RIVW FINA
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
unaudited consolidated interim financial statements contained in Part I, Item 1
of this report, and with our audited consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented in our Annual Report on
Form 10-K
for the year ended December 31, 2020 .
Cautionary Note Regarding Forward-Looking Statements:
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are subject to risks and uncertainties.
These statements are based on assumptions and may describe future plans,
strategies and expectations of Riverview Financial Corporation and its direct
and indirect subsidiaries. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. All statements in this report,
other than statements of historical facts, are forward-looking statements.
Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Important factors that could cause our
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: our ability to achieve the intended benefits of
acquisitions and integration of previously acquired businesses; restructuring
initiatives; changes in interest rates; economic conditions, particularly in our
market area; legislative and regulatory changes and the ability to comply with
the significant laws and regulations governing the banking and financial
services business; monetary and fiscal policies of the U.S. government,
including policies of the U.S. Department of Treasury and the Federal Reserve
System ; credit risk associated with lending activities and changes in the
quality and composition of our loan and investment portfolios; demand for loan
and other products; deposit flows; competition; changes in the values of real
estate and other collateral securing the loan portfolio, particularly in our
market area; changes in relevant accounting principles and guidelines; and
inability of third party service providers to perform. Most recently, the risk
factors associated with the onset of
COVID-19
could continue to have a material adverse effect on significant estimates,
operations, and business results of Riverview.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, Riverview Financial Corporation does
not undertake, and specifically disclaims any obligation, to release publicly
the result of any revisions that may be made to any forward-looking statements
to reflect events or circumstances after the date of the statements or to
reflect the occurrence of anticipated or unanticipated events.
Notes to the Consolidated Financial Statements referred to in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") are incorporated by reference into the MD&A. Certain prior period
amounts have been reclassified to conform with the current year's presentation
and did not have any effect on the operating results or financial position of
the Company.
Critical Accounting Policies:
Disclosure of our significant accounting policies are included in Note 1 to the
Consolidated Financial Statements of the Annual Report on
Form 10-K
for the year ended December 31, 2020 . Some of these policies are particularly
sensitive requiring significant judgments, estimates and assumptions. Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties and could potentially result in materially different
results under different assumptions and conditions. We believe that the most
critical accounting policies upon which our financial condition and results of
operation depend, and which involve the most complex subjective decisions or
assessments, are included in Note 1 to the consolidated financial statements in
the Company's Annual Report on
Form 10-K
for the fiscal year ended December 31, 2020 , as filed with the Securities and
Exchange Commission on March 11, 2021 .
Operating Environment:
Economic growth measured as gross domestic product ("GDP"), the value of all
goods and services produced in the United States , increased at an annualized
rate of 6.4% in the first quarter of 2021. This was an increase over the 4.3%
growth realized in the fourth quarter of 2020 and shows a continued recovery
from COVID-19 related contractions indicating government stimulus programs
continue to provide forward momentum. Increases were seen in personal
consumption expenditures, nonresidential fixed investment, federal government
spending, residential fixed investment, and state and local government spending
that were partly offset by decreases in private inventory investment and
exports.
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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 6.0% in March 2021 from 6.7% in December 2020
but was still elevated compared to 4.4% in March 2020 . The average unemployment
rate for counties in our market area increased to 7.1% in March 2021 compared to
6.5% in December 2020 . The resulting impacts of the pandemic on consumer and
business customers, including the sudden significant increase in the
unemployment rate, has caused changes in consumer and business spending,
borrowing needs and saving habits, which has affected the demand for loans and
other products and services we offer, as well as the creditworthiness of
potential and current borrowers and delinquency rates. Our business and consumer
customers are experiencing varying degrees of financial distress 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.
Inflationary pressure continues to increase as Federal stimulus programs
continue to provide funds to the personal and business sectors. The Personal
Consumption Expenditures ("PCE") index increased 3.5% in the first quarter of
2021 compared to an increase of 1.5% in the fourth quarter of 2020. While
supply-side limitations will reduce consumption and increase inflationary
pressure in the short-term, limitations to and/or cessation of supplemental
unemployment programs and PPP loans will have a larger impact on future Federal
Open Market Committee ("FOMC") actions related to short-term interest rates.
Prior year monetary policy actions by the FOMC to decrease the target Federal
Funds rate to a range of 0% to 0.25% have adversely impacted the Company's net
interest margin and will continue to compress earnings on earning assets.
