UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form10-Q

 

 

 

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

for the quarterly period ended JuneSeptember 30, 2017

or

 

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

for the transition period from

333-201017

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company as defined in Rule12b-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 Rule12b-2 of the Exchange Act.    Yes  ☐    No  ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 4,877,2659,026,395 at July 25,October 30, 2017.

 

 

 

Page 1 of 41

Exhibit index on page 41


RIVERVIEW FINANCIAL CORPORATION

FORM10-Q

For the Quarter Ended JuneSeptember 30, 2017

 

Contents

  Page No. 
PART I.  

FINANCIAL INFORMATION:

  
Item 1.  

Financial Statements (Unaudited)

  

Consolidated Balance Sheets at JuneSeptember 30, 2017 and December 31, 2016

   3 
  

Consolidated Statements of Income and Comprehensive Income (Loss) for the Three and SixNine Months Ended June

    September 30, 2017 and 2016

   4 
  

Consolidated Statements of Changes in Stockholders’ Equity for the Three and SixNine Months Ended JuneSeptember 30, 2017

    and 2016

   5 

Consolidated Statements of Cash Flows for the Three and SixNine Months Ended JuneSeptember 30, 2017 and 2016

   6 

Notes to Consolidated Financial Statements

   7 
Item 2.  

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

   2826 
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

   3835 
Item 4.  

Controls and Procedures

   3835 
PART II  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

   3836 
Item 1A.  

Risk Factors

   3836 
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   3836 
Item 3.  

Defaults upon Senior Securities

   3836 
Item 4.  

Mine Safety Disclosures

   3836 
Item 5.  

Other Information

   3936 
Item 6.  

Exhibits

   3936 

Signatures

   4037 


Riverview Financial Corporation

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share data)

 

  June 30,
2017
 December 31,
2016
   September 30,
2017
 December 31,
2016
 

Assets:

      

Cash and due from banks

  $9,613  $7,783   $8,425  $7,783 

Interest-bearing deposits in other banks

   6,064  11,337    10,741  11,337 

Investment securitiesavailable-for-sale

   67,852  73,113    56,874  73,113 

Loans held for sale

   1,037  652    519  652 

Loans, net

   504,749  409,343    560,187  409,343 

Less: allowance for loan losses

   4,834  3,732    5,404  3,732 
  

 

  

 

   

 

  

 

 

Net loans

   499,915  405,611    554,783  405,611 

Premises and equipment, net

   12,132  12,201    12,163  12,201 

Accrued interest receivable

   1,651  1,726    1,995  1,726 

Goodwill

   5,079  5,408    5,079  5,408 

Intangible assets

   1,170  1,405    1,099  1,405 

Other assets

   23,728  23,812    29,701  23,812 
  

 

  

 

   

 

  

 

 

Total assets

  $628,241  $543,048   $681,379  $543,048 
  

 

  

 

   

 

  

 

 

Liabilities:

      

Deposits:

      

Noninterest-bearing

  $76,096  $73,932   $76,214  $73,932 

Interest-bearing

   447,799  378,628    498,736  378,628 
  

 

  

 

   

 

  

 

 

Total deposits

   523,895  452,560    574,950  452,560 

Short-term borrowings

   30,000  31,500    37,250  31,500 

Long-term debt

   11,589  11,154    6,503  11,154 

Accrued interest payable

   194  192    213  192 

Other liabilities

   5,048  5,722    5,084  5,722 
  

 

  

 

   

 

  

 

 

Total liabilities

   570,726  501,128    624,000  501,128 
  

 

  

 

   

 

  

 

 

Stockholders’ equity:

      

Preferred stock: no par value, authorized 3,000,000 shares; Series A convertible perpetual preferred stock

      

Common stock: no par value, authorized 20,000,000 shares; June 30, 2017, issued and outstanding 4,876,774 shares; December 31, 2016, issued and outstanding 3,237,859 shares

   45,240  29,052 

Common stock: no par value, authorized 20,000,000 shares; September 30, 2017, issued and outstanding 4,892,143 shares; December 31, 2016, issued and outstanding 3,237,859 shares

   45,427  29,052 

Capital surplus

   235  220    243  220 

Retained earnings

   13,118  14,845    12,848  14,845 

Accumulated other comprehensive loss

   (1,078 (2,197   (1,139 (2,197
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   57,515  41,920    57,379  41,920 
  

 

  

 

   

 

  

 

 

Total liabilities and stockholders’ equity

  $628,241  $543,048   $681,379  $543,048 
  

 

  

 

   

 

  

 

 

See notes to consolidated financial statements.

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands, except per share data)

 

  Three Months Ended Six Months Ended   Three Months Ended Nine Months Ended 

June 30,

  2017 2016 2017 2016 

September 30,

  2017 2016 2017 2016 

Interest income:

          

Interest and fees on loans:

          

Taxable

  $4,989  $4,337  $9,274  $8,764   $5,717  $4,598  $14,991  $13,362 

Tax-exempt

   107  88  215  174    146  87  361  261 

Interest and dividends on investment securitiesavailable-for-sale:

          

Taxable

   566  435  1,130  836    477  539  1,607  1,375 

Tax-exempt

   46  91  93  227    47  53  140  280 

Dividends

   4  3  7    1  3  8 

Interest on interest-bearing deposits in other banks

   24  13  47  28    31  13  78  41 

Interest on federal funds sold

   4  1  10  2    2   12  2 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest income

   5,736  4,969  10,772  10,038    6,420  5,291  17,192  15,329 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Interest expense:

          

Interest on deposits

   668  461  1,200  928    821  447  2,021  1,375 

Interest on short-term borrowings

   63  13  85  56    112  3  197  59 

Interest on long-term debt

   78  82  153  137    75  77  228  214 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest expense

   809  556  1,438  1,121    1,008  527  2,446  1,648 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net interest income

   4,927  4,413  9,334  8,917    5,412  4,764  14,746  13,681 

Provision for loan losses

   519  156  1,124  255    610  29  1,734  284 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net interest income after provision for loan losses

   4,408  4,257  8,210  8,662    4,802  4,735  13,012  13,397 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noninterest income:

          

Service charges, fees and commissions

   292  320  629  618    270  315  899  933 

Commission and fees on fiduciary activities

   31  35  61  54    31  34  92  88 

Wealth management income

   194  179  452  337    179  194  631  531 

Mortgage banking income

   147  109  229  191    205  210  434  401 

Bank owned life insurance investment income

   74  76  147  158    107  118  254  276 

Net gain on sale of investment securitiesavailable-for-sale

   64  334  63  332    43  152  106  484 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total noninterest income

   802  1,053  1,581  1,690    835  1,023  2,416  2,713 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noninterest expense:

          

Salaries and employee benefits expense

   2,757  2,126  5,593  4,277    2,928  2,334  8,521  6,611 

Net occupancy and equipment expense

   634  526  1,280  1,079    615  538  1,895  1,617 

Amortization of intangible assets

   71  76  235  152    71  95  306  247 

Net cost of operation of other real estate owned

   138  89  174  131    (13 83  161  214 

Other expenses

   1,441  1,428  2,922  2,721    1,566  1,283  4,488  4,004 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total noninterest expense

   5,041  4,245  10,204  8,360    5,167  4,333  15,371  12,693 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income (loss) before income taxes

   169  1,065  (413 1.992    470  1,425  57  3,417 

Income tax expense (benefit)

   (10 210  (25 384    69  454  44  838 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income (loss)

   179  855  (388 1,608    401  971  13  2,579 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive income:

          

Unrealized gain on investment securitiesavailable-for-sale

   1,246  581  1,758  1,088 

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

   (64 (334 (63 (332

Unrealized gain (loss) on investment securitiesavailable-for-sale

   (50 (148 1,708  940 

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

   (43 (152 (106 (484
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive income

   1,182  247  1,695  756 

Other comprehensive income (loss)

   (93 (300 1,602  456 

Income tax expense (benefit) related to other comprehensive income

   402  84  576  257    (32 (102 544  155 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive income, net of income taxes

   780  163  1,119  499 

Other comprehensive income (loss), net of income taxes

   (61 (198 1,058  301 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income

  $959  $1,018  $731  $2,107   $340  $773  $1,071  $2,880 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Per share data:

          

Net income:

          

Basic

  $0.04  $0.27  $(0.08 $0.50   $0.08  $0.30  $0.03  $0.80 

Diluted

  $0.04  $0.27  $(0.08 $0.50   $0.08  $0.30  $0.03  $0.80 

Average common shares outstanding:

          

Basic

   3,655,446  3,214,248  3,555,629  3,210,375    4,880,676  3,224,053  4,002,165  3,214,967 

Diluted

   3,726,939  3,245,868  3,555,629  3,233,937    4,945,456  3,244,688  4,060,813  3,237,553 

Dividends declared

  $0.14  $0.14  $0.28  $0.28   $0.14  $0.14  $0.41  $0.41 

See notes to consolidated financial statements.

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

 

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

Balance, January 1, 2016

   $28,681   $180   $13,550  $(108 $42,303    $28,681   $180   $13,550  $(108 $42,303 

Net income

        1,608   1,608         2,579   2,579 

Other comprehensive income, net of income taxes

        499  499         301  301 

Compensation cost of option grants

      21     21       31     31 

Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,390 shares

   174       174 

Dividends declared, $0.28 per share

        (884  (884

Issuance under ESPP, 401k and Dividend Reinvestment plans: 23,923 shares

   274       274 

Dividends declared, $0.41 per share

        (1,327  (1,327
  

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

 

Balance, June 30, 2016

   $28,855   $201   $14,274  $391  $43,721 

Balance, September 30, 2016

   $28,955   $211   $14,802  $193  $44,161 
  

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

 

Balance, January 1, 2017

   $29,052   $220   $14,845  $(2,197 $41,920    $29,052   $220   $14,845  $(2,197 $41,920 

Net loss

        (388  (388

Net income

        13   13 

Other comprehensive income, net of income taxes

        1,119  1,119         1,058  1,058 

Compensation cost of option grants

      15     15       23     23 

Issuance of 269,885 common shares

   2,658       2,658    2,658       2,658 

Issuance of 1,348,809 preferred shares

  $13,283        13,283   $13,283        13,283 

Preferred shares converted into common shares

   (13,283 13,283          (13,283 13,283       

Issuance under ESPP, 401k and Dividend Reinvestment plans: 9,614 shares

   247       247 

Dividends declared: $0.28 per share

        (1,339  (1,339

Issuance under ESPP, 401k and Dividend Reinvestment plans: 29,840 shares

   373       373 

Exercise of stock options: 5,750 shares

   61       61 

Dividends declared: $0.41 per share

        (2,010  (2,010
  

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

 

Balance, June 30, 2017$

  $  $45,240   $235   $13,118  $(1,078 $57,515 

Balance, September 30, 2017

  $  $45,427   $243   $12,848  $(1,139 $57,379 
  

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

   

 

  

 

  

 

 

See notes to consolidated financial statements.

