Mid Penn Bancorp Inc 8-K/A, filed Feb 4, 2022
Mid Penn Bancorp Inc (MPB)
About this 8-K/A
Mid Penn Bancorp Inc filed this 8-K/A on February 4, 2022, reporting on events of November 30, 2021.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Amendment No. 1)
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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MID PENN BANCORP, INC.
FORM 8-K/A
Explanatory Note
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired. |
The financial information required by this Item 9.01(a) of Form 8-K is attached as Exhibit 99.2 to this Current Report on Form 8-K/A.
| (b) | Pro Form Financial Information. |
The financial information required by this Item 9.01(b) of Form 8-K is attached as Exhibit 99.3 to this Current Report on Form 8-K/A.
| (d) | Exhibits |
| Exhibit No. |
Description | |
| 99.2 | Unaudited financial statements for Riverview Financial Corporation for the nine months ended September 30, 2021. | |
| 99.3 | Unaudited pro forma condensed combined financial statements as of and for the nine months ended September 30, 2021. | |
| 104 | Cover Page Interactive Date File (embedded within the XBRL document) | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| MID PENN BANCORP, INC. | ||||||
| Date: February 4, 2022 | /s/ Rory G. Ritrievi | |||||
| Rory G. Ritrievi | ||||||
| President and Chief Executive Officer | ||||||
Exhibit 99.2
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Riverview Financial Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except per share data)
| September 30, 2021 |
December 31, 2020 |
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| Assets: |
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| Cash and due from banks |
$ | 10,842 | $ | 13,511 | ||||
| Interest-bearing deposits in other banks |
175,236 | 36,270 | ||||||
| Investment securities available-for-sale |
131,705 | 103,695 | ||||||
| Loans held for sale |
443 | 4,338 | ||||||
| Loans, net |
866,140 | 1,139,239 | ||||||
| Less: allowance for loan losses |
10,834 | 12,200 | ||||||
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| Net loans |
855,306 | 1,127,039 | ||||||
| Premises and equipment, net |
16,983 | 18,147 | ||||||
| Accrued interest receivable |
2,604 | 4,216 | ||||||
| Intangible assets |
1,522 | 1,918 | ||||||
| Other assets |
48,152 | 48,420 | ||||||
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| Total assets |
$ | 1,242,793 | $ | 1,357,554 | ||||
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| Liabilities: |
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| Deposits: |
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| Noninterest-bearing |
$ | 192,556 | $ | 173,600 | ||||
| Interest-bearing |
877,018 | 841,860 | ||||||
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| Total deposits |
1,069,574 | 1,015,460 | ||||||
| Short-term borrowings |
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| Long-term debt |
52,004 | 228,765 | ||||||
| Accrued interest payable |
847 | 1,038 | ||||||
| Other liabilities |
12,792 | 14,859 | ||||||
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| Total liabilities |
1,135,217 | 1,260,122 | ||||||
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| Stockholders’ equity: |
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| Common stock: no par value, authorized 20,000,000 shares; September 30, 2021, issued and outstanding 9,361,967 shares; December 31, 2020, issued and outstanding 9,306,442 shares |
103,127 | 102,662 | ||||||
| Capital surplus |
292 | 292 | ||||||
| Retained earnings (accumulated deficit) |
4,498 | (6,457 | ) | |||||
| Accumulated other comprehensive income (loss) |
(341 | ) | 935 | |||||
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| Total stockholders’ equity |
107,576 | 97,432 | ||||||
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| Total liabilities and stockholders’ equity |
$ | 1,242,793 | $ | 1,357,554 | ||||
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See notes to consolidated financial statements.
1
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(Dollars in thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest income: |
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| Interest and fees on loans: |
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| Taxable |
$ | 10,738 | $ | 11,265 | $ | 32,615 | $ | 31,649 | ||||||||
| Tax-exempt |
180 | 223 | 538 | 704 | ||||||||||||
| Interest and dividends on investment securities available-for-sale: |
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| Taxable |
490 | 360 | 1,537 | 1,291 | ||||||||||||
| Tax-exempt |
144 | 71 | 440 | 176 | ||||||||||||
| Interest on interest-bearing deposits in other banks |
40 | 11 | 64 | 112 | ||||||||||||
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| Total interest income |
11,592 | 11,930 | 35,194 | 33,932 | ||||||||||||
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| Interest expense: |
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| Interest on deposits |
746 | 1,200 | 2,491 | 4,384 | ||||||||||||
| Interest on short-term borrowings |
28 | |||||||||||||||
| Interest on long-term debt |
521 | 304 | 1,752 | 652 | ||||||||||||
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| Total interest expense |
1,267 | 1,504 | 4,243 | 5,064 | ||||||||||||
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| Net interest income |
10,325 | 10,426 | 30,951 | 28,868 | ||||||||||||
| (Recovery of) provision for loan losses |
1,844 | (735 | ) | 5,656 | ||||||||||||
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| Net interest income after (recovery of) provision for loan losses |
10,325 | 8,582 | 31,686 | 23,212 | ||||||||||||
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| Noninterest income: |
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| Service charges, fees and commissions |
1,248 | 1,099 | 5,477 | 3,491 | ||||||||||||
| Commission and fees on fiduciary activities |
250 | 246 | 804 | 669 | ||||||||||||
| Wealth management income |
264 | 220 | 716 | 636 | ||||||||||||
| Mortgage banking income |
104 | 401 | 440 | 900 | ||||||||||||
| Bank owned life insurance investment income |
178 | 192 | 552 | 578 | ||||||||||||
| Net gain on sale of investment securities available-for-sale |
44 | 317 | 815 | |||||||||||||
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| Total noninterest income |
2,088 | 2,158 | 8,306 | 7,089 | ||||||||||||
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| Noninterest expense: |
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| Salaries and employee benefits expense |
4,511 | 5,411 | 14,472 | 15,452 | ||||||||||||
| Net occupancy and equipment expense |
1,040 | 1,428 | 3,084 | 3,676 | ||||||||||||
| Amortization of intangible assets |
132 | 170 | 396 | 509 | ||||||||||||
| Goodwill impairment |
24,754 | |||||||||||||||
| Net cost (benefit) of operation of other real estate owned |
(22 | ) | 51 | (44 | ) | 40 | ||||||||||
| Other expenses |
2,933 | 2,918 | 8,597 | 8,713 | ||||||||||||
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| Total noninterest expense |
8,594 | 9,978 | 26,505 | 53,144 | ||||||||||||
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| Income (loss) before income taxes |
3,819 | 762 | 13,487 | (22,843 | ) | |||||||||||
| Income tax expense (benefit) |
704 | 67 | 2,532 | (49 | ) | |||||||||||
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| Net income (loss) |
3,115 | 695 | 10,955 | (22,794 | ) | |||||||||||
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| Other comprehensive income: |
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| Unrealized gain (loss) on investment securities available-for-sale |
25 | 114 | (1,725 | ) | 2,007 | |||||||||||
| Reclassification adjustment for net gain on sale of investment securities available-for-sale included in net income (loss) |
(44 | ) | (317 | ) | (815 | ) | ||||||||||
| Net change in cash flow hedge |
54 | 49 | 427 | 11 | ||||||||||||
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| Other comprehensive income (loss) |
35 | 163 | (1,615 | ) | 1,203 | |||||||||||
| Income tax expense (benefit) related to other comprehensive income |
8 | 35 | (339 | ) | 253 | |||||||||||
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| Other comprehensive income (loss), net of income taxes |
27 | 128 | (1,276 | ) | 950 | |||||||||||
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| Comprehensive income (loss) |
$ | 3,142 | $ | 823 | $ | 9,679 | $ | (21,844 | ) | |||||||
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| Per share data: |
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| Net income (loss): |
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| Basic |
$ | 0.33 | $ | 0.08 | $ | 1.17 | $ | (2.46 | ) | |||||||
| Diluted |
$ | 0.33 | $ | 0.08 | $ | 1.17 | $ | (2.46 | ) | |||||||
| Average common shares outstanding: |
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| Basic |
9,361,967 | 9,273,666 | 9,353,546 | 9,248,856 | ||||||||||||
| Diluted |
9,390,160 | 9,273,666 | 9,366,293 | 9,248,856 | ||||||||||||
See notes to consolidated financial statements.
2
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands, except per share data)
| For the nine months ended September 30, |
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | |||||||||||||||
| Balance, January 1, 2021 |
$ | 102,662 | $ | 292 | $ | (6,457 | ) | $ | 935 | $ | 97,432 | |||||||||
| Net income |
10,955 | 10,955 | ||||||||||||||||||
| Other comprehensive income, net of income taxes |
(1,276 | ) | (1,276 | ) | ||||||||||||||||
| Issuance under ESPP, 401k and Dividend Reinvestment plans |
266 | 266 | ||||||||||||||||||
| Stock based compensation |
199 | 199 | ||||||||||||||||||
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| Balance, September 30, 2021 |
$ | 103,127 | $ | 292 | $ | 4,498 | $ | (341 | ) | $ | 107,576 | |||||||||
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| Balance, January 1, 2020 |
$ | 102,206 | $ | 112 | $ | 16,140 | $ | (348 | ) | $ | 118,110 | |||||||||
| Net income (loss) |
(22,794 | ) | (22,794 | ) | ||||||||||||||||
| Other comprehensive income, net of income taxes |
950 | 950 | ||||||||||||||||||
| Issuance under ESPP, 401k and Dividend Reinvestment plans |
466 | 466 | ||||||||||||||||||
| Stock based compensation |
78 | 78 | ||||||||||||||||||
| Dividends declared, $0.15 per share |
(1,386 | ) | (1,386 | ) | ||||||||||||||||
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| Balance, September 30, 2020 |
$ | 102,672 | $ | 190 | $ | (8,040 | ) | $ | 602 | $ | 95,424 | |||||||||
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| For the three months ended September 30, |
Common Stock |
Capital Surplus |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Total | |||||||||||||||
| Balance, July 1, 2021 |
$ | 103,058 | $ | 292 | $ | 1,383 | $ | (368 | ) | $ | 104,365 | |||||||||
| Net income |
3,115 | 3,115 | ||||||||||||||||||
| Other comprehensive income, net of income taxes |
27 | 27 | ||||||||||||||||||
| Issuance under ESPP, 401k and Dividend Reinvestment plans |
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| Stock based compensation |
69 | 69 | ||||||||||||||||||
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| Balance, September 30, 2021 |
$ | 103,127 | $ | 292 | $ | 4,498 | $ | (341 | ) | $ | 107,576 | |||||||||
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| Balance, July 1, 2020 |
$ | 102,552 | $ | 161 | $ | (8,735 | ) | $ | 474 | $ | 94,452 | |||||||||
| Net income |
695 | 695 | ||||||||||||||||||
| Other comprehensive income, net of income taxes |
128 | 128 | ||||||||||||||||||
| Issuance under ESPP, 401k and Dividend Reinvestment plans |
120 | 120 | ||||||||||||||||||
| Stock based compensation |
29 | 29 | ||||||||||||||||||
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| Balance, September 30, 2020 |
$ | 102,672 | $ | 190 | $ | (8,040 | ) | $ | 602 | $ | 95,424 | |||||||||
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See notes to consolidated financial statements.
