Attached files

file filename
EX-31.2 - EX-31.2 - Riverview Financial Corpa09-36283_1ex31d2.htm
EX-32.1 - EX-32.1 - Riverview Financial Corpa09-36283_1ex32d1.htm
EX-31.1 - EX-31.1 - Riverview Financial Corpa09-36283_1ex31d1.htm
EX-21.1 - EX-21.1 - Riverview Financial Corpa09-36283_1ex21d1.htm
EX-32.2 - EX-32.2 - Riverview Financial Corpa09-36283_1ex32d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 333-153486-99

 

RIVERVIEW FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Pennsylvania

 

26-3853402

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

3rd and Market Streets
Halifax, Pennsylvania

 

17032

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code 717.896.3433

 

Securities registered pursuant to Section 12(b) of the Act:  None.

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File, required to be submitted and posted pursuant to Rule 405 of Regulation S-T (d 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

 

Large accelerated filer o

Accelerated Filer o

 

 

Non-accelerated Filer o

Smaller Reporting Company x

 

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x

 

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates, on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $20,934,000.

 

As of March 18, 2010, the registrant had 1,750,003 shares of common stock outstanding.

 

 

 



Table of Contents

 

RIVERVIEW FINANCIAL CORPORATION

FORM 10-K

TABLE OF CONTENTS

 

 

 

PAGE

PART I

 

 

Item 1-

Business

1

 

 

 

Item 1A-

Risk Factors

12

 

 

 

Item 1B-

Unresolved Staff Comments

12

 

 

 

Item 2 -

Properties

13

 

 

 

Item 3 -

Legal Proceedings

13

 

 

 

Item 4 -

(Removed and Reserved)

13

 

 

 

PART II

 

 

Item 5 -

Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases of Equity Securities

14

 

 

 

Item 6 -

Selected Financial Data

14

 

 

 

Item 7 -

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

15

 

 

 

Item 7A -

Quantitative and Qualitative Disclosure About Market Risk

37

 

 

 

Item 8 -

Financial Statements and Supplementary Data

38

 

 

 

Item 9 -

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

80

 

 

 

Item 9A(T)

Controls and Procedures

80

 

 

 

Item 9B-

Other Information

81

 

 

 

PART III

 

 

Item 10 -

Directors, Executive Officers and Corporate Governance

81

 

 

 

Item 11 -

Executive Compensation

85

 

 

 

Item 12 -

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

88

 

 

 

Item 13 -

Certain Relationships and Related Transactions, and Director Independence

90

 

 

 

Item 14 -

Principal Accountant Fees and Services

91

 

 

 

PART IV

 

 

Item 15 -

Exhibits and Financial Statement Schedules

92

 

 

 

Signatures

 

95

 

 

 

EXHIBIT INDEX

 

97

 



Table of Contents

 

PART I

 

ITEM 1. BUSINESS.

 

The disclosures set forth in this Item are qualified by the section captioned “Special Cautionary Notice Regarding Forward-Looking Statements” contained in Part II, Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements are set forth elsewhere in this report.

 

Riverview Financial Corporation

 

Riverview Financial Corporation is a one bank holding company, incorporated in the Commonwealth of Pennsylvania on December 31, 2008 and is headquartered in Halifax, Pennsylvania.

 

Riverview was formed upon the consolidation of First Perry Bancorp, Inc., Marysville, Pennsylvania, and HNB Bancorp, Inc., Halifax, Pennsylvania.  Riverview is a registered bank holding company and its sole business is to act as a holding company for Riverview National Bank.

 

Riverview National Bank

 

Riverview National Bank was formed upon the consolidation of the charters of The First National Bank of Marysville and Halifax National Bank on December 31, 2008 and is headquartered in Marysville, Pennsylvania.  However, after the consolidation, the branches of The First National Bank of Marysville and Halifax National Bank continue to operate under their current names as trade names of Riverview National Bank.

 

Riverview National Bank is a full service commercial bank providing a wide range of services to individuals and small to medium sized businesses in its Central Pennsylvania market area of Perry and Dauphin counties.  Riverview National Bank’s commercial banking activities include accepting time, demand, and savings deposits and making secured and unsecured commercial, real estate and consumer loans.

 

Supervision and Regulation of Riverview

 

The Holding Company Act of 1956.  Riverview is subject to the provisions of the Bank Holding Company Act of 1956, as amended, and to supervision by the Federal Reserve Board.  The following restrictions apply:

 

· General Supervision by the Federal Reserve Board.  As a bank holding company, Riverview’s activities are limited to the business of banking and activities closely related or incidental to banking.  Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve Board.  The Federal Reserve Board has adopted a risk-focused supervision program for small shell bank holding companies that is tied to the examination results of the subsidiary bank.  The Federal Reserve Board has issued regulations under the Holding Company Act that require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks.  As a result, the Federal Reserve Board may require that Riverview stand ready to provide adequate capital funds to Riverview National Bank during periods of financial stress or adversity.

 

· Restrictions on Acquiring Control of other Banks and Companies.  A bank holding company may not:

 

· acquire direct or indirect control of more than 5% of the outstanding shares of any class of voting stock, or substantially all of the assets of, any bank, or

 

1



Table of Contents

 

· merge or consolidate with another bank holding company,

 

without prior approval of the Federal Reserve Board.

 

In addition, a bank holding company may not:

 

· engage in a non-banking business, or

· acquire ownership or control of more than 5% of the outstanding shares of any class of voting stock of any company engaged in a non-banking business,

 

unless the business is determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident to banking.  In making this determination, the Federal Reserve Board considers whether these activities offer benefits to the public that outweigh any possible adverse effects.

 

· Anti-Tie-In Provisions.  A bank holding company and its subsidiaries may not engage in tie-in arrangements in connection with any extension of credit or provision of any property or services.  These anti-tie-in provisions state generally that a bank may not:

 

· extend credit,

 

· lease or sell property, or

 

· furnish any service to a customer

 

on the condition that the customer provides additional credit or service to a bank or its affiliates, or on the condition that the customer does not obtain other credit or service from a competitor of the bank.

 

· Restrictions on Extensions of Credit by Banks to their Holding Companies.  Subsidiary banks of a bank holding company are also subject to restrictions imposed by the Federal Reserve Act on:

 

· any extensions of credit to the bank holding company or any of its subsidiaries,

 

· investments in the stock or other securities of the corporation, and

 

· taking these stock or securities as collateral for loans to any borrower.

 

· Risk-Based Capital Guidelines.  Generally, bank holding companies must comply with the Federal Reserve Board’s risk-based capital guidelines.  However, small bank holding companies are sometimes eligible for certain exemptions.  The required minimum ratio of total capital to risk-weighted assets, including some off-balance sheet activities, such as standby letters of credit, is 8%.  At least half of the total capital is required to be Tier I Capital, consisting principally of common stockholders’ equity, less certain intangible assets.  The remainder, Tier II Capital, may consist of:

 

· some types of preferred stock,

 

· a limited amount of subordinated debt,

 

· some hybrid capital instruments,

 

· other debt securities, and

 

· a limited amount of the general loan loss allowance.

 

2



Table of Contents

 

The risk-based capital guidelines are required to take adequate account of interest rate risk, concentration of credit risk, and risks of nontraditional activities.

 

· Capital Leverage Ratio Requirements.  The Federal Reserve Board requires a bank holding company to maintain a leverage ratio of a minimum level of Tier I capital, as determined under the risk-based capital guidelines, equal to 3% of average total consolidated assets for those bank holding companies that have the highest regulatory examination rating and are not contemplating or experiencing significant growth or expansion.  All other bank holding companies are required to maintain a ratio of at least 1% to 2% above the stated minimum.  Riverview National Bank is subject to similar capital requirements pursuant to the Federal Deposit Insurance Act.

 

· Restrictions on Control Changes.  The Change in Bank Control Act of 1978 requires persons seeking control of a bank or bank holding company to obtain approval from the appropriate federal banking agency before completing the transaction.  The law contains a presumption that the power to vote 10% or more of voting stock confers control of a bank or bank holding company.  The Federal Reserve Board is responsible for reviewing changes in control of bank holding companies.  In doing so, the Federal Reserve Board reviews the financial position, experience and integrity of the acquiring person and the effect on the financial condition of the corporation, relevant markets and federal deposit insurance funds.

 

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting.  The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered or that file reports under the Securities Exchange Act of 1934.  In particular, the Sarbanes-Oxley Act establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Principal Executive Officer and Principal Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) increased civil and criminal penalties for violations of the securities laws.  Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC.  Because neither First Perry’s nor HNB’s common stock was registered with the SEC, they were not subject to the 1934 Act.  However, Riverview is subject to the 1934 Act.

 

Permitted Activities for Bank Holding Companies

 

The Federal Reserve Board permits bank holding companies to engage in activities so closely related to banking or managing or controlling banks as to be a proper incident of banking.  In 1997, the Federal Reserve Board significantly expanded its list of permissible non-banking activities to improve the competitiveness of bank holding companies.  The following list includes activities that a holding company may engage in, subject to change by the Federal Reserve Board:

 

· Making, acquiring or servicing loans and other extensions of credit for its own account or for the account of others.

 

· Any activity used in connection with making, acquiring, brokering, or servicing loans or other extensions of credit, as determined by the Federal Reserve Board.  The Federal Reserve Board has determined that the following activities are permissible:

 

· real estate and personal property appraising;

· arranging commercial real estate equity financing;

· check-guaranty services;

· collection agency services;

· credit bureau services;

· asset management, servicing, and collection activities;

 

3



Table of Contents

 

· acquiring debt in default, if a holding company divests shares or assets securing debt in default that are not permissible investments for bank holding companies within prescribed time periods, and meets various other conditions; and

· real estate settlement services.

