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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
Form
10-Q
 
 
 
☒
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2021
or
 
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from
                    
001-38627
(Commission File Number)
 
 
RIVERVIEW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Pennsylvania
  
38-3917371
(State of incorporation)
  
(IRS Employer
Identification Number)
   
3901 North Front Street, Harrisburg, PA
  
17110
(Address of principal executive offices)
  
(Zip code)
(717)
957-2196
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months or for such shorter period that the registrant was required to submit such files.    
Yes
 ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer   ☐    Accelerated filer   ☐
       
Non-accelerated
filer		   ☒    Smaller reporting company   ☒
       
         Emerging growth company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company as defined in Rule
12b-2
of the Exchange Act.    Yes  ☐    No  
☒
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
  
Trading
Symbol(s)
  
Name of each exchange
on which registered
Common Stock
  
RIVE
  
Nasdaq Global Market
Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 9,361,967 at October 29, 2021.
 
 
 
Table of Contents
RIVERVIEW FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 2021
 
Contents
       
Page No.
  
PART I.
   FINANCIAL INFORMATION:   
Item 1.
   Financial Statements (Unaudited)      3  
  Consolidated Balance Sheets at September 30, 2021 and December 31, 2020      3  
  Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020      4  
  Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020      5  
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020      6  
  Notes to Consolidated Financial Statements      7  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23  
Item 3.
   Quantitative and Qualitative Disclosures About Market Risk      33  
Item 4.
   Controls and Procedures      33  
PART II
   OTHER INFORMATION:   
Item 1.
   Legal Proceedings      33  
Item 1A.
   Risk Factors      33  
Item 2.
   Unregistered Sales of Equity Securities and Use of Proceeds      33  
Item 3.
   Defaults upon Senior Securities      33  
Item 4.
   Mine Safety Disclosures      33  
Item 5.
   Other Information      33  
Item 6.
   Exhibits      33  
  Signatures      34  
Table of Contents
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
                 
    
September 30,
2021
    
December 31,
2020
  
Assets:
                 
Cash and due from banks
    $ 10,842     $ 13,511  
Interest-bearing deposits in other banks
      175,236       36,270  
Investment securities
available-for-sale
      131,705       103,695  
Loans held for sale
      443       4,338  
Loans, net
      866,140       1,139,239  
Less: allowance for loan losses
      10,834       12,200  
    
 
 
    
 
 
  
Net loans
      855,306       1,127,039  
Premises and equipment, net
      16,983       18,147  
Accrued interest receivable
      2,604       4,216  
Intangible assets
      1,522       1,918  
Other assets
      48,152       48,420  
    
 
 
    
 
 
  
Total assets
    $ 1,242,793     $ 1,357,554  
    
 
 
    
 
 
  
Liabilities:
                 
Deposits:
                 
Noninterest-bearing
    $ 192,556     $ 173,600  
Interest-bearing
      877,018       841,860  
    
 
 
    
 
 
  
Total deposits
      1,069,574       1,015,460  
Short-term borrowings
                 
Long-term debt
      52,004       228,765  
Accrued interest payable
      847       1,038  
Other liabilities
      12,792       14,859  
    
 
 
    
 
 
  
Total liabilities
      1,135,217       1,260,122  
    
 
 
    
 
 
  
Stockholders’ equity:
                 
Common stock: no par value, authorized 20,000,000 shares; September 30, 2021, issued and outstanding 9,361,967 shares; December 31, 2020, issued and outstanding 9,306,442 shares
      103,127       102,662  
Capital surplus
      292       292  
Retained earnings (accumulated deficit)
      4,498       (6,457 ) 
Accumulated other comprehensive income (loss)
      (341 )      935  
    
 
 
    
 
 
  
Total stockholders’ equity
      107,576       97,432  
    
 
 
    
 
 
  
Total liabilities and stockholders’ equity
    $ 1,242,793     $ 1,357,554  
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
3
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
                                 
    
Three Months Ended
     
Nine Months Ended
  
September 30,
   
2021
    
2020
     
2021
    
2020
  
Interest income:
                                  
Interest and fees on loans:
                                  
Taxable
    $ 10,738     $ 11,265      $ 32,615     $ 31,649  
Tax-exempt
      180       223        538       704  
Interest and dividends on investment securities
available-for-sale:
                                  
Taxable
      490       360        1,537       1,291  
Tax-exempt
      144       71        440       176  
Interest on interest-bearing deposits in other banks
      40       11        64       112  
    
 
 
    
 
 
     
 
 
    
 
 
  
Total interest income
      11,592       11,930        35,194       33,932  
    
 
 
    
 
 
     
 
 
    
 
 
  
Interest expense:
                                  
Interest on deposits
      746       1,200        2,491       4,384  
Interest on short-term borrowings
                               28  
Interest on long-term debt
      521       304        1,752       652  
    
 
 
    
 
 
     
 
 
    
 
 
  
Total interest expense
      1,267       1,504        4,243       5,064  
    
 
 
    
 
 
     
 
 
    
 
 
  
Net interest income
      10,325       10,426        30,951       28,868  
(Recovery of) provision for loan losses
              1,844        (735 )      5,656  
    
 
 
    
 
 
     
 
 
    
 
 
  
Net interest income after (recovery of) provision for loan losses
      10,325       8,582        31,686       23,212  
    
 
 
    
 
 
     
 
 
    
 
 
  
Noninterest income:
                                  
Service charges, fees and commissions
      1,248       1,099        5,477       3,491  
Commission and fees on fiduciary activities
      250       246        804       669  
Wealth management income
      264       220        716       636  
Mortgage banking income
      104       401        440       900  
Bank owned life insurance investment income
      178       192        552       578  
Net gain on sale of investment securities
available-for-sale
      44                317       815  
    
 
 
    
 
 
     
 
 
    
 
 
  
Total noninterest income
      2,088       2,158        8,306       7,089  
    
 
 
    
 
 
     
 
 
    
 
 
  
Noninterest expense:
                                  
Salaries and employee benefits expense
      4,511       5,411        14,472       15,452  
Net occupancy and equipment expense
      1,040       1,428        3,084       3,676  
Amortization of intangible assets
      132       170        396       509  
Goodwill impairment
                               24,754  
Net cost (benefit) of operation of other real estate owned
      (22 )      51        (44 )      40  
Other expenses
      2,933       2,918        8,597       8,713  
    
 
 
    
 
 
     
 
 
    
 
 
  
Total noninterest expense
      8,594       9,978        26,505       53,144  
    
 
 
    
 
 
     
 
 
    
 
 
  
Income (loss) before income taxes
      3,819       762        13,487       (22,843 ) 
Income tax expense (benefit)
      704       67        2,532       (49 ) 
    
 
 
    
 
 
     
 
 
    
 
 
  
Net income (loss)
      3,115       695        10,955       (22,794 ) 
    
 
 
    
 
 
     
 
 
    
 
 
  
Other comprehensive income:
                                  
Unrealized gain (loss) on investment securities
available-for-sale
      25       114        (1,725 )      2,007  
Reclassification adjustment for net gain on sale of investment securities
available-for-sale
included in net income (loss)
      (44 )               (317 )      (815 ) 
Net change in cash flow hedge
      54       49        427       11  
    
 
 
    
 
 
     
 
 
    
 
 
  
Other comprehensive income (loss)
      35       163        (1,615 )      1,203  
Income tax expense (benefit) related to other comprehensive income
      8       35        (339 )      253  
    
 
 
    
 
 
     
 
 
    
 
 
  
Other comprehensive income (loss), net of income taxes
      27       128        (1,276 )      950  
    
 
 
    
 
 
     
 
 
    
 
 
  
Comprehensive income (loss)
    $ 3,142     $ 823      $ 9,679     $ (21,844 ) 
    
 
 
    
 
 
     
 
 
    
 
 
  
Per share data:
                                  
Net income (loss):
                                  
Basic
    $ 0.33     $ 0.08      $ 1.17     $ (2.46 ) 
Diluted
    $ 0.33     $ 0.08      $ 1.17     $ (2.46 ) 
Average common shares outstanding:
                                  
Basic
      9,361,967       9,273,666        9,353,546       9,248,856  
Diluted
      9,390,160       9,273,666        9,366,293       9,248,856  
See notes to consolidated financial statements.
 