3
Riverview Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands, except per share data)
| For the Nine Months Ended September 30, |
2021 | 2020 | ||||||
| Cash flows from operating activities: |
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| Net income (loss) |
$ | 10,955 | $ | (22,794 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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| Depreciation and amortization of premises and equipment |
1,021 | 952 | ||||||
| (Recovery of) provision for loan losses |
(735 | ) | 5,656 | |||||
| Stock based compensation |
199 | 78 | ||||||
| Net amortization of investment securities available-for-sale |
1,253 | 559 | ||||||
| Net cost (benefit) of operation of other real estate owned |
(44 | ) | 40 | |||||
| Net gain on sale of investment securities available-for-sale |
(317 | ) | (815 | ) | ||||
| Premium on sale of deposits |
(1,602 | ) | ||||||
| Amortization of purchase adjustment on loans |
(174 | ) | (592 | ) | ||||
| Amortization of intangible assets |
396 | 509 | ||||||
| Amortization of assumed discount on long-term debt |
66 | 63 | ||||||
| Amortization of long-term debt insurance costs |
77 | |||||||
| Impairment of goodwill |
24,754 | |||||||
| Deferred income taxes |
421 | (779 | ) | |||||
| Proceeds from sale of loans originated for sale |
17,301 | 26,921 | ||||||
| Net gain on sale of loans originated for sale |
(440 | ) | (900 | ) | ||||
| Loans originated for sale |
(12,966 | ) | (30,487 | ) | ||||
| Bank owned life insurance investment income |
(552 | ) | (578 | ) | ||||
| Net change in: |
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| Accrued interest receivable |
1,612 | (804 | ) | |||||
| Other assets |
1,177 | 2,107 | ||||||
| Accrued interest payable |
(191 | ) | 156 | |||||
| Other liabilities |
(2,067 | ) | (1,545 | ) | ||||
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| Net cash provided by operating activities |
15,390 | 2,501 | ||||||
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| Cash flows from investing activities: |
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| Investment securities available-for-sale: |
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| Purchases |
(74,503 | ) | (42,151 | ) | ||||
| Proceeds from repayments |
13,073 | 8,832 | ||||||
| Proceeds from sales |
30,442 | 27,168 | ||||||
| Proceeds from the sale of other real estate owned |
466 | 355 | ||||||
| Net increase in restricted equity securities |
(412 | ) | (837 | ) | ||||
| Net (increase) decrease in loans |
272,642 | (312,627 | ) | |||||
| Purchases of premises and equipment |
(19 | ) | (1,519 | ) | ||||
| Proceeds from sale of premises and equipment |
162 | |||||||
| Premium paid on bank owned life insurance |
(22 | ) | (22 | ) | ||||
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| Net cash provided by (used in) investing activities |
241,829 | (320,801 | ) | |||||
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| Cash flows from financing activities: |
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| Net increase in deposits |
55,716 | 90,833 | ||||||
| Repayment of long-term debt |
(176,904 | ) | ||||||
| Proceeds from long-term debt |
209,997 | |||||||
| Issuance under ESPP, 401k and DRP plans |
266 | 466 | ||||||
| Cash dividends paid |
(1,386 | ) | ||||||
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| Net cash provided by (used in) financing activities |
(120,922 | ) | 299,910 | |||||
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| Net increase (decrease) in cash and cash equivalents |
136,297 | (18,390 | ) | |||||
| Cash and cash equivalents—beginning |
49,781 | 50,348 | ||||||
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| Cash and cash equivalents—ending |
$ | 186,078 | $ | 31,958 | ||||
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| Supplemental disclosures: |
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| Cash paid during the period for: |
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| Interest |
$ | 4,434 | $ | 4,908 | ||||
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| Federal income taxes |
$ | 1,700 | $ | |||||
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| Supplemental schedule of noncash investing and financing activities: |
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| Other real estate acquired in settlement of loans |
$ | $ | 338 | |||||
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| Transfer of deposits in sale |
$ | 42,191 | $ | |||||
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See notes to consolidated financial statements.
4
Riverview Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Summary of significant accounting policies:
Nature of Operations
Riverview Financial Corporation, (the “Company” or “Riverview”), a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).
Riverview Bank, with 23 full-service offices and three (3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities, and small-to-medium sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, and Schuylkill Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.
Basis of presentation:
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form 10-K, filed on March 11, 2021.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.
The operating results and financial position of the Company for the three and nine months ended as of September 30, 2021, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the outbreak of the Coronavirus (“COVID-19”) pandemic which may adversely affect the Company’s business results of operations and financial condition for an indefinite period.
The impact of the pandemic on Riverview’s financial results is evolving and uncertain. Net interest income and non-interest income may decrease, and credit-related losses may increase in the future if economic activity slows due to COVID-19. We believe that we may experience a material adverse effect on our business, results of operations and financial condition as a result of the COVID-19 pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans, or deferred taxes.
Accounting Standards Adopted in 2021
In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20) — Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”. Subtopic 715-20 addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting — Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
5
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU No. 2019-12 improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.
Recent Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No. 2016-13 requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU No. 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans, and available-for-sale debt securities. In November 2018, the FASB issued ASU No. 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU No. 2019-05 “Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU No. 2016-13 to allow companies to irrevocably elect, upon adoption of ASU No, 2016-13, the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. In November 2019, the FASB issued ASU No. 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic 805-20. In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any day-one regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the allowance for credit losses (“ACL”) is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of the guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.
6
2. Other comprehensive income (loss):
The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale and benefit plan and derivative adjustments.
The components of accumulated other comprehensive income (loss) included in stockholders’ equity at September, 2021 and December 31, 2020 is as follows:
| September 30, 2021 |
December 31, 2020 |
|||||||
| Net unrealized gain (loss) on investment securities available-for-sale |
$ | (80 | ) | $ | 1,962 | |||
| Income tax expense (benefit) |
(17 | ) | 412 | |||||
|
|
|
|
|
|||||
| Net of income (loss) taxes |
(63 | ) | 1,550 | |||||
|
|
|
|
|
|||||
| Benefit plan adjustments |
(951 | ) | (951 | ) | ||||
| Income tax benefit |
(200 | ) | (200 | ) | ||||
|
|
|
|
|
|||||
| Net of income taxes |
(751 | ) | (751 | ) | ||||
|
|
|
|
|
|||||
| Derivative fair value adjustment |
599 | 172 | ||||||
| Income tax benefit |
126 | 36 | ||||||
|
|
|
|
|
|||||
| Net of income taxes |
473 | 136 | ||||||
|
|
|
|
|
|||||
| Accumulated other comprehensive income (loss) |
$ | (341 | ) | $ | 935 | |||
|
|
|
|
|
|||||
Other comprehensive income (loss) and related tax effects for the three and nine months ended September 30, 2021 and 2020 is as follows:
| Three months ended September 30, |
2021 | 2020 | ||||||
| Unrealized gain on investment securities available-for-sale |
$ | 25 | $ | 114 | ||||
| Net gain on the sale of investment securities available-for-sale(1) |
(44 | ) | ||||||
| Net change in derivative fair value |
54 | 49 | ||||||
|
|
|
|
|
|||||
| Other comprehensive income before taxes |
35 | 163 | ||||||
| Income tax expense |
8 | 35 | ||||||
|
|
|
|
|
|||||
| Other comprehensive income |
$ | 27 | $ | 128 | ||||
|
|
|
|
|
|||||
| Nine months ended September 30, |
2021 | 2020 | ||||||
| Unrealized gain (loss) on investment securities available-for-sale |
$ | (1,725 | ) | $ | 2,007 | |||
| Net gain on the sale of investment securities available-for-sale(1) |
(317 | ) | (815 | ) | ||||
| Net change in derivative fair value |
427 | 11 | ||||||
|
|
|
|
|
|||||
| Other comprehensive income (loss) before taxes |
(1,615 | ) | 1,203 | |||||
| Income tax expense (benefit) |
$ | (339 | ) | 253 | ||||
|
|
|
|
|
|||||
| Other comprehensive income (loss) |
$ | (1,276 | ) | $ | 950 | |||
|
|
|
|
|
|||||
| (1) | Represents amounts reclassified out of accumulated other comprehensive income and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income. |
7
3. Earnings per share:
Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2021 and 2020:
| Three months ended September 30, |
2021 | 2020 | ||||||
| Numerator: |
||||||||
| Net income (loss) |
$ | 3,115 | $ | 695 | ||||
|
|
|
|
|
|||||
| Denominator: |
||||||||
| Basic |
9,361,967 | 9,273,666 | ||||||
| Dilutive options |
28,193 | |||||||
|
|
|
|
|
|||||
| Diluted |
9,390,160 | 9,273,666 | ||||||
|
|
|
|
|
|||||
| Earnings per share: |
||||||||
| Basic |
$ | 0.33 | $ | 0.08 | ||||
| Diluted |
$ | 0.33 | $ | 0.08 | ||||
| Nine months ended September 30, |
2021 | 2020 | ||||||
| Numerator: |
||||||||
| Net income (loss) |
$ | 10,955 | $ | (22,794 | ) | |||
|
|
|
|
|
|||||
| Denominator: |
||||||||
| Basic |
9,353,546 | 9,248,856 | ||||||
| Dilutive options |
12,747 | |||||||
|
|
|
|
|
|||||
| Diluted |
9,366,293 | 9,248,856 | ||||||
|
|
|
|
|
|||||
| Earnings per share: |
||||||||
| Basic |
$ | 1.17 | $ | (2.46 | ) | |||
| Diluted |
$ | 1.17 | $ | (2.46 | ) | |||
For the three and nine months ended September 30, 2021 there were 18,200 and 68,412 outstanding stock options, respectively, that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2020 there were 172,964 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.
