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 6.5% in the second quarter of 2021. This was an increase over the 6.3%
growth realized in the first quarter of 2021 and shows a continued recovery from
COVID-19
related contractions indicating government stimulus programs continue to provide
forward momentum. Increases were seen in personal consumption expenditures,
nonresidential fixed investment, exports, and state and local government
spending that were partly offset by decreases in private inventory investment,
residential fixed investment and federal government spending.

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The impact of the virus has been felt nationally and within our primary market
area as unemployment rates had been elevated but have since returned to more
historically normal levels. The unemployment rate is now substantially lower for
the United States and the Commonwealth of Pennsylvania and was 5.9% and 6.4%,
respectively, in June 2021 compared to 11.1% and 13.2%, respectively, in June
2020. The average unemployment rate for counties in our market area decreased to
6.2% in June 2021 compared to 12.2% in June 2021. The resulting impacts of the
pandemic and subsequent government stimulus programs on consumer and business
customers has caused changes in consumer and business spending, borrowing needs,
and saving habits. This has also affected the demand for loans and other
products and services we offer, as well as the creditworthiness of potential and
current borrowers and delinquency rates. Our business and consumer customers
continue to experience varying degrees of financial distress, but overall, there
has been continued improvement and stability in credit quality metrics
associated with our loan portfolio.
Inflationary pressures continue to increase even as Federal stimulus programs
reduce economic impact payments which had provided funds to the personal and
business sectors. The Personal Consumption Expenditures ("PCE") index, excluding
food and energy prices, increased 6.4% in the second quarter of 2021 compared to
2.7% in the first quarter of 2021. While stimulus payments have helped to
increase demand by providing cash to consumers and businesses, supply-side
limitations have reduced availability of goods and have helped increase prices
on certain goods, all which will have an impact on future Federal Open Market
Committee ("FOMC") actions related to short-term interest rates. Prior year
monetary policy actions by the FOMC to decrease the target Federal Funds rate to
a range of 0% to 0.25% have adversely impacted the Company's net interest margin
and will continue to compress earnings on earning assets.
On June 30, 2021, Riverview entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Mid Penn Bancorp, Inc. ("Mid Penn") pursuant to which
Riverview will merge with and into Mid Penn (the "Merger"), with Mid Penn being
the surviving corporation in the Merger. Upon consummation of the Merger,
Riverview Bank, a wholly-owned subsidiary of Riverview, will be merged with and
into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn, with Mid Penn Bank
being the surviving bank in the Bank Merger. The Merger Agreement was
unanimously approved by the boards of directors of Mid Penn and Riverview. The
Merger is expected to close in the fourth quarter of 2021. Subject to the terms
and conditions of the Merger Agreement, upon consummation of the Merger, each
share of common stock of Riverview will be converted into 0.4833 shares of Mid
Penn common stock, subject to the payment of cash in lieu of fractional shares.
For additional information related to the Merger and Merger Agreement refer to
the Securities and Exchange Commission Report filed by Riverview on July 2,
2021.
Review of Financial Position:
Total assets decreased $142,813 to $1,214,741 at June 30, 2021, from $1,357,554
at December 31, 2020. Loans, net, decreased to $948,740 at June 30, 2021,
compared to $1,139,239 at December 31, 2020, a decrease of $190,499. The
decrease in loans was due primarily to SBA forgiveness payments on PPP loans.
Approximately 75.0%, amounting to $188,866 of outstanding PPP loans at
December 31, 2020, were forgiven in the first half of 2021. Business lending,
including commercial and commercial real estate loans, decreased $161,817,
retail lending, including residential mortgages and consumer loans, decreased
$10,780, and construction lending decreased $17,902 during the six months ended
June 30, 2021. Investment securities increased $44,353, or 42.8%, in the six
months ended June 30, 2021. Noninterest-bearing deposits increased $10,293,
while interest-bearing deposits increased $18,762 during the six months ended
June 30, 2021. Total stockholders' equity increased $6,933, to $104,365 at
June 30, 2021 from $97,432 at
year-end
2020. The increase in stockholders' equity was caused primarily by the
recognition of net income offset partially by a change in accumulated other
comprehensive income. For the six months ended June 30, 2021, total assets
averaged $1,338,729, an increase of $149,643 from $1,189,086 for the same period
in 2020.
Investment Portfolio:
The Company's entire investment portfolio is held 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 $148,048 at June 30, 2021, an increase of $44,353, or 42.8%, from
$103,695 at December 31, 2020. Activity in the investment portfolio during the
first half of 2021, included purchases of $74,503, sales of $19,519 and
repayments of $8,056. As a result of modest loan demand in the first six months
of 2021, excess funds from SBA forgiveness were utilized to increase the
investment portfolio. Purchases consisted of $19,391 of U.S. Treasury
securities, $8,000 of corporate bonds, and $14,553 of U. S. Government
mortgage-backed securities and $32,559 of state and municipal obligations. The
tax-equivalent
yield on the bonds purchased in the first six months of 2021 was 1.73%. In an
effort to reduce interest rate risk, we sold $9,622 of U.S. Treasury securities,
$3,482 of corporate bonds, $4,334 of
tax-exempt
state and municipal obligations and $2,081 of U.S. Government-sponsored
enterprises. The net gain on the sale amounted to $273 in the six months ended
June 30, 2021 compared to a net gain of $815 recognized for the same period last
year.
For the six months ended June 30, 2021, the investment portfolio averaged
$141,404, an increase of $67,054 compared to $74,350 for the same period last
year. The
tax-equivalent
yield on the investment portfolio decreased 85 basis points to 2.03% for the six
months ended June 30, 2021, from 2.88% for the comparable period of 2020.
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 $61, net
of deferred income tax of $13 at June 30, 2021, and net unrealized gains of
$1,962, net of deferred income taxes of $412 at December 31, 2020. The change in
the unrealized holding gain was the result of increases in general market rates.

