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Section 1: 10-Q (FORM 10-Q)

Form 10-Q
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, 2019

or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                     

001-38627

(Commission File Number)

 

 

RIVERVIEW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   38-3917371
(State of incorporation)  

(IRS Employer

Identification Number)

3901 North Front Street, Harrisburg, PA   17110
(Address of principal executive offices)   (Zip code)

(717) 957-2196

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit such files.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock   RIVE   Nasdaq Global Market

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 9,184,391 at October 30, 2019.

 

 

 


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2019

 

Contents

       Page No.  

PART I.

 

FINANCIAL INFORMATION:

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets at September 30, 2019 and December  31, 2018

     3  
 

Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018

     4  
 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018

     5  
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

     6  
 

Notes to Consolidated Financial Statements

     7  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     38  

Item 4.

 

Controls and Procedures

     38  

PART II

 

OTHER INFORMATION:

  

Item 1.

 

Legal Proceedings

     38  

Item 1A.

 

Risk Factors

     38  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     38  

Item 3.

 

Defaults upon Senior Securities

     38  

Item 4.

 

Mine Safety Disclosures

     38  

Item 5.

 

Other Information

     38  

Item 6.

 

Exhibits

     39  
 

Signatures

     40  


Table of Contents

Riverview Financial Corporation

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per share data)

 

     September 30,
2019
    December 31,
2018
 

Assets:

    

Cash and due from banks

   $ 13,108     $ 16,708  

Interest-bearing deposits in other banks

     16,733       37,108  

Investment securities available-for-sale

     106,637       104,677  

Loans held for sale

     336       637  

Loans, net

     883,506       893,184  

Less: allowance for loan losses

     7,097       6,348  
  

 

 

   

 

 

 

Net loans

     876,409       886,836  

Premises and equipment, net

     18,115       18,208  

Accrued interest receivable

     2,751       3,010  

Goodwill

     24,754       24,754  

Intangible assets

     2,927       3,509  

Other assets

     47,989       42,156  
  

 

 

   

 

 

 

Total assets

   $ 1,109,759     $ 1,137,603  
  

 

 

   

 

 

 

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 161,211     $ 162,574  

Interest-bearing

     808,372       842,019  
  

 

 

   

 

 

 

Total deposits

     969,583       1,004,593  

Short-term borrowings

    

Long-term debt

     6,951       6,892  

Accrued interest payable

     432       484  

Other liabilities

     15,538       11,724  
  

 

 

   

 

 

 

Total liabilities

     992,504       1,023,693  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Common stock: no par value, authorized 20,000,000 shares; September 30, 2019, issued and outstanding 9,182,565 shares; December 31, 2018, issued and outstanding 9,121,555 shares

     101,807       101,134  

Capital surplus

     300       332  

Retained earnings

     15,557       15,063  

Accumulated other comprehensive loss

     (409     (2,619
  

 

 

   

 

 

 

Total stockholders’ equity

     117,255       113,910  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,109,759     $ 1,137,603  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  

September 30,

   2019     2018     2019     2018  

Interest income:

        

Interest and fees on loans:

        

Taxable

   $ 12,283     $ 11,957     $ 34,651     $ 35,424  

Tax-exempt

     259       230       722       699  

Interest and dividends on investment securities available-for-sale:

        

Taxable

     641       551       2,113       1,616  

Tax-exempt

     43       80       159       243  

Dividends

        

Interest on interest-bearing deposits in other banks

     200       181       647       361  

Interest on federal funds sold

           20  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     13,426       12,999       38,292       38,363  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Interest on deposits

     2,027       1,885       6,199       5,162  

Interest on short-term borrowings

           30  

Interest on long-term debt

     127       194       392       562  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,154       2,079       6,591       5,754  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     11,272       10,920       31,701       32,609  

Provision for loan losses

     1,049       225       2,250       615  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     10,223       10,695       29,451       31,994  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Service charges, fees and commissions

     1,129       1,267       3,497       4,146  

Commission and fees on fiduciary activities

     314       226       855       671  

Wealth management income

     226       199       709       572  

Mortgage banking income

     151       168       357       527  

Bank owned life insurance investment income

     193       194       574       584  

Net gain (loss) on sale of investment securities available-for-sale

     (53       (95     40  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,960       2,054       5,897       6,540  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Salaries and employee benefits expense

     5,232       5,032       18,572       15,575  

Net occupancy and equipment expense

     1,041       1,008       3,174       3,142  

Amortization of intangible assets

     194       215       582       656  

Net cost (benefit) of operation of other real estate owned

     (15     29       20       30  

Other expenses

     2,979       3,057       9,531       8,882  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     9,431       9,341       31,879       28,285  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,752       3,408       3,469       10,249  

Income tax expense (benefit)

     486       620       456       1,863  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     2,266       2,788       3,013       8,386  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Unrealized gain (loss) on investment securities available-for-sale

     (256     (576     2,703       (1,539

Reclassification adjustment for net (gain) loss on sale of investment securities available-for-sale included in net income (loss)

     53         95       (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (203     (576     2,798       (1,579

Income tax expense (benefit) related to other comprehensive income

     (42     (121     588       (331
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of income taxes

     (161     (455     2,210       (1,248
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,105     $ 2,333     $ 5,223     $ 7,138  
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

        

Net income:

        

Basic

   $ 0.25     $ 0.30     $ 0.33     $ 0.92  

Diluted

   $ 0.25     $ 0.30     $ 0.33     $ 0.92  

Average common shares outstanding:

        

Basic

     9,173,901       9,100,616       9,159,281       9,089,636  

Diluted

     9,181,076       9,156,931       9,172,015       9,143,041  

See notes to consolidated financial statements.

 

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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, 2019

   $ 101,134      $ 332     $ 15,063     $ (2,619   $ 113,910  

Net income

          3,013         3,013  

Other comprehensive income, net of income taxes

            2,210       2,210  

Compensation cost of option grants

           

Issuance under ESPP, 401k and Dividend Reinvestment plans: 42,518 shares

     474              474  

Exercise of stock options: 18,492 shares

     199        (32         167  

Dividends declared, $0.28 per share

          (2,519       (2,519
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2019

   $ 101,807      $ 300     $ 15,557     $ (409   $ 117,255  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2018

   $ 100,476      $ 423     $ 6,936     $ (1,579   $ 106,256  

Net income

          8,386         8,386  

Other comprehensive income (loss), net of income taxes

            (1,248     (1,248

Compensation cost of option grants

        9           9  

Issuance under ESPP, 401k and Dividend Reinvestment plans: 31,636 shares

     406              406  

Exercise of stock options: 9,677 shares

     117        (76         41  

Dividends declared, $0.20 per shares

          (1,819       (1,819
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2018

   $ 100,999      $ 356     $ 13,503     $ (2,827   $ 112,031  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30,

   Common
Stock
     Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance, July 1, 2019

   $ 101,644      $ 304     $ 13,978     $ (248   $ 115,678  

Net income

          2,266         2,266  

Other comprehensive income, net of income taxes

            (161     (161

Compensation cost of option grants

           

Issuance under ESPP, 401k and Dividend Reinvestment plans: 14,534 shares

     159              159  

Exercise of stock options: 361 shares

     4        (4      

Dividends declared, $0.08 per share

          (687       (687
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2019

   $ 101,807      $ 300     $ 15,557     $ (409   $ 117,255  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 1, 2018

   $ 100,790      $ 424     $ 11,625     $ (2,372   $ 110,467  

Net income

          2,788         2,788  

Other comprehensive income (loss), net of income taxes

            (455     (455

Compensation cost of option grants

           

Issuance under ESPP, 401k and Dividend Reinvestment plans: 10,774 shares

     141              141  

Exercise of stock options: 4,916 shares

     68        (68      

Dividends declared, $0.10 per shares

          (910       (910
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2018

   $ 100,999      $ 356     $ 13,503     $ (2,827   $ 112,031  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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,

   2019     2018  

Cash flows from operating activities:

    

Net income

   $ 3,013     $ 8,386  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization of premises and equipment

     874       921  

Provision for loan losses

     2,250       615  

Stock based compensation

       9  

Net amortization of investment securities available-for-sale

     576       606  

Net cost of operation of other real estate owned

     20       30  

Net (gain) loss on sale of investment securities available-for-sale

     95       (40

Amortization of purchase adjustment on loans

     (2,868     (3,754

Amortization of intangible assets

     582       656  

Amortization of assumed discount on long-term debt

     59    

Deferred income taxes

     273       1,668  

Proceeds from sale of loans originated for sale

     10,335       20,278  

Net gain on sale of loans originated for sale

     (357     (527

Loans originated for sale

     (9,677     (20,095

Bank owned life insurance investment income

     (574     (584

Net change in:

    

Accrued interest receivable

     259       171  

Other assets

     (1,651     165  

Accrued interest payable

     (52     35  

Other liabilities

     (715     (754
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,442       7,786  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investment securities available-for-sale:

    

Purchases

     (32,058     (20,135

Proceeds from repayments

     12,458       9,264  

Proceeds from sales

     19,767       4,825  

Proceeds from the sale of other real estate owned

     728       195  

Net (increase) decrease in restricted equity securities

     (12     44  

Net decrease in loans

     10,931       43,090  

Purchases of premises and equipment

     (1,321     (717

Purchase of bank owned life insurance

     (22     (21
  

 

 

   

 

 

 

Net cash provided by investing activities

     10,471       36,545  
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net decrease in deposits

     (35,010     (5,716

Net decrease in short-term borrowings

       (6,000

Repayment of long-term debt

       (214

Issuance under ESPP, 401k and DRP plans

     474       406  

Proceeds from exercise of stock options

     167       41  

Cash dividends paid

     (2,519     (1,819
  

 

 

   

 

 

 

Net cash used in financing activities

     (36,888     (13,302
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (23,975     31,029  

Cash and cash equivalents—beginning

     53,816       25,786  
  

 

 

   

 

 

 

Cash and cash equivalents—ending

   $ 29,841     $ 56,815  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 6,643     $ 5,719  
  

 

 

   

 

 

 

Income taxes

   $       $  300  
  

 

 

   

 

 

 

Noncash items from operating activities:

    

Initial operating lease right-of-use assets and liabilities

   $ 4,529     $    
  

 

 

   

 

 

 

Noncash items from investing activities:

    

Transfer of owned properties to available for sale

   $ 540     $    
  

 

 

   

 

 

 

Noncash items from financing activities:

    

Other real estate acquired in settlement of loans

   $ 114     $ 657  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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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 28 full service offices and four 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 serves the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Northumberland, Perry, Schuylkill and Somerset Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public.

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 operating results and financial position of the Company for the three and nine months ended as of September 30, 2019, are not necessarily indicative of the results of operations and financial position that may be expected in the future. The condensed consolidated balance sheet at December 31, 2018 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 2018 Annual Report on Form 10-K, filed on March 14, 2019.

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.

Accounting Standards Adopted in 2019

In February 2016, the FASB issued an update ASU 2016-02, “Leases”, which requires lessees to record most leases on their balance sheet and recognize leasing expenses in the income statement. Operating leases, except for short-term leases that are subject to an accounting policy election, will be recorded on the balance sheet for lessees by establishing a lease liability and corresponding right-of-use asset. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. The guidance in this ASU became effective January 1, 2019 at which time the Company recorded on the Consolidated Balance Sheet a right-of-use asset and lease liability of $3,719. For further detail, see Note 7 – Leases.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Topic 310), Premium Amortization on Purchased Callable Debt Securities”. These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of ASU No. 2017-08 on January 1, 2019, did not have a material effect on our consolidated financial statements.

 

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Table of Contents

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. The amendments in the Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of ASU No. 2017-12 on January 1, 2019, did not have a material effect on our consolidated financial statements.

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 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 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 2019-05 “Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 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 December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any day-one regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a one-time cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity. The effective date is subject to final approval by FASB.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This new accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019. The Company does not expect the adoption of the new accounting guidance to have a material effect on the statement of cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update improve the effectiveness of fair value measurement disclosures by modifying the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The ASU is effective for all entities in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

 

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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 guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to internal-use software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., prepaid expense). The new guidance provides that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted in any annual or interim period for which financial statements have not yet been issued or made available for issuance. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

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 adjustments.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at September 30, 2019 and December 31, 2018 is as follows:

 

     September 30,
2019
     December 31,
2018
 

Net unrealized gain (loss) on investment securities available-for-sale

   $ 615      $ (2,183

Income tax expense (benefit)

     130        (458
  

 

 

    

 

 

 

Net of income taxes

     485        (1,725
  

 

 

    

 

 

 

Benefit plan adjustments

     (1,132      (1,132

Income tax benefit

     (238      (238
  

 

 

    

 

 

 

Net of income taxes

     (894      (894
  

 

 

    

 

 

 

Accumulated other comprehensive loss

   $ (409    $ (2,619
  

 

 

    

 

 

 

Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2019 and 2018 is as follows:

 

Three months ended September 30,

   2019      2018  

Unrealized gain (loss) on investment securities available-for-sale

   $ (256    $ (576

Net (gain) loss on the sale of investment securities available-for-sale(1)

     53     
  

 

 

    

 

 

 

Other comprehensive income (loss) before taxes

     (203      (576

Income tax expense (benefit)

     (42      (121
  

 

 

    

 

 

 

Other comprehensive income (loss)

   $ (161    $ (455
  

 

 

    

 

 

 

Nine months ended September 30,

   2019      2018  

Unrealized gain (loss) on investment securities available-for-sale

   $ 2,703      $ (1,539

Net (gain) loss on the sale of investment securities available-for-sale(1)

     95        (40
  

 

 

    

 

 

 

Other comprehensive income (loss) before taxes

     2,798        (1,579

Income tax expense (benefit)

     588        (331
  

 

 

    

 

 

 

Other comprehensive income (loss)

   $ 2,210      $ (1,248
  

 

 

    

 

 

 

 

(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, 2019 and 2018:

 

Three months ended September 30,

   2019      2018  

Numerator:

     

Net income

   $ 2,266      $ 2,788  
  

 

 

    

 

 

 

Denominator:

     

Basic

     9,173,901        9,100,616  

Dilutive options

     7,175        56,315  
  

 

 

    

 

 

 

Diluted

     9,181,076        9,156,931  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.25      $ 0.30  

Diluted

   $ 0.25      $ 0.30  

 

Nine months ended September 30,

   2019      2018  

Numerator:

     

Net income

   $ 3,013      $ 8,386  
  

 

 

    

 

 

 

Denominator:

     

Basic

     9,159,281        9,089,636  

Dilutive options

     12,734        53,405  
  

 

 

    

 

 

 

Diluted

     9,172,015        9,143,041  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.33      $ 0.92  

Diluted

   $ 0.33      $ 0.92  

For the three and nine months ended September 30, 2019, there were 43,350 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. None of the outstanding stock options for the three and nine months ended September 30, 2018 were excluded from the diluted earnings per share calculation.

 

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4. Investment securities:

The amortized cost and fair value of investment securities available-for-sale aggregated by investment category at September 30, 2019 and December 31, 2018 are summarized as follows:

 

September 30, 2019

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

U.S. Treasury securities

   $ 10,400      $ 15      $        $ 10,415  

State and municipals:

           

Taxable

     25,242        643        4        25,881  

Tax-exempt

     5,000        73           5,073  

Mortgage-backed securities:

           

U.S. Government agencies

     38,107        284        308        38,083  

U.S. Government-sponsored enterprises

     23,773        225        59        23,939  

Corporate debt obligations

     3,500           254        3,246  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106,022      $ 1,240      $ 625      $ 106,637  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

State and municipals:

           

Taxable

   $ 34,025      $ 145      $ 892      $ 33,278  

Tax-exempt

     12,970        2        196        12,776  

Mortgage-backed securities:

           

U.S. Government agencies

     23,715        61        106        23,670  

U.S. Government-sponsored enterprises

     26,635        11        451        26,195  

Corporate debt obligations

     9,515           757        8,758  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106,860      $ 219      $ 2,402      $ 104,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2019, is summarized as follows:

 

September 30, 2019

   Fair
Value
 

Within one year

   $ 601  

After one but within five years

     7,974  

After five but within ten years

     15,877  

After ten years

     20,163  
  

 

 

 
     44,615  

Mortgage-backed securities

     62,022  
  

 

 

 

Total

   $ 106,637  
  

 

 

 

Securities with a fair value of $69,088 and $71,797 at September 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.

