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Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
Form
10-Q
 
 
 
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2020
or
 
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from
                     
001-38627
(Commission File Number)
 
 
RIVERVIEW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Pennsylvania
  
38-3917371
(State of incorporation)
  
(IRS Employer
Identification Number)
3901 North Front Street, Harrisburg, PA
  
17110
(Address of principal executive offices)
  
(Zip code)
(717)
957-2196
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    
Yes
 
☒
   No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months or for such shorter period that the registrant was required to submit such
files.    
Yes
  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or a smaller reporting company as defined in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer   ☒
Non-accelerated
filer		   ☐    Smaller reporting company   ☒
     Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.  ☐ 
Indicate by check mark whether the registrant is a shell company as defined in Rule
12b-2
of the Exchange
Act.    Yes  ☐    No  
☒
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock
  
RIVE
  
Nasdaq Global Market
Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 9,281,015 at October 
29
, 2020.
 
 
 
Table of Contents
RIVERVIEW FINANCIAL CORPORATION
FORM
10-Q
For the Quarter Ended September 30, 2020
 
Contents
       
Page No.
  
PART I.
  
FINANCIAL INFORMATION:
   
Item 1.
   Financial Statements (Unaudited)   
  Consolidated Balance Sheets at September 30, 2020 and December 31, 2019      3  
  Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019      4  
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019      5  
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019      6  
  Notes to Consolidated Financial Statements      7  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26  
Item 3.
   Quantitative and Qualitative Disclosures About Market Risk      42  
Item 4.
   Controls and Procedures      42  
PART II
   OTHER INFORMATION:   
Item 1.
   Legal Proceedings      42  
Item 1A.
   Risk Factors      42  
Item 2.
   Unregistered Sales of Equity Securities and Use of Proceeds      42  
Item 3.
   Defaults upon Senior Securities      42  
Item 4.
   Mine Safety Disclosures      42  
Item 5.
   Other Information      42  
Item 6.
   Exhibits      43  
  Signatures      44  
Table of Contents
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
 
    
September 30,
2020
    
December 31,
2019
  
Assets:
     
Cash and due from banks
    $ 10,646     $ 11,838  
Interest-bearing deposits in other banks
      21,312       38,510  
Investment securities
available-for-sale
      98,846       91,247  
Loans held for sale
      4,547       81  
Loans, net
      1,163,442       852,109  
Less: allowance for loan losses
      11,624       7,516  
  
 
 
    
 
 
  
Net loans
      1,151,818       844,593  
Premises and equipment, net
      18,419       17,852  
Accrued interest receivable
      3,218       2,414  
Goodwill
        24,754  
Intangible assets
      2,227       2,736  
Other assets
      45,739       45,929  
  
 
 
    
 
 
  
Total assets
    $ 1,356,772     $ 1,079,954  
  
 
 
    
 
 
  
Liabilities:
     
Deposits:
     
Noninterest-bearing
    $ 178,168     $ 147,405  
Interest-bearing
      853,145       793,075  
  
 
 
    
 
 
  
Total deposits
      1,031,313       940,480  
Short-term borrowings
Long-term debt
      217,031       6,971  
Accrued interest payable
      591       435  
Other liabilities
      12,413       13,958  
  
 
 
    
 
 
  
Total liabilities
      1,261,348       961,844  
  
 
 
    
 
 
  
Stockholders’ equity:
     
Common stock: no par value, authorized 20,000,000 shares; September 30, 2020, issued and outstanding 9,279,503 shares; December 31, 2019, issued and outstanding 9,216,616 shares
      102,672       102,206  
Capital surplus
      190       112  
Retained earnings (accumulated deficit)
      (8,040 )      16,140  
Accumulated other comprehensive income (loss)
      602       (348 ) 
  
 
 
    
 
 
  
Total stockholders’ equity
      95,424       118,110  
  
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 1,356,772     $ 1,079,954  
  
 
 
    
 
 
  
See notes to consolidated financial statements.
 
3
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
 
    
Three Months Ended
    
Nine Months Ended
  
September 30,
   
2020
     
2019
    
2020
    
2019
  
Interest income:
          
Interest and fees on loans:
          
Taxable
    $ 11,265      $ 12,283     $ 31,649     $ 34,651  
Tax-exempt
      223        259       704       722  
Interest and dividends on investment securities
available-for-sale:
          
Taxable
      360        641       1,291       2,113  
Tax-exempt
      71        43       176       159  
Interest on interest-bearing deposits in other banks
      11        200       112       647  
  
 
 
     
 
 
    
 
 
    
 
 
  
Total interest income
      11,930        13,426       33,932       38,292  
  
 
 
     
 
 
    
 
 
    
 
 
  
Interest expense:
          
Interest on deposits
      1,200        2,027       4,384       6,199  
Interest on short-term borrowings
             28    
Interest on long-term debt
      304        127       652       392  
  
 
 
     
 
 
    
 
 
    
 
 
  
Total interest expense
      1,504        2,154       5,064       6,591  
  
 
 
     
 
 
    
 
 
    
 
 
  
Net interest income
      10,426        11,272       28,868       31,701  
Provision for loan losses
      1,844        1,049       5,656       2,250  
  
 
 
     
 
 
    
 
 
    
 
 
  
Net interest income after provision for loan losses
      8,582        10,223       23,212       29,451  
  
 
 
     
 
 
    
 
 
    
 
 
  
Noninterest income:
          
Service charges, fees and commissions
      1,099        1,129       3,491       3,497  
Commission and fees on fiduciary activities
      246        314       669       855  
Wealth management income
      220        226       636       709  
Mortgage banking income
      401        151       900       357  
Bank owned life insurance investment income
      192        193       578       574  
Net gain (loss) on sale of investment securities
available-for-sale
         (53 )      815       (95 ) 
  
 
 
     
 
 
    
 
 
    
 
 
  
Total noninterest income
      2,158        1,960       7,089       5,897  
  
 
 
     
 
 
    
 
 
    
 
 
  
Noninterest expense:
          
Salaries and employee benefits expense
      5,411        5,232       15,452       18,572  
Net occupancy and equipment expense
      1,428        1,041       3,676       3,174  
Amortization of intangible assets
      170        194       509       582  
Goodwill impairment
             24,754    
Net cost (benefit) of operation of other real estate owned
      51        (15 )      40       20  
Other expenses
      2,918        2,979       8,713       9,531  
  
 
 
     
 
 
    
 
 
    
 
 
  
Total noninterest expense
      9,978        9,431       53,144       31,879  
  
 
 
     
 
 
    
 
 
    
 
 
  
Income (loss) before income taxes
      762        2,752       (22,843 )      3,469  
Income tax expense (benefit)
      67        486       (49 )      456  
  
 
 
     
 
 
    
 
 
    
 
 
  
Net income (loss)
      695        2,266       (22,794 )      3,013  
  
 
 
     
 
 
    
 
 
    
 
 
  
Other comprehensive income (loss):
          
Unrealized (gain) loss on investment securities
available-for-sale
      114        (256 )      2,007       2,703  
Reclassification adjustment for net (gain) loss on sale of investment securities
available-for-sale
included in net income (loss)
         53       (815 )      95  
Net change in derivative fair value
      49          11    
  
 
 
     
 
 
    
 
 
    
 
 
  
Other comprehensive income (loss)
      163        (203 )      1,203       2,798  
Income tax expense (benefit) related to other comprehensive income
      35        (42 )      253       588  
  
 
 
     
 
 
    
 
 
    
 
 
  
Other comprehensive income (loss), net of income taxes
      128        (161 )      950       2,210  
  
 
 
     
 
 
    
 
 
    
 
 
  
Comprehensive income (loss)
    $ 823      $ 2,105     $ (21,844 )    $ 5,223  
  
 
 
     
 
 
    
 
 
    
 
 
  
Per share data:
          
Net income (loss):
          
Basic
    $ 0.08      $ 0.25     $ (2.46 )    $ 0.33  
Diluted
    $ 0.08      $ 0.25     $ (2.46 )    $ 0.33  
Average common shares outstanding:
          
Basic
      9,273,666        9,173,901       9,248,856       9,159,281  
Diluted
      9,273,666        9,181,076       9,248,856       9,172,015  
See notes to consolidated financial statements.
 
4
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the nine months ended September 30,
   
Common
Stock
     
Capital
Surplus
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
  
Balance, January 1, 2020
    $ 102,206      $ 112     $ 16,140     $ (348 )    $ 118,110  
Net income
 (loss)
           (22,794 )        (22,794 ) 
Other comprehensive income
 (loss)
,
 net of income taxes
             950       950  
Issuance under ESPP, 401k and Dividend Reinvestment plans: 62,887 shares
      466              466  
Stock based compensation
         78           78  
Dividends declared, $0.15 per share
           (1,386 )        (1,386 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, September 30, 2020
    $ 102,672      $ 190     $ (8,040 )    $ 602     $ 95,424  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, January 1, 2019
    $ 101,134      $ 332     $ 15,063     $ (2,619 )    $ 113,910  
Net income
 (loss)
           3,013         3,013  
Other comprehensive income (loss), net of income taxes
             2,210       2,210  
Issuance under ESPP, 401k and Dividend Reinvestment plans: 42,518 shares
      474              474  
Exercise of stock options: 18,492 shares
      199        (32 )          167  
Dividends declared, $0.28 per shares
           (2,519 )        (2,519 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, September 30, 2019
    $ 101,807      $ 300     $ 15,557     $ (409 )    $ 117,255  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
For the three months ended September 30,
   
Common
Stock
     
Capital
Surplus
    
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
  
Balance, July 1, 2020
    $ 102,552      $ 161     $ (8,735 )    $ 474     $ 94,452  
Net income
 (loss)
           695         695  
Other comprehensive income
 (loss)
,
 net of income taxes
             128       128  
Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,806 shares
      120              120  
Stock based compensation
         29           29  
Dividends declared, $0.00 per share
          
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, September 30, 2020
    $ 102,672      $ 190     $ (8,040 )    $ 602     $ 95,424  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, July 1, 2019
    $ 101,644      $ 304     $ 13,978     $ (248 )    $ 115,678  
Net income
 (loss)
           2,266         2,266  
Other comprehensive income (loss), net of income taxes
             (161 )      (161 ) 
Issuance under ESPP, 401k and Dividend Reinvestment plans: 14,534 shares
      159              159  
Exercise of stock options: 361 shares
      4        (4 )       
Dividends declared, $0.08 per shares
           (687 )        (687 ) 
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
Balance, September 30, 2019
    $ 101,807      $ 300     $ 15,557     $ (409 )    $ 117,255  
  
 
 
     
 
 
    
 
 
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
5
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the Nine Months Ended September 30,
   
2020
    
2019
  
Cash flows from operating activities:
     
Net income (loss)
    $ (22,794 )    $ 3,013  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
     
Depreciation and amortization of premises and equipment
      952       874  
Provision for loan losses
      5,656       2,250  
Stock based compensation
      78    
Net amortization of investment securities
available-for-sale
      559       576  
Net cost (benefit) of operation of other real estate owned
      40       20  
Net (gain) loss on sale of investment securities
available-for-sale
      (815 )      95  
Amortization of purchase adjustment on loans
      (592 )      (2,868 ) 
Amortization of intangible assets
      509       582  
Amortization of assumed discount on long-term debt
      63       59  
Impairment of goodwill
      24,754    
Deferred income taxes
      (779 )      273  
Proceeds from sale of loans originated for sale
      26,921       10,335  
Net gain on sale of loans originated for sale
      (900 )      (357 ) 
Loans originated for sale
      (30,487 )      (9,677 ) 
Bank owned life insurance investment income
      (578 )      (574 ) 
Net change in:
     