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Loan Portfolio:
Loans, net, decreased to $948,740 at June 30, 2021 from $1,139,239 at
December 31, 2020, a decrease of $190,499, or 16.7%. The decrease in the loan
portfolio was attributable to forgiveness payments on PPP loans totaling
$188,866 and a decrease in organic loan growth of $21,093, offset partially by
the origination of PPP loans of $19,460. Business loans, including commercial
and commercial real estate loans, decreased $161,817, or 18.8%, to $699,758 at
June 30, 2021 from $861,575 at December 31, 2020. Retail loans, including
residential real estate and consumer loans, decreased $10,780, or 5.3%, to
$193,482 at June 30, 2021 from $204,262 at December 31, 2020. Construction
lending decreased $17,902, or 24.4%, to $55,500 at June 30, 2021 from $73,402 at
December 31, 2020. PPP loans, net of unearned loan fees, totaled $82,404 at
June 30, 2021 and $251,810 at December 31, 2020.
For the six months ended June 30, 2021, loans averaged $1,074,211, an increase
of $99,059 compared to $975,152 for the same period in 2020. The
tax-equivalent
yield on the loan portfolio was 4.19% for the six months ended June 30, 2021, a
14 basis point decrease from 4.33% for the comparable period last year. The
continuation of the low interest rate environment caused a decline in loan yield
as higher yields from payments and prepayments on existing loans are replaced by
lower yields originated on new and refinanced loans. Concerns about the spread
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 six months of 2021 related to acquired loans was $58
compared to $292 for the same period in 2020. The yield earned on PPP loans from
interest and fees increased to 4.47% for the six months ended June 30, 2021 due
an acceleration in the recognition in fees from higher levels of loan
forgiveness as compared to 2.48% for the same period in 2020.
In addition to the risks inherent in our loan portfolio in the normal course of
business, we are also a party to financial instruments with
off-balance
sheet risk to meet the financing needs of our customers. These instruments
include legally binding commitments to extend credit, unused portions of lines
of credit and commercial letters of credit made under the same underwriting
standards 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 June 30, 2021 and December 31, 2020 are summarized as
follows:

                                            June 30,       December 31,
                                              2021             2020

Unused portions of lines of credit $ 102,141 $ 92,848 Construction loans

                             14,320             24,751
Commitments to extend credit                   12,797             10,275
Deposit overdraft protection                   18,031             18,117
Standby and performance letters of credit       7,274              6,577

Total                                       $ 154,563     $      152,568



Asset Quality:
National, Pennsylvania and our market area unemployment rates at June 30, 2021
and 2020 are summarized as follows:

                    2021        2020
United States         5.9 %      11.1 %
Pennsylvania          6.4 %      13.2 %
Berks County          6.7 %      13.9 %
Blair County          6.0 %      11.6 %
Bucks County          5.3 %      12.8 %
Centre County         5.2 %       8.5 %
Clearfield County     7.0 %      11.6 %
Dauphin County        6.4 %      13.5 %
Huntingdon County     6.7 %      13.8 %
Lebanon County        5.6 %      12.0 %
Lehigh County         7.1 %      14.7 %
Lycoming County       6.5 %      11.5 %
Perry County          4.7 %       9.6 %
Schuylkill County     6.6 %      12.7 %