 

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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, 2019 and December 31, 2018, 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, 2019

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

U.S. Treasury securities

   $        $        $        $        $        $    

State and municipals:

                 

Taxable

     280      4            280        4  

Tax-exempt

                 

Mortgage-backed securities:

                 

U.S. Government agencies

     19,723        308              19,723        308  

U.S. Government-sponsored enterprises

           3,925        59        3,925        59  

Corporate debt obligation

           3,246        254        3,246        254  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,003      $ 312      $ 7,171      $ 313      $ 27,174      $ 625  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less Than 12 Months      12 Months or More      Total  

December 31, 2018

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

State and municipals:

                 

Taxable

   $ 2,300      $ 4      $ 22,943      $ 888      $ 25,243      $ 892  

Tax-exempt

     1,950        32        9,556        164        11,506        196  

Mortgage-backed securities:

                 

U.S. Government agencies

     7,862        66        1,216        40        9,078        106  

U.S. Government-sponsored enterprises

     18,110        163        7,133        288        25,243        451  

Corporate debt obligation

           8,758        757        8,758        757  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,222      $ 265      $ 49,606      $ 2,137      $ 79,828      $ 2,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had 30 investment securities, consisting of one taxable state and municipal obligation, 28 mortgage-backed securities, and one corporate debt obligation that were in unrealized loss positions at September 30, 2019. Of these securities, six mortgage-backed securities and one corporate debt obligation were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at September 30, 2019. There was no OTTI recognized for the three and nine months ended September 30, 2019 and 2018.

The Company had 92 investment securities, consisting of 39 taxable state and municipal obligations, 22 tax-exempt municipal obligations, four corporate obligations and 27 mortgage-backed securities that were in unrealized loss positions at December 31, 2018. Of these securities, 35 taxable state and municipal obligations, 19 tax-exempt municipal obligations, four corporate obligations and 13 mortgage-backed securities were in a continuous unrealized loss position for twelve months or more.

 

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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, 2019 and December 31, 2018 are summarized as follows. Net deferred loan costs were $1,128 and $1,026 at September 30, 2019 and December 31, 2018.

 

     September 30,
2019
     December 31,
2018
 

Commercial

   $ 129,252      $ 122,919  

Real estate:

     

Construction

     58,558        39,556  

Commercial

     479,265        497,597  

Residential

     207,215        221,115  

Consumer

     9,216        11,997  
  

 

 

    

 

 

 

Total

   $ 883,506      $ 893,184  
  

 

 

    

 

 

 

The changes in the allowance for loan losses account by major classification of loan for the three and nine months ended September 30, 2019 and 2018 are summarized as follows:

 

           Real Estate                    

September 30, 2019

   Commercial     Construction      Commercial     Residential     Consumer     Unallocated     Total  

Allowance for loan losses:

               

Beginning Balance, July 1, 2019

   $ 1,117     $ 491      $ 3,591     $ 1,649     $ 154     $       $ 7,002  

Charge-offs

     (759        (110     (5     (111       (985

Recoveries

     1          2         28         31  

Provisions

     876       30        95       (28     74       2       1,049  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,235     $ 521      $ 3,578     $ 1,616     $ 145     $ 2     $ 7,097  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           Real Estate                    

September 30, 2019

   Commercial     Construction      Commercial     Residential     Consumer     Unallocated     Total  

Allowance for loan losses:

               

Beginning Balance, January 1, 2019

   $ 1,162     $ 404      $ 3,298     $ 1,286     $ 50     $ 148     $ 6,348  

Charge-offs

     (1,148        (110     (25     (364       (1,647

Recoveries

     12          4       4       126         146  

Provisions

     1,209       117        386       351       333       (146     2,250  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,235     $ 521      $ 3,578     $ 1,616     $ 145     $ 2     $ 7,097  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           Real Estate                    

September 30, 2018

   Commercial     Construction      Commercial     Residential     Consumer     Unallocated     Total  

Allowance for loan losses:

               

Beginning Balance, July 1, 2018

   $ 1,026     $ 249      $ 3,606     $ 1,295     $ 36     $ 189     $ 6,401  

Charge-off

     (23          (33     (133       (189

Recoveries

     2          1       8       24         35  

Provisions

     411       61        (212     26       120       (181     225  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,416     $ 310      $ 3,395     $ 1,296     $ 47     $ 8     $ 6,472  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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           Real Estate                    

September 30, 2018

   Commercial     Construction     Commercial      Residential     Consumer     Unallocated     Total  

Allowance for loan losses:

               

Beginning Balance, January 1, 2018

   $ 1,206     $ 379     $ 2,963      $ 1,340     $ 37     $ 381     $ 6,306  

Charge-offs

     (193          (93     (295       (581

Recoveries

     10         5        29       88         132  

Provisions

     393       (69     427        20       217       (373     615  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,416     $ 310     $ 3,395      $ 1,296     $ 47     $ 8     $ 6,472  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The allocation of the allowance for loan losses and the related loans by major classifications of loans at September 30, 2019 and December 31, 2018 is summarized as follows:

 

            Real Estate                       

September 30, 2019

   Commercial      Construction      Commercial      Residential      Consumer      Unallocated      Total  

Allowance for loan losses:

                    

Ending balance

   $ 1,235      $ 521      $ 3,578      $ 1,616      $ 145      $ 2      $ 7,097  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     29           251        45              325  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     1,206        521        3,327        1,571        145        2        6,772  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $        $        $        $        $        $        $    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Ending balance

   $ 129,252      $ 58,558      $ 479,265      $ 207,215      $ 9,216      $        $ 883,506  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     1,723           1,312        2,110              5,145  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     127,514        58,558        476,432        204,860        9,216           876,580  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $ 15      $        $ 1,521      $ 245      $        $        $ 1,781  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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            Real Estate                       

December 31, 2018

   Commercial      Construction      Commercial      Residential      Consumer      Unallocated      Total  

Allowance for loan losses:

                    

Ending balance

   $ 1,162      $ 404      $ 3,298      $ 1,286      $ 50      $ 148      $ 6,348  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     382           78        28              488  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     780        404        3,220        1,258        50        148        5,680  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $        $        $        $        $        $        $    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable:

                    

Ending balance

   $ 122,919      $ 39,556      $ 497,597      $ 221,115      $ 11,997      $        $ 893,184  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

individually evaluated for impairment

     1,249           1,643        2,146              5,038  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

collectively evaluated for impairment

     121,521        39,556        492,779        218,468        11,997           884,321  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance:

                    

purchased credit impaired loans

   $ 149      $        $ 3,175      $ 501      $        $        $ 3,825  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

 

   

Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.

 

   

Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

 

   

Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or 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.

 

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Table of Contents

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2019 and December 31, 2018:

 

September 30, 2019

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 117,183      $ 8,221      $ 3,848         $ 129,252  

Real estate:

              

Construction

     58,399        159              58,558  

Commercial

     447,077        13,889        18,299           479,265  

Residential

     202,774        2,038        2,403           207,215  

Consumer

     9,216                 9,216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 834,649      $ 24,307      $ 24,550         $ 883,506  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

   $ 109,609      $ 9,123      $ 4,187         $ 122,919  

Real estate:

              

Construction

     39,265           291           39,556  

Commercial

     471,364        13,106        13,127           497,597  

Residential

     216,218        2,126        2,771           221,115  

Consumer

     11,997                 11,997  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 848,453      $ 24,355      $ 20,376         $ 893,184  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2019 and December 31, 2018. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.

 

     Accrual Loans                

September 30, 2019

   30-59 Days
Past Due
     60-89 Days
Past Due
     90 or More
Days Past
Due
     Total Past
Due
     Current      Nonaccrual
Loans
     Total Loans  

Commercial

   $ 149      $        $        $ 149      $ 127,467      $ 1,621      $ 129,237  

Real estate:

                    

Construction

     10              10        58,548           58,558  

Commercial

     380        1,379           1,759        475,446        538        477,743  

Residential

     1,325        469        63        1,857        204,346        768        206,971  

Consumer

     62        19        37        118        9,098           9,216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,926      $ 1,867      $ 100      $ 3,893      $ 874,905      $ 2,927      $ 881,725  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       1,781  
                    

 

 

 

Total Loans

                     $ 883,506  
                    

 

 

 
     Accrual Loans                

December 31, 2018

   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

   $ 69      $ 128      $ 82      $ 279      $ 121,350      $ 1,141      $ 122,770  

Real estate:

                    

Construction

     11        655        247        913        38,643           39,556  

Commercial

     467        538        170        1,175        492,545        702        494,422  

Residential

     4,537        1,322        290        6,149        213,579        886        220,614  

Consumer

     124        57        50        231        11,766           11,997  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,208      $ 2,700      $ 839      $ 8,747      $ 877,883      $ 2,729      $ 889,359  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans

                       3,825  
                    

 

 

 

Total Loans

                     $ 893,184  
                    

 

 

 

 

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Table of Contents

The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2019 and 2018, and as of and for the year ended, December 31, 2018 by major loan classification:

 

                          This Quarter      Year-to-Date  

September 30, 2019

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

                    

Commercial

   $ 1,617      $ 2,256      $        $ 871      $ 96      $ 399      $ 604  

Real estate:

                    