Accrued interest receivable
      (804 )      259  
Other assets
      2,107       (1,651 ) 
Accrued interest payable
      156       (52 ) 
Other liabilities
      (1,545 )      (715 ) 
  
 
 
    
 
 
  
Net cash provided by (used in) operating activities
      2,501       2,442  
  
 
 
    
 
 
  
Cash flows from investing activities:
     
Investment securities
available-for-sale:
     
Purchases
      (42,151 )      (32,058 ) 
Proceeds from repayments
      8,832       12,458  
Proceeds from sales
      27,168       19,767  
Proceeds from the sale of other real estate owned
      355       728  
Net (increase) decrease in restricted equity securities
      (837 )      (12 ) 
Net (increase) decrease in loans
      (312,627 )      10,931  
Purchases of premises and equipment
      (1,519 )      (1,321 ) 
Premium paid on bank owned life insurance
      (22 )      (22 ) 
  
 
 
    
 
 
  
Net cash provided by (used in) investing activities
      (320,801 )      10,471  
  
 
 
    
 
 
  
Cash flows from financing activities:
     
Net increase (decrease) in deposits
      90,833       (35,010 ) 
Proceeds from long-term debt
      209,997    
Issuance under ESPP, 401k and DRP plans
      466       474  
Proceeds from exercise of stock options
        167  
Cash dividends paid
      (1,386 )      (2,519 ) 
  
 
 
    
 
 
  
Net cash provided by (used in) financing activities
      299,910       (36,888 ) 
  
 
 
    
 
 
  
Net increase in cash and cash equivalents
      (18,390 )      (23,975 ) 
Cash and cash equivalents—beginning
      50,348       53,816  
  
 
 
    
 
 
  
Cash and cash equivalents—ending
    $ 31,958     $ 29,841  
  
 
 
    
 
 
  
Supplemental disclosures:
     
Cash paid during the period for:
     
Interest
    $ 4,908     $ 6,643  
  
 
 
    
 
 
  
Noncash items from operating activities:
     
Operating lease
right-of-use
assets and liabilities
      $ 4,529  
  
 
 
    
 
 
  
Noncash items from investing activities:
     
Transfer of owned properties to available for sale
      $ 540  
  
 
 
    
 
 
  
Supplemental schedule of noncash investing and financing activities:
     
Other real estate acquired in settlement of loans
    $ 338     $ 114  
  
 
 
    
 
 
  
See notes to consolidated financial statements.
 
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Riverview Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Summary of significant accounting policies:
Nature of Operations
Riverview Financial Corporation, (the “Company” or “Riverview”), a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).
Riverview Bank, with twenty seven (27) full service offices and three (3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities and
small-to-medium
sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to
Form 10-Q
and Article 8 of
Regulation S-X.
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on
Form 10-K,
filed on March 16, 2020.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.
The operating results and financial position of the Company for the three and nine months ended as of September 30, 2020, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus
(“COVID-19”)
pandemic which may adversely affect the Company’s business results of operations and financial condition for an indefinite period.
Beginning in the first quarter of 2020, the
COVID-19
pandemic caused disruption in economic and social activity, both globally and in the United States. The spread of
COVID-19
and the related government actions to mandate or encourage quarantines and social distancing, have caused severe disruptions in the U.S. economy, which has and will likely continue to disrupt the business, activities, and operations of our customers, as well as our own business and operations.
The national public health crisis arising from the
COVID-19
pandemic and public expectations about it, combined with certain
pre-existing
factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in which Riverview operates. The resulting impacts of the pandemic on consumers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services Riverview offers, as well as the creditworthiness of potential and current borrowers. The significant decrease in commercial activity associated with the pandemic, both nationally and in Riverview’s markets, may cause customers, vendors, and counterparties to be unable to meet existing payments or other obligations to Riverview and the Bank.
Riverview’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. Riverview expects the pandemic to limit, at least for a period of time, customer demand for many banking activities. Many companies and residents in our market area are subject to mandatory
“non-essential
business” shut-downs and “stay at home” orders, which have reduced banking activity across our market area. In response to these mandates, Riverview has temporarily limited
some
locations to
drive-up
and ATM services, with lobby access available by appointment only, reduced hours of operation at some
 
7
Table of Contents
locations and encouraged our customers to use electronic banking platforms. We expect these measures to remain in place for an undetermined period of time. In addition, the use of quarantines and social distancing methods to curtail the spread of
COVID-19
—whether mandated by governmental authorities or recommended as a public health practice — may adversely affect Riverview’s operations as key personnel, employees and customers avoid physical interaction. The continued spread of
COVID-19
could also negatively impact the business and operations of third-party service providers who perform critical services for Riverview’s business. It is not yet known what impact these operational changes may have on Riverview’s financial performance.
There continues to be broad concerns related to the potential effects of the
COVID-19
pandemic. The pandemic continues to have an adverse effect on, among other things, (i) our ability to attract customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services and/or (iv) unemployment rates, financial markets, real estate markets or economic growth.
The outbreak of
COVID-19
has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including a reduction in interest rates by the Federal Reserve. These reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability.
The
COVID-19
pandemic and its impact on the economy heighten the risks related to economic conditions in our market areas, interest rates, loan losses and reliance on our executives and third-party service providers. For example, borrower loan defaults that adversely affect Riverview’s earnings correlate with deteriorating economic conditions, which in turn, may impact borrowers’ creditworthiness. If our borrowers are unable to meet their payment obligations to us, we will be required to increase our allowance for the losses through provisions for credit losses. In addition, loan programs adopted by the federal government, such as the Paycheck Protection Program (“PPP”), while intended to lessen the impact of the pandemic on businesses, may result in a decreased demand for Riverview’s loan products.
The impact of the pandemic on Riverview’s financial results is evolving and uncertain. The Company expects its net interest income and
non-interest
income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to
COVID-19
and the actions by the Federal Reserve with respect to interest rates. We believe that we may experience a material adverse effect 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.
The Company determined a triggering event occurred as a result of the onset of the
COVID-19
pandemic causing management to evaluate goodwill for impairment as of June 30, 2020. The result of the quantitative testing concluded that the Company recognized an impairment charge of $24,754 at June 30, 2020. The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity and the Company’s cash balances. It is uncertain whether a prolonged effect of the
COVID-19
pandemic will result in future impairment charges related to intangible assets, long-lived assets, right of use assets or available for sale investment securities.
Accounting Standards Adopted in 2020
In August 2016, the FASB issued ASU
No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting guidance became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
In January 2017, the FASB issued ASU
No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new guidance on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations or disclosures.
In August 2018, the FASB issued ASU
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update improve the effectiveness of fair value measurement disclosures by modifying the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The ASU became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
 
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Table of Contents
In August 2018, the FASB issued ASU
No. 2018-15,
“Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining
internal-use
software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to
internal-use
software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., prepaid expense). The new guidance provides that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This update became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recent Accounting Standards
In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No.
2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU
No. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans and
available-for-sale
debt securities. In November 2018, the FASB issued ASU No.
2018-19—Codification
Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU
No. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU
No. 2016-13
to allow companies to irrevocably elect, upon adoption of ASU No,
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
held-to-maturity
debt securities. Entities are required to make this election on an
instrument-by-instrument
basis. In November 2019, the FASB issued ASU
No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic
805-20.
In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any
day-one
regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a
one-time
cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity.
In August 2018, the FASB issued ASU
No. 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General
(Subtopic 715-20)
— Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”.
Subtopic 715-20
addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
In December 2019, the FASB issued ASU
No. 2019-12,
“Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU
No. 2019-12
improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
 
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In March 2020, the FASB issued ASU
No. 2020-04,
“Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU
2020-04
provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU
2020-04
also provides numerous optional expedients for derivative accounting. ASU
2020-04
is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU
2020-04
for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have a material effect on our business operations and consolidated financial statements.
2. Other comprehensive income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities
available-for-sale
and benefit plan and derivative adjustments.
The components of accumulated other comprehensive income (loss) included in stockholders’ equity at September 30, 2020 and December 31, 2019 is as follows:
 
    
September 30,
2020
     
December 31,
2019
  
Net unrealized
gain (
loss
)
on investment securities
available-for-sale
    $ 1,868      $ 676  
Income tax expense
      392        142  
  
 
 
     
 
 
  
Net of income taxes
      1,476        534  
  
 
 
     
 
 
  
Benefit plan adjustments
      (1,117 )       (1,117 ) 
Income tax benefit
      (235 )       (235 ) 
  
 
 
     
 
 
  
Net of income taxes
      (882 )       (882 ) 
  
 
 
     
 
 
  
Derivative fair value adjustment
      11     
Income tax benefit
      3     
  
 
 
     
 
 
  
Net of income taxes
      8     
  
 
 
     
 
 
  
Accumulated other comprehensive income (loss)
    $ 602      $ (348 ) 
  
 
 
     
 
 
  
 
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Table of Contents
Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2020 and 2019 is as follows:
 
Three months ended September 30,
   
2020
     
2019
  
Unrealized gain (loss) on investment securities
available-for-sale
    $ 114      $ (256 ) 
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
         53  
Net change in derivative fair value
      49     
  
 
 
     
 
 
  
Other comprehensive income (loss) before taxes
      163        (203 ) 
Income tax expense (benefit)
      35        (42 ) 
  
 
 
     
 
 
  
Other comprehensive income (loss)
    $ 128      $ (161 ) 
  
 
 
     
 
 
  
 
Nine months ended September 30,
   
2020
     
2019
  
Unrealized gain on investment securities
available-for-sale
    $ 2,007      $ 2,703  
Net (gain) loss on the sale of investment securities
available-for-sale
(1)
      (815 )       95  
Net change in derivative fair value
      11     
  
 
 
     
 
 
  
Other comprehensive income before taxes
      1,203        2,798  
Income tax expense
      253        588  
  
 
 
     
 
 
  
Other comprehensive income
    $ 950      $ 2,210  
  
 
 
     
 
 
  
 
(1)
 
Represents amounts reclassified out of accumulated other comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.
3. Earnings per share:
Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019:
 
Three months ended September 30,
   
2020
     
2019
  
Numerator:
      
Net income
    $ 695      $ 2,266  
  
 
 
     
 
 
  
Denominator:
      
Basic
      9,273,666        9,173,901  
Dilutive options
         7,175  
  
 
 
     
 
 
  
Diluted
      9,273,666        9,181,076  
  
 
 
     
 
 
  
Earnings per share:
      
Basic
    $ 0.08      $ 0.25  
Diluted
    $ 0.08      $ 0.25  
 
Nine months ended September 30,
   
2020
     
2019
  
Numerator:
      
Net income (loss)
    $ (22,794 )     $ 3,013  
  
 
 
     
 
 
  
Denominator:
      
Basic
      9,248,856        9,159,281  
Dilutive options
         12,734  
  
 
 
     
 
 
  
Diluted
      9,248,856        9,172,015  
  
 
 
     
 
