RIVW FINA
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
unaudited consolidated interim financial statements contained in Part I, Item 1
of this report, and with our audited consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented in our Annual Report on
Form 10-K
for the year ended December 31, 2020 .
Cautionary Note Regarding Forward-Looking Statements:
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are subject to risks and uncertainties.
These statements are based on assumptions and may describe future plans,
strategies and expectations of Riverview Financial Corporation and its direct
and indirect subsidiaries. These forward-looking statements are generally
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. All statements in this report,
other than statements of historical facts, are forward-looking statements.
Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Important factors that could cause our
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: our ability to achieve the intended benefits of
acquisitions and integration of previously acquired businesses; restructuring
initiatives; changes in interest rates; economic conditions, particularly in our
market area; legislative and regulatory changes and the ability to comply with
the significant laws and regulations governing the banking and financial
services business; monetary and fiscal policies of the U.S. government,
including policies of the U.S. Department of Treasury and the Federal Reserve
System ; credit risk associated with lending activities and changes in the
quality and composition of our loan and investment portfolios; demand for loan
and other products; deposit flows; competition; changes in the values of real
estate and other collateral securing the loan portfolio, particularly in our
market area; changes in relevant accounting principles and guidelines; and
inability of third party service providers to perform. Most recently, the risk
factors associated with the onset of
COVID-19
could continue to have a material adverse effect on significant estimates,
operations, and business results of Riverview.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Except as
required by applicable law or regulation, Riverview Financial Corporation does
not undertake, and specifically disclaims any obligation, to release publicly
the result of any revisions that may be made to any forward-looking statements
to reflect events or circumstances after the date of the statements or to
reflect the occurrence of anticipated or unanticipated events.
Notes to the Consolidated Financial Statements referred to in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") are incorporated by reference into the MD&A. Certain prior period
amounts have been reclassified to conform with the current year's presentation
and did not have any effect on the operating results or financial position of
the Company.
Critical Accounting Policies:
Disclosure of our significant accounting policies are included in Note 1 to the
Consolidated Financial Statements of the Annual Report on
Form 10-K
for the year ended December 31, 2020 . Some of these policies are particularly
sensitive requiring significant judgments, estimates and assumptions. Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties and could potentially result in materially different
results under different assumptions and conditions. We believe that the most
critical accounting policies upon which our financial condition and results of
operation depend, and which involve the most complex subjective decisions or
assessments, are included in Note 1 to the consolidated financial statements in
the Company's Annual Report on
Form 10-K
for the fiscal year ended December 31, 2020 , as filed with the Securities and
Exchange Commission on March 11, 2021 .
Review of Financial Position:
Total assets decreased $114,761 to $1,242,793 at September 30, 2021 , from
$1,357,554 at December 31, 2020 . Loans, net, decreased to $866,140 at
September 30, 2021 , compared to $1,139,239 at December 31, 2020 , a decrease of
$273,099 . The decrease in loans was due primarily to SBA forgiveness payments on
PPP loans. Approximately 91.3%, amounting to $247,625 of outstanding PPP loans
at December 31, 2020 , were forgiven in the first nine months of 2021. Business
lending, including commercial and commercial real estate loans, decreased
$224,997 , retail lending, including residential mortgages and consumer loans,
decreased $16,472 , and
23
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Table of Contents
construction lending decreased $31,630 during the nine months ended
September 30, 2021 . Investment securities increased $28,010 , or 27.0%, in the
nine months ended September 30, 2021 . Noninterest-bearing deposits increased
$18,956 , while interest-bearing deposits increased $35,158 during the nine
months ended September 30, 2021 . Total stockholders' equity increased $10,144 ,
to $107,576 at September 30, 2021 from $97,432 at
year-end
2020. The increase in stockholders' equity was caused primarily by the
recognition of net income offset partially by a change in accumulated other
comprehensive income. For the nine months ended September 30, 2021 , total assets
averaged $1,301,414 , an increase of $56,838 from $1,244,576 for the same period
in 2020.
Investment Portfolio:
The Company's entire investment portfolio is held as
available-for-sale,
which allows for greater flexibility in using the investment portfolio for
liquidity purposes by allowing securities to be sold when favorable market
opportunities exist. Investment securities
available-for-sale
totaled $131,705 at September 30, 2021 , an increase of $28,010 , or 27.0%, from
$103,695 at December 31, 2020 . Activity in the investment portfolio during the
nine months of 2021, included purchases of $74,503 , sales of $30,442 and
repayments of $13,073 .