4
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
 
For the nine months ended September 30,
   
Common
Stock
     
Capital
Surplus
     
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
  
Balance, January 1, 2021
    $ 102,662      $ 292      $ (6,457 )    $ 935     $ 97,432  
Net income
                        10,955               10,955  
Other comprehensive income, net of income taxes
                                (1,276 )      (1,276 ) 
Issuance under ESPP, 401k and Dividend Reinvestment plans
      266                                 266  
Stock based compensation
      199                                 199  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, September 30, 2021
    $ 103,127      $ 292      $ 4,498     $ (341 )    $ 107,576  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, January 1, 2020
    $ 102,206      $ 112      $ 16,140     $ (348 )    $ 118,110  
Net income (loss)
                        (22,794 )              (22,794 ) 
Other comprehensive income, net of income taxes
                                950       950  
Issuance under ESPP, 401k and Dividend Reinvestment plans
      466                                 466  
Stock based compensation
               78                        78  
Dividends declared, $0.15 per share
                        (1,386 )              (1,386 ) 
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, September 30, 2020
    $ 102,672      $ 190      $ (8,040 )    $ 602     $ 95,424  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
                                         
For the three months ended September 30,
   
Common
Stock
     
Capital
Surplus
     
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
  
Balance, July 1, 2021
    $ 103,058      $ 292      $ 1,383     $ (368 )    $ 104,365  
Net income
                        3,115               3,115  
Other comprehensive income, net of income taxes
                                27       27  
Issuance under ESPP, 401k and Dividend Reinvestment plans
                                           
Stock based compensation
      69                                 69  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, September 30, 2021
    $ 103,127      $ 292      $ 4,498     $ (341 )    $ 107,576  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, July 1, 2020
    $ 102,552      $ 161      $ (8,735 )    $ 474     $ 94,452  
Net income
                        695               695  
Other comprehensive income, net of income taxes
                                128       128  
Issuance under ESPP, 401k and Dividend Reinvestment plans
      120                                 120  
Stock based compensation
               29                        29  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
Balance, September 30, 2020
   
$
 		 102,672       
$
 190     
$
 		 (8,040)      
$
 602    
$
 95,424  
    
 
 
     
 
 
     
 
 
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
5
Table of Contents
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
                 
For the Nine Months Ended September 30,
   
2021
    
2020
  
Cash flows from operating activities:
                 
Net income (loss)
    $ 10,955     $ (22,794 ) 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                 
Depreciation and amortization of premises and equipment
      1,021       952  
(Recovery of) provision for loan losses
      (735 )      5,656  
Stock based compensation
      199       78  
Net amortization of investment securities
available-for-sale
      1,253       559  
Net cost (benefit) of operation of other real estate owned
      (44 )      40  
Net gain on sale of investment securities
available-for-sale
      (317 )      (815 ) 
Premium on sale of deposits
      (1,602 )         
Amortization of purchase adjustment on loans
      (174 )      (592 ) 
Amortization of intangible assets
      396       509  
Amortization of assumed discount on long-term debt
      66       63  
Amortization of long-term debt insurance costs
      77          
Impairment of goodwill
              24,754  
Deferred income taxes
      421       (779 ) 
Proceeds from sale of loans originated for sale
      17,301       26,921  
Net gain on sale of loans originated for sale
      (440 )      (900 ) 
Loans originated for sale
      (12,966 )      (30,487 ) 
Bank owned life insurance investment income
      (552 )      (578 ) 
Net change in:
                 
Accrued interest receivable
      1,612       (804 ) 
Other assets
      1,177       2,107  
Accrued interest payable
      (191 )      156  
Other liabilities
      (2,067 )      (1,545 ) 
    
 
 
    
 
 
  
Net cash provided by operating activities
      15,390       2,501  
    
 
 
    
 
 
  
Cash flows from investing activities:
                 
Investment securities
available-for-sale:
                 
Purchases
      (74,503 )      (42,151 ) 
Proceeds from repayments
      13,073       8,832  
Proceeds from sales
      30,442       27,168  
Proceeds from the sale of other real estate owned
      466       355  
Net increase in restricted equity securities
      (412 )      (837 ) 
Net (increase) decrease in loans
      272,642       (312,627 ) 
Purchases of premises and equipment
      (19 )      (1,519 ) 
Proceeds from sale of premises and equipment
      162          
Premium paid on bank owned life insurance
      (22 )      (22 ) 
    
 
 
    
 
 
  
Net cash provided by (used in) investing activities
      241,829       (320,801 ) 
    
 
 
    
 
 
  
Cash flows from financing activities:
                 
Net increase in deposits
      55,716       90,833  
Repayment of long-term debt
      (176,904 )         
Proceeds from long-term debt
              209,997  
Issuance under ESPP, 401k and DRP plans
      266       466  
Cash dividends paid
              (1,386 ) 
    
 
 
    
 
 
  
Net cash provided by (used in) financing activities
      (120,922 )      299,910  
    
 
 
    
 
 
  
Net increase (decrease) in cash and cash equivalents
      136,297       (18,390 ) 
Cash and cash equivalents—beginning
      49,781       50,348  
    
 
 
    
 
 
  
Cash and cash equivalents—ending
    $ 186,078     $ 31,958  
    
 
 
    
 
 
  
Supplemental disclosures:
                 
Cash paid during the period for:
                 
Interest
    $ 4,434     $ 4,908  
    
 
 
    
 
 
  
Federal income taxes
    $ 1,700     $    
    
 
 
    
 
 
  
Supplemental schedule of noncash investing and financing activities:
                 
Other real estate acquired in settlement of loans
    $       $ 338  
    
 
 
    
 
 
  
Transfer of deposits in sale
    $ 42,191     $    
    
 
 
    
 
 
  
See notes to consolidated financial statements.
 
6
Table of Contents
Riverview Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Summary of significant accounting policies:
Nature of Operations
Riverview Financial Corporation, (the “Company” or “Riverview”), a
 
bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).
Riverview Bank, with 23 full-service offices and
three
(3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities, and
small-to-medium
sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, and Schuylkill Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to
Form 10-Q
and Article 8 of
Regulation S-X.
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on
Form 10-K,
filed on March 11, 2021.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.
The operating results and financial position of the Company for the three and nine months ended as of September 30, 2021, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus
(“COVID-19”)
pandemic which may adversely affect the Company’s business results of operations and financial condition for an indefinite period.
The impact of the pandemic on Riverview’s financial results is evolving and uncertain. Net interest income and
non-interest
income may decrease, and credit-related losses may increase in the future if economic activity slows due to
COVID-19.
We believe that we may experience a material adverse effect on our business, results of operations and financial condition as a result of the
COVID-19
pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans, or deferred taxes.
Accounting Standards Adopted in 2021
In August 2018, the FASB issued ASU
No. 2018-14,
“Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic
715-20)
— Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”. Subtopic
715-20
addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
 