Review of Financial Position:
Total assets increased $17,286 to $1,374,840 at March 31, 2021 , from $1,357,554
at December 31, 2020 . Loans, net, decreased to $1,091,824 at March 31, 2021 ,
compared to $1,139,239 at December 31, 2020 , a decrease of $47,415 . The decrease
in loans was due primarily to SBA forgiveness on PPP loans. Business lending,
including commercial and commercial real estate loans, decreased $44,732 , retail
lending, including residential mortgages and consumer loans, decreased $7,558 ,
and construction lending increased $4,875 during the three months ended
March 31, 2021 . Investment securities increased $52,168 , or 50.3%, in the three
months ended March 31, 2021 . Noninterest-bearing deposits increased $23,760 ,
while interest-bearing deposits increased $41,708 during the three months ended
March 31, 2021 . Total stockholders' equity increased $1,191 , to $98,623 at
March 31, 2021 from $97,432 at
year-end
2020. The increase in stockholders' equity was caused primarily by the
recognition of net income offset partially by a change in accumulated other
comprehensive income. For the three months ended March 31, 2021 , total assets
averaged $1,364,225 , an increase of $278,880 from $1,085,345 for the same period
in 2020.
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 $155,863 at March 31, 2021 , an increase of $52,168 , or 50.3%, from
$103,695 at December 31, 2020 . Activity in the investment portfolio during the
first quarter of 2021, included purchases of $68,371 , sales of $9,898 and
repayments of $2,865 . As a result of modest loan demand in the first quarter of
2021 excess funds from SBA forgiveness were utilized to increase the investment
portfolio. Purchases consisted of $19,391 of U.S. Treasury securities, $6,000 of
corporate bonds, and $10,420 of U. S. Government mortgage-backed securities and
$32,560 of state and municipal obligations. The
tax-equivalent
yield on the bonds purchased in the first quarter of 2021 was 1.72%. In an
effort to reduce cash flow timing risk, we sold $3,483 of corporate bonds,
$4,335 of
tax-exempt
state and municipal obligations and $2,080 of U.S. Government -sponsored
enterprises. The net gain on the sale amounted to $246 in the three months ended
March 31, 2021 compared to a net gain of $815 recognized for the same period
last year.
For the three months ended March 31, 2021 , the investment portfolio averaged
$132,992 , an increase of $50,964 compared to $82,028 for the same period last
year. The
tax-equivalent
yield on the investment portfolio decreased 76 basis points to 2.09% for the
three months ended March 31, 2021 , from 2.85% for the comparable period of 2020.
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 losses of $1,313 ,
net of deferred income tax of $276 at March 31, 2021 . This compares with net
unrealized gains of $1,962 , net of deferred income taxes of $412 at December 31,
2020 . The change in the unrealized holding gain was the result of increases in
general market rates.
Loan Portfolio:
Loans, net, decreased to $1,091,824 at March 31, 2021 from $1,139,239 at
December 31, 2020 , a decrease of $47,415 , or 4.2%. The decrease in the loan
portfolio was attributable to the forgiveness of PPP loans totaling $55,903 and
a decrease in organic loan growth of $9,970 , offset partially by the origination
of PPP loans of $18,458 . Business loans, including commercial and commercial
real
24
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estate loans, decreased $44,732 , or 5.2%, to $816,843 at March 31, 2021 from
$861,575 at December 31, 2020 . Retail loans, including residential real estate
and consumer loans, decreased $7,558 , or 3.7%, to $196,704 at March 31, 2021
from $204,262 at December 31, 2020 . Construction lending increased $4,875 , or
6.6%, to $78,277 at March 31, 2021 from $73,402 at December 31, 2020 . PPP loans,
net of unearned loan fees, totaled $214,365 at March 31, 2021 and $251,810 at
December 31, 2020 .
For the three months ended March 31, 2021 , loans averaged $1,122,546 , an
increase of $248,126 compared to $874,420 for the same period in 2020. The
tax-equivalent
yield on the loan portfolio was 3.82% for the three months ended March 31, 2021 ,
an
82-basis
point decrease from 4.64% 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 yielding PPP loans. Concerns about the spread of
COVID-19
and its anticipated negative impact on economic activity, severely disrupted
domestic financial markets prompting the Federal Open Market Committee of the
Federal Reserve Board to aggressively cut the target Federal Funds rate by
150-basis
points in the first half of 2020. Loan accretion included in loan interest
income in the first three months of 2021 related to acquired loans was $22
compared to $132 for the same period in 2020. The yield earned on PPP loans from
interest and fees was 2.65% for the three months ended March 31, 2021 .