4. Investment securities:
The amortized cost and fair value of investment securities available-for-sale aggregated by investment category at September 30, 2021 and December 31, 2020 are summarized as follows:
| September 30, 2021 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
| State and municipals: |
||||||||||||||||
| Taxable |
$ | 22,133 | $ | 301 | $ | 258 | $ | 22,176 | ||||||||
| Tax-exempt |
44,196 | 89 | 743 | 43,542 | ||||||||||||
| Mortgage-backed securities: |
||||||||||||||||
| U.S. Government agencies |
35,029 | 680 | 98 | 35,611 | ||||||||||||
| U.S. Government-sponsored enterprises |
15,177 | 186 | 24 | 15,339 | ||||||||||||
| Corporate debt obligations |
15,250 | 64 | 277 | 15,037 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 131,785 | $ | 1,320 | $ | 1,400 | $ | 131,705 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
8
| December 31, 2020 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
| State and municipals: |
||||||||||||||||
| Taxable |
$ | 22,317 | $ | 400 | $ | 143 | $ | 22,574 | ||||||||
| Tax-exempt |
17,988 | 423 | 16 | 18,395 | ||||||||||||
| Mortgage-backed securities: |
||||||||||||||||
| U.S. Government agencies |
26,051 | 940 | 26,991 | |||||||||||||
| U.S. Government-sponsored enterprises |
24,627 | 442 | 17 | 25,052 | ||||||||||||
| Corporate debt obligations |
10,750 | 56 | 123 | 10,683 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 101,733 | $ | 2,261 | $ | 299 | $ | 103,695 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at September 30, 2021, is summarized as follows:
| September 30, 2021 |
Fair Value |
|||
| Within one year |
$ | 770 | ||
| After one but within five years |
929 | |||
| After five but within ten years |
22,955 | |||
| After ten years |
56,101 | |||
|
|
|
|||
| 80,755 | ||||
| Mortgage-backed securities |
50,950 | |||
|
|
|
|||
| Total |
$ | 131,705 | ||
|
|
|
|||
Securities with a fair value of $89,410 and $71,676 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits as required or permitted by law.
Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At September 30, 2021 and December 31, 2020, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.
The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| September 30, 2021 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| State and municipals: |
||||||||||||||||||||||||
| Taxable |
$ | 3,453 | $ | 60 | 7,625 | $ | 198 | $ | 11,078 | $ | 258 | |||||||||||||
| Tax-exempt |
33,175 | 740 | 631 | 3 | 33,806 | 743 | ||||||||||||||||||
| Mortgage-backed securities: |
||||||||||||||||||||||||
| U.S. Government agencies |
13,716 | 98 | 13,716 | 98 | ||||||||||||||||||||
| U.S. Government-sponsored enterprises |
4,650 | 16 | 1,013 | 8 | 5,663 | 24 | ||||||||||||||||||
| Corporate debt obligations |
9,473 | 277 | 9,473 | 277 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 64,467 | $ | 1,191 | $ | 9,269 | $ | 209 | $ | 73,736 | $ | 1,400 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
9
| Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| December 31, 2020 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
| State and municipals: |
||||||||||||||||||||||||
| Taxable |
$ | 11,586 | $ | 143 | $ | $ | $ | 11,586 | $ | 143 | ||||||||||||||
| Tax-exempt |
1,737 | 16 | 1,737 | 16 | ||||||||||||||||||||
| Mortgage-backed securities: |
||||||||||||||||||||||||
| U.S. Government agencies |
5,960 | 17 | 5,960 | 17 | ||||||||||||||||||||
| U.S. Government-sponsored enterprises |
||||||||||||||||||||||||
| Corporate debt obligations |
3,378 | 123 | 3,378 | 123 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 19,283 | $ | 176 | $ | 3,378 | $ | 123 | $ | 22,661 | $ | 299 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The Company had 59 investment securities, consisting of 10 taxable state and municipal obligations, 32 tax-exempt state and municipal obligations, four U.S. Government agencies, five U.S. Government-sponsored enterprises and eight corporate debt obligation that were in unrealized loss positions at September 30, 2021. Of these securities, none of the securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, resulting from changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at September 30, 2021. There was no OTTI recognized for the three and nine months ended September 30, 2021 and 2020.
The Company had 16 investment securities, consisting of nine taxable state municipal obligations, three tax-exempt state municipal obligations, three mortgage-backed securities and one corporate obligation that were in unrealized loss positions at December 31, 2020. Of these securities, one corporate obligation was in a continuous unrealized loss position for twelve months or more.
5. Loans, net, and allowance for loan losses:
The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2021 and December 31, 2020 are summarized as follows. Net deferred loan costs were $602 at September 30, 2021 and net deferred loan costs were $701 at December 31, 2020.
| September 30, 2021 |
December 31, 2020 |
|||||||
| Commercial |
$ | 139,375 | $ | 359,080 | ||||
| Real estate: |
||||||||
| Construction |
41,772 | 73,402 | ||||||
| Commercial |
497,203 | 502,495 | ||||||
| Residential |
181,870 | 197,596 | ||||||
| Consumer |
5,920 | 6,666 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 866,140 | $ | 1,139,239 | ||||
|
|
|
|
|
|||||
The Company participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program (“PPP”), a multi-billion dollar specialized low-interest loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of September 30, 2021, the Company had PPP loans totaling $23,579, net of unearned loan fees of $599, included in commercial loans. PPP loans totaled $251,810, net of unearned fees of $5,075 as of December 31, 2020.
10
The change in the allowance for loan losses account by major loan classifications for the three and nine months ended September 30, 2021 and 2020 is summarized as follows:
| Real Estate | ||||||||||||||||||||||||||||
| September 30, 2021 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Beginning Balance, July 1, 2021 |
$ | 1,416 | $ | 753 | $ | 6,365 | $ | 1,858 | $ | 111 | $ | 364 | $ | 10,867 | ||||||||||||||
| Charge-offs |
(15 | ) | (9 | ) | (33 | ) | (57 | ) | ||||||||||||||||||||
| Recoveries |
3 | 5 | 16 | 24 | ||||||||||||||||||||||||
| Provisions |
(202 | ) | (143 | ) | 186 | 131 | 1 | 27 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance |
$ | 1,202 | $ | 610 | $ | 6,556 | $ | 1,980 | $ | 95 | $ | 391 | $ | 10,834 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Real Estate | Real Estate | |||||||||||||||||||||||||||
| September 30, 2021 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Beginning Balance, January 1, 2021 |
$ | 1,705 | $ | 1,117 | $ | 6,494 | $ | 2,427 | $ | 142 | $ | 315 | $ | 12,200 | ||||||||||||||
| Charge-offs |
(225 | ) | (37 | ) | (373 | ) | (9 | ) | (118 | ) | (762 | ) | ||||||||||||||||
| Recoveries |
60 | 8 | 2 | 61 | 131 | |||||||||||||||||||||||
| Provisions |
(338 | ) | (470 | ) | 427 | (440 | ) | 10 | 76 | (735 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance |
$ | 1,202 | $ | 610 | $ | 6,556 | $ | 1,980 | $ | 95 | $ | 391 | $ | 10,834 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Real Estate | ||||||||||||||||||||||||||||
| September 30, 2020 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Beginning Balance, July 1, 2020 |
$ | 1,685 | $ | 741 | $ | 5,078 | $ | 2,070 | $ | 162 | $ | $ | 9,736 | |||||||||||||||
| Charge-offs |
(42 | ) | (42 | ) | ||||||||||||||||||||||||
| Recoveries |
2 | 57 | 27 | 86 | ||||||||||||||||||||||||
| Provisions |
173 | 145 | 1,015 | 490 | 21 | 1,844 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance |
$ | 1,860 | $ | 886 | $ | 6,150 | $ | 2,560 | $ | 168 | $ | $ | 11,624 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Real Estate | ||||||||||||||||||||||||||||
| September 30, 2020 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Beginning Balance, January 1, 2020 |
$ | 1,953 | $ | 473 | $ | 3,115 | $ | 1,820 | $ | 155 | $ | $ | 7,516 | |||||||||||||||
| Charge-offs |
(899 | ) | (595 | ) | (2 | ) | (243 | ) | (1,739 | ) | ||||||||||||||||||
| Recoveries |
11 | 59 | 1 | 120 | 191 | |||||||||||||||||||||||
| Provisions |
795 | 413 | 3,571 | 741 | 136 | 5,656 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance |
$ | 1,860 | $ | 886 | $ | 6,150 | $ | 2,560 | $ | 168 | $ | $ | 11,624 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
11
The allocation of the allowance for loan losses and related loans by classifications of loans at September 30, 2021 and December 31, 2020 is summarized as follows:
| Real Estate | ||||||||||||||||||||||||||||
| September 30, 2021 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Ending balance |
$ | 1,202 | $ | 610 | $ | 6,556 | $ | 1,980 | $ | 95 | $ | 391 | $ | 10,834 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| individually evaluated for impairment |
48 | 48 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| collectively evaluated for impairment |
1,202 | 610 | 6,508 | 1,980 | 95 | 391 | 10,786 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| purchased credit impaired loans |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Loans receivable: |
||||||||||||||||||||||||||||
| Ending balance |
$ | 139,375 | $ | 41,772 | $ | 497,203 | $ | 181,870 | $ | 5,920 | $ | $ | 866,140 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| individually evaluated for impairment |
608 | 7,447 | 2,522 | 10,577 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| collectively evaluated for impairment |
138,767 | 41,772 | 489,563 | 179,210 | 5,920 | 855,232 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| purchased credit impaired loans |
$ | $ | $ | 193 | $ | 138 | $ | $ | $ | 331 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Real Estate | ||||||||||||||||||||||||||||
| December 31, 2020 |
Commercial | Construction | Commercial | Residential | Consumer | Unallocated | Total | |||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||||||
| Ending balance |
$ | 1,705 | $ | 1,117 | $ | 6,494 | $ | 2,427 | $ | 142 | $ | 315 | $ | 12,200 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| individually evaluated for impairment |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| collectively evaluated for impairment |
1,705 | 1,117 | 6,494 | 2,427 | 142 | 315 | 12,200 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| purchased credit impaired loans |
$ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Loan’s receivable: |
||||||||||||||||||||||||||||
| Ending balance |
$ | 359,080 | $ | 73,402 | $ | 502,495 | $ | 197,596 | $ | 6,666 | $ | $ | 1,139,239 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| individually evaluated for impairment |
1,565 | 6,444 | 2,494 | 10,503 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| collectively evaluated for impairment |
357,515 | 73,402 | 495,674 | 194,939 | 6,666 | 1,128,196 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ending balance: |
||||||||||||||||||||||||||||
| purchased credit impaired loans |
$ | $ | $ | 377 | $ | 163 | $ | $ | $ | 540 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Non-homogeneous loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:
| • | Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention. |
12
| • | Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification. |
| • | Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
| • | Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. |
| • | Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may occur in the future. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance. |
The following tables present the major classifications of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at September 30, 2021 and December 31, 2020:
| September 30, 2021 |
Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Commercial |
$ | 138,433 | $ | $ | 942 | $ | $ | 139,375 | ||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction |
40,092 | 1,680 | 41,772 | |||||||||||||||||
| Commercial |
450,401 | 29,197 | 17,605 | 497,203 | ||||||||||||||||
| Residential |
178,210 | 1,109 | 2,551 | 181,870 | ||||||||||||||||
| Consumer |
5,920 | 5,920 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 813,056 | $ | 30,306 | $ | 22,778 | $ | $ | 866,140 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2020 |
Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
| Commercial |
$ | 353,758 | $ | 3,147 | $ | 2,175 | $ | $ | 359,080 | |||||||||||
| Real estate: |
||||||||||||||||||||
| Construction |
63,838 | 1,817 | 7,747 | 73,402 | ||||||||||||||||
| Commercial |
451,190 | 29,180 | 22,125 | 502,495 | ||||||||||||||||
| Residential |
191,775 | 2,670 | 3,151 | 197,596 | ||||||||||||||||
| Consumer |
6,666 | 6,666 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 1,067,227 | $ | 36,814 | $ | 35,198 | $ | $ | 1,139,239 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2021 and December 31, 2020. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.