 

· Leasing personal and real property or acting as agent, broker, or advisor in leasing property, provided that:

 

· the lease is a non-operating lease;

· the initial term of the lease is at least 90 days;

· if real property is being leased, the transaction will compensate the lessor for at least the lessor’s full investment in the property and costs, with various other conditions.

 

· Operating nonbank depository institutions, including an industrial bank or savings association.

 

· Performing functions or activities that may be performed by a trust company, including activities of a fiduciary, agency or custodial nature, in the manner authorized by federal or state law, so long as the holding company is not a bank.

 

· Acting as investment or financial advisor to any person, including:

 

· serving as investment advisor to an investment company registered under the Investment Company Act of 1940;

 

· furnishing general economic information and advice, general economic statistical forecasting services, and industry studies;

 

· providing advice in connection with mergers, acquisitions, divestitures, investments, joint ventures, capital structuring, financing transactions, and conducting financial feasibility studies;

 

· providing general information, statistical forecasting, and advice concerning any transaction in foreign exchange, swaps and similar transactions, commodities, and options, futures and similar instruments;

 

· providing educational courses and instructional materials to consumers on individual financial management matters; and

 

· providing tax planning and tax preparation services to any person.

 

· Agency transactional services for customer investments, including:

 

· Securities brokerage—Providing securities brokerage services, whether alone or in combination with investment advisory services, and incidental activities, including related securities credit activities compliant with Federal Reserve Board Regulation T and custodial services, if the securities brokerage services are restricted to buying and selling securities solely as agent for the account of customers and do not include securities underwriting or dealing;

 

· Riskless-principal transactions—Buying and selling all types of securities in the secondary market on the order of customers as ‘‘riskless principal’’;

 

· Private-placement services—Acting as agent for the private placement of securities in accordance with the requirements of the Securities Act of 1933 and the rules of the SEC; and

 

4



Table of Contents

 

· Futures commission merchant—Acting as a futures commission merchant for unaffiliated persons in the execution and clearance of any futures contract and option on a futures contract traded on an exchange in the United States or abroad, if the activity is conducted through a separately incorporated subsidiary of the holding company and the company satisfies various other conditions.

 

· Investment transactions as principal:

 

· Underwriting and dealing in government obligations and money market instruments, including bankers’ acceptances and certificates of deposit, under the same limitations applicable if the activity were performed by a holding company’s subsidiary member banks.

 

· Engaging as principal in:

 

· foreign exchanges, and

· forward contracts, options, futures, options on futures, swaps, and similar contracts, with various conditions.

 

· Buying and selling bullion, and related activities.

 

· Management consulting and counseling activities:

 

· Subject to various limitations, management consulting on any matter to unaffiliated depository institutions, or on any financial, economic, accounting, or audit matter to any other company; and

 

· Providing consulting services to employee benefit, compensation, and insurance plans, including designing plans, assisting in the implementation of plans, providing administrative services to plans, and developing employee communication programs for plans.

 

· Providing career counseling services to:

 

· a financial organization and individuals currently employed by, or recently displaced from, a financial organization;

 

· individuals who are seeking employment at a financial organization; and

 

· individuals who are currently employed in or who seek positions in the finance, accounting, and audit departments of any company.

 

· Support services:

 

· providing limited courier services; and

 

· printing and selling checks and related items requiring magnetic ink character recognition.

 

· Insurance agency and underwriting:

 

· Subject to various limitations, acting as principal, agent, or broker for credit life, accident health and unemployment insurance that is directly related to an extension of credit to a holding company or any of its subsidiaries;

 

· Engaging in any insurance agency activity in a place where Riverview or a subsidiary of Riverview has a lending office and that has a population not exceeding 5,000 or has inadequate insurance agency facilities, as determined by the Federal Reserve Board;

 

5



Table of Contents

 

· Supervising, on behalf of insurance underwriters, the activities of retail insurance agents who sell fidelity insurance and property and casualty insurance on the real and personal property used in Riverview’s operations or its subsidiaries, and group insurance that protects the employees of Riverview or its subsidiaries;

 

· Engaging in any insurance agency activities if Riverview has total consolidated assets of $50 million or less, with the sale of life insurance and annuities being limited to sales in small towns or as credit insurance.

 

· Making equity and debt investments in corporations or projects designed primarily to promote community welfare, and providing advisory services to these programs.

 

· Subject to various limitations, providing others financially oriented data processing or bookkeeping services.

 

· Issuing and selling money orders, travelers’ checks and United States savings bonds.

 

· Providing consumer financial counseling that involves counseling, educational courses and distribution of instructional materials to individuals on consumer-oriented financial management matters, including debt consolidation, mortgage applications, bankruptcy, budget management, real estate tax shelters, tax planning, retirement and estate planning, insurance and general investment management, so long as this activity does not include the sale of specific products or investments.

 

· Providing tax planning and preparation advice.

 

Permitted Activities for Financial Holding Companies

 

The Gramm-Leach-Bliley Financial Services Modernization Act, became law in November 1999, and amends the Holding Company Act of 1956 to create a new category of holding company—the financial holding company.  To be designated as a financial holding company, a bank holding company must file an application with the Federal Reserve Board.  In order to become a financial holding company, Riverview must be and remain well capitalized and well managed, as determined by Federal Reserve Board regulations and maintain at least a ‘‘satisfactory’’ examination rating under the Community Reinvestment Act.  Once a bank holding company becomes a financial holding company, the holding company or its affiliates may engage in any financial activities that are financial in nature or incidental to financial activities.  Furthermore, the Federal Reserve may approve a proposed activity if it is complementary to financial activities and does not threaten the safety and soundness of banking.  The Act provides an initial list of activities that constitute activities that are financial in nature, including:

 

· lending and deposit activities,

 

· insurance activities, including underwriting, agency and brokerage,

 

· providing financial investment advisory services,

 

· underwriting in, and acting as a broker or dealer in, securities,

 

· merchant banking, and

 

· insurance company portfolio investment.

 

6



Table of Contents

 

Supervision and Regulation of Riverview National Bank

 

General Overview

 

Banks operate in a highly regulated environment and are regularly examined by federal and state regulatory authorities.  The following discussion concerns various federal and state laws and regulations and the potential impact of such laws and regulations on Riverview National Bank.

 

To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory or regulatory provisions themselves.  Proposals to change laws and regulations are frequently introduced in Congress, the state legislatures, and before the various bank regulatory agencies.  We cannot determine the likelihood or timing of any such proposals or legislation, or the impact they may have on Riverview National Bank.  A change in law, regulations or regulatory policy may have a material effect on Riverview National Bank’s business.

 

The operations of Riverview National Bank are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System, and to banks whose deposits are insured by the FDIC.  Riverview National Bank operations are subject to regulations of the Office of the Comptroller of the Currency (“OCC”), the Board of Governors of the Federal Reserve System and the FDIC.

 

Safety and Soundness

 

The primary regulator for Riverview National Bank is the OCC.  The OCC has the authority under the Financial Institutions Supervisory Act and the Federal Deposit Insurance Act to prevent a national bank from engaging in any unsafe or unsound practice in conducting business or from otherwise conducting activities in violation of the law.

 

Federal and state banking laws and regulations govern, but are not limited to, the following:

 

· Scope of a bank’s business

 

· Investments a bank may make

 

· Reserves that must be maintained against certain deposits

 

· Loans a bank makes and collateral it takes

 

· Merger and consolidation activities

 

· Establishment of branches

 

Riverview National Bank is a member of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant impact on many elements of Riverview National Bank’s operations including:

 

· Loan and deposit growth

 

· Rate of interest earned and paid

 

· Levels of liquidity

 

· Levels of required capital

 

7



Table of Contents

 

Management cannot predict the effect of changes to such policies and regulations upon Riverview National Bank’s business model and the corresponding impact they may have on future earnings.

 

FDIC Insurance Assessments

 

The Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against financial institutions for deposit insurance.  The FDIC imposes a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on a bank’s capital and supervisory measures.  Under the risk-related premium schedule, the FDIC assigns, on a semiannual basis, each depository institution to one of three capital groups, the best of these being well capitalized.  For purposes of calculating the insurance assessment, Riverview National Bank is expected to be well capitalized.  The FDIC adjusts the insurance rates every six months and has indicated the possibility that all banks may again be required to pay deposit insurance premiums in the future if current trends related to insured deposits versus insurance funds continue.

 

Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits.  If this reserve ratio drops below 1.15% or the FDIC expects that it will do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).

 

Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio.  As of June 30, 2008, the designated reserve ratio was 1.01% of estimated insured deposits as of March 31, 2008.  As a result of this reduced reserve ratio, on October 16, 2008, the FDIC published a proposed rule that would restore the ratio to its required level of 1.15% within five years.  On February 27, 2009, the FDIC took action to extend the restoration plan horizon to seven years.

 

The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments that improve how the assessment system differentiates for risk.  Currently, most banks are in the best risk category and pay anywhere from 12 to 14 cents per $100 of deposits for insurance.  Under the final rule, banks in this category pay initial base rates ranging from 12 to 16 cents per $100 of deposits on an annual basis beginning April 1, 2009.