 
  
Earnings per share:
      
Basic
    $ (2.46 )     $ 0.33  
Diluted
    $ (2.46 )     $ 0.33  
 
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For the three and nine months ended September 30, 2020 there were 172,964
outstanding
 
stock
options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2019, there were 59,350 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.
4. Investment securities:
The amortized cost and fair value of investment securities
available-for-sale
aggregated by investment category at September 30, 2020 and December 31, 2019 are summarized as follows:
 
September 30, 2020
   
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair
Value
  
State and municipals:
            
Taxable
    $ 20,483      $ 392      $ 34      $ 20,841  
Tax-exempt
      20,523        358        44        20,837  
Mortgage-backed securities:
            
U.S. Government agencies
      26,792        835           27,627  
U.S. Government-sponsored enterprises
      23,180        505        20        23,665  
Corporate debt obligations
      6,000        9        133        5,876  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 96,978      $ 2,099      $ 231      $ 98,846  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
December 31, 2019
   
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair
Value
  
State and municipals:
            
Taxable
    $ 24,365      $ 466      $ 7      $ 24,824  
Tax-exempt
      4,260        73           4,333  
Mortgage-backed securities:
            
U.S. Government agencies
      36,024        294        184        36,134  
U.S. Government-sponsored enterprises
      22,422        265        42        22,645  
Corporate debt obligations
      3,500           189        3,311  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 90,571      $ 1,098      $ 422      $ 91,247  
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as
available-for-sale
at September 30, 2020, is summarized as follows:
 
September 30, 2020
   
Fair
Value
  
Within one year
    $ 543  
After one but within five years
      5,623  
After five but within ten years
      11,290  
After ten years
      30,099  
  
 
 
  
     47,555  
Mortgage-backed securities
      51,291  
  
 
 
  
Total
    $ 98,846  
  
 
 
  
Securities with a fair value of $68,604 and $63,389 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a
case-by-case
basis. At September 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.
 
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Table of Contents
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at September 30, 2020 and December 31, 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
 
    
Less Than 12 Months
     
12 Months or More
     
Total
  
September 30, 2020
   
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
  
State and municipals:
                  
Taxable
    $ 6,082      $ 33      $ 280      $ 1      $ 6,362      $ 34  
Tax-exempt
      9,040        44              9,040        44  
Mortgage-backed securities:
                  
U.S. Government agencies
                                  
U.S. Government-sponsored enterprises
      5,312        20              5,312        20  
Corporate debt obligations
            3,367        133        3,367        133  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 20,434      $ 97      $ 3,647      $ 134      $ 24,081      $ 231  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Less Than 12 Months
     
12 Months or More
     
Total
  
December 31, 2019
   
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
  
State and municipals:
                  
Taxable
    $ 1,280      $ 7      $        $        $ 1,280      $ 7  
Tax-exempt
                  
Mortgage-backed securities:
                  
U.S. Government agencies
      15,799        184              15,799        184  
U.S. Government-sponsored enterprises
            3,245        42        3,245        42  
Corporate debt obligations
            3,311        189        3,311        189  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 17,079      $ 191      $ 6,556      $ 231      $ 23,635      $ 422  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company had 22 investment securities, consisting of five taxable state and municipal obligations,
13 tax-exempt state and municipal obligations,
three U.S. Government
-sponsored enterprises
 and one corporate debt obligation that were in unrealized loss positions at September 30, 2020. Of these securities, one taxable
state and
municipal
obligations
and one corporate debt obligation were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, resulting from changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at September 30, 2020. There was no OTTI recognized for the three and nine months ended September 30, 2020 and 2019.
The Company had 22 investment securities, consisting of two taxable state and municipal obligations, 19 mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, four mortgage-backed securities and one corporate obligation were in a continuous unrealized loss position for twelve months or more.
5. Loans, net and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2020 and December 31, 2019 are summarized as follows. Net deferred loan fees were $5,264 at September 30, 2020 and net deferred loan costs were $1,129 at December 31, 2019.
 
    
September 30,

2020
     
December 31,

2019
  
Commercial
    $ 382,518      $ 118,658  
Real estate:
      
Construction
      64,322        61,831  
Commercial
      507,795        455,901  
Residential
      202,132        207,354  
Consumer
      6,675        8,365  
  
 
 
     
 
 
  
Total
    $ 1,163,442      $ 852,109  
  
 
 
     
 
 
  
 
13
Table of Contents
The Company participated in the
Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program (“PPP”), a multi-billion dollar specialized
low-interest
loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of September 30, 2020, the Company
had
1,274 PPP loans totaling $
273,813
. The Company is utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to meet the funding needs of its borrowers of PPP loans.
The change in the allowance for loan losses account by major loan classifications for the three and nine months ended September 30, 2020 and 2019 is summarized as follows:
 
          
Real Estate
                     
September 30, 2020
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                 
Beginning Balance, July 1, 2020
    $ 1,685     $ 741      $ 5,078     $ 2,070     $ 162     $        $ 9,736  
Charge-offs
               (42 )         (42 ) 
Recoveries
      2                57               27                86  
Provisions
      173       145        1,015       490       21          1,844  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,860     $ 886      $ 6,150     $ 2,560     $ 168     $        $ 11,624  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
          
Real Estate
                     
September 30, 2020
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                 
Beginning Balance, January 1, 2020
    $ 1,953     $ 473      $ 3,115     $ 1,820     $ 155     $        $ 7,516  
Charge-offs
      (899 )         (595 )      (2 )      (243 )         (1,739 ) 
Recoveries
      11                59       1       120                191  
Provisions
      795       413        3,571       741       136          5,656  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,860     $ 886      $ 6,150     $ 2,560     $ 168     $        $ 11,624  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
          
Real Estate
                     
September 30, 2019
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                 
Beginning Balance, July 1, 2019
    $ 1,117     $ 491      $ 3,591     $ 1,649     $ 154     $        $
 
 
 7,002  
Charge-off
      (759 )         (110 )      (5 )      (111 )         (985 ) 
Recoveries
      1                2               28                31  
Provisions
      876       30        95       (28 )      74       2        1,049  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,235     $ 521      $ 3,578     $ 1,616     $ 145     $ 2      $ 7,097  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
          
Real Estate
    
 
    
 
    
 
  
September 30, 2019
   
Commercial
    
Construction
     
Commercial
    
Residential
    
Consumer
    
Unallocated
    
Total
  
Allowance for loan losses:
                
Beginning Balance, January 1, 2019
    $ 1,162     $ 404      $ 3,298     $ 1,286     $ 50     $ 148     $ 6,348  
Charge-offs
      (1,148 )         (110 )      (25 )      (364 )        (1,647 ) 
Recoveries
      12                4       4       126               146  
Provisions
      1,209       117        386       351       333       (146 )      2,250  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance
    $ 1,235     $ 521      $ 3,578     $ 1,616     $ 145     $ 2     $ 7,097  
  
 
 
    
 
 
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
 
14
Table of Contents
The allocation of the allowance for loan losses and related loans by classifications of loans at September 30, 2020 and December 31, 2019 is summarized as follows:
 
           
Real Estate
                       
September 30, 2020
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                     
Ending balance
    $ 1,860      $ 886      $ 6,150      $ 2,560      $ 168      $        $ 11,624  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      32           1                 33  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      1,828        886        6,149        2,560        168           11,591  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $        $        $        $        $    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loans receivable:
                     
Ending balance
    $ 382,518      $ 64,322      $ 507,795      $ 202,132      $ 6,675      $        $ 1,163,442  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      1,853           7,545        2,480              11,878  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      380,665        64,322        498,902        199,480        6,675           1,150,044  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $ 1,348      $ 172      $        $        $ 1,520  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
15
Table of Contents
           
Real Estate
                       
December 31, 2019
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                     
Ending balance
    $ 1,953      $ 473      $ 3,115      $ 1,820      $ 155      $        $ 7,516  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      712           218                 930  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      1,241        473        2,897        1,820        155           6,586  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $        $        $        $        $        $        $    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loans receivable:
                     
Ending balance
    $ 118,658      $ 61,831      $ 455,901      $ 207,354      $ 8,365      $        $ 852,109  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
individually evaluated for impairment
      2,260           1,224        2,085              5,569  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
collectively evaluated for impairment
      116,390        61,831        453,156        205,026        8,365           844,768  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                     
purchased credit impaired loans
    $ 8      $        $ 1,521      $ 243      $        $        $ 1,772  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
Non-homogeneous
loans are individually analyzed fo
r
 credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
 
 
•
 
Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.
 
 
•
 
Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.
 
 
•
 
Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
 
 
•
 
Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
 
•
 
Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance.
 
16
Table of Contents
The following tables present the major classifications of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2020 and December 31, 2019:
 
September 30, 2020
   
Pass
     
Special
Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 374,721      $ 3,319      $ 4,478      $        $ 382,518  
Real estate:
               
Construction
      55,072        8,252        998           64,322  
Commercial
      452,958        30,048        24,789           507,795  
Residential
      197,405        1,570        3,157           202,132  
Consumer
      6,675                 6,675  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,086,831      $ 43,189      $ 33,422      $        $ 1,163,442  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
December 31, 2019
   
Pass
     
Special
Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 109,190      $ 5,992      $ 3,476      $        $ 118,658  
Real estate:
               
Construction
      61,678        153              61,831  
Commercial
      430,771        9,271        15,859           455,901  
Residential
      203,381        1,437        2,536           207,354  
Consumer
      8,365                 8,365  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 813,385      $ 16,853      $ 21,871      $        $ 852,109  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
 
    
Accrual Loans
                
September 30, 2020
   
30-59 Days

Past Due
     
60-89 Days

Past Due
     
90 or More
Days Past
Due
     
Total Past
Due
     
Current
     
Nonaccrual
Loans
     
Total Loans
  
Commercial
    $ 20      $ 78      $ 108      $ 206      $ 381,521      $ 791      $ 382,518  
Real estate:
                     
Construction
         208                 208        64,114           64,322  
Commercial
                  505,216        1,231        506,447  
Residential
      650        219           869        199,888        1,203        201,960  
Consumer
      20        1           21        6,654           6,675  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 690      $ 506      $ 108      $ 1,304      $ 1,157,393      $ 3,225      $ 1,161,922  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                        1,520  
                    
 
 
  
Total Loans
                      $ 1,163,442  
                    
 
 
  
    
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
    $ 137      $        $        $ 137      $ 117,354      $ 1,159      $ 118,650  
Real estate:
                     
Construction
      9              9        61,822           61,831  
Commercial
      147              147        453,774        459        454,380  
Residential
      3,402        820        18        4,240        202,202        669        207,111  
Consumer
      84        14        27        125        8,240           8,365  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 3,779      $ 834      $ 45      $ 4,658      $ 843,392      $ 2,287      $ 850,337  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                        1,772  
                    
 
 
  
Total Loans
                      $ 852,109  
                    
 
 
  
 
17
Table of Contents
The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2020 and 2019, and as of and for the year ended, December 31, 2019 by major loan classification:
 
                         
This Quarter
     
Year-to-Date
  
September 30, 2020
   
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
Average
Recorded
Investment
     
Interest
Income
Recognized
     
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
                     
Commercial
    $ 1,732      $ 1,842         $ 1,896      $ 154      $ 1,630      $ 354  
Real estate:
                     