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Unemployment rates have improved substantially since the onset of the pandemic
and are significantly better at the end of the second quarter of 2021 compared
to the end of second quarter of 2021 for the Nation, Commonwealth of
Pennsylvania and within every county in which we have branch locations. The
average unemployment rate for all our counties decreased to 5.5% in June 2021
from 12.2% in June 2020. The lowest unemployment rate in 2021 for all the
counties we serve was 4.7% which was in Perry County, and the highest recorded
rate being 7.1% in Lehigh County. High levels or increases in unemployment rates
may have a negative impact on economic growth within these areas and could have
a corresponding effect on our business by decreasing loan demand and weakening
asset quality.
Nonperforming assets increased $20 to $11,982 at June 30, 2021 from $11,962 at
December 31, 2020. The increase resulted from a $975 increase in nonaccrual
loans, which was offset by reductions of $687 in accruing restructured loans,
$203 in other real estate owned and $65 in accruing loans past due 90 days or
more. The increase in nonaccrual loans was due to increases of $155 in
commercial real estate loans, $957 in construction loans, and $48 in residential
loans partially offset by a reduction of $185 in commercial loans. As a
percentage of loans, net and foreclosed assets, nonperforming assets equaled
1.26% at June 30, 2021 compared to 1.05% at December 31, 2020. Nonperforming
assets decreased $1,169 in the second quarter of 2021 due to reductions of $432
in nonaccrual loans, $663 in accruing restructured loans and $74 in accruing
loans past due 90 days or more.
In response to the
COVID-19
pandemic and its economic impact to our customers, we implemented short-term
modification programs that comply with regulatory and accounting guidance to
provide temporary payment relief to those borrowers directly impacted by
COVID-19
who were not more than 30 days past due at the time we implemented our
modification programs. These programs allow for a deferral of principal, or
principal and interest payments for a maximum of 180 days on a cumulative and
successive basis. The deferred payments, including interest accrued during the
deferral period, if applicable, result in the extension of the loan due date by
the number of months deferred.
As of June 30, 2021, seven loans with outstanding balances totaling $5,956, or
0.6% of total loans, were deferring loan payments compared to 19 loans with
outstanding balances totaling $21,854, or 1.9% of total loans at December 31,
2020. We have experienced significant reductions in the number and amount of
modified loans under this program since its inception in the second quarter of
2020. In comparison, as of June 30, 2020, we had outstanding modifications to
consumer and commercial customers for 501 loans totaling $256,422, or 22.0%, of
total loans. Depending on the circumstances and request from the borrower,
modifications were made to defer all payments for loans requiring principal and
interest payments, or to defer principal payments only and continue to collect
interest payments, or to defer all interest payments for loans requiring
interest only payments.
We maintain the allowance for loan losses at a level we believe adequate to
absorb probable credit losses related to specifically identified loans, as well
as probable incurred loan losses inherent in the remainder of the loan portfolio
as of the balance sheet date. The allowance for loan losses is based on past
events and current economic conditions. We employ the Federal Financial
Institutions Examination Council Interagency Policy Statement, as amended, and
GAAP in assessing the adequacy of the allowance account.
Under GAAP, the adequacy of the allowance account is determined based on the
provisions of FASB Accounting Standards Codification ("ASC") 310, "Receivables",
for loans specifically identified to be individually evaluated for impairment
and the requirements of FASB ASC 450, "Contingencies", for large groups of
smaller-balance homogeneous loans to be collectively evaluated for impairment.
We follow our systematic methodology in accordance with procedural discipline by
applying it in the same manner regardless of whether the allowance is being
determined at a high point or a low point in the economic cycle. Each quarter,
the Chief Credit Officer identifies those loans to be individually evaluated for
impairment and those loans collectively evaluated for impairment utilizing
standard criteria. Grades are assigned quarterly to loans identified to be
individually evaluated. A loan's grade may differ from period to period based on
current conditions and events. However, we consistently utilize the same grading
system each quarter. We consistently use loss experience from the latest eight
quarters in determining the historical loss factor for each pool collectively
evaluated for impairment. Qualitative factors are evaluated in the same manner
each quarter and are adjusted within a relevant range of values based on current
conditions. We continue to evaluate risks which may impact our loan portfolios.
As a result of the coronavirus pandemic and resultant business shutdowns and
unemployment spikes, we reviewed our loan portfolio segments, assessing the
likely impact of
COVID-19
on each segment and established specific qualitative adjustment factors. As we
weigh additional information on the potential impact of this event on our
overall economic prospects coupled with our loan officers' further assessments
of the impact on individual borrowers, our delinquencies and loss estimates will
be revised as needed, and these revisions could have a material impact on future
provisions to the allowance for loan losses and results of operations. For
additional disclosure related to the allowance for loan losses refer to the note
entitled, "Loans, net and Allowance for Loan Losses", in the Notes to
Consolidated Financial Statements to this Quarterly Report.
The allowance for loan losses decreased $1,333 to $10,867 at June 30, 2021, from
$12,200 at the end of 2020 as a result of recognizing a recovery of provision
for loan losses and net charge offs. We recognized a $735 recovery of provision
for loan losses in the second quarter of 2021 due to experiencing continued
stability in the credit quality of the loan portfolio since the onset of the
pandemic, as well as evidence of an overall mitigation of related risks factors.
As a result of the uncertainty of the magnitude and longevity of the impact of
COVID-19,
the Company bolstered its allowance for loan losses through additional
provisions totaling

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$6,282 in 2020 due primarily to increased qualitative factors for the economy
and concentrations in industries specifically affected by the virus. Current
national and local economic conditions reflect a more stable economic climate in
2021 compared with the previous year. The Company was able to decrease its
qualitative factors in the second quarter based on the remaining low number of
CARES Act payment deferrals, improvements in industries most likely to be
affected by the pandemic, and continued stability in the credit quality metrics
of the loan portfolio. For the six months ended June 30, net charge offs were
$598, or 0.11% of average loans outstanding in 2021 compared to $1,592, or 0.33%
of average loans outstanding for the same period in 2020.
Deposits:
We attract the majority of our deposits from within our
12-county
market area by offering various deposit products including demand deposit
accounts, NOW accounts, business checking accounts, money market deposit
accounts, savings accounts, club accounts and time deposits, including
certificates of deposit and individual retirement accounts. For the six months
ended June 30, 2021, total deposits increased $29,055 to $1,044,515 from
$1,015,460 at December 31, 2020. The increase was due to the successful
acquisition of a municipal relationship in the first six months of 2021.
Noninterest-bearing transaction accounts increased $10,293, while
interest-bearing accounts increased $18,762. Specifically, interest-bearing
transaction accounts, including money market, NOW and savings, increased $47,700
and time deposits, including certificates of deposit and individual retirement
accounts decreased $28,938 for the six months ended June 30, 2021.
For the six months ended June 30, interest-bearing deposits averaged $871,397 in
2021 compared to $816,298 in 2020. The cost of interest-bearing deposits was
0.40% in 2021 compared to 0.78% in 2020. Consistent with recent FOMC actions to
keep short-term rates at a historically low level due to the onset of
COVID-19,
we took action to lower deposit rates to fend off net interest margin
contraction due to changes in loan yields as payments on higher earning existing
loans are replaced by lower yields originated on new and refinanced loans. We
anticipate deposit costs to continue to decrease in the short term based on the
continued market rate impact of FOMC actions.
On May 21, 2021, Riverview Bank, the wholly-owned subsidiary of Riverview
Financial Corporation, completed its previously announced branch sale to
AmeriServ Financial Bank, whereby AmeriServ Financial Bank acquired the branch
office and deposit customers of Citizens Neighborhood Bank ("CNB"), an operating
division of Riverview Bank, located in Meyersdale, Pennsylvania, as well as the
deposit customers of CNB's leased branch office in the Borough of Somerset,
Pennsylvania. The transferred deposits totaled $42,191 and were acquired for a
3.71% deposit premium amounting to $1,602.
Borrowings:
The Bank utilizes borrowings as a secondary source of liquidity for its
asset/liability management. Advances are available from the Federal Home Loan
Bank of Pittsburgh ("FHLB") provided certain standards related to credit
worthiness have been met. Repurchase and term agreements are also available from
the FHLB.
Short-term borrowings are generally used to meet temporary funding needs and
consist of federal funds purchased, securities sold under agreements to
repurchase, and overnight and short-term borrowings from Atlantic Community
Bankers Bank ("ACBB"), Pacific Community Bankers Bank ("PCBB") and the FHLB. At
June 30, 2021 and December 31, 2020, we did not have any short-term borrowings
outstanding.
Long-term debt totaled $51,956 at June 30, 2021 as compared to $228,765 at
December 31, 2020. The large decrease in long-term debt is attributable to the
payoff of all existing advances taken through the Federal Reserve Bank's PPPLF,
whereby loans originated through the PPP program were pledged as security to
facilitate advancements made through the program. For the six months ended
June 30, long-term debt averaged $167,378 in 2021 and $67,346 in 2020. The
average cost of long-term debt was 1.48% for the six months ended June 30, 2021,
an increase from 1.04% for the same period last year.
Market Risk Sensitivity:
Market risk is the risk to our earnings or financial position resulting from
adverse changes in market rates or prices, such as interest rates, foreign
exchange rates or equity prices. Our exposure to market risk is primarily
interest rate risk ("IRR") associated with our lending, investing and
deposit-gathering activities. During the normal course of business, we are not
exposed to foreign exchange risk or commodity price risk. Our exposure to IRR
can be explained as the potential for change in our reported earnings and/or the
market value of our net worth. Variations in interest rates affect earnings by
changing net interest income and the level of other interest-sensitive income
and operating expenses. Interest rate changes also affect the underlying
economic value of our assets, liabilities, and
off-balance
sheet items. These changes arise because the present value of future cash flows,
and often the cash flows themselves, change with interest rates. The effects of
the changes in these present values reflect the change in our underlying
economic value and provide a basis for the expected change in future earnings
related to interest rates. IRR is inherent in the role of banks as financial
intermediaries. However, a bank with a high degree of IRR may experience lower
earnings, impaired liquidity, and capital positions, and most likely, a greater
risk of insolvency. Therefore, banks must carefully evaluate IRR to promote
safety and soundness in their activities.