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

For the Six Months Ended June 30,

  2017 2016 

For the Nine Months Ended September 30,

  2017 2016 

Cash flows from operating activities:

      

Net income (loss)

  $(388 $1,608   $13  $2,579 

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

      

Depreciation of premises and equipment

   392  390    586  533 

Provision for loan losses

   1,124  255    1,734  284 

Stock based compensation

   15  21    23  31 

Net amortization of investment securitiesavailable-for-sale

   195  279    315  389 

Net cost of operation of other real estate owned

   174  131    161  214 

Net gain on sale of investment securitiesavailable-for-sale

   (63 (332   (106 (484

Amortization of purchase adjustment on loans

   (98 (270   (127 (704

Amortization of intangible assets

   235  152    306  247 

Deferred income taxes

   (47 384    (47 384 

Proceeds from sale of loans originated for sale

   11,606  10,877    20,733  18,329 

Net gain on sale of loans originated for sale

   (229 (182   (434 (401

Loans originated for sale

   (11,762 (9,919   (20,166 (17,654

Bank owned life insurance investment income

   (147 (158   (254 (276

Net change in:

      

Accrued interest receivable

   75  8    (269 (107

Other assets

   (785 (418   (1,255 (208

Accrued interest payable

   2  (15   21  (16

Other liabilities

   (674 (123   (638 (196
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) operating activities

   (375 2,688    596  2,944 
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Net maturities of interest-bearing time deposits

   991 

Investment securitiesavailable-for-sale:

      

Purchases

   (31,265   (40,916

Proceeds from repayments

   1,260  5,052    1,805  7,420 

Proceeds from sales

   5,564  28,619    15,827  37,526 

Proceeds from the sale of other real estate owned

   433  1,020    613  1,129 

Net decrease in restricted equity securities

   83  1,727    (341 1,489 

Net (increase) decrease in loans

   (95,517 9,571    (151,072 9,996 

Business disposition (acquisition), net of cash

   329  (895   329  (894

Purchases of premises and equipment

   (323 (253   (548 (447

Purchase of bank owned life insurance

   (16 (27

Purchases of bank owned life insurance

   (5,017 (27

Proceeds from bank owned life insurance

   279 
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) investing activities

   (88,187 14,540    (138,404 15,555 
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Net increase in deposits

   71,335  13,105    122,390  10,651 

Net decrease in short-term borrowings

   (1,500 (38,506

Net increase (decrease) in short-term borrowings

   5,750  (36,575

Repayment of long-term debt

   (165 (65   (5,251 (143

Proceeds from long-term debt

   600  2,050    600  2,050 

Issuance under ESPP, 401k and DRP plans

   247  174    373  274 

Issuance of common stock

   15,941     15,941  

Proceeds from exercise of stock options

   61  

Cash dividends paid

   (1,339 (884   (2,010 (1,327
  

 

  

 

   

 

  

 

 

Net cash provided by (used in) financing activities

   85,119  (24,126   137,854  (25,070
  

 

  

 

   

 

  

 

 

Net increase (decrease) in cash and cash equivalents

   (3,443 (6,898   46  (6,571

Cash and cash equivalents - beginning

   19,120  21,697    19,120  22,688 
  

 

  

 

   

 

  

 

 

Cash and cash equivalents - ending

  $15,677  $14,799   $19,166  $16,117 
  

 

  

 

   

 

  

 

 

Supplemental disclosures:

      

Cash paid during the period for:

      

Interest

  $1,436  $1,136   $2,425  $1,664 
  

 

  

 

   

 

  

 

 

Income taxes

  $  $   $  $ 
  

 

  

 

   

 

  

 

 

Noncash items from investing activities:

      

Other real estate acquired in settlement of loans

  $187  $1,040   $293  $1,348 
  

 

  

 

   

 

  

 

 

See notes to consolidated financial statements.

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”), 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”). The Company services its retail and commercial customers through 17 community banking offices and three limited purpose offices located within Berks, Dauphin, Lebanon, Lycoming, Northumberland, Perry, Schuylkill and Somerset Counties in Pennsylvania.

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 Form10-Q and Article 8 ofRegulation 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 to 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 sixnine months ended and as of JuneSeptember 30, 2017, 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, 2016 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 2016 Annual Report on Form10-K, filed on March 29, 2017.

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. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, the determination of other-than-temporary impairment losses on securities and impairment of goodwill. Actual results could differ from those estimates.

Recent Accounting Standards

In January 2016, the FASB issued ASUNo. 2016-01, “Financial Instruments - Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in ASU2016-01, among other things: require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; require separate presentation of financial assets and liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and eliminate the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU2016-01 will have on its consolidated financial statements. The Company does not expect the adoption of the new accounting guidance to have a material effect on its consolidated financial statements, and expects the fair values of financial instruments disclosed in the footnotes to conform to a market participant’s view for measurement and disclosure purposes.

In February 2016, the FASB issued ASUNo. 2016-02, “Leases (Topic 842)”. Among other things, in the amendments in ASU2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and aright-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and

operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any

transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASUNo. 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”. The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on astep-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has anavailable-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments were effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The adoption of ASUNo. 2016-07 did not have a material effect on our consolidated financial statements.

In March 2016, the FASB issued ASUNo. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting”. The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: income tax consequences; classification of awards as either equity or liabilities; and classification on the statement of cash flows. The amendments were effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASUNo. 2016-09 did not have a material effect on our consolidated financial statements.

In June 2016, the FASB ASUNo. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU2016-13 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. ASU2016-13 also requires new disclosures for financial assets measured at amortized cost, loans andavailable-for-sale debt securities. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We have dedicated staff and resources in place evaluating the Company’s options including evaluating the appropriate model options and collecting and reviewing loan data for use in these models. The Company is currently still assessing the impact that this new guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASUNo. 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 flow.

In December 2016, the FASB issued ASUNo. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”.ASU 2016-20 updates the new revenue standard by clarifying issues that have arisen fromASU 2014-09, but does not change the core principle of the new standard. The issues addressed in this ASU include: (i) Loan guarantee fees; (ii) Impairment testing of contract costs; (iii) Interaction of impairment testing with guidance in other topics; (iv) Provisions for losses on construction-type and production-type contracts; (v) Scope of Topic 606; (vi) Disclosure of remaining performance obligations; (vii) Disclosure of prior-period performance obligations; (viii) Contract modifications; (ix) Contract asset vs. receivable; (x) Refund liability; (xi) Advertising costs; (xii) Fixed-odds wagering contracts in the casino industry; and (xiii) Cost capitalization for advisors to private funds and public funds. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope ofASU 2014-09, andnon-interest income.ASU 2016-20 and2014-09 could require us to change how we recognize certain revenue streams withinnon-interest income, however, we do not expect these changes to have a significant impact on our financial statements. We continue to evaluate the impact ofASU 2016-20 and2014-09 on our Company and expect to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

In January 2017, FASB issued ASUNo. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The ASU clarifies the definition of a business to assist with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

In January 2017, the FASB issued ASUNo. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the 2015 22, 2016 and November 17, 2016 EITF Meetings”. The ASU adds an SEC paragraph to ASUs2014-09,2016-02 and2016-13 which specifies the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate disclosure about the potential material effects of those ASUs on the financial statements when adopted. The guidance also specifies the SEC staff view on financial statement disclosures when the company does not know or cannot reasonably estimate the impact that adoption of the ASUs will have on the financial statements. The ASU also conforms to SEC guidance on accounting for tax benefits resulting from investments in affordable housing projects to the guidance in ASU2014-01, Investments - Equity Method and Joint Ventures (Topic 323). The amendments in this update are effective upon issuance. The guidance did not have a significant impact on our consolidated financial statements.

In January 2017, FASB issued ASUNo. 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 February 2017, the FASB issued ASUNo. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The amendments clarify that a financial asset is within the scope of Topic 610 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Topic 610 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Topic 610 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The guidance is effective for public business entities for annual periods beginning after December 15, 2017 and interim periods therein. Entities may use either a full or modified approach to adopt the ASU. The Company is assessing ASU2017-05 and does not expect it to have a material impact on its accounting and disclosures.

In March 2017, the FASB issued ASU2017-07, “Compensation - Retirement Benefits (Topic 715)”, which requires employers that offer or maintain defined benefit plans to disaggregate the service component from the other components of net benefit cost and provides guidance on presentation of the service component and the other components of net benefit cost in the statement of operations. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In March 2017, FASB issued ASUNo. 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 Company is assessing the impact of ASU2017-08 on its accounting and disclosures.

In May 2017, the FASB issued ASU2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”. This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity would not apply modification accounting if the fair value, vesting

conditions, and classification of the awards are the same immediately before and after the modification. This ASU is effective for fiscal years beginning after December 15, 2017, and interims periods within those fiscal years. The Company does not expect the adoption of the guidance to have a material impact on our consolidated financial statements.

In August 2017, FASB issued ASU2017-12, “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. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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 securitiesavailable-for-sale and benefit plan adjustments.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at JuneSeptember 30, 2017 and December 31, 2016 is as follows:

 

  June 30,
2017
   December 31,
2016
   September 30,
2017
   December 31,
2016
 

Net unrealized loss on investment securitiesavailable-for-sale

  $(818  $(2,513  $(911  $(2,513

Related income taxes

   (278   (854   (310   (854
  

 

   

 

   

 

   

 

 

Net of income taxes

   (540   (1,659   (601   (1,659
  

 

   

 

   

 

   

 

 

Benefit plan adjustments

   (815   (815   (815   (815

Related income taxes

   (277   (277   (277   (277
  

 

   

 

   

 

   

 

 

Net of income taxes

   (538   (538   (538   (538
  

 

   

 

   

 

   

 

 

Accumulated other comprehensive income (loss)

  $(1,078  $(2,197  $(1,139  $(2,197
  

 

   

 

   

 

   

 

 

Other comprehensive income (loss) and related tax effects for the three and sixnine months ended JuneSeptember 30, 2017 and 2016 is as follows:

 

Three months ended June 30,

  2017   2016 

Unrealized gain on investment securitiesavailable-for-sale

  $1,246   $581 

Net gain on the sale of investment securitiesavailable-for-sale (1)

   (64   (334
  

 

 

   

 

 

 

Other comprehensive income before taxes

   1,182    247 

Income tax expense (benefit)

   402    84 
  

 

 

   

 

 

 

Other comprehensive income

  $780   $163 
  

 

 

   

 

 

 

Six months ended June 30,

  2017   2016 

Three months ended September 30,

  2017   2016 

Unrealized loss on investment securitiesavailable-for-sale

  $(50  $(148

Net gain on the sale of investment securitiesavailable-for-sale (1)

   (43   (152
  

 

   

 

 

Other comprehensive loss before taxes

   (93   (300

Income tax expense (benefit)

   (32   (102
  

 

   

 

 

Other comprehensive loss

  $(61  $(198
  

 

   

 

 

Nine months ended September 30,

  2017   2016 

Unrealized gain on investment securitiesavailable-for-sale

  $1,758   $1,088   $1,708   $940 

Net gain on the sale of investment securitiesavailable-for-sale(1)

   (63   (332   (106   (484
  

 

   

 

   

 

   

 

 

Other comprehensive income before taxes

   1,695    756    1,602    456 

Income tax expense (benefit)

   576    257    544    155 
  

 

   

 

   

 

   

 

 

Other comprehensive income

  $1,119   $499   $1,058   $301 
  

 

   

 

   

 

   

 

 

 

(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.

3. Earnings per share:

Basic earnings per share is computed by dividing net income (loss) allocated to common stockholders divided by the weighted-average number of common shares outstanding during the period. Net income (loss) allocated to common stockholders is net income (loss) adjusted for preferred stock dividends including dividends declared, less income (loss) allocated to participating securities. 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 sixnine months ended JuneSeptember 30, 2017 and 2016:

 

Three months ended June 30,

  2017   2016 

Three months ended September 30,

  2017   2016 

Numerator:

        

Net income (loss)

  $179   $855   $401   $971 

Dividends on preferred stock

   (186      
  

 

   

 

   

 

   

 

 

Net income (loss) available to common stockholders

  $(7  $855   $401   $971 

Undistributed loss allocated to preferred stockholders

   128       
  

 

   

 

   

 

   

 

 

Income (loss) allocated to common stockholders

  $121   $855   $401   $971 
  

 

   

 

   

 

   

 

 

Denominator:

        

Basic

   3,655,446    3,214,248    4,880,676    3,224,053 

Dilutive options

   71,493    31,620    64,780    20,635 
  

 

   

 

   

 

   

 

 

Diluted

   3,726,939    3,245,868    4,945,456    3,244,688 
  

 

   

 

   

 

   

 

 

Earnings per share:

        

Basic

  $0.04   $0.27   $0.08   $0.30 

Diluted

  $0.04   $0.27   $0.08   $0.30 

Nine months ended September 30,

  2017   2016 

Numerator:

    

Net income (loss)

  $13   $2,579 

Dividends on preferred stock

   (371  
  

 

   

 

 

Net income (loss) available to common stockholders

  $(358  $2,579 

Undistributed loss allocated to preferred stockholders

   475   
  

 

   

 

 

Income (loss) allocated to common stockholders

  $117   $2,579 
  

 

   

 

 

Denominator:

    

Basic

   4,002,165    3,214,967 

Dilutive options

   58,648    22,586 
  

 

   

 

 

Diluted

   4,060,813    3,237,553 
  

 

   

 

 

Earnings per share:

    

Basic

  $0.03   $0.80 

Diluted

  $0.03   $0.80 

Six months ended June 30,

  2017   2016 

Numerator:

    

Net income (loss)

  $(388  $1,608 

Dividends on preferred stock

   (371  
  

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $(759  $1,608 

Undistributed loss allocated to preferred stockholders

   475   
  

 

 

   

 

 

 

Income (loss) allocated to common stockholders

  $(284  $1,608 
  

 

 

   

 

 

 

Denominator:

    

Basic

   3,555,629    3,210,375 

Dilutive options

     23,562 
  

 

 

   

 

 

 

Diluted

   3,555,629    3,233,937 
  

 

 

   

 

 

 

Earnings per share:

    

Basic

  $(0.08  $0.50 

Diluted

  $(0.08  $0.50 

None of the outstanding stock options for the three months ended June 30, 2017 were excluded from the diluted earnings per share calculation because their effect was antidilutive. All of the outstanding stock options for the six months ended June 30, 2017 were excluded from the diluted earnings per share calculation because the effect was antidilutive. There were 25,300 outstanding stock options for the three and sixnine months ended JuneSeptember 30, 2016 that were excluded from the diluted earnings per share calculation because of their antidilutive effect.