The economic slowdown associated with
COVID-19
may have an adverse impact on the growth and asset quality of our loan
portfolio, especially those industry segments being severely impacted by the
pandemic. Specifically, we have identified the following industries, by the
amount of aggregate loans and percentage of total loans as of March 31, 2021 in
our loan portfolio that may have increased exposure to this pandemic event:
March 31, 2021
% of Total
Industry: Amount Loans
Mining, Quarry, Oil and Gas $ 2,482 0.23 %
Construction-Land Subdivision 20,004 1.83 %
Manufacturing 18,064 1.65 %
Wholesale Trade 3,916 0.36 %
Automobile Dealers 1,975 0.18 %
Non-Residential
Rentals and Leasing 254,703 23.33 %
Residential Rental and Leasing 113,388 10.39 %
Health Care 17,145 1.57 %
Arts, Entertainment and Recreation 6,288 0.58 %
Hospitality 66,914 6.13 %
Restaurants 8,168 0.75 %
$ 513,047 47.00 %
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 March 31, 2021 and December 31, 2020 are summarized as
follows:
March 31, December 31,
2021 2020
Unused portion of lines of credit $ 100,153 $ 92,848
Construction loans 14,906 24,751
Commitments to extend credit 5,740 10,275
Deposit overdraft protection 17,909 18,117
Standby and performance letters of credit 7,313 6,577
Total $ 146,021 $ 152,568
25-------------------------------------------------------------------------------- Table of Contents Asset Quality: National,Pennsylvania and our market area unemployment rates atMarch 31, 2021 and 2020 are summarized as follows: 2021 2020 United States 6.0 % 4.4 % Pennsylvania 7.3 % 5.6 % Berks County 7.6 % 5.5 % Blair County 6.7 % 5.7 % Bucks County 6.1 % 4.8 % Centre County 4.9 % 4.1 % Clearfield County 8.0 % 7.4 % Dauphin County 7.2 % 4.9 % Huntingdon County 8.8 % 8.7 % Lebanon County 6.3 % 4.8 % Lehigh County 7.3 % 5.6 % Lycoming County 7.8 % 6.8 % Perry County 5.5 % 4.7 % Schuylkill County 7.8 % 6.5 % Somerset County 7.9 % 7.7 % Unemployment rates despite improving since the onset of the pandemic were still higher at the end of the first quarter of 2021 compared to the end of first quarter of 2021 for the Nation,Commonwealth of Pennsylvania and within every county in which we have branch locations. The average unemployment rate for all our counties increased to 7.1% inMarch 2021 from 5.9% inMarch 2020 . The lowest unemployment rate in 2021 for all the counties we serve was 4.9% which was inCentre County , and the highest recorded rate being 8.8% inHuntingdon County . High levels or increases in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality. Nonperforming assets increased$1,189 to$13,151 atMarch 31, 2021 from$11,962 atDecember 31, 2020 . The majority of the increase resulted from a commercial real estate loan totaling$971 and two commercial loans totaling$314 moved to non-accrual status. This was partially offset by a reduction in other real estate owned of$203 . As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.20% atMarch 31, 2021 compared to 1.05% atDecember 31, 2020 . Loans on nonaccrual status increased$1,407 to$2,828 atMarch 31, 2021 from$1,421 atDecember 31, 2020 . The increase in nonaccrual loans was due to increases of$968 in commercial real estate loans,$147 in residential loans and$292 in commercial loans. Accruing loans past due 90 days or more increased$9 and accruing restructured loans decreased$24 during the three months endedMarch 31, 2021 . In response to the COVID-19 pandemic and its economic impact to our customers, we implemented short-term modification programs that comply with regulatory and accounting guidance to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due at the time we implemented our modification programs. These programs allow for a deferral of principal, or principal and interest payments for a maximum of 180 days on a cumulative and successive basis. The deferred payments, including interest accrued during the deferral period, if applicable, result in the extension of the loan due date by the number of months deferred. As ofMarch 31, 2021 , 15 loans with outstanding balances totaling$18,611 , or 1.7% of total loans were currently deferring loan payments compared to 19 loans with outstanding balances totaling$21,854 , or 1.9% of total loans atDecember 31, 2020 . 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 ofMarch 31, 2021 , by loan classification: 26
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Weighted Average
% of % of Loan to Value Aggregate Deferred Payments
Number Outstanding Outstanding % of Total % of
of Including Excluding Loan Loans
Loans Amount PPP Loans PPP Loans Classification Modified Principal Interest
Commercial
Construction:
Commercial 1 $ 973 1.96 % $ 30 $ 49
Hospitality 1 1,501 5.26 % 69.04 % 75,28 % 33
Total 2 2,474 3.16 % 30 82
Commercial Real Estate :
Multi Family
Owner Occupied.