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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 1.68 at June 30, 2021. Given the recent monetary policy
actions of the FOMC based on uncertainty surrounding the timing of the recovery
from the pandemic and the potential for rates to remain at these low levels, the
focus of ALCO has been to reduce our exposure to the effects of repricing
assets.
The current position at June 30, 2021, indicates that the amount of RSA
repricing within one year would exceed that of RSL, with declining rates causing
a slight decrease in net interest income. However, these forward-looking
statements are qualified in the aforementioned section entitled "Forward-Looking
Discussion" in this Management's Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully
illustrate the impact of interest rate changes on future earnings. First, market
rate changes normally do not equally or simultaneously affect all categories of
assets and liabilities. Second, assets and liabilities that can contractually
reprice within the same period may not do so at the same time or to the same
magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout
the year. Finally, assumptions must be made in constructing such a table.
As the static gap report fails to address the dynamic changes in the balance
sheet composition or prevailing interest rates, we utilize a simulation model to
enhance our asset/liability management. This model is used to create pro forma
net interest income scenarios under various interest rate shocks. Given an
instantaneous and parallel shift in interest rates of plus and minus 100 basis
points, our projected net interest income for the 12 months ending June 30,
2021, would increase 6.2% and decrease 5.0% from model results using current
interest rates. We will continue to monitor our IRR through employing deposit
and loan pricing strategies and directing the reinvestment of loan and
investment repayments to manage our IRR position.
Financial institutions are affected differently by inflation than commercial and
industrial companies that have significant investments in fixed assets and
inventories. Most of our assets are monetary in nature and change
correspondingly with variations in the inflation rate. It is difficult to
precisely measure the impact inflation has on us, however we believe that our
exposure to inflation can be mitigated through asset/liability management.
Liquidity:
Liquidity management is essential to our continuing operations and enables us to
meet financial obligations as they come due, as well as to take advantage of new
business opportunities as they arise. Financial obligations include, but are not
limited to, the following:

  •   Funding new and existing loan commitments;



  •   Payment of deposits on demand or at their contractual maturity;



  •   Repayment of borrowings as they mature;



  •   Payment of lease obligations; and



  •   Payment of operating expenses.


These obligations are managed daily, thus enabling us to effectively monitor
fluctuations in our liquidity position and to adapt that position according to
market influences and balance sheet trends. Future liquidity needs are
forecasted, and strategies are developed to ensure adequate liquidity at all
times.