For the nine months ended September 30, 2021 , the investment portfolio averaged
$139,504 , an increase of $64,311 compared to $75,193 for the same period last
year. The
tax-equivalent
yield on the investment portfolio decreased 68 basis points to 2.01% for the
nine months ended September 30, 2021 , from 2.69% for the comparable period of
2020.
Securities
available-for-sale
are carried at fair value, with unrealized gains or losses net of deferred
income taxes reported in the accumulated other comprehensive income (loss)
component of stockholders' equity. We reported net unrealized losses of $80 , net
of deferred income tax of $17 at September 30, 2021 , and net unrealized gains of
$1,962 , net of deferred income taxes of $412 at December 31, 2020 . The change in
the unrealized holding gain was the result of increases in general market rates.
Loan Portfolio:
Loans, net, decreased to $866,140 at September 30, 2021 from $1,139,239 at
December 31, 2020 , a decrease of $273,099 , or 24.0%. The decrease in the loan
portfolio was attributable to forgiveness payments on PPP loans totaling
$247,625 and a decrease in organic loan growth of $44,868 , offset partially by
the origination of PPP loans of $19,394 . Business loans, including commercial
and commercial real estate loans, decreased $224,997 , or 26.1%, to $636,576 at
September 30, 2021 from $861,575 at December 31, 2020 . Retail loans, including
residential real estate and consumer loans, decreased $16,472 , or 8.1%, to
$187,790 at September 30, 2021 from $204,262 at December 31, 2020 . Construction
lending decreased $31,630 , or 43.1%, to $41,772 at September 30, 2021 from
$73,402 at December 31, 2020 . PPP loans, net of unearned loan fees, totaled
$23,579 at September 30, 2021 and $251,810 at December 31, 2020 .
For the nine months ended September 30, 2021 , loans averaged $1,017,390 , a
decrease of $21,868 compared to $1,039,258 for the same period in 2020. The
tax-equivalent
yield on the loan portfolio was 4.38% for the nine months ended September 30,
2021 , a 20 basis point increase from 4.18% for the comparable period last year.
The increase in the loan yield was caused by an increase in fees earned on PPP
loans. However, the continuation of the low interest rate environment may cause
a decline in loan yield as higher yields from payments and prepayments on
existing loans are replaced by lower yields originated on new and refinanced
loans. Concerns about the spread of
COVID-19
and its anticipated negative impact on economic activity, severely disrupted
domestic financial markets prompting the Federal Open Market Committee of the
Federal Reserve Board to aggressively cut the target Federal Funds rate by
150-basis
points in the first half of 2020.
In addition to the risks inherent in our loan portfolio in the normal course of
business, we are also a party to financial instruments with
off-balance
sheet risk to meet the financing needs of our customers. These instruments
include legally binding commitments to extend credit, unused portions of lines
of credit and commercial letters of credit made under the same underwriting
standards as
on-balance
sheet instruments, and may involve, to varying degrees, elements of credit risk
and interest rate risk ("IRR") in excess of the amount recognized in the
consolidated financial statements. With the onset of the
COVID-19
pandemic, we are continually monitoring draws on unused portions of lines of
credit and construction loans.