Non-Owner
Occupied 2 2,032 0.80 % 85 29
Hospitality 3 13,479 37.77 % 68.07 % 65.71 % 604 358
Agricultural 1 154 0.58 % 103 10
Total 6 15,665 3.20 % 792 397
Residential Real Estate 7 473 0.25 % 16 16
Consumer
Total 15 $ 18,612 1.70 % 2.12 % $ 838 $ 495
We maintain the allowance for loan losses at a level we believe adequate to
absorb probable credit losses related to specifically identified loans, as well
as probable incurred loan losses inherent in the remainder of the loan portfolio
as of the balance sheet date. The allowance for loan losses is based on past
events and current economic conditions. We employ the Federal Financial
Institutions Examination Council Interagency Policy Statement, as amended, and
GAAP in assessing the adequacy of the allowance account.
Under GAAP, the adequacy of the allowance account is determined based on the
provisions of FASB Accounting Standards Codification ("ASC") 310, "Receivables",
for loans specifically identified to be individually evaluated for impairment
and the requirements of FASB ASC 450, "Contingencies", for large groups of
smaller-balance homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by
applying it in the same manner regardless of whether the allowance is being
determined at a high point or a low point in the economic cycle. Each quarter,
the Chief Credit Officer identifies those loans to be individually evaluated for
impairment and those loans collectively evaluated for impairment utilizing
standard criteria. Grades are assigned quarterly to loans identified to be
individually evaluated. A loan's grade may differ from period to period based on
current conditions and events. However, we consistently utilize the same grading
system each quarter. We consistently use loss experience from the latest eight
quarters in determining the historical loss factor for each pool collectively
evaluated for impairment. Qualitative factors are evaluated in the same manner
each quarter and are adjusted within a relevant range of values based on current
conditions. We continue to evaluate risks which may impact our loan portfolios.
As a result of the coronavirus pandemic and resultant business shutdowns and
unemployment spikes, we reviewed our loan portfolio segments, assessing the
likely impact of
COVID-19
on each segment and established specific qualitative adjustment factors. As we
weigh additional information on the potential impact of this event on our
overall economic prospects coupled with our loan officers' further assessments
of the impact on individual borrowers, our delinquencies and loss estimates will
be revised as needed, and these revisions could have a material impact on future
provisions to the allowance for loan losses and results of operations. For
additional disclosure related to the allowance for loan losses refer to the note
entitled, "Loans, net and Allowance for Loan Losses", in the Notes to
Consolidated Financial Statements to this Quarterly Report.
The allowance for loan losses decreased $60 to $12,140 at March 31, 2021 , from
$12,200 at the end of 2020. The Company did not recognize a charge in the form
of a provision for loan losses in the first quarter of 2021 based on the results
from its adequacy modeling of the allowance for loan loss account at March 31,
2021 . Exclusive of PPP loans, the portfolio declined this quarter which, along
with decreased qualitative factors stemming primarily from improved economic
conditions, resulted in no provision for loan losses being recognized in the
first quarter of 2021. For the three months ended March 31 , net charge offs were
$60 , or 0.02%, of average loans outstanding in 2021 compared to $1,065 , or
0.49%, of average loans outstanding for the same period in 2020.
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Deposits:
We attract the majority of our deposits from within our
13-county
market area by offering various deposit products including demand deposit
accounts, NOW accounts, business checking accounts, money market deposit
accounts, savings accounts, club accounts and time deposits, including
certificates of deposit and IRA's. For the three months ended March 31, 2021 ,
total deposits increased $65,468 to $1,080,928 from $1,015,460 at December 31,
2020 . Approximately
two-thirds
of the increase was due to the successful acquisition of a municipal
relationship in the first quarter of 2021. Noninterest-bearing transaction
accounts increased $23,760 , while interest-bearing accounts increased $41,708 .
Specifically, interest-bearing transaction accounts, including money market, NOW
and savings, increased $45,411 and time deposits, including certificates of
deposit and individual retirement accounts decreased $3,703 for the three months
ended March 31, 2021 .
For the three months ended March 31 , interest-bearing deposits averaged $863,765
in 2021 compared to $795,084 in 2020. The cost of interest-bearing deposits was
0.43% in 2021 compared to 0.90% in 2020. 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 .
On January 15, 2021 , the Company announced the execution of a definitive
agreement whereby AmeriServ Financial, Inc. will acquire Citizens Neighborhood
Bank's ("CNB"), an operating division of Riverview Bank , branch and deposit
customers in Meyersdale, Pennsylvania , as well as the deposit customers of CNB's
leased branch in the Borough of Somerset . The transaction is scheduled to close
on May 21, 2021 . At March 31, 2021 , the related deposits totaled $44,713 million
and will be acquired for a 3.71% deposit premium and are considered as held for
assumption within total deposits.