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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
June 30, 2021, we had available liquidity of $57,508 from cash and
interest-bearing balances with other banks. Our investment securities portfolio
is comprised primarily of highly liquid U.S. Government and Government-Sponsored
Enterprises and high credit quality municipal securities. At June 30, 2021,
available-for-sale
investment securities totaled $148,048. Our secondary sources of liquidity
consist of the available borrowing capacity at the Federal Home Loan Bank
("FHLB"), Atlantic Community Bankers Bank ("ACBB") and Pacific Coast Bankers
Bank ("PCBB"). At June 30, 2021, our available borrowing capacity was $362,318
at the FHLB, $10,000 at ACBB and $50,000 at PCBB.
With respect to monitoring and managing our liquidity, in addition to our normal
quarterly liquidity reporting to the Risk Committee that includes stress testing
under moderate, severe, and extreme scenarios, we have instituted a formalized
monthly presentation using various metrics to assist the Board of Directors in
assessing our liquidity position. With the changes in the industry related to
COVID-19,
we have focused on maintaining greater liquidity.
We employ several analytical techniques in assessing the adequacy of our
liquidity position. One such technique is the use of ratio analysis to determine
the extent of our reliance on noncore funds to fund our investments and loans
maturing after June 30, 2021. Our noncore funds at June 30, 2021 were comprised
of time deposits in denominations of $250 or more and other borrowings. These
funds are not considered to be a strong source of liquidity since they are very
interest rate sensitive and are considered highly volatile. At June 30, 2021,
our net noncore funding dependence ratio, the difference between noncore funds
and short-term investments to long-term assets, was 1.99%, while our net
short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 3.71%. Comparatively, our net
noncore dependence ratio was 14.60% while our net short-term noncore funding
ratio was 0.94% at
year-end.
The decrease in the net noncore funding dependence ratio is associated with
reductions in PPPLF borrowing. Although we experienced an increase in the
short-term noncore funding ratio, it remains below peers.
The Consolidated Statements of Cash Flows present the changes in cash and cash
equivalents from operating, investing, and financing activities. Cash and cash
equivalents, consisting of cash on hand, cash items in the process of
collection, deposit balances with other banks and federal funds sold, increased
$7,727 during the six months ended June 30, 2021 as compared with a decrease of
$7,120 for the same period last year. For the six months ended June 30, 2021, we
realized net cash inflows of $10,666 from operating activities and $143,042 from
investing activities offset partially by net cash outflows of $145,981 from
financing activities. For the six months ended June 30, 2020, we realized net
cash outflows of $273 from operating activities and $298,477 from investing
activities offset partially by a net cash inflows of $291,630 from financing
activities.
Operating activities provided net cash of $10,666 for the six months ended
June 30, 2021 compared to the use of net cash $273 for the same period last
year. Net income, adjusted for the effects of gains and losses along with
noncash transactions such as depreciation, amortization, and the provision for
loan losses, is the primary source of funds from operations.
Investing activities primarily include transactions related to our lending
activities and investment portfolio. Investing activities provided net cash of
$143,042 for the six months ended June 30, 2021. For the comparable period in
2020, investing activities used net cash of $298,477. For the six months ended
June 30, 2021, loan forgiveness from PPP loans offset by purchases of investment
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 used net cash of $145,981 for the six months ended June 30,
2021 and provided net cash of $291,630 for the same period last year. Liquidity
generated through funds from deposit gathering were more than offset by
repayments on long-term debt from the Federal Reserve Bank's PPPLF secured
borrowing arrangement for the purpose of financing PPP loans in 2021. Proceeds
received on borrowings from the PPPLF program was the major factor for the net
funds provided from financing activities in 2020. Transfer of deposits in sale
totaled $42,191 during the six months ended June 30, 2021 as a noncash item.
We believe that our future liquidity needs will be satisfied through maintaining
an adequate level of cash and cash equivalents, by maintaining readily available
access to traditional funding sources, and through proceeds received from the
investment and loan portfolios. The current sources of funds are expected to
enable us to meet all cash obligations as they come due.
Capital:
Stockholders' equity totaled $104,365, or $11.15 per share, at June 30, 2021,
and $97,432, or $10.47 per share, at December 31, 2020. The net increase in
stockholders' equity in the six months ended June 30, 2021 was primarily a
result of the recognition of net income offset by a change in other accumulated
comprehensive income.

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Bank regulatory agencies consider capital to be a significant factor in ensuring
the safety of a depositor's accounts. These agencies have adopted minimum
capital adequacy requirements that include mandatory and discretionary
supervisory actions for noncompliance.
On November 13, 2019, the federal regulators finalized and adopted a regulatory
capital rule establishing a new community bank leverage ratio ("CBLR"), which
became effective on January 1, 2020. The intent of the CBLR is to provide a
simple alternative measure of capital adequacy for electing qualifying
depository institutions as directed under the Economic Growth, Regulatory
Relief, and Consumer Protection Act. Under the CBLR, if a qualifying depository
institution elects to use such measure, such institutions will be considered
well capitalized if its ratio of Tier 1 capital to average total consolidated
assets (i.e., leverage ratio) exceeds a 9.0% threshold, subject to a limited two
quarter grace period, during which the leverage ratio cannot go 100 basis points
below the then applicable threshold and will not be required to calculate and
report risk-based capital ratios.
In April 2020, under the CARES Act, the 9.0% leverage ratio threshold was
temporarily reduced to 8.0% in response to the
COVID-19
pandemic. The threshold increased to 8.5% in 2021 and will return to 9.0% in
2022. The Bank elected to begin using the CBLR for the first quarter of 2021 and
intends to utilize this measure for the foreseeable future. Eligibility criteria
to utilize the CBLR includes the following:

  •   Total assets of less than $10 billion,

• Total trading assets plus liabilities of 5.0% or less of consolidated


          assets,



  •   Total
      off-balance
      sheet exposures of 25.0% or less of consolidated assets,



  •   Cannot be an advanced approaches banking organization, and

• Leverage ratio greater than 9.0%, or temporarily prescribed threshold

established in response to

COVID-19.




As of June 30, 2021 and December 31, 2020, the Bank was categorized as well
capitalized. Listed in the table below is a comparison of the Bank's actual
capital amounts with the minimum requirements for well capitalized banks, as
defined above.