| Accrual Loans | ||||||||||||||||||||||||||||
| September 30, 2021 |
30-59 Days Past Due |
60-89 Days Past Due |
90 or More Days Past Due |
Total Past Due |
Current | Nonaccrual Loans |
Total Loans | |||||||||||||||||||||
| Commercial |
$ | 531 | $ | $ | $ | 531 | $ | 138,835 | $ | 9 | $ | 139,375 | ||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
185 | 1,703 | 1,888 | 39,884 | 41,772 | |||||||||||||||||||||||
| Commercial |
63 | 63 | 495,552 | 1,395 | 497,010 | |||||||||||||||||||||||
| Residential |
629 | 252 | 177 | 1,058 | 179,785 | 889 | 181,732 | |||||||||||||||||||||
| Consumer |
6 | 9 | 15 | 5,905 | 5,920 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 1,351 | $ | 324 | $ | 1,880 | $ | 3,555 | $ | 859,961 | $ | 2,293 | $ | 865,809 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Purchased credit impaired loans |
331 | |||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Total Loans |
$ | 866,140 | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
13
| Accrual Loans | ||||||||||||||||||||||||||||
| December 31, 2020 |
30-59 Days Past Due |
60-89 Days Past Due |
90 or More Days Past Due |
Total Past Due |
Current | Nonaccrual Loans |
Total Loans | |||||||||||||||||||||
| Commercial |
$ | 64 | $ | 1 | $ | $ | 65 | $ | 358,496 | $ | 519 | $ | 359,080 | |||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
73,402 | 73,402 | ||||||||||||||||||||||||||
| Commercial |
1,238 | 4,063 | 5,301 | 496,785 | 32 | 502,118 | ||||||||||||||||||||||
| Residential |
2,125 | 2,993 | 146 | 5,264 | 191,299 | 870 | 197,433 | |||||||||||||||||||||
| Consumer |
22 | 20 | 10 | 52 | 6,614 | 6,666 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 3,449 | $ | 7,077 | $ | 156 | $ | 10,682 | $ | 1,126,596 | $ | 1,421 | $ | 1,138,699 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Purchased credit impaired loans |
540 | |||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Total Loans |
$ | 1,139,239 | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
The following tables summarize information concerning impaired loans as of and for the three and nine months ended September 30, 2021 and 2020, and as of and for the year ended, December 31, 2020 by major loan classification, excluding purchased credit impaired loans:
| This Quarter | Year-to-Date | |||||||||||||||||||||||||||
| September 30, 2021 |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||||
| With no related allowance: |
||||||||||||||||||||||||||||
| Commercial |
$ | 608 | $ | 608 | $ | 791 | $ | 8 | $ | 1,243 | $ | 58 | ||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
479 | 643 | ||||||||||||||||||||||||||
| Commercial |
1,757 | 1,757 | 1,214 | 16 | 1,949 | 58 | ||||||||||||||||||||||
| Residential |
2,660 | 2,790 | 2,581 | 27 | 2,567 | 89 | ||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
5,025 | 5,155 | 5,065 | 51 | 6,402 | 205 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| With an allowance recorded: |
||||||||||||||||||||||||||||
| Commercial |
||||||||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||||||
| Commercial |
5,883 | 5,883 | 48 | 5,907 | 110 | 4,958 | 253 | |||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
5,883 | 5,883 | 48 | 5,907 | 110 | 4,958 | 253 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Commercial |
608 | 608 | 791 | 8 | 1,243 | 58 | ||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
479 | 643 | ||||||||||||||||||||||||||
| Commercial |
7,640 | 7,640 | 48 | 7,121 | 126 | 6,907 | 311 | |||||||||||||||||||||
| Residential |
2,660 | 2,790 | 2,581 | 27 | 2,567 | 89 | ||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 10,908 | $ | 11,038 | $ | 48 | $ | 10,972 | $ | 161 | $ | 11,360 | $ | 458 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
14
| Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
For the Year Ended | |||||||||||||||||
| December 31, 2020 |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||
| With no related allowance: |
||||||||||||||||||||
| Commercial |
$ | 1,565 | $ | 1,675 | $ | 1,356 | $ | 416 | ||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction |
||||||||||||||||||||
| Commercial |
6,821 | 6,821 | 4,392 | 311 | ||||||||||||||||
| Residential |
2,657 | 2,787 | 2,493 | 146 | ||||||||||||||||
| Consumer |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
11,043 | 11,283 | 8,241 | 873 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| With an allowance recorded: |
||||||||||||||||||||
| Commercial |
561 | |||||||||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction |
||||||||||||||||||||
| Commercial |
391 | 65 | ||||||||||||||||||
| Residential |
||||||||||||||||||||
| Consumer |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
952 | 65 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Commercial |
1,565 | 1,675 | 1,917 | 416 | ||||||||||||||||
| Real estate: |
||||||||||||||||||||
| Construction |
||||||||||||||||||||
| Commercial |
6,821 | 6,821 | 4,783 | 376 | ||||||||||||||||
| Residential |
2,657 | 2,787 | 2,493 | 146 | ||||||||||||||||
| Consumer |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 11,043 | $ | 11,283 | $ | 9,193 | $ | 938 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| This Quarter | Year-to-Date | |||||||||||||||||||||||||||
| September 30, 2020 |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||||
| With no related allowance: |
||||||||||||||||||||||||||||
| Commercial |
$ | 1,732 | $ | 1,842 | $ | 1,896 | $ | 154 | $ | 1,630 | $ | 354 | ||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||||||
| Commercial |
3,124 | 3,510 | 6,141 | 10 | 4,944 | 76 | ||||||||||||||||||||||
| Residential |
2,652 | 2,782 | 2,700 | 12 | 2,564 | 118 | ||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
7,508 | 8,134 | 10,737 | 176 | 9,138 | 548 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| With an allowance recorded: |
||||||||||||||||||||||||||||
| Commercial |
121 | 121 | $ | 32 | 121 | 121 | ||||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||||||
| Commercial |
5,769 | 5,759 | 1 | 2,885 | 61 | 2,045 | 65 | |||||||||||||||||||||
| Residential |
||||||||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
5,890 | 5,890 | 33 | 3,006 | 61 | 2,166 | 65 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Commercial |
1,853 | 1,963 | 32 | 2,017 | 154 | 1,751 | 354 | |||||||||||||||||||||
| Real estate: |
||||||||||||||||||||||||||||
| Construction |
||||||||||||||||||||||||||||
| Commercial |
8,893 | 9,279 | 1 | 9,026 | 71 | 6,989 | 141 | |||||||||||||||||||||
| Residential |
2,652 | 2,782 | 2,700 | 12 | 2,564 | 118 | ||||||||||||||||||||||
| Consumer |
||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 13,398 | $ | 14,024 | $ | 33 | $ | 13,743 | $ | 237 | $ | 11,304 | $ | 613 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
15
For the three and nine months ended September 30, interest income related to impaired loans, would have been $21 and $70 in 2021 and $33 and $89 in 2020 had the loans been current and the terms of the loans not been modified.
Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:
| • | Rate Modification—A modification in which the interest rate is changed to a below market rate. |
| • | Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed. |
| • | Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time. |
| • | Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above. |
| • | Combination Modification—Any other type of modification, including the use of multiple categories above. |
Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled $9,206 at September 30, 2021, $9,985 at December 31, 2020 and $9,893 at September 30, 2020.
There were no loans modified as troubled debt restructures during the three and nine months ended September 30, 2021. There were no loans modified as troubled debt restructures during the third quarter of 2020 and nine loans modified during the nine months ended September 30, 2020 totaling $7,817.
During the three and nine months ended September 30, 2021, there were no defaults on restructured loans. During the three months ended September 30, 2020, there were no defaults on restructured loans and one default on a restructured loan totaling $368 during the nine months ended September 30, 2020.
6. Other assets:
The components of other assets at September 30, 2021 and December 31, 2020 are summarized as follows:
| September 30, 2021 |
December 31, 2020 |
|||||||
| Other real estate owned |
$ | $ | 422 | |||||
| Bank owned life insurance |
31,999 | 31,425 | ||||||
| Restricted equity securities |
2,171 | 1,759 | ||||||
| Deferred tax assets |
3,825 | 3,907 | ||||||
| Lease right-of-use assets |
1,516 | 2,278 | ||||||
| Other assets |
8,641 | 8,629 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 48,152 | $ | 48,420 | ||||
|
|
|
|
|
|||||
7. Fair value estimates:
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.