Borrowings:
The Bank utilizes borrowings as a secondary source of liquidity for its
asset/liability management. Advances are available from the Federal Home Loan
Bank of Pittsburgh ("FHLB") provided certain standards related to credit
worthiness have been met. Repurchase and term agreements are also available from
the FHLB.
Short-term borrowings are generally used to meet temporary funding needs and
consist of federal funds purchased, securities sold under agreements to
repurchase, and overnight and short-term borrowings from Atlantic Community
Bankers Bank ("ACBB"), Pacific Community Bankers Bank ("PCBB") and the FHLB. At
March 31, 2021 and December 31, 2020 , we did not have any short-term borrowings
outstanding.
Long-term debt totaled $180,644 at March 31, 2021 as compared to $228,765 at
December 31, 2020 . For the three months ended March 31 , long-term debt averaged
$209,781 in 2021 and $11,817 in 2020. The large increase in average 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 March 31, 2021 , we had
outstanding borrowings through the program of $128,736 at a rate of 0.35%,
compared to outstanding borrowings of $176,904 at a rate of 0.35% at
December 31, 2020 . The average cost of long-term debt was 1.25% for the three
months ended March 31, 2021 , a decrease from 4.19% for the same period last
year.
Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from
adverse changes in market rates or prices, such as interest rates, foreign
exchange rates or equity prices. Our exposure to market risk is primarily
interest rate risk ("IRR") associated with our lending, investing and
deposit-gathering activities. During the normal course of business, we are not
exposed to foreign exchange risk or commodity price risk. Our exposure to IRR
can be explained as the potential for change in our reported earnings and/or the
market value of our net worth. Variations in interest rates affect earnings by
changing net interest income and the level of other interest-sensitive income
and operating expenses. Interest rate changes also affect the underlying
economic value of our assets, liabilities, and
off-balance
sheet items. These changes arise because the present value of future cash flows,
and often the cash flows themselves, change with interest rates. The effects of
the changes in these present values reflect the change in our underlying
economic value and provide a basis for the expected change in future earnings
related to interest rates. IRR is inherent in the role of banks as financial
intermediaries. However, a bank with a high degree of IRR may experience lower
earnings, impaired liquidity, and capital positions, and most likely, a greater
risk of insolvency. Therefore, banks must carefully evaluate IRR to promote
safety and soundness in their activities.
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As a result of the FOMC's recent actions to lower short-term interest rates in
order to mitigate the impact of the
COVID-19
pandemic on the economy, it has become increasing more challenging to manage
IRR. IRR and effectively managing it are very important to both Bank management
and regulators. Bank regulations require us to develop and maintain an IRR
management program that is overseen by the Board of Directors and senior
management, which involves a comprehensive risk management process to
effectively identify, measure, monitor and control risk. Should bank regulatory
agencies identify a material weakness in a bank's risk management process or
high-risk exposure relative to capital, bank regulatory agencies may take action
to remedy these shortcomings. Moreover, the level of IRR exposure and the
quality of a bank's risk management process is a determining factor when
evaluating capital adequacy.
The Asset Liability Committee ("ALCO"), comprised of members of our senior
management and other appropriate officers, oversees our IRR management program.
Specifically, ALCO analyzes economic data and market interest rate trends, as
well as competitive pressures, and utilizes computerized modeling techniques to
reveal potential exposure to IRR. This allows us to monitor and attempt to
control the influence these factors may have on our rate-sensitive assets
("RSA") and rate-sensitive liabilities ("RSL"), and overall operating results
and financial position. One such technique utilizes a static gap model that
considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap
analysis attempts to measure our interest rate exposure by calculating the net
amount of RSA and RSL that reprice within specific time intervals. A positive
gap occurs when the amount of RSA repricing in a specific period is greater than
the amount of RSL repricing within that same time frame and is indicated by a
RSA/RSL ratio greater than 1.0. Conversely, a negative gap occurs when the
amount of RSL repricing is greater than the amount of RSA and is indicated by a
RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be
impacted favorably if interest rates rise and adversely if interest rates fall
during the period. A negative gap tends to indicate that earnings will be
affected inversely to interest rate changes.
Our cumulative
one-year
RSA/RSL ratio equaled 1.50 at March 31, 2021 . Given the recent monetary policy
actions of the FOMC based on uncertainty surrounding the timing of the recovery
from the pandemic and the potential for rates to remain at these low levels, the
focus of ALCO has been to reduce our exposure to the effects of repricing
assets.
The current position at March 31, 2021 , indicates that the amount of RSA
repricing within one year would exceed that of RSL, with declining rates causing
a slight decrease in net interest income. However, these forward-looking
statements are qualified in the aforementioned section entitled "Forward-Looking
Discussion" in this Management's Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes normally do not equally or simultaneously affect all categories of
assets and liabilities. Second, assets and liabilities that can contractually
reprice within the same period may not do so at the same time or to the same
magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout
the year. Finally, assumptions must be made in constructing such a table.
