrations of credit and changes in the level of such concentrations; (vii) changes in the experience, ability and depth of lending management and other relevant staff; (viii) changes in the quality of the loan review system and the degree of oversight by the board of directors; and (ix) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio. Each environmental risk is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The principal consideration for our determination that auditing the allowance for loan losses risk factors applied to adjust historical loss experience (qualitative factors) is a critical audit matter is the high degree of subjectivity involved in management’s assignment of values to reflect improving, stable, or declining conditions based on management’s best judgement associated with each risk factor, and the significant degree of auditor judgement.
Our audit procedures related to the allowance loan losses qualitative factors included the following procedures to address the critical audit matter.
•
Substantive tests included:
•
Data inputs used to adjust historical loss rates by qualitative factors were agreed to source documentation.
•
Evaluating the reliability of the underlying objective data used to derive the qualitative factors. Based on the underlying data, we evaluated the reasonableness of management’s designation improving, stable or declining conditions and the resulting adjustment to the historical loss experience.
•
Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.
/s/ Crowe LLP
We have served as the Company’s auditor since 2019.
Washington, D.C.
March 11, 2021
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31
Assets:
Cash and due from banks
$ 13,511
$ 11,838
Interest-bearing deposits in other banks
36,270
38,510
Investment securities available-for-sale
103,695
91,247
Loans held for sale
4,338
Loans, net
1,139,239
852,109
Less: allowance for loan losses
12,200
7,516
Net loans
1,127,039
844,593
Premises and equipment, net
18,147
17,852
Accrued interest receivable
4,216
2,414
Goodwill
24,754
Intangible assets
1,918
2,736
Other assets
48,420
45,929
Total assets
$ 1,357,554
$ 1,079,954
Liabilities:
Deposits:
Noninterest-bearing
$ 173,600
$ 147,405
Interest-bearing
841,860
793,075
Total deposits
1,015,460
940,480
Short-term borrowings
Long-term debt
228,765
6,971
Accrued interest payable
1,038
Other liabilities
14,859
13,958
Total liabilities
1,260,122
961,844
Stockholders’ equity:
Common stock, no par value, authorized 20,000,000 shares, issued and outstanding: 2020; 9,306,442 shares; 2019; 9,216,616 shares
102,662
102,206
Capital surplus
Retained earnings (accumulated deficit)
(6,457 )
16,140
Accumulated other comprehensive gain (loss)
(348 )
Total stockholders’ equity
97,432
118,110
Total liabilities and stockholders’ equity
$ 1,357,554
$ 1,079,954
See notes to consolidated financial statements.
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
Year Ended December 31
Interest income:
Interest and fees on loans:
Taxable
$ 43,052
$ 44,867
Tax-exempt
Interest on investment securities:
Taxable
1,702
2,735
Tax-exempt
Interest on interest-bearing deposits in other banks
Total interest income
46,046
49,547
Interest expense:
Interest on deposits
5,419
8,086
Interest on short-term borrowings
Interest on long-term debt
1,336
Total interest expense
6,783
8,600
Net interest income
39,263
40,947
Provision for loan losses
6,282
2,406
Net interest income after provision for loan losses
32,981
38,541
Noninterest income:
Service charges, fees and commissions
4,133
5,186
Commission and fees on fiduciary activities
1,080
Wealth management income
Mortgage banking income
1,233
Bank owned life insurance investment income
Net gain (loss) on sale of investment securities available-for-sale
(22 )
Total noninterest income
8,773
8,514
Noninterest expense:
Salaries and employee benefits expense
20,207
23,845
Net occupancy and equipment expense
5,141
4,357
Amortization of intangible assets
Goodwill impairment
24,754
Net cost of operation of other real estate
Other expenses
11,733
13,026
Total noninterest expense
62,708
42,068
Income (loss) before income taxes
(20,954 )
4,987
Income tax expense
Net income (loss)
(21,211 )
4,286
Other comprehensive income (loss):
Unrealized gain on investment securities available-for-sale
2,101
2,837
Reclassification adjustment for net (gain) loss on sales included in net income
(815 )
Change in pension liability
Change in cash flow hedge
Income tax expense related to other comprehensive income
Other comprehensive income, net of income taxes
1,283
2,271
Comprehensive income (loss)
$ (19,928 )
$ 6,557
Per share data:
Net income (loss):
Basic
$ (2.29 )
$ 0.47
Diluted
$ (2.29 )
$ 0.47
Average common shares outstanding:
Basic
9,258,493
9,167,415
Diluted
9,258,493
9,181,752
Dividends declared
$ 0.15
$ 0.35
See notes to consolidated financial statements.
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)
For the two years ended December 31,
Common
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, January 1, 2020
$ 102,206
$
$ 16,140
$ (348 )
$ 118,110
Net income
(21,211 )
(21,211 )
Other comprehensive income, net of income taxes
1,283
1,283
Issuance under ESPP, 401k and Dividend Reinvestment plans: 75,948 shares
Issuance of restricted stock awards: 13,878 shares
(87 )
Dividends declared, $0.15 per share
(1,386 )
(1,386 )
Balance, December 31, 2020
$ 102,662
$
$ (6,457 )
$
$ 97,432
Balance, January 1, 2019
$ 101,134
$
$ 15,063
$ (2,619 )
$ 113,910
Net income
4,286
4,286
Other comprehensive income, net of income taxes
2,271
2,271
Issuance under ESPP, 401k and Dividend Reinvestment plans: 57,356 shares
Exercise of stock options: 22,776 shares
(33 )
Issuance of restricted stock awards: 14,929 shares
(187 )
Dividends declared, $0.35 per share
(3,209 )
(3,209 )
Balance, December 31, 2019
$ 102,206
$
$ 16,140
$ (348 )
$ 118,110
See notes to consolidated financial statements.
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
Year Ended December 31
Cash flows from operating activities:
Net income (loss)
$ (21,211 )
$ 4,286
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment
1,186
1,248
Provision for loan losses
6,282
2,406
Stock based compensation
Net amortization of investment securities available-for-sale
Net cost of operation of other real estate owned
Net (gain) loss on sale of investment securities available-for-sale
(815 )
Accretion of purchase adjustment on loans
(973 )
(3,245 )
Amortization of intangible assets
Amortization of assumed discount on long-term debt
Amortization of long-term debt issuance costs
Impairment of goodwill
24,754
Deferred income taxes
1,009
Proceeds from sale of loans originated for sale
35,874
17,032
Net gain on sale of loans originated for sale
(1,233 )
(567 )
Loans originated for sale
(38,898 )
(15,909 )
Bank owned life insurance investment income
(755 )
(763 )
Net change in:
Accrued interest receivable
(1,802 )
Other assets
(798 )
(856 )
Accrued interest payable
(49 )
Other liabilities
1,067
(1,658 )
Net cash provided by operating activities
5,257
5,256
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases
(53,323 )
(32,058 )
Proceeds from repayments
14,305
17,308
Proceeds from sales
27,812
30,232
Proceeds from the sale of other real estate owned
Net (increase) decrease in restricted equity securities
(769 )
Net (increase) decrease in loans
(288,516 )
42,901
Purchases of premises and equipment
(1,481 )
(1,545 )
Proceeds from sale of equipment
Purchase of bank owned life insurance
(23 )
(22 )
Net cash provided by (used in) investing activities
(301,629 )
57,746
Cash flows from financing activities:
Net increase (decrease) in deposits
74,980
(64,113 )
Net decrease in short-term borrowings
Repayment of long-term debt
(13,088 )
Proceeds from long-term debt
234,756
Issuance under DRP, 401k and ESPP plans
Proceeds from exercise of options
Cash dividends paid
(1,386 )
(3,209 )
Net cash provided by (used in) financing activities
295,805
(66,470 )
Net decrease in cash and cash equivalents
(567 )
(3,468 )
Cash and cash equivalents-beginning
50,348
53,816
Cash and cash equivalents-ending
$ 49,781
$ 50,348
Supplemental disclosures:
Cash paid during the period for:
Interest
$
6,180
$
8,649
Federal income taxes
$
Lease liabilities arising from obtaining right-of-use
assets
$
3,892
Noncash items from investing activities:
Other real estate acquired in settlement of loans
$
$
Noncash items from investing and operating activities:
Noncash transfer of owned properties available-for-sale
$
See notes to consolidated financial statements.
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 27 full service offices and three limited purpose offices, is a full-service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities and small to medium sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties.
The Bank is state-chartered under the jurisdiction of the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. The Bank’s primary product is loans to small- and medium-sized
businesses. Other lending products include one-to-four
family residential mortgages and consumer loans. The Bank primarily funds its loans by offering interest-bearing transaction accounts to commercial enterprises and individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts. The Bank offers a broad range of financial advisory, investment and fiduciary services through its wealth management and trust operating divisions.
The wealth management and trust divisions did not meet the quantitative thresholds for required segment disclosure in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Bank’s 30 community banking offices, all similar with respect to economic characteristics, share a majority of the following aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.
The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the Central, Northern, Southwestern and Southeastern Pennsylvania markets, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.
The Company and the Bank are subject to regulations of certain federal and state regulatory agencies and undergo periodic examinations.
Basis of presentation:
The consolidated financial statements of the Company have been prepared in conformity with GAAP, Regulation S-X
and reporting practices applied in the banking industry. All significant intercompany balances and transactions have been eliminated in consolidation. The Company also presents herein condensed parent company only financial information regarding Riverview Financial Corporation (“Parent Company”). Prior period amounts are reclassified when necessary to conform with the current year’s presentation. Such reclassifications had no effect on financial position or results of operations.
The operating results and financial position of the Company for the year ended as of December 31, 2020, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus (“COVID-19”) pandemic which has adversely affected the Company’s business results of operations and financial condition in 2020.
The impact of the pandemic on Riverview’s financial results is evolving and uncertain. The Company expects its net interest income and non-interest
income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to COVID-19
and the actions by the Federal Reserve with respect to interest rates. We believe that we may experience a material adverse effect on our business, results of operations and financial condition as a result of the COVID-19
pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans or deferred taxes.
Estimates:
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Investment securities:
Investment securities are classified and accounted for as either held-to-maturity,
available-for-sale,
or trading account securities based on management’s intent at the time of acquisition. Management is required to reassess the appropriateness of such classifications at each reporting date. The Company classifies debt securities as held-to
maturity when management has the positive intent and ability to hold such securities to maturity. Held-to-maturity
securities are stated at cost, adjusted for amortization of premium and accretion of discount. Investment securities are designated as available-for-sale
when they are to be held for indefinite periods of time as management intends to use such securities to implement asset/liability strategies or to sell them in response to changes in interest rates, prepayment risk, liquidity requirements, or other circumstances identified by management. Available-for-sale
securities are reported at fair value, with unrealized gains and losses, net of income taxes, excluded from earnings and reported in a separate component of stockholders’ equity. Estimated fair values for investment securities are based on market prices from a national pricing service. Realized gains and losses are computed using the specific identification method and are included in noninterest income. Premiums are amortized, and discounts are accreted using the level yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Investment securities that are bought and held principally for the purpose of selling them in the near term, in order to generate profits from market appreciation, are classified as trading account securities. Trading account securities are carried at market value. Interest on trading account securities is included in interest income. Profits or losses on trading account securities are included in noninterest income. All of the Company’s investment securities were classified as available-for-sale
in 2020 and 2019. Transfers of securities between categories are recorded at fair value at the date of the transfer, with the accounting treatment of unrealized gains or losses determined by the category into which the security is transferred.