In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced
16
liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:
| • | Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| • | Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| • | Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.
The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:
Investment securities: The fair values for U. S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.
Interest rate swap hedges: The fair value of interest rate swaps is based on an external derivative model using input data of the valuation date.
Assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:
| Fair Value Measurement Using | ||||||||||||||||
| September 30, 2021 |
Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
| State and Municipals: |
||||||||||||||||
| Taxable |
$ | 22,176 | $ | 22,176 | ||||||||||||
| Tax-exempt |
43,542 | 43,542 | ||||||||||||||
| Mortgage-backed securities: |
||||||||||||||||
| U.S. Government agencies |
35,611 | 35,611 | ||||||||||||||
| U.S. Government-sponsored enterprises |
15,339 | 15,339 | ||||||||||||||
| Corporate debt obligations |
15,037 | 15,037 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 131,705 | $ | 131,705 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest rate swap hedge |
$ | 599 | $ | 599 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
17
| December 31, 2020 |
Fair Value Measurement Using | |||||||||||||||
| Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| State and municipals: |
||||||||||||||||
| Taxable |
$ | 22,574 | $ | 22,574 | ||||||||||||
| Tax-exempt |
18,395 | 18,395 | ||||||||||||||
| Mortgage-backed securities: |
||||||||||||||||
| U.S. Government agencies |
26,991 | 26,991 | ||||||||||||||
| U.S. Government-sponsored enterprises |
25,052 | 25,052 | ||||||||||||||
| Corporate debt obligations |
10,683 | 10,683 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 103,695 | $ | 103,695 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Interest rate swap hedge |
$ | 172 | $ | 172 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Other real estate owned: Assets acquired through loan foreclosure are recorded at fair value less estimated costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a charge-off. If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals, current sale value assessments by real estate agents or pending offers to acquire by independent buyers and is updated at least annually. The Company classifies other real estate owned in level 3 of the fair value hierarchy.
Impaired loans: The fair value of impaired loans is specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans. Collateral may include but is not necessarily limited to real estate, personal or business assets including vehicles, equipment, inventory, accounts receivable or marketable securities. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business equipment is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial statements. Likewise, values for inventory, accounts receivable or marketable security collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate or custodian account statements (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income.
Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2021 and December 31, 2020 are summarized as follows:
| Fair Value Measurement Using | ||||||||||||||||
| September 30, 2021 |
Amount | (Level 1) Quoted Prices in Active Markets for Identical Assets |
(Level 2) Significant Other Observable Inputs |
(Level 3) Significant Unobservable Inputs |
||||||||||||
| Impaired loans, net of related allowance |
$ | 5,835 | $ | 5,835 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 5,835 | $ | 5,835 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2020 |
Fair Value Measurement Using | |||||||||||||||
| Amount | (Level 1) Quoted Prices in Active Markets for Identical Assets |
(Level 2) Significant Other Observable Inputs |
(Level 3) Significant Unobservable Inputs |
|||||||||||||
| Other real estate owned |
$ | 422 | $ | 422 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 422 | $ | 422 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
18
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at September 30, 2021 and December 31, 2020.
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
| September 30, 2021 |
Fair Value Estimate |
Valuation Techniques | Unobservable Input | Range (Weighted Average) |
||||||||||||
| Impaired loans |
$5,835 | Appraisal of collateral | Appraisal adjustments | 0.0% to 0.0% (0.0%) | ||||||||||||
| Liquidation expenses | 7.0% to 7.0% (7.0%) | |||||||||||||||
| Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
| December 31, 2020 |
Fair Value Estimate |
Valuation Techniques | Unobservable Input | Range (Weighted Average) |
||||||||||||
| Other real estate owned |
$422 | Appraisal of collateral | Appraisal adjustments | 20.0% to 14.0% (8.4%) | ||||||||||||
| Liquidation expenses | 10.0% to 10.0% (10.0%) | |||||||||||||||
The carrying and fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 and their placement within the fair value hierarchy are as follows:
| Carrying Amount |
Fair Value Hierarchy | |||||||||||||||||||
| September 30, 2021 |
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 186,078 | $ | 186,078 | $ | 186,078 | ||||||||||||||
| Investment securities |
131,705 | 131,705 | $ | 131,705 | ||||||||||||||||
| Loans held for sale |
443 | 443 | 443 | |||||||||||||||||
| Net loans |
855,306 | 840,466 | $ | 840,466 | ||||||||||||||||
| Accrued interest receivable |
2,604 | 2,604 | 715 | 1,889 | ||||||||||||||||
| Restricted equity securities |
2,171 | 2,171 | ||||||||||||||||||
| Interest rate swap hedges |
599 | 599 | 599 | |||||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits |
$ | 1,069,574 | $ | 1,070,933 | $ | 1,070,933 | ||||||||||||||
| Long-term debt |
52,004 | 54,920 | 54,920 | |||||||||||||||||
| Accrued interest payable |
847 | 847 | 847 | |||||||||||||||||
| Carrying Amount |
Fair Value Hierarchy | |||||||||||||||||||
| December 31, 2020 |
Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Cash and cash equivalents |
$ | 49,781 | $ | 49,781 | $ | 49,781 | ||||||||||||||
| Investment securities available-for-sale |
103,695 | 103,695 | $ | 103,695 | ||||||||||||||||
| Loans held for sale |
4,338 | 4,338 | 4,338 | |||||||||||||||||
| Net loans |
1,127,039 | 1,116,618 | $ | 1,116,618 | ||||||||||||||||
| Accrued interest receivable |
4,216 | 4,216 | 578 | 3,638 | ||||||||||||||||
| Restricted equity securities |
1,759 | 1,759 | ||||||||||||||||||
| Interest rate swap hedges |
172 | 172 | 172 | |||||||||||||||||
| Financial liabilities: |
||||||||||||||||||||
| Deposits |
$ | 1,015,460 | $ | 1,018,529 | $ | 1,018,529 | ||||||||||||||
| Long-term debt |
228,765 | 231,748 | 231,748 | |||||||||||||||||
| Accrued interest payable |
1,038 | 1,038 | 1,038 | |||||||||||||||||
19
8. Subsequent Events:
In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred from the date of the financial statements through the date these consolidated financial statements were issued. On June 30, 2021, Riverview entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid Penn Bancorp, Inc. (“Mid Penn”) pursuant to which Riverview will merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. Upon consummation of the Merger, Riverview Bank, a wholly-owned subsidiary of Riverview, will be merged with and into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn, with Mid Penn Bank being the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the boards of directors of Mid Penn and Riverview. The Merger is expected to close in the fourth quarter of 2021.
20
Exhibit 99.3
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed consolidated financial information has been prepared using the acquisition method of accounting, giving effect to the merger of Mid Penn Bancorp, Inc. (“Mid Penn” or “MPB”) with Riverview Financial Corporation (“Riverview” or “RIVE”). The merger was completed on November 30, 2021. The following unaudited pro forma combined consolidated financial information is based upon the total number of shares of Riverview common stock outstanding immediately prior to the completion of the merger, which was 9,352,941 and utilizes the exchange ratio of 0.4833 resulting in 4,519,776 shares of MPB common stock issued as acquisition purchase price consideration.
The unaudited pro forma combined condensed financial statements have been prepared in accordance with Article 11 of Regulation S-X, Pro Forma Information, as amended by the final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses, as adopted by the SEC on May 21, 2020, which requires the depiction of the accounting for the transaction, which we refer to as transaction accounting adjustments, and presentation of the reasonably estimable cost savings and revenue enhancements and other transaction effects that have occurred or are reasonably expected to occur, which we refer to as management’s adjustments. Mid Penn has elected not to present management’s adjustments and will only be presenting transaction accounting adjustments in the following unaudited pro forma condensed combined financial information.
The following unaudited pro forma combined consolidated balance sheet as of September 30, 2021 and income statements for both (i) the twelve months ended December 31, 2020 and (ii) the nine months ended September 30, 2021combine the historical financial statements of Mid Penn and Riverview. The unaudited pro forma consolidated financial statements give effect to the proposed acquisition as if the acquisition occurred on September 30, 2021 with respect to the balance sheet, and at the beginning of the periods for both the year ended December 31, 2020 and the nine months ended September 30, 2021, with respect to the statement of operations. The unaudited pro forma consolidated financial statements were prepared with Mid Penn as the acquirer and Riverview as the acquiree under the acquisition method of accounting. Accordingly, the consideration paid by Mid Penn to complete the acquisition of Riverview will be allocated to Riverview’s assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition. The allocation is dependent upon certain valuations and other studies that have not been finalized at the time of this filing; however, preliminary valuations based on the fair value of the acquired assets and liabilities have been estimated and included in the unaudited pro forma financial statements.
The final allocation of the purchase price will be determined after completion of the merger and after completion of thorough analyses to determine the fair value of Riverview’s tangible and identifiable intangible assets and liabilities as of the date the merger was completed. Increases or decreases in the estimated fair values of the net assets as compared with the information shown in the unaudited pro forma combined condensed consolidated financial information may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact Mid Penn’s consolidated statement of operations due to adjustments in yield and/or amortization of the adjusted assets or liabilities. Any changes to Riverview’s shareholders’ equity, includingresults of operations from September 30, 2021 through the date the merger was completed will also change the purchase price allocation, which may include the recording of a lower or higher amount of goodwill. The final adjustments may be materially different from the unaudited transaction accounting adjustments presented herein. The actual value of Mid Penn’s common stock to be recorded as consideration in the merger was based on the $31.46 closing price of MPB common stock at the time of the merger completion date on November 30, 2021.
The pro forma income statement and per share data information does not include anticipated cost savings or revenue enhancements, nor does it include one-time merger-related expenses which will be expensed against income. Mid Penn is currently in the process of assessing the two companies’ personnel, benefits plans, premises, equipment, computer systems and service contracts to determine where the companies may take advantage of redundancies or where it will be beneficial or necessary to convert to one system. Certain decisions arising from these assessments may involve canceling contracts between either Riverview or Mid Penn and certain service providers. There is no assurance that the anticipated cost savings will be realized on the anticipated time schedule or at all.