Construction

                    29     

Commercial

     2,048        2,048           3,135        1,204        3,882        1,408  

Residential

     2,178        2,178           2,189        33        2,247        158  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,843        6,482           6,195        1,333        6,557        2,170  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                    

Commercial

     121        121        29        448           767     

Real estate:

                    

Construction

                    

Commercial

     785        939        251        579        4        468        12  

Residential

     177        315        45        178        2        179        5  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,083        1,375        325        1,205        6        1,414        17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     1,738        2,377        29        1,319        96        1,166        604  

Real estate:

                    

Construction

                    29     

Commercial

     2,833        2,987        251        3,714        1,208        4,350        1,420  

Residential

     2,355        2,493        45        2,367        35        2,426        163  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,926      $ 7,857      $ 325      $ 7,400      $ 1,339      $ 7,971      $ 2,187  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          For the Year Ended  

December 31, 2018

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

              

Commercial

   $ 149      $ 149         $ 459      $ 564  

Real estate:

              

Construction

              

Commercial

     4,284        4,284           6,382        2,846  

Residential

     2,466        2,466           2,875        460  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,899        6,899           9,716        3,870  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Commercial

     1,249        1,249      $ 382        1,117        7  

Real estate:

              

Construction

              

Commercial

     534        534        78        676        17  

Residential

     181        319        28        184        3  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,964        2,102        488        1,977        27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     1,398        1,398        382        1,576        571  

Real estate:

              

Construction

              

Commercial

     4,818        4,818        78        7,058        2,863  

Residential

     2,647        2,785        28        3,059        463  

Consumer

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,863      $ 9,001      $ 488      $ 11,693      $ 3,897  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                          This Quarter      Year-to-Date  

September 30, 2018

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

                    

Commercial

   $ 288      $ 288      $        $ 327      $ 27      $ 562      $ 399  

Real estate:

                    

Construction

                    

Commercial

     6,181        6,181           6,580        795        7,081        2,165  

Residential

     2,865        2,883           2,941        64        3,011        201  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9,334        9,352           9,848        886        10,654        2,765  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                    

Commercial

     1,280        1,280        398        1,056        2        1,072        5  

Real estate:

                    

Construction

                    

Commercial

     1,104        1,104        139        818        4        723        11  

Residential

     182        320        34        184           184        3  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,566        2,704        571        2,058        6        1,979        19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     1,568        1,568        398        1,383        29        1,634        404  

Real estate:

                    

Construction

                    

Commercial

     7,285        7,285        139        7,398        799        7,804        2,176  

Residential

     3,047        3,203        34        3,125        64        3,195        204  

Consumer

                    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,900      $ 12,056      $ 571      $ 11,906      $ 892      $ 12,633      $ 2,784  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three and nine months ended September 30, interest income related to impaired loans, would have been $48 and $133 in 2019 and $23 and $79 in 2018 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 restructurings that are classified as impaired. Troubled debt restructurings totaled $2,729 at September 30, 2019, $2,925 at December 31, 2018 and $4,766 at September 30, 2018.

There were no loans modified as troubled debt restructuring during the third quarter of 2019 and one loan modified during the nine months ended September 30, 2019. There were no loans modified as troubled debt restructuring for the three and nine months ended September 30, 2018.

During the three months ended September 30, 2019, there were no defaults on loans restructured and one default on a restructured loan totaling $222 during the nine months ended September 30, 2019. During the three months ended September 30, 2018, there were no defaults on loans restructured and six defaults on loans restructured totaling $1,474 during the nine months ended September 30, 2018.

 

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Purchased loans are initially recorded at their acquisition date fair values. The carryover of the allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, and prepayment risk.

As part of its acquisition due diligence process, the Bank reviews the acquired institution’s loan grading system and the associated risk rating for loans. In performing this review, the Bank considers cash flows, debt service coverage, delinquency status, accrual status, and collateral for the loan. This process allows the Bank to clearly identify the population of acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Bank would be unable to collect all contractually required payments. All such loans identified by the Bank are considered to be within the scope of ASC 310-30, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”.

As a result of the merger with CBT, effective October 1, 2017, the Bank identified 37 PCI loans. As part of the merger with Citizens, effective December 31, 2015, the Bank identified 10 PCI loans. As a result of the consolidation with Union effective November 1, 2013, the Bank identified 14 PCI loans. For all PCI loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require the Bank to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which the Bank then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loan. The Bank’s evaluation of the amount of future cash flows that it expects to collect is based on a cash flow methodology that involves assumptions and judgments as to credit risk, collateral values, discount rates, payment speeds, and prepayment risk. Charge-offs of the principal amount on purchased impaired loans are first applied to the non-accretable discount.

For purchased loans that are not deemed impaired at acquisition, credit discounts representing principal losses expected over the life of the loans are a component of the initial fair value, and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan losses.

The unpaid principal balances and the related carrying amount of acquired loans as of September 30, 2019 and December 31, 2018 were as follows:

 

     September 30,
2019
     December 31,
2018
 

Credit impaired purchased loans evaluated individually for incurred credit losses:

     

Outstanding balance

   $ 2,975      $ 7,491  

Carrying Amount

     1,781        3,825  

Other purchased loans evaluated collectively for incurred credit losses:

     

Outstanding balance

     265,901        315,013  

Carrying Amount

     265,778        314,328  

Total Purchased Loans:

     

Outstanding balance

     268,876        322,504  

Carrying Amount

   $ 267,559      $ 318,153  

As of the indicated dates, the changes in the accretable discount related to the purchased credit impaired loans were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2019      2018      2019     2018  

Balance—beginning of period

   $ 305      $ 1,439      $ 579     $ 2,129  

Accretion recognized during the period

     (1,301      (819      (2,075     (2,673

Net reclassification from non-accretable to accretable

     1,103        208        1,603       1,372  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance—end of period

   $ 107      $ 828      $ 107     $ 828  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

Unused commitments at September 30, 2019, totaled $167,736 consisting of $96,519 in commitments to extend credit, $65,893 in unused portions of lines of credit and $5,324 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments, at December 31, 2018, totaled $161,732, consisting of $96,431 in commitments to extend credit, $59,512 in unused portions of lines of credit and $5,789 in standby letters of credit.

6. Other assets:

The components of other assets at September 30, 2019 and December 31, 2018 are summarized as follows:

 

     September 30,
2019
     December 31,
2018
 

Other real estate owned

   $ 87      $ 721  

Bank owned life insurance

     30,458        29,862  

Restricted equity securities

     1,066        1,054  

Deferred tax assets

     5,023        5,884  

Lease right-of-use assets

     4,136     

Other assets

     7,219        4,635  
  

 

 

    

 

 

 

Total

   $ 47,989      $ 42,156  
  

 

 

    

 

 

 

As a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”), the Company is required to purchase and hold stock in these entities to satisfy membership and borrowing requirements. These restricted equity securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

7. Leases:

On January 1, 2019, the Company adopted ASU 2016-02, Leases, as further explained in Note 1, Summary of Significant Accounting Policies. The Company’s primary leasing activities relate to certain real estate leases entered into in support of the Company’s branch and back office operations. On January 1, 2019, the Company leased 12 of its 32 locations. The Company’s branch locations operating under lease agreements have all been designated as operating leases. In addition, the Company leases certain equipment under operating leases. The Company does not have leases designated as finance leases.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which the Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases.

On September 30, 2019, the Company leased 15 of its 32 locations. The Company’s lease ROU assets and related lease liabilities were $4,136 and $4,165, respectively, and have remaining terms ranging from 1 to 35 years, including extension options that the Company is reasonably certain will be exercised. For the three and nine months ended September 30, 2019, operating lease cost totaled $203 and $538, respectively.

 

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The table below summarizes other information related to our operating leases:

 

     Nine Months Ended
September 30, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

   $ 465  

ROU assets obtained in exchange for lease liabilities

   $ 4,529  

Weighted average remaining lease term—operating leases, in years

     10.46  

Weighted average discount rate—operating leases

     3.06

The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconcilement to the Company’s current lease liability.

 

2019

   $ 198  

2020

     771  

2021

     754  

2022

     662  

2023

     445  

Thereafter

     2233  
  

 

 

 

Total lease payments

     5,063  

Less imputed interest

     898  
  

 

 

 
   $ 4,165  
  

 

 

 

As of September 30, 2019, the Company entered into one new lease arrangements. The lease ROU asset and related lease liability was $98.

8. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:

 

   

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

   

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

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.