Management evaluates each investment security at least quarterly, to determine if a decline in fair value below its amortized cost is an other-than-temporary impairment (“OTTI”), and more frequently when economic or market concerns warrant an evaluation. Factors considered in determining whether an other-than-temporary impairment was incurred include: (i) the length of time and the extent to which the fair value has been less than amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether a decline in fair value is attributable to adverse conditions specifically related to the security or specific conditions in an industry or geographic area; (iv) the credit-worthiness of the issuer of the security; (v) whether dividend or interest payments have been reduced or have not been made; (vi) an adverse change in the remaining expected cash flows from the security such that the Company will not recover the amortized cost of the security; (vii) whether management intends to sell the security; and (viii) if it is more likely than not that management will be required to sell the security before recovery. If a decline is judged to be other-than-temporary, the individual security is written-down to fair value with the credit related component of the write-down included in earnings and the non-credit
related component included in other comprehensive income or loss. The assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time.
Loans held for sale:
Loans held for sale consist of one-to-four
family residential mortgages originated and intended for sale in the secondary market with servicing rights released. The loans are carried in aggregate at the lower of cost or estimated market value, based upon current delivery prices in the secondary mortgage market. Gains or losses on the sale of these loans are recognized in noninterest income at the time of sale using the specific identification method. Loan origination fees, net of certain direct loan origination costs, are included in net gains or losses upon the sale of the related mortgage loan. These loans are generally sold without servicing rights retained and without recourse.
Loans, net:
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of deferred fees or costs. Interest income is accrued on the principal amount outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the contractual life of the related loan as an adjustment to yield using the effective interest method. Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective interest method. Delinquency fees are recognized in income when chargeable, assuming collectability is reasonably assured.
Transfers of financial assets, which include loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (i) the assets have been isolated from the Company; (ii) the transferee obtains the right, free of conditions that constrain it from taking advantage of that right, to pledge or exchange the transferred assets and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The loan portfolio is segmented into business, construction and retail loans. Business loans consist of commercial and commercial real estate loans. Construction loans consist of both commercial and residential loans. Retail loans consist of residential real estate and other consumer loans.
The Company makes commercial loans for real estate development and other business purposes required by the customer base. The Company’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversion of assets. Commercial real estate loans include long-term loans financing commercial properties. Repayment of these loans is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan to value of not greater than 80% and vary in terms. Commercial and commercial real estate loans generally have higher credit risk compared to residential mortgage loans and consumer loans, as they typically involve larger loan balances concentrated with single borrowers or groups of borrowers. In addition, the payment expectations on loans secured by income-producing properties typically depend on the successful operations of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Loans secured by commercial real estate generally have larger balances and involve a greater degree of risk than one-to-four
family residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s and any guarantor’s creditworthiness and the feasibility and cash flow potential of the financed project. Additional considerations include: location, market and geographic concentrations, loan to value, strength of guarantors and quality of tenants. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual consolidated financial statements on commercial real estate loans and rent rolls where applicable. In reaching a decision on whether to make a commercial real estate loan, we consider and review a cash flow analysis of the borrower and guarantor, when applicable, and considers the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. An environmental report is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.
Residential mortgages, including home equity loans, are secured by the borrower’s residential real estate in either a first or second lien position. Residential mortgages have varying loan rates depending on the financial condition of the borrower and the loan to value ratio. Residential mortgages may have amortizations up to 30 years.
Consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are secured. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as motor vehicles. In the latter case, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state insolvency laws, may limit the amount that can be recovered on such loans.
Leases:
The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch and back office operations. The Company’s branch locations operating under lease agreements have all been designated as operating leases. In addition, the Company leases certain equipment under operating leases. The Company does not have leases designated as finance leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use
(“ROU”) assets and operating lease liabilities in the consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease pre-payments
made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease
components, which the Company has elected to account for separately as the non-lease
component amounts are readily determinable under most leases.
Off-balance
sheet financial instruments:
In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit, unused portions of lines of credit and standby letters of credit. These financial instruments are recorded in the consolidated financial statements when they are funded. Fees on commercial letters of credit and on unused available lines of credit are recorded as service charges, fees and commissions and are included in noninterest income when earned. The Company records an allowance for off-balance
sheet credit losses, if deemed necessary, separately as a liability.
Nonperforming assets:
Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans include nonaccrual loans, troubled debt restructured loans and accruing loans past due 90 days or more. Past due status is based on contractual terms of the loan. Generally, a loan is classified as nonaccrual when it is determined that the collection of all or a portion of interest or principal is doubtful or when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual, interest accruals are discontinued, and uncollected accrued interest is reversed against income in the current period. Interest collections after a loan has been placed on nonaccrual status are credited to the principal balance. Interest earned that would have been recognized is credited to income over the remaining life of the loan using the effective yield method if the nonaccrual loan is returned to performing status. A nonaccrual loan is returned to performing status when the loan is current as to principal and interest and has performed according to the contractual terms for a minimum of six months.
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 can 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.
In March 2020, a joint policy statement was issued by federal and state regulatory agencies to clarify that short-term loan modifications made in good-faith to provide temporary payment relief to borrowers directly impacted by COVID-19
and were current prior to the modification are not troubled debt restructurings in accordance with the certain provisions of the CARES Act. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification programs were implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For all borrowers who enroll in these loan modification programs, the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program, and the modifications will not impact a borrower’s repayment history for credit repayment reporting purposes. The Company reevaluates these credit` granted deferrals under this guidance each quarter under its existing troubled debt restructuring framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR.
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
•
Pass - A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.
•
Special Mention - A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.
•
Substandard - A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of 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 be effected in the future.
Other real estate owned is comprised of properties acquired through foreclosure proceedings or in-substance
foreclosures. A loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. Other real estate owned is included in other assets and recorded at fair value less cost to sell at the time of acquisition, establishing a new cost basis. Any excess of the loan balance over the recorded value is charged to the allowance for loan losses. Subsequent declines in the recorded values of the properties prior to their disposal and costs to maintain the assets are included in other expenses. Any gain or loss realized upon disposal of other real estate owned is included in noninterest expense.
Allowance for loan losses:
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses account is maintained through a provision for loan losses charged to earnings. Loans, or portions of loans, determined to be confirmed losses are charged against the allowance account and subsequent recoveries, if any, are credited to the account. A loss is considered confirmed when information available at the financial statement date indicates the loan, or a portion thereof, is uncollectible. Nonaccrual, troubled debt restructured, and loans deemed impaired at the time of acquisition are reviewed monthly to determine if carrying value reductions are warranted or if these classifications should be changed. Consumer loans are considered losses and charged-off
when they are 120 days past due.
Management evaluates the adequacy of the allowance for loan losses account quarterly. This assessment is based on past charge-off
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. Regulators, in reviewing the loan portfolio as part of the scope of a regulatory examination, may require the Company to increase its allowance for loan losses or take other actions that would require the Company to increase its allowance for loan losses.
The allowance for loan losses is maintained at a level believed to be adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses consists of an allocated element and an unallocated element. The allocated element consists of a specific allowance for impaired loans individually evaluated under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, “Receivables,” and a formula portion for loss contingencies on those loans collectively evaluated under FASB ASC 450, “Contingencies.”
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. Factors considered by management in determining impairment include payment status, ability to pay and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company recognizes interest income on impaired loans, including the recording of cash receipts for nonaccrual, restructured loans or accruing loans depending on the status of the impaired loan. Loans considered impaired under FASB ASC 310 are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. If the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent, is less than the recorded investment in the loan, a specific allowance for the loan will be established.
The formula portion of the allowance for loan losses relates to large pools of smaller-balance homogeneous loans and those identified loans considered not individually impaired having similar characteristics as these loan pools. Loss contingencies for each of the major loan pools are determined by applying a total loss factor to the current balance outstanding for each individual pool. The total loss factor is comprised of a historical loss factor using a loss migration method plus qualitative factors, which adjust the historical loss factor for changes in trends, conditions and other relevant factors that may affect repayment of the loans in these pools as of the evaluation date. Loss migration involves determining the percentage of each pool that is expected to ultimately result in loss based on historical loss experience. Historical loss factors are based on the ratio of net loans charged-off
to loans, net, for each of the major groups of loans evaluated and measured for impairment under FASB ASC 450. The historical loss factor for each pool is an average of the Company’s historical net charge-off
ratio for the most recent rolling eight quarters. Management adjusts these historical loss factors by qualitative factors that represent a number of environmental risks that may cause estimated credit losses associated with the current portfolio to differ from historical loss experience. These environmental risks include: (i) changes in lending policies and procedures including underwriting standards and collection, charge-off
and recovery practices; (ii) changes in the composition and volume of the portfolio; (iii) changes in national, local and industry conditions, including the effects of such changes on the value of underlying collateral for collateral-dependent loans; (iv) changes in the volume and severity of classified loans including past due, nonaccrual, troubled debt restructures and other loan modifications; (v) changes in the levels of, and trends in, charge-offs and recoveries; (vi) the existence and effect of any concentrations of credit and changes in the level of such concentrations; (vii) changes in the experience, ability and depth of lending management and other relevant staff; (viii) changes in the quality of the loan review system and the degree of oversight by the board of directors; and (ix) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio. Each environmental risk factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. The onset of the pandemic had a material influence on the environmental factors in 2020.
The unallocated element, if any, is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using the above impairment evaluation methodology due to limitations in the process. One such limitation is the imprecision of accurately estimating the impact current economic conditions will have on historical loss rates. Variations in the magnitude of impact may cause estimated credit losses associated with the current portfolio to differ from historical loss experience, resulting in an allowance that is higher or lower than the anticipated level. Management establishes the unallocated element of the allowance by considering environmental risks similar to the ones used for determining the qualitative factors. Management continually monitors trends in historical and qualitative factors, including trends in the volume, composition and credit quality of the portfolio. The reasonableness of the unallocated element is evaluated through monitoring trends in its level to determine if changes from period to period are directionally consistent with changes in the loan portfolio. Management believes the level of the allowance for loan losses was adequate to absorb probable credit losses as of December 31, 2020.
Premises and equipment, net:
Land is stated at cost. Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. The cost of routine maintenance and repairs is expensed as incurred. The cost of major replacements, renewals and betterments is capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are eliminated, and any resulting gain or loss is reflected in noninterest income.
Depreciation and amortization are computed principally using the straight-line method based on the following estimated useful lives of the related assets, or in the case of leasehold improvements, to the expected terms of the leases, if shorter:
Premises and leasehold improvements
7 - 50 years
Leasehold improvements
10 - 30 years
Furniture, fixtures
and
equipment
3 - 10 years
Business combinations, goodwill and other intangible assets, net:
The Company accounts for its acquisitions using the purchase accounting method. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the sum of the year’s digits over their estimated useful lives of up to ten years.
Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable
discount. The non-accretable
discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the non-accretable
discount which the Company will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan. Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the non-accretable
difference portion of the fair value adjustment.
The Company accounts for performing loans acquired in business combinations using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.
Customer list intangibles are also included in intangible assets as a result of the purchase of the wealth management companies. These intangibles are amortized as an expense over
ten years using the sum of the years’ amortization method.
Goodwill and other intangible assets are tested for impairment annually during the fourth quarter of each year or when circumstances arise which are considered to be a triggering event indicating impairment may have occurred. In making this assessment that impairment has occurred, management considers a number of factors including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of impairment. Changes in economic and operating conditions, as well as other factors, could result in impairment in future periods. Any impairment losses arising from such testing would be reported in the Consolidated Statements of Income and Comprehensive Income as a separate line item within operations. The Company recognized an impairment charge equal to the entire amount of its recorded goodwill on the balance sheet at June 30, 2020 totaling $24,754. For additional disclosure related to the goodwill impairment charge refer to the note entitled “Goodwill” in the Notes to Consolidated Financial Statements. There were no impairment losses recognized as a result of periodic impairment testing for the year ended December 31, 2019.
Restricted equity securities:
As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB-Pgh”)
and Atlantic Community Bankers Bank (“ACBB”), the Company is required to purchase and hold stock in these entities to satisfy membership and borrowing requirements. This stock is restricted in that it can only be redeemed by these entities or to another member institution and all redemptions of stock must be at par. As a result of these restrictions, restricted equity stock is unlike other investment securities as there is no trading market in it and the transfer price is determined by the FHLB-Pgh
and ACBB membership rules and not by market participants. Therefore, it is accounted for at historical cost and evaluated for impairment. The carrying value of restricted stock is included in other assets.