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In December 2019, the FASB issued ASU
No. 2019-12,
“Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU
No. 2019-12
improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.    
Recent Accounting Standards
In June 2016, the FASB issued ASU
No. 2016-13,
“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No.
2016-13 requires
an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses.
ASU No. 2016-13
also requires new disclosures for financial assets measured at amortized cost, loans, and
available-for-sale
debt securities. In November 2018, the FASB issued ASU No.
2018-19—Codification
Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU
No. 2019-05
“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU
No. 2016-13
to allow companies to irrevocably elect, upon adoption of ASU No,
2016-13,
the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC
326-20
if the instruments are eligible for the fair value option under ASC
825-10.
The fair value option election does not apply to
held-to-maturity
debt securities. Entities are required to make this election on an
instrument-by-instrument
basis. In November 2019, the FASB issued ASU
No. 2019-11,
“Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic
805-20.
In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any
day-one
regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the allowance for credit losses (“ACL”) is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. 
In March 2020, the FASB issued ASU
No. 2020-04,
“Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU
2020-04
provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU
2020-04
also provides numerous optional expedients for derivative accounting. ASU
2020-04
is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU
2020-04
for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. In January 2021, the FASB issued ASU
2021-01,
“Reference Rate Reform (Topic 848): Scope.” ASU
2021-01
clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU
2021-01
also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU
2021-01
was effective upon issuance and generally can be applied through December 31, 2022. The adoption of the guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
 
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2. Other comprehensive
 
income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities
available-for-sale
and benefit plan and derivative adjustments.
The components of accumulated other comprehensive income (loss) included in stockholders’ equity at September, 2021 and December 31, 2020 is as follows:
    
September 30,
2021
     
December 31,
2020
  
Net unrealized gain (loss) on investment securities
available-for-sale
    $ (80 )     $ 1,962  
Income tax expense (benefit)
      (17 )       412  
    
 
 
     
 
 
  
Net of income (loss) taxes
      (63 )       1,550  
    
 
 
     
 
 
  
Benefit plan adjustments
      (951 )       (951 ) 
Income tax benefit
      (200 )       (200 ) 
    
 
 
     
 
 
  
Net of income taxes
      (751 )       (751 ) 
    
 
 
     
 
 
  
Derivative fair value adjustment
      599        172  
Income tax benefit
      126        36  
    
 
 
     
 
 
  
Net of income taxes
      473        136  
    
 
 
     
 
 
  
Accumulated other comprehensive income (loss)
    $ (341 )     $ 935  
    
 
 
     
 
 
  
Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2021 and 2020 is as follows:
                 
Three months ended September 30,
   
    2021    
     
        2020        
  
Unrealized gain on investment securities
available-for-sale
    $ 25      $ 114  
Net gain on the sale of investment securities
available-for-sale
(1)
      (44 )          
Net change in derivative fair value
      54        49  
    
 
 
     
 
 
  
Other comprehensive income before taxes
      35        163  
Income tax expense
      8        35  
    
 
 
     
 
 
  
Other comprehensive income
    $ 27      $ 128  
    
 
 
     
 
 
  
                 
Nine months ended September 30,
   
    2021    
     
        2020        
  
Unrealized gain (loss) on investment securities
available-for-sale
    $ (1,725 )     $ 2,007  
Net gain on the sale of investment securities
available-for-sale
(1)
      (317 )       (815 ) 
Net change in derivative fair value
      427        11  
    
 
 
     
 
 
  
Other comprehensive income (loss) before taxes
      (1,615 )       1,203  
Income tax expense (benefit)
    $ (339 )       253  
    
 
 
     
 
 
  
Other comprehensive income (loss)
    $ (1,276 )     $ 950  
    
 
 
     
 
 
  
 
(1)
Represents amounts reclassified out of accumulated other comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.
 
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3. Earnings per share:
Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:
                 
Three months ended September 30,
   
2021
     
2020
  
Numerator:
                  
Net income (loss)
    $ 3,115      $ 695  
    
 
 
     
 
 
  
Denominator:
                  
Basic
      9,361,967        9,273,666  
Dilutive options
      28,193           
    
 
 
     
 
 
  
Diluted
      9,390,160        9,273,666  
    
 
 
     
 
 
  
Earnings per share:
                  
Basic
    $ 0.33      $ 0.08  
Diluted
    $ 0.33      $ 0.08  
                 
Nine months ended September 30,
   
2021
     
2020
  
Numerator:
                  
Net income (loss)
    $ 10,955      $ (22,794 ) 
    
 
 
     
 
 
  
Denominator:
                  
Basic
      9,353,546        9,248,856  
Dilutive options
      12,747           
    
 
 
     
 
 
  
Diluted
      9,366,293        9,248,856  
    
 
 
     
 
 
  
Earnings per share:
                  
Basic
    $ 1.17      $ (2.46 ) 
Diluted
    $ 1.17      $ (2.46 ) 
For the three and nine months ended September 30, 2021 there were 18,200 and 68,412 outstanding stock options, respectively, that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2020 there were 172,964 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.
4. Investment securities:
The amortized cost and fair value of investment securities
available-for-sale
aggregated by investment category at September 30, 2021 and December 31, 2020 are summarized as follows:
                                 
September 30, 2021
   
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair
Value
  
State and municipals:
                                    
Taxable
    $ 22,133      $ 301      $ 258      $ 22,176  
Tax-exempt
      44,196        89        743        43,542  
Mortgage-backed securities:
                                    
U.S. Government agencies
      35,029        680        98        35,611  
U.S. Government-sponsored enterprises
      15,177        186        24        15,339  
Corporate debt obligations
      15,250        64        277        15,037  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 131,785      $ 1,320      $ 1,400      $ 131,705  
    
 
 
     
 
 
     
 
 
     
 
 
  
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December 31, 2020
   
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair
Value
  
State and municipals:
                                    
Taxable
    $ 22,317      $ 400      $ 143      $ 22,574  
Tax-exempt
      17,988        423        16        18,395  
Mortgage-backed securities:
                                    
U.S. Government agencies
      26,051        940                 26,991  
U.S. Government-sponsored enterprises
      24,627        442        17        25,052  
Corporate debt obligations
      10,750        56        123        10,683  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 101,733      $ 2,261      $ 299      $ 103,695  
    
 
 
     
 
 
     
 
 
     
 
 
  
The maturity distribution of the fair
 
value, which is the net carrying amount, of the debt securities classified as
available-for-sale
at September 30, 2021, is summarized as follows:    
 
September 30, 2021
  
Fair
Value
 
Within one year
  
$
770
 
After one but within five years
  
 
929
 
After five but within ten years
  
 
22,955
 
After ten years
  
 
56,101
 
 
  
 
 
 
 
  
 
80,755
 
Mortgage-backed securities
  
 
50,950
 
 
  
 
 
 
Total
  
$
131,705
 
 
  
 
 
 
Securities with a fair value of $89,410 and $71,676 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a
case-by-case
basis. At September 30, 2021 and December 31, 2020, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
 
 
  
Less Than 12 Months
 
  
12 Months or More
 
  
Total
 
September 30, 2021
  
Fair
Value
 
  
Unrealized
Losses
 
  
Fair
Value
 
  
Unrealized
Losses
 
  
Fair
Value
 
  
Unrealized
Losses
 
State and municipals:
  
      
  
      
  
      
  
      
  
      
  
      
Taxable
  
$
3,453
 
  
$
60
 
  
 
7,625
 
  
$
198
 
  
$
11,078
 
  
$
258
 
Tax-exempt
  
 
33,175
 
  
 
740
 
  
 
631
 
  
 
3
 
  
 
33,806
 
  
 
743
 
Mortgage-backed securities:
  
      
  
      
  
      
  
      
  
      
  
      
U.S. Government agencies
  
 
13,716
 
  
 
98
 
  
      
  
      
  
 
13,716
 
  
 
98
 
U.S. Government-sponsored enterprises
  
 
4,650
 
  
 
16
 
  
 
1,013
 
  
 
8
 
  
 
5,663
 
  
 
24
 
Corporate debt obligations
  
 
9,473
 
  
 
277
 
  
      
  
      
  
 
9,473
 
  
 
277
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
64,467
 
  
$
1,191
 
  
$
9,269
 
  
$
209
 
  
$
73,736
 
  
$
1,400
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
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Less Than 12 Months
     
12 Months or More
     
Total
  
December 31, 2020
   
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
  
State and municipals:
                                                      