The contractual amounts of
off-balance
sheet commitments at September 30, 2021 and December 31, 2020 are summarized as
follows:
September 30, December 31,
2021 2020
Unused portions of lines of credit $ 104,774 $ 92,848
Construction loans 19,111 24,751
Commitments to extend credit 30,104 10,275
Deposit overdraft protection 17,039 18,117
Standby and performance letters of credit 9,512 6,577
Total $ 180,540 $ 152,568
24-------------------------------------------------------------------------------- Table of Contents Asset Quality: Nonperforming assets increased$1,400 to$13,362 atSeptember 30, 2021 from$11,962 atDecember 31, 2020 . The increase resulted from a$872 increase in nonaccrual loans, and a$1,724 increase in accruing loans past due 90 days or more, which were offset by reductions of$774 in accruing restructured loans and$442 in other real estate owned. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.54% atSeptember 30, 2021 compared to 1.05% atDecember 31, 2020 . Nonperforming assets increased$1,380 in the third quarter of 2021 due to an increase of$1,789 in accruing loans past due 90 days or more, with reductions of$103 in nonaccrual loans,$87 in accruing restructured loans and$219 in foreclosed assets. The increase in accruing loans past due 90 days or more in the third quarter of 2021 was due to one commercial real estate relationship. We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification ("ASC") 310, "Receivables", for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, "Contingencies", for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment. We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, the Chief Credit Officer identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing standard criteria. Grades are assigned quarterly to loans identified to be individually evaluated. A loan's grade may differ from period to period based on current conditions and events. However, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. We continue to evaluate risks which may impact our loan portfolios. As a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of COVID-19 on each segment and established specific qualitative adjustment factors. As we weigh additional information on the potential impact of this event on our overall economic prospects coupled with our loan officers' further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised as needed, and these revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. For additional disclosure related to the allowance for loan losses refer to the note entitled, "Loans, net and Allowance for Loan Losses", in the Notes to Consolidated Financial Statements to this Quarterly Report. The allowance for loan losses decreased$1,366 to$10,384 atSeptember 30, 2021 , from$12,200 at the end of 2020 primarily as a result of recognizing a recovery of provision for loan losses and reduced net charge offs. We recognized a$735 recovery of provision for loan losses in 2021 due to experiencing continued stability in the credit quality of the loan portfolio since the onset of the pandemic, as well as evidence of an overall mitigation of related risks factors and decline in organic loan growth. As a result of the uncertainty of the magnitude and longevity of the impact of COVID-19, the Company bolstered its allowance for loan losses through additional provisions totaling$6,282 in 2020 due primarily to increased qualitative factors for the economy and concentrations in industries specifically affected by the virus. Current national and local economic conditions reflect a more stable economic climate in 2021 compared with the previous year. The Company was able to decrease its qualitative factors based on the discontinuance of the need to provide CARES Act payment deferrals, improvements in industries most likely to be affected by the pandemic, and continued stability in the credit quality metrics of the loan portfolio. For the nine months endedSeptember 30 , net charge offs were$631 , or 0.08% of average loans outstanding in 2021 compared to$1,548 , or 0.20% of average loans outstanding for the same period in 2020. Deposits: We attract the majority of our deposits from within our 12-county market area by offering various deposit products including demand deposit accounts, NOW accounts, business checking accounts, money market deposit accounts, savings accounts, club accounts and time deposits, including certificates of deposit and individual retirement accounts. For the nine months endedSeptember 30, 2021 , total deposits increased$54,114 to$1,069,574 from$1,015,460 atDecember 31, 2020 . The increase was due to the successful acquisition of a municipal relationship in 2021. Noninterest-bearing transaction accounts increased$18,956 , while interest-bearing accounts increased$35,158 . Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased$67,572 and time deposits, including certificates of deposit and individual retirement accounts decreased$32,414 for the nine months endedSeptember 30, 2021 . 25 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 30 , interest-bearing deposits averaged$869,603 in 2021 compared to$828,884 in 2020. The cost of interest-bearing deposits was 0.38% in 2021 compared to 0.71% in 2020. Consistent with recentFOMC actions to keep short-term rates at a historically low level due to the onset of COVID-19, we took action to lower deposit rates to fend off net interest margin contraction due to changes in loan yields as payments on higher earning existing loans were replaced by lower yields originated on new and refinanced loans. OnMay 21, 2021 ,Riverview Bank , the wholly-owned subsidiary ofRiverview Financial Corporation , completed its previously announced branch sale toAmeriServ Financial Bank , wherebyAmeriServ Financial Bank acquired the branch office and deposit customers ofCitizens Neighborhood Bank ("CNB"), an operating division ofRiverview Bank , located inMeyersdale, Pennsylvania , as well as the deposit customers of CNB's leased branch office in the Borough ofSomerset, Pennsylvania . The transferred deposits totaled$42,191 and were acquired for a 3.71% deposit premium amounting to$1,602 . Borrowings: The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from theFederal 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 fromAtlantic Community Bankers Bank ("ACBB"),Pacific Community Bankers Bank ("PCBB") and the FHLB. AtSeptember 30, 2021 andDecember 31, 2020 , we did not have any short-term borrowings outstanding. Long-term debt totaled$52,004 atSeptember 30, 2021 as compared to$228,765 atDecember 31, 2020 . The large decrease in long-term debt is attributable to the payoff of all existing advances taken through theFederal Reserve Bank's PPPLF, whereby loans originated through the PPP program were pledged as security to facilitate advancements made through the program. For the nine months endedSeptember 30 , long-term debt averaged$128,490 in 2021 and$117,602 in 2020. The average cost of long-term debt was 1.82% for the nine months endedSeptember 30, 2021 , an increase from 0.74% for the same period last year. Market Risk Sensitivity: Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk ("IRR") associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities, and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity, and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities. As a result of the COVID-19 pandemic impact on the economy, it has become increasing more challenging to manage IRR. IRR and effectively managing it are very important to both Bank management and regulators. Bank regulations require us to develop and maintain an IRR management program that is overseen by the Board of Directors and senior management, which involves a comprehensive risk management process to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in a bank's risk management process or high-risk exposure relative to capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of a bank's risk management process is a determining factor when evaluating capital adequacy. The Asset Liability Committee ("ALCO"), comprised of members of our senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets ("RSA") and rate-sensitive liabilities ("RSL"), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. 