 

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An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018 are summarized as follows:

 

     Fair Value Measurement Using  

September 30, 2019

   Amount      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

U.S. Treasury securities

   $ 10,415      $ 10,415        

State and Municipals:

           

Taxable

     25,881         $ 25,881     

Tax-exempt

     5,073           5,073     

Mortgage-backed securities:

           

U.S. Government agencies

     38,083           38,083     

U.S. Government-sponsored enterprises

     23,939           23,939     

Corporate debt obligations

     3,246           3,246     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106,637      $ 10,415      $ 96,222     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurement Using  

December 31, 2018

   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

   $ 33,278         $ 33,278     

Tax-exempt

     12,776           12,776     

Mortgage-backed securities:

           

U.S. Government agencies

     23,670           23,670     

U.S. Government-sponsored enterprises

     26,195           26,195     

Corporate debt obligations

     8,758           8,758     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 104,677         $ 104,677     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other real estate owned: Assets acquired through loan foreclosure are recorded at fair value less 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 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 be in the form of real estate or business assets including equipment, inventory and accounts receivable. 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 and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income (Loss).

 

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Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018 are summarized as follows:

 

     Fair Value Measurement Using  

September 30, 2019

   Amount      (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Other real estate owned

   $ 87            $ 87  

Impaired loans, net of related allowance

     758              758  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 845            $ 845  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurement Using  

December 31, 2018

   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

   $ 721            $ 721  

Impaired loans, net of related allowance

     1,476              1,476  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,197            $ 2,197  
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2019 and December 31, 2018

 

     Quantitative Information about Level 3 Fair Value Measurements

September 30, 2019

   Fair Value
Estimate
     Valuation Techniques      Unobservable Input     

Range

(Weighted Average)

Other real estate owned

   $ 87        Appraisal of collateral        Appraisal adjustments      32.0% to 43.0% (39.5)%
           Liquidation expenses      10.0% to 10.0% (10.0)%

Impaired loans

   $ 758        Appraisal of collateral        Appraisal adjustments      10.0% to 50.0% (11.8)%
           Liquidation expenses      7.0% to 21.8% (7.9)%
     Quantitative Information about Level 3 Fair Value Measurements

December 31, 2018

   Fair Value
Estimate
     Valuation Techniques      Unobservable Input     

Range

(Weighted Average)

Other real estate owned

   $ 721        Appraisal of collateral        Appraisal adjustments      0.0% to 69.0% (28.4)%
           Liquidation expenses      0.0% to 7.0% (7.0)%

Impaired loans

   $ 1,476        Appraisal of collateral        Appraisal adjustments      0.0% to 0.0% (0.0)%
           Liquidation expenses      7.0% to 25.0% (10.3)%

 

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The carrying and fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 and their placement within the fair value hierarchy are as follows:

 

            Fair Value Hierarchy  

September 30, 2019

   Carrying
Amount
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial assets:

              

Cash and cash equivalents

   $ 29,841      $ 29,841      $ 29,841        

Investment securities

     106,637        106,637        10,415      $ 96,222     

Loans held for sale

     336        336           336     

Net loans(1)

     876,409        870,170            $ 870,170  

Accrued interest receivable

     2,751        2,751           615        2,136  

Financial liabilities:

              

Deposits

   $ 969,583      $ 969,528         $ 969,528     

Long-term debt

     6,951        6,588           6,588     

Accrued interest payable

     432        432           432     
            Fair Value Hierarchy  

December 31, 2018

   Carrying
Amount
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Financial assets:

              

Cash and cash equivalents

   $ 53,816      $ 53,816      $ 53,816        

Investment securities available-for-sale

     104,677        104,677         $ 104,677     

Loans held for sale

     637        637           637     

Net loans(1)

     886,836        872,455            $ 872,455  

Accrued interest receivable

     3,010        3,010           663        2,347  

Financial liabilities:

              

Deposits

   $ 1,004,593      $ 999,929         $ 999,929     

Long-term debt

     6,892        6,892           6,892     

Accrued interest payable

     484        484           484     

 

1) 

The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU No. 2016-01 where the fair value of loans as of September 30, 2019 and December 31, 2018 was measured using an exit price notion.

Note 9. Revenue recognition:

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and other fees. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges, Fees and Commissions

Service charges on deposit accounts consist of monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period

 

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in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. Such income is presented net of network expenses as the Company acts as an agent in these transactions. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM, or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisor fees from wealth management products, safe deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees or trailers from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from wealth management products is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Trust and Asset Management

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2019 and 2018.

 

     Three Months Ended      Nine Months Ended  

September 30,

   2019      2018      2019      2018  

Noninterest Income:

           

In-scope of Topic 606:

           

Service charges, fees and commissions

   $ 1,129      $ 1,267      $ 3,497      $ 4,146  

Trust and asset management

     540        425        1,564        1,243  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income (in-scope of Topic 606)

     1,669        1,692        5,061        5,389  

Noninterest income (out-of-scope of Topic 606)

     291        362        836        1,151  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 1,960      $ 2,054      $ 5,897      $ 6,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration, resulting in a contract receivable, or before payment is due, resulting in a contract asset. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.

 

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Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, for example, sales commission. The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

 

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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, 2018.

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.

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, 2018. 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, 2018, as filed with the Securities and Exchange Commission on March 14, 2019.

Operating Environment:

Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 1.9% in the third quarter of 2019. This represents a slight decrease from 2.0% recorded in the second quarter of 2019. The increase in GDP in the third quarter of 2019 reflected positive contributions from personal expenditures, government spending and residential fixed investment partially offset by negative contributions from nonresidential fixed investment and private inventory investment. The consumer price index for the last 12 months rose 1.7% ending September 30, 2019 below the Federal Open Market Committee (“FOMC”) inflation benchmark of 2.0%. On October 30, 2019 the FOMC lowered the federal funds target rate range by 25 basis points, for the third time in 2019, to a range of 1.50% to 1.75%, citing global risk and soft business spending as the catalyst for the decision, while also acknowledging strength in the labor market and moderate growth in economic activity. Signals are mixed in regard to future rate changes. Accordingly, additional interest rate decreases may have an adverse impact on our net interest margin if we are unable to reduce fund costs at the same magnitude or pace as repricing earning assets.

 

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Review of Financial Position:

Total assets decreased $27,844 to $1,109,759 at September 30, 2019, from $1,137,603 at December 31, 2018. Loans, net, decreased to $883,506 at September 30, 2019, compared to $893,184 at December 31, 2018, a decrease of $9,678. Business lending, including commercial and commercial real estate loans, decreased $11,999, retail lending, including residential mortgages and consumer loans, decreased $16,681, while construction lending increased $19,002 during the nine months ended September 30, 2019. Investment securities increased $1,960, or 1.9%, in the nine months ended September 30, 2019. Noninterest-bearing deposits decreased $1,363, while interest-bearing deposits decreased $33,647 during the nine months ended September 30, 2019. Total stockholders’ equity increased $3,345, or 2.9%, to $117,255 at September 30, 2019 from $113,910 at year-end 2018. For the nine months ended September 30, 2019, total assets averaged $1,122,510, a decrease of $33,240 from $1,155,750 for the same period in 2018.

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 $106,637 at September 30, 2019, an increase of $1,960, or 1.9%, from $104,677 at December 31, 2018. The increase was a result of $32,058 in securities purchased partially offset by payments, prepayments, and sales of investments, during the nine months ended September 30, 2019.

For the nine months ended September 30, 2019, the investment portfolio averaged $101,078, an increase of $8,916, compared to $92,162 for the same period last year. The tax-equivalent yield on the investment portfolio increased to 3.06% for the nine months ended September 30, 2019, from 2.79% for the comparable period of 2018. The tax-equivalent yield on the investment portfolio for the third quarter of 2019 increased 14 basis point to 2.96% from 2.82% for the third quarter of 2018.

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 a net unrealized holding gain, included as a separate component of stockholders’ equity of $485, net of deferred income taxes of $130 at September 30, 2019. This compares with a net unrealized holding loss of $1,725, net of deferred income taxes of $458, at December 31, 2018. The change from an unrealized holding loss to an unrealized holding gain was a result of reductions in general market rates.

Loan Portfolio:

Loans, net, decreased to $883,506 at September 30, 2019 from $893,184 at December 31, 2018, a decrease of $9,678, or 1.1%. Business loans, including commercial and commercial real estate loans, decreased $11,999, or 1.9%, to $608,517 at September 30, 2019 from $620,516 at December 31, 2018. Retail loans, including residential real estate and consumer loans, decreased $16,681, or 7.2%, to $216,431 at September 30, 2019 from $233,112 at December 31, 2018. Construction lending increased $19,002, or 48.04%, to $58,558 at September 30, 2019 from $39,556 at December 31, 2018. Net loan repayments in the first nine months of 2019 represented a more moderate pace as compared to the same period of 2018. The reduction in loan growth was a result of management’s decision to focus on improving margins on loan originations through employing prudent pricing practices and maintaining strong underwriting standards.