 

The FDIC also imposed a 5 basis point emergency special assessment on the banking industry on June 30, 2009, where the assessment was required to be accrued during the second quarter of 2009 and paid on September 30, 2009.  All FDIC insured financial institutions were required to pay the special assessment.

 

On November 12, 2009 the FDIC approved a final rule requiring banks to prepay on December 30, 2009 their estimated quarterly assessments for the fourth quarter of 2009, as well as all of 2010, 2011 and 2012.  The assessment rate that was used for the entire period was the Bank’s base assessment rate that was in effect as of September 30, 2009.  The rate will be increased by 3 basis points for all of 2011 and 2012 based on the FDIC’s expectation that industry earnings will be stronger.  Each institution recorded the entire amount of its prepaid assessment as a prepaid expense (asset) as of December 31, 2009.  As of December 31, 2009, and each quarter thereafter, each institution records an expense (charge to earnings) for its regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment until the asset is exhausted.  Once the asset is exhausted, the institution will record an accrued expense payable each quarter for the assessment payment, which will be paid in arrears to the FDIC at the end of the following quarter.  If the prepaid assessment is not exhausted by December 31, 2014, any remaining amount will be returned to the depository institution.

 

FDIC Insurance

 

As a member institution of the FDIC, deposit accounts at the bank were insured generally up to a maximum of $100,000 for each separately insured depositor, and up to a maximum of $250,000 for self-

 

8



Table of Contents

 

directed retirement accounts.  In 2009, the FDIC increased the deposit insurance available on all deposit accounts to $250,000, effective until December 31, 2013.  Additionally, certain non-interest-bearing transaction accounts maintained with financial institutions participating in the FDIC’s Temporary Liquidity Guarantee Program (“TLG Program”) are fully insured regardless of the dollar amount until June 30, 2010.  The FDIC implemented the TLG Program on November 21, 2008.

 

Community Reinvestment Act

 

All FDIC insured institutions have a responsibility under the Community Reinvestment Act (‘‘CRA’’) and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods.  The OCC, which is a governmental agency that overviews national banks, is required to assess all financial institutions that it regulates to determine whether these institutions are meeting the credit needs of the community that they serve.  The Act focuses specifically on low and moderate-income neighborhoods.  The OCC takes an institution’s CRA record into account in its evaluation of any application made by any of such institutions.  A financial institution’s failure to comply with the CRA provisions could, at a minimum, result in regulatory restrictions on its activities including:

 

· Approval of a new branch or other deposit facility

 

· Closing of a branch or other deposit facility

 

· An office relocation or a merger

 

· Any acquisition of bank shares

 

The CRA, as amended, also requires that the OCC make publicly available the evaluation of a bank’s record of meeting the credit needs of its entire community, including low-and-moderate-income neighborhoods.  This evaluation includes a descriptive rating of either outstanding, satisfactory, needs to improve, or substantial noncompliance, and a statement describing the basis for the rating.  These ratings are publicly disclosed.

 

Payment of Dividends and Other Restrictions

 

Dividends are paid by the Corporation from its earnings, which are mainly provided by dividends from the Bank.  However, certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances.  The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the Bank’s net profits for that year combined with its retained net profits for the preceding two calendar years.  Under this restriction, at December 31, 2009, the Bank could declare dividends of $609,000 to the Corporation without prior regulatory approval.

 

Capital Adequacy

 

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (‘‘FDICIA’’) institutions are classified in one of five defined categories as illustrated below.

 

Capital Category

 

Total
Risk-Based
Ratio

 

Tier 1
Risk-Based
Ratio

 

Tier 1
Leverage
Ratio

 

Well capitalized

 

>10.0

 

>6.0

 

>5.0

 

Adequately capitalized

 

>8.0

 

>4.0

 

>4.0*

 

Undercapitalized

 

<8.0

 

<4.0

 

<4.0*

 

Significantly undercapitalized

 

<6.0

 

<3.0

 

<3.0

 

Critically undercapitalized

 

 

 

 

 

<2.0

 

 


*                3.0 for those banks having the highest available regulatory rating.

 

9



Table of Contents

 

Riverview National Bank’s capital ratios exceed the regulatory requirements to be considered well capitalized for Total Risk-Based Capital, Tier 1 Risk-Based Capital, and Tier 1 Leverage Capital.

 

Prompt Corrective Action

 

In the event an institution’s capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including:

 

· Implementation of a capital restoration plan and a guarantee of the plan by a parent institution

 

· Placement of a hold on increases in assets, number of branches, or lines of business

 

If capital reaches the significantly or critically undercapitalized level, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver.  For well-capitalized institutions, FDICIA provides authority for regulatory intervention where they deem the institution to be engaging in unsafe or unsound practices, or if the institution receives a less than satisfactory examination report rating for asset quality, management, earnings, liquidity, or sensitivity to market risk.

 

Legislation and Regulatory Changes

 

From time to time, legislation is enacted that has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial institutions.  Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various regulatory agencies.  No prediction can be made as to the likelihood of any major changes or the impact such changes might have on Riverview National Bank’s operations.  Certain changes of potential significance to Riverview National Bank that have been enacted recently and others, which are currently under consideration by Congress or various regulatory or professional agencies, are discussed below.

 

Legislation and Regulations

 

USA Patriot Act

 

The USA PATRIOT Improvement and Reauthorization Act of 2005 became law on March 9, 2006.  This enactment extended the requirements of the original act signed into law in October 2001 and was renewed in March 2006.  The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements.  By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act included measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies.  Further, certain provisions of Title III imposed affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

 

The rules, developed by the Secretary of the Treasury, require that banks have procedures in place to:

 

· Verify the identity of persons applying to open an account

 

· Ensure adequate maintenance of the records used to verify a person’s identity, and

 

· Determine whether a person is on any US governmental agency list of known or suspected terrorists or a terrorist organization

 

10



Table of Contents

 

The bank regulatory agencies have increased the regulatory scrutiny of the Bank Secrecy Act and anti-money laundering programs maintained by financial institutions.  Significant penalties and fines, as well as other supervisory orders may be imposed on a financial institution for non-compliance with these requirements.  In addition, federal bank regulatory agencies must consider the effectiveness of financial institutions engaging in a merger transaction in combating money laundering activities.  Riverview National Bank has adopted policies and procedures which are in compliance with these requirements

 

Multifactor Authentification

 

The bank regulatory agencies jointly published the ‘‘Interagency Guidance on Authentification in an Internet Banking Environment’’.  This guidance requires banks to implement enhanced security measures to authenticate customers using internet based services to process transactions that either access customer information or transfer funds to third parties.  The principles of this guidance apply to telephone banking systems and call centers if the same level of access is available through these services.

 

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

 

The Bankruptcy Abuse and Consumer Protection Act of 2005 was passed by Congress on April 14, 2005 and signed into law by the President on April 20, 2005.

 

This Act amends both the Bankruptcy Code and the Truth in Lending Act.  The Bankruptcy Code revisions became effective October 15, 2005.  The Bankruptcy Code was amended, adding requirements to the process for filing for bankruptcy.  The provisions related to the Truth in Lending did not become effective until October of 2006.  It requires lenders to:

 

· Warn customers about the impact of making only the minimum payment under an open-end consumer credit plan

 

· Provide a toll free number for consumers to call for information regarding the consequences of making only minimum required payments

 

· Inform customers that interest attributed to the portion of a home secured loan that exceeds the property’s fair market value is not tax deductible

 

· Provide new disclosures on solicitations and applications for open-end credit plans containing an introductory rate

 

Ongoing Legislation

 

As a consequence of the extensive regulation of commercial banking activities in the United States, Riverview National Bank’s business is particularly susceptible to changes in the federal and state legislation and regulations.  Over the course of time, various federal and state proposals for legislation could result in additional regulatory and legal requirements for Riverview National Bank.  Riverview National Bank can neither predict if any such legislation will be adopted nor if adopted how it would affect the business of Riverview National Bank.  Past history has demonstrated that new legislation or changes to existing legislation usually results in a heavier compliance burden and, therefore, generally increases the cost of doing business.

 

Recent Developments

 

Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009.  In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law and subsequently amended by the American

 

11



Table of Contents

 

Recovery and Reinvestment Act of 2009 on February 17, 2009.  Under the authority of the EESA, as amended, the United States Department of the Treasury (the “Treasury”) created the Troubled Asset Relief Program (“TARP”) Capital Purchase Program and through this program invested in financial institutions by purchasing preferred stock and warrants to purchase either common stock or additional shares of preferred stock.  As of December 31, 2009, the Treasury will not make additional investments under the TARP Capital Purchase Program but is considering continuing a similar program for banks under $10 billion in assets under a different program.

 

Available Information

 

Riverview Financial Corporation is subject to the informational requirements of Section 15(d) of the Exchange Act, and, accordingly, files reports, and other information with the Securities and Exchange Commission.  The reports and other information filed with the SEC are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, and Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Riverview Financial Corporation is an electronic filer with the SEC.  The SEC maintains an internet site that contains reports and information statements, and other information regarding issuers that file electronically with the SEC.  The SEC’s internet site address is http://www.sec.gov.

 

Riverview Financial Corporation’s headquarters are located at 3rd and Market Streets, Halifax, Pennsylvania 17032, and its telephone number is (717) 896-3433.

 

At December 31, 2009, Riverview Financial Corporation had 53 full time employees and 10 part time employees.  In the opinion of management, Riverview Financial Corporation enjoys a satisfactory relationship with its employees.  Riverview Financial Corporation is not a party to any collective bargaining agreement.