Bank owned life insurance:
The Company invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Bank on certain of its directors and employees. The Bank is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies and is included in other assets. Income from increases in cash surrender value of the policies is included in noninterest income.
Pension and post-retirement benefit plans:
The Company sponsors various pension plans covering substantially all employees. The Company also provides post-retirement benefit plans other than pensions, consisting principally of life insurance benefits, to eligible retirees. The liabilities and annual income or expense of the Company’s pension and other post-retirement benefit plans are determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate and the long-term rate of asset return, based on the market-related value of assets. The fair values of plan assets are determined based on prevailing market prices or estimated fair value for investments with no available quoted prices.
Derivative Instruments and Hedging Activities:
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
As of and for the year ended December 31, 2020, the Company’s derivative instruments and hedging activities consisted entirely of interest rate swap hedges on its holdings of trust preferred securities. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments. A cash flow hedge is a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the consolidated statements of cash flows the same as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as other income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transaction will affect earnings. The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. The contract to which the Company is a party settles monthly.
Statements of Cash Flows
:
The Consolidated Statements of Cash Flows are presented using the indirect method. For purposes of cash flow, cash and cash equivalents include cash on hand, cash items in the process of collection, noninterest-bearing and interest-bearing deposits in other banks and federal funds sold.
Fair value of financial instruments:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best
determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.
Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities, generally measured at fair value, into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
•
Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•
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.
The following methods and assumptions were used by the Company to construct the summary table containing the fair values and related carrying amounts of financial instruments in the Note entitled “Fair value of financial instruments” in the Notes to the Consolidated Financial Statements.
Cash and cash equivalents:
The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.
Investment securities available-for-sale:
The fair values of debt securities are based on pricing from a matrix pricing model.
Loans held for sale:
The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.
Net Loans:
Exit price observations are obtained from an independent third-party using its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The valuation is based on the probability of default, loss given default, recovery delay, prepayment, and discount rate assumptions. The new methodology is a result of the adoption of ASU No. 2016-01.
Adjustable-rate loans that reprice frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired
loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.
In conjunction with the mergers, the loans purchased were recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on distressed loans represents the portion of the loan balance that has been deemed uncollectible based on the management’s expectations of future cash flows for each respective loan.
Impaired loans:
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.
Accrued interest receivable:
The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.
Other real estate owned:
Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.
Restricted equity securities:
The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.
Deposits:
The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost
funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.
Short-term borrowings:
The carrying values of short-term borrowings approximate fair value.
Long-term debt:
The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.
Accrued interest payable
:
The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.
Interest rate swap hedges:
The fair value of the interest rate swap liability is based on an external derivative model using input data as of the valuation date.
Off-balance
sheet financial instruments:
The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable of either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance
sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance
sheet financial instruments was not material at December 31, 2020 and December 31, 2019.
Loss contingencies:
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Advertising:
The Company follows the policy of charging marketing and advertising costs to expense as incurred. Advertising expense for the years ended December 31, 2020 and 2019 was $369 and $812, respectively.
Income taxes:
The Company accounts for income taxes in accordance with the income tax accounting guidance set forth in FASB ASC 740, “Income Taxes”. ASC 740 sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
The Company has two accruals for income taxes: (i) an income tax payable representing the estimated net amount currently due to the federal government, net of any reserve for potential audit issues and any tax refunds; and (ii) a deferred federal income tax and related valuation accounts, representing the estimated impact of temporary differences between how the Company recognizes its assets and liabilities under GAAP, and how such assets and liabilities are recognized under federal tax law.
Deferred income taxes are provided on the balance sheet method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the effective date. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a likelihood of being realized on examination of more than 50 percent. For tax positions not meeting the more likely than not threshold, no tax benefit is recorded. Under the more likely than not threshold guidelines, the Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition
of an existing tax benefit. The Company had no material unrecognized tax benefits or accrued interest and penalties for any year in the two-year
period ended December 31, 2020.
As applicable, the Company recognizes accrued interest and penalties assessed as a result of a taxing authority examination through income tax expense. The Company files consolidated income tax returns in the United States of America and various states’ jurisdictions. With limited exception, the Company is no longer subject to federal and state income tax examinations by taxing authorities for years before 2017.
Other comprehensive income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale,
benefit plan adjustments and derivative adjustments. The components of accumulated other comprehensive income (loss) included in stockholders’ equity at December 31, 2020 and 2019 are as follows:
December 31
Net unrealized gain on investment securities available-for-sale
$ 1,962
$
Income tax expense
Net of income taxes
1,550
Benefit plan adjustments
(951 )
(1,117 )
Income tax benefit
(200 )
(235 )
Net of income taxes
(751 )
(882 )
Derivative adjustments
Income tax expense
Net of income taxes
Accumulated other comprehensive income (loss)
$
$ (348 )
Other comprehensive income and related tax effects for the years ended December 31, 2020 and 2019 are as follows:
Year ended December 31
Unrealized gain on investment securities available-for-sale
$ 2,101
$ 2,837
Net (gain) loss on the sale of investment securities available-for-sale(1)
(815 )
Benefit plans:
Amortization of actuarial loss(2)
Actuarial gain (loss)
(88 )
Net change in benefit plan liabilities
Net change in derivative fair value
Other comprehensive income gain before taxes
1,624
2,875
Income tax expense
Other comprehensive income
$ 1,283
$ 2,271
(1)
Represents amounts reclassified out of accumulated comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.
(2)
Represents amounts reclassified out of accumulated comprehensive income and included in the computation of net periodic pension expense.
Earnings (loss) per share:
Basic earnings (loss) per share is computed by dividing net income (loss) allocated to common stockholders 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 (loss) per share and diluted earnings per share for the years ended December 31, 2020 and 20
19:
For the Year Ended December 31
Numerator:
Net income
$ (21,211 )
$ 4,286
Denominator:
Basic
9,258,493
9,167,415
Dilutive options
14,337
Diluted
9,258,493
9,181,752
Earnings (loss) per share:
Basic
$ (2.29 )
$ 0.47
Diluted
$ (2.29 )
$ 0.47
Common stock equivalents outstanding that are anti-dilutive and thus excluded from the calculation of the diluted number of shares represented above were 172,964 in 2020 and 23,700 in 2019.
Stock-based compensation:
The Company recognizes all share-based payments to employees in the consolidated statement of operations based on their grant date fair values. The fair value of such equity instruments is recognized as an expense in the historical consolidated financial statements as services are performed. The Company uses the Black-Scholes model to estimate the fair value of stock options on the date of grant. The Black-Scholes model estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price of the option, the expected life of the option, the current market price and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company typically grants stock options to employees with an exercise price equal to the fair value of the shares at the date of grant. The fair value of restricted stock is equivalent to the fair value on the date of grant and is expensed over the vesting period.
Accounting Standards Adopted in 2020
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting guidance became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new guidance on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations or disclosures.
In August 2018, the FASB issued ASU 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update improve the effectiveness of fair value measurement disclosures by modifying the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The ASU became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
In August 2018, the FASB issued ASU No. 2018-15,
“Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use
software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to internal-use
software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., prepaid expense). The new guidance provides that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This update became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recent Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No. 2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU No. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale
debt securities. In November 2018, the FASB issued ASU No. 2018-19-Codification
Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU No. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU No. 2016-13
to allow companies to irrevocably elect, upon adoption of ASU No, 2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20
if the instruments are eligible for the fair value option under ASC 825-10.
The fair value option election does not apply to held-to-maturity
debt securities. Entities are required to make this election on an instrument-by-instrument
basis. In November 2019, the FASB issued ASU No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic 805-20.
In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any day-one
regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a one-time
cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity.
In August 2018, the FASB issued ASU No. 2018-14,
“Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)
- Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans”. Subtopic 715-20
addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
In December 2019, the FASB issued ASU No. 2019-12,
“Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU No. 2019-12
improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
In March 2020, the FASB issued ASU No. 2020-04,
“Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04
provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04
also provides numerous optional expedients for derivative accounting. ASU 2020-04
is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04
for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. In January 2021, the FASB issued ASU 2021-01,
“Reference Rate Reform (Topic 848): Scope.” ASU 2021-01
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. ASU 2021-01
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. ASU 2021-01
was effective upon issuance and generally can be applied through December 31, 2022. We are evaluating the impacts of these ASUs and have not yet determined whether LIBOR transition and this ASU will have a material effect on our business operations and consolidated financial statements.
2. Cash and due from banks:
Historically the Bank was required to maintain average reserve balances in cash or on deposit with the Federal Reserve Bank. On March 26, 2020, the Federal Reserve Bank reduced the reserve percentages to 0%. There was no required reserve at December 31, 2020 and 2019. In addition, the Bank’s other correspondents may require average compensating balances as part of their agreements to provide services. The Bank maintains balances with correspondent banks that may exceed federal insured limits, which management considers to be a normal business risk.
3. Investment securities:
The amortized cost and fair value of investment securities available-for-sale
aggregated by investment category at December 31, 2020 and 2019 are summarized as follows:
December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
State and municipals:
Taxable
$ 22,317
$
$
$ 22,574
Tax-exempt
17,988
18,395
Mortgage-backed securities:
U.S. Government agencies
26,051
26,991
U.S. Government-sponsored enterprises
24,627
25,052
Corporate debt obligations
10,750
10,683
Total
$ 101,733
$ 2,261
$
$ 103,695
December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
State and municipals:
Taxable
$ 24,365
$
$
$ 24,824
Tax-exempt
4,260
4,333
Mortgage-backed securities:
U.S. Government agencies
36,024
36,134
U.S. Government-sponsored enterprises
22,422
22,645
Corporate debt obligations
3,500
3,311
Total
$ 90,571
$ 1,098
$
$ 91,247
The Company had a net unrealized gain of $1,962, net of deferred income taxes of $412 at December 31, 2020, and a net unrealized gain of $534, net of deferred income taxes of $142 at December 31, 2019. Proceeds from the sale of investment securities available-for-sale
amounted to $27,812 in 2020. Gross gains of $826 and gross losses of $11 were realized from the sale of securities in 2020. Income tax benefits applicable to net realized losses amounted to $171 in 2020. In 2019, proceeds from the sale of investment securities available-for-sale
amounted to $30,232, with gross gains of $321 and gross losses of $343 realized from the sales. Income tax benefits applicable to net realized losses amounted to $5 in 2019.
The maturity distribution of the fair value, which is the net carrying amount of the debt securities classified as available-for-sale
at December 31, 2020, is summarized as follows:
December 31, 2020
Fair
Value
Within one year
$
After one but within five years
8,727
After five but within ten years
14,889
After ten years
27,834
51,652
Mortgage-backed securities
52,043
Total
$ 103,695
Securities with a carrying value of $71,676 and $63,389 at December 31, 2020 and 2019, respectively, were pledged to secure public deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case
basis. At December 31, 2020 and 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at December 31, 2020 and 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
Less Than 12 Months
12 Months or More
Total
December 31, 2020
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
State and municipals:
Taxable
$ 11,586
$
$
$
$ 11,586
$
Tax-exempt
1,737
1,737
Mortgage-backed securities:
U.S. Government agencies
5,960
5,960
U.S. Government-sponsored enterprises
Corporate debt obligations
3,378
3,378
Total
$ 19,283
$
$ 3,378
$
$ 22,661
$
Less Than 12 Months
12 Months or More
Total
December 31, 2019
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
State and municipals:
Taxable
$ 1.280
$
$
$
$ 1,280
$
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
15,799
15,799
U.S. Government-sponsored enterprises
3,245
3,245
Corporate debt obligations
3,311
3,311
Total
$ 17,079
$
$ 6,556
$
$ 23,635
$
The Company had 16 investment securities, consisting of
nine taxable state municipal obligations, three tax-exempt
state municipal obligations, three mortgage-backed securities and one 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. Management does not consider the unrealized losses on the debt securities as a result of 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 any of the unrealized losses to be OTTI at December 31, 2020.