For the nine months ended September 30, 2019, loans, net averaged $885,812, a decrease of $49,492 compared to $935,304 for the same period in 2018. The tax-equivalent yield on the loan portfolio was 5.37% for the nine months ended September 30, 2019, an 18 basis point increase from the comparable period last year. Loan accretion included in loan interest income in the first nine months of 2019 related to acquired loans was $2,868 compared to $3,754 for the same period in 2018. The tax-equivalent yield on the loan portfolio increased 43 basis points during the third quarter of 2019 to 5.67% from 5.24% in the third quarter of 2018. The tax-equivalent yield included accretion on purchase loans of $1,373 realized in the third quarter of 2019 versus $1,141 in the third quarter of 2018.

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.

Off-balance sheet commitments at September 30, 2019, totaled $167,736, consisting of $96,519 in commitments to extend credit, $65,893 in unused portions of lines of credit and $5,324 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, off-balance sheet commitments, at December 31, 2018, totaled $161,732, consisting of $96,431 in commitments to extend credit, $59,512 in unused portions of lines of credit and $5,789 in standby letters of credit.

 

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Asset Quality:

National, Pennsylvania and market area unemployment rates at September 30, 2019 and 2018 are summarized as follows:

 

     2019     2018  

United States

     3.5     3.7

Pennsylvania

     3.9     4.2

Berks County

     3.9     3.9

Blair County

     4.0     3.7

Bucks County

     3.5     3.5

Centre County

     3.0     3.0

Clearfield County

     4.3     4.1

Cumberland County

     3.2     3.1

Dauphin County

     3.9     3.7

Huntingdon County

     4.7     4.3

Lebanon County

     .3.5     3.4

Lehigh County

     4.1     4.4

Lycoming County

     4.2     4.2

Northumberland County

     4.6     4.5

Perry County

     3.2     3.3

Schuylkill County

     4.7     4.7

Somerset County

     4.2     3.9

Employment conditions in 2019 improved for the United States and the Commonwealth of Pennsylvania, but deteriorated for seven of the counties in which we have branch locations. The average unemployment rate for all our counties increased to 4.0% in 2019 from 3.9% in 2018. The lowest unemployment rate in 2019 for all the counties we serve was 3.0% which was in Centre County, and the highest recorded rate being 4.7% in Schuylkill and Huntingdon Counties. An increase in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality.

Our asset quality improved in the nine months ended September 30, 2019. Nonperforming assets decreased $1,396, or 19.4%, to $5,806 at September 30, 2019, from $7,202 at December 31, 2018. We experienced decreases in other real estate owned, accruing loans past due 90 days or more and accruing restructured loans, partially offset by an increase in nonaccrual loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 0.66% at September 30, 2019 compared to 0.81% at December 31, 2018.

Loans on nonaccrual status increased $198 to $2,927 at September 30, 2019 from $2,729 at December 31, 2018. The increase in nonaccrual loans was due to increases of $480 in commercial loans offset by decreases of $164 in commercial real loans and $118 in residential real estate loans. Accruing troubled debt restructured loans declined $221, to $2,692 at September 30, 2019 from $2,913 at December 31, 2018. Accruing loans past due 90 days or more decreased $739, while other real estate owned decreased $634 during the nine months ended September 30, 2019.

Nonperforming assets decreased $2,530 to $5,806 at September 30, 2019 from $8,336 at September 30, 2018. Decreases in accruing troubled debt restructured loans, accruing loans past due 90 days or more and other real estate owned were partially offset by a slight increase in nonaccrual loans.

Generally, maintaining a high loan to deposit ratio is our primary goal in order to maximize profitability. However, this objective is superseded by our attempts to ensure that asset quality remains strong. We continue to focus our efforts on maintaining sound underwriting standards for both commercial and consumer credit.

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.

 

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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. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses”, in the Notes to Consolidated Financial Statements to this Quarterly Report.

The allowance for loan losses increased $749 to $7,097 at September 30, 2019, from $6,348 at the end of 2018. The increase in the allowance was a result of the provision for loan losses of $2,250 for the first nine months of 2019 exceeding net charge-offs for the period. For the nine months ended September 30, net charge-offs were $1,501, or 0.23%, of average loans outstanding in 2019 compared to $449, or 0.06%, of average loans outstanding for the same period in 2018. The increase in net charge-offs was primarily due to those take in the third quarter of 2019 as four commercial account relationships totaling $759 and one commercial real estate loan totaling $110 were charged off due to deterioration in their financial conditions. The accounts were written down to their net estimated realizable values base on impairment analysis due to deterioration in their financial condition arising in the third quarter.

Deposits:

We attract the majority of our deposits from within our 15-county market area by offering various deposit products including demand deposit accounts, NOW accounts, business checking accounts, money market deposit accounts, savings accounts, club accounts and time deposits, including certificates of deposit and IRA’s. For the nine months ended September 30, 2019, total deposits decreased to $969,583 from $1,004,593 at December 31, 2018. Noninterest-bearing transaction accounts decreased $1,363, while interest-bearing transaction accounts decreased $4,538 and time deposits decreased $29,109 in the nine months ended September 30, 2019.

For the nine months ended September 30, interest-bearing deposits averaged $824,948 in 2019 compared to $860,061 in 2018. The cost of interest-bearing deposits was 1.00% in 2019 compared to 0.80% in 2018. Corresponding with recent FOMC actions, interest rates have decreased beginning in the third quarter of 2019 from an extended period of tightening beginning in December 2015 and ending July 2019. As a result, the cost of interest-bearing deposits decreased three basis point comparing the third quarter of 2019 with the second quarter of 2019. We anticipate deposit costs to continue to decrease in the short term based on recent actions of the FOMC.

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 the Atlantic Community Bankers Bank (“ACBB”), Pacific Community Bankers Bank and the FHLB. At September 30, 2019 and December 31, 2018, we did not have any short-term borrowings outstanding. For the nine months ended September 30, we did not utilize short-term borrowings in 2019, while short-term borrowings averaged $2,406 in 2018. The average cost of short-term borrowings was 1.67% in the nine months ended September 30, 2018.

Long-term debt totaled $6,951 at September 30, 2019 as compared to $6,892 at December 31, 2018. For the nine months ended September 30, long-term debt averaged $6,922 in 2019 and $13,129 in 2018. The reduction in the average balance was due to the paydown of $6,085 in borrowings in December of 2018. The average cost of long-term debt was 7.57% in the nine months ended September 30, 2019 and 5.72% 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.

 

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These changes arise because the present value of future cash flows, and often the cash flows themselves change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

As a result of the FOMC’s actions to lower short-term interest rates at a time when the yield curve is inverted, it has become 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 in order 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. 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 1.62 at September 30, 2019. Given the recent posture of the FOMC and the potential for rates to decrease in the future, the focus of ALCO has been to lower our exposure to the effect of repricing assets.

The current position at September 30, 2019, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending September 30, 2020, would increase 3.0% and decrease 5.0% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments in order 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;

 

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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, than other types of funding. 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 a number of 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, 2019. Our noncore funds at September 30, 2019, 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 to be highly volatile. At September 30, 2019, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 1.24%, while our net short-term noncore funding ratio, noncore funds maturing within one-year, less short-term investments to assets equaled 1.22%. Comparatively, our net noncore dependence ratio was 0.65% while our net short-term noncore funding ratio was 1.73% at year-end. In addition, as compared to peer levels, our reliance on short-term noncore funds remains low.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $23,975 during the nine months ended September 30, 2019. Cash and cash equivalents increased $31,029 for the same period last year. For the nine months ended September 30, 2019, we realized net cash inflows of $2,442 and $10,471 from operating and investing activities, and net cash outflows of $36,888 from financing activities. For the same period of 2018, we recognized net cash inflows of $7,786 from operating activities and $36,545 from investing activities, offset by net cash outflows of $13,302 from financing activities.

Operating activities provided net cash of $2,442 for the nine months ended September 30, 2019 compared to providing $7,786 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 $10,471 for the nine months ended September 30, 2019. For the comparable period in 2018, investing activities provided net cash of $36,545. For the nine months ended September 30, 2019 and 2018, payments and prepayments on loans exceeding loan originations was the primary factor causing the net cash inflow from investing activities.

Financing activities utilized net cash of $36,888 for the nine months ended September 30, 2019 and $13,202 for the same period last year. Deposit gathering is a predominant financing activity. However, during the nine months ended September 30, deposits decreased $35,010 in 2019 and $5,716 in 2018. The payment of a cash dividends of $2,519 also impacted net cash from financing activities in 2019. The repayment of short-term borrowings of $6,000 and cash dividends of $1,819 increased the amount of the net cash utilized from financing activities for the first nine months of 2018.