On January 20, 2017, Riverview announced that it entered into agreements with accredited investors and qualified institutional buyers to raise approximately $17.0 million in common and preferred equity, before expenses, through the private placement of 269,885 shares of its no par value common stock at a price of $10.50 per share and 1,348,809 shares of a newly created Series A convertible, perpetual preferred stock (the “Series A preferred stock”) at a price of $10.50 per share.

Effective as of the close of business on June 22, 2017, the Company filed an amendment to the Articles of Incorporation to authorize a class ofnon-voting common stock after obtaining shareholder approval on June 21, 2017. As a result, each share of Series A preferred stock was automatically converted into one share ofnon-voting common stock as of the effective date. Thenon-voting common stock has the same relative rights as, and is identical in all respects with, each other share of common stock of the Company, except that holders ofnon-voting common stock do not have voting rights.

The additional capital allowed Riverview to announce on April 20, 2017, the execution of a definitive business combination agreement to form a strategic partnership withacquire CBT Financial Corp, Clearfield, Pennsylvania.Pennsylvania, in a stock transaction valued at approximately $54.6 million effective October 1, 2017. This action will formmerger created a combined community banking franchise with approximately $1.2 billion of assets and will provideprovides enhanced products and services through 33 banking locations covering 12 Pennsylvania counties.

4. Investment securities:

The amortized cost and fair value of investment securitiesavailable-for-sale aggregated by investment category at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

June 30, 2017

  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

State and municipals:

        

Taxable

  $43,155   $411   $713   $42,853 

Tax-exempt

   5,747    88      5,835 

Mortgage-backed securities:

        

U.S. Government agencies

   1,713    3    5    1,711 

U.S. Government-sponsored enterprises

   8,520    63    93    8,490 

Corporate debt obligations

   9,535      572    8,963 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $68,670   $565   $1,383   $67,852 
  

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2017

  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

State and municipals:

        

Taxable

  $35,424   $392   $684   $35,132 

Tax-exempt

   5,746    55      5,801 

Mortgage-backed securities:

        

U.S. Government agencies

   1,567      31    1,536 

U.S. Government-sponsored enterprises

   5,516    12    105    5,423 

Corporate debt obligations

   9,532      550    8,982 
  

 

   

 

   

 

   

 

 

Total

  $57,785   $459   $1,370   $56,874 
  

 

   

 

   

 

   

 

 

December 31, 2016

  Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

U.S. Treasury securities

  $5,088     $67   $5,021   $5,088     $67   $5,021 

State and municipals:

                

Taxable

   44,045   $234    1,885    42,394    44,045   $234    1,885    42,394 

Tax-exempt

   5,748    3    77    5,674    5,748    3    77    5,674 

Mortgage-backed securities:

                

U.S. Government agencies

   1,905      15    1,890    1,905      15    1,890 

U.S. Government-sponsored enterprises

   9,115    28    247    8,896    9,115    28    247    8,896 

Corporate debt obligations

   9,542      492    9,050    9,542      492    9,050 

Equity securities, financial services

   183    5      188    183    5      188 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $75,626   $270   $2,783   $73,113   $75,626   $270   $2,783   $73,113 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified asavailable-for-sale at JuneSeptember 30, 2017, is summarized as follows:

 

June 30, 2017

  Fair
Value
 

September 30, 2017

  Fair
Value
 

Within one year

  $174   $173 

After one but within five years

   2,132    2,281 

After five but within ten years

   9,874    9,316 

After ten years

   45,471    38,146 
  

 

   

 

 
   57,651    49,916 

Mortgage-backed securities

   10,201    6,958 
  

 

   

 

 

Total

  $67,852   $56,874 
  

 

   

 

 

Securities with a carrying value of $67,852$56,874 and $47,576 at JuneSeptember 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and repurchase agreements 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 acase-by-case basis. At JuneSeptember 30, 2017 and December 31, 2016, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.

The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at JuneSeptember 30, 2017 and December 31, 2016, 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 

June 30, 2017

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

State and municipals:

            

Taxable

  $25,822   $643   $1,992   $70   $27,814   $713 

Tax-exempt

            

Mortgage-backed securities:

            

U.S. Government agencies

   259    5        259    5 

U.S. Government-sponsored enterprises

   4,481    93        4,481    93 

Corporate debt obligation

   3,827    173    5,136    399    8,963    572 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $34,389   $914   $7,128   $469   $41,517   $1,383 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  Less Than 12 Months   12 Months or More   Total 

September 30, 2017

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

State and municipals:

            

Taxable

  $10,533   $227   $13,463   $457   $23,996   $684 

Tax-exempt

            

Mortgage-backed securities:

            

U.S. Government agencies

   1,536    31        1,536    31 

U.S. Government-sponsored enterprises

   3,317    58    1,757    47    5,074    105 

Corporate debt obligation

   3,761    239    5,221    311    8,982    550 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $19,147   $555   $20,441   $815   $39,588   $1,370 
  

 

   

 

   

 

   

 

   

 

   

 

 
  Less Than 12 Months   12 Months or More   Total   Less Than 12 Months   12 Months or More   Total 

December 31, 2016

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

U.S. Treasury securities

  $5,021   $67       $5,021   $67   $5,021   $67       $5,021   $67 

U.S. Government-sponsored enterprises

                        

State and municipals:

                        

Taxable

   30,895    1,876   $282   $9    31,177    1,885    30,895    1,876   $282   $9    31,177    1,885 

Tax-exempt

   3,998    77        3,998    77    3,998    77        3,998    77 

Mortgage-backed securities:

                        

U.S. Government agencies

   1,891    15        1,891    15    1,891    15        1,891    15 

U.S. Government-sponsored enterprises

   7,412    247        7,412    247    7,412    247        7,412    247 

Corporate debt obligation

   9,050    492        9,050    492    9,050    492        9,050    492 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $58,267   $2,774   $282   $9   $58,549   $2,783   $58,267   $2,774   $282   $9   $58,549   $2,783 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Company had 4745 investment securities, consisting of 3830 taxable state and municipal obligations, four11 mortgage-backed securities and four corporate debt obligations and one US Government Agency security that were in unrealized loss positions at JuneSeptember 30, 2017. Of these securities, four16 taxable state and municipal obligation, two mortgage-backed securities and two corporate debt obligations 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 JuneSeptember 30, 2017. There was no OTTI recognized for the three and sixnine months ended JuneSeptember 30, 2017 and 2016.

The Company had 80 investment securities, consisting of three U.S. Treasury notes, 49 taxable state and municipal obligations, seventax-exempt state and municipal obligations, 17 mortgage-backed securities and four corporate debt obligations that were in unrealized loss positions at December 31, 2016. Of these securities, one taxable state and municipal obligation was in a continuous unrealized loss position for twelve months or more.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows. Net deferred loan costs were $873$781 and $1,077 at JuneSeptember 30, 2017 and December 31, 2016.

 

  June 30,
2017
   December 31,
2016
   September 30,
2017
   December 31,
2016
 

Commercial

  $60,057   $51,166   $74,389   $51,166 

Real estate:

        

Construction

   9,491    8,605    9,754    8,605 

Commercial

   302,092    212,550    337,688    212,550 

Residential

   126,895    130,874    131,741    130,874 

Consumer

   6,214    6,148    6,615    6,148 
  

 

   

 

   

 

   

 

 

Total

  $504,749   $409,343   $560,187   $409,343 
  

 

   

 

   

 

   

 

 

The changes in the allowance for loan losses account by major classification of loan for the three and sixnine months ended JuneSeptember 30, 2017 and 2016 are summarized as follows:

 

      Real Estate          

June 30, 2017

  Commercial  Construction   Commercial   Residential  Consumer  Unallocated  Total 

Allowance for loan losses:

          

Beginning Balance

    April 1, 2017

  $625  $160   $2,545   $821  $54  $124  $4,329 

Charge-offs

   (10      (9  (2   (21

Recoveries

        6   1    7 

Provisions

   142   32    420    10   (4  (81  519 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $757  $192   $2,965   $828  $49  $43  $4,834 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

      Real Estate           

June 30, 2017

  Commercial  Construction   Commercial   Residential  Consumer  Unallocated   Total 

Allowance for loan losses:

           

Beginning Balance

    January 1, 2017

  $629  $160   $2,110   $789  $44    $3,732 

Charge-offs

   (10      (16  (7    (33

Recoveries

      3    7   1     11 

Provisions

   138   32    852    48   11  $43    1,124 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

Ending balance

  $757  $192   $2,965   $828  $49  $43   $4,834 
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

   

 

 

 

    Real Estate           Real Estate         

June 30, 2016

  Commercial Construction Commercial Residential Consumer Unallocated Total 

September 30, 2017

  Commercial Construction Commercial Residential Consumer Unallocated   Total 

Allowance for loan losses:

                 

Beginning Balance

April 1, 2016

  $566  $93  $2,211  $754  $30  $63  $3,717 

Beginning Balance July 1, 2017

  $757  $192  $2,965  $828  $49  $43   $4,834 

Charge-offs

   (249 (41 (8 (5  (303   (24   (18     (42

Recoveries

   36    2  1   39    1     1     2 

Provisions

   (44 326  (70 (3 10  (63 156    421  (3 (56 127  (4 125    610 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $558  $170  $2,100  $745  $36  $  $3,609   $1,155  $189  $2,909  $937  $46  $168   $5,404 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

   

 

 
    Real Estate         

September 30, 2017

  Commercial Construction Commercial Residential Consumer Unallocated   Total 

Allowance for loan losses:

         

Beginning Balance January 1, 2017

  $629  $160  $2,110  $789  $44    $3,732 

Charge-offs

   (34   (34 (7    (75

Recoveries

   1   3  7  2     13 

Provisions

   559  29  796  175  7  $168    1,734 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $1,155  $189  $2,909  $937  $46  $168   $5,404 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

 
    Real Estate         

September 30, 2016

  Commercial Construction Commercial Residential Consumer Unallocated   Total 

Allowance for loan losses:

         

Beginning Balance July 1, 2016

  $558  $170  $2,100  $745  $36    $3,609 

Charge-offs

   (1 (1  (25 (8    (35

Recoveries

   25  1   1  7     34 

Provisions

   (72 (13 38  69  5  $2    29 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $510  $157  $2,138  $790  $40  $2   $3,637 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

    Real Estate     ��       Real Estate         

June 30, 2016

  Commercial Construction Commercial Residential Consumer Unallocated   Total 

September 30, 2016

  Commercial Construction Commercial Residential Consumer Unallocated   Total 

Allowance for loan losses:

                  

Beginning Balance January 1, 2016

  $1,298  $202  $2,227  $613  $25  $   $4,365   $1,298  $202  $2,227  $613  $25    $4,365 

Charge-offs

   (723 (249 (65 (8 (16    (1,061   (724 (250 (65 (33 (24    (1,096

Recoveries

   46    2  2     50    70  1   3  10     84 

Provisions

   (63 217  (62 138  25     255    (134 204  (24 207  29  $2    284 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Ending balance

  $558  $170  $2,100  $745  $36  $   $3,609   $510  $157  $2,138  $790  $40  $2   $3,637 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

   

 

 

The allocation of the allowance for loan losses and the related loans by major classifications of loans at JuneSeptember 30, 2017 and December 31, 2016 is summarized as follows:

 

      Real Estate                   Real Estate             

June 30, 2017

  Commercial   Construction   Commercial   Residential   Consumer   Unallocated   Total 

September 30, 2017

  Commercial   Construction   Commercial   Residential   Consumer   Unallocated   Total 

Allowance for loan losses:

                            

Ending balance

  $757   $192   $2,965   $828   $49   $43   $4,834   $1,155   $189   $2,909   $937   $46   $168   $5,404 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: individually evaluated for impairment

   33      205    58        296    25      194    54        273 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: collectively evaluated for impairment

  $724   $192   $2,760   $770   $49   $43   $4,538   $1,130   $189   $2,715   $884   $45   $168   $5,131 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans receivable:

                            

Ending balance

  $60,057   $9,491   $302,092   $126,895   $6,214     $504,749   $74,389   $9,754   $337,688   $131,741   $6,615     $560,187 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: individually evaluated for impairment

   923      3,550    2,533        7,006    799      3,671    2,462        6,932 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: collectively evaluated for impairment

  $59,134   $9,491   $298,542   $124,362   $6,214     $497,743   $73,590   $9,754   $334,017   $129,279   $6,615     $553,255 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
      Real Estate                   Real Estate             

December 31, 2016

  Commercial   Construction   Commercial   Residential   Consumer   Unallocated   Total   Commercial   Construction   Commercial   Residential   Consumer   Unallocated   Total 

Allowance for loan losses:

                            

Ending balance

  $629   $160   $2,110   $789   $44     $3,732   $629   $160   $2,110   $789   $44     $3,732 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: individually evaluated for impairment

   8      140          148    8      140          148 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: collectively evaluated for impairment

  $621   $160   $1,970   $789   $44     $3,584   $621   $160   $1,970   $789   $44     $3,584 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans receivable:

                            

Ending balance

  $51,166   $8,605   $212,550   $130,874   $6,148     $409,343   $51,166   $8,605   $212,550   $130,874   $6,148     $409,343 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: individually evaluated for impairment

   966      3,924    2,515        7,405    966      3,924    2,515        7,405 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Ending balance: collectively evaluated for impairment

  $50,200   $8,605   $208,626   $128,359   $6,148     $401,938   $50,200   $8,605   $208,626   $128,359   $6,148     $401,938 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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 be effected in the future.

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 JuneSeptember 30, 2017 and December 31, 2016:

 

June 30, 2017

  Pass   Special
Mention
   Substandard   Doubtful   Total 

September 30, 2017

  Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial

  $56,500   $1,840   $1,717     $60,057   $70,549   $2,277   $1,563     $74,389 

Real estate:

                    

Construction

   9,081    410        9,491    9,344    410        9,754 

Commercial

   290,502    7,820    3,770      302,092    326,203    7,753    3,732      337,688 

Residential

   125,196    28    1,671      126,895    130,001    28    1,712      131,741 

Consumer

   6,214          6,214    6,615          6,615 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $487,493   $10,098   $7,158     $504,749   $542,712   $10,468   $7,007     $560,187 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2016:

  Pass   Special
Mention
   Substandard   Doubtful   Total   Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial

  $47,765   $1,604   $1,797     $51,166   $47,765   $1,604   $1,797     $51,166 

Real estate:

                    

Construction

   8,605          8,605    8,605          8,605 

Commercial

   200,636    8,063    3,851      212,550    200,636    8,063    3,851      212,550 

Residential

   129,320    28    1,526      130,874    129,320    28    1,526      130,874 

Consumer

   6,148          6,148    6,148          6,148 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $392,474   $9,695   $7,174     $409,343   $392,474   $9,695   $7,174     $409,343 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Information concerning nonaccrual loans by major loan classification at JuneSeptember 30, 2017 and December 31, 2016 is summarized as follows:

 

  June 30,
2017
   December 31,
2016
   September 30,
2017
   December 31,
2016
 

Commercial

  $323   $356   $199   $356 

Real estate:

        

Construction

        

Commercial

   564    359    704    359 

Residential

   815    671    862    671 

Consumer

        
  

 

   

 

   

 

   

 

 

Total

  $1,702   $1,386   $1,765   $1,386 
  

 

   

 

   

 

   

 

 

The major classifications of loans by past due status at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

June 30, 2017

  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
than 90
Days
   Total Past
Due
   Current   Total
Loans
   Loans > 90
Days and
Accruing
 

September 30, 2017

  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
than 90
Days
   Total Past
Due
   Current   Total
Loans
   Loans > 90
Days and
Accruing
 

Commercial

  $1,100   $546   $208   $1,854   $58,203   $60,057     $1,603   $24   $11   $1,638   $72,751   $74,389   

Real estate:

                            

Construction

     409      409    9,082    9,491              9,754    9,754   

Commercial

   681    159    288    1,128    300,964    302,092      569      235    804    336,884    337,688   

Residential

   240    46    656    942    125,953    126,895   $35    818    297    440    1,555    130,186    131,741   

Consumer

   1    1      2    6,212    6,214      3    1      4    6,611    6,615   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $2,022   $1,161   $1,152   $4,335   $500,414   $504,749   $35   $2,993   $322   $686   $4,001   $556,186   $560,187   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

December 31, 2016

  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
than 90
Days
   Total Past
Due
   Current   Total
Loans
   Loans > 90
Days and
Accruing
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
than 90
Days
   Total Past
Due
   Current   Total
Loans
   Loans > 90
Days and
Accruing
 

Commercial

  $580   $   $214   $794   $50,372   $51,166     $580   $   $214   $794   $50,372   $51,166   

Real estate:

                            

Construction

   22        22    8,583    8,605      22        22    8,583    8,605   

Commercial

   784    97    11    892    211,658    212,550      784    97    11    892    211,658    212,550   

Residential

   905    256    592    1,753    129,121    130,874   $357    905    256    592    1,753    129,121    130,874   $357 

Consumer

   6      2    8    6,140    6,148    2    6      2    8    6,140    6,148    2 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $2,297   $353   $819   $3,469   $405,874   $409,343   $359   $2,297   $353   $819   $3,469   $405,874   $409,343   $359 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following tables summarize information concerning impaired loans as of and for the three and sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016, and as of and for the year ended, December 31, 2016 by major loan classification:

 

               This Quarter   Year-to-Date 

June 30, 2017

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

With no related allowance:

              

Commercial

  $840    840     $842   $7   $805   $15 

Real estate:

              

Construction

              

Commercial

   2,685    2,685      2,991    22    3,110    58 

Residential

   2,342    2,342      2,280    26    2,461    59 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   5,867    5,867      6,113    55    6,376    132 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With an allowance recorded:

              

Commercial

   83    83    33    28    1    75    1 

Real estate:

              

Construction

              

Commercial

   865    865    205    865    6    787    12 

Residential

   189    327    58    189    4    94    4 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   1,137    1,275    296    1,082    11    956    17 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

   923    923    33    870    8    880    16 

Real estate:

              

Construction

              

Commercial

   3,550    3,550    205    3,856    28    3,897    70 

Residential

   2,531    2,669    58    2,469    30    2,555    63 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,004   $7,142   $296   $7,195   $66   $7,332   $149 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

              For the Year Ended               This Quarter   Year-to-Date 

December 31, 2016

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

September 30, 2017

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

With no related allowance:

                        

Commercial

  $225   $225   $   $225     $724   $724     $798   $8   $803   $23 

Real estate:

                        

Construction

                        

Commercial

   3,094    3,094      3,168    147    2,753    2,753      2,760    32    2,992    90 

Residential

   2,515    2,652      2,747    130    2,274    2,292      2,304    28    2,408    87 

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   5,834    5,971      6,140    277    5,751    5,769      5,862    68    6,203    200 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

With an allowance recorded:

                        

Commercial

   741    741    8    761    30    75    75   $25    78      76    1 

Real estate:

                        

Construction

                        

Commercial

   830    830    140    840      918    918    194    820    8    798    20 

Residential

             188    326    54    189    2    126    6 

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   1,571    1,571    148    1,601    30    1,181    1,319    273    1,087    10    1,000    27 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Commercial

   966    966    8    986    30    799    799    25    876    8    879    24 

Real estate:

                        

Construction

                        

Commercial

   3,924    3,924    140    4,008    147    3,671    3,671    194    3,580    40    3,790    110 

Residential

   2,515    2,652      2,747    130    2,462    2,618    54    2,493    30    2,534    93 

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $7,405   $7,542   $148   $7,741   $307   $6,932   $7,088   $273   $6,949   $78   $7,203   $227 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

              This Quarter   Year-to-Date               For the Year Ended 

June 30, 2016

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

December 31, 2016

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

With no related allowance:

                        

Commercial

  $848   $848   $   $850   $7   $852   $14   $225   $225     $225   

Real estate:

                        

Construction

                        

Commercial

   3,976    3,976      3,993    45    4,009    90    3,094    3,094      3,168    147 

Residential

   2,726    2,863      2,925    34    2,959    68    2,515    2,652      2,747    130 

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   7,550    7,687      7,768    86    7,820    172    5,834    5,971      6,140    277 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

With an allowance recorded:

                        

Commercial

   131    131    1    132      134      741    741   $8    761    30 

Real estate:

                        

Construction

                        

Commercial

   207    207    2    209      212      830    830    140    840   

Residential

   119    119    33    120    1    120    2           

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   457    457    36    461    1    466    2    1,571    1,571    148    1,601    30 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Commercial

   979    979    1    982    7    986    14    966    966    8    986    30 

Real estate:

                        

Construction

                        

Commercial

   4,183    4,183    2    4,202    45    4,221    90    3,924    3,924    140    4,008    147 

Residential

   2,845    2,982    33    3,045    35    3,079    70    2,515    2,652      2,747    130 

Consumer

                        
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $8,007   $8,144   $36   $8,229   $87   $8,286   $174   $7,405   $7,542   $148   $7,741   $307 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

               This Quarter   Year-to-Date 

September 30, 2016

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

With no related allowance:

              

Commercial

  $838   $838     $843   $8   $849   $22 

Real estate:

              

Construction

              

Commercial

   3,438    3,438      3,455    20    3,823    110 

Residential

   2,709    2,846      2,907    34    2,942    102 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   6,985    7,122      7,205    62    7,614    234 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With an allowance recorded:

              

Commercial

   126    126   $2    128      132   

Real estate:

              

Construction

              

Commercial

   298    298    55    269      231   

Residential

   119    119    33    119    2    120    4 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   543    543    90    516    2    483    4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial

   964    964    2    971    8    981    22 

Real estate:

              

Construction

              

Commercial

   3,736    3,736    55    3,724    20    4,054    110 

Residential

   2,828    2,965    33    3,026    36    3,062    106 

Consumer

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $7,528   $7,665   $90   $7,721   $64   $8,097   $238 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three and sixnine months ended JuneSeptember 30, interest income, related to impaired loans, would have been $28$23 and $54$77 in 2017 and $28$90 and $56$317 in 2016 had the loans been current and the terms of the loans not been modified.

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 $5,635$5,593 at JuneSeptember 30, 2017, $6,208 at December 31, 2016 and $6,853$6,342 at JuneSeptember 30, 2016.

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.