26 -------------------------------------------------------------------------------- Table of Contents Conversely, a negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes. Our cumulative one-year RSA/RSL ratio equaled 1.87 atSeptember 30, 2021 . Given recent inflationary pressure and the potential for rates to rise, the focus of ALCO has been to increase the amount of repricing assets. The current position atSeptember 30, 2021 , indicates that the amount of RSA repricing within one year would exceed that of RSL, with rising rates causing an increase in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled "Forward-Looking Discussion" in this Management's Discussion and Analysis. Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table. As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months endingSeptember 30, 2021 , would increase 9.03% and decrease 5.79% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments to manage our IRR position. Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management. Liquidity: Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following: • Funding new and existing loan commitments; • Payment of deposits on demand or at their contractual maturity; • Repayment of borrowings as they mature; • Payment of lease obligations; and • Payment of operating expenses. These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted, and strategies are developed to ensure adequate liquidity at all times. Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, when compared to other types of funding sources. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available-for-sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis. We employ several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing afterSeptember 30, 2021 . Our noncore funds atSeptember 30, 2021 were comprised of time deposits in denominations of$250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered highly volatile. AtSeptember 30, 2021 , our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was (10.74)%, while our net short-term noncore funding ratio, noncore funds maturing within one-year, less short-term investments to assets equaled 3.61%. Comparatively, our net noncore dependence ratio was 14.60% while our net short-term noncore funding ratio was 0.94% atDecember 31, 2020 . 27 -------------------------------------------------------------------------------- Table of Contents The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing, and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, increased$136,297 during the nine months endedSeptember 30, 2021 as compared with a decrease of$18,390 for the same period last year. For the nine months endedSeptember 30, 2021 , we realized net cash inflows of$15,390 from operating activities and$241,829 from investing activities offset partially by net cash outflows of$120,922 from financing activities. For the nine months endedSeptember 30, 2020 , we realized a net cash outflow of$320,801 from investing activities offset partially by net cash inflows of$2,501 from operating activities and$299,910 from financing activities. Operating activities provided net cash of$15,390 for the nine months endedSeptember 30, 2021 compared to$2,501 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations. Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities provided net cash of$241,829 for the nine months endedSeptember 30, 2021 . For the comparable period in 2020, investing activities used net cash of$320,801 . For the nine months endedSeptember 30, 2021 , loan forgiveness from PPP loans offset partially by purchases of investment securities available-for-sale were the primary factors for the net cash provided by investing activities. For the comparable period of 2020, loan originations from PPP loans were the primary factor for the increase in loans. Financing activities used net cash of$120,922 for the nine months endedSeptember 30, 2021 and provided net cash of$299,910 for the same period last year. Liquidity generated through funds from deposit gathering were more than offset by repayments on long-term debt from theFederal Reserve Bank's PPPLF secured borrowing arrangement for the purpose of financing PPP loans in 2021. Funds from deposit gathering and proceeds received through long-term debt were the major factors for the net funds provided from financing activities in 2020. Transfer of deposits in sale totaled$42,191 during the nine months endedSeptember 30, 2021 as a noncash item. We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds are expected to enable us to meet all cash obligations as they come due. Capital: Stockholders' equity totaled$107,576 , or$11.49 per share, atSeptember 30, 2021 , and$97,432 , or$10.47 per share, atDecember 31, 2020 . The net increase in stockholders' equity in the nine months endedSeptember 30, 2021 was primarily a result of the recognition of net income offset by a change in other accumulated comprehensive income. Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor's accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance. OnNovember 13, 2019 , the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio ("CBLR"), which became effective onJanuary 1, 2020 . The intent of the CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e., leverage ratio) exceeds a 9.0% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold and will not be required to calculate and report risk-based capital ratios. InApril 2020 , under the CARES Act, the 9.0% leverage ratio threshold was temporarily reduced to 8.0% in response to the COVID-19 pandemic. The threshold increased to 8.5% in 2021 and will return to 9.0% in 2022. The Bank elected to begin using the CBLR for the first quarter of 2021 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following: • Total assets of less than$10 billion ,
• Total trading assets plus liabilities of 5.0% or less of consolidated
assets,
• Total
off-balance
sheet exposures of 25.0% or less of consolidated assets,
• Cannot be an advanced approaches banking organization, and
• Leverage ratio greater than 9.0%, or temporarily prescribed threshold
established in response to
COVID-19.