Taxable
    $ 11,586      $ 143      $        $        $ 11,586      $ 143  
Tax-exempt
      1,737        16                          1,737        16  
Mortgage-backed securities:
                                                      
U.S. Government agencies
      5,960        17                          5,960        17  
U.S. Government-sponsored enterprises
                                                      
Corporate debt obligations
                        3,378        123        3,378        123  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 19,283      $ 176      $ 3,378      $ 123      $ 22,661      $ 299  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company had 59 investment securities, consisting of 10 taxable state and municipal obligations, 32
tax-exempt
state and municipal obligations, four U.S. Government agencies, five U.S. Government-sponsored enterprises and eight corporate debt obligation that were in unrealized loss positions at September 30, 2021. Of these securities, none of the securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, resulting from changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at September 30, 2021. There was no OTTI recognized for the three and nine months ended September 30, 2021 and 2020.
The Company had 16 investment securities, consisting of nine taxable state municipal obligations, three
tax-exempt
state municipal obligations, three mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2020. Of these securities, one corporate obligation was in a continuous unrealized loss position for twelve months or more.
5. Loans, net, and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2021 and December 31, 2020 are summarized as follows. Net deferred loan costs were $602 at September 30, 2021 and net deferred loan costs were $701 at December 31, 2020.
                 
    
September 30,
2021
     
December 31,
2020
  
Commercial
    $ 139,375      $ 359,080  
Real estate:
                  
Construction
      41,772        73,402  
Commercial
      497,203        502,495  
Residential
      181,870        197,596  
Consumer
      5,920        6,666  
    
 
 
     
 
 
  
Total
    $ 866,140      $ 1,139,239  
    
 
 
     
 
 
  
The Company participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program (“PPP”), a multi-billion dollar specialized
low-interest
loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of September 30, 2021, the Company had PPP loans totaling $23,579, net of unearned loan fees of $599, included in commercial loans. PPP loans totaled $251,810, net of unearned fees of $5,075 as of December 31, 2020.
 
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The change in the allowance for loan
 
losses account by major loan classifications for the three and nine months ended September 30, 2021 and 2020 is summarized as follows:
 
          
Real Estate
                     
September 30, 2021
   
Commercial
    
Construction
    
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                                                          
Beginning Balance, July 1, 2021
    $ 1,416     $ 753     $ 6,365     $ 1,858     $ 111     $ 364      $ 10,867  
Charge-offs
      (15 )                      (9 )      (33 )               (57 ) 
Recoveries
      3               5               16                24  
Provisions
      (202 )      (143 )      186       131       1       27           
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,202     $ 610     $ 6,556     $ 1,980     $ 95     $ 391      $ 10,834  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
           
          
Real Estate
    
Real Estate
               
September 30, 2021
   
Commercial
    
Construction
    
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                                                          
Beginning Balance, January 1, 2021
    $ 1,705     $ 1,117     $ 6,494     $ 2,427     $ 142     $ 315      $ 12,200  
Charge-offs
      (225 )      (37 )      (373 )      (9 )      (118 )               (762 ) 
Recoveries
      60               8       2       61                131  
Provisions
      (338 )      (470 )      427       (440 )      10       76        (735 ) 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,202     $ 610     $ 6,556     $ 1,980     $ 95     $ 391      $ 10,834  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
           
          
Real Estate
                     
September 30, 2020
   
Commercial
    
Construction
    
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                                                          
Beginning Balance, July 1, 2020
    $ 1,685     $ 741     $ 5,078     $ 2,070     $ 162     $        $ 9,736  
Charge-offs
                                      (42 )               (42 ) 
Recoveries
      2               57               27                86  
Provisions
      173       145       1,015       490       21                1,844  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,860     $ 886     $ 6,150     $ 2,560     $ 168     $        $ 11,624  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
           
          
Real Estate
                     
September 30, 2020
   
Commercial
    
Construction
    
Commercial
    
Residential
    
Consumer
    
Unallocated
     
Total
  
Allowance for loan losses:
                                                          
Beginning Balance, January 1, 2020
    $ 1,953     $ 473     $ 3,115     $ 1,820     $ 155     $        $ 7,516  
Charge-offs
      (899 )              (595 )      (2 )      (243 )               (1,739 ) 
Recoveries
      11               59       1       120                191  
Provisions
      795       413       3,571       741       136                5,656  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
Ending balance
    $ 1,860     $ 886     $ 6,150     $ 2,560     $ 168     $        $ 11,624  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
     
 
 
  
 
13
Table of Contents
The allocation of the allowance for loan losses and related loans by classifications of loans at September 30, 2021 and December 31, 2020 is summarized as follows:
 
           
Real Estate
                       
September 30, 2021
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                                                               
Ending balance
    $ 1,202      $ 610      $ 6,556      $ 1,980      $ 95      $ 391      $ 10,834  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
individually evaluated for impairment
                        48                                   48  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
collectively evaluated for impairment
      1,202        610        6,508        1,980        95        391        10,786  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
purchased credit impaired loans
    $        $        $        $        $        $        $    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loans receivable:
                                                               
Ending balance
    $ 139,375      $ 41,772      $ 497,203      $ 181,870      $ 5,920      $        $ 866,140  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
individually evaluated for impairment
      608                 7,447        2,522                          10,577  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
collectively evaluated for impairment
      138,767        41,772        489,563        179,210        5,920                 855,232  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
purchased credit impaired loans
    $        $        $ 193      $ 138      $        $        $ 331  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
                                                         
           
Real Estate
                       
December 31, 2020
   
Commercial
     
Construction
     
Commercial
     
Residential
     
Consumer
     
Unallocated
     
Total
  
Allowance for loan losses:
                                                               
Ending balance
    $ 1,705      $ 1,117      $ 6,494      $ 2,427      $ 142      $ 315      $ 12,200  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
individually evaluated for impairment
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
collectively evaluated for impairment
      1,705        1,117        6,494        2,427        142        315        12,200  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
purchased credit impaired loans
    $        $        $        $        $        $        $    
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Loan’s receivable:
                                                               
Ending balance
    $ 359,080      $ 73,402      $ 502,495      $ 197,596      $ 6,666      $        $ 1,139,239  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
individually evaluated for impairment
      1,565                 6,444        2,494                          10,503  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
collectively evaluated for impairment
      357,515        73,402        495,674        194,939        6,666                 1,128,196  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Ending balance:
                                                               
purchased credit impaired loans
    $        $        $ 377      $ 163      $        $        $ 540  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
Non-homogeneous
loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
 
  •  
Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.
 
14
Table of Contents
  •  
Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.
 
  •  
Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
 
  •  
Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
  •  
Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance.
The following tables present the major classifications
 
of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2021 and December 31, 2020:
                                         
September 30, 2021
   
Pass
     
Special
Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 138,433      $        $ 942      $        $ 139,375  
Real estate:
                                             
Construction
      40,092                 1,680                 41,772  
Commercial
      450,401        29,197        17,605                 497,203  
Residential
      178,210        1,109        2,551                 181,870  
Consumer
      5,920                                   5,920  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 813,056      $ 30,306      $ 22,778      $        $ 866,140  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
           
December 31, 2020
   
Pass
     
Special
Mention
     
Substandard
     
Doubtful
     
Total
  
Commercial
    $ 353,758      $ 3,147      $ 2,175      $        $ 359,080  
Real estate:
                                             
Construction
      63,838        1,817        7,747                 73,402  
Commercial
      451,190        29,180        22,125                 502,495  
Residential
      191,775        2,670        3,151                 197,596  
Consumer
      6,666                                   6,666  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,067,227      $ 36,814      $ 35,198      $        $ 1,139,239  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2021 and December 31, 2020. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
 
                                                         
    