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Given an
instantaneous and parallel shift in interest rates of plus and minus 100 basis
points, our projected net interest income for the 12 months ending March 31,
2021 , would increase 2.7% and decrease 5.1% from model results using current
interest rates. We will continue to monitor our IRR through employing deposit
and loan pricing strategies and directing the reinvestment of loan and
investment repayments to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of our assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely measure the impact inflation has on us, however we believe that our
exposure to inflation can be mitigated through asset/liability management.
Liquidity:
Liquidity management is essential to our continuing operations and enables us to
meet financial obligations as they come due, as well as to take advantage of new
business opportunities as they arise. Financial obligations include, but are not
limited to, the following:
• Funding new and existing loan commitments;
• Payment of deposits on demand or at their contractual maturity;
• Repayment of borrowings as they mature;
• Payment of lease obligations; and
• Payment of operating expenses.
29-------------------------------------------------------------------------------- Table of Contents 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. AtMarch 31, 2021 , we had available liquidity of$63,164 from cash and interest-bearing balances with other banks. Our investment securities portfolio is comprised primarily of highly liquidU.S. Government andGovernment-Sponsored Enterprises and high credit quality municipal securities. AtMarch 31, 2021 , available-for-sale investment securities totaled$155,863 . Our secondary sources of liquidity consist of the available borrowing capacity at theFederal Home Loan Bank ("FHLB"),Atlantic Community Bankers Bank ("ACBB") andPacific Coast Bankers Bank ("PCBB"). AtMarch 31, 2021 , our available borrowing capacity was$395,535 at the FHLB,$10,000 at ACBB and$50,000 at PCBB. With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe, and extreme scenarios, we have instituted a formalized monthly presentation using various metrics to assist the Board of Directors in assessing our liquidity position. With the changes in the industry related to COVID-19, we have focused on maintaining greater liquidity. We employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing afterMarch 31, 2021 . Our noncore funds atMarch 31, 2021 were comprised of time deposits in denominations of$250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. AtMarch 31, 2021 , our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 11.81%, while our net short-term noncore funding ratio, noncore funds maturing within one-year, less short-term investments to assets equaled (0.74)%. Comparatively, our net noncore dependence ratio was 14.6% while our net short-term noncore funding ratio was 0.94% at year-end. The decrease in the noncore funding dependence ratios is associated with lower borrowing to fund investment in PPP loans which is anticipated to reduce substantially as these loans continue to 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, increased$13,383 during the three months endedMarch 31, 2021 as compared with an increase of$22,887 for the same period last year. For the three months endedMarch 31, 2021 , we realized net cash inflows of$4,147 from operating activities and$17,434 from financing activities offset partially by net cash outflows of$8,198 . For the three months endedMarch 31, 2020 , we realized net cash inflows of$383 from operating activities and$37,511 from financing activities offset partially by net cash outflows of$15,007 from investing activities. Operating activities provided net cash of$4,147 for the three months endedMarch 31, 2021 compared to$383 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations. Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of$8,198 for the three months endedMarch 31, 2021 . For the comparable period in 2020, investing activities used net cash of$15,007 . For the three months endedMarch 31, 2021 , loan forgiveness from PPP loans offset by purchases of investment securities available-for-sale were the primary factors for the net cash used in investing activities. For the comparable period of 2020, loan originations more than offset net proceeds received on the sale of investment securities available-for-sale. Financing activities provided net cash of$17,434 for the three months endedMarch 31, 2021 and net cash of$37,511 for the same period last year. Liquidity was generated through funds from deposit gathering offset by repayments on long-term debt from theFederal Reserve Bank's PPPLF secured borrowing arrangement for the purpose of financing PPP loans. During the three months endedMarch 31 , deposits increased$65,468 in 2021 and$18,023 in 2020. 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. 30 -------------------------------------------------------------------------------- Table of Contents Capital: Stockholders' equity totaled$98,623 , or$10.55 per share, atMarch 31, 2021 , and$97,432 , or$10.47 per share, atDecember 31, 2020 . The net increase in stockholders' equity in the three months endedMarch 31, 2021 was primarily a result of the recognition of net income offset by a change in other accumulated comprehensive income. 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. OnNovember 13, 2019 , the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio ("CBLR"), which became effective onJanuary 1, 2020 . The intent of the CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9.0% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold and will not be required to calculate and report risk-based capital ratios. InApril 2020 , under the CARES Act, the 9.0% leverage ratio threshold was temporarily reduced to 8.0% in response to the COVID-19 pandemic. The threshold increased to 8.5% in 2021 and will return to 9.0% in 2022. The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following: • Total assets of less than$10 billion ,
• Total trading assets plus liabilities of 5.0% or less of consolidated
assets,
• Total
off-balance
sheet exposures of 25.0% or less of consolidated assets,
• Cannot be an advanced approaches banking organization, and
• Leverage ratio greater than 9.0%, or temporarily prescribed threshold
established in response to
COVID-19.