Construction
                     
Commercial
      3,124        3,510           6,141        10        4,944        76  
Residential
      2,652        2,782           2,700        12        2,564        118  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      7,508        8,134           10,737        176        9,138        548  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                     
Commercial
      121        121      $ 32        121           121     
Real estate:
                     
Construction
                     
Commercial
      5,769        5,769        1        2,885        61        2,045        65  
Residential
                     
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,890        5,890        33        3,006        61        2,166        65  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      1,853        1,963        32        2,017        154        1,751        354  
Real estate:
                     
Construction
                     
Commercial
      8,893        9,279        1        9,026        71        6,989        141  
Residential
      2,652        2,782           2,700        12        2,564        118  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 13,398      $ 14,024      $ 33      $ 13,743      $ 237      $ 11,304      $ 613  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
For the Year Ended
  
December 31, 2019
   
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
               
Commercial
    $ 1,147      $ 1,257         $ 648      $ 660  
Real estate:
               
Construction
               
Commercial
      1,963        1,963           3,124        1,456  
Residential
      2,329        2,467           2,397        173  
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,439        5,687           6,169        2,289  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
               
Commercial
      1,121        1,121      $ 712        685     
Real estate:
               
Construction
               
Commercial
      782        936        218        658        17  
Residential
               91     
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      1,903        2,057        930        1,434        17  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      2,268        2,378        712        1,333        660  
Real estate:
               
Construction
               
Commercial
      2,745        2,899        218        3,782        1,473  
Residential
      2,329        2,467           2,488        173  
Consumer
               
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 7,342      $ 7,744      $ 930      $ 7,603      $ 2,306  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
18
Table of Contents
                         
This Quarter
     
Year-to-Date
  
September 30, 2019
   
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
Average
Recorded
Investment
     
Interest
Income
Recognized
     
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
                     
Commercial
    $ 1,617      $ 2,256         $ 871      $ 96      $ 399      $ 604  
Real estate:
                     
Construction
                     29     
Commercial
      2,048        2,048           3,135        1,204        3,882        1,408  
Residential
      2,178        2,178           2,189        33        2,247        158  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,843        6,482           6,195        1,333        6,557        2,170  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                     
Commercial
      121        121      $ 29        448           767     
Real estate:
                     
Construction
                     
Commercial
      785        939        251        579        4        468        12  
Residential
      177        315        45        178        2        179        5  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      1,083        1,375        325        1,205        6        1,414        17  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      1,738        2,377        29        1,319        96        1,166        604  
Real estate:
                     
Construction
                     29     
Commercial
      2,833        2,987        251        3,714        1,208        4,350        1,420  
Residential
      2,355        2,493        45        2,367        35        2,426        163  
Consumer
                     
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 6,926      $ 7,857      $ 325      $ 7,400      $ 1,339      $ 7,971      $ 2,187  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
For the three and nine months ended September 30, interest income related to impaired loans, would have been $33 and $89 in 2020 and $48 and $133 in 2019 had the loans been current and the terms of the loans not been modified.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
 
  •  
Rate Modification—A modification in which the interest rate is changed to a below market rate.
 
  •  
Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed.
 
  •  
Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time.
 
  •  
Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
 
  •  
Combination Modification—Any other type of modification, including the use of multiple categories above.
Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled $9,893 at September 30, 2020, $2,701 at December 31, 2019 and $2,729 at September 30, 2019.
There were no loans modified as troubled debt restructures during the third quarter of 2020 and nine loans modified during the nine months ended September 30, 2020 totaling $7,817. There were no loans modified as troubled debt restructures during the third quarter of 2019 and one loan modified during the nine months ended September 30, 2019.
During the three months ended September 30, 2020, there were no defaults on loans restructured and one default on a restructured loan totaling $368 during the nine months ended September 30, 2020. During the three months ended September 30, 2019, there were no defaults on loans restructured and one default on a restructured loan totaling $222 during the nine months ended September 30, 2019.
 
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The Company is a party to financial instruments with
off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk over and above the amount recognized in the consolidated balance sheets.
Distribution of
off-balance
sheet commitments
 
    
September 30,
2020
     
December 31,
2019
  
Unused portions of lines of credit
    $ 93,694      $ 81,665  
Construction loans
      26,216        41,168  
Commitments to extend credit
      13,086        24,954  
Deposit overdraft protection
      22,231        23,730  
Standby and performance letters of credit
      3,973        4,726  
  
 
 
     
 
 
  
Total
    $ 159,200      $ 176,243  
  
 
 
     
 
 
  
We record a valuation allowance for
off-balance
sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $95 at September 30, 2020 and $89 at December 31, 2019. We do not anticipate that losses, if any, that may occur as a result of funding
off-balance
sheet commitments, would have a material adverse effect on our operating results or financial position.
6. Other assets:
The components of other assets at September 30, 2020 and December 31, 2019 are summarized as follows:
 
    
September 30,
2020
     
December 31,
2019
  
Other real estate owned
    $ 25      $ 82  
Bank owned life insurance
      31,247        30,647  
Restricted equity securities
      1,827        990  
Deferred tax assets
      4,798        4,272  
Lease
right-of-use
assets
      3,336        3,856  
Other assets
      4,506        6,082  
  
 
 
     
 
 
  
Total
    $ 45,739      $ 45,929  
  
 
 
     
 
 
  
7. Leases:     
On September 30, 2020, the Company leased 13 locations. The Company’s operating lease
right-of-use
(“ROU”) assets and related lease liabilities were $3,336 and $3,397, respectively, and have remaining terms ranging from 1 to 33 years, including extension options that the Company is reasonably certain will be exercised. For the three and nine months ended September 30, 2020, operating lease cost totaled $346 and $954, respectively. On September 30, 2019 the Company’s lease ROU assets and related lease liabilities were $4,136 and $4,165, respectively. For the three and nine months ended September 30, 2019, operating lease cost totaled $203 and $538, respectively.
 
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The table below summarizes other information related to our operating leases:
 
   
Nine Months Ended
September 30, 2020
    
Nine Months Ended
September 30, 2019
  
Cash paid for amounts included in the measurement of lease liabilities:
    
Operating cash flows from operating leases
   $ 584     $ 465  
ROU assets obtained in exchange for lease liabilities
     $ 4,529  
Weighted average remaining lease term—operating leases, in years
     9.12       10.46  
Weighted average discount rate—operating leases
     3.04 %      3.06 % 
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconcilement to the Company’s current lease liability.
 
2020
    $ 187  
2021
      754  
2022
      697  
2023
      485  
2024
      317  
Thereafter
      1,568  
  
 
 
  
Total lease payments
      4,008  
Less imputed interest
      611  
  
 
 
  
    
$3,397
  
  
 
 
  
For the nine months ended September 30, 2020, the Company did not enter into any new lease arrangements.
8. Fair value estimates:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
 
  •  
Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
  •  
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
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  •  
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.
The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:
Investment securities:
The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 are summarized as follows:
 
    
Fair Value Measurement Using
  
September 30, 2020
   
Amount
     
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant
Other Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
State and Municipals:
            
Taxable
    $ 20,841         $ 20,841     
Tax-exempt
      20,837           20,837     
Mortgage-backed securities:
            
U.S. Government agencies
      27,627           27,627     
U.S. Government-sponsored enterprises
      23,665           23,665     
Corporate debt obligations
      5,876           3,876      $ 2,000  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 98,846         $ 96,846      $ 2,000  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
    
Fair Value Measurement Using
  
December 31, 2019
   
Amount
     
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant
Other Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
State and municipals:
            
Taxable
    $ 24,824         $ 24,824     
Tax-exempt
      4,333           4,333     
Mortgage-backed securities:
            
U.S. Government agencies
      36,134           36,134     
U.S. Government-sponsored enterprises
      22,645           22,645     
Corporate debt obligations
      3,311           3,311     
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 91,247         $ 91,247     
  
 
 
     
 
 
     
 
 
     
 
 
  
Other real estate owned
: Assets acquired through loan foreclosure are recorded at fair value less estimated costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a
charge-off.
If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of other real estate owned is not
re-measured
to fair value on a recurring basis but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals, current sale value assessments by real estate agents or pending offers to acquire by independent buyers and is updated at least annually. The Company classifies other real estate owned in level 3 of the fair value hierarchy.
Impaired loans
: The fair value of impaired loans is specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may include but is not necessarily limited to real estate, personal or business assets including vehicles, equipment, inventory, accounts receivable or marketable securities. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business
 
equipment
is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial
 
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statements. Likewise, values for inventory, accounts receivable or marketable security collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate or custodian account statements (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income (Loss).
Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019 are summarized as follows:
 
    
Fair Value Measurement Using
  
September 30, 2020
   
Amount
     
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     
(Level 2)
Significant
Other
Observable
Inputs
     
(Level 3)
Significant
Unobservable
Inputs
  
Other real estate owned
    $ 25            $ 25  
Impaired loans, net of related allowance
      5,857              5,857  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 5,882            $ 5,882  
  
 
 
     
 
 
     
 
 
     
 
 
  
    
Fair Value Measurement Using
  
December 31, 2019
   
Amount
     
(Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     
(Level 2)
Significant
Other
Observable
Inputs
     
(Level 3)
Significant
Unobservable
Inputs
  
Other real estate owned
    $ 82            $ 82  
Impaired loans, net of related allowance
      973              973  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,055            $ 1,055  
  
 
 
     
 
 
     
 
 
     
 
 
  
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at September 30, 2020 and December 31, 2019.
 
    
Quantitative Information about Level 3 Fair Value Measurements
  
September 30, 2020
   
Fair Value
Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range
(Weighted Average)
  
Other real estate owned
    $ 25        Appraisal of collateral        Appraisal adjustments        60.0% to 60.0% (60.0)%  
           Liquidation expenses        10.0% to 10.0% (10.0)%  
Impaired loans
    $ 5,857        Appraisal of collateral        Appraisal adjustments        15.0% to 20.0% (15.0)%  
           Liquidation expenses        7.0% to 7.0% (7.0)%  
 
    
Quantitative Information about Level 3 Fair Value Measurements
  
December 31, 2019
   
Fair Value
Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range
(Weighted Average)
  
Other real estate owned
    $ 82        Appraisal of collateral        Appraisal adjustments        42.0% to 60.0% (52.0)%  
           Liquidation expenses        10.0% to 10.0% (10.0)%  
Impaired loans
    $ 973        Appraisal of collateral        Appraisal adjustments        10.0% to 50.0% (22.0)%  
           Liquidation expenses        9.5% to 12.3% (8.8)%  
 
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The carrying and fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019 and their placement within the fair value hierarchy are as follows:
 
    
Carrying
Amount
     
Fair Value Hierarchy
  
September 30, 2020
   
Fair Value
     
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     
Significant
Other
Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
Financial assets:
               
Cash and cash equivalents
    $ 31,958      $ 31,958      $ 31,958        
Investment securities
      98,846        98,846         $ 96,846      $ 2,000  
Loans held for sale
      4,547        4,547           4,547     
Net loans
(1)
      1,151,818        1,142,187              1,142,187  
Accrued interest receivable
      3,218        3,218           406        2,812  
Financial liabilities:
               
Deposits
    $ 1,031,313      $ 989,122         $ 989,122     
Long-term debt
      217,031        218,150           218,150     
Accrued interest payable
      591        591           591     
 
    
Carrying
Amount
     
Fair Value Hierarchy
  
December 31, 2019
   
Fair Value
     
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     
Significant
Other
Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
Financial assets:
               
Cash and cash equivalents
    $ 50,348      $ 50,348      $ 50,348        
Investment securities
available-for-sale
      91,247        91,247         $ 91,247     
Loans held for sale
      81        81           81     
Net loans
(1)
      844,593        836,074            $ 836,074  
Accrued interest receivable
      2,414        2,414           461        1,953  
Financial liabilities:
               
Deposits
    $
 
 
 
 940,480      $
 
 
 
 940,546         $ 940,546     
Long-term debt
      6,971        6,971           6,971     
Accrued interest payable
      435        435           435     
 
1)
The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU
No. 2016-01
where the fair value of loans as of September 30, 2020 and December 31, 2019 was measured using an exit price notion
9. Goodwill
The following table summarizes activity related to the carrying value of goodwill for the nine months ended September 30, 2020:
 
Balance, January 1, 2020
    $ 24,754  
Less: Goodwill impairment
      24,754  
  
 
 
  
Balance, September 30, 2020
    $    
  
 
 
  
Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the end of the first quarter of 2020, as a result of the onset of the
COVID-19
pandemic, the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was
more-likely-than-not
the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.
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
 
24
Table of Contents
 
weight to arrive at the fair value of the reporting unit. Based on the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the quantitative test, the Company recognized an impairment charge equal to the entire amount of its recorded goodwill on the balance sheet at June 30, 2020 totaling $24,754.
10. Subsequent Events:
On October 6,
 2020, 
the Company announced the completion of its private placement of 
$
25 million of
 its 
5.75%
 
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.
 