There was one loanwere no loans modified as troubled debt restructuring for the three months ended JuneSeptember 30, 2017 in the amount of $109 and two loans modified as troubled debt restructuring for the sixnine months ended JuneSeptember 30, 2017 in the amount of $138. These loans are residential real estate loans. One loan was modified by court order in a confirmed Chapter 13 bankruptcy plan to reduce the principal balance, with payments to be received through the plan on the lower balance at a reduced rate of interest. One loan was matured with payments to date although financial information indicated questionable repayment ability. An extension was granted under a forbearance agreement at an increase rate of interest due to past due real estate taxes. There were no loans modified as troubled debt restructuring for the three months and sixnine months ending JuneSeptember 30, 2016. There were no commitments to extend additional funds to borrowers

having loans considered troubled debt restructurings at September 30, 2017. There were two residential real estate properties held in other real estate owned totaling $144 at September 30, 2017. There were 12 residential real estate properties in the process of foreclosure totaling $682 at September 30, 2017.

During the three months ending JuneSeptember 30, 2017, there was one default on loans restructured within the last 12 months. During the nine months ending September 30, 2017, there were five defaults on loans restructured within the last twelve months totaling $1,374. These loans were comprised of four residential real estate loans and one commercial real estate loan. As of September 30, 2017, the defaults were cured on three of the four residential real estate loans with one residential real estate loan remaining past due in the30-69 day category. During the three months and nine months ended September 30, 2016, there were no defaults on loans restructured within the last 12 months. During the six months ending June 30, 2017, there were four defaults on loans restructured within the last twelve months totaling $1,229. These loans were comprised of four residential real estate loans. Each of these loans defaulted as they were all more than 30 days past due as of June 30, 2017. The effect of these defaults on the allowance for loan losses was negligible as all loans were well secured and the delinquencies were promptly cured. During the three months and six months ending June 30, 2016, there was one default on loans restructured within the last 12 months totaling $64.

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 ASC310-30, “Loan and Debt Securities Acquired with Deteriorated Credit Quality” and are identified as “Purchased Credit Impaired Loans”.

As a result of the merger with Citizens, effective December 31, 2015, the Bank identified ten purchased credit impaired (“PCI”) loans. As part of the consolidation with Union, effective November 1, 2013, the Bank identified fourteen 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 thenon-accretable discount. Thenon-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 thenon-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 thenon-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 following is a summary of the loans acquired in the Union mergerand Citizens mergers, as of November 1, 2013, the datedates of the consolidation:

 

  Purchased
Credit
Impaired
Loans
   Purchased
Non-
Impaired
Loans
   Total
Purchased
Loans
   Purchased
Credit
Impaired
Loans
   Purchased
Non-
Impaired
Loans
   Total
Purchased
Loans
 

Union

      

Contractually required principal and interest at acquisition

  $10,290   $92,704   $102,994   $11,184   $174,484   $185,668 

Contractual cash flows not expected to be collected

   (5,487   (9,492   (14,979   (5,724   (23,009   (28,733
  

 

   

 

   

 

   

 

   

 

   

 

 

Expected cash flows at acquisition

   4,803    83,212    88,015    5,460    151,475    156,935 

Interest component of expected cash flows

   (386   (12,278   (12,664   (603   (23,119   (23,722
  

 

   

 

   

 

   

 

   

 

   

 

 

Basis in acquired loans at acquisition – estimated fair value

  $4,417   $70,934   $75,351 

Basis in acquired loans at acquisition - estimated fair value

  $4,857   $128,356   $133,213 
  

 

   

 

   

 

   

 

   

 

   

 

 

The unpaid principal balances and the related carrying amount of Union and Citizens acquired loans as of JuneSeptember 30, 2017 and December 31, 2016 were as follows:

 

  June 30,
2017
   December 31,
2016
   September 30,
2017
   December 31,
2016
 

Credit impaired purchased loans evaluated individually for incurred credit losses

        

Outstanding balance

  $773   $793   $1,216   $1,401 

Carrying Amount

   451    463    730    887 

Other purchased loans evaluated collectively for incurred credit losses

        

Outstanding balance

   33,755    38,901    72,449    84,743 

Carrying Amount

   33,321    38,077    71,864    83,670 

Total Purchased Loans

        

Outstanding balance

   34,528    39,694    73,665    86,144 

Carrying Amount

  $33,772   $38,540   $72,594   $84,557 

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

 

   Three Months Ended   Six Months Ended 
   June 30,
2017
   June 30,
2016
   June 30,
2017
   June 30,
2016
 

Balance – beginning of period

  $158   $259   $164   $307 

Accretion recognized during the period

   (14   (21   (27   (115

Net reclassification fromnon-accretable to accretable

   8    13    15    59 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance – end of period

  $152   $251   $152   $251 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of the loans acquired in the Citizens’ merger as of December 31, 2015, the effective date of the merger:

   Purchased
Credit
Impaired
Loans
   Purchased
Non-
Impaired
Loans
   Total
Purchased
Loans
 

Citizens

      

Contractually required principal and interest at acquisition

  $894   $81,780   $82,674 

Contractual cash flows not expected to be collected

   (237   (13,517   (13,754
  

 

 

   

 

 

   

 

 

 

Expected cash flows at acquisition

   657    68,263    68,920 

Interest component of expected cash flows

   (217   (10,841   (11,058
  

 

 

   

 

 

   

 

 

 

Basis in acquired loans at acquisition – estimated fair value

  $440   $57,422   $57,862 
  

 

 

   

 

 

   

 

 

 

The unpaid principal balances and the related carrying amount of Citizens acquired loans as of June 30, 2017 and December 31, 2016 were as follows:

   June 30,
2017
   December 31,
2016
 

Credit impaired purchased loans evaluated individually for incurred credit losses

    

Outstanding balance

  $509   $608 

Carrying Amount

   340    424 

Other purchased loans evaluated collectively for incurred credit losses

    

Outstanding balance

   41,857    45,842 

Carrying Amount

   41,672    45,593 

Total Purchased Loans

    

Outstanding balance

   42,366    46,450 

Carrying Amount

  $42,012   $46,017 

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

  Three Months Ended   Six Months Ended   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  June 30,
2017
   June 30,
2016
   June 30,
2017
   June 30,
2016
   2017   2016   2017   2016 

Balance – beginning of period

  $165   $213   $206   $217 

Balance - beginning of period

  $313   $457   $370   $524 

Accretion recognized during the period

   (7   (8   (17   (14   (32   (410   (76   (539

Net reclassification fromnon-accretable to accretable

   3    1    (28   3    (2   326    (15   388 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Balance – end of period

  $161   $206   $161   $206 

Balance - end of period

  $279   $373   $279   $373 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The Company is a party to financial instruments withoff-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 JuneSeptember 30, 2017, totaled $105,163,$86,876, consisting of $64,448$48,695 in commitments to extend credit, $36,951$34,521 in unused portions of lines of credit and $3,764$3,660 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, 2016, totaled $58,475, consisting of $27,829 in commitments to extend credit, $26,729 in unused portions of lines of credit and $3,917 in standby letters of credit.

6. Other assets:

The components of other assets at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

  June 30,
2017
   December 31,
2016
   September 30,
2017
   December 31,
2016
 

Other real estate owned

  $205   $625   $144   $625 

Bank owned life insurance

   12,020    11,857    17,128    11,857 

Restricted equity securities

   1,762    1,845    2,186    1,845 

Deferred tax assets

   6,873    7,402    6,904    7,402 

Other assets

   2,868    2,083    3,339    2,083 
  

 

   

 

   

 

   

 

 

Total

  $23,728   $23,812   $29,701   $23,812 
  

 

   

 

   

 

   

 

 

7. Fair value estimates:

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

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

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

 

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

 

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

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.

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.

Loans held for sale: The carrying value of loans held for sale as reported on the balance sheet approximate fair value.

Net loans: For adjustable-rate loans thatre-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of othernon-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.

Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.

Restricted equity securities:The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.

Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from suchlow-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.

Short-term borrowings: The carrying values of short-term borrowings approximate fair value.

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.

Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.

Off-balance sheet financial instruments:

The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values ofoff-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value ofoff-balance sheet financial instruments was not material at JuneSeptember 30, 2017 and December 31, 2016.

Assets and liabilities measured at fair value on a recurring basis at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

  Fair Value Measurement Using   Fair Value Measurement Using 

June 30, 2017

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

September 30, 2017

  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

  $42,853     $42,853     $35,132     $35,132   

Tax-exempt

   5,835      5,835      5,801      5,801   

Mortgage-backed securities:

                

U.S. Government agencies

   1,711      1,711      1,536      1,536   

U.S. Government-sponsored enterprises

   8,490      8,490      5,423      5,423   

Corporate debt obligations

   8,963      8,963      8,982      8,982   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $67,852   $   $67,852     $56,874   $   $56,874   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
  Fair Value Measurement Using 

December 31, 2016

  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

  $5,021     $5,021   

State and municipals:

        

Taxable

   42,394      42,394   

Tax-exempt

   5,674      5,674   

Mortgage-backed securities:

        

U.S. Government agencies

   1,890      1,890   

U.S. Government-sponsored enterprises

   8,896      8,896   

Corporate debt obligations

   9,050      9,050   

Equity securities, financial services

   188   $188     
  

 

   

 

   

 

   

 

 

Total

  $73,113   $188   $72,925   
  

 

   

 

   

 

   

 

 

   Fair Value Measurement Using 

December 31, 2016

  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

  $5,021     $5,021   

State and municipals:

        

Taxable

   42,394      42,394   

Tax-exempt

   5,674      5,674   

Mortgage-backed securities:

        

U.S. Government agencies

   1,890      1,890   

U.S. Government-sponsored enterprises

   8,896      8,896   

Corporate debt obligations

   9,050      9,050   

Equity securities, financial services

   188   $188     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $73,113   $188   $72,925   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assets and liabilities measured at fair value on a nonrecurring basis at JuneSeptember 30, 2017 and December 31, 2016 are summarized as follows:

 

   Fair Value Measurement Using 

June 30, 2017

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

Loans held for sale

  $1,037     $1,037   

Other real estate owned

   205       $205 

Impaired loans, net of related allowance

   841        841 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $2,083     $1,037   $1,046 
  

 

 

   

 

 

   

 

 

   

 

 

 

  Fair Value Measurement Using 

September 30, 2017

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

Loans held for sale

  $519     $519   

Other real estate owned

   144       $144 

Impaired loans, net of related allowance

   908        908 
  

 

   

 

   

 

   

 

 

Total

  $1,571     $519   $1,052 
  

 

   

 

   

 

   

 

 
  Fair Value Measurement Using   Fair Value Measurement Using 

December 31, 2016

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

Loans held for sale

  $652     $652     $652     $652   

Other real estate owned

   625       $625    625       $625 

Impaired loans, net of related allowance

   1,424        1,424    1,424        1,424 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $2,701     $652   $2,049   $2,701     $652   $2,049 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Fair value of other real estate owned is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

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 JuneSeptember 30, 2017 and December 31, 2016:

 

   Quantitative Information about Level 3 Fair Value Measurements 
   Fair Value          Range 

June 30, 2017

  Estimate   Valuation Techniques  Unobservable Input   (Weighted Average) 

Other real estate owned

  $205   Appraisal of collateral   Appraisal adjustments    14.0% to 75.0% (46.1)
       Liquidation expenses    7.0% to 11.0% (7.4)

Impaired loans

  $841   Appraisal of collateral   Appraisal adjustments    0.0% to 0.0% (0.0)
       Liquidation expenses    7.0% to 7.0% (7.0)
   Quantitative Information about Level 3 Fair Value Measurements 
   Fair Value          Range 

December 31, 2016

  Estimate   Valuation Techniques  Unobservable Input   (Weighted Average) 

Other real estate owned

  $625   Appraisal of collateral   Appraisal adjustments    22.0% to 82.0% (45.0)
       Liquidation expenses    3.0% to 6.0% (5.0)

Impaired loans

  $1,424   Discounted cash flow   Discount rate adjustments    3.75% to 5.50% (4.3)
       Liquidation expenses    3.0% to 7.0% (4.5)