 

ITEM 1A. RISK FACTORS.

 

Not required for smaller reporting companies.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

12



Table of Contents

 

ITEM 2. PROPERTIES.

 

Riverview owns a parking lot located at 110 Verbeke Street, Marysville, Pennsylvania 17053, which is adjacent to the main office of Riverview National Bank.  The table below sets forth the locations of the properties that are owned and leased in the name of Riverview National Bank, which include its main office, branch offices and certain parking facilities related to its banking offices.  As for those properties that are owned, all are owned free and clear of any lien.  The Bank’s main office and all branch offices are located in Pennsylvania.

 

Operating under the name “The First National Bank of Marysville, a division of Riverview National Bank”:

 

Office and Address

 

2040 Good Hope Road, Enola, Pennsylvania 17025 (leased)

1288 North Mountain Road, Harrisburg, Pennsylvania 17112 (leased)

55 South Main Street, Duncannon, Pennsylvania 17020 (leased)

200 Front Street, Marysville, Pennsylvania 17053 (owned)

500 South State Road, Marysville, Pennsylvania 17053 (owned)

 

Operating under the name “Halifax National Bank, a division of Riverview National Bank”:

 

Office and Address

 

Third and Market Streets, Halifax, Pennsylvania 17032 (owned)

311 South Market Street, Millersburg, Pennsylvania 17061 (owned)

Drive-through facility on 16 N. 3rd Street, Halifax, Pennsylvania 17032 (owned)

15 N. 3rd Street, Halifax, Pennsylvania 17032 (owned)

Parking Lot on N. 3rd Street, Halifax, Pennsylvania 17032 (owned)

Market Street Main Building (owned)

34 South Market Street, Elizabethville, Pennsylvania 17023 (leased)

 

All of these properties are in good condition and are deemed by management to be adequate for Riverview’s purposes.

 

ITEM 3. LEGAL PROCEEDINGS.

 

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position or results of operations of Riverview.  There are no proceedings pending other than ordinary routine litigation incident to the business of Riverview and Riverview National Bank.  In addition, management does not know of any material proceedings contemplated by governmental authorities against Riverview or Riverview National Bank or any of its properties.

 

ITEM 4. (REMOVED AND RESERVED).

 

13



Table of Contents

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The authorized common stock of Riverview consists of 5,000,000 shares of common stock with a par value of $0.50 per share of which 1,750,003 shares were outstanding as of March 18, 2010 and held by approximately 370 holders of record.  The number of shareholders does not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms, and others.  Riverview common stock is not listed or traded on any market or exchange but instead is traded in a local over-the-counter market and privately negotiated transactions under the symbol “RIVE”. Therefore, the stock is traded at irregular intervals.

 

Riverview pays dividends on the outstanding shares of common stock on a quarterly basis at the discretion of the Board of Directors which bases its decision on Riverview’s earnings, cash requirements and overall financial position.  The following table presents the per share cash dividends declared by the Board of Directors and paid for the years presented.  Dividend information for the year 2008 reflects the dividends paid by First Perry Bancorp, Inc.

 

 

 

 

Per Share Cash
Dividends Paid

 

2009

First quarter

 

$

0.100

 

 

Second quarter

 

0.100

 

 

Third quarter

 

0.100

 

 

Fourth quarter

 

0.120

 

 

 

 

$

0.420

 

 

 

 

 

 

2008

First quarter

 

$

0.078

 

 

Second quarter

 

0.078

 

 

Third quarter

 

0.078

 

 

Fourth quarter

 

0.078

 

 

 

 

$

0.312

 

 

On March 3, 2010, the Board of Directors declared a quarterly cash dividend of $0.125 per common share, payable on March 31, 2010 to all common shareholders of record as of March 17, 2010.

 

Additional information relating to dividend restrictions can be found in Note 14 — Regulatory Matters and Shareholders’ Equity — in Part II, Item 8 — Financial Statements and Supplementary Data - incorporated in this Form 10-K.

 

Information about Riverview’s Equity Compensation Plans can be found in Part II, Item 7 under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated herein by reference.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not Required.

 

14



Table of Contents

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RIVERVIEW FINANCIAL CORPORATION.

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed below, may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Riverview to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

 

Riverview’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

 

·                  anticipated cost savings and synergies from the consolidation may not be realized;

·                  the effects of future economic conditions on Riverview and the Riverview National Bank’s customers;

·                  the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

·                  governmental monetary and fiscal policies, as well as legislative and regulatory changes;

·                  the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

·                  the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

·                  the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Riverview’s market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the Internet;

·                  technological changes;

·                  acquisitions and integration of acquired businesses;

·                  the failure of assumptions underlying the establishment of reserves for loan and lease losses and estimations of values of collateral and various financial assets and liabilities; and

·                  acts of war or terrorism;

·                  volatilities in the securities market; and

·                  deteriorating economic conditions.

 

All written or oral forward-looking statements attributable to Riverview are expressly qualified in their entirety by these cautionary statements.

 

We caution readers not to place undue reliance on these forward-looking statements.  They only reflect management’s analysis as of this date.  Riverview does not revise or update these forward-looking statements to reflect events or changed circumstances.  Please carefully review the risk factors described in this Annual Report on Form 10-K and other documents Riverview files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and any other Current Reports on Form 8-K.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of Riverview’s consolidated financial statements and should be read in conjunction with

 

15



Table of Contents

 

the Consolidated Financial Statements of Riverview and Notes thereto and other detailed information appearing elsewhere in this Annual Report.

 

Critical Accounting Policies and Estimates

 

The consolidated financial statements include Riverview and its wholly-owned subsidiary, the Riverview National Bank.  All significant intercompany accounts and transactions have been eliminated.

 

The accounting and reporting policies followed by Riverview conform, in all material respects, to accounting principles generally accepted in the United States of America.  In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and results of operations for the periods indicated.  Actual results could differ significantly from those estimates.

 

Riverview’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.  The most significant accounting policies followed by Riverview are presented in Note 1 of the consolidated financial statements.  Note 1 presents significant accounting policies used in the development and presentation of its financial statements.  This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of Riverview and its results of operations.  Riverview has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.  These policies relate to the allowance for loan losses, valuation of its securities and accounting for income taxes.

 

The allowance for loan losses is established through a charge to earnings for the provision for loan losses.  In determining the balance in the allowance for loan losses, consideration is given to a variety of factors in establishing the estimate.  In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics and trends in actual and forecasted credit quality, results of internal loan reviews, borrowers’ perceived financial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors.  The use of different estimates and assumptions could produce different provisions for loan losses.  Additional information is provided in the “Provisions for Loan Losses”, “Allowance for Loan Losses” and “Credit Risk and Loan Quality” sections.

 

Declines in the fair value of securities held to maturity and available-for-sale, below their costs that are deemed to be other-than-temporarily impaired, are reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Riverview to retain its investment in the issuer for a period of time sufficient to allow for any recovery in fair value.  No securities were deemed to be other-than-temporarily impaired as of December 31, 2009.

 

Deferred income tax assets and liabilities are determined using the liability method.  Under this method, the net deferred tax asset or liability is recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established.  The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.  Riverview has deemed that its deferred tax assets will more likely than not be realized, and accordingly, has not established a

 

16



Table of Contents

 

valuation allowance for them.

 

OVERVIEW

 

Business Combination

 

On December 31, 2008 and pursuant to the Agreement and Plan of Consolidation (the “Agreement”), dated, June 18, 2008, as amended, by and between First Perry Bancorp, Inc. (“First Perry”) and HNB Bancorp, Inc. (“HNB”), Riverview Financial Corporation (“Riverview”), a Pennsylvania Corporation, was formed upon the completion of the consolidation of First Perry and HNB under Pennsylvania law.  Each outstanding share of common stock of First Perry and HNB was converted into 2.435 and 2.520 shares of Riverview’s common stock, respectively.  Further, The First National Bank of Marysville, the wholly owned subsidiary of First Perry, and Halifax National Bank, the wholly owned subsidiary of HNB, consolidated to form Riverview National Bank (the “Bank”), which is the wholly owned subsidiary of Riverview.  Riverview issued 1,750,003 shares of common stock and incurred $310,000 in transaction costs.  The primary reason for the combination was to pool resources to provide greater products and services to customers in the contiguous counties, and to provide better efficiencies and cost savings through the consolidation of operations.

 

As a community-focused financial institution, Riverview, through its wholly-owned banking subsidiary, generates the majority of its revenues from net interest income derived from its core banking activities.  During 2009, Riverview continued to experience strong financial performance and achieved solid growth in assets, loans and deposits.  Riverview was able to successfully grow while maintaining its commitment to ensure strong credit quality, retain and expand customer relationships and prudently manage interest rate risk.  In addition, Riverview continues to be focused on business practices that not only provide value to its customers but to its shareholders as well.

 

The combined financial information for the year ended December 31, 2008 reflects the impact of the consolidation of First Perry’s and HNB’s combined financial condition under the purchase method of accounting with First Perry treated as the acquirer from an accounting standpoint.  Under this method of accounting, Riverview was formed and treated as a recapitalization of First Perry, with First Perry’s assets and liabilities recorded at their historical values, and HNB’s at their fair values on the date the consolidation was completed.  In accordance with Financial Accounting Standards Board Statement No. 141, Business Combinations, the financial information relating to the periods prior to December 31, 2008 of First Perry, the acquirer, is reported under the name of Riverview Financial Corporation.