Accrual Loans
                
September 30, 2021
   
30-59 Days

Past Due
     
60-89 Days

Past Due
     
90 or More
Days Past
Due
     
Total Past
Due
     
Current
     
Nonaccrual
Loans
     
Total Loans
  
Commercial
    $ 531      $        $        $ 531      $ 138,835      $ 9      $ 139,375  
Real estate:
                                                               
Construction
      185                 1,703        1,888        39,884                 41,772  
Commercial
               63                 63        495,552        1,395        497,010  
Residential
      629        252        177        1,058        179,785        889        181,732  
Consumer
      6        9                 15        5,905                 5,920  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 1,351      $ 324      $ 1,880      $ 3,555      $ 859,961      $ 2,293      $ 865,809  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                                                            331  
                                                          
 
 
  
Total Loans
                                                          $ 866,140  
                                                          
 
 
  
 
15
Table of Contents
    
Accrual Loans
                
December 31, 2020
   
30-59 Days

Past Due
     
60-89 Days

Past Due
     
90 or More
Days Past
Due
     
Total Past
Due
     
Current
     
Nonaccrual
Loans
     
Total Loans
  
Commercial
    $ 64      $ 1      $        $ 65      $ 358,496      $ 519      $ 359,080  
Real estate:
                                                               
Construction
                                          73,402                 73,402  
Commercial
      1,238        4,063                 5,301        496,785        32        502,118  
Residential
      2,125        2,993        146        5,264        191,299        870        197,433  
Consumer
      22        20        10        52        6,614                 6,666  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 3,449      $ 7,077      $ 156      $ 10,682      $ 1,126,596      $ 1,421      $ 1,138,699  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Purchased credit impaired loans
                                                            540  
                                                          
 
 
  
Total Loans
                                                          $ 1,139,239  
                                                          
 
 
  
The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2021 and 2020, and as of and for the year ended, December 31, 2020 by major loan classification, excluding purchased credit impaired loans:
                                                         
                         
This Quarter
     
Year-to-Date
  
September 30, 2021
   
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
Average
Recorded
Investment
     
Interest
Income
Recognized
     
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
                                                               
Commercial
    $ 608      $ 608               $ 791      $ 8      $ 1,243      $ 58  
Real estate:
                                                               
Construction
                                 479                 643           
Commercial
      1,757        1,757                 1,214        16        1,949        58  
Residential
      2,660        2,790                 2,581        27        2,567        89  
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,025        5,155                 5,065        51        6,402        205  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                                                               
Commercial
                                                               
Real estate:
                                                               
Construction
                                                               
Commercial
      5,883        5,883        48        5,907        110        4,958        253  
Residential
                                                               
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,883        5,883        48        5,907        110        4,958        253  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      608        608                 791        8        1,243        58  
Real estate:
                                                               
Construction
                                 479                 643           
Commercial
      7,640        7,640        48        7,121        126        6,907        311  
Residential
      2,660        2,790                 2,581        27        2,567        89  
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 10,908      $ 11,038      $ 48      $ 10,972      $ 161      $ 11,360      $ 458  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
16
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
For the Year Ended
  
December 31, 2020
   
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
                                             
Commercial
    $ 1,565      $ 1,675               $ 1,356      $ 416  
Real estate:
                                             
Construction
                                             
Commercial
      6,821        6,821                 4,392        311  
Residential
      2,657        2,787                 2,493        146  
Consumer
                                             
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      11,043        11,283                 8,241        873  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                                             
Commercial
                                 561           
Real estate:
                                             
Construction
                                             
Commercial
                                 391        65  
Residential
                                             
Consumer
                                             
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
                                 952        65  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      1,565        1,675                 1,917        416  
Real estate:
                                             
Construction
                                             
Commercial
      6,821        6,821                 4,783        376  
Residential
      2,657        2,787                 2,493        146  
Consumer
                                             
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 11,043      $ 11,283               $ 9,193      $ 938  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
                                                         
                         
This Quarter
     
Year-to-Date
  
September 30, 2020
   
Recorded
Investment
     
Unpaid
Principal
Balance
     
Related
Allowance
     
Average
Recorded
Investment
     
Interest
Income
Recognized
     
Average
Recorded
Investment
     
Interest
Income
Recognized
  
With no related allowance:
                                                               
Commercial
    $ 1,732      $ 1,842               $ 1,896      $ 154      $ 1,630      $ 354  
Real estate:
                                                               
Construction
                                                               
Commercial
      3,124        3,510                 6,141        10        4,944        76  
Residential
      2,652        2,782                 2,700        12        2,564        118  
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      7,508        8,134                 10,737        176        9,138        548  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With an allowance recorded:
                                                               
Commercial
      121        121      $ 32        121                 121           
Real estate:
                                                               
Construction
                                                               
Commercial
      5,769        5,759        1        2,885        61        2,045        65  
Residential
                                                               
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
      5,890        5,890        33        3,006        61        2,166        65  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Commercial
      1,853        1,963        32        2,017        154        1,751        354  
Real estate:
                                                               
Construction
                                                               
Commercial
      8,893        9,279        1        9,026        71        6,989        141  
Residential
      2,652        2,782                 2,700        12        2,564        118  
Consumer
                                                               
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 13,398      $ 14,024      $ 33      $ 13,743      $ 237      $ 11,304      $ 613  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
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For the three and nine months ended September 30, interest income related to impaired loans, would have been $21 and $70 in 2021 and $33 and $89 in 2020 had the loans been current and the terms of the loans not been modified.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
 
  •  
Rate Modification—A modification in which the interest rate is changed to a below market rate.
 
  •  
Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed.
 
  •  
Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time.
 
  •  
Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.
 
  •  
Combination Modification—Any other type of modification, including the use of multiple categories above.
Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled $9,206 at September 30, 2021, $9,985 at December 31, 2020 and $9,893 at September 30, 2020.
There were no loans modified as troubled debt restructures during the three and nine months ended September 30, 2021. There were no loans modified as troubled debt restructures during the third quarter of 2020 and nine loans modified during the nine months ended September 30, 2020 totaling $7,817.
During the three and nine months ended September 30, 2021, there were no defaults on restructured loans. During the three months ended September 30, 2020, there were no defaults on restructured loans and one default on a restructured loan totaling $368 during the nine months ended September 30, 2020.
6. Other assets:
The components of other assets at September 30, 2021 and December 31, 2020
 
are summarized as follows:
    
September 30,
2021
     
December 31,
2020
  
Other real estate owned
    $        $ 422  
Bank owned life insurance
      31,999        31,425  
Restricted equity securities
      2,171        1,759  
Deferred tax assets
      3,825        3,907  
Lease
right-of-use
assets
      1,516        2,278  
Other assets
      8,641        8,629  
    
 
 
     
 
 
  
Total
    $   48,152      $ 48,420  
    
 
 
     
 
 
  
7. Fair value estimates:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced
 
18
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liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities
 
are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
 
  •  
Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
  •  
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
  •  
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.
The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:
Investment securities:
The fair values for U. S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Interest rate swap hedges
: The fair value of interest rate swaps is based on an external derivative model using input data of the valuation date.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:
                                 
    
Fair Value Measurement Using
  
September 30, 2021
   
    Amount    
     
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant
Other Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
State and Municipals:
                                    
Taxable
    $ 22,176               $ 22,176           
Tax-exempt
      43,542                 43,542           
Mortgage-backed securities:
                                    
U.S. Government agencies
      35,611                 35,611           
U.S. Government-sponsored enterprises
      15,339                 15,339           
Corporate debt obligations
      15,037                 15,037           
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 131,705               $ 131,705                       
    
 
 
     
 
 
     
 
 
     
 
 
  
Interest rate swap hedge
    $ 599               $ 599           
    
 
 
     
 
 
     
 
 
     
 
 
  
 
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December 31, 2020
   
Fair Value Measurement Using
  
  
    Amount    
     
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant
Other Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
State and municipals:
                                    