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2017

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Other real estate owned

$144Appraisal of collateral

Appraisal adjustments

14.0% to 41.0% (32.4)%

Liquidation expenses

7.0% to 7.0% (7.0)%

Impaired loans

$908Appraisal of collateral

Appraisal adjustments

0.0% to 0.0% (0.0)%

Liquidation expenses

7.0% to 7.0% (7.0)%
Quantitative Information about Level 3 Fair Value Measurements

December 31, 2016

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Other real estate owned

$625Appraisal of collateral

Appraisal adjustments

22.0% to 82.0% (45.0)%

Liquidation expenses

3.0% to 6.0% (5.0)%

Impaired loans

$1,424Discounted cash flow

Discount rate adjustments

3.75% to 5.50% (4.3)%

Liquidation expenses

3.0% to 7.0% (4.5)%

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The carrying and fair values of the Company’s financial instruments at JuneSeptember 30, 2017 and December 31, 2016 and their placement within the fair value hierarchy are as follows:

 

      Fair Value Hierarchy       Fair Value Hierarchy 

June 30, 2017

  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)
 

September 30, 2017

  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

  $15,677   $15,677   $15,677       $8,425   $8,425   $8,425     

Investment securities

   67,852    67,852     $67,852      56,874    56,874     $56,874   

Loans held for sale

   1,037    1,037      1,037      519    519      519   

Net loans

   499,915    499,891       $499,891    554,783    553,818       $553,818 

Accrued interest receivable

   1,651    1,651      1,651      1,995    1,995      1,995   

Restricted equity securities

   1,762    1,762    1,762        2,186    2,186    2,186     

Financial liabilities:

                    

Deposits

  $523,895   $511,848     $511,848     $574,950   $562,256     $562,256   

Short-term borrowings

   30,000    30,000      30,000      37,250    37,250      37,250   

Long-term debt

   11,589    11,257      11,257      6,503    6,503      6,503   

Accrued interest payable

   194    194      194      213    213      213   
      Fair Value Hierarchy       Fair Value Hierarchy 

December 31, 2016

  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)
   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

  $19,120   $19,120   $19,120       $19,120   $19,120   $19,120     

Investment securitiesavailable-for-sale

   73,113    73,113    188   $72,925      73,113    73,113    188   $72,925   

Loans held for sale

   652    652      652      652    652      652   

Net loans

   405,611    407,561       $407,561    405,611    407,561       $407,561 

Accrued interest receivable

   1,726    1,726      1,726      1,726    1,726      1,726   

Restricted equity securities

   1,845    1,845    1,845        1,845    1,845    1,845     

Financial liabilities:

                    

Deposits

  $452,560   $438,744     $438,744     $452,560   $438,744     $438,744   

Short-term borrowings

   31,500    31,500      31,500      31,500    31,500      31,500   

Long-term debt

   11,154    11,148      11,148      11,154    11,148      11,148   

Accrued interest payable

   192    192      192      192    192      192   

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

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 Form10-K for the year ended December 31, 2016.

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 Form10-K for the year ended December 31, 2016. 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 Form10-K for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission on March 29, 2017.

Operating Environment:

The United States economy grew at a stronger pace in the secondthird quarter of 2017 compared to the same period last year andbut declined slightly from the firstsecond quarter of 2017 as a result of improvements in consumer spending, nonresidential fixed investment and net exports.2017. The gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 2.6%3.0% in the secondthird quarter of 2017 compared to 2.2%2.8% in the secondthird quarter of 2016 and 1.2%3.1% in the firstsecond quarter of 2017. The consumer price index for the last 12 months rose 1.6%2.2% ending June,September, 2017. This inflation measure has been declining slightlyaccelerating since February,June, 2017 when it was 2.7%1.6%. Excluding food and energy, the preferred price index of theThe Federal Open Market Committee (“FOMC”) rose at 0.9% annualized in the second quarter of 2017 and continued to be below the FOMC’s inflation target of 2.0%. Despite the

reduction in inflation, the FOMClast changed rates on June 14, 2017 where it increased the federal funds target rate for the second time in 2017 to a range of 1.00% to 1.25%. The improvement in second quarter growthFOMC has continued to take the stance that the current target range is accommodative and it may cause the FOMC to take additional monetary policy actions in the near term which shouldto increase general market rates. Accordingly, these interest rate increases may have an adverse impact on our loan growth, asset quality and fund costs.

Review of Financial Position:

Total assets increased $85,193,$138,331, or 15.7%25.5%, to $628,241$681,379 at JuneSeptember 30, 2017, from $543,048 at December 31, 2016. Loans, net increased to $504,749$560,187 at JuneSeptember 30, 2017, compared to $409,343 at December 31, 2016, an increase of $95,406,$150,844, or 23.3%36.9%. The increase in net loans during the first six months of 2017 was attributable to the hiring of multiple teams of seasoned lenders having established customer relationships in new and existing markets. Investment securities decreased $5,261,$16,239, or 7.2%22.2% in the sixnine months ended JuneSeptember 30, 2017. Noninterest-bearing deposits increased $2,164,$2,282, while interest-bearing deposits increased $69,171$120,108 in the first sixnine months ofended September 30, 2017. Total stockholders’ equity increased $15,595,$15,459, or 37.2%36.9%, to $57,515$57,379 at JuneSeptember 30, 2017 from $41,920 atyear-end 2016. On January 20, 2017, the Company announced the successful completion of a $17.0 million private placement of common and preferred securities. The additional capital not only afforded the Company the ability to significantly grow its loan portfolio but more notably the capital raise allowed us to announce on April 20, 2017, the execution of a definitive business combination agreement to form a strategic partnership withacquire CBT Financial Corp., the parent company of CBT Bank, in a stock transaction valued at approximately $54,568 effective October 1, 2017. This action will formformed a combined community banking franchise with approximately $1.2 billion ofin assets and will provideprovides enhanced products and services through 33 banking locations covering 12 Pennsylvania counties. The transaction is expected to close in the fourth quarter of 2017. For the sixnine months ended JuneSeptember 30, 2017, total assets averaged $584,031,$611,477, an increase of $44,888$75,143 from $539,143$536,334 for the same period in 2016. For the secondthird quarter of 2017, total assets, loans, net and deposits increased $27,868, $40,268$55,761, $62,753 and $27,388, respectively.$48,994, respectively, compared to the prior quarter.

Investment Portfolio:

The Company’s entire investment portfolio is held asavailable-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 securitiesavailable-for-sale totaled $67,852$56,874 at JuneSeptember 30, 2017, a decrease of $5,261,$16,239, or 7.2%22.2% from $73,113 at December 31, 2016.

For the sixnine months ended JuneSeptember 30, 2017, the investment portfolio averaged $74,246, an increase$71,251, a decrease of $1,972$814 compared to $72,274$72,065 for the same period last year. Thetax-equivalent yield on the investment portfolio increased 16seven basis points to 3.46%3.42% for the sixnine months ended JuneSeptember 30, 2017, from 3.30%3.35% for the comparable period of 2016. Moreover, thetax-equivalent yield infor the secondthird quarter of 2017 increased twodecreased 14 basis points from 3.45% in3.47% for the firstsecond quarter of 2017.

Securitiesavailable-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 loss, included as a separate component of stockholders’ equity of $540,$601, net of deferred income taxes of $278,$310, at JuneSeptember 30, 2017, and $1,659, net of deferred income taxes of $854, at December 31, 2016.

The Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.

Loan Portfolio:

Loan growth increased significantly in the first six months of 2017. Loans, net, increased to $504,749$560,187 at JuneSeptember 30, 2017 from $409,343 at December 31, 2016, an increase of $95,406,$150,844, or 23.3%36.9%. The increase reflectedWe experienced growth in commercial, construction, commercial real estate and consumer loans, partially offset by a decrease in residential real estateall major sectors of loans. Business loans, including commercial, construction and commercial real estate loans, increased $99,319,$149,510, or 36.5%54.9%, to $371,640$421,831 at JuneSeptember 30, 2017 from $272,321 at December 31, 2016. Retail loans, including residential real estate and consumer loans, declined $3,913,increased $1,334, or 2.9%1.0%, to $133,109$138,356 at the end of the first six months ofSeptember 30, 2017 from $137,022 atyear-end 2016.

For the secondthird quarter of 2017, loans, net grew $40,268,$55,438, or 8.7%11.0%. Business loans increased $42,468,$50,191, while retail loans decreased $2,200increased $5,247 during the secondthird quarter of 2017.

For the sixnine months ended JuneSeptember 30, 2017, loans, net averaged $447,685,$478,033, an increase of $43,841,$75,155, or 10.9%18.7% compared to $403,844$402,878 for the same period of 2016. Thetax-equivalent yield on the loan portfolio was 4.32%4.35% for the sixnine months ended JuneSeptember 30, 2017, a 1821 basis point decrease from the comparable period last year. Thetax-equivalent yield on the loan portfolio increased fiveincrease three basis points during the secondthird quarter of 2017 from 4.30%the 4.35%tax-equivalent yield in the firstsecond quarter of 2017.

In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments withoff-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 ason-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 JuneSeptember 30, 2017, totaled $105,163,$86,876, consisting of $64,448$48,695 in commitments to extend credit, $36,951$34,521 in unused portions of lines of credit and $3,764$3,660 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, 2016, totaled $58,475, consisting of $27,829 in commitments to extend credit, $26,729 in unused portions of lines of credit and $3,917 in standby letters of credit.

Asset Quality:

National, Pennsylvania and market area unemployment rates at JuneSeptember 30, 2017 and 2016 are summarized as follows:

 

  June 30,
2017
 June 30,
2016
   September 30,
2017
 September 30,
2016

United States

   4.4 4.9  4.2% 4.9%

Pennsylvania (statewide)

   5.0 5.5  4.8% 5.5%

Berks County

   4.9 5.3  4.8% 5.0%

Dauphin County

   4.8 5.1  4.7% 4.8%

Lebanon

  4.4% 4.4%

Lycoming

   6.0 6.9  5.5% 6.3%

Northumberland County

   5.7 6.3  5.3% 5.9%

Perry County

   4.3 4.9  4.4% 4.6%

Schuylkill County

   6.0 6.4  5.9% 6.1%

Somerset County

   5.9 7.2  5.8% 6.3%

Employment conditions in 2017 improved for the United States, Commonwealth of Pennsylvania and all of the Counties in which we have branch locations. The lowest unemployment rate in 2017 for all the Counties we serve was 4.3%4.4% which was in Lebanon and Perry County.Counties. The decrease in unemployment rates may have a positive impact on economic growth within these areas and could have a corresponding effect on our business by increasing loan demand and improving asset quality.

Our asset quality improved in the first sixnine months ofended September 30, 2017. Nonperforming assets decreased $1,034,$1,098, or 12.6%13.4% to $7,141$7,077 at JuneSeptember 30, 2017, from $8,175 at December 31, 2016. We experienced a decrease in restructured loans, accruing loans past due 90 days or more and foreclosed assets, which more than offset the increase in nonaccrual loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 1.4%1.3% at JuneSeptember 30, 2017 compared to 2.0% at December 31, 2016.

Loans on nonaccrual status increased $316$379 to $1,702$1,765 at JuneSeptember 30, 2017 from $1,386 at December 31, 2016. The increase in nonaccrual loans was due to increases of $205$345 in commercial real estate loans and $144$191 in residential real estate loans partially offset partially by a $33$157 decrease in commercial loans. Accruing troubled debt restructured loans declined $606,$637, or 10.4%11.0%, to $5,199$5,168 at JuneSeptember 30, 2017 from $5,805 at December 31, 2016. Accruing loans past due 90 days or more declined $324,$359, while other real estate owned decreased $420$481 during the sixnine months ended JuneSeptember 30, 2017.