28-------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2021 andDecember 31, 2020 , the Bank was categorized as well capitalized. Listed in the table below is a comparison of the Bank's actual capital amounts with the minimum requirements for well capitalized banks, as defined above. Minimum Regulatory Capital Ratios under Well Capitalized under Actual Basel III Basel III September 30, 2021: Amount Ratio Amount Ratio Amount Ratio CBLR Framework Tier 1 capital (to average total (1) (1) assets): (i.e., leverage ratio)$ 127,526 10.4 %$ 104,141 ³ 8.5 % Minimum Regulatory Capital Ratios under Well Capitalized under Actual Basel III Basel III December 31, 2020: Amount Ratio Amount Ratio Amount Ratio Total risk-based capital (to risk-weighted assets)$ 126,108 14.2 % $
93,462 ³ 10.5 %
114,967 12.9 % 75,659 ³ 8.5 % 71,209 ³ 8.0 %
Common equity tier 1 risk-based capital (to risk-weighted assets) 114,967 12.9 % 62,308 ³ 7.0 %
57,857 ³ 6.5 %
Tier 1 capital (to average total
assets) 114,967 9.8 % 47,102 ³ 4.0 % 58,877 ³ 5.0 %
(1) Under the CBLR Framework, capital adequacy amounts and ratios are not
applicable as qualifying depositary institutions are evaluated solely on
whether or not they are well capitalized.
Based on the most recent notification from theFDIC , the Bank was categorized as well capitalized atSeptember 30, 2021 andDecember 31, 2020 . There are no conditions or negative events since this notification that we believe have changed the Bank's well capitalized status. Review of Financial Performance: We reported net income of$10,955 , or$1.17 per basic and diluted weighted average common share, for the nine months endedSeptember 30, 2021 , compared to a net loss of$22,794 , or$2.46 per basic and diluted weighted average common share, for the same period last year. For the third quarter endedSeptember 30 , net income was$3,115 or$0.33 per basic and diluted weighted average common share in 2021 as compared to net income of$695 , or$0.08 per basic and diluted weighted average common share in 2020. Major factors impacting 2021 earnings included the acceleration of income earned on PPP loans, the recognition of a deposit premium on branch sales and the recovery of provision for loan losses. During the nine months endedSeptember 30, 2021 , SBA forgiveness of PPP loans increased causing an acceleration in the recognition of fees as these loans were paid off. Approximately 91.3%, amounting to$247,625 of the outstanding PPP loans atDecember 31, 2020 , were forgiven during the nine months of 2021. Net interest income generated from PPP loans totaled$2,268 in the third quarter of 2021 and$6,604 during the nine months of 2021. OnMay 21, 2021 , the Company completed the sale of the branch office located inMeyersdale and related liabilities of theMeyersdale and Somerset branches, resulting in the recognition of$1,602 of noninterest income in the form of a deposit premium. As aforementioned, the$735 recapture of the provision for loan losses was a result of waning risk factors associated with the continued recovery from the impact of the pandemic, coupled with credit portfolio performance trends and decline in organic loan growth. The major factors causing the reported net losses of$22,794 for the nine months endedSeptember 30, 2020 were a non-cash charge related to the recognition of goodwill impairment and an increase in the provision for loan losses, both stemming from the COVID-19 pandemic. The goodwill impairment of$24,754 had no impact on tangible book value, regulatory capital ratios, liquidity and the Company's cash balances. For the three and nine months endedSeptember 30, 2020 , the provisions for loan losses totaled$1,844 and$5,656 , respectively. If the COVID-19 pandemic persists, it will continue to have a severe effect on economic activity and may cause greater negative consequences for our customers which, in turn, could adversely affect the Company's financial condition, liquidity and results of operations. 29 -------------------------------------------------------------------------------- Table of Contents Net Interest Income: Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:
• Variations in the volume, rate, and composition of earning assets and
interest-bearing liabilities;
• Changes in general market rates; and
• The level of nonperforming assets.