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Table of Contents
Riverview Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on
Form 10-K
for the year ended December 31, 2019.
Cautionary Note Regarding Forward-Looking Statements:
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Riverview Financial Corporation and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: our ability to achieve the intended benefits of acquisitions and integration of previously acquired businesses; restructuring initiatives; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; and inability of third party service providers to perform. Most recently, the risk factors associated with the onset of
COVID-19
could have a material adverse effect on significant estimates, operations and business results of Riverview. For a discussion of the risks and potential impacts of the
COVID-19
refer to Note 1 entitled “Summary of Significant Accounting Policies-Basis of presentation” in the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Riverview Financial Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform with the current year’s presentation and did not have any effect on the operating results or financial position of the Company.
Critical Accounting Policies:
Disclosure of our significant accounting policies are included in Note 1 to the Consolidated Financial Statements of the Annual Report on
Form 10-K
for the year ended December 31, 2019. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in Note 1 to the consolidated financial statements in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020.
Operating Environment:
Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 33.1% in the third quarter of 2020. This more than offset the decline in the second quarter when the economy decreased at an annualized rate of 31.4%. The strong bounce back in GDP was in dimension and character much as
 
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Table of Contents
expected. The strongest rebounds were in business equipment spending, residential investment and consumer spending, while government spending and nonresidential structures investment declined. A cessation of inventory reduction resulted in a strong addition to output growth, while overall growth was tempered by a deterioration in the trade deficit. The annualized rate of growth declined only 2.9% over the past twelve month ended September 30, 2020 despite the major headwinds caused by the onset of the pandemic.
The impact of the virus has been felt nationally and within our primary market area as unemployment rates have been elevated. The unemployment rate declined sharply in the United States to 7.9% in the third quarter of 2020 from 11.1% in the second quarter of 2020 but was still elevated compared to 3.5% in the third quarter of 2019. With respect to the markets we serve, the unemployment rate decreased in all the counties in which we have office locations comparing the third and second quarters of 2020. The average unemployment rate for counties in our market area improved to 6.8% in September 2020 compared to 12.0% in June 2020. The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, has cause 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 over coming months and will likely adversely affect borrowers’ ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn may influence the recognition of credit losses in our loan portfolios and has increased our allowance for loan losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers’ businesses has also resulted in declines in, among other things, trust and wealth management revenue. These developments, as a consequence of the pandemic, are materially impacting our business, the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our quarterly results.
Inflationary pressure has increased, as reflected by the Personal Consumption Expenditures (“PCE”) Price Index,
increasing at a rate of 3.7% in the third quarter of 2020, as compared with a decrease of 1.6% in the second quarter. Excluding food and energy prices, the PCE price index increased 3.5 percent in the third quarter of 2020, in contrast to a decrease of 0.8 percent in the prior quarter. The Consumer Price Index
(“CPI-U”)
increased 0.2% in September on a seasonally adjusted basis after increasing 0.4% in the prior month. Over the last 12 months, the
CPI-U
increased 1.4% as prices have recovered after sharp declines in the first quarter of 2020. Concerns about the spread of the virus and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, including a
50-basis
point reduction on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. Accordingly, these monetary policy actions have already adversely impacted and may continue to impact our net interest margin if we are unable to reduce fund costs at the same magnitude or pace as repricing earning assets. Based on the aforementioned economic conditions, we believe that we may experience a material adverse effect in our business, results of operations and financial condition as a result of the
COVID-19
pandemic for an indefinite period.
Review of Financial Position:
Total assets increased $276,818 to $1,356,772 at September 30, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to $1,163,442 at September 30, 2020, compared to $852,109 at December 31, 2019, an increase of $311,333. The origination of $273,813 under the PPP was primarily responsible for the increase in loans. Business lending, including commercial and commercial real estate loans, increased $
315,754
, retail lending, including residential mortgages and consumer loans, decreased $6,912, and construction lending increased $
2,491
 during the nine months ended September 30, 2020. Investment securities increased $7,599, or 8.3%, in the nine months ended September 30, 2020. Noninterest-bearing deposits increased $30,763, while interest-bearing deposits increased $60,070 during the nine months ended September 30, 2020. Total stockholders’ equity decreased $22,686, to $95,424 at September 30, 2020 from $118,110 at
year-end
2019. The decrease in stockholders’ equity was caused primarily by the recognition of a goodwill impairment charge of $24,754 at the end of the second quarter 2020. For the nine months ended September 30, 2020, total assets averaged $1,244,576, an increase of $122,066 from $1,122,510 for the same period in 2019.
Investment Portfolio:
The Company’s entire investment portfolio is held as
available-for-sale,
which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when favorable market opportunities exist. Investment securities
available-for-sale
totaled $98,846 at September 30, 2020, an increase of $7,599, or 8.3%, from $91,247 at December 31, 2019. The onset of
COVID-19
caused a marked reduction in general market rates which increased the value of fixed rate securities and lowered the yield on adjustable rate securities. This provided the opportunity to aid in funding loan demand and reduce exposure to falling interest rates through the sale of investment securities at a net gain. Accordingly, we sold $27,168 in investment securities
available-for-sale
which consisted of equal portions of longer-term municipal obligations and adjustable rate US Government mortgage backed securities. The net gain on the sale amounted to $815
 
in the nine months ended September 30, 2020 compared to a net loss of $95
 
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recognized for the same period last year. In order to employ excess funds and meet pledging requirements, we purchased $42,151 in investment securities
available-for-sale
in 2020. These purchases consisted of $11,506 of taxable state and municipal obligations, $16,925 of
tax-exempt
state and municipal obligations, $2,500 of corporate debt obligations and $11,220 of U.S. Government agencies and U.S. Government-sponsored enterprise mortgage-backed securities. The weighted average
tax-equivalent
yield was 2.06% on these purchases.
For the nine months ended September 30, 2020, the investment portfolio averaged $75,193, a decrease of $25,885 compared to $101,078 for the same period last year. The
tax-equivalent
yield on the investment portfolio decreased 37 basis points to 2.69% for the nine months ended September 30, 2020, from 3.06% for the comparable period of 2019.
Securities
available-for-sale
are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported net unrealized gains of $1,868, deferred income tax of $392, and accumulated comprehensive income of $1,476 at September 30, 2020. This compares with net unrealized gains of $676, deferred income taxes of $142, and accumulated comprehensive income of $534 at December 31, 2019. The increase in the unrealized holding gain was the result of reductions in general market rates.
Loan Portfolio:
Loans, net, increased to $1,163,442 at September 30, 2020 from $852,109 at December 31, 2019, an increase of $311,333, or 36.5%. Business loans, including commercial and commercial real estate loans, increased $315,754, or 55.0%, to $890,313 at September 30, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, decreased $6,912, or 3.2%, to $208,807 at September 30, 2020 from $215,719 at December 31, 2019. Construction lending increased $2,491, or 4.0%, to $64,322 at September 30, 2020 from $61,831 at December 31, 2019. The increase in the loan portfolio was attributable to the origination of PPP loans along with the remainder generated primarily from new markets.
For the nine months ended September 30, 2020, loans averaged $1,039,258, an increase of $153,446 compared to $885,812 for the same period in 2019. The
tax-equivalent
yield on the loan portfolio was 4.18% for the nine months ended September 30, 2020, a 119 basis point decrease from 5.37% for the comparable period last year. The decrease in loan yield was caused by declines in general market rates, reductions in loan accretion and lower yield on originated PPP loans. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate by
150-basis
points in the first half of 2020. Loan accretion included in loan interest income in the first nine months of 2020 related to acquired loans was $592 compared to $2,868 for the same period in 2019. The yield earned on PPP loans from interest and fees was 2.46% for the nine months ended September 30, 2020.
The economic slowdown associated with
COVID-19
may have an adverse impact on the growth and asset quality of our loan portfolio, especially those industry segments being severely impacted by the pandemic. Specifically, we have identified the following industries, by the amount of aggregate loans and percentage of total loans as of September 30, 2020 in our loan portfolio that may have increased exposure to this pandemic event:
 
    
September 30, 2020
  
Industry:
   
Amount
     
% of Total
Loans
  
Mining, Quarry, Oil and Gas
    $ 4,214        0.40 % 
Construction-Land Subdivision
      23,316        2.00 % 
Manufacturing
      13,163        1.10 % 
Wholesale Trade
      4,767        0.40 % 
Automobile Dealers
      7,062        0.60 % 
Non-Residential
Rentals and Leasing
      261,575        22.50 % 
Residential Rental and Leasing
      114,451        9.80 % 
Health Care
      15,897        1.40 % 
Arts, Entertainment and Recreation
      5,229        0.40 % 
Hospitality
      65,968        5.70 % 
Restaurants
      8,374        0.70 % 
  
 
 
     
   $ 524,016        45.04 % 
  
 
 
     
There have been a number of initiatives recently instituted by the Federal Government that may help offset the adverse impact on the growth and asset quality of our loan portfolio. In response to the economic slowdown caused by
COVID-19,
President Donald Trump signed into law the CARES Act on March 27, 2020, which included numerous provisions including the institution of the establishment
 
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of the PPP. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production due to the
COVID-19
pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives 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 as of September 30, 2020 had originated 1,274 loans totaling $273,813. The FDIC, Federal Reserve and OCC created the PPPLF to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We have utilized the liquidity relief offered by the PPPLF to the extent needed and as a result, do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations. Offsetting the positive influence offered by the PPP is the fact that most states, including the Commonwealth of Pennsylvania, have placed significant restrictions on
non-essential
businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.
In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments with
off-balance
sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as
on-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements. With the onset of the
COVID-19
pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans.
The contractual amounts of
off-balance
sheet commitments at September 30, 2020 and December 31, 2019 are summarized as follows:
 