Taxable
    $ 22,574               $ 22,574                       
Tax-exempt
      18,395                 18,395           
Mortgage-backed securities:
                                    
U.S. Government agencies
      26,991                 26,991           
U.S. Government-sponsored enterprises
      25,052                 25,052           
Corporate debt obligations
      10,683                 10,683           
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 103,695               $ 103,695           
    
 
 
     
 
 
     
 
 
     
 
 
  
Interest rate swap hedge
    $ 172               $ 172           
    
 
 
     
 
 
     
 
 
     
 
 
  
Other real estate owned
: Assets acquired through loan foreclosure are recorded at fair value less estimated costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a
charge-off.
If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of other real estate owned is not
re-measured
to fair value on a recurring basis but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals, current sale value assessments by real estate agents or pending offers to acquire by independent buyers and is updated at least annually. The Company classifies other real estate owned in level 3 of the fair value hierarchy.
Impaired loans
: The fair value of impaired loans is specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may include but is not necessarily limited to real estate, personal or business assets including vehicles, equipment, inventory, accounts receivable or marketable securities. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial statements. Likewise, values for inventory, accounts receivable or marketable security collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate or custodian account statements (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income.
Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:
                                 
    
Fair Value Measurement Using
  
September 30, 2021
   
Amount
     
(Level 1)
Quoted Prices in
Active Markets for
Identical
Assets
     
(Level 2)
Significant
Other Observable
Inputs
     
(Level 3)
Significant
Unobservable
Inputs
  
Impaired loans, net of related allowance
    $ 5,835                        $ 5,835  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 5,835                        $ 5,835  
    
 
 
     
 
 
     
 
 
     
 
 
  
   
December 31, 2020
   
Fair Value Measurement Using
  
  
Amount
     
(Level 1)
Quoted Prices in
Active Markets for
Identical
Assets
     
(Level 2)
Significant
Other Observable
Inputs
     
(Level 3)
Significant
Unobservable
Inputs
  
Other real estate owned
    $ 422                        $ 422  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 422                        $ 422  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
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The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at September 30, 2021 and December 31, 2020.
                                 
    
Quantitative Information about Level 3 Fair Value Measurements
  
September 30, 2021
   
Fair Value
Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range
(Weighted Average)
  
Impaired loans
      $5,835        Appraisal of collateral        Appraisal adjustments        0.0% to 0.0% (0.0%)  
                         Liquidation expenses        7.0% to 7.0% (7.0%)  
   
    
Quantitative Information about Level 3 Fair Value Measurements
  
December 31, 2020
   
Fair Value
Estimate
     
Valuation Techniques
     
Unobservable Input
     
Range
(Weighted Average)
  
Other real estate owned
      $422        Appraisal of collateral        Appraisal adjustments        20.0% to 14.0% (8.4%)  
                         Liquidation expenses        10.0% to 10.0% (10.0%)  
The carrying and fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 and their placement within the fair value hierarchy are as follows:
                                         
    
Carrying
Amount
     
Fair Value Hierarchy
  
September 30, 2021
   
Fair Value
     
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     
Significant
Other
Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
Financial assets:
                                             
Cash and cash equivalents
    $ 186,078      $ 186,078      $ 186,078                    
Investment securities
      131,705        131,705               $ 131,705           
Loans held for sale
      443        443                 443           
Net loans
      855,306        840,466                        $ 840,466  
Accrued interest receivable
      2,604        2,604                 715        1,889  
Restricted equity securities
      2,171        2,171                             
Interest rate swap hedges
      599        599                 599           
Financial liabilities:
                                             
Deposits
    $ 1,069,574      $ 1,070,933               $ 1,070,933           
Long-term debt
      52,004        54,920                 54,920           
Accrued interest payable
      847        847                 847           
     
    
Carrying
Amount
     
Fair Value Hierarchy
  
December 31, 2020
   
Fair Value
     
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     
Significant
Other
Observable
Inputs
(Level 2)
     
Significant
Unobservable
Inputs
(Level 3)
  
Financial assets:
                                             
Cash and cash equivalents
    $ 49,781      $ 49,781      $ 49,781                    
Investment securities
available-for-sale
      103,695        103,695               $ 103,695           
Loans held for sale
      4,338        4,338                 4,338           
Net loans
      1,127,039        1,116,618                        $ 1,116,618  
Accrued interest receivable
      4,216        4,216                 578        3,638  
Restricted equity securities
      1,759        1,759                             
Interest rate swap hedges
      172        172                 172           
Financial liabilities:
                                             
Deposits
    $ 1,015,460      $ 1,018,529               $ 1,018,529           
Long-term debt
      228,765        231,748                 231,748           
Accrued interest payable
      1,038        1,038                 1,038           
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8. Subsequent
 
Events:
In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred from the date of the financial statements through the date these consolidated financial statements were issued. On June 30, 2021, Riverview entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid Penn Bancorp, Inc. (“Mid Penn”) pursuant to which Riverview will merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. Upon consummation of the Merger, Riverview Bank, a wholly-owned subsidiary of Riverview, will be merged with and into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn, with Mid Penn Bank being the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the boards of directors of Mid Penn and Riverview. The Merger is expected to close in the fourth quarter of 2021.
 
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Table of Contents
Riverview Financial Corporation
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Dollars in thousands, except per share data)
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on
Form 10-K
for the year ended December 31, 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.
Review of Financial Position:
Total assets decreased $114,761 to $1,242,793 at September 30, 2021, from $1,357,554 at December 31, 2020. Loans, net, decreased to $866,140 at September 30, 2021, compared to $1,139,239 at December 31, 2020, a decrease of $273,099. The decrease in loans was due primarily to SBA forgiveness payments on PPP loans. Approximately 91.3%, amounting to $247,625 of outstanding PPP loans at December 31, 2020, were forgiven in the first nine months of 2021. Business lending, including commercial and commercial real estate loans, decreased $224,997, retail lending, including residential mortgages and consumer loans, decreased $16,472, and
 
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construction lending decreased $31,630 during the nine months ended September 30, 2021. Investment securities increased $28,010, or 27.0%, in the nine months ended September 30, 2021. Noninterest-bearing deposits increased $18,956, while interest-bearing deposits increased $35,158 during the nine months ended September 30, 2021. Total stockholders’ equity increased $10,144, to $107,576 at September 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 nine months ended September 30, 2021, total assets averaged $1,301,414, an increase of $56,838 from $1,244,576 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 $131,705 at September 30, 2021, an increase of $28,010, or 27.0%, from $103,695 at December 31, 2020. Activity in the investment portfolio during the nine months of 2021, included purchases of $74,503, sales of $30,442 and repayments of $13,073.
For the nine months ended September 30, 2021, the investment portfolio averaged $139,504, an increase of $64,311 compared to $75,193 for the same period last year. The
tax-equivalent
yield on the investment portfolio decreased 68 basis points to 2.01% for the nine months ended September 30, 2021, from 2.69% 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 $80, net of deferred income tax of $17 at September 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.
Loan Portfolio:
Loans, net, decreased to $866,140 at September 30, 2021 from $1,139,239 at December 31, 2020, a decrease of $273,099, or 24.0%. The decrease in the loan portfolio was attributable to forgiveness payments on PPP loans totaling $247,625 and a decrease in organic loan growth of $44,868, offset partially by the origination of PPP loans of $19,394. Business loans, including commercial and commercial real estate loans, decreased $224,997, or 26.1%, to $636,576 at September 30, 2021 from $861,575 at December 31, 2020. Retail loans, including residential real estate and consumer loans, decreased $16,472, or 8.1%, to $187,790 at September 30, 2021 from $204,262 at December 31, 2020. Construction lending decreased $31,630, or 43.1%, to $41,772 at September 30, 2021 from $73,402 at December 31, 2020. PPP loans, net of unearned loan fees, totaled $23,579 at September 30, 2021 and $251,810 at December 31, 2020.
For the nine months ended September 30, 2021, loans averaged $1,017,390, a decrease of $21,868 compared to $1,039,258 for the same period in 2020. The
tax-equivalent
yield on the loan portfolio was 4.38% for the nine months ended September 30, 2021, a 20 basis point increase from 4.18% for the comparable period last year. The increase in the loan yield was caused by an increase in fees earned on PPP loans. However, the continuation of the low interest rate environment may cause 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.
In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments with
off-balance
sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as
on-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements. With the onset of the
COVID-19
pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans.
The contractual amounts of
off-balance
sheet commitments at September 30, 2021 and December 31, 2020 are summarized as follows:
 