The Company had 22 investment securities, consisting of
two taxable state and municipal obligations, 19 mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, four mortgage-backed securities and one corporate obligation were in a continuous unrealized loss position for twelve months or more.
4. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at December 31, 2020 and 2019 are summarized as follows. Net deferred
loan costs were $701 and $1,129 at December 31, 2020 and 2019, respectively.
December 31
Commercial
$ 359,080
$ 118,658
Real estate:
Construction
73,402
61,831
Commercial
502,495
455,901
Residential
197,596
207,354
Consumer
6,666
8,365
Total
$ 1,139,239
$ 852,109
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. The Company had $251,810 of PPP loans, net of unearned fees of $5,075, included in commercial loans at December 31, 2020. The Company is utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to meet the funding needs of its borrowers of PPP loans.
Additionally, the Company is working with borrowers impacted by COVID-19 and providing modifications to include interest only deferral or principal and interest deferral up to 180 days. The majority of deferrals approved by the Company were 90 days or less. The modifications are excluded from troubled debt restructuring classification under the CARES Act. The Company modified 325 commercial and 176 consumer loans with outstanding balances of $256,422 at time of deferral, during the year ended December 31, 2020. As of December 31, 2020, 19 modified loans remained on deferral with an outstanding balance of $21,854.
Loans outstanding to directors, executive officers, principal stockholders or to their affiliates totaled $17,800 and $9,518 at December 31, 2020 and 2019, respectively. Advances and repayments during 2020, totaled $15,880 and $7,598, respectively. There were no related party loans that were classified as nonaccrual, past due, or restructured or considered a potential credit risk at December 31, 2020 and 2019.
At December 31, 2020, the majority of the Company’s loans were at least partially secured by real estate located in Central and Southwestern Pennsylvania. Therefore, a primary concentration of credit risk is directly related to the real estate market in these areas. Changes in the general economy, local economy or in the real estate market could affect the ultimate collectability of this portion of the loan portfolio. Management does not believe there are any other significant concentrations of credit risk that could affect the loan portfolio.
The changes in the allowance for loan losses account by major classification of loan for the years ended December 31, 2020 and 2019 are summarized as follows:
Real Estate
December 31, 2020
Commercial
Construction
Commercial
Residential
Consumer
Unallocated
Total
Allowance for loan losses:
Beginning Balance January 1, 2020
$ 1,953
$
$ 3,115
$ 1,820
$
$
$ 7,516
Charge-offs
(909 )
(595 )
(2 )
(333 )
(1,839 )
Recoveries
Provisions
3,913
6,282
Ending balance
$ 1,705
$ 1,117
$ 6,494
$ 2,427
$
$
$ 12,200
Real Estate
December 31, 2019
Commercial
Construction
Commercial
Residential
Consumer
Unallocated
Total
Allowance for loan losses:
Beginning Balance January 1, 2019
$ 1,162
$
$ 3,298
$ 1,286
$
$
$ 6,348
Charge-offs
(1,128 )
(254 )
(26 )
(476 )
(1,884 )
Recoveries
Provisions
1,435
(148 )
2,406
Ending balance
$ 1,953
$
$ 3,115
$ 1,820
$
$
$ 7,516
The allocation of the allowance for loan losses and the related loans by major classifications of loans at December 31, 2020 and December 31, 2019 is summarized as follows:
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
$
$
$ 12,200
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
1,705
1,117
6,494
2,427
12,200
Ending balance: purchased credit impaired loans
$
$
$
$
$
$
$
Loans 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
$
$
$
$
$
$
$
Real Estate
December 31, 2020
Commercial
Construction
Commercial
Residential
Consumer
Unallocated
Total
Allowance for loan losses:
Ending balance
$ 1,953
$
$ 3,115
$ 1,820
$
$
$ 7,516
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
1,241
2,897
1,820
6,586
Ending balance: purchased credit impaired loans
$
$
$
$
$
$
$
Loans receivable:
Ending balance
$ 118,658
$ 61,831
$ 455,901
$ 207,354
$ 8,365
$
$ 852,109
Ending balance: individually evaluated for impairment
2,260
1,224
2,085
5,569
Ending balance: collectively evaluated for impairment
116,390
61,831
453,156
205,026
8,365
844,768
Ending balance: purchased credit impaired loans
$
$
$ 1,521
$
$
$
$ 1,772
The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at December 31, 2020 and 2019:
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
December 31, 2019:
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial
$ 109,190
$ 5,992
$ 3,476
$
$ 118,658
Real estate:
Construction
61,678
61,831
Commercial
430,771
9,271
15,859
455,901
Residential
203,381
1,437
2,536
207,354
Consumer
8,365
8,365
Total
$ 813,385
$ 16,853
$ 21,871
$
$ 852,109
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2020 and 2019. Purchased credit impaired loans are excluded from the aging and nonaccrual loan schedules.
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
$
$
$
$
$ 358,496
$
$ 359,080
Real estate:
Construction
73,402
73,402
Commercial
1,238
4,063
5,301
496,785
502,118
Residential
2,125
2,993
5,264
191,299
197,433
Consumer
6,614
6,666
Total
$ 3,449
$ 7,077
$
$ 10,682
$ 1,126,596
$ 1,421
$ 1,138,699
Purchased credit impaired loans
Total Loans
$ 1,139,239
Accrual Loans
December 31, 2019
30-59 Days
Past Due
60-89 Days
Past Due
90 or More
Days Past
Due
Total Past
Due
Current
Nonaccrual
Loans
Total Loans
Commercial
$
$
$
$
$ 117,354
$ 1,159
$ 118,650
Real estate:
Construction
61,822
61,831
Commercial
453,774
454,380
Residential
3,402
4,240
202,202
207,111
Consumer
8,240
8,365
Total
$ 3,779
$
$
$ 4,658
$ 843,392
$ 2,287
$ 850,337
Purchased credit impaired loans
1,772
Total Loans
$ 852,109
The following tables summarize information concerning impaired loans including purchase credit impaired loans as of and for the years ended December 31, 2020 and 2019, by major loan classification:
For the Year Ended
December 31, 2020
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance:
Commercial
$ 1,565
$ 1,675
$ 1,356
$
Real estate:
Construction
Commercial
6,821
6,821
4,392
Residential
2,657
2,787
2,493
Consumer
Total
11,043
11,283
8,241
With an allowance recorded:
Commercial
Real estate:
Construction
Commercial
Residential
Consumer
Total
Commercial
1,565
1,675
1,917
Real estate:
Construction
Commercial
6,821
6,821
4,783
Residential
2,657
2,787
2,493
Consumer
Total
$ 11,043
$ 11,283
$ 9,193
$
For the Year Ended
December 31, 2019
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance:
Commercial
$ 1,147
$ 1,257
$
$
Real estate:
Construction
Commercial
1,963
1,963
3,124
1,456
Residential
2,329
2,467
2,397
Consumer
Total
5,439
5,687
6,169
2,289
With an allowance recorded:
Commercial
1,121
1,121
$
Real estate:
Construction
Commercial
Residential
Consumer
Total
1,903
2,057
1,434
Commercial
2,268
2,378
1,333
Real estate:
Construction
Commercial
2,745
2,899
3,782
1,473
Residential
2,329
2,467
2,488
Consumer
Total
$ 7,342
$ 7,744
$
$ 7,603
$ 2,306
For the years ended December 31, interest income, rela
ted to impaired loans, would have been $108 in 2020 and $163 in 2019 had the loans been current and the terms of the loans not been modified.
At and for the year ended December 31, 2020, there were nine loans modified as troubled debt restructuring and 20 restructured loans totaling $9,985. At and for the year ended December 31, 2019, there was one loan modified as troubled debt restructuring and 14 restructured loans totaling $2,701.
The following tables present the number of loans and recorded investment in loans restructured and identified as troubled debt restructurings for the years ended December 31, 2020 and 2019. Defaulted loans are those which are 30 days or more past due for payment under the modified terms.
December 31, 2020
Number of
Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Recorded
Investment
Commercial
$ 1,042
$ 1,042
$
Commercial real estate
6,063
6,063
6,243
Residential real estate
December 31, 2019
Number of
Contracts
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Recorded
Investment
Residential real estate
$
$
$
During 2020, there was
one default on loans restructured, totaling $
265.
5. Off-balance
sheet financial instruments:
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 in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, unused portions of lines of credit and standby letters of credit 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 for on-balance
sheet instruments. We record a valuation allowance for off-balance
sheet credit losses, if deemed necessary, separately as a liability. The allowance was $93 and $89 at December 31, 2020 and 2019, respectively.
The contractual amounts of off-balance
sheet commitments at December 31, 2020 and 2019 are summarized as follows:
December 31
Commitments to extend credit
$ 70,474
$ 105,403
Unused portions of lines of credit
75,517
66,114
Standby letters of credit
6,577
4,726
$ 152,568
$ 176,243
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Unused portions of lines of credit, including home equity and overdraft protection agreements, are commitments for possible future extensions of credit to existing customers. Unused portions of home equity lines are collateralized and generally have fixed expiration dates. Overdraft protection agreements are uncollateralized and usually do not carry specific maturity dates. Unused portions of lines of credit ultimately may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all standby letters of credit expire within twelve months. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending other loan commitments. The Company requires collateral supporting these standby letters of credit as deemed necessary. The carrying value of the liability for the Company’s obligations under guarantees for standby letters of credit was not material at December 31, 2020 and 2019.
6. Premises and equipment, net:
Premises and equipment at December 31, 2020 and 2019 are summarized as follows:
December 31
Land
$ 4,349
$ 4,309
Premises and leasehold improvements
14,955
15,413
Furniture, fixtures and equipment
6,152
6,352
25,456
26,074
Less: accumulated depreciation
7,309
8,222
$ 18,147
$ 17,852
Depreciation and amortization included in noninterest expense amounted to $1,186 and $1,248 in 2020 and 2019, respectively.
7. Intangible assets, net:
The gross carrying amount and accumulated amortization related to intangible assets at December 31, 2020 and 2019 are presented below:
December 31
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$ 4,558
$ 2,942
$ 4,558
$ 2,289
Customer list intangible
1,082
1,082
Trade name intangibles
Total intangible assets
$ 6,136
$ 4,218
$ 6,136
$ 3,400
Amortization expense for intangible assets totaled $818 and $773 for the years ended 2020 and 2019, respectively.
Riverview estimates the amortization expense for amortizable intangibles as follows:
$
Thereafter
$ 1,918
8. Goodwill:
The following table summarizes activity related to the carrying value of goodwill for the year ended December 31, 2020:
Balance, January 1, 2020
$ 24,754
Less: Goodwill impairment
24,754
Balance, December 31, 2020
$
Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the beginning of the second quarter of 2020, as a result of the onset of the COVID-19 pandemic, the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter of 2020. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was more-likely-than-not the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.
The Company utilized multiple valuations approaches, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the quantitative test, the Company recognized an impairment charge equal to the entire amount of its recorded goodwill on the balance sheet at June 30, 2020 totaling $24,754.
9. Other assets:
The components of other assets at December 31, 2020 and 2019 are summarized as follows:
December 31
Other real estate owned
$
$
Bank owned life insurance
31,425
30,647
Restricted equity securities
1,759
Deferred tax assets
3,907
4,272
Lease right-of-use
assets
2,278
3,856
Other assets
8,629
6,082
Total
$ 48,420
$ 45,929
10. Leases:
At December 31, 2020, the Company leased 11 of its 30 locations
with
remaining terms ranging from 1 to 34 years, including extension options that the Company is reasonably certain will be exercised. For the year ended December 31, 2020 and 2019, right-of-use assets were $2,278 and $3,856, and lease liabilities were $2,322 and $3,892, respectively. Lease terminations from branch closures accounted for reductions of $908 in right-of-use assets and $927 in lease liabilities in 2020. For the year ended December 31, 2020 and 2019, operating lease cost totaled $1,544 and $726, respectively, with $776 of the increase due to lease terminations from branch closures. The table below summarizes other information related to our operating leases:
Years Ended December 31
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
$
ROU assets obtained in exchange for lease liabilities
4,430
Weighted average remaining lease term - operating leases, in years
8.82
9.16
Weighted average discount rate - operating leases
2.87%
3.00%
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconcilement to the Company’s current lease liability.