For the three months ended JuneSeptember 30, 2017, nonperforming assets improved to $7,141,$7,077, a decrease of $931$64 from $8,072$7,141 at March 31, 2017.September 30, 2016. There were decreases in all categories of nonperforming assets including nonaccrual, accruing troubled debt restructured loans, accruing loans past due 90 days or more and other real estate owned.owned, partially offset by an 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. During the first half of 2017, we continuedWe continue to focus our efforts to maintainon 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 December 13, 2006, 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 a 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 $1,102$1,672 to $4,834$5,404 at JuneSeptember 30, 2017, from $3,732 at the end of 2016. The increase in the allowance was primarily attributable to the significant loan growth in the first half of 2017. For the sixnine months ended JuneSeptember 30, 2017, net charge-offs were $22,$62, or 0.01%0.02%, of average loans outstanding, a $989$950 decrease compared to $1,011,$1,012, or 0.50%0.34% of average loans outstanding in the same period of 2016. Net charge-offs totaled $14$40 in the secondthird quarter of 2017 as compared to $264$1 for the same period last year.

Deposits:

We attract the majority of our deposits from within our seveneight county market area that stretches from Schuylkill County in the eastern part of Pennsylvania to Somerset County in the southwestern part of Pennsylvania 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 sixnine months ended JuneSeptember 30, 2017, total deposits increased to $523,895$574,950 from $452,560 at December 31, 2016. Noninterest-bearing accounts increased $2,164,$2,282, while interest-bearing accounts increased $69,171$120,108 in the sixnine months ended JuneSeptember 30, 2017. Interest-bearing transaction accounts, including NOW, money market and savings accounts, increased $63,619,$104,949, or 24.7%40.7%, to $321,281$362,611 at JuneSeptember 30, 2017 from $257,662 at December 31, 2016. Total time deposits increased $5,552$15,159 to $126,518$136,125 at JuneSeptember 30, 2017 from $120,966 at December 31, 2016. Time deposits less than $100 increased $3,519,$6,768, or 4.8%9.2%, while time deposits of $100 or more increased $2,033,$8,391, or 4.3%17.6%. For the three months ended JuneSeptember 30, 2017, total deposits increased $27,388. Growth$51,055 with growth in NOW, money market,all categories except savings and time deposits more than offset declines in noninterest bearing deposits.accounts.

For the first sixnine months ended September 30, interest-bearing deposits averaged $418,776$440,638 in 2017 compared to $390,330$391,990 in 2016. The cost of interest-bearing deposits was 0.58%0.61% in the first half of 2017 compared to 0.48% for the same period last year.0.47% in 2016. For the sixnine months ended JuneSeptember 30, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.65%0.69% in 2017 compared to 0.54%0.53% in 2016. The cost of interest-bearing liabilities increased nineseven basis points when comparing the secondthird quarter of 2017 with the firstsecond quarter of 2017.

Corresponding with recent FOMC actions, interest rates have increased from historic lows that existed for an extended period. All deposit rates have increased and as such, customers have continued to be attracted to interest-bearingnon-maturity deposits to provide flexibility in the event of additional increases in general market rates in the near term.

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”) and the FHLB. At JuneSeptember 30, 2017, short-term borrowings totaled $30,000$37,250 compared to $31,500 at December 31, 2016, all of which were borrowed under the Bank’s Open Repo Plus line with the FHLB. The average cost of short-term borrowings was 103118 basis points in the first half ofnine months ended September 30, 2017 and 58 basis points during the same period last year. Long-term debt totaled $11,589$6,503 at JuneSeptember 30, 2017 as compared to $11,154 at December 31, 2016. The average cost of long-term debt was 2.77%3.11% in the first half ofnine months ended September 30, 2017 and 2.65%2.67% 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 andoff-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 economic uncertainty and a prolonged era of historically low market rates, it has become challenging to manage IRR. Due to these factors, 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, 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 Board of Directors, 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 cumulativeone-year RSA/RSL ratio equaled 0.860.79 at JuneSeptember 30, 2017. Given the recent actions of the FOMC and the potential for rates to increase in the future, the focus of ALCO has been to move towards a positive static gap position.

The current position at JuneSeptember 30, 2017, indicates that the amount of RSL repricing within one year would exceed that of RSA, thereby causing increases in market rates, to slightly decrease 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 aone-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. Model results at JuneSeptember 30, 2017, produced similar results from those indicated by theone-year static gap position. Given an instantaneous and parallel shift in interest rates of plus 100 basis points, our projected net interest income for the 12 months ending JuneSeptember 30, 2018, would decrease 1.70%1.23% 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;

 

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 JuneSeptember 30, 2017. Our noncore funds at JuneSeptember 30, 2017, 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 JuneSeptember 30, 2017, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 6.86%6.80%, while our net short-term noncore funding ratio, noncore funds maturing withinone-year, less short-term investments to assets equaled 6.02%6.54%. Comparatively, our overall noncore dependence ratio improved fromyear-end 2016 when it was 6.85%. Similarly, our net short-term noncore funding ratio was 7.36% atyear-end, indicating that our reliance on noncore funds has decreased.

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 $3,443increased $46 during the sixnine months ended JuneSeptember 30, 2017. Cash and cash equivalents decreased $6,898$6,571 for the same period last year. For the sixnine months ended JuneSeptember 30, 2017, net cash outflowsinflows of $375$596 from operating activities and $88,187$137,854 from investingfinancing activities were partially offset by a net cash inflowoutflow of $85,119$138,404 from financinginvesting activities. For the same period of 2016, net cash inflows of $2,688$2,944 from operating activities and $14,540$15,555 from investing activities were more than offset by a net cash outflow of $24,126$25,070 from financing activities.

Operating activities usedprovided net cash of $375$596 for the first half ofnine months ended September 30, 2017 and provided net cash of $2,688$2,944 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $88,187$138,404 for the sixnine months ended JuneSeptember 30, 2017. For the comparable period in 2016, investing activities provided net cash of $14,540.$15,555. In 2017, an increase in lending activities was the primary factor causing the net cash outflow from investing activities. Investment portfolio activities along with a decrease in lending were the predominant factors causing the net cash inflow from investing activities in 2016.

Financing activities provided net cash of $85,119$137,854 for the sixnine months ended JuneSeptember 30, 2017 and used net cash of $24,126$25,070 for the same period last year. Deposit gathering is a predominant financing activity. During the sixnine months ended JuneSeptember 30, 2017 and 2016, deposits increased $71,335$122,390 and $13,105,$10,651, respectively. TheAlso impacting financing activities in 2017 was a capital issuance which accounted for a net cash inflow of $15,941 also significantly influenced financing activities in 2017.$15,941.

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 $57,515,$57,379, or $11.79$11.73 per common share, at JuneSeptember 30, 2017, and $41,920, or $12.95 per common share, at December 31, 2016. The increase in equity in the first half ofnine months ended September 30, 2017 was a result of the completion of the sale of approximately $17.0 million, before expenses, in common and preferred equity before expenses, to accredited investors and qualified institutional buyers through the private placement of 269,885 shares of common stock and 1,348,809 shares of a newly created series of convertible, perpetual preferred stock. All shares of convertible, perpetual preferred stock were subsequently converted to common nonvoting shares at an exchange ratio of 1:1. Stockholders’ equity was also affected by recognizing a net lossearnings of $388,$13, cash dividend payments of $1,339,$2,010, compensation costs of $15$23 relating to option grants, the issuance of common stock to Riverview’s ESPP, 401k and dividend reinvestment plans of $247$373, the issuance of common stock related to the exercise of stock options of $61, and other comprehensive income of $1,119,$1,058, resulting from net unrealized gains in the investment portfolio.

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 Tier I and total risk-based capital ratios are strong and have consistently exceeded the well capitalized regulatory capital ratios of 8.0% and 10.0% required for well capitalized institutions. The ratio of Tier 1 capital to risk-weighted assets andoff-balance sheet items was 10.8%9.8% at JuneSeptember 30, 2017 and 9.9% at December 31, 2016. The total risk-based capital ratio was 11.7%10.7% at JuneSeptember 30, 2017 and 10.9% at December 31, 2016. In addition, the Bank is required to maintain a minimum common equity Tier 1 capital to risk-weighted assets of 5.75% for the calendar year of 2017. The Bank’s common equity Tier I capital to risk-weighted assets ratio was 10.8%9.8% at JuneSeptember 30, 2017 and 9.9% at December 31, 2016. The Bank’s Leverage ratio, which equaled 9.1%8.3% at JuneSeptember 30, 2017 and 7.7% at December 31, 2016, exceeded the minimum of 4.0% for capital adequacy purposes. Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized under regulatory capital guidelines. There are no conditions or negative events since this notification that we believe have changed the Bank’s category.

Review of Financial Performance:

The Company reported a net lossearnings of $388$13 or $(0.08)$0.03 per basic and diluted weighted average common share for the first sixnine months ofended September 30, 2017, compared to net income of $1,608$2,579 or $0.50$0.80 per basic and diluted weighted average common share, for the comparable period of 2016. The net lossearnings recognized in the first sixnine months ofended September 30, 2017 was a direct result ofdirectly affected from incurring certain costs involved in implementing strategic initiatives to enhance shareholder value through asset growth provided by organic and inorganic opportunities. On January 20, 2017, Riverview announced the successful completion of a $17.0 million private placement of common and preferred securities. The additional capital afforded Riverview the ability to significantly grow its loan portfolio through hiring multiple teams of experienced and established lenders to serve new and existing markets. More notably the capital raise allowed Riverview to announce on April 20, 2017, the execution of a definitive business combination agreement to form a strategic partnership with CBT Financial Corp.Corp, which was effective October 1, 2017. This action will formcreated a combined community banking franchise with approximately $1.2 billion of assets and will provideprovides enhanced products and services through 33 banking locations covering 12 Pennsylvania counties. Merger related costs included in noninterest expense totaled $375 for the nine months ended September 30, 2017.

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, 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 comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearinginterest-

bearing liabilities.Tax-exempt loans and investments carrypre-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 atax-equivalent basis using the prevailing federal statutory tax rate of 34.0% in 2017 and 2016.

For the three months ended JuneSeptember 30,tax-equivalent net interest income increased $500$675 to $5,006$5,511 in 2017 from $4,506$4,836 in 2016. The net interest spread decreased to 3.47%3.46% for the three months ended JuneSeptember 30, 2017 from 3.68%3.92% for the three months ended JuneSeptember 30, 2016. Thetax-equivalent net interest margin decreased to 3.58%3.57% for the secondthird quarter of 2017 from 3.75%3.99% for the comparable period of 2016. Thetax-equivalent net interest margin for the firstsecond quarter of 2017 was 3.57%3.58%.

For the three months ended JuneSeptember 30,tax-equivalent interest income on earning assets increased $754$1,156 to $5,815$6,519 in 2017 from $5,062$5,363 in 2016. The yield on earning assets, on a fullytax-equivalent basis, declined six21 basis points for the three months ended JuneSeptember 30, 2017 at 4.16%4.22% as compared to 4.22%4.43% for the three months ended JuneSeptember 30, 2016. Thetax-equivalent yield on loans decreased 1432 basis points for the secondthird quarter of 2017 to 4.35%4.38% from 4.49%4.70% for the secondthird quarter of 2016. Average loans increased to $474,987$537,740 for the quarter ended JuneSeptember 30, 2017 compared to $400,508$400,427 for the same period in 2016. Thetax-equivalent interest earned on loans was $5,151$5,938 for the three month period ended JuneSeptember 30, 2017 compared to $4,471$4,730 for the same period in 2016, an increase of $680.$1,208. Comparing the secondthird quarters of 2017 and 2016, tax equivalent interest income on investments improved $59decreased $72 as average volumes grew $1,943declined $6,292 andtax-equivalent yield increased 23decreased 11 basis points.

Total interest expense increased $253$481 to $809$1,008 for the three months ended JuneSeptember 30, 2017 from $556$527 for the three months ended JuneSeptember 30, 2016. Deposit costs increased to 0.62%0.67% in the secondthird quarter of 2017 from 0.47%0.45% in the secondthird quarter of 2016. The average volume of interest bearing liabilities increased to $469,017$524,506 for the three months ended JuneSeptember 30, 2017 as compared to $413,154$408,670 for the three months ended JuneSeptember 30, 2016. The cost of funds increased to 0.69%0.76% for the secondthird quarter of 2017 as compared to 0.54%0.51% for the same period in 2016.