The pro forma combined basic and diluted earnings per share of Mid Penn common stock is based on the pro forma combined net income per common share for Riverview and Mid Penn divided by the pro forma basic or
II-1
diluted common shares of the combined entities. The pro forma information includes adjustments related to the fair value of assets and liabilities of Riverview and is subject to adjustment as additional information becomes available and as final merger date analyses are performed. The pro forma combined balance sheet and book value per share data does include the impact of merger-related expenses on the balance sheet with Riverview’s after-tax charges currently estimated at $6,531,000, illustrated as an adjustment to accrued other liabilities, and Mid Penn’s after-tax estimated charges of $8,610,000, illustrated as an adjustment to retained earnings and to accrued other liabilities. The pro forma combined book value and tangible book value of Mid Penn common stock is based on the pro forma combined common stockholders’ equity of Riverview and Mid Penn divided by total pro forma common shares of the combined entities.
Certain reclassification adjustments have been made to Riverview’s financial statements to conform to Mid Penn’s financial statement presentation. The unaudited pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period.
The unaudited pro forma combined condensed consolidated financial information has been derived from and should be read in conjunction with Mid Penn’s historical consolidated financial information and related notes, which are contained in Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2020 and Quarterly Report on Form 10-Q for the nine-month period ended September 30, 2021, Riverview’s audited financial statements for the year ended December 31, 2020, which were included in Mid Penn’s Form S-4 filed on September 13, 2021, as amended (File No. 333-259490), and Riverview’s unaudited financial statements for the nine-month period ended September 30, 2021, which appear elsewhere in this document.
The unaudited pro forma data are qualified by the statements set forth under this caption and should not be considered indicative of the market value of Mid Penn common stock or the actual or future results of operations of Mid Penn for any period. Actual results may be materially different than the pro forma information presented.
II-2
Pro Forma Combined Consolidated Balance Sheet as of September 30, 2021
Unaudited (Dollars in thousands, except share and per common share data)
| Mid Penn Bancorp, Inc. |
Riverview Financial Corp. |
Unadjusted Combined |
Transaction Accounting Adjustments |
Pro Forma Combined |
||||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Cash and due from banks |
$ | 40,134 | $ | 10,842 | $ | 50,976 | $ | (792 | ) | A | $ | 50,184 | ||||||||||||
| Interest-bearing balances with other financial institutions |
2,536 | 175,236 | 177,772 | — | 177,772 | |||||||||||||||||||
| Federal funds sold |
712,272 | — | 712,272 | — | 712,272 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total cash and cash equivalents |
754,942 | 186,078 | 941,020 | (792 | ) | 940,228 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Investment securities available for sale, at fair value |
5,015 | 131,705 | 136,720 | — | B | 136,720 | ||||||||||||||||||
| Investment securities held to maturity, at amortized cost |
152,791 | — | 152,791 | — | 152,791 | |||||||||||||||||||
| Equity securities available for sale, at fair value |
505 | — | 505 | — | 505 | |||||||||||||||||||
| Loans held for sale |
23,154 | 443 | 23,597 | — | 23,597 | |||||||||||||||||||
| Loans and leases, net of unearned interest |
2,370,429 | 866,140 | 3,236,569 | (20,285 | ) | C | 3,216,284 | |||||||||||||||||
| Less: Allowance for loan and lease losses |
(14,233 | ) | (10,834 | ) | (25,067 | ) | 10,834 | D | (14,233 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net loans and leases |
2,356,196 | 855,306 | 3,211,502 | (9,451 | ) | 3,202,051 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Bank premises and equipment, net |
25,562 | 16,983 | 42,545 | (5,005 | ) | E | 37,540 | |||||||||||||||||
| Operating lease right of use asset |
9,942 | 1,516 | 11,458 | (1,297 | ) | F | 10,161 | |||||||||||||||||
| Finance lease right of use asset |
3,132 | — | 3,132 | — | 3,132 | |||||||||||||||||||
| Cash surrender value of life insurance |
17,406 | 31,999 | 49,405 | — | 49,405 | |||||||||||||||||||
| Restricted investment in bank stocks |
7,906 | 2,171 | 10,077 | — | 10,077 | |||||||||||||||||||
| Foreclosed assets held for sale |
11 | — | 11 | — | G | 11 | ||||||||||||||||||
| Deferred income taxes |
4,133 | 3,825 | 7,958 | 5,227 | H | 13,185 | ||||||||||||||||||
| Goodwill |
62,840 | — | 62,840 | 48,904 | I | 111,744 | ||||||||||||||||||
| Core deposit and other intangibles, net |
3,537 | 1,522 | 5,059 | 4,734 | J | 9,793 | ||||||||||||||||||
| Accrued interest receivable and other assets |
26,115 | 11,245 | 37,360 | — | 37,360 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Assets |
$ | 3,453,187 | $ | 1,242,793 | $ | 4,695,980 | $ | 42,320 | $ | 4,738,300 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| LIABILITIES & SHAREHOLDERS’ EQUITY |
||||||||||||||||||||||||
| Deposits: |
||||||||||||||||||||||||
| Noninterest-bearing demand |
$ | 661,890 | $ | 192,556 | $ | 854,446 | $ | — | $ | 854,446 | ||||||||||||||
| Interest-bearing demand |
745,833 | 349,543 | 1,095,376 | — | 1,095,376 | |||||||||||||||||||
| Money market |
905,742 | 151,413 | 1,057,155 | — | 1,057,155 | |||||||||||||||||||
| Savings |
205,842 | 173,453 | 379,295 | — | 379,295 | |||||||||||||||||||
| Time |
442,574 | 202,609 | 645,183 | 1,911 | K | 647,094 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Deposits |
2,961,881 | 1,069,574 | 4,031,455 | 1,911 | 4,033,366 | |||||||||||||||||||
| Short-term borrowings |
— | — | — | — | — | |||||||||||||||||||
| Long-term debt |
119,457 | 52,004 | 171,461 | (2,325 | ) | L | 169,136 | |||||||||||||||||
| Operating lease liability |
10,950 | 1,531 | 12,481 | (1,297 | ) | F | 11,184 | |||||||||||||||||
| Accrued interest payable and other liabilities |
11,591 | 12,108 | 23,699 | 18,025 | M | 41,724 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Liabilities |
3,103,879 | 1,135,217 | 4,239,096 | 16,314 | 4,255,410 | |||||||||||||||||||
| Shareholders’ Equity: |
||||||||||||||||||||||||
| Common stock |
11,532 | 103,127 | 114,659 | (98,607 | ) | N | 16,052 | |||||||||||||||||
| Additional paid-in capital |
246,830 | 292 | 247,122 | 137,380 | N | 384,502 | ||||||||||||||||||
| Retained earnings |
92,722 | 4,498 | 97,220 | (13,108 | ) | M, N | 84,112 | |||||||||||||||||
| Accumulated other comprehensive income (loss) |
147 | (341 | ) | (194 | ) | 341 | N | 147 | ||||||||||||||||
| Treasury stock |
(1,923 | ) | — | (1,923 | ) | — | (1,923 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Shareholders’ Equity |
349,308 | 107,576 | 456,884 | 26,006 | 482,890 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Liabilities and Shareholders’ Equity |
$ | 3,453,187 | $ | 1,242,793 | $ | 4,695,980 | $ | 42,320 | $ | 4,738,300 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Per Common Share Data: |
||||||||||||||||||||||||
| Common shares issued |
11,532,006 | 9,361,967 | (4,519,776 | ) | 16,374,197 | |||||||||||||||||||
| Common shares outstanding |
11,433,554 | 9,361,967 | (4,519,776 | ) | 16,275,745 | |||||||||||||||||||
| Book value per common share |
$ | 30.55 | $ | 11.49 | $ | 29.67 | ||||||||||||||||||
II-3
Pro Forma Combined Consolidated Statement of Income
For the Nine Months Ended September 30, 2021
Unaudited (Dollars in thousands, exept share and per common share data)
| Mid Penn Bancorp, Inc. |
Riverview Financial Corp. |
Unadjusted Combined |
Transaction Accounting Adjustments |
Pro Forma Combined |
||||||||||||||||||||
| INTEREST INCOME |
||||||||||||||||||||||||
| Interest & fees on loans and leases |
$ | 87,755 | $ | 33,153 | $ | 120,908 | $ | 1,501 | C | 122,409 | ||||||||||||||
| Interest and dividends on investment securities: |
||||||||||||||||||||||||
| U.S. Treasury and government agency |
688 | 701 | 1,389 | — | 1,389 | |||||||||||||||||||
| State and political subdivision obligations, tax-exempt |
834 | 440 | 1,274 | — | 1,274 | |||||||||||||||||||
| Other securities |
870 | 836 | 1,706 | — | 1,706 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total interest and dividends on investment securities |
2,392 | 1,977 | 4,369 | — | 4,369 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Interest on interest-bearing balances |
5 | 64 | 69 | — | 69 | |||||||||||||||||||
| Interest on federal funds sold |
485 | — | 485 | — | 485 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Interest Income |
90,637 | 35,194 | 125,831 | 1,501 | 127,332 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| INTEREST EXPENSE |
||||||||||||||||||||||||
| Interest on deposits |
8,791 | 2,491 | 11,282 | (559 | ) | K | 10,723 | |||||||||||||||||
| Interest on short-term borrowings |
539 | — | 539 | — | 539 | |||||||||||||||||||
| Interest on long-term and subordinated debt |
2,111 | 1,752 | 3,863 | (506 | ) | L | 3,357 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Interest Expense |
11,441 | 4,243 | 15,684 | (1,065 | ) | 14,619 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net Interest Income |
79,196 | 30,951 | 110,147 | 2,566 | 112,713 | |||||||||||||||||||
| PROVISION FOR (RECOVERY OF) LOAN AND LEASE LOSSES |
2,575 | (735 | ) | 1,840 | — | 1,840 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net Interest Income After Provision for (Recovery Of) Loan and Lease Losses |