$
Thereafter
Total lease payments
2,731
Less imputed interest
(409 )
$ 2,322
11. Deposits:
The major components of interest-bearing and noninterest-bearing deposits at December 31, 2020 and 2019 are summarized as follows:
December 31
Interest-bearing deposits:
Money market accounts
$ 130,769
$ 101,373
Now accounts
317,775
273,798
Savings accounts
158,293
132,150
Time deposits
235,023
285,754
Total interest-bearing deposits
841,860
793,075
Noninterest-bearing deposits
173,600
147,405
Total deposits
$ 1,015,460
$ 940,480
The aggregate amount of time deposits that met or exceeded the FDIC insurance limit of $250 was $19,997 at December 31, 2020 and $26,059 at December 31, 2019.
The aggregate amounts of maturities for all time deposits at December 31, 2020, are summarized as follows:
$ 114,685
64,323
37,544
7,351
5,366
Thereafter
5,754
$ 235,023
The amount of related party deposits totaled $2,305 at December 31, 2020 and $2,488 at December 31, 2019.
The aggregate amount of deposits reclassified as loans was $137 at December 31, 2020, and $169 at December 31, 2019. Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit losses.
On January 15, 2021, the Company announced the execution of a definitive agreement whereby AmeriServ Financial, Inc. will acquire Citizens Neighborhood Bank’s (“CNB”), an operating division of Riverview Bank, branch and deposit customers in Meyersdale, as well as the deposit customers of CNB’s leased branch in the Borough of Somerset. The transaction is expected to close in the second quarter of 2021, subject to regulatory approval and other customary closing conditions. As December 31, 2020, the related deposits total $47.9 million
and will be acquired for a 3.71% deposit premium and are considered as held for assumption within total deposits
.
12. Short-term borrowings:
Short-term borrowings consist of overnight or less than 30-day
borrowings from the FHLB-Pgh,
ACBB and Pacific Coast Bankers Bank (“PCBB”). The Company had no outstanding short-term borrowings at and for the years ended December 31, 2020 and December 31, 2019. Short-term borrowings at and for the year ended December 31, 2020 are summarized as follows:
At and for the year ended December 31, 2020
Ending
Balance
Average
Balance
Maximum
Month-End
Balance
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at End
of the Year
FHLB-Pgh
Open Repo Plus advances
$
$ 7,311
$
0.38 %
Total
$
$ 7,311
$
0.38 %
The Bank has an agreement with the FHLB-Pgh
which allows for borrowings up to its maximum borrowing capacity based on a percentage of qualifying collateral assets. At December 31, 2020, the Bank’s available maximum borrowing capacity was $415,487. Advances with the FHLB-Pgh
are secured under terms of a blanket collateral agreement by a pledge of FHLB-Pgh
stock and certain other qualifying collateral, such as investments and mortgage-backed securities and mortgage loans. Interest accrues daily on the FHLB-Pgh
advances based on rates of the FHLB-Pgh
discount notes. This rate resets each day.
In addition, the Bank has unsecured line of credit agreements with ACBB and PCBB. The maximum borrowing capacity on these credit arrangements were $10,000 at ACBB and $50,000 at PCBB at December 31, 2020. There were no amounts outstanding on these lines of credit at December 31, 2020 and 2019. Interest on these borrowings accrue daily based on the daily federal funds rate.
13. Long-term debt:
Long-term debt totaled $228,765 at December 31, 2020 and $6,971 at December 31, 2019. For the year ended December 31, long-term debt averaged $147,374 in 2020 and $6,932 in 2019. The increase in long-term debt is primarily attributable to advances taken through the Federal Reserve Board’s PPPLF, whereby loans originated through the PPP program can be pledged as security to facilitate advancements made through the program. As December 31, 2020, we had outstanding borrowing through the program of $176,904 at a rate of 0.35%. The maturity of the PPPLF borrowings have a maturity date based on the term of the PPP loans securing the borrowing, which is 24 months, unless the PPP loans are forgiven prior to the stated maturities.
At the end of March 2020, we borrowed $20,000 of term debt from the FHLB to take advantage of reductions in general market rates. These funds were used to bolster our liquidity position and provide necessary funding for new loans. The amount of the term debt was spread over three, five and seven-year maturities. The FHLB borrowing had a weighted average rate of 0.90% and weighted average life of five years. As a FHLB member, we are required to buy a portion of stock in FHLB for each advance. The adjusted weighted average cost of the borrowing decreases to 0.57% considering the addition of the dividend rate on the FHLB stock at the time the borrowing was granted.
As a result of the merger with CBT Financial Corp. (“CBT”), the Company assumed the subordinated debentures that were recorded as of the October 1, 2017 effective date. A trust issued $5,155 of floating rate trust preferred securities in 2003 as part of a pooled offering of such securities. The interest rate prior to entering into a fixed interest rate swap in 2020 adjusted quarterly to the three-month LIBOR rate plus 2.95%. CBT issued subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2008 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033. In 2005 a trust formed by CBT issued $4,124 of fixed rate trust preferred securities as part of a pooled offering of such securities. CBT issued subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2010 at a price of 100% of face value. Interest payments on the debentures may be deferred at any time at the election of the Company for up to 20 consecutive quarterly periods. Interest on the debentures will accrue during the extension period, and all accrued principal and interest must be paid at the end of the extension period. During an extension period, the Company may not declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to any of the Company’s capital stock.
On October 6, 2020, the Company announced the completion of its private placement of $25,000 of its 5.75% Fixed to Floating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The Notes will have a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus 563 basis points, payable quarterly until maturity. The Company may redeem the Notes at par, in whole or in part, at its option, anytime beginning on October 15, 2025
. The primary purpose of the offering is to enhance the safety and soundness of the Bank’s capital position given the uncertain impact of the COVID-19
pandemic and to support growth, for general corporate purposes and to take advantage of potential strategic opportunities. 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.
Long-term debt consisting of the following advances at December 31, 2020 and 2019 are as follows:
Interest Rate
Loan Type
Maturity
Fixed
Adjustable
PPPLF
May 3, 2022
0.35 %
$ 176,904
FHLB
March 10, 2023
0.75 %
6,500
FHLB
March 10, 2025
0.88 %
7,000
FHLB
March 10, 2027
1.07 %
6,500
Subordinated Debt - Trust Preferred I
September 17, 2033
3.18 %
4,420
$ 4,229
Subordinated Debt - Trust Preferred II
September 15, 2035
1.76 %
2,913
2,742
Subordinated Debt
October 15, 2030
5.75 %
24,528
$ 228,765
$ 6,971
Maturities of long-term debt, by contractual maturity, in years subsequent to December 31, 2020 are as follows:
$ 176,904
6,500
7,000
Thereafter
38,361
$ 228,765
14. Derivative Instruments and Hedging Activities:
As of and for the year ended December 31, 2020, the Company’s derivative instruments and hedging activities consisted entirely of interest rate swap hedges on its holdings of trust preferred securities. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments. The Company entered into interest rate swaps having a notional amount of $9,279 and a 10-year
weighted average rate of 2.99% in June 2020. The interest rate swap had a weighted average remaining maturity of 9.5 years and estimated fair value of $172 at December 31, 2020. The swap was determined to be effective at December 31, 2020. The Company expects the hedge to remain effective during the remaining term of the swap. The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges was reported in other comprehensive income.
15. Fair value of financial instruments:
Assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019 are summarized as follows:
Fair Value Measurement Using
December 31, 2020
Amount
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
State and Municipals:
Taxable
$ 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
Fair Value Measurement Using
December 31, 2019
Amount
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
State and Municipals:
Taxable
$ 24,824
$ 24,824
Tax-exempt
4,333
4,333
Mortgage-backed securities:
U.S. Government agencies
36,134
36,134
U.S. Government-sponsored enterprises
22,645
22,645
Corporate debt obligations
3,311
3,311
Total
$ 91,247
$ 91,247
Assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2020 and 2019 are summarized as follows:
Fair Value Measurement Using
December 31, 2020
Amount
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Other real estate owned
$
$
Total
$
$
Fair Value Measurement Using
December 31, 2019
Amount
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
Other real estate owned
$
$
Impaired loans, net of related allowance
Total
$ 1,055
$ 1,055
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
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
$
Appraisal of collateral
Appraisal adjustments
20.0% to 14.0% (8.4%)
Liquidation expenses
10.0% to 10.0% (10.0%)
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019
Fair Value
Estimate
Valuation Techniques
Unobservable Input
Range (Weighted Average)
Other real estate owned
$
Appraisal of collateral
Appraisal adjustments
42.0% to 60.0% (52.0%)
Liquidation expenses
10.0% to 10.0% (10.0%)
Impaired loans
$
Appraisal of collateral
Appraisal adjustments
10.0% to 50.0% (22.0%)
Liquidation expenses
9.5% to 12.3% (8.8%)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
The carrying and fair values of the Company’s financial instruments at December 31, 2020 and 2019 and their placement within the fair value hierarchy are as follows:
Fair Value Hierarchy
December 31, 2020
Carrying
Amount
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents
$ 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 loans (1)
1,127,039
1,116,618
$ 1,116,618
Accrued interest receivable
4,216
4,216
3,638
Restricted equity securities
1,759
1,759
Financial liabilities:
Deposits
$ 1,015,460
$ 1,018,529
$ 1,018,529
Long-term borrowings
228,765
231,748
231,748
Accrued interest payable
1,038
1,038
1,038
Interest rate swap hedges
Fair Value Hierarchy
December 31, 2019
Carrying
Amount
Fair Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
Cash and cash equivalents
$ 50,348
$ 50,348
$ 50,348
Investment securities available-for-sale
91,247
91,247
$ 91,247
Loans held for sale
Net loans (1)
844,593
836,074
$ 836,074
Accrued interest receivable
2,414
2,414
1,953
Restricted equity securities
Financial liabilities:
Deposits
$ 940,480
$ 940,546
$
940,546
Long-term borrowings
6,971
6,971
6,971
Accrued interest payable
1)
The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU No. 2016-01
where the fair value of loans as of December 31, 2020 and December 31, 2019 was measured using an exit price notion
16. Revenue recognition:
ASU No. 2014-09
“Revenue from Contracts with Customers (Topic 606)” does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and other fees. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope
of Topic 606 are discussed below.
Service Charges, Fees and Commissions
Service charges on deposit accounts consist of monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized
, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. Such income is presented net of network expenses as the Company acts as an agent in these transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company
ATM, or a non-Company
cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisor fees from wealth management products, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees or trailers from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from wealth management products is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.
Trust and Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end
market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
The following presents noninterest income, segregated by revenue streams in-scope
and out-of-scope
of Topic 606, for the years ended December 31, 2020 and 2019.
Year Ended December 31
Noninterest Income:
In-scope
of Topic 606:
Service charges, fees and commissions
$ 4,133
$ 5,186
Trust and asset management
1,837
2,020
Noninterest income (in-scope
of Topic 606)
5,970
7,206
Noninterest income (out-of-scope
of Topic 606)
2,803
1,308
Total noninterest income
$ 8,773
$ 8,514
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration, resulting in a contract receivable, or before payment is due, resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end
revenue accruals such as asset management fees based on month-end
market values. Consideration is often received immediately or shortly after the Company
satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2020 and 2019, the Company did not have any significant contract balances.