For the sixnine months ended JuneSeptember 30,tax-equivalent net interest income increased $369$1,045 to $9,493$15,004 in 2017 from $9,124$13,959 in 2016. Overall, aA favorable volume variance of $1,313$2,500 from average earning asset growth exceeding average growth in interest bearing liabilities more than offset an unfavorable rate variance of $944$1,455 from a decline in the net interest margin. The net interest spread decreased 2330 basis points for the sixnine months ended JuneSeptember 30, 2017 to 3.47% from 3.70%3.77% for the sixnine months ended JuneSeptember 30, 2016. Thetax-equivalent net interest margin for the sixnine months ended JuneSeptember 30 was 3.58% in 2017 compared to 3.77%3.85% in 2016.

For the sixnine months ended JuneSeptember 30, 2017,tax-equivalent interest income increased $686$1,843 to $10,931$17,450 as compared to $10,245$15,607 for the sixnine months ended JuneSeptember 30, 2016. A positive volume variance in interest income of $1,289$2,673 attributable to changes in the average balance of earning assets was offset by a negative rate variance of $603$830 due to a reduction in the yield on earning assets. Average volumes of earning assets increased $48,505$76,137 comparing the sixnine months ended JuneSeptember 30, 2017 and 2016. Thetax-equivalent yield on earning assets decreased 1214 basis points in 2017 compared to 2016.

Total interest expense increased $317$798 to $1,438$2,446 for the sixnine months ended JuneSeptember 30, 2017 from $1,121$1,648 for the sixnine months ended JuneSeptember 30, 2016. A change in the mixvolume of average interest bearing liabilities caused interest expense to decrease $24.increase $173. The average volume of interest bearing liabilities increased to $446,526$472,805 for the sixnine months ended JuneSeptember 30, 2017, as compared to $420,253$416,363 for the sixnine months ended JuneSeptember 30, 2016. In addition, we recognized an unfavorable rate variance of $341$625 from an 11a 16 basis point increase in the overall cost of funds. Cost of funds increased to 0.65%0.69% for the sixnine months ended JuneSeptember 30, 2017 as compared to 0.54%0.53% for the same period in 2016.

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 includeavailable-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 of 34%.

 

  Six months ended   Nine months ended 
  June 30, 2017 June 30, 2016   September 30, 2017 September 30, 2016 
  Average
Balance
   Interest   Yield/
Rate
 Average
Balance
   Interest   Yield/
Rate
   Average
Balance
   Interest   Yield/
Rate
 Average
Balance
   Interest   Yield/
Rate
 

Assets:

                      

Earning assets:

                      

Loans

                      

Taxable

  $431,345   $9,274    4.34 $391,264   $8,764    4.50  $459,703   $14,991    4.36 $390,602   $13,362    4.57

Tax exempt

   16,340    326    4.02 12,580    264    4.22   18,330    547    3.99 12,276    395    4.30

Investments

                      

Taxable

   68,499    1,133    3.34 56,550    843    3.00   65,504    1,610    3.29 59,430    1,383    3.11

Tax exempt

   5,747    141    4.95 15,724    344    4.40   5,747    212    4.93 12,635    424    4.48

Interest bearing deposits

   10,398    47    0.91 9,336    28    0.60   9,975    78    1.05 9,348    41    0.59

Federal funds sold

   2,497    10    0.81 867    2    0.46   1,812    12    0.89 643    2    0.42
  

 

   

 

    

 

   

 

     

 

   

 

    

 

   

 

   

Total earning assets

   534,826    10,931    4.12 486,321    10,245    4.24   561,071    17,450    4.16 484,934    15,607    4.30

Less: allowance for loan losses

   4,112      4,060        4,409      3,928     

Other assets

   53,317      56,882        54,815      55,328     
  

 

      

 

       

 

      

 

     

Total assets

  $584,031      $539,143       $611,477      $536,334     
  

 

      

 

       

 

      

 

     

Liabilities and Stockholders’ Equity:

                      

Interest bearing liabilities:

                      

Money market accounts

  $85,004   $310    0.74 $43,314   $78    0.36  $92,860   $548    0.79 $45,263   $127    0.37

NOW accounts

   128,386    199    0.31 138,722    215    0.31   140,186    409    0.39 139,267    313    0.30

Savings accounts

   80,771    63    0.16 72,235    74    0.21   80,836    85    0.14 73,660    103    0.19

Time deposits less than $100

   75,558    347    0.93 79,245    311    0.79   76,244    538    0.94 78,740    466    0.79

Time deposits $100 or more

   49,057    281    1.16 56,814    250    0.88   50,512    441    1.17 55,060    366    0.89

Short term borrowings

   16,616    85    1.03 19,522    56    0.58   22,375    197    1.18 13,676    59    0.58

Long-term debt

   11,134    153    2.77 10,400    137    2.65   9,792    228    3.11 10,697    214    2.67
  

 

   

 

    

 

   

 

     

 

   

 

    

 

   

 

   

Total interest bearing liabilities

   446,526    1,438    0.65 420,252    1,121    0.54   472,805    2,446    0.69 416,363    1,648    0.53

Non-interest bearing demand deposits

   75,326      69,308        76,166      69,862     

Other liabilities

   6,116      6,523        5,975      6,614     

Stockholders’ equity

   56,063      43,060        56,531      43,495     
  

 

      

 

       

 

      

 

     

Total liabilities and stockholders’ equity

  $584,031      $539,143       $611,477      $536,334     
  

 

   

 

    

 

   

 

     

 

   

 

    

 

   

 

   
  

 

      

 

     

Net interest income/spread

    $9,493    3.47   $9,124    3.70    $15,004    3.47   $13,959    3.77
    

 

      

 

       

 

      

 

   

Net interest margin

       3.58      3.77       3.58      3.85

Tax-equivalent adjustments:

                      

Loans

    $111      $90       $186      $134   

Investments

     48       117        72       144   
    

 

      

 

       

 

      

 

   

Total adjustments

    $159      $207       $258      $278   
    

 

      

 

       

 

      

 

   

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 JuneSeptember 30, 2017.

For the three and sixnine months ended JuneSeptember 30, the provision for loan losses totaled $519$610 and $1,124$1,734 in 2017, and $156$29 and $255$284 in 2016. The increase in the provision in 2017 was a direct result of loan growth.

Noninterest Income:

Noninterest income for the secondthird quarter decreased $251,$188, or 23.8%18.4%, to $802$835 in 2017 from $1,053$1,023 in 2016. The primary cause of the decrease was a $270$109 reduction in net gains from the sale of investment securitiesavailable-for-sale to $64$43 in the secondthird quarter of 2017 from $334$152 in the secondthird quarter of 2016.

For the sixnine months ended JuneSeptember 30, noninterest income totaled $1,581amounted to $2,416 in 2017, a decrease of $109$297 from $1,690$2,713 in 2016. Wealth management income grew $115, or 34.1%, due to revenues from businesses acquired in 2016. In addition, service charges, fees and commissions and trust income improved $11 and $7, respectively, comparing the first six months of 2017 with 2016. The recognition of a sign on bonus from a credit card vendor was primarily responsiblemost significant factor for the increasedecrease was a $378 decrease in service charges, fees and commissions. Mortgage banking income in 2017 increased $38 as compared with last year despite recent increases in interest rates. Income of bank owned life insurance declined to $147 in the first half of 2017 compared to $158 for the comparable quarter of 2016. Netnet gains recognized on the sale of investment securitiesavailable-for-sale decreased $269 during the first six monthsinvestment securities. Partially offsetting this decrease were improvements of 2017 from $332 for the first six months of 2016.$100 in wealth management income and $33 in mortgage banking income.

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, including FDIC assessment, 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 $796,$834, or 18.8%19.2%, to $5,041$5,167 for the three months ended JuneSeptember 30, 2017, from $4,245$4,333 for the same period last year. The majority of the increase was associated with an increase in salaries and employee benefits expense of $631$594 to $2,757$2,928 for the secondthird quarter of 2017 from $2,126$2,334 for the secondthird quarter of 2016. Net occupancy expense and the net cost of the operation of other real estate ownedexpenses increased $108$77 and $49$163 in the secondthird quarter of 2017 as compared with the same period in 2016.

Noninterest expense increased $1,844,$2,678, or 22.1%21.1%, to $10,204$15,371 for the sixnine months ended JuneSeptember 30, 2017, from $8,360$12,693 for the same period last year. The majority of the increase in salaries and employee benefit expense was a result of implementing the lending team lift out initiative and related costs, as well as staffing atwo full service officeoffices in Berks County in the first quarter of 2017.and Lycoming Counties, respectively. Additions to leased facilities for this newly opened community banking office along with offices to support the lending teams were primarily responsible for the $201,$278, or 18.6%17.2% increase in occupancy and equipment costs. The majority of the increase in other expenses comparing the first sixnine months ofended September 30, 2017 and 2016 was a result of incurring professional feesmerger related expenses related to the announced business combination with CBT Financial Corp.

Income Taxes:

We recorded an income tax benefitexpense of $10$69 for the three months ended JuneSeptember 30, 2017, and income tax expense of $210$454 for the same period last year. For the sixnine months ended JuneSeptember 30, an income tax benefitexpense of $25$44 was recorded, as compared to an income tax expense of $384$838 for the first six monthscomparable period of 2016.

Riverview Financial Corporation

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

Not applicable to a smaller reporting company.

Item 4.Controls and Procedures.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At JuneSeptember 30, 2017, the end of the period covered by this Quarterly Report on Form10-Q, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined inRule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at JuneSeptember 30, 2017, 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—II - OTHER INFORMATION

Item 1. Legal Proceedings

Legal Proceedings

Riverview Bank and two unrelated, third-parties have been named as defendants in a lawsuit brought on behalf of a group of 58 plaintiffs filed on March 31, 2016. The complaint against Riverview Bank relates to an IOLTA account at the Bank and alleges that the Bank failed to properly monitor and detect fraudulent activity engaged in by the owner of the account. The lawsuit seeks damages from the defendants, including the Bank, alleged to be in excess of $11.3 million, treble damages and attorneys’ fees with respect to alleged violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, punitive damages, plus interest and costs. Riverview believes that the allegations against it are without merit and it will continue to defend against plaintiffs’ claims. Even if the litigation were determined adversely to the Bank, the Bank believes the impact on the Bank would not be material.

In the opinion of the Company, after review with legal counsel, there are no other proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would behave a material in relation toeffect on the Company’s 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.

Neither the Company nor any of its property is subject to any material legal proceedings. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of pending and threatened lawsuits will have a material effect on the operating results or financial position of the Company

Item 1A.Risk Factors

Item 1A. Risk Factors

Not required for smaller reporting companies.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults upon Senior Securities

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.Other Information

Item 5. Other Information

Not applicable.

Item 6.Exhibits.

Item 6. Exhibits.

The following Exhibits are incorporated by reference hereto:

 

  31.1  Section 302 Certification of the Chief Executive Officer (Pursuant to Rule13a-14(a)/15d-14(a)).
  31.2  Section 302 Certification of the Chief Financial Officer (Pursuant to Rule13a-14(a)/15d-14(a)).
  32.1  Chief Executive Officer’s §1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).
  32.2  Chief Financial Officer’s §1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).
101  Interactive Data File (XBRL).

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/ Kirk D. Fox

 Kirk D. Fox
 Chief Executive Officer
 (Principal Executive Officer)
Date: August 3,November 14, 2017
By: 

/s/ Scott A. Seasock

 Scott A. Seasock
 Chief Financial Officer
 (Principal Financial Officer)
Date: August 3,November 14, 2017

Exhibit Index

37

Exhibit
No.

Description

  31.1Section 302 Certification of the Chief Executive Officer (Pursuant to Rule13a-14(a)/15d-14(a)).
  31.2Section 302 Certification of the Chief Financial Officer (Pursuant to Rule13a-14(a)/15d-14(a)).
  32.1Chief Executive Officer’s §1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).
  32.2Chief Financial Officer’s §1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).
101Interactive Data File (XBRL).

41