    
September 30,
2020
     
December 31,
2019
  
Unused portions of lines of credit
    $ 93,694      $ 81,665  
Construction loans
      26,216        41,168  
Commitments to extend credit
      13,086        24,954  
Deposit overdraft protection
      22,231        23,730  
Standby and performance letters of credit
      3,973        4,726  
  
 
 
     
 
 
  
Total
    $ 159,200      $ 176,243  
  
 
 
     
 
 
  
Asset Quality:
National, Pennsylvania and our market area unemployment rates at September 30, 2020 and 2019 are summarized as follows:
 
    
2020
    
2019
  
United States
      7.9 %      3.5 % 
Pennsylvania
      7.7 %      3.9 % 
Berks County
      7.5 %      4.2 % 
Blair County
      6.6 %      4.2 % 
Bucks County
      7.1 %      3.7 % 
Centre County
      4.5 %      3.3 % 
Clearfield County
      6.9 %      4.6 % 
Cumberland County
      5.4 %      3.3 % 
Dauphin County
      7.5 %      4.1 % 
Huntingdon County
      8.3 %      5.1 % 
Lebanon County
      6.5 %      3.8 % 
Lehigh County
      8.1 %      4.4 % 
Lycoming County
      7.5 %      4.5 % 
Perry County
      5.2 %      3.3 % 
Schuylkill County
      7.5 %      5.1 % 
Somerset County
      7.1 %      4.5 % 
Employment conditions deteriorated in 2020 for the Nation, Commonwealth of Pennsylvania and within every county in which we have branch locations. The average unemployment rate for all our counties increased to 6.8% in 2020 from 4.2% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was 4.5% which was in Centre County, and the highest recorded rate being 8.3% in Huntingdon County. High levels or increases in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality.
 
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Our asset quality deteriorated in the nine months ended September 30, 2020. Nonperforming assets increased $7,926 to $13,006 at September 30, 2020, from $5,080 at December 31, 2019. We experienced increases in all major categories of nonperforming assets in the nine months of 2020 with the majority of this increase coming in the form of accruing troubled debt restructured loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.12% at September 30, 2020 compared to 0.60% at December 31, 2019.
Loans on nonaccrual status increased $938 to $3,225 at September 30, 2020 from $2,287 at December 31, 2019. The increase in nonaccrual loans was due to increases of $772 in commercial real estate loans and $534 in residential loans partially offset by decreases of $368 in commercial loans. Accruing loans past due 90 days or more increased $63, and other real estate owned decreased $57 during the nine months ended September 30, 2020.
In response to the
COVID-19
pandemic and its economic impact to our customers, we implemented short-term modification programs that comply with regulatory and accounting guidance to provide temporary payment relief to those borrowers directly impacted by
COVID-19
who were not more than 30 days past due at the time we implemented our modification programs. These programs allow for a deferral of principal, or principal and interest payments for a maximum of 180 days on a cumulative and successive basis. The deferred payments, including interest accrued during the deferral period, if applicable, result in the extension of the loan due date by the number of months deferred.
In March 2020, a joint statement was issued by federal and state regulatory agencies to clarify that short-term loan modifications are not troubled debt restructurings (“TDR”) if made on a good-faith basis in response to
COVID-19
to borrowers who were current prior to the implementation of our deferral programs. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification programs were implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For all borrowers who enroll in these loan modification programs offered as a result of
COVID-19,
the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program, and the modifications will not impact a borrower’s repayment history for credit repayment reporting purposes. The Company reevaluates these 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 $6,982, to $9,648 at September 30, 2020 from $2,666 at December 31, 2019.
 
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As of September 30, 2020, 204 loans with outstanding balances totaling $130,682, or 11.2%, of total loans were currently deferring loan payments. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes loans actively deferring payments under the above described modification program as of September 30, 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
      23      $ 11,764        3.08 %      10.25 %        $ 270      $ 249  
Construction:
                    
Commercial
      2        246        0.67 %        66.26 %      74.08 %      3        8  
Hospitality
      4        19,788        71.23 %        67.07 %      70.23 %      55        527  
  
 
 
     
 
 
             
 
 
     
 
 
  
Total
      6        20,034        31.15 %            58        535  
  
 
 
     
 
 
             
 
 
     
 
 
  
Commercial Real Estate:
                    
Multi Family
      5        7,965        13.85 %        66.28 %      75.68 %      99        143  
Owner Occupied
      21        10,809        8.74 %        78.63 %      60.12 %      319        133  
Non-Owner
Occupied
      16        33,507        12.67 %        63.14 %      64.39 %      1,855        452  
Hospitality
      6        16,554        51.75 %        66.17 %      65.01 %      336        367  
Agricultural
      19        11,332        37.59 %        53.62 %      60.29 %      234        274  
  
 
 
     
 
 
             
 
 
     
 
 
  
Total
      67        80,167        15.79 %            2,843        1,369  
  
 
 
     
 
 
             
 
 
     
 
 
  
Residential Real Estate
      95        18,666        9.23 %            273        393  
Consumer
      13        51        7.60 %            10        3  
  
 
 
     
 
 
             
 
 
     
 
 
  
Total
      204      $ 130,682        11.23 %      14.59 %        $ 3,454      $ 2,549  
  
 
 
     
 
 
             
 
 
     
 
 
  
 
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The following table summarizes information concerning loan modifications as of the latest practicable date October 23, 2020 by loan classification:
 
    Number of
Loans		     Amount     % of
Outstanding
Including
PPP Loans		     % of
Outstanding
Excluding
PPP Loans		     Aggregate Deferred Payments     Loans with Second Deferrals        
    Principal     Interest     Number of
Loans		     Amount     % of
Outstanding
Including
PPP Loans		     % of
Outstanding
Excluding
PPP Loans		  
Commercial
     10     $ 3,003       0.78 %      2.61 %    $ 141     $ 77          
Construction:
                    
Commercial
     2       246       0.64 %        3       8          
Hospitality
     2       13,468       48.42 %        55       398       1       6,755       24.29 %   
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total
     4       13,714       20.65 %        58       406       1       6,755       10.17 %   
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Commercial Real Estate:
                    
Multi Family
     3       7,709       13.43 %        95       136       1       1,053       1.84 %   
Owner Occupied
     9       4,745       3.77 %        204       95       1       1,088       0.86 %   
Non-Owner
Occupied
     5       24,962       9.46 %        1,681       334       1       1,541       0.58 %   
Hospitality
     5       14,232       46.07 %        325       226       2       3,998       12.94 %   
Agricultural
     16       10,133       35.02 %        210       248          
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total
     38       61,781       12.19 %        2,.515       1,039       5       7,680       1.51 %
1
 		  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Residential Real Estate
     40       4,813       2.37 %        119       135       4       1.660       0.82 %   
Consumer
     5       10       0.15 %        4       1          
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total
     97     $ 83,321       7.14 %      9.28 %    $ 2,837     $ 1,658       10     $ 16,095       1.38 %      1.79 % 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account.
Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables”, for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies”, for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, the Chief Credit Officer identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing standard criteria. Grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events. However, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. We continue to evaluate risks which may impact our loan portfolios. As a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of
COVID-19
on each segment and established specific qualitative adjustment factors. As we weigh additional information on the potential impact of this event on our overall economic prospects coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised as needed, and these revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses”, in the Notes to Consolidated Financial Statements to this Quarterly Report.
The allowance for loan losses increased $4,108 to $11,624 at September 30, 2020, from $7,516 at the end of 2019. The increase in the allowance was a result of the provision for loan losses of $5,656 for the nine months ended September 30, 2020 exceeding net charge-offs for the period. The provision for loan losses totaled $1,844 for the quarter ended September 30, 2020, compared to $1,049 for the same period in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors and changes in qualitative factors related to the reserve build associated with the effects of
COVID-19
as of the balance sheet date. For the nine months ended September 30, net charge offs were $1,548, or 0.20%, of average loans outstanding in 2020 compared to $1,501, or 0.23%, of average loans outstanding for the same period in 2019.
 
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Deposits:
We attract the majority of our deposits from within our
14-county
market area by offering various deposit products including demand deposit accounts, NOW accounts, business checking accounts, money market deposit accounts, savings accounts, club accounts and time deposits, including certificates of deposit and IRA’s. For the nine months ended September 30, 2020, total deposits increased $90,833 to $1,031,313 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased $30,763, while interest-bearing accounts increased $60,070. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increase d $94,045 and time deposits, including certificates of deposit and individual retirement accounts decreased $33,975 for the nine months ended September 30, 2020.
For the nine months ended September 30, interest-bearing deposits averaged $828,884 in 2020 compared to $824,948 in 2019. The cost of interest-bearing deposits was 0.71% in 2020 compared to 1.00% in 2019. Consistent with recent 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 changes in yields on floating and adjustable rate loans. We anticipate deposit costs to continue to decrease in the short term based on the continued market rate impact of FOMC actions to lower its target federal funds rate in the latter part of March 2020.
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 enter the end of their lifespan 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.
Borrowings:
The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.
Short-term borrowings are generally used to meet temporary funding needs and consist of federal funds purchased, securities sold under agreements to repurchase, and overnight and short-term borrowings from Atlantic Community Bankers Bank (“ACBB”), Pacific Community Bankers Bank and the FHLB. At September 30, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.
Long-term debt totaled $217,031 at September 30, 2020 as compared to $6,971 at December 31, 2019. For the nine months ended September 30th, long-term debt averaged $117,602 in 2020 and $6,922 in 2019. The large increase in long-term debt is attributable to advances taken through the Federal Reserve’s PPPLF, whereby loans originated through the PPP program can be pledged as security to facilitate advancements made through the program. As of September 30, 2020, we had outstanding borrowing through the program of $189,719 at a rate of 0.35%. At the end of March 2020, we borrowed $20,000 of term debt from the FHLB to take advantage of reductions in general market rates. These funds were used to bolster our liquidity position and provide necessary funding for new loans. The amount of the term debt was spread equally over three, five and seven-year maturities. The FHLB borrowing had a weighted average rate of 0.90% and weighted average life of five years. As a FHLB member, we are required to buy a portion of stock in FHLB for each advance. The adjusted weighted average cost of the borrowing decreases to 0.57% considering the addition of the dividend rate on the FHLB stock at the time the borrowing was granted. The average cost of long-term debt was 0.74% for the nine months ended September 30, 2020, a decrease from 7.57% for the same period last year. As a result of the significant reduction in market rates during the first nine months of 2020, the Company took advantage of the historically low interest rate environment by entering into a fixed interest rate swap on $9,279 of trust preferred securities at a
10-year
weighted average rate of 2.99%.
On October 6, 2020, the Company announced the completion of its private placement of $25 million 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.
 