                                                                      Minimum Regulatory
                                                                     Capital Ratios under           Well Capitalized under
                                                Actual                     Basel III                       Basel III
June 30, 2021:                            Amount       Ratio          Amount          Ratio           Amount           Ratio
CBLR Framework
Tier 1 capital (to average total                                            (1)          (1)
assets): (i.e., leverage ratio)          $ 123,876       10.0 %                                   $      105,188       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 % $ 89,011 ³ 10.0 % Tier 1 capital (to risk-weighted assets)

                                    114,967       12.9 %          75,659       ³  8.5 %            71,209       ³  8.0 %

Common equity tier 1 risk-based capital (to risk-weighted assets) 114,967 12.9 % 62,308 ³ 7.0 %

            57,857       ³  6.5 %
Tier 1 capital (to average total
assets)                                    114,967        9.8 %          47,102       ³  4.0 %            58,877       ³  5.0 %

(1) Under the CBLR Framework, capital adequacy amounts and ratios are not

applicable as qualifying depositary institutions are evaluated solely on

whether or not they are well capitalized.




In light of the pandemic crisis and its potential adverse impact on capital
adequacy within the financial industry, maintaining a high level of capital is
of extreme importance to federal regulators as well as our management and Board
of Directors. Our asset liability committee continually reviews our capital
position. As part of its review, the ALCO considers:

• The current and expected capital requirements, including the maintenance


          of capital ratios in excess of minimum regulatory guidelines;

• The market value of our securities and the resulting effect on capital;

• Nonperforming asset levels and the effect deterioration in asset quality


          will have on capital;



  •   Any planned asset growth;

• The anticipated level of net earnings and capital position, taking into

account the projected asset/liability position and exposure to changes in


          interest rates;



     •    The source and timing of additional funds to fulfill future capital
          requirements.



                                       30

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Table of Contents Based on the heightened level of stress on capital caused by recent events, management maintains a capital plan approved by the Board of Directors. Our capital plan consists of the following areas of focus, among others:

• Comprehensive risk assessment including consideration of the following

risk elements, among others: credit; liquidity; earnings; economic value


          of equity; concentration; and economic, both national and local;



  •   Assessing current regulatory capital adequacy levels;

• Monitoring procedures consisting of stress testing, using both scenarios

of previous historic data of financial crisis periods and the Federal

Reserve Board's Supervisory Capital Assessment Program ("SCAP"), and

certain triggering events that would call into question the need to raise


          additional capital;



     •    Identifying realistic and readily available alternative sources for
          augmenting capital if higher capital levels are required;



  •   Evaluating dividend levels, and;



  •   Providing a
      ten-year
      financial projection for analyzing capital adequacy.


Regulatory bodies recently issued guidance reminding bank management of the
importance of taking capital preservation actions in these uncertain economic
times and encouraging management to remain vigilant on how the current
environment impacts their organization's financial performance, need for
capital, and ability to serve customers and communities throughout this crisis.
In response to this guidance, the Board of Directors of Riverview decided on
July 23, 2020, to suspend the payment of dividends in order to conserve capital.
In concert with this guidance, on October 6, 2020, the Company completed the
issuance of $25,000 in subordinated debt at the bank holding company, which will
be used to support the Bank on an
as-needed
basis. Subsequent to the issuance in the fourth quarter of 2020, management
determined to downstream $15,000 of the available $25,000 from the bank holding
company to the Bank in the form of additional capital.
Based on the most recent notification from the FDIC, the Bank was categorized as
well capitalized at June 30, 2021 and December 31, 2020. There are no conditions
or negative events since this notification that we believe have changed the
Bank's well capitalized status.
Review of Financial Performance:
We reported net income of $7,840, or $0.84 per basic and diluted weighted
average common share, for the six months ended June 30, 2021, compared to a net
loss of $23,489, or $(2.54) per basic and diluted weighted average common share,
for the same period last year. For the second quarter ended June 30, net income
was $4,780 or $0.51 per basic and diluted weighted average common share in 2021
as compared to a net loss of $24,122, or $(2.61) per basic and diluted weighted
average common share in 2020.
Major factors impacting 2021 earnings included the acceleration of income earned
on PPP loans, the recognition of a deposit premium on branch sales and the
recovery of provision for loan losses. During the first half of 2021, SBA
forgiveness of PPP loans increased causing an acceleration in the recognition of
fees as these loans were paid off. Approximately 75.0%, amounting to $188,866 of
the outstanding PPP loans at December 31, 2020, were forgiven in the first half
of 2021. Net interest income generated from PPP loans totaled $2,724 in the
second quarter of 2021 and $4,136 in the first half of 2021. On May 21, 2021,
the Company completed the sale of the branch office located in Meyersdale and
related liabilities of the Meyersdale and Somerset branches, resulting in the
recognition of $1,602 of noninterest income in the form of a deposit premium. As
aforementioned, the $735 recapture of the provision for loan losses was a result
of waning risk factors associated with the continued recovery from the impact of
the pandemic, coupled with credit portfolio performance trends.
The major factors causing the reported net losses of $24,122 for the three
months and $23,489 for the six months ended June 30, 2020 were a
non-cash
charge related to the recognition of goodwill impairment and an increase in the
provision for loan losses, both stemming from the
COVID-19
pandemic. The goodwill impairment of $24,754 had no impact on tangible book
value, regulatory capital ratios, liquidity and the Company's cash balances. For
the three and six months ended June 30, 2020, the provisions for loan losses
totaled $2,012 and $3,856, respectively.
If the
COVID-19
pandemic persists, it will continue to have a severe effect on economic activity
and may cause greater negative consequences for our customers which, in turn,
could adversely affect the Company's financial condition, liquidity and results
of operations.