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 $117,255, or $12.77 per common share, at September 30, 2019, and $113,910, or $12.49 per common share, at December 31, 2018. The net increase in stockholders’ equity in the nine months ended September 30, 2019 was a result of the recognition of net income of $3,013, the issuance of common stock through Riverview’s ESPP, 401k and dividend reinvestment plans of $474, the issuance of common stock related to the stock options exercised of $167 and the recognition of a change in other comprehensive income of $2,210, offset by the payout of cash dividends of $2,519.

 

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Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance.

The Bank’s capital ratios and the minimum ratios required for capital adequacy purposes and to be considered well capitalized under the prompt corrective action provisions are summarized below for the periods ended September 30, 2019 and December 31, 2018:

 

     Actual     Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in)
    Well Capitalized under
Basel III
 

September 30, 2019:

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total risk-based capital (to risk-weighted assets)

   $ 102,601        11.80   $ 91,311      ³ 10.50   $ 86,963      ³ 10.00

Tier 1 capital (to risk-weighted assets)

     95,431        10.97       73,918      ³ 8.50       69,570      ³ 8.00  

Common equity tier 1 risk-based capital (to risk-weighted assets)

     95,431        10.97       60,874      ³ 7.00       56,526      ³ 6.50  

Tier 1 capital (to average total assets)

     95,431        8.82       43,299      ³ 4.00       54,124      ³ 5.00  
     Actual     Minimum Regulatory
Capital Ratios under
Basel III (with 1.875%
capital conservation
buffer phase-in)
    Well Capitalized under
Basel III
 

December 31, 2018:

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total risk-based capital (to risk-weighted assets)

   $ 100,001        11.42   $ 86,443      ³ 9.875   $ 87,538      ³ 10.00

Tier 1 capital (to risk-weighted assets)

     93,580        10.69       68,936      ³ 7.875       70,030      ³ 8.00  

Common equity tier 1 risk-based capital (to risk-weighted assets)

     93,580        10.69       55,805      ³ 6.375       56,900      ³ 6.50  

Tier 1 capital (to average total assets)

     93,580        8.37       44,733      ³ 4.000       55,916      ³ 5.00  

Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at September 30, 2019 and December 31, 2018. There are no conditions or negative events since this notification that we believe have changed the Bank’s category.

Review of Financial Performance:

We reported net income of $3,013, or $0.33 per basic and diluted weighted average common share, for the nine months ended September 30, 2019, compared to net income of $8,386, or $0.92 per basic and diluted weighted average common share, for the comparable period of 2018. The return on average assets and return on average stockholders’ equity were 0.36% and 3.49% for the nine months ended September 30, 2019. The reduction in net income recognized in 2019 was largely a function of recognizing $1.0 million less of net accretion on acquired assets and assumed liabilities, a $2.2 million nonrecurring executive separation charge and $553 of severance expense to employees that either retired or were separated from service due to branch network consolidations. In addition, the results for the nine months ended September 30, 2019 included $1,6 million of additional loan loss provision as compared with the same period in 2018.

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, net interest income as a percentage of earning assets, is a more

 

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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 2019 and 2018, respectively.

For the nine months ended September 30, tax-equivalent net interest income decreased $925 to $31,935 in 2019 from $32,860 in 2018. The decrease in tax-equivalent net interest income was primarily attributable to a net decline in average loans of $49,492 and reductions in net accretion on purchased assets and assumed liabilities, offset by an improvement in the tax equivalent net interest margin. Overall, average earning assets decreased $9,328 less than the decline in average interest-bearing liabilities in comparing the first nine months of 2019 with 2018. The tax-equivalent net interest margin for the nine months ended September 30, was 4.18% in 2019 compared to 4.16% in 2018. The net interest spread decreased to 3.98% for the nine months ended September 30, 2019 from 4.00% for the nine months ended September 30, 2018. Net accretion included in interest income in the first nine months of 2019 related to purchase accounting marks from mergers was $3,034 resulting in an increase in the tax-equivalent net interest margin of 40 basis points. For the same period in 2018 net accretion income was $4,074, resulting in an increase in the tax-equivalent net interest margin of 52 basis points.

For the nine months ended September 30, 2019, tax-equivalent interest income decreased $88, to $38,526 from $38,614 for the nine months ended September 30, 2018. A negative volume variance in interest income of $2,236 attributable to changes in the average balance of earning assets was offset by a $2,148 favorable rate variance due to increased yields on earning assets. Specifically, the decrease in interest income was primarily due to a reduction in average earning assets, which decreased $34,398 to $1,022,899 for the first nine months of 2019 from $1,057,297 for the same period in 2018. The overall yield on earning assets, on a fully tax-equivalent basis, increased for the nine months ended September 30, 2019 to 5.04% as compared to 4.88% for the nine months ended September 30, 2018. This increase was a result of the impact of increased yields on all interest earning assets. Average loans decreased $49,492 comparing the first nine months of 2019 and 2018, which caused a decrease in tax-equivalent interest income of $2,483. However, partially offsetting this negative impact was a favorable rate variance as the tax-equivalent yield on the loan portfolio increased to 5.37% for the nine months ended September 30, 2019 compared to 5.19% for the same period last year. The decline in average volume more than offset the increase in yield causing tax-equivalent loan interest income to decline $744 comparing the nine months ended September 30, 2019 and 2018. The yield earned on investments increased 27 basis points for the first nine months of 2019 to 3.06% from 2.79% for the first nine months of 2018 and resulted in higher tax-equivalent interest income of $242. Average investments increased to $101,078 for the nine months ended September 30, 2019 compared to $92,162 for the same period in 2018 causing interest income to increase $148. Overall tax-equivalent interest earned on investments was $2,314 for the nine month period ended September 30, 2019 compared to $1,924 for the same period in 2018.

Total interest expense increased $837 to $6,591 for the nine months ended September 30, 2019 from $5,754 for the nine months ended September 30, 2018. While there was a favorable volume variance, an unfavorable rate variance caused interest expenses to increase more as the cost of funds grew to 1.06% in 2019 from 0.88% in 2018. The average volume of interest-bearing liabilities decreased to $831,870 for the nine months ended September 30, 2019, from $875,596 for the nine months ended September 30, 2018. Average interest-bearing deposits decreased $35,113 to $824,948 for the first nine months of 2019 from $860,061 for the same period last year. The cost of interest-bearing deposits increased 20 basis points when comparing the first nine months of 2019 and 2018.

For the three months ended September 30, tax-equivalent net interest income increased $349 to $11,352 in 2019 from $11,003 in 2018. The increase in tax-equivalent net interest income was primarily attributable to an improvement in the tax equivalent net interest margin. Average earning assets declined $3,792 less than the decline in average interest-bearing liabilities comparing the third quarters of 2019 and 2018. The tax-equivalent net interest margin for the three months ended September 30, was 4.46% in 2019 compared to 4.15% in 2018. The net interest spread increased to 4.26% for the three months ended September 30, 2019 from 3.97% for the three months ended September 30, 2018. Net accretion included in interest income in the third quarter of 2019 was $1,415, resulting in an increase in the tax-equivalent net interest margin of 56 basis points. Comparatively, net accretion included in interest income in the third quarter of 2018 was $1,241 resulting in an increase in the tax-equivalent net interest margin of 47 basis points. Excluding the impact of net accretion, the tax-equivalent net interest margin for the three months ended September 30, was 3.90% in 2019 compared to 3.68% in 2018.

For the three months ended September 30, tax-equivalent interest income increased $424, to $13,506 in 2019 from $13,082 in 2018. A rate variance in interest income of $3,498 was attributable to an improvement in the yield on earning assets. The overall yield on earning assets, on a fully tax-equivalent basis, increased for the three months ended September 30, 2019 to 5.31% as compared to 4.93% for the three months ended September 30, 2018. This improvement was a result of the combined impact of higher loan yields and the effects of accretion on purchased loans. Average loans decreased $44,307 comparing the third quarters of 2019 and 2018. The tax-equivalent yield on the loan portfolio was 5.67% for the three months ended September 30, 2019 compared to 5.24% for the same period last year. The yield earned on investments increased 14 basis points for the third quarter of 2019 to 2.96% from 2.82% for the third quarter of 2018. This coupled with average investments increasing to $93,010 for the quarter ended September 30, 2019

 

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compared to $91,861 for the same period in 2018, resulted in an increase in tax-equivalent interest income of $42. Overall tax-equivalent interest earned on investments was $695 for the three-month period ended September 30, 2019 compared to $653 for the same period in 2018.