Changes in net interest income are measured by the net interest spread and net
interest margin. Net interest spread, the difference between the average yield
earned on earning assets and the average rate incurred on interest-bearing
liabilities, illustrates the effects changing interest rates have on
profitability. Net interest margin, which is net interest income as a percentage
of earning assets, is a more comprehensive ratio, as it reflects not only the
spread, but also the change in the composition of interest-earning assets and
interest-bearing liabilities.
Tax-exempt
loans and investments carry
pre-tax
yields lower than their taxable counterparts. Therefore, in order to make the
analysis of net interest income more comparable,
tax-exempt
income and yields are reported herein on a
tax-equivalent
basis using the prevailing federal statutory tax rate of 21% in 2021 and 2020,
respectively.
For the nine months ended September 30 ,
tax-equivalent
net interest income increased $2,109 to $31,211 in 2021 from $29,102 in 2020.
The increase in
tax-equivalent
net interest income was primarily attributable to recognizing interest income of
$6,604 in the nine months ended September 30, 2021 on PPP loans compared to
$2,501 for the same period last year. The
tax-equivalent
net interest margin for the nine months ended September 30 was 3.39% in 2021
compared to 3.37% in 2020. The net interest spread increased to 3.28% for the
nine months ended September 30, 2021 from 3.25% for the nine months ended
September 30, 2020 . Adding to the positive impact of the improvement in the net
interest margin was a net increase in the volume of average earning assets as
compared to the increase in average interest-bearing liabilities. Overall,
average earning assets increased $76,425 while average interest-bearing
liabilities increased $41,841 comparing the nine months ended September 30, 2021
and 2020.
For the three months ended September 30 ,
tax-equivalent
net interest income decreased slightly by $93 to $10,411 in 2021 from $10,504 in
2020. Average earning assets decreased $123,363 while average earning
liabilities decreased $152,747 comparing the third quarters of 2021 and 2020.
The
tax-equivalent
net interest margin for the three months ended September 30 , was 3.57% in 2021
compared to 3.26% in 2020. The net interest spread increased to 3.45% for the
three months ended September 30, 2021 from 3.17% for the three months ended
September 30, 2020 .
30
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The average balances of assets and liabilities, corresponding interest income
and expense and resulting average yields or rates paid are summarized as
follows. Average balances were calculated using average daily balances. Averages
for earning assets include nonaccrual loans. Loan fees are included in interest
income on loans. Investment averages include
available-for-sale
securities at amortized cost. Income on investment securities and loans is
adjusted to a tax equivalent basis using the prevailing federal statutory tax
rate.