 

Riverview’s results of operations are primarily derived from the management of spread income generated between the interest received on its interest-earning assets and the interest paid on its interest-bearing liabilities.  Changes in net interest income are not only affected by changes in interest rates, but are also impacted by changes in the make-up of the balance sheet as well as the level of yield generated from interest-earning assets versus the costs associated with interest-bearing liabilities.  Riverview also generates non-interest income from fees associated with various products and services offered to customers, mortgage banking activities, bank owned life insurance (“BOLI”) and from the sale of assets, such as loans or investments.   Offsetting these revenues are provisions for potential losses on loans, administrative expenses and income taxes.

 

As of the 2009 year end, Riverview achieved net income of $1,111,000, an increase of 199.5% from net income of $371,000 for the 2008 year end.  Basic earnings per share in 2009 were $0.63 per share, an increase of 61.5% from $0.39 per share in 2008.  The increase is primarily due to the fact that 2009 net income reflects the combined earnings of First Perry Bancorp, Inc. and HNB Bancorp, Inc. and their wholly-owned subsidiaries, The First National Bank of Marysville and Halifax National Bank (the “consolidation”), which were consolidated on December 31, 2008 to form Riverview Financial Corporation, as compared with 2008 net income, which only represents the earnings of First Perry Bancorp, Inc., the holding company of The First National Bank of Marysville.  Further impacting the increase in net income was the growth of assets as a result of the consolidation, and Riverview’s management of its net interest margin during a period in which short-term interest rates remained at historic lows.  Return on average assets was 0.46% in 2009 compared to

 

17



Table of Contents

 

0.29% in 2008.  Return on average equity was 4.45% in 2009 compared to 2.90% in 2008.  The increase in both ratios is attributable to the increase in net income during 2009.

 

RESULTS OF OPERATIONS

 

Net Interest Income and Net Interest Margin

 

Net interest income is the most significant component of Riverview’s net income as a result of its focus on traditional banking activities.  It is the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities.  The change in net interest income from year to year may be due to changes in interest rates, changes in volumes of interest-earning assets and liabilities as well as changes in the mix of such assets and liabilities.  Riverview’s principal interest-earning assets are loans to individuals and small businesses, with a secondary source of income earned from the investment securities portfolio and other interest-earning deposits with banks.  Interest-bearing liabilities consist primarily of demand deposit accounts, time deposits, money market accounts, savings deposits, securities sold under agreements to repurchase and borrowings.  Generally, changes in net interest income are portrayed by net interest rate spread and net interest margin.  Net interest rate spread is equal to the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities.  Net interest margin is the average yield on interest-earning assets minus the average interest rate paid on interest-bearing deposits.  Net interest income growth is generally dependent upon balance sheet growth and maintaining or growing the net interest margin.  For analysis purposes, net interest income is evaluated on a fully tax-equivalent (“FTE”) basis.  The FTE basis is calculated by grossing up the yield on tax-exempt securities and loans by the Federal tax rate of 34% in order that the yield on tax-exempt assets may be comparable to interest earned on taxable assets.

 

2009 Compared to 2008

 

Total interest income increased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax exempt assets — see Table 1 for calculation), by $5,135,000, or 70.1 %, to $12,457,000 for 2009 from $7,322,000 for 2008.  This increase was due to the consolidation and organic growth, which contributed to the 85.8% increase in average interest-earning assets to $221,605,000 in 2009 from $119,246,000 in 2008.  The growth in average interest-earning assets was attributable to a 43.6 % increase in investment securities, 77.2% increase in loans and a 1651.3% increase in other interest-earning assets, mostly comprised of deposits with banks.  The increased volume offset the decline in yields (calculated on a fully tax-equivalent basis) to 5.62% for 2009 from 6.14% in 2008.  The decline in the yield on earning assets was attributable to changes in market interest rates.

 

Total interest expense increased $1,816,000, or 59.7% to $4,860,000 for the year ended December 31, 2009 from $3,044,000 for the year ended December 31, 2008.  Cost of funds decreased to 2.48% at the end of 2009 from 2.87% at the end of 2008.  The decline in the cost of funds offset the increase in the volume of average interest-bearing liabilities.  While average interest-bearing liabilities increased due to the consolidation and deposit growth, Riverview paid off $20,796,000 in short-term borrowings and took advantage of declining interest rates by securing more cost effective long-term borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”).

 

Net interest income calculated on a fully tax equivalent basis increased $3,319,000, or 77.6%, to $7,597,000 for the year ended December 31, 2009 from $4,278,000 for the year ended December 31, 2008.  Riverview’s net interest spread decreased to 3.14% at December 31, 2009 from 3.27% at December 31, 2008, while its net interest margin decreased to 3.43% at December 31, 2009 from 3.58% at December 31, 2008.  In consideration of the increased volume of interest-earning assets and interest-bearing liabilities, management proactively managed the cost associated with interest-bearing liabilities and was able to improve its net interest spread and margin even though the yields from interest-earning assets declined.  Riverview’s ability to manage net interest income over a variety of interest rate and economic environments is important to its financial success.  Growth in net interest income is generally dependent upon the growth of the balance sheet and managing the net interest margin.

 

18



Table of Contents

 

2008 Compared to 2007

 

Total interest income increased on a fully tax equivalent basis, by $692,000, or 10.4%, to $7,322,000 for the year ended December 31, 2008 from $6,630,000 for the year ended December 31, 2007.  This increase was attributable to a shift in the composition of interest-earning assets where the cash flows from investment securities and other interest-earning assets were reinvested in loans which generated a higher yield.

 

Total interest expense decreased $214,000, or 6.6%, to $3,044,000 in 2008 from $3,258,000 in 2007.  The decrease was attributable to a decline in cost of funds, which mitigated the impact of the 13.5% growth in total interest-bearing liabilities, which increased to $106,069,000 at the 2008 year end from $93,452,000 for 2007 as a result of increased borrowings.

 

Net interest income on a fully tax equivalent basis increased by $906,000, or 26.9%, to $4,278,000 for the year ended December 31, 2008 from $3,372,000 for the year ended December 31, 2007.  This was attributable to the growth in interest sensitive assets and prime rate decreases, which had the impact of reducing cost of funds.  The net interest spread (on a fully tax equivalent basis) increased to 3.27% for 2008 from 2.80 for 2008, while the net interest margin (on a fully tax equivalent basis) increased to 3.58% for 2008 from 3.20% for 2007.

 

19



Table of Contents

 

Table 1 presents a summary of the Bank’s average balances, interest rates, interest income and expense, the interest rate spread and the net interest margin, adjusted to a fully tax-equivalent basis, for the years ended December 31, 2009, 2008 and 2007.

 

TABLE 1

 

AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE

 

 

 

2009

 

2008

 

2007

 

Year Ended December 31,

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

(Dollars in thousands)

 

Balance

 

Interest

 

Yield/Rate

 

Balance

 

Interest

 

Yield/Rate

 

Balance

 

Interest

 

Yield/Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities (2)

 

$

15,731

 

$

514

 

3.27

%

$

15,917

 

$

596

 

3.74

%

$

17,187

 

$

664

 

3.86

%

Tax-exempt securities (1)(2)

 

11,516

 

686

 

5.96

%

3,061

 

208

 

6.80

%

5,045

 

344

 

6.82

%

Total securities

 

 27,247

 

1,200

 

4.40

%

18,978

 

804

 

4.24

%

22,232

 

1,008

 

4.53

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

4,959

 

281

 

5.67

%

3,622

 

276

 

7.62

%

4,440

 

348

 

7.84

%

Commercial

 

11,647

 

749

 

6.43

%

9,030

 

626

 

6.93

%

7,086

 

560

 

7.90

%

Real estate

 

159,136

 

10,065

 

6.32

%

86,553

 

5,585

 

6.45

%

 68,703

 

4,575

 

6.66

%

Total loans

 

175,742

 

11,095

 

6.31

%

99,205

 

6,487

 

6.54

%

80,229

 

5,483

 

6.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest-earning assets

 

18,616

 

162

 

0.87

%

1,063

 

31

 

2.92

%

3,015

 

139

 

4.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

221,605

 

12,457

 

5.62

%

119,246

 

7,322

 

6.14

%

105,476

 

6,630

 

6.29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest earning assets

 

21,217

 

 

 

 

 

10,007

 

 

 

 

 

 9,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

242,822

 

 

 

 

 

$

129,253

 

 

 

 

 

$

114,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

$

40,337

 

$

602

 

1.49

%

$

17,020

 

$

216

 

1.27

%

$

16,759

 

$

436

 

2.60

%

Savings deposits

 

28,709

 

302

 

1.05

%

15,067

 

137

 

0.91

%

15,617

 

203

 

1.30

%

Time deposits

 

108,321

 

3,569

 

3.29

%

51,059

 

1,942

 

3.80

%

50,989

 

2,103

 

4.12

%

Total deposits

 

177,367

 

4,473

 

2.52

%

83,146

 

2,295

 

2.76

%

83,365

 

2,742

 

3.29

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

8,111

 

49

 

0.60

%

9,743

 

152

 

1.56

%

3,579

 

190

 

5.31

%

Long-term borrowings

 

10,391

 

338

 

3.25

%

13,180

 

597

 

4.53

%

6,508

 

326

 

5.01

%

Total borrowings

 

18,502

 

387

 

2.09

%

22,923

 

749

 

3.27

%

 10,087

 

516

 

5.12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

195,869

 

4,860

 

2.48

%

106,069

 

3,044

 

2.87

%

93,452

 

3,258

 

3.49

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

20,338

 

 

 

 

 

9,684

 

 

 

 

 

8,279

 

 

 

 

 

Other liabilities

 

1,652

 

 

 

 

 

692

 

 

 

 

 

857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 24,963

 

 

 

 

 

12,808

 

 

 

 

 

12,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

242,822

 

 

 

 

 

$

129,253

 

 

 

 

 

$

114,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

 

$

7,597

 

 

 

 

 

$

4,278

 

 

 

 

 

$

3,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Spread

 

 

 

 

 

3.14

%

 

 

 

 

3.27

%

 

 

 

 

2.80

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin

 

 

 

 

 

3.43

%

 

 

 

 

3.58

%

 

 

 

 

3.20

%

 


(1)   Yields on tax-exempt assets have been calculated on a fully tax equivalent basis assuming a tax rate of 34%.