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Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and
off-balance
sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.
As a result of the FOMC’s recent actions to lower short-term interest rates in order to mitigate the impact of the
COVID-19
pandemic on the economy, it has become increasing more challenging to manage IRR. IRR and effectively managing it are very important to both Bank management and regulators. Bank regulations require us to develop and maintain an IRR management program that is overseen by the Board of Directors and senior management, which involves a comprehensive risk management process to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in a bank’s risk management process or high-risk exposure relative to capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of a bank’s risk management process is a determining factor when evaluating capital adequacy.
The Asset Liability Committee (“ALCO”), comprised of members of our senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. Conversely, a negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.
Our cumulative
one-year
RSA/RSL ratio equaled 1.45 at September 30, 2020. Given the recent monetary policy actions of the FOMC based on uncertainty surrounding the timing of the recovery from the pandemic and the potential for rates to remain at these low levels, the focus of ALCO has been to reduce our exposure to the effects of repricing assets.
The current position at September 30, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a slight decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.
As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending September 30, 2021, would increase 7.9% and decrease 4.8% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.
 
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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 September 30, 2020, we had available liquidity of $31,958 from cash and interest-bearing balances with other banks. Our investment securities portfolio is comprised primarily of highly liquid U.S. Government and Government-Sponsored Enterprises and high credit quality municipal securities. At September 30, 2020,
available-for-sale
investment securities totaled $98,846, and had a net unrealized holding gain of $1,868. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Community Bankers Bank (“ACBB”), Pacific Coast Bankers Bank (“PCBB”), and through a relationship with StoneCastle Partners, LLC, a third party financial institution who provides cash management services to institutional investors. At September 30, 2020, our available borrowing capacity was $426,045 at the FHLB and was $10,000 each at ACBB and PCBB. StoneCastle provides deposits to community banks up to 15% of their total assets, which would amount to additional liquidity of $203,509 for us based on September 30, 2020. As aforementioned, the issuance of $25 million of Subordinated Notes subsequent to the end of the third quarter of 2020 will further strengthen the Company’s liquidity position.
With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe and extreme scenarios, we have instituted a formalized monthly presentation 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 September 30, 2020. Our noncore funds at September 30, 2020 were comprised of time deposits in denominations of $250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. At September 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 16.47%, while our net short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 0.85%. Comparatively, our net noncore dependence ratio was (1.03)% while our net short-term noncore funding ratio was 1.54% at
year-end.
The increase in the net noncore funding dependence ratio is associated with borrowing to fund investment in PPP loans and is anticipated to reduce substantially as these loans enter the forgiveness stage. In addition, as compared to peer levels, our reliance on short-term noncore funds remains low.
The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $18,390 during the nine months ended September 30, 2020 as compared with a decrease of $23,975 for the same period last year. For the nine months ended September 30, 2020, we realized a net cash outflow of $320,801 from investing activities offset partially by net cash inflows of $2,501 from operating activities and $299,910 from financing activities. For the same period of 2019, we recognized net cash inflows of $2,442 from operating activities and $10,471 from investing activities, offset by a net cash outflow of $36,888 from financing activities.
 
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Operating activities provided net cash of $2,501 for the nine months ended September 30, 2020 compared to $2,442 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as goodwill impairment, depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations.
Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $320,801 for the nine months ended September 30, 2020. For the comparable period in 2019, investing activities provided net cash of $10,471. For the nine months ended September 30, 2020, loan originations of $273,813 from PPP loans were the primary factor for the net increase in loans of $312,627. For the comparable period of 2019, payments and prepayments on loans exceeding loan originations was the primary factor causing the net cash inflow from investing activities.
Financing activities provided net cash of $299,910 for the nine months ended September 30, 2020 and used net cash of $36,888 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 $189,713 for the purpose of financing PPP loans. During the nine months ended September 30, deposits increased $90,833 in 2020 versus a decrease of $35,010 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:
Stockholders’ equity totaled $95,424, or $10.28 per share, at September 30, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net decrease in stockholders’ equity in the nine months ended September 30, 2020 was a result of the recognition of a net loss of $22,794 and the payout of cash dividends of $1,386, offset by the issuance of common stock through Riverview’s ESPP, 401k and dividend reinvestment plans of $466, stock-based compensation of $78 and the recognition of a change in other comprehensive income of $950.
Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance.
The Bank’s capital ratios and the minimum ratios required for capital adequacy purposes and to be considered well capitalized under the prompt corrective action provisions are summarized below for the periods ended September 30, 2020 and December 31, 2019:
 
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    
Well Capitalized under
Basel III
  
September 30, 2020:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total risk-based capital (to risk-weighted assets)
    $ 108,601        12.4 %    $ 92,065     
³
 10.5 %    $ 87,681     
³
 10.0 % 
Tier 1 capital (to risk-weighted assets)
      97,631        11.1       74,529     
³
 8.5       70,145     
³
 8.0  
Common equity tier 1 risk-based capital (to risk-weighted assets)
      97,631        11.1       61,377     
³
 7.0       56,993     
³
 6.5  
Tier 1 capital (to average total assets)
      97,631        8.4       46,419     
³
 4.0       58,024     
³
 5.0  
 
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    
Well Capitalized under
Basel III
  
December 31, 2019:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total risk-based capital (to risk-weighted assets)
    $ 104,010        12.4 %    $ 88,132     
³
 10.5 %    $ 83,936     
³
 10.0 % 
Tier 1 capital (to risk-weighted assets)
      96,405        11.5       71,345     
³
 8.5       67,148     
³
 8.0  
Common equity tier 1 risk-based capital (to risk-weighted assets)
      96,405        11.5       58,755     
³
 7.0       54,558     
³
 6.5  
Tier 1 capital (to average total assets)
      96,405        9.1       42,489     
³
 4.0       53,112     
³
 5.0  
 
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In light of the recent pandemic crisis and its potential adverse impact on capital adequacy within the financial industry, maintaining a high level of capital is of extreme importance to federal regulators as well as our management and Board of Directors. Our asset liability committee continually reviews our capital position. As part of its review, the ALCO considers:
 
  •  
The current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;
 
  •  
The market value of our securities and the resulting effect on capital;
 
  •  
Nonperforming asset levels and the effect deterioration in asset quality will have on capital;
 
  •  
Any planned asset growth;
 
  •  
The anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates;
 
  •  
The source and timing of additional funds to fulfill future capital requirements.
Based on the heightened level of stress on capital caused by the recent events, management maintains a capital plan approved by the Board of Directors. Our capital plan consists of the following areas of focus, among others:
 
  •  
Comprehensive risk assessment including consideration of the following risk elements, among others: credit; liquidity; earnings; economic value of equity; concentration; and economic, both national and local;
 
  •  
Assessing current regulatory capital adequacy levels;
 
  •  
Monitoring procedures consisting of stress testing, using both scenarios of previous historic data of financial crisis periods and the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”), and certain triggering events that would call into question the need to raise additional capital;
 
  •  
Identifying realistic and readily available alternative sources for augmenting capital if higher capital levels are required;
 
  •  
Evaluating dividend levels, and;
 
  •  
Providing a
ten-year
financial projection for analyzing capital adequacy.
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 will be used to support the Bank on an
as-needed
basis. Subsequent to the issuance in the fourth quarter of 2020, management determined to downstream $15 million of the available $25 million from the bank holding company to the Bank in the form of additional capital.
Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at September 30, 2020 and December 31, 2019. There are no conditions or negative events since this notification that we believe have changed the Bank’s well capitalized status.
Review of Financial Performance:
We reported a net loss of $22,794, or $2.46 per basic and diluted weighted average common share, for the nine months ended September 30, 2020, compared to net income of $3,013, or $0.33 per basic and diluted weighted average common share, for the same period last year. For the third quarter ended September 30, net income was $695 or $0.08 per basic and diluted weighted average common share in 2020 and $2,266 or $0.25 per basic and diluted weighted average common share in 2019.
The major factor impacting earnings in 2020 was the recognition of goodwill impairment of $24,754 in the second quarter of 2020. The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity or the Company’s cash balances. Also impacting net income for the nine months ended September 30, 2020 was a provision for loan losses of $5,656, an increase of $3,406 compared to the same period last year. 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 September 30, 2020. As the Company weighs additional information on the potential impact of this event on our overall economic prospects, coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised, as needed. These revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. Another factor influencing the level of earnings in the nine months of 2020 was the recognition of $2,311 less net accretion on acquired assets and assumed liabilities as compared to the nine months of 2019.
 
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Table of Contents
Partially offsetting the impact of these reductions to income was the recognition of an $815 net gain on the sale of investment securities in order to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. The Company also recognized interest and fees on origination of loans pursuant to the PPP of $2,776 during the nine months ended September 30, 2020.
The Company began implemented cost reduction strategies beginning in 2019, and those efforts continued subsequent to the end of the second quarter of 2020 by implementing additional efficiency initiatives aimed at substantially lowering operating costs. This action implemented on September 1, 2020 is expected to lower salaries and benefits expense by $3.4 million annually on a
pre-tax
basis. The results for the nine months ended September 30, included $637 in nonrecurring severance expense in 2020 compared to $2,218 in nonrecurring executive separation expenses and $456 in severance charges in 2019 related to these actions.
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. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:
 
  •  
Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;
 
  •  
Changes in general market rates; and
 
  •  
The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, which is net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities.
Tax-exempt
loans and investments carry
pre-tax
yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable,
tax-exempt
income and yields are reported herein on a
tax-equivalent
basis using the prevailing federal statutory tax rate of 21% in 2020 and 2019, respectively.
For the nine months ended September 30,
tax-equivalent
net interest income decreased $2,833 to $29,102 in 2020 from $31,935 in 2019. The decrease in
tax-equivalent
net interest income was primarily attributable to a decline in the
tax-equivalent
loan yield due to reductions in market rates, the addition of lower yielding PPP loans, and the realization of lower levels of loan accretion from purchase accounting marks. The
tax-equivalent
net interest margin for the nine months ended September 30 was 3.37% in 2020 compared to 4.18% in 2019. The net interest spread decreased to 3.25% for the nine months ended September 30, 2020 from 3.98% for the nine months ended September 30, 2019. The
tax-equivalent
yield on the loan portfolio decreased to 4.18% in 2020 compared to 5.37% in 2019. The actions taken by the Federal Open Market Committee in March 2020 to reduce its target federal funds rate by 150 basis points impacted the loan portfolio yield as it had a corresponding adverse effect on our floating and adjustable rate loans 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 $2,276 in 2020. Partially offsetting the negative impact of the reduction in the net interest margin was a net increase in the volume of average earning assets as compared to the increase in average interest-bearing liabilities. Overall, average earning assets increased $130,549 while average interest-bearing liabilities increased $124,382 comparing the nine months ended September 30, 2020 and 2019.
For the nine months ended September 30,
tax-equivalent
interest income decreased $4,360, to $34,166 in 2020 from $38,526 in 2019. An unfavorable rate variance due to reductions in market rates, lower yield earned on PPP loans and decreases in loan accretion income more than offset a favorable volume variance primarily caused by the addition of PPP loans. Interest and fee accretion generated from the PPP program was $2,776 while loan accretion income was $592 for the nine months of 2020 compared to $2,868 for the same period in 2019. Specifically, the overall yield on earning assets, on a fully
tax-equivalent
basis, decreased for the nine months ended September 30, to 3.96% in 2020 from 5.04% in 2019. With respect to the volume variance, average earning assets increased $130,549 to $1,153,448 in 2020 from $1,022,899 in 2019.
Tax-equivalent
loan income decreased $3,025 in 2020. The increase in average loans of $153,446 was more than offset by a 119 basis point decline in yield. The decrease in average investments of $25,885 in 2020 was the primary cause of the $800 reduction in
tax-equivalent
interest income on investments.
 
