Attached files
file | filename |
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EX-32.1 - EX-32.1 - Riverview Financial Corp | a11-9563_1ex32d1.htm |
EX-31.2 - EX-31.2 - Riverview Financial Corp | a11-9563_1ex31d2.htm |
EX-32.2 - EX-32.2 - Riverview Financial Corp | a11-9563_1ex32d2.htm |
EX-31.1 - EX-31.1 - Riverview Financial Corp | a11-9563_1ex31d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
333-153486-99
Commission File Number
RIVERVIEW FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania |
|
26-3853402 |
(State or other jurisdiction of |
|
(IRS Employer Identification Number) |
incorporation or organization) |
|
|
3rd and Market Streets, Halifax, PA 17032
(Address of principal executive offices)
Registrants telephone number: 717-896-3433
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, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 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 |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 1,744,116 shares of Common Stock, par value $0.50 per share, outstanding as of April 30, 2011.
RIVERVIEW FINANCIAL CORPORATION
RIVERVIEW FINANCIAL CORPORATION
|
|
March 31, |
|
December 31, |
| ||
(In thousands, except share data) |
|
2011 |
|
2010 |
| ||
|
|
(Unaudited) |
|
|
| ||
Assets | |||||||
Cash and due from banks |
|
$ |
6,186 |
|
$ |
5,514 |
|
Interest bearing deposits |
|
24,672 |
|
24,607 |
| ||
Cash and cash equivalents |
|
30,858 |
|
30,121 |
| ||
Interest bearing time deposits with banks |
|
250 |
|
350 |
| ||
Investment securities available for sale |
|
46,757 |
|
48,696 |
| ||
Mortgage loans held for sale |
|
379 |
|
322 |
| ||
Loans, net of allowance for loan losses of $3,083 - 2011; $2,973 - 2010 |
|
176,123 |
|
175,064 |
| ||
Premises and equipment |
|
7,523 |
|
7,607 |
| ||
Accrued interest receivable |
|
925 |
|
896 |
| ||
Restricted investments in bank stocks |
|
2,217 |
|
2,311 |
| ||
Cash value of life insurance |
|
5,883 |
|
5,823 |
| ||
Foreclosed assets |
|
297 |
|
230 |
| ||
Goodwill |
|
1,796 |
|
1,796 |
| ||
Intangible assets |
|
142 |
|
150 |
| ||
Other assets |
|
2,196 |
|
1,992 |
| ||
Total Assets |
|
$ |
275,346 |
|
$ |
275,358 |
|
Liabilities and Shareholders Equity | |||||||
Liabilities |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Demand, non-interest bearing |
|
$ |
21,503 |
|
$ |
18,440 |
|
Demand, interest bearing |
|
84,680 |
|
81,990 |
| ||
Savings and money market |
|
32,751 |
|
32,652 |
| ||
Time |
|
98,004 |
|
104,190 |
| ||
Total deposits |
|
236,938 |
|
237,272 |
| ||
Short-term borrowings |
|
1,136 |
|
968 |
| ||
Long-term borrowings |
|
10,682 |
|
10,683 |
| ||
Accrued interest payable |
|
238 |
|
271 |
| ||
Other liabilities |
|
1,092 |
|
1,237 |
| ||
Total Liabilities |
|
250,086 |
|
250,431 |
| ||
|
|
|
|
|
| ||
Shareholders Equity |
|
|
|
|
| ||
Common stock, par value $0.50 per share; authorized 5,000,000 shares; issued 2011 and 2010 1,750,003 shares; outstanding 2011 1,744,616 shares; 2010 1,745,916 shares |
|
$ |
875 |
|
$ |
875 |
|
Surplus |
|
11,285 |
|
11,280 |
| ||
Retained earnings |
|
13,172 |
|
12,841 |
| ||
Accumulated other comprehensive loss |
|
(16 |
) |
(29 |
) | ||
Treasury stock, at cost 2011 5,387 shares; 2010 4,087 shares |
|
(56 |
) |
(40 |
) | ||