17. Employee Benefit Plans:
Defined Contribution Plan:
The Bank maintains a contributory 401(k) retirement plan for all eligible employees. Currently, the Bank’s policy is to match 100% of the employee’s voluntary contribution to the plan up to a maximum of 4% of the employees’ compensation. Additionally, the Bank may make discretionary contributions to the plan after considering current profits and business conditions. The amount charged to expense in 2020 and 2019 totaled $523 and $505, respectively. Of these amounts, no discretionary contributions were made in 2020 and 2019.
Director Emeritus Plan:
Effective November 2, 2011, a Director Emeritus Agreement (the “Agreement”) was entered into by and between the Company, the Bank and certain Directors. In order to promote orderly succession of the Company’s and Bank’s Board of Directors, the Agreement defines the benefits the Company is willing to provide upon the termination of service to those individuals who served as Directors of the Company and Bank as of December 31, 2011, where the Company will pay the Director $15 per year for services performed as a Director Emeritus, which may be increased at the sole discretion of the Board of Directors. The agreement further states that the benefit is to be paid to a Director Emeritus over five years, in 12 monthly installments:
•
upon termination of service as a Director on or after the age of 65, provided the Director agrees to provide certain ongoing services for Riverview;
•
upon termination of service as a Director due to a disability prior to age 65;
•
upon a change of control; or
•
upon the death of a Director after electing to be a Director Emeritus.
Expenses recorded under the terms of this agreement were $75 for each of the years ended December 31, 2020 and 2019, respectively.
Deferred Compensation Agreements:
The Bank maintains 12 Supplemental Executive Retirement Plan (“SERP”) agreements that provide specified benefits to certain key executives. The agreements were specifically designed to encourage key executives to remain as employees of the Bank. The agreements are unfunded, with benefits to be paid from the Bank’s general assets. After normal retirement, benefits are payable to the executive or his/her beneficiary in equal monthly installments for a period of 15 years for nine of the executives and 20 years for three of the executives. There are provisions for death benefits should a participant die before his/her retirement date. These benefits are also subject to change of control and other provisions.
The Bank maintains a “Director Deferred Fee Agreement” (“DDFA”) which allows electing directors to defer payment of their directors’ fees until a future date. In addition, the Bank maintains an “Executive Deferred Compensation Agreement” (“EDCA”) with eight of its current and former executives. This agreement allows the executives of the Bank to defer payment of their base salary, bonus and performance-based compensation until a future date. For both types of deferred fee agreements during the deferral period, the estimated present value of the future benefits is accrued over the effective dates of the agreements using an interest factor that is evaluated and approved by the compensation committee of the Board of Directors on an annual basis. The agreements are unfunded, with benefits to be paid from the Bank’s general assets.
The accrued benefit obligations for all the plans total $4,582 at December 31, 2020 and $4,862 at December 31, 2019 and are included in other liabilities. Expenses relating to these plans totaled $242 and $643 in the years ended December 31, 2020 and 2019, respectively.
2009 Stock Option Plan:
The Company has a nonqualified stock option plan to advance the development, growth and financial condition of the Company. This plan provides incentives through participation in the appreciation of its common stock in order to secure, retain and motivate directors, officers and key employees and align such person’s interests with those of its shareholders. A total of 350,000 shares were originally authorized under the stock option plan.
The vesting
schedule for all option grants is a seven-year cliff, which means that the options are 100% vested in the seventh year following the grant date while the expiration date of all options is ten years following the grant date. The Plan states that upon the date of death of a participant, all awards granted pursuant to the agreement for that participant shall become fully vested and remain exercisable for the option grant’s remaining term. All stock options, except for 1,500 stock options granted during 2018, were fully vested and exercisable at December 31, 2020.
The following table summarizes the stock option activity for the years ended December 31, 2020 and 2019:
Option
Grants
Weighted
Average
Exercise
Price
Option
Grants
Weighted
Average
Exercise
Price
Outstanding - January 1
,
172,964
$ 10.66
263,480
$ 10.62
Granted
Forfeited
(6,150 )
12.98
Expired
(34,250 )
10.60
Exercised
(50,116 )
10.22
Outstanding - December 3
1,
172,964
$ 10.66
172,964
$ 10.66
Options vested and exercisable at year-end
171,464
171,464
Range of exercise price
$ 9.75 - $13.05
$ 9.75 - $13.05
Remaining contractual life
3.42 years
4.42 years
There were no stock options granted during 2020 and 2019 since the Plan expired January 7, 2019.
During the year ended December 31, 2020, no stock options were exercised.
There was no intrinsic value associated with 172,964 options outstanding at December 31, 2020, where the market value of the stock as of the close of business at year end was $9.15 per share as compared with the option exercise price of $9.75 for 21,664 options, $10.00 for 85,600 options, $10.35 for 12,500 options, $10.60 for 16,000 options, $11.94 for 15,000 options, $12.25 for 2,500, $12.58 for 1,500 options and $13.05 for 18,200 options.
There was intrinsic value associated with 153,264 options outstanding at December 31, 2019, where the market value of the stock as of the close of business at year end was $12.49 per share as compared with the option exercise price of $9.75 for 21,664 options, $10.00 for 85,600 options, $10.35 for 12,500 options, $10.60 for 16,000 options, $11.94 for 15,000 options and $12.25 for 2,500 options. There was no intrinsic value associated with 19,700 options outstanding at December 31, 2019, where the market value of the stock as of the close of business at year end was $12.49 per share as compared with the option exercise price of $12.58 for 1,500 options and $13.05 for 18,200 options.
The Company accounts for these options in accordance with GAAP, which requires that the fair value of the equity awards be recognized as compensation expense over the period during which the employee is required to provide service in exchange for such an award. The Company policy has been to amortize compensation expense over the vesting period, or seven years. The Company recognized no compensation expense for stock options for the years ended December 31, 2020 and December 31, 2019. As of December 31, 2020, the Company had no unrecognized compensation expense associated with the stock options since all of the options granted prior to 2018 were fully vested in 2017 as a result of the change in control associated with the merger with CBT.
2019 Equity Incentive Plan:
The Company has a non-qualified
equity incentive plan that was approved by the shareholders at the annual meeting held on June 13, 2019. The purpose of the plan is to promote the long-term success of the Company by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company’s shareholders through the ownership of common stock of the Company. The types of awards that may be granted under the Plan include: incentive stock options, non-qualified
stock options, restricted stock awards, restricted stock units and performance awards. A total of 1,140,000 shares of common stock were reserved under the Plan, of which a maximum of 1,140,000 shares of common stock may be issued pursuant to grants of stock options but only a maximum of 570,000 shares of common stock may be issued pursuant to grants of restricted stock or restricted stock units. To the extent a restricted stock award or restricted stock unit is granted, the number of shares available as stock options will be reduced by two shares of each share represented by a restricted stock award agreement or restricted stock unit agreement. The maximum number of shares of common stock pursuant to any type of award available under the Plan that may be granted to any one employee shall not exceed 200,000 shares. A director may be granted an award of non-qualified
stock options, restricted stock awards, restricted stock units, or a combination of such awards provided that the aggregate grant date fair value shall not exceed $50,000.
The duration of the Plan is 10 years from the approval date.
The following table summarizes the award activity for the years ended December 31, 2020 and 2019:
Restricted
Stock
Awards
Fair
Market
Value
Restricted
Stock
Awards
Fair
Market
Value
Outstanding - January 1,
14,929
$ 12.49
-
Granted
16,390
9.15
14,929
$ 12.49
Forfeited and retired
(2,512 )
12.49
Awards vested at year-end
(7,828 )
12.49
-
Outstanding - December 31,
20,979
$ 9.88
14,929
$ 12.49
Remaining contractual life
1.11 years
2.17 years
Restricted stock awards granted in 2020 and 2019 provide the participant with the right to vote the shares of restricted stock awarded at any time and to receive dividends once the shares are vested. The fair value of the restricted stock awards granted was the closing price of the Company’s common stock as of the date of grant. The expense associated with the grants made December 31, 2020 totaled $150 and $186 for the grants made December 31, 2019 and are respectively expensed over the vesting periods of one year for the awards granted to directors and three equal annual installments for awards granted to employees. The amount expensed for the year ended December 31, 2020 totaled $105 and no expense was recorded for the year ended December 31, 2019.
Employee Stock Purchase Plan:
The Company has an Employee Stock Purchase Plan (“ESPP”), whereby employees may purchase up to 170,000 shares of common stock of the Company, at a discount of up to a 15%. On April 15, 2015, the Company filed a Registration Statement on Form S-8,
to register 75,000 shares of common stock that the Company may issue to the ESPP. On March 27, 2020, the Company filed a Registration Statement on Form S-8,
to register another 95,000 shares of common stock that the Company may issue to the ESPP. Common shares acquired through the ESPP totaled 29,392 shares in 2020 and 21,733 shares in 2019.
Defined Benefit Pension Plan and Post Retirement Benefit Plan:
As a result of the consolidation with Union, the Company took over Union’s noncontributory defined benefit pension plan, which substantially covered all Union employees. The plan benefits were based on average salary and years of service. Union elected to freeze all benefits earned under the plan effective January 1, 2007.
The Company also assumed responsibility of Citizens’ noncontributory defined benefit pension plan effective as of the December 31, 2015 merger date. The plan substantially covered all Citizens employees and the plan benefits were based on average salary and years of service. Citizens elected to freeze all benefits earned under the plan effective January 1, 2013.
As a result of the merger of equals effective October 1, 2017, the Company assumed responsibility of CBT’s postretirement benefits plan, which is an unfunded postretirement benefit plan covering health insurance costs and postretirement life insurance benefits for certain retirees.
The Company accounts for the defined benefit pension plan and the postretirement benefits plan in accordance with FASB ASC Topic 715, “Compensation-Retirement Plans”. This guidance requires the Company to recognize the funded status, which is the difference between the fair value of the plan assets and the projected benefit obligation of the benefit plan.
The following table presents the plans’ funded status and the amounts recognized in the Company’s consolidated financial statements for 2020 and 2019. The measurement date, for purposes of these valuations, was December 31, 2020 and 2019.
Benefit Plans
Obligations and funded status:
Change in benefit obligations:
Benefit obligation beginning January 1,
$ 8,202
$ 7,669
Interest cost
Benefits paid
(547 )
(548 )
Actuarial (gain)/loss
Benefit obligation at end of year
8,620
8,202
Change in plan assets:
Fair value of plan assets at January 1,
8,281
6,310
Adjustment to asset value at January 1
Actual return on plan assets
1,287
1,108
Contributions
1,411
Benefits paid
(547 )
(548 )
Fair value of plan assets at end of year
9,023
8,281
Funded status included in other liabilities
$
$
Amounts related to the plan that have been recognized in accumulated other comprehensive loss but not yet recognized as a component of net periodic pension cost are as follows for the years ended December 31:
Benefit Plans
Net loss
$ (951 )
$ (1,117 )
Income tax expense (benefit)
(235 )
Net amount recognized in other comprehensive loss
$ (751 )
$ (882 )
The amount of net periodic benefit credit expected to be accreted in 2021 is $226 for the pension plans.
Net periodic pension expense and postretirement benefit cost include the following components for the years ended December 31, 2020 and 2019:
Pension Benefits
Interest cost
$
$
Expected return on plan assets
(521 )
(410 )
Amortization of net loss
Net periodic pension cost (credit)
$ (149 )
$
Postretirement Life
Insurance Benefits
Service credit
$ (7 )
$ (7 )
Interest cost
Net periodic postretirement benefit credit
$ (5 )
$ (5 )
The accumulated benefit obligation was $8,620 at December 31, 2020 and $8,202 at December 31, 2019 for the pension benefit and postretirement benefit plans.