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Table of Contents
Total interest expense decreased $1,527 to $5,064 for the nine months ended September 30, 2020 from $6,591 for the nine months ended September 30, 2019. Reductions in fund costs more than offset increases in average volumes on interest-bearing liabilities. Comparing the nine months of 2020 and 2019, the weighted average cost of funds decreased 35 basis points to 0.71% from 1.06% while the average volume of interest-bearing liabilities increased $124,382 to $956,252 from $831,870. Money market and NOW account costs declined 63 and 43 basis points and were the major cause in lowering interest expense on deposits. The average volume and weighted average yield for long-term debt for the nine months ended September 30, 2020 were $117,602 and 0.74%, compared to $6,922 and 7.57% for the same period in 2019. The volume increase was due to liquidity-based borrowings established at FHLB and the Federal Reserve to primarily fund PPP loan originations. We expect that our net interest margin will continue to decrease as our rate sensitive assets decline at a frequency and magnitude greater than our fund costs given the uncertainty in the market as a result of the pandemic.
For the three months ended September 30,
tax-equivalent
net interest income decreased $848 to $10,504 in 2020 from $11,352 in 2019. The decrease in
tax-equivalent
net interest income was attributable to a decline in net accretion from purchased assets and assumed liabilities and reduced earnings from general market rates, partially offset by increased net earnings from PPP loans. Average earning assets increased $271,312 while average earning liabilities increased $253,431 comparing the third quarters of 2020 and 2019. The
tax-equivalent
net interest margin for the three months ended September 30, was 3.26% in 2020 compared to 4.46% in 2019. The net interest spread decreased to 3.17% for the three months ended September 30, 2020 from 4.26% for the three months ended September 30, 2019. Net accretion decreased to $325 from $1,415 comparing the third quarters of 2020 and 2019. Net interest income generated from PPP loans amounted to $1,479 in the third quarter of 2020.
For the three months ended September 30,
tax-equivalent
interest income decreased $1,498, to $12,008 in 2020 from $13,506 in 2019. The overall yield on earning assets, on a fully
tax-equivalent
basis, decreased 158 basis points for the three months ended September 30, 2020 to 3.73% as compared to 5.31% for the three months ended September 30, 2019. This decrease was a result of the combined impact of lower loan yields from declines in market rates and the addition of low yielding PPP loans along with the effects of reduced accretion on purchased loans. Average loans increased $283,450 comparing the third quarters of 2020 and 2019 primarily due to PPP loans. The
tax-equivalent
yield on the loan portfolio was 3.94% for the three months ended September 30, 2020 compared to 5.67% for the same period last year. The combined impact of rate and volume variances caused an overall decrease in interest earned on loans of $1,064. The yield earned on investments decreased 63 basis points for the third quarter of 2020 to 2.33% from 2.96% for the third quarter of 2019. This coupled with average investments decreasing to $76,861 for the quarter ended September 30, 2020 compared to $93,010 for the same period in 2019, resulted in a decrease in
tax-equivalent
interest income of $245. Overall
tax-equivalent
interest earned on investments was $450 for the three months ended September 30, 2020 compared to $695 for the same period in 2019.
Total interest expense decreased $650 to $1,504 for the three months ended September 30, 2020 from $2,154 for the three months ended September 30, 2019. A favorable rate variance more than offset an unfavorable volume variance and caused interest expense to decrease. The cost of funds decreased to 0.56% for the three months ended September 30, 2020 as compared to 1.05% for the same period in 2019. The average volume of interest-bearing liabilities increased to $1,070,803 for the three months ended September 30, 2020, from $817,372 for the three months ended September 30, 2019. Average interest-bearing deposits increased $43,352 to $853,782 for the third quarter of 2020 from $810,430 for the same period last year. Average long-term debt increased to $217,021 for the third quarter of 2020 from $6,942 for the same period last year to provide funding for PPP loans.
 
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Table of Contents
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.
 
    
Nine months ended
  
    
September 30, 2020
    
September 30, 2019
  
    
Average
Balance
     
Interest
     
Yield/
Rate
    
Average
Balance
     
Interest
     
Yield/
Rate
  
Assets:
                 
Earning assets:
                 
Loans:
                 
Taxable
    $ 1,005,344      $ 31,649        4.21 %    $ 849,959      $ 34,651        5.45 % 
Tax exempt
      33,914        891        3.51 %      35,853        914        3.41 % 
Investments:
                 
Taxable
      67,222        1,291        2.57 %      93,423        2,113        3.02 % 
Tax exempt
      7,971        223        3.74 %      7,655        201        3.51 % 
Interest bearing deposits
      38,997        112        0.38 %      36,009        647        2.40 % 
Federal funds sold
                 
  
 
 
     
 
 
       
 
 
     
 
 
     
Total earning assets
      1,153,448        34,166        3.96 %      1,022,899        38,526        5.04 % 
Less: allowance for loan losses
      8,431             6,636        
Other assets
      99,559             106,247        
  
 
 
          
 
 
        
Total assets
    $ 1,244,576           $ 1,122,510        
  
 
 
          
 
 
        
Liabilities and Stockholders’ Equity:
                 
Interest bearing liabilities:
                 
Money market accounts
    $ 116,504      $ 288        0.33 %    $ 112,598      $ 806        0.96 % 
NOW accounts
      291,182        574        0.26 %      273,199        1,415        0.69 % 
Savings accounts
      142,385        117        0.11 %      133,347        127        0.13 % 
Time deposits
      278,813        3,405        1.63 %      305,804        3,851        1.68 % 
Short term borrowings
      9,766        28        0.38 %         
Long-term debt
      117,602        652        0.74 %      6,922        392        7.57 % 
  
 
 
     
 
 
       
 
 
     
 
 
     
Total interest-bearing liabilities
      956,252        5,064        0.71 %      831,870        6,591        1.06 % 
Non-interest-bearing
demand deposits
      163,886             158,384        
Other liabilities
      12,952             16,842        
Stockholders’ equity
      111,486             115,414        
  
 
 
          
 
 
        
Total liabilities and stockholders’ equity
    $ 1,244,576           $ 1,122,510        
  
 
 
          
 
 
        
Net interest income/spread
       $ 29,102        3.25 %       $ 31,935        3.98 % 
     
 
 
          
 
 
     
Net interest margin
            3.37 %            4.18 % 
Tax-equivalent
adjustments:
                 
Loans
       $ 187           $ 192     
Investments
         47             42     
     
 
 
          
 
 
     
Total adjustments
       $ 234           $ 234     
     
 
 
          
 
 
     
Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of September 30, 2020.
The provision for loan losses totaled $5,656 for the nine months ended September 30, 2020, compared to $2,250 in 2019. For the quarter ended September 30, the provision for loan losses was $1,844 in 2020 compared to $1,049 in 2019. The increase in the
 
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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 September 30, 2020. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt along with increasing unemployment for those individuals depending on these businesses for income. As a result, our future provisions may increase by the growth of loan delinquencies and charge-offs resulting from
COVID-19
pandemic related financial stress.
Noninterest Income:
For the nine months ended September 30, noninterest income totaled $7,089 in 2020, an increase of $1,192 from $5,897 in 2019. The increase was primarily attributable to recognizing an $815 net gain on the sale of investment securities to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. This compares to a $95 loss from the sale of investment securities recorded in 2019. Mortgage banking income increased $543 for the nine months ended September 30, 2020 as compared to the same period in 2019 due to an increase in refinancing activity brought on by reductions in mortgage interest rates. Partially offsetting these positive influences were reductions in service charges, commissions and fees on fiduciary activities and wealth management income. Service charges, fees and commissions decreased due to
COVID-19
induced suspensions and reductions to service charges along with reductions in customer activity. Specifically, the Company experienced reductions in overdraft fee income, ATM income, and reduced late charge fee income as it proactively worked with customers and noncustomers alike in an effort to minimize the financial impact of
COVID-19
within the communities served. Trust and wealth management income declined for the nine months ended September 30, 2020 by $186 and $73 compared to the same period of 2019 driven partially by the impact that
COVID-19
has had upon equity market valuations in 2020.
For the quarter ended September 30, noninterest income totaled $2,158 in 2020, an increase of $198 from $1,960 in 2019. An increase of $250 in mortgage banking income was partially offset primarily by reductions in services charges, fees and commissions of $30 and trust income of $68.
Noninterest Expenses:
In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies to control the variable expenses.
Noninterest expense increased $21,265, to $53,144 for the nine months ended September 30, 2020, from $31,879 for the same period last year. The increase was primarily due to writing off the entire amount of goodwill on the books totaling $24,754. Excluding this nonrecurring charge, noninterest expense would have decreased $3,489, or 10.9%, comparing the nine months ended September 30, 2020 and 2019. For the nine months ended September 30, salaries and employee benefit expenses decreased $3,120, or 16.8%, to $15,452 in 2020 from $18,572 in 2019 due primarily to
one-time
charges of $2,218 taken in 2019 related to a separation agreement. Net occupancy expense increased $502, or 15.8%, to $3,676 in 2020 from $3,174 in 2019. The primary cause for the increase in cost was a $356
one-time
charge for the acceleration of lease expense on a closed office. Other expenses decreased $818, or 8.6%, to $8,713 in 2020 compared to $9,531 in 2019. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.
For the three months ended September 30, 2020, noninterest expense increased $547, to $9,978 from $9,431 for the same period last year. Salaries and employee benefit expense was $5,411 for the quarter ended September 30, 2020, an increase of $179 over the same period in 2019 due to the recognition of severance and furlough expenses. Net occupancy expense increased $387, to $1,428 in the third quarter of 2020 as compared to $1,041 in the third quarter of 2019 caused by the lease acceleration expense. For the third quarter, other expenses decreased to $2,918 in 2020 from $2,979 in 2019.
Income Taxes:
We recorded an income tax benefit of $49 for the nine months ended September 30, 2020 as compared to income tax expense of $456 for the nine months ended September 30, 2019. For the three months ended September 30, we recorded income tax expense of $67 in 2020 compared to $486 in 2019.
 
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Riverview Financial Corporation
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a smaller reporting company.
 
Item 4.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
At September 30, 2020, the end of the period covered by this Quarterly Report on Form
10-Q,
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in
Rule 13a-15(e)
under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at September 30, 2020, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.
(b) Changes in internal control.
There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
In the opinion of the Company, after review with legal counsel, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would have a material effect on the consolidated results of operations or financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of the Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.
 
Item 1A.
Risk Factors
Not required for smaller reporting companies.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
 
Item 3.
Defaults upon Senior Securities
Not applicable.
 
Item 4.
Mine Safety Disclosures
Not applicable.
 
Item 5.
Other Information
Not applicable.
 
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Item 6.
Exhibits
The following Exhibits are incorporated by reference hereto:
 
31.1    Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
31.2    Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
32.1    Chief Executive Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2    Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101    Interactive Data File (XBRL).
104    Cover Page Interactive Data File (embedded within the Inline XBRL document).
 
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
By:   /s/ Brett D. Fulk
  Brett D. Fulk
  President and Chief Executive Officer
  (Principal Executive Officer)
Date: November 5, 2020
 
By:   /s/ Scott A. Seasock
  Scott A. Seasock
  Chief Financial Officer
  (Principal Financial Officer)
Date: November 5, 2020
 
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