As ofMarch 31, 2021 andDecember 31, 2020 , the Bank was categorized as well capitalized. Listed in the table below is a comparison of the Bank's actual capital amounts with the minimum requirements for well capitalized banks, as defined above. Minimum Regulatory Capital Ratios under Well Capitalized under Actual Basel III Basel III March 31, 2021: Amount Ratio Amount Ratio Amount Ratio CBLR Framework Tier 1 capital (to average total (1) (1) assets): (i.e., leverage ratio)$ 118,560 9.9 %$ 102,214 ³ 8.5 % Minimum Regulatory Capital Ratios under Well Capitalized under Actual Basel III Basel III December 31, 2020: Amount Ratio Amount Ratio Amount Ratio Total risk-based capital (to risk-weighted assets)$ 126,108 14.2 % $
93,462 ³ 10.5 %
114,967 12.9 75,659 ³ 8 .5 71,209 ³ 8 .0
Common equity tier 1 risk-based
capital (to risk-weighted assets) 114,967 12.9 62,308 ³ 7 .0 57,857 ³ 6 .5
Tier 1 capital (to average total
assets) 114,967 9.8 47,102 ³ 4 .0 58,877 ³ 5 .0
(1) Under the CBLR Framework, capital adequacy amounts and ratios are not
applicable as qualifying depositary institutions are evaluated solely on
whether or not they are well capitalized.
In light of the 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;
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• 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 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 March 31, 2021 and December 31, 2020 . There are no
conditions or negative events since this notification that we believe have
changed the Bank's well capitalized status.
Review of Financial Performance:
We reported net income of $3,060 , or $0.33 per basic and diluted weighted
average common share, for the three months ended March 31, 2021 , compared to net
income of $633 , or $0.07 per basic and diluted weighted average common share,
for the same period last year. The increase in the Company's earnings for the
three months ended March 31, 2021 as compared to the same period in 2020 was the
result of the impact of ongoing efficiency initiatives, including branch office
consolidations, an increase in loan income from the recognition of interest and
fees earned on PPP loans and lower deposit costs. The Company implemented cost
reduction strategies beginning in 2019, and those efforts continued through the
end of the fourth quarter of 2020 by implementing additional efficiency
initiatives aimed at substantially lowering operating costs. The
COVID-19
pandemic continues to place additional pressure on the Bank's earnings, causing
increased emphasis on the need to improve operational efficiency to help
mitigate margin compression and noninterest income reductions. As a result,
Riverview closed two branch offices in January 2021 and will be completing the
sale of two additional branches in May of 2021.
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.
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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 2021 and 2020,
respectively.
For the three months ended March 31 ,
tax-equivalent
net interest income increased $851 to $9,697 in 2021 from $8,846 in 2020. For
the quarter ended March 31 ,
tax-equivalent
interest income increased $503 while interest expense decreased $348 .
Tax-equivalent
interest income increased to $11,266 in 2021 from $10,763 in 2020 caused by an
increase in average earning assets of $304,701 , offset partially by a decrease
in the
tax-equivalent
yield on earning assets of 85 basis points. Net interest income generated from
PPP loans amounted to $1,412 in the first quarter of 2021. Interest expense
decreased to $1,569 in 2021 from $1,917 in 2020 as a result of a 36 basis point
decrease in the cost of funds offset partially by an increase in average
interest-bearing liabilities of $265,656 . Interest expense on deposits decreased
$866 to $923 for the three months ended March 31, 2021 from $1,789 for the same
period last year. The
tax-equivalent
net interest margin for the three months ended March 31 was 3.04% in 2021
compared to 3.60% in 2020. The net interest spread decreased to 2.95% for the
three months ended March 31, 2021 from 3.44% for the three months ended
March 31, 2020 . The
tax-equivalent
yield on the loan portfolio decreased to 3.82% in 2021 compared to 4.64% in
2020. Th actions taken by the Federal Open Market Committee in March 2020 to
reduce its target federal funds rate by 150 basis points impacted the loan
portfolio yield as it had a corresponding adverse effect on our floating and
adjustable rate loans and yields obtained on new loan originations. Also
influencing the decline was recognizing the lower yield of 2.65% earned on the
addition of PPP loans. Excluding income and fees earned on PPP loans, the
tax-equivalent
net interest margin would have been 3.19% in the first quarter of 2021.