76,621 | 31,686 | 108,307 | 2,566 | 110,873 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NONINTEREST INCOME |
||||||||||||||||||||||||
| Mortgage banking income |
8,382 | 440 | 8,822 | — | 8,822 | |||||||||||||||||||
| Income from fiduciary activities |
1,716 | 804 | 2,520 | — | 2,520 | |||||||||||||||||||
| Service charges on deposits |
552 | 1,642 | 2,194 | — | 2,194 | |||||||||||||||||||
| ATM debit card interchange income |
1,854 | 1,497 | 3,351 | — | 3,351 | |||||||||||||||||||
| Net gain on sales of SBA loans |
560 | — | 560 | — | 560 | |||||||||||||||||||
| Merchant services income |
359 | 33 | 392 | — | 392 | |||||||||||||||||||
| Earnings from cash surrender value of life insurance |
223 | 552 | 775 | — | 775 | |||||||||||||||||||
| Net gain on sales of investment securities |
79 | 317 | 396 | — | 396 | |||||||||||||||||||
| Other income |
2,148 | 3,021 | 5,169 | — | 5,169 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Noninterest Income |
15,873 | 8,306 | 24,179 | — | 24,179 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NONINTEREST EXPENSE |
||||||||||||||||||||||||
| Salaries and employee benefits |
29,873 | 14,472 | 44,345 | — | 44,345 | |||||||||||||||||||
| Occupancy, net |
4,115 | 1,515 | 5,630 | — | 5,630 | |||||||||||||||||||
| Equipment expense |
2,237 | 1,570 | 3,807 | — | 3,807 | |||||||||||||||||||
| Software licensing and data processing |
4,493 | 2,468 | 6,961 | — | 6,961 | |||||||||||||||||||
| Pennsylvania Bank Shares tax expense |
1,022 | 850 | 1,872 | — | 1,872 | |||||||||||||||||||
| FDIC Assessment |
1,364 | 355 | 1,719 | — | 1,719 | |||||||||||||||||||
| Legal and professional fees |
1,591 | 569 | 2,160 | — | 2,160 | |||||||||||||||||||
| Charitable contrbutions qualifying for State tax credits |
635 | — | 635 | — | 635 | |||||||||||||||||||
| Mortgage banking profit-sharing expense |
2,005 | — | 2,005 | — | 2,005 | |||||||||||||||||||
| Marketing and advertising expense |
466 | 440 | 906 | — | 906 | |||||||||||||||||||
| Telephone expense |
409 | 420 | 829 | — | 829 | |||||||||||||||||||
| Gain on sale or write-down of foreclosed assets |
(26 | ) | (44 | ) | (70 | ) | — | (70 | ) | |||||||||||||||
| Intangible amortization |
823 | 396 | 1,219 | 457 | O | 1,676 | ||||||||||||||||||
| Merger and acquisition expense |
720 | 560 | 1,280 | (1,280 | ) | M | — | |||||||||||||||||
| Other expenses |
7,306 | 2,934 | 10,240 | — | 10,240 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Noninterest Expense |
57,033 | 26,505 | 83,538 | (823 | ) | 82,715 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| INCOME BEFORE PROVISION FOR INCOME TAXES |
35,461 | 13,487 | 48,948 | 3,389 | 52,337 | |||||||||||||||||||
| Provision for income taxes |
6,749 | 2,532 | 9,281 | 712 | P | 9,993 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NET INCOME |
$ | 28,712 | $ | 10,955 | $ | 39,667 | $ | 2,677 | $ | 42,344 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Weighted average common shares outstanding: |
||||||||||||||||||||||||
| Basic |
10,064,655 | 9,353,546 | (4,519,776 | ) | 14,898,425 | |||||||||||||||||||
| Diluted |
10,077,408 | 9,366,293 | (4,519,776 | ) | 14,898,425 | |||||||||||||||||||
| Earnings per common share: |
||||||||||||||||||||||||
| Basic |
$ | 2.85 | $ | 1.17 | $ | 2.84 | ||||||||||||||||||
| Diluted |
$ | 2.85 | $ | 1.17 | $ | 2.84 | ||||||||||||||||||
II-4
Pro Forma Combined Consolidated Statement of Income
For the Year Ended December 31, 2020
Unaudited (Dollars in thousands, exept share and per common share data)
| Mid Penn Bancorp, Inc. |
Riverview Financial Corp. |
Unadjusted Combined |
Transaction Accounting Adjustments |
Pro Forma Combined |
||||||||||||||||||||
| INTEREST INCOME |
||||||||||||||||||||||||
| Interest & fees on loans and leases |
$ | 103,507 | $ | 43,935 | $ | 147,442 | $ | 1,815 | C | 149,257 | ||||||||||||||
| Interest and dividends on investment securities: |
||||||||||||||||||||||||
| U.S. Treasury and government agency |
1,631 | 1,110 | 2,741 | — | 2,741 | |||||||||||||||||||
| State and political subdivision obligations, tax-exempt |
1,008 | 289 | 1,297 | — | 1,297 | |||||||||||||||||||
| Other securities |
1,253 | 592 | 1,845 | — | 1,845 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total interest and dividends on investment securities |
3,892 | 1,991 | 5,883 | — | 5,883 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Interest on interest-bearing balances |
39 | 20 | 59 | — | 59 | |||||||||||||||||||
| Interest on federal funds sold |
497 | 100 | 597 | — | 597 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Interest Income |
107,935 | 46,046 | 153,981 | 1,815 | 155,796 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| INTEREST EXPENSE |
||||||||||||||||||||||||
| Interest on deposits |
16,399 | 5,419 | 21,818 | (1,161 | ) | K | 20,657 | |||||||||||||||||
| Interest on short-term borrowings |
371 | 443 | 814 | — | 814 | |||||||||||||||||||
| Interest on long-term and subordinated debt |
2,957 | 921 | 3,878 | (576 | ) | L | 3,302 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Interest Expense |
19,727 | 6,783 | 26,510 | (1,737 | ) | 24,773 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net Interest Income |
88,208 | 39,263 | 127,471 | 3,552 | 131,023 | |||||||||||||||||||
| PROVISION FOR LOAN AND LEASE LOSSES |
4,200 | 6,282 | 10,482 | — | 10,482 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net Interest Income After Provision for Loan and Lease Losses |
84,008 | 32,981 | 116,989 | 3,552 | 120,541 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NONINTEREST INCOME |
||||||||||||||||||||||||
| Mortgage banking income |
9,682 | 1,233 | 10,915 | — | 10,915 | |||||||||||||||||||
| Income from fiduciary activities |
1,694 | 961 | 2,655 | — | 2,655 | |||||||||||||||||||
| Service charges on deposits |
637 | 2,451 | 3,088 | — | 3,088 | |||||||||||||||||||
| ATM debit card interchange income |
1,960 | 1,752 | 3,712 | — | 3,712 | |||||||||||||||||||
| Net gain on sales of SBA loans |
442 | — | 442 | — | 442 | |||||||||||||||||||
| Merchant services income |
392 | 44 | 436 | — | 436 | |||||||||||||||||||
| Earnings from cash surrender value of life insurance |
301 | 755 | 1,056 | — | 1,056 | |||||||||||||||||||
| Net gain on sales of investment securities |
467 | 815 | 1,282 | — | 1,282 | |||||||||||||||||||
| Other income |
2,333 | 762 | 3,095 | — | 3,095 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Noninterest Income |
17,908 | 8,773 | 26,681 | — | 26,681 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NONINTEREST EXPENSE |
||||||||||||||||||||||||
| Salaries and employee benefits |
37,758 | 20,207 | 57,965 | — | 57,965 | |||||||||||||||||||
| Occupancy, net |
5,505 | 3,424 | 8,929 | — | 8,929 | |||||||||||||||||||
| Equipment expense |
2,910 | 1,717 | 4,627 | — | 4,627 | |||||||||||||||||||
| Software licensing and data processing |
5,286 | 3,999 | 9,285 | — | 9,285 | |||||||||||||||||||
| Pennsylvania Bank Shares tax expense |
583 | 770 | 1,353 | — | 1,353 | |||||||||||||||||||
| FDIC Assessment |
1,680 | 732 | 2,412 | — | 2,412 | |||||||||||||||||||
| Legal and professional fees |
1,665 | 1,335 | 3,000 | — | 3,000 | |||||||||||||||||||
| Charitable contrbutions qualifying for State tax credits |
1,342 | 200 | 1,542 | — | 1,542 | |||||||||||||||||||
| Mortgage banking profit-sharing expense |
2,004 | — | 2,004 | — | 2,004 | |||||||||||||||||||
| Marketing and advertising expense |
542 | 369 | 911 | — | 911 | |||||||||||||||||||
| Telephone expense |
539 | 694 | 1,233 | — | 1,233 | |||||||||||||||||||
| Loss on sale or write-down of foreclosed assets |
333 | 55 | 388 | — | 388 | |||||||||||||||||||
| Intangible amortization |
1,398 | 818 | 2,216 | 173 | O | 2,389 | ||||||||||||||||||
| Goodwill impairment |
— | 24,754 | 24,754 | — | 24,754 | |||||||||||||||||||
| Other expenses |
9,032 | 3,634 | 12,666 | — | 12,666 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Noninterest Expense |
70,577 | 62,708 | 133,285 | 173 | 133,458 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |
31,339 | (20,954 | ) | 10,385 | 3,379 | 13,764 | ||||||||||||||||||
| Provision for income taxes |
5,130 | 257 | 5,387 | 710 | P | 6,097 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| NET INCOME (LOSS) |
$ | 26,209 | $ | (21,211 | ) | $ | 4,998 | $ | 2,669 | $ | 7,667 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Weighted average common shares outstanding: |
||||||||||||||||||||||||
| Basic |
8,439,427 | 9,258,493 | (4,519,776 | ) | 13,178,144 | |||||||||||||||||||
| Diluted |
8,443,092 | 9,258,493 | (4,519,776 | ) | 13,178,144 | |||||||||||||||||||
| Earnings per common share: |
||||||||||||||||||||||||
| Basic |
$ | 3.11 | $ | (2.29 | ) | $ | 0.58 | |||||||||||||||||
| Diluted |
$ | 3.10 | $ | (2.29 | ) | $ | 0.58 | |||||||||||||||||
II-5
Explanatory Notes to the Unaudited Pro Forma Combined Consolidated Financial Statements
| A. | Under the June 30, 2021 Definitive Merger Agreement among Mid Penn Bancorp, Inc. (“MPB”), Mid Penn Bank (“Mid Penn”), Riverview Financial Corp. (“RIVE”) and Riverview Bank (“Riverview”), shareholders of RIVE common stock received, for each share of RIVE held at the effective time of the merger, 0.4833 shares of MPB common stock as merger consideration. This exchange ratio did not change as a result of changes in the MPB share price. The actual final value and allocation of the merger consideration paid by MPB in common stock and cash following the closing of the merger of Riverview with and into Mid Penn effective November 30, 2021, based upon the relevant provisions of the Definitive Merger Agreement, was as follows: |
Mid Penn Bancorp, Inc. Acquisition of Riverview Financial Corp.