Total Shareholders Equity |
|
25,260 |
|
24,927 |
| ||
Total Liabilities and Shareholders Equity |
|
$ |
275,346 |
|
$ |
275,358 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RIVERVIEW FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
(In thousands, except per share data) |
|
2011 |
|
2010 |
| ||
Interest and Dividend Income |
|
|
|
|
| ||
Loans, including fees |
|
2,686 |
|
$ |
2,642 |
| |
Investment securities - taxable |
|
239 |
|
242 |
| ||
Investment securities - tax exempt |
|
161 |
|
152 |
| ||
Interest-bearing deposits |
|
15 |
|
14 |
| ||
Dividends |
|
6 |
|
6 |
| ||
|
|
|
|
|
| ||
Total Interest Income |
|
3,107 |
|
3,056 |
| ||
|
|
|
|
|
| ||
Interest Expense |
|
|
|
|
| ||
Deposits |
|
855 |
|
970 |
| ||
Short-term borrowings |
|
1 |
|
2 |
| ||
Long-term debt |
|
70 |
|
68 |
| ||
|
|
|
|
|
| ||
Total Interest Expense |
|
926 |
|
1,040 |
| ||
|
|
|
|
|
| ||
Net Interest Income |
|
2,181 |
|
2,016 |
| ||
|
|
|
|
|
| ||
Provision for Loan Losses |
|
116 |
|
|
| ||
|
|
|
|
|
| ||
Net Interest Income after Provision for Loan Losses |
|
2,065 |
|
2,016 |
| ||
|
|
|
|
|
| ||
Noninterest Income |
|
|
|
|
| ||
Service charges on deposit accounts |
|
73 |
|
72 |
| ||
Other service charges and fees |
|
85 |
|
139 |
| ||
Earnings on cash value of life insurance |
|
60 |
|
63 |
| ||
Gain on sale of available for sale securities |
|
236 |
|
4 |
| ||
Gain on sale of mortgage loans |
|
43 |
|
72 |
| ||
|
|
|
|
|
| ||
Total Noninterest Income |
|
497 |
|
350 |
| ||
|
|
|
|
|
| ||
Noninterest Expenses |
|
|
|
|
| ||
Salaries and employee benefits |
|
940 |
|
834 |
| ||
Occupancy expenses |
|
201 |
|
199 |
| ||
Equipment expenses |
|
98 |
|
97 |
| ||
Telecommunication and processing charges |
|
150 |
|
117 |
| ||
Postage and office supplies |
|
50 |
|
46 |
| ||
FDIC premium |
|
99 |
|
90 |
| ||
Bank shares tax expense |
|
69 |
|
67 |
| ||
Directors compensation |
|
60 |
|
64 |
| ||
Professional services |
|
47 |
|
30 |
| ||
Other expenses |
|
131 |
|
103 |
| ||
|
|
|
|
|
| ||
Total Noninterest Expenses |
|
1,845 |
|
1,647 |
| ||
|
|
|
|
|
| ||
Income before Income Taxes |
|
717 |
|
719 |
| ||
|
|
|
|
|
| ||
Applicable Federal Income Taxes |
|
168 |
|
169 |
| ||
|
|
|
|
|
| ||
Net Income |
|
$ |
549 |
|
$ |
550 |
|
|
|
|
|
|
| ||
Earnings Per Share Basic and Diluted |
|
$ |
0.31 |
|
$ |
0.31 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RIVERVIEW FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Three Months Ended March 31, 2011 and 2010
(Unaudited)
(In thousands, except share data) |
|
Common Stock |
|
Surplus |
|
Retained |
|
Accumulated |
|
Treasury |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance January 1, 2010 |
|
$ |
875 |
|
$ |
11,252 |
|
$ |
12,429 |
|
$ |
161 |
|
$ |
|
|
$ |
24,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
550 |
|
|
|
|
|
550 |
| ||||||
Other comprehensive income |
|
|
|
|
|
|
|
118 |
|
|
|
118 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
668 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Compensation cost of option grants |
|
|
|
11 |
|
|
|
|
|
|
|
11 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash dividends, $0.125 per share |
|
|
|
|
|
(219 |
) |
|
|
|
|
(219 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance March 31, 2010 |
|