Total interest expense increased $75 to $2,154 for the three months ended September 30, 2019 from $2,079 for the three months ended September 30, 2018. An unfavorable rate variance more than offset a favorable volume variance caused interest expenses to increase. The average volume of interest bearing liabilities decreased to $817,372 for the three months ended September 30, 2019, from $863,552 the three months ended September 30, 2018. Average interest-bearing deposits decreased $40,062 to $810,430 for the third quarter of 2019 from $850,492 for the same period last year. The cost of funds increased to 1.05% for the three months ended September 30, 2019 as compared to 0.96% for the same period in 2018.

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, 2019     September 30, 2018  
     Average
Balance
     Interest      Yield/
Rate
    Average
Balance
     Interest      Yield/
Rate
 

Assets:

                

Earning assets:

                

Loans

                

Taxable

   $ 849,959      $ 34,651        5.45   $ 898,975      $ 35,424        5.27

Tax exempt

     35,853        914        3.41     36,329        885        3.26

Investments

                

Taxable

     93,423        2,113        3.02     77,198        1,616        2.80

Tax exempt

     7,655        201        3.51     14,964        308        2.75

Interest bearing deposits

     36,009        647        2.40     28,112        361        1.72

Federal funds sold

             1,719        20        1.56
  

 

 

    

 

 

      

 

 

    

 

 

    

Total earning assets

     1,022,899        38,526        5.04     1,057,297        38,614        4.88

Less: allowance for loan losses

     6,636             6,437        

Other assets

     106,247             104,890        
  

 

 

         

 

 

       

Total assets

   $ 1,122,510           $ 1,155,750        
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity:

                

Interest bearing liabilities:

                

Money market accounts

   $ 112,598      $ 806        0.96   $ 119,238      $ 812        0.91

NOW accounts

     273,199        1,415        0.69     269,630        1,196        0.59

Savings accounts

     133,347        127        0.13     154,624        85        0.07

Time deposits

     305,804        3,851        1.68     316,569        3,069        1.30

Short term borrowings

             2,406        30        1.67

Long-term debt

     6,922        392        7.57     13,129        562        5.72
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     831,870        6,591        1.06     875,596        5,754        0.88

Non-interest-bearing demand deposits

     158,384             159,749        

Other liabilities

     16,842             10,597        

Stockholders’ equity

     115,414             109,808        
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,122,510           $ 1,155,750        
  

 

 

         

 

 

       

Net interest income/spread

      $ 31,935        3.98      $ 32,860        4.00
     

 

 

         

 

 

    

Net interest margin

           4.18           4.16

Tax-equivalent adjustments:

                

Loans

      $ 192           $ 186     

Investments

        42             65     
     

 

 

         

 

 

    

Total adjustments

      $ 234           $ 251     
     

 

 

         

 

 

    

 

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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, 2019.

The provision for loan losses totaled $2,250 for the nine months ended September 30, 2019, compared to $615 in 2018. The increase in the provision for loan losses in 2019 was due to increased qualitative factors related to weakening economic trends and higher historical factors due to an increase in net charge-offs primarily associated with legacy purchased loans. For the quarter ended September 30, the provision for loan losses was $1,049 in 2019 compared $225 for the same period in 2018.

Noninterest Income:

For the nine months ended September 30, noninterest income totaled $5,897 in 2019, a decrease of $643 from $6,540 in 2018. The overall reduction was primarily driven by decreases in service charges, fees and commission of $649 and mortgage banking income of $170. Service charge income experienced a decrease in NSF and overdraft income, while mortgage banking income decreased due to lower origination volume. Positive increases were made in both trust and wealth management as income for the first nine months of 2019 increased by $184 and $137, respectively, when compared against the first nine months of 2018. Additionally, net losses on the sale of investment securities of $95 were recognized in the first nine months of 2019 in order to dispose of certain investments with low yields and higher risk characteristics. This compares with a $40 net gain on the sale of investment securities recorded during the first nine months of 2018.

For the quarter ended September 30, noninterest income totaled $1,960 in 2019, a decrease of $94 from $2,054 in 2018. The decrease in noninterest income for the quarter was due primarily to decreases in services charges, fees and commissions of $138 and mortgage banking income of $17 offset partially by increases in wealth management income of $27 and trust income of $88. Also adding to the decrease for the quarter ended September 30 was a $53 loss recorded in 2019 compared to a $40 gain from the sale of investment securities recorded in 2018.

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 in an effort to control the variable expenses.

Noninterest expense increased $3,594, or 12.7%, to $31,879 for the nine months ended September 30, 2019, from $28,285 for the same period last year. The majority of this increase is attributable to expenses related to an executive separation of service agreement and contractual payments due to retirements and severance. The net cost of operation of other real estate owned was $20 for the first nine months of 2019 versus $30 for the same period in 2018 as the Company continues to reduce its holdings in other real estate owned. Other expenses increased $649, or 7.3% to $9,531 for the first nine months of 2019 from $8,882 for the same period last year. Offsets to the overall increase in noninterest expense were realized through reduced costs in net occupancy and equipment of $32, and in the amortization expense of intangible assets of $74 when comparing the first nine months of 2019 to the first nine months of 2018.

For the three months ended September 30, 2019, noninterest expense increased $90, to $9,431 from $9,341 for the same period last year. Salaries and employee benefit expense was $5,232 for the quarter ended September 30, 2019, an increase of $200 over the same period in 2018 and was caused by recognizing nonrecurring severance payments associate with staff eliminations related to branch network consolidations. For the third quarter, other expenses decreased to $2,979 in 2019 from $3,057 in 2018.

 

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Income Taxes:

We recorded an income tax expense of $456 for the nine months ended September 30, 2019 as compared to $1,863 for the nine months ended September 30, 2018. For the three months ended September 30, we recorded a tax expense of $486 in 2019 as compared with $620 in 2018.

 

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Riverview Financial Corporation

 

Item 3.

Quantitative And Qualitative Disclosures about Market Risk

Not applicable to a smaller reporting company.

 

Item 4.

Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At September 30, 2019, 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, 2019, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.

(b) Changes in internal control.

There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

In the opinion of the Company, after review with legal counsel, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would have a material effect on the consolidated results of operations or financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of the Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.

 

Item 1A.

Risk Factors

Not required for smaller reporting companies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

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Table of Contents
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).

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

By:  

/s/ Brett D. Fulk

  Brett D. Fulk
  President and Chief Executive Officer
  (Principal Executive Officer)
Date: November 7, 2019
By:  

/s/ Scott A. Seasock

  Scott A. Seasock
  Chief Financial Officer
  (Principal Financial Officer)
Date: November 7, 2019

 

40

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Section 2: EX-31.1 (EX-31.1)

EX-31.1

Exhibit 31.1

Riverview Financial Corporation

CERTIFICATION

I, Brett D. Fulk certify that:

1. I have reviewed this quarterly report on Form 10-Q of Riverview Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 7, 2019     By:  

/s/ Brett D. Fulk

      Brett D. Fulk
      President and Chief Executive Officer
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Section 3: EX-31.2 (EX-31.2)

EX-31.2

Exhibit 31.2

Riverview Financial Corporation

CERTIFICATION

I, Scott A. Seasock certify that:

1. I have reviewed this quarterly report on Form 10-Q of Riverview Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 7, 2019     By:  

/s/ Scott A. Seasock

      Scott A. Seasock
      Chief Financial Officer
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Section 4: EX-32.1 (EX-32.1)

EX-32.1

Exhibit 32.1

Riverview Financial Corporation

CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), I, Brett D. Fulk, President and Chief Executive Officer of Riverview Financial Corporation (the “Company”), hereby certify that, to the best of my knowledge, the Company’s Form 10-Q for the quarter ended September 30, 2019 (the “Report”):

 

  1.

fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the quarter ended September 30, 2019.

 

Date: November 7, 2019     By:  

/s/ Brett D. Fulk

      Brett D. Fulk
      President and Chief Executive Officer
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Section 5: EX-32.2 (EX-32.2)

EX-32.2

Exhibit 32.2

Riverview Financial Corporation

CHIEF FINANCIAL OFFICER

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code), I, Scott A. Seasock, Chief Financial Officer of Riverview Financial Corporation (the “Company”), hereby certify that, to the best of my knowledge, the Company’s Form 10-Q for the quarter ended September 30, 2019 (the “Report”):

 

  1.

fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the quarter ended September 30, 2019.

 

Date: November 7, 2019     By:  

/s/ Scott A. Seasock

      Scott A. Seasock
      Chief Financial Officer
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