Nine months ended
September 30, 2021 September 30, 2020
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets:
Earning assets:
Loans:
Taxable $ 987,840 $ 32,615 4.41 % $ 1,005,344 $ 31,649 4.21 %
Tax exempt 29,550 681 3.08 % 33,914 891 3.51 %
Investments:
Taxable 96,062 1,537 2.14 % 67,222 1,291 2.57 %
Tax exempt 43,442 557 1.71 % 7,971 223 3.74 %
Interest bearing deposits 72,979 64 0.12 % 38,997 112 0.38 %
Federal funds sold
Total earning assets 1,229,873 35,454 3.85 % 1,153,448 34,166 3.96 % Less: allowance for loan losses
11,708 8,431
Other assets 83,249 99,559
Total assets $ 1,301,414 $ 1,244,576
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Money market accounts $ 152,423 $ 122 0.11 % $ 116,504 $ 288 0.33 %
NOW accounts 327,154 259 0.11 % 291,182 574 0.26 %
Savings accounts 170,855 87 0.07 % 142,385 117 0.11 %
Time deposits 219,171 2,023 1.23 % 278,813 3,405 1.63 %
Short term borrowings 9,766 28 0.38 %
Long-term debt 128,490 1,752 1.82 % 117,602 652 0.74 %
Total interest-bearing liabilities 998,093 4,243 0.57 % 956,252 5,064 0.71 %
Non-interest-bearing
demand deposits 187,167 163,886
Other liabilities 13,818 12,952
Stockholders' equity 102,336 111,486
Total liabilities and stockholders' equity $ 1,301,414 $ 1,244,576
Net interest income/spread $ 31,211 3.28 % $ 29,102 3.25 %
Net interest margin 3.39 % 3.37 %
Tax-equivalent
adjustments:
Loans $ 143 $ 187
Investments 117 47
Total adjustments $ 260 $ 234
31-------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2021 . We recognized a$735 recovery of provision for loan losses for the nine months endedSeptember 30, 2021 , compared to a provision for loan losses of$5,656 in 2020. For the quarter endedSeptember 30 , no provision for loan losses was recorded in 2021 compared to a provision for loan losses of$1,844 in 2020. The Company was able to decrease its qualitative factors in 2021 based on the discontinuance of the need for CARES Act payment deferrals, improvements in industries most likely to be affected by the pandemic, and continued stability in the credit quality metrics of the loan portfolio. Despite the improvements brought on by medical advances, government assistance programs and their positive impacts on employment and consumer and business activity, future credit loss provisions are subject to significant uncertainty as the pandemic recovery continues to unfold. Our future provisions may increase due to the growth of loan delinquencies and charge-offs resulting from COVID-19 related financial stress. Noninterest Income: For the nine months endedSeptember 30 , noninterest income totaled$8,306 in 2021, an increase of$1,217 from$7,089 in 2020. The increase was primarily attributable to recognizing a$1,602 deposit premium from the sale of deposits of two branch offices and increases of$135 and$80 from trust and wealth management income. Partially offsetting these positive influences were decreases of$498 in gains from the sale of investment securities and$460 in mortgage banking income. Mortgage banking income decreased for the nine months endedSeptember 30, 2021 as compared to the same period in 2020 due to a reduction in residential refinancing mortgage activity. For the quarter endedSeptember 30 , noninterest income totaled$2,088 in 2021, a decrease of$70 from$2,158 in 2020. The primary contributors to the decline were a$297 reduction in mortgage banking income offset partially by a$149 increase in service charges, fees and commissions. Noninterest Expenses: In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance,FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies to control the variable expenses. Noninterest expense decreased$26,639 , to$26,505 for the nine months endedSeptember 30, 2021 , from$53,144 for the same period last year. The decrease was primarily due to writing off the entire amount of goodwill on the books totaling$24,754 in 2020. Excluding this nonrecurring charge, noninterest expense would have decreased$1,885 , or 6.6%, comparing the nine months endedSeptember 30, 2021 and 2020. For the nine months endedSeptember 30 , salaries and employee benefit expenses decreased$980 , or 6.3%, to$14,472 in 2021 from$15,452 in 2020. Net occupancy expense decreased$592 , or 16.1%, to$3,084 in 2021 from$3,676 in 2020. The primary cause for the decrease in cost was due to branch closures and the sale of two branch offices. Other expenses decreased$115 , or 1.3%, to$8,597 in 2021 compared to$8,713 in 2020 as a result of implementing cost savings initiatives in the latter part of 2019. Noninterest expense decreased to$8,594 for the three months endedSeptember 30, 2021 , from$9,978 for the same period last year. The overall decrease was primarily due to implementing efficiency initiatives with respect to staffing beginning in the fourth quarter of 2019. Income Taxes: We recorded an income tax expense of$2,532 for the nine months endedSeptember 30, 2021 compared to a tax benefit of$49 for the nine months endedSeptember 30, 2020 . For the three months endedSeptember 30 , we recorded income tax expense of$704 in 2021 compared to$67 in 2020. The effective tax rates were 18.8% and 18.4% for the nine and three months endedSeptember 30, 2021 . 32
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