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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 six months ended June 30,
tax-equivalent
net interest income increased $2,202 to $20,800 in 2021 from $18,598 in 2020.
The increase in
tax-equivalent
net interest income was primarily attributable to recognizing interest income of
$4,136 in the first half of 2021 on PPP loans as compared to $1,022 for the same
period last year. The
tax-equivalent
net interest margin for the six months ended June 30 was 3.31% in 2021 compared
to 3.43% in 2020. The net interest spread decreased to 3.21% for the six months
ended June 30, 2021 from 3.29% for the six months ended June 30, 2020. Partially
offsetting the negative impact of the reduction in the net interest margin was a
net increase in the volume of average earning assets as compared to the increase
in average interest-bearing liabilities. Overall, average earning assets
increased $177,618 while average interest-bearing liabilities increased $140,428
comparing the six months ended June 30, 2021 and 2020.
For the six months ended June 30,
tax-equivalent
interest income increased $1,618, to $23,776 in 2021 from $22,158 in 2020. An
unfavorable rate variance due to reductions in market rates and decreases in
loan accretion income was more than offset by a favorable volume variance
primarily caused by the addition of PPP loans. Loan accretion income was $58 for
the six months of 2021 compared to $292 for the same period in 2020.
Specifically, the overall yield on earning assets, on a fully
tax-equivalent
basis, decreased for the six months ended June 30, to 3.79% in 2021 from 4.09%
in 2020. With respect to the volume variance, average earning assets increased
$177,618 to $1,266,452 in 2021 from $1,088,834 in 2020.
Tax-equivalent
loan income increased $1,337 in 2021 due to PPP fee acceleration. The increase
in average investments of $67,054 in 2021 was the primary cause of the $358
increase in
tax-equivalent
interest income on investments.
Total interest expense decreased $584 to $2,976 for the six months ended
June 30, 2021 from $3,560 for the six months ended June 30, 2020. Reductions in
fund costs more than offset increases in average volumes on interest-bearing
liabilities. Comparing the first six months of 2021 and 2020, the weighted
average cost of funds decreased 22 basis points to 0.58% from 0.80% while the
average volume of interest-bearing liabilities increased $140,428 to $1,038,775
from $898,347. Money market, NOW account and time deposit costs declined 32, 23
and 41 basis points, respectively, and were the major causes in lowering
interest expense on deposits. The average volume and weighted average yield for
long-term debt for the six months ended June 30, 2021 were $167,378 and 1.48%,
compared to $67,346 and 1.04% for the same period in 2020.
For the three months ended June 30,
tax-equivalent
net interest income increased $1,351 to $11,103 in 2021 from $9,752 in 2020. The
increase in
tax-equivalent
net interest income was attributable to an acceleration in the recognition of
fees earned on forgiven PPP loans. Average earning assets increased $50,812
while average earning liabilities increased $15,582 comparing the second
quarters of 2021 and 2020. The
tax-equivalent
net interest margin for the three months ended June 30, was 3.59% in 2021
compared to 3.29% in 2020. The net interest spread increased to 3.48% for the
three months ended June 30, 2021 from 3.18% for the three months ended June 30,
2020.
For the three months ended June 30,
tax-equivalent
interest income increased $1,115, to $12,510 in 2021 from $11,395 in 2020. The
overall yield on earning assets, on a fully
tax-equivalent
basis, increased 19 basis points for the three months ended June 30, 2021 to
4.04% as compared to 3.85% for the three months ended June 30, 2020. This
increase was a result of the acceleration in the recognition of fees earned on
forgiven PPP loans. Average loans decreased $49,477 comparing the second
quarters of 2021 and 2020 primarily due to reductions in PPP loans. The
tax-equivalent
yield on the loan portfolio was 4.60% for the three months ended June 30, 2021
compared to 4.08% for the same period last year. The combined impact of rate and
volume variances caused an overall increase of $858 in interest earned on loans.
The yield earned on investments decreased 94 basis points for the second quarter
of 2021 to 1.97% from 2.91% for the second quarter of 2020. This combined with
average investments increasing to $149,724 for the quarter ended June 30, 2021
compared to $66,672 for the same period in 2020, resulted in an increase in
tax-equivalent
interest income of $254. Overall
tax-equivalent
interest earned on investments was $736 for the three months ended June 30, 2021
compared to $482 for the same period in 2020.

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Total interest expense decreased $236 to $1,407 for the three months ended
June 30, 2021 from $1,643 for the three months ended June 30, 2020. A favorable
rate variance was the primary cause of the improvement in fund costs. The cost
of funds decreased to 0.56% for the three months ended June 30, 2021 as compared
to 0.67% for the same period in 2020. The average volume of interest-bearing
liabilities increased to $1,004,386 for the three months ended June 30, 2021
from $988,804 for the three months ended June 30, 2020. Average interest-bearing
deposits increased $41,433 to $878,945 for the second quarter of 2021 from
$837,512 for the same period last year. Average long-term debt increased to
$125,441 for the second quarter of 2021 from $122,875 for the same period last
year.

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The average balances of assets and liabilities, corresponding interest income
and expense and resulting average yields or rates paid are summarized as
follows. Average balances were calculated using average daily balances. Averages
for earning assets include nonaccrual loans. Loan fees are included in interest
income on loans. Investment averages 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.

                                                                             Six months ended
                                                         June 30, 2021                              June 30, 2020
                                               Average                     Yield/         Average                     Yield/
                                               Balance       Interest       Rate          Balance       Interest       Rate
Assets:
Earning assets:
Loans
Taxable                                      $ 1,045,249     $  21,877        4.22 %    $   939,993     $  20,384        4.36 %
Tax exempt                                        28,962           453        3.15 %         35,159           609        3.48 %
Investments
Taxable                                           98,410         1,047        2.15 %         67,815           931        2.76 %
Tax exempt                                        42,994           375        1.76 %          6,535           133        4.09 %
Interest bearing deposits                         50,837            24        0.10 %         39,332           101        0.52 %

Total earning assets                           1,266,452        23,776

3.79 % 1,088,834 22,158 4.09 % Less: allowance for loan losses

                   12,144                                      7,754
Other assets                                      84,421                                    108,006