 

(2)   Available-for-sale securities are reported at amortized cost for purposes of calculating yields.

 

(3)   For yield calculation purposes, non-accruing loans are included in the average loan balances, and any income recognized on these loans is included in interest income.

 

20



Table of Contents

 

Table 2 presents a summary of changes in interest income and interest expense resulting from changes in volumes (average balances) and changes in rates for the periods indicated.

 

TABLE 2

 

RATE VOLUME ANALYSIS OF NET INTEREST INCOME

 

FOR THE YEARS ENDED DECEMBER 31,

 

 

 

2009 vs. 2008

 

2008 vs. 2007

 

 

 

Increase/(Decrease)

 

Increase/(Decrease)

 

(In thousands)

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing due from banks and federal funds sold

 

$

151

 

$

(20

)

$

131

 

$

(53

)

$

(55

)

$

(108

)

Securities, taxable (1)

 

(7

)

(75

)

(82

)

(47

)

(21

)

(68

)

Securities, tax-exempt (1)

 

503

 

(25

)

478

 

(134

)

(2

)

(136

)

Loans (1)

 

4,836

 

(228

)

4,608

 

1,237

 

(233

)

1,004

 

Net Change in Interest Income

 

5,483

 

(348

)

5,135

 

1,003

 

(311

)

692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

349

 

37

 

386

 

3

 

(223

)

(220

)

Savings deposits

 

144

 

21

 

165

 

(5

)

(61

)

(66

)

Time deposits

 

1,887

 

(260

)

1,627

 

2

 

(163

)

(161

)

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

(8

)

(95

)

(103

)

97

 

(135

)

(38

)

Long-term borrowings

 

(90

)

(169

)

(259

)

302

 

(31

)

271

 

Net Change in Interest Expense

 

2,282

 

(466

)

1,816

 

399

 

(613

)

(214

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHANGE IN NET INTEREST INCOME

 

$

3,201

 

$

118

 

$

3,319

 

$

604

 

$

302

 

$

906

 

 


(1)                                  Yields on tax-exempt assets have been computed on a fully tax-equivalent basis assuming a tax rate of 34%.

 

Provision for Loan Losses

 

Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level management considers adequate to absorb credit losses inherent in the loan portfolio.  Credit exposures deemed uncollectible are charged against the allowance for loan losses.  Recoveries of previously charged-off loans are credited to the allowance for loan losses.  The Bank performs periodic evaluations of the allowance for loan losses with consideration given to historical, internal and external factors.  In evaluating the adequacy of the allowance for loan losses, management considers historical loss experience, delinquency trends and charge-off activity, status of past due and non-performing loans, growth within the portfolio, the amount and types of loans comprising the loan portfolio, adverse situations that may affect a borrower’s ability to pay, the estimated value of underlying collateral, peer group information and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are caused to undergo interpretation and possible revision as events occur or as more information becomes available.  Loans are also reviewed for impairment based on discounted cash flows using the loans’ initial effective interest rates or the fair value of the collateral for certain collateral dependent loans as provided under the accounting standard relating to Accounting by Creditors for Impairment of a Loan.  After an evaluation of these factors, the provision recorded for the year ended December 31, 2009 was $1,125,000 as compared with $380,000 for the year ended December 31, 2008.   A higher provision was made to the allowance for loan losses in 2009 due to an increase in criticized loans, and particularly, the adverse classification of two large commercial loans deemed to be impaired which required specific reserves.  The allowance for loan losses was $2,560,000 or 1.48% of total loans outstanding at December 31, 2009 as compared to $1,710,000, or 0.96% of total loans at December 31, 2008.

 

21



Table of Contents

 

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses, if necessary, in order to maintain the adequacy of the allowance.  Management believes the reserve for loan losses at December 31, 2009 is maintained at a level that is currently adequate to absorb probable and potential losses inherent in the loan portfolio.  At the same time, management continues to allocate dedicated resources to continue to manage at-risk credits.

 

Non-Interest Income

 

Non-interest income continues to represent a considerable source of income for Riverview, representing 18.3% of the total revenues (comprised of net interest income and non-interest income) in 2009 and 12.1% in 2008.  Non-interest income consists primarily of customer service fees and charges derived from deposit accounts, mortgage banking activities, the investment in bank owned life insurance (“BOLI”) and gains from the sale of loans and available-for-sale securities.

 

The increases in service charges on deposit accounts and other fee income for 2009 were generally attributable to the consolidation as well as increased core deposit activity.  Earnings from the cash value of life insurance increased in 2009 as compared with 2008 as a result of the consolidation as well as a gain of $26,000 from the proceeds of bank owned life insurance paid as a result of the death of a former director.  Also contributing to the increase in the 2009 non-interest income were gains from the sale of available-for-sale securities, which were $247,000 higher than the gains on sale recorded in 2008.  During 2009 the Bank recorded $443,000 in income, as compared with $50,000 recorded in 2008, that was generated from the sale of mortgage loans sold servicing released to Freddie Mac and to the Federal Home Loan Bank of Pittsburgh (“FHLB”) under its Mortgage Partnership Finance program (“MPF”).  The reason why this income is so much lower for 2008 is because the Bank did not partake in the sale of mortgage loans until the latter part of 2008 and due to a lower interest rate environment.

 

The following table presents the components of non-interest income and related fluctuations for the years ended December 31, 2009 and 2008.

 

 

 

Years Ended December 31,

 

 

 

(Dollars in thousands)

 

Non-Interest Income

 

2009

 

Increase
(Decrease)

Amount

 

%

 

2008

 

Service charges on deposit accounts

 

$

288

 

$

132

 

84.6

%

$

156

 

Other service charges and fees

 

358

 

138

 

62.7

%

220

 

Earnings on cash value of life insurance

 

262

 

162

 

162.0

%

100

 

Gain on sale of available-for-sale securities

 

287

 

247

 

617.5

%

40

 

Gain from sale of held for sale mortgage loans

 

443

 

393

 

786.0

%

50

 

 

 

$

1,638

 

$

1,072

 

189.4

%

$

566

 

 

Non-Interest Expenses

 

The increase of $2,556,000 or 64.2% in non-interest expenses is primarily attributable to the consolidation, increased professional fees relating to the consolidation and costs associated with the merger of systems and processes to expedite the union of First Perry Bancorp, Inc. and HNB Bancorp, Inc. and their wholly-owned subsidiaries, The First National Bank of Marysville and Halifax National Bank.

 

During the second quarter of 2009, the Bank updated its standard costs relating to the origination of all types of loans.  Generally accepted accounting principles relating to Accounting for Nonrefundable Fees and Costs Associated with Originating of Acquiring Loans and Initial Direct Costs of Leases establish the accounting treatment for fees and initial direct costs associated with the origination of a loan, where direct loan costs may be deferred and capitalized.  These costs will be expensed over the life of the related loan as a reduction of the loan yield.  Direct loan costs capitalized during 2009 increased $330,000 over 2008 as a

 

22



Table of Contents

 

result of the updated cost structure, the consolidation of the loan portfolios of the two merged banks, and the volume loan originations.  In recording the deferral of these direct loan costs, it had the immediate impact of reducing salary expense by $376,000 during the twelve months ended December 31, 2009 as compared with $46,000 recorded in 2008.

 

With regard to the FDIC premium, on November 12, 2009, the Board of Directors of the FDIC adopted a final rulemaking requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  The FDIC also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011.  Each institution recorded the entire amount of its prepaid assessment as a prepaid expense (asset) as of December 31, 2009.  As of December 31, 2009, and each quarter thereafter, each institution will record an expense (charge to earnings) for its regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment until the asset is exhausted.  Once the asset is exhausted, the institution will record an accrued expense payable each quarter for the assessment payment, which will be paid in arrears to the FDIC at the end of the following quarter.  If the prepaid assessment is not exhausted by December 31, 2014, any remaining amount will be returned to the depository institution.  This expense for 2009  is higher than that of 2008 because of the expense incurred to record the special FDIC assessment that was required to be accrued during the second quarter but paid at the end of the third quarter of 2009.  All FDIC insured financial institutions were required to pay this special assessment.  In addition, there was a higher expense associated with the “regular” FDIC assessment as compared with the 2008 assessment, at which time the Bank received a one-time credit.