Projected Acquisition Purchase Price Consideration Including Allocation Between Cash and Mid Penn Stock
| (Dollars in Thousands except per share data) | ||||
| Total Acquisition Purchase Price Considerations: |
||||
| Stock Consideration - Common Stock Outstanding: Riverview shareholders representing 9,352,941 shares outstanding received 0.4833 shares of Mid Penn common stock for each Riverview share as merger consideration. Mid Penn issued 4,519,776 new shares of common stock in connection with the merger. The value of Mid Penn common stock issued as merger consideration was $31.46 per share. | $ | 142,192 | ||
| Cash Consideration - Cash in Lieu of Fractional Shares: The conversion of Riverview common stock to Mid Penn common stock resulted in 500 fractional shares paid out in cash based upon the closing price of $31.46 per share. | 16 | |||
| Cash Consideration - Buyout of Stock Awards: In accordance with the definitive merger agreement, outstanding options at the time of the merger will be converted into the right to receive an amount in cash equal to the product obtained by multiplying the aggregate number of shares of Riverview common stock that were issuable upon exercise of each option outstanding, and the closing sale price of Mid Penn’s common stock on the fifth (5th) business day prior to the merger closing date multiplied by the exchange ratio, less the per share exercise price of each option outstanding, without interest. There were 172,964 options outstanding to purchase Riverview common stock and the closing price of Mid Penn common stock was at $30.76 per share on the fifth business day prior to the merger closing date. Additionally, 2,500 shares of restricted stock were paid out in cash. | 776 | |||
|
|
|
|||
| Total Acquisition Purchase Price Consideration: |
$ | 142,984 | ||
| B. | The available-for-sale portfolio will be maintained at the same classification post-merger and will be acquired by Mid Penn at the fair value of the securities as of the merger date. |
II-6
| C. | The estimated balance sheet adjustments to Riverview’s loan portfolio reflect fair value credit and interest rate discounts of $13,415,000. The earnings impact of the credit and interest rate discounts is projected to be recognized using an accelerated amortization method over the expected life of the acquired loan portfolio, resulting in an estimated increase to interest income of $2,090,000 in the first year post-merger and $1,570,000 in the first nine months post-merger. Additionally, the balance sheet adjustment to the loan portfolio also includes a reduction of $6,870,000 as a result of the anticipated merger date redemption of subordinated debt issued by Mid Penn and held as an outstanding loan receivable by Riverview as of September 30, 2021. The redemption of Mid Penn’s subordinated debt would reduce loan interest income by $275,000 in the first year post merger and $69,000 in the first nine months post merger. |
| D. | This balance sheet adjustment reflects the reversal of the Riverview allowance for loan losses of $10,834,000 in accordance with the GAAP method of acquisition accounting requiring the recording of acquired loans at fair value. |
| E. | This balance sheet adjustment to Riverview’s bank premises and equipment includes: (i) fair value discounts of $6,485,000 determined using recent certified appraisals for real estate properties to be retained by Mid Penn; (ii) fair value discounts of $789,000 based upon preliminary condition and value assessments of fixed assets including equipment, and furniture and fixtures, and (iii) the reversal of remaining purchase accounting discounts recorded in fixed assets by Riverview Bank from its previous acquisition activity totaling $2,269,000. Combined, the preliminary estimate of these fair value balance sheet adjustments to Riverview’s bank premises and equipment totals $5,005,000. |
| F. | The estimated balance sheet adjustment of $1,297,000 to the operating lease right of use asset includes the anticipated reassessment of leased facilities, with a similar adjustment to the operating lease liability and minimal anticipated goodwill impact. |
| G. | Riverview held no foreclosed real estate assets as of September 30, 2021. Under GAAP foreclosed assets must be carried at fair value therefore no fair value adjustment would be recorded should a foreclosed property be assumed prior to the merger date. |
| H. | The pro-forma combined deferred tax asset of $5,227,000 was valued based upon an assumed corporate tax rate of 21 percent and includes both (i) $3,587,000 for the related deferred tax impact of purchase accounting adjustments, and (ii) $1,640,000 tax benefit related to one-time merger charges. |
| I. | For purposes of this unaudited pro forma combined consolidated balance sheet as of September 30, 2021, goodwill of $48,904,000 is projected to result from the Mid Penn acquisition of Riverview. However, the eventual amount actually recorded as goodwill will be determined as part of the final acquisition accounting as of the merger date, and the goodwill amount may be adjusted from this projection based on changes in financial condition and transactions subsequent to September 30, 2021, as additional information becomes available and updated analyses are performed. The goodwill will not be amortized, but will be measured for impairment annually (or more frequently if warranted). The unaudited pro forma combined consolidated statement of income projects no goodwill impairment in the first year post merger. The following reflects the unaudited pro forma calculation of goodwill based upon estimated fair value adjustments to Riverview assets to be acquired and liabilities to be assumed: |
II-7
Goodwill Resulting from the Mid Penn Bancorp, Inc. Acquisition of Riverview Financial Corp.
Pro Forma as of September 30, 2021
| (Dollars in Thousands except per share data) | ||||||||
| Acqusition Purchase Price Consideration |
||||||||
| ($792 in Cash and $142,192 in MPB stock)* |
||||||||
| $142,984 | ||||||||
| Net Assets Acquired: |
||||||||
| Riverview Stockholders’ Equity |
$ | 107,576 | ||||||
| Core Deposit Intangible |
4,096 | |||||||
| Customer List Intangible |
2,160 | |||||||
| Adjustments to Riverview Assets acquired to reflect fair value: |
||||||||
| Loans - general credit and interest rate marks |
(13,415 | ) | ||||||
| Allowance for loan losses |
10,834 | |||||||
| Premises and Equipment |
(5,005 | ) | ||||||
| Pre-transaction remaining CDI of Riverview |
(1,522 | ) | ||||||
| Deferred tax impact of fair value adjustments |
3,587 | |||||||
| Adjustments to Riverview Liabilities assumed to reflect fair value: |
||||||||
| Time deposits |
(1,911 | ) | ||||||
| Pre-transaction remaining marks on long-term debt |
(2,243 | ) | ||||||
| Subordinated debt and trust preferred |
(2,302 | ) | ||||||
| Seller transaction merger liabilities accrued at closing |
(7,775 | ) | ||||||
|
|
|
|||||||
| 94,080 | ||||||||
|
|
|
|||||||
| Goodwill resulting from merger |
$ | 48,904 | ||||||
|
|
|
|||||||
| * | actual paid by Mid Penn Bancorp, Inc. following closing of transaction on November 30, 2021 |
| J. | This balance sheet adjustment represents the estimated fair value of the core deposit intangible (CDI) asset of $4,096,000 as well as the estimated fair value of a customer list intangible of $2,160,000. With the reversal of Riverview’s pre-acquisition CDI of $1,522,000, the net required adjustment to reflect combined CDI is $4,734,000. The core deposit intangible and customer list intangible will be amortized over a ten-year period using a sum of the year’s digits basis, resulting in $1,138,000 of additional intangible amortization in the first year post merger. |
| K. | This balance sheet amount represents a fair value premium of $1,911,000 for Riverview’s certificates of deposit. This adjustment will be recognized using an amortization method based upon the maturities of the deposit liabilities and is expected to decrease interest expense by $1,161,000 in the first year post merger and $559,000 in the first nine months post merger. |
| L. | This balance sheet amount includes both (i) a fair value premium of $2,302,000 to reflect the estimated fair value of Riverview’s subordinated debt and trust preferred securities outstanding, and (ii) the reversal of $2,243,000 of pre-transaction fair value discount on subordinated debt and trust preferred securities acquired by Riverview in a previous merger transaction. Additionally, the balance sheet amount reflects the redemption of $6,870,000 of subordinated debt issued by Mid Penn and held by Riverview. The redemption of Mid Penn’s subordinated debt would reduce interest expense by $275,000 in the first year post merger and $69,000 in the first nine months post merger. The fair value premium amount of $2,302,000 will be recognized on the income statement using an amortization method based upon the estimated remaining maturity of the subordinated debt, resulting in an expected reduction to interest expense of $574,000 in the first year post merger and $428,000 in the first nine months post merger. |
| M. | This balance sheet adjustment reflects the accrual of one-time merger-related charges for Mid Penn and Riverview: (a) Riverview pre-tax charges are estimated at $7,775,000 ($6,531,000 after-tax) and are included as a pro forma fair value liability accrual, and (b) Mid Penn pre-tax charges are estimated at $10,250,000 ($8,610,000 after-tax) and are included as a pro forma liability accrual with the after-tax cost as reduction to retained earnings. The pro forma income statement does not include one-time merger-related expenses which will be expensed against income when incurred. It is noted that a tax benefit was not taken for certain merger obligations and costs that were not considered to be tax deductible. |
| N. | These balance sheet adjustments to the common stock and additional paid-in-capital accounts, and to the number of common shares outstanding, reflect the impact of actual acquisition consideration of $142,984,000 paid primarily in MPB common stock, as further detailed in Explanatory Note A. The adjustments also reflect the reclassification of Riverview’s historical equity accounts (common stock, accumulated other comprehensive loss, and retained earnings) into additional paid in capital. |
II-8
| O. | This income statement adjustment to intangible amortization expense reflects both (i) the reversal of the pre-merger Riverview CDI amortization expense of $818,000 in the first year post merger (consistent with the reversal of Riverview’s CDI asset for fair value purchase accounting purposes), and (ii) $1,137,000 of amortization expense in the first year post merger related to the new CDI and the customer list intangible resulting from this acquisition, with such amortization being determined based upon the sum-of-the-years-digits method over 10 years from the date of acquisition. Comparatively, for the first nine months post merger, the reversal of CDI expense would be $396,000 and the new CDI amortization is estimated to be $853,000. |
| P. | The statutory federal income tax rate of 21 percent was used to determine the income tax expense impact of merger-related adjustments. |
II-9