Pension Benefits
Union
Citizens
Postretirement Life
Insurance Benefits
Discount rate
3.22 %
4.22 %
3.22 %
4.22 %
3.25 %
4.25 %
Expected long-term rate of return on plan assets
6.50 %
6.75 %
6.50 %
6.75 %
The following summarizes the actuarial assumptions used for the Company’s pension plan and postretirement benefits plan:
•
For the pension plan, the selected long-term rate of return on plan assets was primarily based on the asset allocation of the plan’s assets. Analysis of the historic returns on these asset classes and projections of expected future returns were considered in setting the long-term rate of return.
•
The benefit offered under the postretirement benefits plan is fixed; therefore, the accumulated postretirement benefit obligation is not impacted by health care cost trends or the rate of compensation increase.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Pension
Benefits
Postretirement
Life Insurance
Benefits
$
$
2026 - 2030
2,310
Total
$
4,881
$
The Company’s pension plan asset allocations as of the year ends, by asset category, are as follows:
Pension
Benefits
Cash and cash equivalents
1.51
%
1.64
%
Equity
42.62
37.34
Fixed income
55.87
61.02
Total
100.00
%
100.00
%
The fair value of the pension plan assets at December 31, 2020 and 2019 by asset category are as follows:
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
$
Mutual fund - equity:
Large-cap
value
Large-cap
core
Mid-cap
core
Small-cap
core
International growth
International value
Large cap growth
Small / midcap growth
Mutual funds/ETFs - fixed income:
Fixed income - core plus
1,881
1,881
Intermediate duration
Long duration - Government credit
2,487
2,487
Long U.S. Treasury - ETF
Common /collective trusts - equity:
Large cap value
$
Total assets
$ 9,023
$ 8,641
$
Total
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$
$
Mutual fund - equity:
Large-cap
value
Large-cap
core
Mid-cap
core
Small-cap
core
International growth
International value
Large cap growth
Small / midcap growth
Mutual funds/ETFs - fixed income:
Fixed income - core plus
1,928
1,928
Intermediate duration
Long duration - Government credit
1,812
1,812
Long U.S. Treasury - ETF
Common /collective trusts - equity:
Large cap value
$
Total assets
$ 8,281
$ 7,936
$
The valuation used is based on quoted market prices provided by an independent third party.
The Company expects to contribute $5 to the CBT postretirement life insurance benefits plan for the fiscal year ending 2021.
18. Income taxes:
The current and deferred amounts of the provision for income taxes expense (benefit) for each of the years ended December 31, 2020 and 2019 are summarized as follows:
Year Ended December 31
Current
$
$ (308 )
Deferred
1,009
$
$
The components of the net deferred tax asset at December 31, 2020 and 2019 are summarized as follows:
December 31
Deferred tax assets:
Allowance for loan losses
$ 2,582
$ 1,535
Deferred compensation
1,021
Purchase accounting adjustments
Alternate minimum tax credit carryforwards
Minimum pension liability
Accrued expenses
Unrealized loss on investment securities available-for-sale
Low income housing credit carryforwards
1,063
Net operating loss carryforwards
Lease liabilities
Other
Total
6,507
6,809
Deferred tax liabilities:
Premises and equipment, net
Purchase accounting adjustments
Unrealized gain on investment securities available-for-sale
Benefit plans
Lease right of use
Cash flow hedge
Postretirement minimum
Other
Total
2,600
2,537
Net deferred tax asset
$ 3,907
$ 4,272
Management believes that future taxable income will be sufficient to utilize deferred tax assets. Core earnings of the Company will continue to support the recognition of the deferred tax asset based on future growth projections.
A reconciliation between the amount of the effective income tax expense and the income tax expense that would have been provided at the federal statutory rate of 21.0 percent for the years ended December 31, 2020 and December 31, 2019 is summarized as follows:
Year Ended December 31
Federal income tax at statutory rate
$ (4,401 )
$ 1,047
Adjustment for non-taxable
goodwill
5,025
Tax exempt interest
(245 )
(248 )
Bank owned life insurance income
(159 )
(160 )
Other, net
Total
$
$
20. Parent company financial statements:
Condensed Balance Sheets
December 31
Assets
Cash and cash equivalents
$ 10,503
$
Investment in bank subsidiary
118,881
124,560
Premises, net
Other assets
$
130,098
$
125,524
Liabilities and stockholders’ equity
Long-term borrowings
$ 31,860
$ 6,971
Other liabilities
Total Liabilities
32,666
7,414
Stockholders’ equity
97,432
118,110
$ 130,098
$ 125,524
Condensed Statements of Income (Loss) and Comprehensive Income (Loss)
December 31
Income, dividends from bank subsidiary
$ 1,400
$ 3,220
Interest expense
Income before equity in undistributed net income of subsidiary
2,706
Undistributed net income (loss) of subsidiary
(21,827 )
1,683
Noninterest expense
Net income (loss) before income taxes
(21,420 )
4,132
Income tax benefit
(209 )
(154 )
Net income (loss)
(21,211 )
4,286
Total comprehensive income (Loss)
$ (19,928 )
$ 6,557
Condensed Statements of Cash Flows
Year Ended December 31
Cash flows from operating activities:
Net income (loss)
$ (21,211 )
$ 4,286
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net (income) loss of subsidiary
21,827
(1,683 )
Amortization of assumed discount on long-term debt
Amortization of long-term debt issuance costs
(Increase) decrease in accrued interest receivable and other assets
(337 )
Increase (decrease) in accrued interest payable and other liabilities
Net cash provided by operating activities
2,830
Cash flows from investing activities:
Capitalization of subsidiary
(15,000 )
Net cash used in investing activities
(15,000 )
Cash flows from financing activities:
Proceeds from long-term debt
24,763
Proceeds from stock-based compensation
Proceeds from issuance of common stock
Dividends paid
(1,386 )
(3,209 )
Net cash provided by (used in) financing activities
24,013
(2,357 )
Increase in cash and cash equivalents
9,781
Cash and cash equivalents - beginning
Cash and cash equivalents - ending
$ 10,503
$
20. Regulatory matters:
In 2018, the Federal Reserve increased the asset limit to qualify as a small bank holding company from $1 billion to $3 billion. As a result, the Company met the eligibility criteria for a small bank holding company and was exempt from risk-based capital and leverage rules, including Basel III.
The Bank’s ability to pay a dividend up to the bank holding company in order to fund the payment of a dividend to shareholders is governed by Section 1302 of the Pennsylvania Banking Code of 1965 which states that the board of directors of an institution may only declare and pay dividends out of accumulated net earnings. 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.
The amount of funds available for transfer from the Bank to the Company in the form of loans and other extensions of credit is also limited. Under Federal Regulation, transfers to any one affiliate are limited to 10.0 percent of capital and surplus. At December 31, 2020, the maximum amount available for transfer from the Bank to the Company in the form of loans amounted to $128,364. At December 31, 2020 and 2019, there were no loans outstanding, nor were any advances made during 2020 and 2019.
On October 6, 2020, the Company announced the completion of its private placement of $25,000 of its 5.75% Fixed to Floating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The primary purpose of the offering is to enhance the safety and soundness of the Bank’s capital position given the uncertain impact of the COVID-19
pandemic and to support growth, for general corporate purposes and to take advantage of potential strategic opportunities. 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.
The Company and Bank are subject to certain regulatory capital requirements administered by the federal banking agencies, which are defined in Section 38 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s consolidated financial statements. In the event an institution is deemed to be undercapitalized by such standards, FDICIA prescribes an increasing amount of regulatory intervention, including the required institution of a capital restoration plan and restrictions on the growth of assets, branches or lines of business. Further restrictions are applied to the significantly or critically undercapitalized institutions including restrictions on interest payable on accounts, dismissal of management and appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention when the institution is deemed to be engaging in unsafe and unsound practices or receives a less than satisfactory examination report rating. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The Bank was categorized as “well capitalized” under the regulatory guidance at December 31, 2020 and 2019, based on the most recent notification from the Federal Deposit Insurance Corporation. To be categorized as well capitalized, the Bank must maintain certain minimum Tier I risk-based, total risk-based, Tier I Leverage and Common equity Tier I risk-based capital ratios as set forth in the following tables. The Tier I Leverage ratio is defined as Tier I capital to total average assets less intangible assets. There are no conditions or events since the most recent notification that management believes have changed the Bank’s category.
The Bank’s capital ratios and the minimum ratios required for capital adequacy purposes and to be considered well capitalized under the prompt corrective action provisions are summarized below for the years ended December 31, 2020 and December 31, 2019:
Actual
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
Well Capitalized under
Basel III
December 31, 2020:
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted assets:
Riverview Bank
$ 126,108
14.2 %
$ 93,462
>
10.5 %
$ 89,011
>
10.0 %
Tier 1 capital (to risk-weighted assets):
Riverview Bank
114,967
12.9
75,659
>
8.5
71,209
>
8.0
Tier 1 capital (to average total assets):
Riverview Bank
114,967
9.8
47,102
>
4.0
58,877
>
5.0
Common equity tier 1 risk-based capital (to risk-weighted assets):
Riverview Bank
114,967
12.9
62,308
>
7.0
57,857
>
6.5
Actual
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
Well Capitalized under
Basel III
December 31, 2019:
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital (to risk-weighted assets:
Riverview Bank
$ 104,010
12.4 %
$ 88,132
>
10.5 %
$ 83,936
>
10.0 %
Tier 1 capital (to risk-weighted assets):
Riverview Bank
96,405
11.5
71,345
>
8.5
67,148
>
8.0
Tier 1 capital (to average total assets):
Riverview Bank
96,405
9.1
42,489
>
4.0
53,112
>
5.0
Common equity tier 1 risk-based capital (to risk-weighted assets):
Riverview Bank
96,405
11.5
58,755
>
7.0
54,558
>
6.5
In November 2019, the Federal Financial Institution Examination Council published final rules implementing a simplified measure of capital adequacy for certain banking organizations that have less than $10 billion in total consolidated assets. Under the final rules, which went into effect on January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9%, off-balance-sheet
exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated
assets, are deemed “qualifying community banking organizations” and are eligible to opt into the “community bank leverage ratio framework.” A qualifying community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules, discussed below. The final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed “well capitalized” so long as the banking organization maintains a leverage capital ratio greater than 8%. A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports. We are currently evaluating the election to use the community bank leverage ratio framework and may make such an election in the future.
21. Contingencies:
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 be material in relation to the Company’s consolidated 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.
Neither the Company nor any of its property is subject to any material legal proceedings. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of pending and threatened lawsuits will have a material effect on the operating results or financial position of the Company.
22. 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 and has not identified any events that require recognition or disclosure in the consolidated financial statements. On January 15, 2021, the Company announced the execution of a definitive agreement whereby AmeriServ Financial, Inc. will acquire CNB, an operating division of Riverview Bank, branch and deposit customers in Meyersdale, as well as the deposit customers of CNB’s leased branch in the Borough of Somerset. The transaction is expected to close in the second quarter of 2021, subject to regulatory approval and other customary closing conditions.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Internal Controls
At December 31, 2020, the end of the period covered by this Annual Report on Form 10-K,
the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e)
under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at December 31, 2020, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and fair presentation of the accompanying consolidated balance sheets of Riverview Financial Corporation and subsidiary (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the two-year
period ended December 31, 2020, in accordance with accounting principles generally accepted in the United States. This responsibility includes: establishing, implementing and maintaining adequate internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable under the circumstances. We are also responsible for compliance with the laws and regulations relating to safety and soundness that are designated by the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and the Pennsylvania Department of Banking.
Our internal control over financial reporting process is designed and effected by those charged with governance, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Our internal controls are designed to provide reasonable assurance that assets are safeguarded, and transactions are initiated, executed, recorded and reported in accordance with our intentions and authorizations and to comply with applicable laws and regulations. The internal control system includes an organizational structure that provides appropriate delegation of authority and segregation of duties, established policies and procedures and comprehensive internal audit and loan review programs. To enhance the reliability of internal controls, we recruit and train highly qualified personnel and maintain sound risk management practices. The internal control system is maintained through a monitoring process that includes a program of internal audits.