 

The following table presents the components of non-interest expenses and the related changes for the years ended 2009 and 2008:

 

 

 

Years Ended December 31,

 

 

 

(Dollars in thousands)

 

Non-Interest Expenses

 

2009

 

Increase
(Decrease)
Amount

 

%

 

2008

 

Salaries and employee benefits

 

$

3,048

 

$

843

 

38.2

%

$

2,205

 

Occupancy expense

 

675

 

226

 

50.3

%

449

 

Equipment expense

 

425

 

212

 

99.5

%

213

 

Telecommunications and processing charges

 

480

 

237

 

97.5

%

243

 

Postage and office supplies

 

225

 

131

 

139.4

%

94

 

FDIC premium

 

433

 

388

 

862.2

%

45

 

Bank shares tax expense

 

257

 

153

 

147.1

%

104

 

Directors’ compensation

 

219

 

114

 

108.6

%

105

 

Professional services

 

266

 

79

 

42.3

%

187

 

Other expenses

 

511

 

173

 

51.2

%

338

 

Total non-interest expenses

 

$

6,539

 

$

2,556

 

64.2

%

$

3,983

 

 

Income Taxes

 

The provision for federal income tax expense (benefit) was $153,000 for the year ended December 31, 2009 as compared to ($42,000) for the year ended December 31, 2008.  The tax provision increased $195,000, or 464.3%, as a result of the increased level of net income achieved in 2009.  The tax provision reflects an effective tax rate of approximately a 12.1% expense for 2009 and a 13.0% benefit for 2008.  The effective tax rate continues to be less than the statutory Federal tax rate of 34%.  The difference between the statutory and effective tax rates reflects the tax-exempt status of interest income on loans and obligations of state and political subdivisions and the impact of the earnings from the cash surrender value of bank owned life insurance.

 

23



Table of Contents

 

FINANCIAL CONDITION

 

Securities

 

Riverview’s securities portfolio is comprised of securities, which not only provide interest income, including tax-exempt income, but also provide a source of liquidity, diversify the earning assets portfolio, allow for the management of risk and tax liability, and provide collateral for repurchase agreements and public fund deposits.  Policies are in place to address various aspects of managing the portfolio, including but not limited to, concentrations, liquidity, credit quality, interest rate sensitivity and regulatory guidelines.  Adherence to these policies is monitored by Riverview’s Asset/Liability Committee (“ALCO”) on a quarterly basis.

 

Because of the changing nature of the banking environment and the need to correspondingly position assets, all investment securities are characterized as available-for-sale and carried at fair value with net unrealized gains and losses, net of taxes, reported as a separate component of comprehensive income.

 

Table 3 illustrates the composition of the securities portfolio for the periods presented.

 

TABLE 3

 

SECURITIES

 

 

 

December 31,

 

 

 

2009

 

2008

 

2007

 

 

 

(In thousands)

 

Available-for-sale securities:

 

 

 

 

 

 

 

U.S. Government agencies

 

$

2,375

 

$

7,264

 

$

4,092

 

State and municipal

 

14,950

 

9,373

 

4,480

 

Mortgage-backed securities

 

17,258

 

11,181

 

11,718

 

Corporate debt securities

 

 

302

 

 

 

 

$

34,583

 

$

28,120

 

$

20,290

 

 

During 2009 U.S. Government agencies declined as a result of investment maturities, prepayments and calls.  The balance of state and municipal bonds increased during 2009 due to the Bank’s need to generate more tax-exempt income to complement the increase in its net income.  In addition, mortgage-backed securities increased during 2009.  During the third quarter of 2009, management decided to sell most of its mortgage-backed securities that were issued by the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”).  The reason for doing this was to alleviate some of the credit risk associated with these particular U.S. Government agencies in light of the fact that they do not carry a full-faith credit guaranty by the government.  The proceeds of the sale of these securities plus additional funds that were on deposit with banks were reinvested in mortgage-backed securities issued by the Government National Mortgage Association (“GNMA”), which is a government owned corporation and carries the full-faith credit guarantee of the United States federal government.

 

Included in the carrying values of investment securities at December 31, 2009 is a net unrealized gain of $245,000, compared to a net unrealized gain of $56,000 at December 31, 2008.  At December 31, 2009, the unrealized gain on securities available-for-sale, net of tax, included in shareholders’ equity totaled $161,000, compared to $37,000 at December 31, 2008.  The net increase in the carrying value of securities is reflective of declines in the interest rate environment and a shorter duration of the portfolio which will cause the securities to trade closer to par.

 

No securities are considered other-than-temporarily-impaired based on management’s evaluation of the individual securities, including the extent and length of the unrealized loss, Riverview’s ability to hold the

 

24



Table of Contents

 

security until maturity or until the fair value recovers, and management’s opinion that it will not have to sell the securities prior to recovery of value.  Riverview invests in securities for the cash flow and yields they produce and not to profit from trading.  Riverview holds no trading securities in its portfolio, and the portfolio does not contain high risk securities or derivatives as of December 31, 2009.

 

Investment in stock of the FHLB is required for membership in the organization and is carried at cost since there is no market value available.  The amount that Riverview is required to invest is based upon a formula which weighs a dependence upon the relative size of outstanding borrowings that it has with the FHLB.  Excess stock was typically repurchased at par by the FHLB from Riverview if borrowings declined to a predetermined level.  Throughout most of 2008, Riverview earned a return or dividend based upon the amount invested.  In late December 2008, the FHLB announced that it had suspended the payment of dividends and the repurchase of excess capital stock to preserve its capital level.  That decision was based on FHLB’s analysis and consideration of certain negative market trends and the impact those trends had on its financial condition.  The FHLB has not violated its agreement with its member banks by not repurchasing excess capital stock in that it is not generally required to redeem membership stock until five years after the membership has terminated.  Based on the financial results of the FHLB for the years ended December 31, 2009 and 2008, management believes that the suspension of both the dividend payment and excess capital stock repurchase is temporary in nature.  Management further believes that the FHLB will continue to be a primary source of wholesale liquidity for both short- and long-term funding and has concluded that its investment in FHLB stock is not other-than-temporarily impaired.  Riverview will continue to monitor the financial condition of the FHLB quarterly to assess its ability to resume these activities in the future.

 

Table 4 presents the maturities and average weighted yields of the securities portfolio at fair value as of December 31, 2009.  Yields are based on amortized cost.

 

TABLE 4

MATURITIES AND WEIGHTED AVERAGE YIELDS OF SECURITIES

 

(Dollars in thousands)

 

1 Year or Less

 

1 to 5 Years

 

5 to 10 Years

 

Over 10 Years or
No Maturity

 

Total

 

Due In:

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

Amount

 

Yield

 

U.S. Government agencies

 

$

512

 

1.32

%

$

1,357

 

2.84

%

$

506

 

4.35

%

$

 

 

$

2,375

 

2.84

%

State and municipal

 

 

 

1,391

 

5.47

%

4,809

 

5.71

%

8,750

 

5.80

%

14,950

 

5.74

%

Mortgage-backed securities

 

 

 

 

 

2,736

 

2.69

%

14,522

 

3.63

%

17,258

 

3.48

%

 

 

$

512

 

1.32

%

$

2,748

 

4.17

%

$

8,051

 

4.60

%

$

23,272

 

4.45

%

$

34,583

 

4.42

%

 

All securities are available-for-sale and are accounted for at fair value.

 

Weighted average yields are calculated on a fully taxable equivalent basis assuming a tax rate of 34%.

 

Loans

 

The loan portfolio comprises the major component of Riverview’s earning assets and is the highest yielding asset category.  At December 31, 2009, total loans receivable (net of the allowance for loan losses, unearned fees and origination costs) amounted to $170,384,000, a decrease of $6,085,000, or 3.4%, as compared with $176,469,000 as of December 31, 2008.  Loans receivable, net of the allowance for loan losses, represent 67.4% of total assets and 79.3% of total deposits as of December 31, 2009, as compared to 76.1% and 101.2%, respectively, at December 31, 2008.  All of Riverview’s loans are to domestic borrowers.

 

25


 


Table of Contents

 

Table 5 presents the composition of the total loan portfolio for the periods presented:

 

TABLE 5

 

TOTAL LOANS OUTSTANDING

 

 

 

December 31,

 

 

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

 

 

% of

 

(Dollars in thousands)

 

2009

 

Total

 

2008

 

Total

 

2007

 

Total

 

2006

 

Total

 

2005

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, agricultural

 

$

13,614

 

7.9

%

$

12,967

 

7.3

%

$

8,845

 

10.5

%

$

   5,722

 

7.4

%

$

6,822

 

9.9

%

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

17,372

 

10.1

%

18,173

 

10.2

%

9,059

 

10.8

%

3,936

 

5.1

%

1,411

 

2.0

%

Mortgage

 

92,206

 

53.3

%

94,322

 

52.8

%

47,324

 

56.3

%

47,082

 

60.6

%

43,741

 

63.2

%

Commercial

 

46,728

 

27.0

%

48,773

 

27.3

%

15,352

 

18.2

%

16,061

 

20.7

%

12,213

 

17.7

%

Consumer installment

 

2,988

 

1.7

%

4,210

 

2.4

%

3,558

 

4.2

%

4,795

 

6.2

%

4,983

 

7.2

%

Total loans

 

172,908

 

100.0

%

178,445

 

100.0

%

84,138

 

100.0

%

77,596

 

100.0

%

69,170

 

100.0

%

Deferred loan fees

 

36

 

 

 

(266

)

 

 

(234

)

 

 

(248

)

 

 

(236

)

 

 

Total loans, net of fees

 

172,944

 

 

 

178,179

 

 

 

83,904

 

 

 

77,348

 

 

 

68,934

 

 

 

Allowance for loan losses

 

(2,560

)

 

 

(1,710

)

 

 

(970

)

 

 

(867

)

 

 

(591

)

 

 

Total loans, net

 

$

170,384

 

 

 

$

176,469

 

 

 

$

82,934

 

 

 

$

76,481

 

 

 

$

68,343

 

 

 

 

The decline in loans is attributable to an increase in the sale of loan participations.  In addition, less mortgage loans were recorded in the portfolio during 2009 since the Bank sold a greater number of mortgage loans servicing released to Freddie Mac and to the FHLB under its MPF program.  The benefit of selling mortgage loans versus keeping them in the portfolio resulted in generating fee income while eliminating the interest rate risk associated with those loans.  Going forward, the Bank will continue to evaluate its options regarding residential mortgage loans in consideration of its relationship with its customers, the interest rate environment and overall economic conditions.  In general, management projects continued growth in the loan portfolio as additional staff has been hired, and as the economy improves and opportunities are identified in Riverview’s market area.