    
September 30,
2021
     
December 31,
2020
  
Unused portions of lines of credit
    $ 104,774      $ 92,848  
Construction loans
      19,111        24,751  
Commitments to extend credit
      30,104        10,275  
Deposit overdraft protection
      17,039        18,117  
Standby and performance letters of credit
      9,512        6,577  
    
 
 
     
 
 
  
Total
    $ 180,540      $ 152,568  
    
 
 
     
 
 
  
 
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Asset Quality:
Nonperforming assets increased $1,400 to $13,362 at September 30, 2021 from $11,962 at December 31, 2020. The increase resulted from a $872 increase in nonaccrual loans, and a $1,724 increase in accruing loans past due 90 days or more, which were offset by reductions of $774 in accruing restructured loans and $442 in other real estate owned. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.54% at September 30, 2021 compared to 1.05% at December 31, 2020. Nonperforming assets increased $1,380 in the third quarter of 2021 due to an increase of $1,789 in accruing loans past due 90 days or more, with reductions of $103 in nonaccrual loans, $87 in accruing restructured loans and $219 in foreclosed assets. The increase in accruing loans past due 90 days or more in the third quarter of 2021 was due to one commercial real estate relationship.
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 $1,366 to $10,384 at September 30, 2021, from $12,200 at the end of 2020 primarily as a result of recognizing a recovery of provision for loan losses and reduced net charge offs. We recognized a $735 recovery of provision for loan losses in 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 and decline in organic loan growth. 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 $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 based on the discontinuance of the need to provide 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 nine months ended September 30, net charge offs were $631, or 0.08% of average loans outstanding in 2021 compared to $1,548, or 0.20% 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 nine months ended September 30, 2021, total deposits increased $54,114 to $1,069,574 from $1,015,460 at December 31, 2020. The increase was due to the successful acquisition of a municipal relationship in 2021. Noninterest-bearing transaction accounts increased $18,956, while interest-bearing accounts increased $35,158. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $67,572 and time deposits, including certificates of deposit and individual retirement accounts decreased $32,414 for the nine months ended September 30, 2021.
 
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For the nine months ended September 30, interest-bearing deposits averaged $869,603 in 2021 compared to $828,884 in 2020. The cost of interest-bearing deposits was 0.38% in 2021 compared to 0.71% 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 were replaced by lower yields originated on new and refinanced loans.
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 September 30, 2021 and December 31, 2020, we did not have any short-term borrowings outstanding.
Long-term debt totaled $52,004 at September 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 nine months ended September 30, long-term debt averaged $128,490 in 2021 and $117,602 in 2020. The average cost of long-term debt was 1.82% for the nine months ended September 30, 2021, an increase from 0.74% 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.
As a result of the
COVID-19
pandemic impact 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.
 
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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 1.87 at September 30, 2021. Given recent inflationary pressure and the potential for rates to rise, the focus of ALCO has been to increase the amount of repricing assets.
The current position at September 30, 2021, indicates that the amount of RSA repricing within one year would exceed that of RSL, with rising rates causing an increase in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.
Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a
one-day
position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.
As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending September 30, 2021, would increase 9.03% and decrease 5.79% 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.
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.
We employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after September 30, 2021. Our noncore funds at September 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 September 30, 2021, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was (10.74)%, while our net short-term noncore funding ratio, noncore funds maturing within
one-year,
less short-term investments to assets equaled 3.61%. Comparatively, our net noncore dependence ratio was 14.60% while our net short-term noncore funding ratio was 0.94% at December 31, 2020.
 
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Table of Contents
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 $136,297 during the nine months ended September 30, 2021 as compared with a decrease of $18,390 for the same period last year. For the nine months ended September 30, 2021, we realized net cash inflows of $15,390 from operating activities and $241,829 from investing activities offset partially by net cash outflows of $120,922 from financing activities. For the nine months ended September 30, 2020, we realized a net cash outflow of $320,801 from investing activities offset partially by net cash inflows of $2,501 from operating activities and $299,910 from financing activities.
Operating activities provided net cash of $15,390 for the nine months ended September 30, 2021 compared to $2,501 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 $241,829 for the nine months ended September 30, 2021. For the comparable period in 2020, investing activities used net cash of $320,801. For the nine months ended September 30, 2021, loan forgiveness from PPP loans offset partially by purchases of investment securities
available-for-sale
were the primary factors for the net cash provided by investing activities. For the comparable period of 2020, loan originations from PPP loans were the primary factor for the increase in loans.
Financing activities used net cash of $120,922 for the nine months ended September 30, 2021 and provided net cash of $299,910 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. Funds from deposit gathering and proceeds received through long-term debt were the major factors for the net funds provided from financing activities in 2020. Transfer of deposits in sale totaled $42,191 during the nine months ended September 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 $107,576, or $11.49 per share, at September 30, 2021, and $97,432, or $10.47 per share, at December 31, 2020. The net increase in stockholders’ equity in the nine months ended September 30, 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.
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.
 
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Table of Contents
As of September 30, 2021 and December 31, 2020, the Bank was categorized as well capitalized. Listed in the table below is a comparison of the Bank’s actual capital amounts with the minimum requirements for well capitalized banks, as defined above.
 
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III
    
Well Capitalized under
Basel III
  
September 30, 2021:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
CBLR Framework
                                                    
Tier 1 capital (to average total assets): (i.e., leverage ratio)
    $ 127,526        10.4 %     
(1)
 		       
(1)
 		     $ 104,141     
³
 8.5 % 
       
    
Actual
    
Minimum Regulatory
Capital Ratios under
Basel III
    
Well Capitalized under
Basel III
  
December 31, 2020:
   
Amount
     
Ratio
    
Amount
     
Ratio
    
Amount
     
Ratio
  
Total risk-based capital (to risk-weighted assets)
    $ 126,108        14.2 %    $ 93,462     
³
 10.5 %    $ 89,011     
³
 10.0 % 
Tier 1 capital (to risk-weighted assets)
      114,967        12.9 %      75,659     
³
 8.5 %      71,209     
³
 8.0 % 
Common equity tier 1 risk-based capital (to risk-weighted assets)
      114,967        12.9 %      62,308     
³
 7.0 %      57,857     
³
 6.5 % 
Tier 1 capital (to average total assets)
      114,967        9.8 %      47,102     
³
 4.0 %      58,877     
³
 5.0 % 
 