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal control over financial reporting at the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective. Our assessment includes controls over initiating, recording, processing and reconciling account balances, classes of transactions and disclosure and related assertions included in the financial statements. Our assessment also includes controls related to the initiation and processing of non-routine
and non-systematic
transactions, to the selection and application of appropriate accounting policies and to the prevention, identification and detection of fraud.
There are inherent limitations in any internal control system, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation.
Furthermore, due to changes in conditions, the effectiveness of internal controls may vary over time. Our internal auditor reviews, evaluates and makes recommendations on policies and procedures, which serves as an integral, but independent, component of our internal control.
Our financial reporting and internal controls are under the general oversight of our board of directors, acting through its audit committee. The audit committee is composed entirely of independent directors. The independent registered public accounting firm and the internal auditor have direct and unrestricted access to the audit committee at all times. The audit committee meets periodically with us, the internal auditor and the independent registered public accounting firm to determine that each is fulfilling its responsibilities and to support actions to identify, measure and control risks and augment internal controls.
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our management, including our CEO and CFO, assessed the effectiveness of our internal controls over financial reporting, including controls over the preparation of regulatory financial statements in accordance with FDICIA requirements under Part 363, as of December 31, 2020 using the criteria established in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Our management’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of our internal control over financial reporting.
Based on its assertion, management believes that our internal control over financial reporting was effective as of December 31, 2020.
Management’s assertion on the effectiveness of internal control over financial reporting, includes controls over the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and financial statements for regulatory reporting purposes in accordance with FDICIA requirements under Part 363, as of December 31, 2020.
/s/ Brett D. Fulk
Brett D. Fulk
President and Chief Executive Officer
(Principal Executive Officer)
March 11, 2021
/s/ Scott A. Seasock
Scott A. Seasock
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 11, 2021

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ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information.
None.
PART III `

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance.
We incorporate herein by reference the information appearing under the headings “Proposal 1: Election of Directors”; “Named Executive Officers”; “Corporate Governance - Code of Ethics”; “Meetings and Committees of the Board of Directors”; and “Audit Committee” by reference to the definitive proxy statement for our 2021 annual meeting of shareholders.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation.
We incorporate herein by reference the information appearing under the headings “Executive Compensation” and “Corporate Governance - Directors’ Compensation” in the definitive proxy statement for our 2021 annual meeting of shareholders.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We incorporate herein by reference the information appearing under the heading “Share Ownership” in the definitive proxy statement for our 2021 annual meeting of shareholders.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
We incorporate herein by reference the information appearing under the headings “Related Party Transactions” and “Corporate Governance - Director Independence” in the definitive proxy statement for our 2021 annual meeting of shareholders.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accounting Fees and Services.
We incorporate herein by reference the information appearing under the heading “Independent Registered Public Accounting Firm” in the definitive proxy statement for our 2021 annual meeting of shareholders.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1)
The following consolidated financial statements of the Company are filed as part of this Form 10-K:
(i)
Reports of Independent Registered Public Accounting Firm
(ii)
Consolidated Balance Sheets as of December 31, 2020 and 2019
(iii)
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2020 and 2019
(iv)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
(v)
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
(vi)
Notes to Consolidated Financial Statements
(a)(2)
Financial Statements Schedules
. All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have therefore been omitted.
(a)(3) Exhibits
.
Exhibit No.
Description
3.1(i)
Amended and Restated Articles of Incorporation of Riverview Financial Corporation (Incorporated by reference to Exhibit 3.1(i) of Riverview’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on March 23, 2018.)
3.1(ii)
Amended and Restated Bylaws of Riverview Financial Corporation (Incorporated by reference to Exhibit 3.1 of Riverview’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2019.)
4.1
Form of Common Stock Certificate of Riverview Financial Corporation (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to Riverview’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on January 20, 2015.)
4.2
Description of Riverview Financial Corporation’s Securities (Incorporated by reference to Exhibit 4.2 of Riverview’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020.)
Executive Compensation
10.1*
Amended and Restated Executive Employment Agreement of Kirk D. Fox (Incorporated by reference to Exhibit 10.2 of Riverview’s Annual Report on Form 10-K for the year ended December 31, 2008 filed on April 10, 2009.)
10.2*
Second Amended and Restated Executive Employment Agreement of Kirk D. Fox, dated November 16, 2011 (Incorporated by reference to Exhibit 10.18 of Riverview’s Amendment No. 2 to Registration Statement on Form S-4 filed on April 29, 2013.)
10.3
First Amendment to Second Amended and Restated Executive Employment Agreement of Kirk D. Fox adopted January 14, 2014 (Incorporated by reference to Exhibit 10.3 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.4*
Noncompetition Agreement of Kirk D. Fox, dated November 16, 2011 (Incorporated by reference to Exhibit 10.20 of Riverview’s Amendment No. 2 to Registration Statement on Form S-4 filed on April 29, 2013.)
10.5
Separation Agreement and Release for Kirk D. Fox, dated January 2, 2019 (Incorporated by reference to Exhibit 10.1 of Riverview’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on January 2, 2019.)
10.6**
Supplemental Executive Retirement Agreement Plan for Kirk D. Fox, dated March 29, 2007 (Incorporated by reference to Exhibit 10.2 of First Perry Bancorp’s Registration Statement on Form S-4/A filed with the Securities and Exchange Commission on October 20, 2008.)
10.7
Amendment to Supplemental Executive Retirement Plan Agreement of Kirk D. Fox, dated June 18, 2008 (Incorporated by reference to Exhibit 10.6 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.8*
Second Amendment to the Supplemental Executive Retirement Agreement Plan Agreement for Kirk D. Fox, dated March 29, 2007, amended June 18, 2008 and entered into between Kirk D. Fox and Riverview National Bank on September 2, 2009 (Incorporated by reference to Exhibit 10.11 of Riverview’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on November 12, 2009.)
10.9*
Riverview National Bank Executive Deferred Compensation Agreement for Kirk D. Fox, dated June 30, 2010 (Incorporated by reference to Exhibit 99.1 on Riverview’s Current Report on Form 8-K filed July 1, 2010.)
10.10*
First Amendment to the Executive Deferred Compensation Agreement of Kirk Fox (Incorporated by reference to
Exhibit 10.13 of Riverview’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on November 10, 2011.)
10.11*
Second Amendment to the Riverview National Bank Executive Deferred Compensation Agreement dated June 30, 2010 for Kirk Fox, entered into January 4, 2013 (Incorporated by reference to Exhibit 10.24 on Riverview’s Registration Statement on Form S-4 filed on April 29, 2013.)
10.12
Amended and Restated Executive Deferred Compensation Agreement of Kirk D. Fox, adopted January 14, 2014 (Incorporated by reference to Exhibit 10.11 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.13
Executive Deferred Compensation Agreement #2 of Kirk D. Fox adopted December 24, 2015 (Incorporated by reference to Exhibit 10.12 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
Exhibit No.
Description
10.14
Third Amendment to the Riverview National Bank Executive Deferred Compensation Agreement dated June 30, 2010 for Kirk D. Fox, entered into December 24, 2015 (Incorporated by reference to Exhibit 10.13 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.15*
Executive Employment Agreement of Brett D. Fulk, dated January 4, 2012 (Incorporated by reference to Exhibit 10.22 of Riverview’s Registration Statement on Form S-4 filed on April 29, 2013.)
10.16
First Amendment to Executive Employment Agreement of Brett D. Fulk adopted January 9, 2014 (Incorporated by reference to Exhibit 10.15 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.17*
Supplemental Executive Retirement Plan Agreement for Brett Fulk, dated January 6, 2012 (Incorporated by reference to Exhibit 10.23 of Riverview’s Registration Statement on Form S-4 filed on April 29, 2013.)
10.18
Deferred Compensation Agreement of Brett Fulk, dated December 23, 2013 (Incorporated by reference to Exhibit 10.31 of Riverview’s Form 10-K as filed with the Securities and Exchange Commission on March 31, 2014.)
10.19
Employment Agreement of Scott A. Seasock (Incorporated by reference to Exhibit 10.1 of Riverview’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)
10.20*
Employment Agreement of Theresa M. Wasko (Incorporated by reference to Exhibit 10.3 of Riverview’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.)
10.21
Amendment to Employment Agreement of Theresa M. Wasko (Incorporated by reference to Exhibit 10.2 of Riverview’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)
10.22
Amended and Restated Deferred Compensation Agreement of Robert Garst, dated June 22, 2015 (Incorporated by reference to Exhibit 10.23 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.23
Supplemental Executive Retirement Plan Agreement for Kirk D. Fox, dated October 25, 2017 (Incorporated by reference to Exhibit 99.1 of Riverview’s Current Report on Form 8-K filed October 30, 2017.)
10.24
Supplemental Executive Retirement Plan Agreement for Brett D. Fulk, dated October 25, 2017 (Incorporated by reference to Exhibit 99.1 of Riverview’s Current report on Form 8-K filed October 30, 2017.)
Director Compensation
10.25*
Director Deferred Fee Agreement for Kirk D. Fox, effective December 31, 2008 (Incorporated by reference to Exhibit 10.7 to Riverview’s Annual Report on Form 10K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.)
10.26*
First Amendment to the Director Deferred Compensation Agreement of Kirk Fox (Incorporated by reference to
Exhibit 10.15 of Riverview’s Form 10-Q as filed with the Securities and Exchange Commission on November 10, 2011.)
10.27*
Director Emeritus Agreements, effective November 2, 2011, of Directors Arthur M. Feld, James G. Ford, II, Kirk D. Fox, David W. Hoover, Joseph D. Kerwin and David A. Troutman (Incorporated by reference to Exhibit 99.1 of Riverview’s Form 8-K as filed with the Securities and Exchange Commission on November 21, 2011.)
10.28*
Director Emeritus Agreements, effective November 2, 2011, of Directors R. Keith Hite and John M. Schrantz (Incorporated by reference to Exhibit 99.1 of Riverview’s Form 8-K as filed with the Securities and Exchange Commission on December 22, 2011.)
10.29
Director Deferred Fee Agreement of William Yaag, dated December 26, 2013 (Incorporated by reference to
Exhibit 10.32 of Riverview’s Form 10-K as filed with the Securities and Exchange Commission on March 31, 2014.)
Plan Documents
10.30*
2009 Stock Option Plan (Incorporated by reference to Exhibit 10.8 of Riverview’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.)
0.31
Riverview Financial Corporation Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.33 of Riverview’s Form 10-K as filed with the Securities and Exchange Commission on March 31, 2014.)
10.32
Riverview Financial Corporation Equity and Cash Incentive Compensation Plan, dated February 22, 2018 (Incorporated by reference to Exhibit 10.35 of Riverview’s Form 10-K as filed with the Securities and Exchange Commission on March 14, 2019.)
10.33
Riverview Financial Corporation 2019 Equity Incentive Plan (Incorporated by reference to Exhibit A to Riverview’s Proxy Statement for the Annual Meeting of Shareholders as filed with the Securities and Exchange Commission on April 23, 2019.)
0.34
Riverview Financial Corporation Executive Annual Incentive Plan (Incorporated by reference to Exhibit 10.1 of Riverview’s Form 8-K as filed with the Securities and Exchange Commission on June 18, 2019.)
Other Material Contracts
10.35
Stock Purchase Agreement (Incorporated by reference to Exhibit 10.2 of Riverview’s Current Report on Form 8-K filed January 18, 2017.)
10.36
Kirk Fox Waiver (Incorporated by reference to Exhibit 10.34 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
10.37
Brett Fulk Waiver (Incorporated by reference to Exhibit 10.35 of Riverview’s Registration Statement on Form S-4 filed on June 29, 2017.)
21.1
Subsidiaries.
23.1
Consent of Independent Registered Public Accounting Firm - Crowe LLP.
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)).
Interactive Data File (XBRL) furnished herewith.
* Filed by Riverview Financial’s predecessor, CIK# 0001452899.
** Filed by Riverview Financial’s predecessor, CIK# 0001445059.