Comparing the first three months of 2021 and 2020, the weighted average cost of
funds decreased 36 basis points to 0.59% from 0.95%. Money market, NOW account
and time deposit costs declined 0.55%, 0.36% and 0.40%, respectively, and were
the major cause in lowering interest expense on deposits. In addition, the
weighted average fund cost on long-term debt was 1.25% in 2021 compared to 4.19%
in 2020. 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.
33
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The average balances of assets and liabilities, corresponding interest income
and expense and resulting average yields or rates paid are summarized as
follows. Average balances were calculated using average daily balances. Averages
for earning assets include nonaccrual loans. Loan fees are included in interest
income on loans. Investment averages include
available-for-sale
securities at amortized cost. Income on investment securities and loans is
adjusted to a tax equivalent basis using the prevailing federal statutory tax
rate.
Three months ended
March 31, 2021 March 31, 2020
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets:
Earning assets:
Loans:
Taxable $ 1,095,594 $ 10,348 3.83 % $ 838,825 $ 9,782 4.69 %
Tax exempt 26,952 223 3.36 % 35,595 310 3.50 %
Investments:
Taxable 91,549 494 2.19 % 77,400 535 2.78 %
Tax exempt 41,443 192 1.88 % 4,628 47 4.08 %
Interest bearing deposits 36,101 9 0.10 % 30,490 89 1.17 %
Total earning assets 1,291,639 11,266 3.54 % 986,938 10,763 4.39 %
Less: allowance for loan losses 12,188 7,273
Other assets 84,774 105,680
Total assets $ 1,364,225 $ 1,085,345
Liabilities and Stockholders'
Equity:
Interest bearing liabilities:
Money market accounts $ 148,513 43 0.12 % $ 102,072 171 0.67 %
NOW accounts 317,296 86 0.11 % 270,559 319 0.47 %
Savings accounts 163,890 32 0.08 % 133,267 60 0.18 %
Time deposits 234,066 762 1.32 % 289,186 1,239 1.72 %
Short term borrowings 989 5 2.03 %
Long-term debt 209,781 646 1.25 % 11,817 123 4.19 %
Total interest-bearing liabilities 1,073,546 1,569 0.59 % 807,890 1,917 0.95 %
Non-interest-bearing
demand deposits 176,895 144,630
Other liabilities 14,861 13,668
Stockholders' equity 98,923 119,157
Total liabilities and stockholders'
equity $ 1,364,225 Net interest income/spread$ 9,697 2.95 %$ 8,846 3.44 % Net interest margin 3.04 % 3.60 % Tax-equivalent adjustments: Loans$ 47 $ 65 Investments 40 10 Total adjustments$ 87 $ 75 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 ofMarch 31, 2021 . The Company did not recognize a charge in the form of a provision for loan losses in the first quarter of 2021 based on the results from its adequacy modeling of the allowance for loan loss account atMarch 31, 2021 . Comparatively, the provision for loan losses totaled$1,800 for the same period in 2020. The 2020 increase in the provision for loan losses was the combined result of organic loan growth, excluding PPP loan balances outstanding, and changes in qualitative factors related to the allowance for loan losses reserve associated with increasing risks within the economy and our credit portfolio due to the effects of COVID-19. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt. Despite the positive signs with respect to the progress made with the pandemic, our future provisions may increase due to the growth of loan delinquencies and charge-offs resulting from COVID-19 related financial stress. 34
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Table of Contents Noninterest Income: For the three months endedMarch 31 , noninterest income totaled$2,523 in 2021, a decrease of$407 from$2,930 in 2020. The primary contributor to the overall decrease was$569 less in gains on the sale of investment securities offset partially by increases in service charges, fees, and commissions of$93 and the recognition of higher comparable trust and mortgage banking income of$47 and$43 , respectively. Noninterest Expenses: In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance,FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies to control the variable expenses. Noninterest expense decreased to$8,387 for the three months endedMarch 31, 2021 , from$9,212 for the same period last year. The overall decrease was primarily due to a decrease of$589 in salaries and employee benefit expenses due to the implementation of the reduction in force initiatives from branch closures and consolidation of departments. Other expenses decreased$190 comparing the first quarters of 2021 and 2020 due to implementing efficiency initiatives and selective expense reductions made during the COVID-19 shutdowns. Income Taxes: We recorded an income tax expense of$686 for the three months endedMarch 31, 2021 and$56 for the three months endedMarch 31, 2020 . The increase in the income tax expense in 2021 is attributable to recognizing higher taxable income.Riverview Financial Corporation
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