 

Riverview manages risk associated with its loan portfolio by maintaining diversification within the portfolio, consistently applying prudent underwriting standards, ongoing monitoring efforts with attention to portfolio dynamics and mix, and procedures that are consistently applied and updated on an annual basis.  Riverview conducts a semi-annual independent review of the loan portfolio to provide continual assessment of asset quality through an evaluation of the established underwriting criteria used in originating credits.  Separately, every loan booked and loan turndown undergoes an internal audit review for conformity with established policies and a review for compliance with current regulatory lending laws.  Riverview has not lessened its loan underwriting criteria during this time, and management believes its standards continue to remain conservative.

 

Other than as described herein, management does not believe there are any trends, events, or uncertainties that are reasonably expected to have a materially adverse impact on future results of operations, liquidity, or capital resources.

 

26



Table of Contents

 

Table 6 summarizes the loan maturities and interest sensitivity for a segment of the loan portfolio.

 

TABLE 6

LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES

 

COMMERCIAL AND CONSTRUCTION LOANS

 

December 31, 2009

 

(In thousands)

 

Due Within
1 Year

 

Due 1 - 5
Years

 

Due Over 5
Years

 

Total

 

Commercial, financial, agricultural

 

$

5,576

 

$

5,488

 

$

2,550

 

$

13,614

 

Real estate, construction

 

10,451

 

6,319

 

602

 

17,372

 

Total

 

$

16,027

 

$

11,807

 

$

3,152

 

$

30,986

 

 

 

 

 

 

 

 

 

 

 

By interest rate structure:

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

4,169

 

$

6,791

 

$

3,151

 

$

14,111

 

Variable rate

 

11,858

 

5,016

 

1

 

16,875

 

Total

 

$

16,027

 

$

11,807

 

$

3,152

 

$

30,986

 

 

Credit Risk and Loan Quality

 

Riverview strives to proactively monitor credit risk and exposure to ensure and protect the high quality of its loan portfolio.  Credit policy requires that underwriting, loan documentation and credit analysis standards be met prior to the approval and funding of any loan.  These practices have contributed to the strength and credit quality of the Riverview’s loan portfolio and have protected the portfolio during economic periods of uncertainty.

 

27



Table of Contents

 

Table 7 presents information about Riverview’s nonperforming loans and nonperforming assets for the periods presented.

 

TABLE 7

 

RISK ELEMENTS AND ASSET QUALITY RATIO

 

 

 

December 31,

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accruing loans

 

$

3,123

 

$

128

 

$

210

 

$

765

 

$

25

 

Accruing loans past due 90 days or more

 

219

 

152

 

932

 

515

 

68

 

Total nonperforming loans

 

3,342

 

280

 

1,142

 

1,280

 

93

 

Foreclosed real estate

 

312

 

144

 

327

 

 

 

Total nonperforming assets

 

$

3,654

 

$

424

 

$

1,469

 

$

1,280

 

$

93

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

Interest income that would have been recorded on non-accruing loans

 

$

193

 

$

10

 

$

64

 

$

55

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income for above loans included in net income for the period

 

$

89

 

$

8

 

$

51

 

$

34

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

1.93

%

0.16

%

1.38

%

1.67

%

0.14

%

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets to total assets

 

1.44

%

0.18

%

1.20

%

1.12

%

0.09

%

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses to nonperforming loans

 

76.60

%

610.71

%

84.94

%

67.73

%

635.48

%

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to lend additional funds to nonperforming loan customers

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

 

Total nonperforming loans (comprised of non-accruing loans and loans past due for more than 90 days) as of December 31, 2009, increased $3,062,000, to $3,342,000 as compared to $280,000 as of December 31, 2008.  The increase in nonperforming loans at the 2009 year end as compared with the 2008 year end is largely attributable to two particular commercial loans, whose businesses were negatively affected by the downturn in the economy and were place in a non-accrual status.  At December 31, 2009, the loans to these two borrowers were deemed impaired, evaluated in accordance with the accounting standard relating to Accounting by Creditors for Impairment of a Loan and appropriate additions to the loan loss reserve were made.  Management continues to be vigilant in its efforts to minimize, identify and evaluate credit risk and potential losses.  Management is proactive in addressing and managing risk appropriate to the increasing level of loan volume and delinquencies in the loan portfolio through its implementation of an enhanced credit administration process - including a more structured loan collection process and close monitoring of compliance with underwriting and loan to value guidelines.

 

Riverview had $312,000 in foreclosed real estate acquired through foreclosure as of December 31, 2009 as compared with $144,000 as of December 31, 2008.  Foreclosed real estate is recorded at fair value.

 

Potential problem loans are loans not disclosed as non-performing or troubled debt restructurings but where there is known information about possible credit problems of borrowers that cause serious doubts as to the ability of such borrowers to comply with loan repayment terms.  As of December 31, 2009 and 2008 there were no such potential problem loans.

 

28



Table of Contents

 

As a result of worsening local and national economic conditions and the softness in real estate in the market served by Riverview, management continues to be attentive to potential deterioration in credit quality due to economic pressures.  Riverview’s residential loan portfolio is centered in properties at price points which have held up well locally as evidenced by appraisals.  Loan-to-value ratios in this portfolio continue to provide adequate collateral support and management does not anticipate any material decline in Riverview’s ability to collect on these loans.  Although management is proactive in identifying and dealing with credit issues that it can control, it anticipates that going forward, additional provisions to its loan loss allowance may be warranted as a result of those economic factors it cannot control.

 

A loan concentration is considered to exist when the total amount of loans to any one or multiple number of borrowers engaged in similar activities or have similar economic characteristics, exceed 10% of loans outstanding in any one category.  The following table presents loan concentrations as of December 31, 2009 and 2008:

 

(Dollars in thousands)

 

December 31,
2009

 

December 31,
2008

 

Loans to Lessors of:

 

 

 

 

 

Residential buildings and dwellings

 

$

31,934

 

$

18,068

 

Nonresidential buildings

 

19,321

 

13,344

 

 

Although such loans were not made to any one particular borrower or industry, it is important to note that the quality of these loans could be affected by the region’s economy and overall real estate market.  Management has stress tested this portfolio by applying a 24% vacancy factor to the properties securing these loans and determined that the loans can still generally perform as agreed.

 

It is noted that the actual vacancy factors in Riverview’s market area in each class of non-residential space increased 1% to 4% during 2009, ending the year with total vacancies ranging from 6% to 12%.  Riverview’s non-residential market has not suffered the serious deterioration evident in certain other areas of the country.  Management does not believe that this concentration is an adverse trend to Riverview at this time.

 

Riverview’s lending policy is executed through the assignment of tiered loan limit authorities to individual officers of Riverview and the Board of Directors.  Although Riverview maintains sound credit policies, certain loans may deteriorate for a variety of reasons.  Riverview’s policy is to place all loans in a non-accrual status upon becoming 90 days delinquent in their payments, unless there is a documented, reasonable expectation of the collection of the delinquent amount.  Loans are reviewed bi-monthly as to their status.  Management is not aware of any material potential loan problems that have not been disclosed in this report.

 

Allowance for Loan Losses

 

The allowance for loan losses is a reserve established in the form of a provision expense for loan losses and is reduced by loan charge-offs net of recoveries.  When loans are deemed to be uncollectible, they are charged off.  Management has established a reserve that it believes is adequate for estimated losses in the loan portfolio. In conjunction with an external loan review function that operates independent of the lending function, management monitors the loan portfolio to identify risks on a timely basis so that an appropriate allowance is maintained.  Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to Riverview’s audit committee detailing significant events that have occurred since the last review.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently

 

29



Table of Contents

 

subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

 

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as substandard or doubtful and deemed to be impaired.  For such loans an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

A loan is considered impaired when, based on current information and events, it is probable that Riverview will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, Riverview does not separately identify individual consumer and residential loans for impairment disclosures, unless the loans are the subject of a restructuring agreement.

 

30



Table of Contents

 

The following Table 8 sets forth information as to the analysis of the allowance for loan losses and the allocation of the loan losses as of the dates indicated:

 

TABLE 8

 

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

 

 

 

December 31,

 

(Dollars in thousands)

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance, beginning of year

 

$

1,710

 

$

970

 

$

867

 

$

591

 

$

466

 

Provision for loan losses

 

1,125

 

380

 

120

 

295

 

150

 

Allowance acquired from HNB

 

 

496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged off:

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial, agricultural

 

217

 

32

 

 

 

 

Real estate mortgage

 

59

 

125

 

14

 

 

 

Installment

 

 

2

 

15

 

26

 

26

 

Total charged-off

 

276

 

159

 

29

 

26