(1)
Under the CBLR Framework, capital adequacy amounts and ratios are not applicable as qualifying depositary institutions are evaluated solely on whether or not they are well capitalized.
Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at September 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 $10,955, or $1.17 per basic and diluted weighted average common share, for the nine months ended September 30, 2021, compared to a net loss of $22,794, or $2.46 per basic and diluted weighted average common share, for the same period last year. For the third quarter ended September 30, net income was $3,115 or $0.33 per basic and diluted weighted average common share in 2021 as compared to net income of $695, or $0.08 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 nine months ended September 30, 2021, SBA forgiveness of PPP loans increased causing an acceleration in the recognition of fees as these loans were paid off. Approximately 91.3%, amounting to $247,625 of the outstanding PPP loans at December 31, 2020, were forgiven during the nine months of 2021. Net interest income generated from PPP loans totaled $2,268 in the third quarter of 2021 and $6,604 during the nine months 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 and decline in organic loan growth.
The major factors causing the reported net losses of $22,794 for the nine months ended September 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 nine months ended September 30, 2020, the provisions for loan losses totaled $1,844 and $5,656, 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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Table of Contents
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 nine months ended September 30,
tax-equivalent
net interest income increased $2,109 to $31,211 in 2021 from $29,102 in 2020. The increase in
tax-equivalent
net interest income was primarily attributable to recognizing interest income of $6,604 in the nine months ended September 30, 2021 on PPP loans compared to $2,501 for the same period last year. The
tax-equivalent
net interest margin for the nine months ended September 30 was 3.39% in 2021 compared to 3.37% in 2020. The net interest spread increased to 3.28% for the nine months ended September 30, 2021 from 3.25% for the nine months ended September 30, 2020. Adding to the positive impact of the improvement 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 $76,425 while average interest-bearing liabilities increased $41,841 comparing the nine months ended September 30, 2021 and 2020.
For the three months ended September 30,
tax-equivalent
net interest income decreased slightly by $93 to $10,411 in 2021 from $10,504 in 2020. Average earning assets decreased $123,363 while average earning liabilities decreased $152,747 comparing the third quarters of 2021 and 2020. The
tax-equivalent
net interest margin for the three months ended September 30, was 3.57% in 2021 compared to 3.26% in 2020. The net interest spread increased to 3.45% for the three months ended September 30, 2021 from 3.17% for the three months ended September 30, 2020.
 
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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.
 
    
Nine months ended
  
    
September 30, 2021
    
September 30, 2020
  
    
Average
Balance
     
Interest
     
Yield/
Rate
    
Average
Balance
     
Interest
     
Yield/
Rate
  
Assets:
                                                     
Earning assets:
                                                     
Loans:
                                                     
Taxable
    $ 987,840      $ 32,615        4.41 %    $ 1,005,344      $ 31,649        4.21 % 
Tax exempt
      29,550        681        3.08 %      33,914        891        3.51 % 
Investments:
                                                     
Taxable
      96,062        1,537        2.14 %      67,222        1,291        2.57 % 
Tax exempt
      43,442        557        1.71 %      7,971        223        3.74 % 
Interest bearing deposits
      72,979        64        0.12 %      38,997        112        0.38 % 
Federal funds sold
                                                     
    
 
 
     
 
 
             
 
 
     
 
 
           
Total earning assets
      1,229,873        35,454        3.85 %      1,153,448        34,166        3.96 % 
Less: allowance for loan losses
      11,708                         8,431                    
Other assets
      83,249                         99,559                    
    
 
 
                      
 
 
                    
Total assets
    $ 1,301,414                       $ 1,244,576                    
    
 
 
                      
 
 
                    
Liabilities and Stockholders’ Equity:
                                                     
Interest bearing liabilities:
                                                     
Money market accounts
    $ 152,423      $ 122        0.11 %    $ 116,504      $ 288        0.33 % 
NOW accounts
      327,154        259        0.11 %      291,182        574        0.26 % 
Savings accounts
      170,855        87        0.07 %      142,385        117        0.11 % 
Time deposits
      219,171        2,023        1.23 %      278,813        3,405        1.63 % 
Short term borrowings
                                9,766        28        0.38 % 
Long-term debt
      128,490        1,752        1.82 %      117,602        652        0.74 % 
    
 
 
     
 
 
             
 
 
     
 
 
           
Total interest-bearing liabilities
      998,093        4,243        0.57 %      956,252        5,064        0.71 % 
Non-interest-bearing
demand deposits
      187,167                         163,886                    
Other liabilities
      13,818                         12,952                    
Stockholders’ equity
      102,336                         111,486                    
    
 
 
                      
 
 
                    
Total liabilities and stockholders’ equity
    $ 1,301,414                       $ 1,244,576                    
    
 
 
                      
 
 
                    
Net interest income/spread
             $ 31,211        3.28 %             $ 29,102        3.25 % 
             
 
 
                      
 
 
           
Net interest margin
                        3.39 %                        3.37 % 
Tax-equivalent
adjustments:
                                                     
Loans
             $ 143                       $ 187           
Investments
               117                         47           
             
 
 
                      
 
 
           
Total adjustments
             $ 260                       $ 234           
             
 
 
                      
 
 
           
 
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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 September 30, 2021.
We recognized a $735 recovery of provision for loan losses for the nine months ended September 30, 2021, compared to a provision for loan losses of $5,656 in 2020. For the quarter ended September 30, no provision for loan losses was recorded in 2021 compared to a provision for loan losses of $1,844 in 2020. The Company was able to decrease its qualitative factors in 2021 based on the discontinuance of the need for 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 nine months ended September 30, noninterest income totaled $8,306 in 2021, an increase of $1,217 from $7,089 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 $135 and $80 from trust and wealth management income. Partially offsetting these positive influences were decreases of $498 in gains from the sale of investment securities and $460 in mortgage banking income. Mortgage banking income decreased for the nine months ended September 30, 2021 as compared to the same period in 2020 due to a reduction in residential refinancing mortgage activity.
For the quarter ended September 30, noninterest income totaled $2,088 in 2021, a decrease of $70 from $2,158 in 2020. The primary contributors to the decline were a $297 reduction in mortgage banking income offset partially by a $149 increase in service charges, fees and commissions.
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 $26,639, to $26,505 for the nine months ended September 30, 2021, from $53,144 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 $1,885, or 6.6%, comparing the nine months ended September 30, 2021 and 2020. For the nine months ended September 30, salaries and employee benefit expenses decreased $980, or 6.3%, to $14,472 in 2021 from $15,452 in 2020. Net occupancy expense decreased $592, or 16.1%, to $3,084 in 2021 from $3,676 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 $115, or 1.3%, to $8,597 in 2021 compared to $8,713 in 2020 as a result of implementing cost savings initiatives in the latter part of 2019.
Noninterest expense decreased to $8,594 for the three months ended September 30, 2021, from $9,978 for the same period last year. The overall decrease was primarily due to implementing efficiency initiatives with respect to staffing beginning in the fourth quarter of 2019.
Income Taxes:
We recorded an income tax expense of $2,532 for the nine months ended September 30, 2021 compared to a tax benefit of $49 for the nine months ended September 30, 2020. For the three months ended September 30, we recorded income tax expense of $704 in 2021 compared to $67 in 2020. The effective tax rates were 18.8% and 18.4% for the nine and three months ended September 30, 2021.
 
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Table of Contents
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable to a smaller reporting company.
 
Item 4.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
At September 30, 2021, the end of the period covered by this Quarterly Report on Form
10-Q,
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in
Rule 13a-15(e)
under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures at September 30, 2021 were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.
(b) Changes in internal control.
There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
 
Item 1.
Legal Proceedings
In the opinion of the Company, after review with legal counsel, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would have a material effect on the consolidated results of operations or financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of the Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.
 
Item 1A.
Risk Factors
Not required for smaller reporting companies.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
 
Item 3.
Defaults upon Senior Securities
Not applicable.
 
Item 4.
Mine Safety Disclosures
Not applicable.
 
Item 5.
Other Information
Not applicable.
 
Item 6.
Exhibits
The following Exhibits are incorporated by reference hereto:
 
31.1    Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
31.2    Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
32.1    Chief Executive Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2    Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101    Interactive Data File (XBRL).
104    Cover Page Interactive Data File (embedded within the Inline XBRL document).
 
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
By:  
/s/ Brett D. Fulk
    Brett D. Fulk
    President and Chief Executive Officer
    (Principal Executive Officer)
 
Date: November 4, 2021
 
By:  
/s/ Scott A. Seasock
    Scott A. Seasock
    Chief Financial Officer
    (Principal Financial Officer)
 
Date: November 4, 2021
 
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