Total assets                                   1,338,729                                  1,189,086

Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Money market accounts                        $   152,365     $      83        0.11 %    $   109,502     $     234        0.43 %
NOW accounts                                     322,807           168        0.10 %        281,703           460        0.33 %
Savings accounts                                 169,319            59        0.07 %        138,501            88        0.13 %
Time deposits                                    226,906         1,435        1.28 %        286,592         2,402        1.69 %
Short term borrowings                                                                        14,703            28        0.38 %
Long-term debt                                   167,378         1,231        1.48 %         67,346           348        1.04 %

Total interest-bearing liabilities             1,038,775         2,976        0.58 %        898,347         3,560        0.80 %
Non-interest-bearing
demand deposits                                  185,729                                    158,065
Other liabilities                                 13,972                                     13,365
Stockholders' equity                             100,253                                    119,309

Total liabilities and stockholders' equity   $ 1,338,729                                $ 1,189,086

Net interest income/spread                                   $  20,800        3.21 %                    $  18,598        3.29 %

Net interest margin                                                           3.31 %                                     3.43 %
Tax-equivalent
adjustments:
Loans                                                        $      95                                  $     128
Investments                                                         79                                         28

Total adjustments                                            $     174                                  $     156




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Provision for Loan Losses:
We evaluate the adequacy of the allowance for loan losses account on a quarterly
basis utilizing our systematic analysis in accordance with procedural
discipline. We take into consideration certain factors such as composition of
the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs,
prevailing economic conditions and other relevant factors when determining the
adequacy of the allowance for loan losses account. We make monthly provisions to
the allowance for loan losses account in order to maintain the allowance at the
appropriate level indicated by our evaluations. Based on our most current
evaluation, we believe that the allowance is adequate to absorb any known and
inherent losses in the portfolio as of June 30, 2021.
We recognized a recovery of provision for loan losses totaling $735 for the six
months ended June 30, 2021, compared to a provision for loan losses of $3,812 in
2020. For the quarter ended June 30, the recovery of provision for loan losses
was $735 in 2021 compared to a provision for loan losses of $2,012 in 2020. The
Company was able to decrease its qualitative factors in 2021 based on the
remaining low number of CARES Act payment deferrals, improvements in industries
most likely to be affected by the pandemic, and continued stability in the
credit quality metrics of the loan portfolio. Despite the improvements brought
on by medical advances, government assistance programs and their positive
impacts on employment and consumer and business activity, future credit loss
provisions are subject to significant uncertainty as the pandemic recovery
continues to unfold. Our future provisions may increase due to the growth of
loan delinquencies and charge-offs resulting from
COVID-19
related financial stress.
Noninterest Income:
For the six months ended June 30, noninterest income totaled $6,218 in 2021, an
increase of $1,287 from $4,931 in 2020. The increase was primarily attributable
to recognizing a $1,602 deposit premium from the sale of deposits of two branch
offices and increases of $131 and $36 from trust and wealth management income.
Partially offsetting these positive influences were decreases of $542 in gains
from the sale of investment securities and $163 in mortgage banking income.
Mortgage banking income decreased for the six months ended June 30, 2021 as
compared to the same period in 2020 due to a reduction in residential
refinancing mortgage activity.
For the quarter ended June 30, noninterest income totaled $3,695 in 2021, an
increase of $1,694 from $2,001 in 2020. The primary contributors to the increase
were the premium recorded on the deposit sale and increases of $84 and $42 in
trust and wealth management income, respectively. Mortgage banking income
decreased $206 in the second quarter of 2021 as compared to the second quarter
in 2020 due to a reduction in mortgage activity.
Noninterest Expenses:
In general, noninterest expense is categorized into three main groups:
employee-related expenses, occupancy and equipment expenses and other expenses.
Employee-related expenses are costs associated with providing salaries,
including payroll taxes and benefits, to our employees. Occupancy and equipment
expenses, the costs related to the maintenance of facilities and equipment,
include depreciation, general maintenance and repairs, real estate taxes, lease
expense and utility costs. Other expenses include general operating expenses
such as advertising, contractual services, insurance, FDIC assessments, other
taxes, and supplies. Several of these costs and expenses are variable, while the
remainder are fixed. We utilize budgets and other related strategies to control
the variable expenses.
Noninterest expense decreased $25,255, to $17,911 for the six months ended
June 30, 2021, from $43,166 for the same period last year. The decrease was
primarily due to writing off the entire amount of goodwill on the books totaling
$24,754 in 2020. Excluding this nonrecurring charge, noninterest expense would
have decreased $501, or 2.7%, comparing the six months ended June 30, 2021 and
2020. For the six months ended June 30, salaries and employee benefit expenses
decreased $80, or 0.8%, to $9,961 in 2021 from $10,041 in 2020. Net occupancy
expense decreased $204, or 9.1%, to $2,044 in 2021 from $2,248 in 2020. The
primary cause for the decrease in cost was due to branch closures and the sale
of two branch offices. Other expenses decreased $131, or 2.3%, to $5,664 in 2021
compared to $5,795 in 2020 as a result of implementing cost savings initiatives
in the latter part of 2019.
Noninterest expense decreased to $9,524 for the three months ended June 30,
2021, from $33,954 for the same period last year. The overall decrease was
primarily due to writing off the entire amount of goodwill on the books totaling
$24,754 in the second quarter of 2020.
Income Taxes:
We recorded an income tax expense of $1,828 for the six months ended June 30,
2021 compared to a tax benefit of $116 for the six months ended June 30, 2020.
For the three months ended June 30, we recorded income tax expense of $1,142 in
2021 compared to a tax benefit of $172 in 2020. The effective tax rates were
18.9% and 19.3% for the six and three months ended June 30, 2021.

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