$ |
875 |
|
$ |
11,263 |
|
$ |
12,760 |
|
$ |
279 |
|
$ |
|
|
$ |
25,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance January 1, 2011 |
|
$ |
875 |
|
$ |
11,280 |
|
$ |
12,841 |
|
$ |
(29 |
) |
$ |
(40 |
) |
$ |
24,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
549 |
|
|
|
|
|
549 |
| ||||||
Other comprehensive income |
|
|
|
|
|
|
|
13 |
|
|
|
13 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
562 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Compensation cost of option grants |
|
|
|
5 |
|
|
|
|
|
|
|
5 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash dividends, $0.125 per share |
|
|
|
|
|
(218 |
) |
|
|
|
|
(218 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Repurchase common stock |
|
|
|
|
|
|
|
|
|
(16 |
) |
(16 |
) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance March 31, 2011 |
|
$ |
875 |
|
$ |
11,285 |
|
$ |
13,172 |
|
$ |
(16 |
) |
$ |
(56 |
) |
$ |
25,260 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RIVERVIEW FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2011 |
|
2010 |
| ||
|
|
(In thousands) |
| ||||
Cash Flows from Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
549 |
|
$ |
550 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation |
|
134 |
|
137 |
| ||
Provision for loan losses |
|
116 |
|
|
| ||
Granting of stock options |
|
5 |
|
11 |
| ||
Net amortization of premiums on securities available for sale |
|
54 |
|
60 |
| ||
Net realized gain on sale of securities available for sale |
|
(236 |
) |
(4 |
) | ||
Amortization of intangible assets |
|
8 |
|
7 |
| ||
Deferred income taxes |
|
(40 |
) |
164 |
| ||
Proceeds from sale of mortgage loans |
|
1,494 |
|
2,704 |
| ||
Net gain on sale of mortgage loans |
|
(43 |
) |
(72 |
) | ||
Mortgage loans originated for sale |
|
(1,508 |
) |
(2,997 |
) | ||
Earnings on cash value of life insurance, net |
|
(60 |
) |
(62 |
) | ||
Increase in accrued interest receivable and other assets |
|
(200 |
) |
(495 |
) | ||
Decrease in accrued interest payable and other liabilities |
|
(178 |
) |
(315 |
) | ||
|
|
|
|
|
| ||
Net Cash Provided by (Used in) Operating Activities |
|
95 |
|
(312 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Investing Activities |
|
|
|
|
| ||
Net maturities of interest bearing time deposits with banks |
|
100 |
|
250 |
| ||
Securities available for sale: |
|
|
|
|
| ||
Purchases |
|
(14,410 |
) |
(23,227 |
) | ||
Proceeds from maturities, calls and principal repayments |
|
2,305 |
|
1,186 |
| ||
Proceeds from sales |
|
14,246 |
|
6,174 |
| ||
Net decrease in restricted investments in bank stock |
|
94 |
|
|
| ||
Net increase in loans |
|
(1,242 |
) |
(3,168 |
) | ||
Purchases of premises and equipment |
|
(50 |
) |
(106 |
) | ||
|
|
|
|
|
| ||
Net Cash Provided by (Used in) Investing Activities |
|
1,043 |
|
(18,891 |
) | ||
|
|
|
|
|
| ||
Cash Flows from Financing Activities |
|
|
|
|
| ||
Net increase (decrease) in deposits |
|
(334 |
) |
2,461 |
| ||
Net increase in securities sold under agreements to repurchase |
|
168 |
|
15 |
| ||
Payments on long-term borrowings |
|
(1 |
) |
(4 |
) | ||
Purchase of treasury stock |
|
(16 |
) |
|
| ||
Dividends paid |
|
(218 |
) |
(219 |
) | ||
|
|
|
|
|
| ||
Net Cash Provided by (Used in) Financing Activities |
|
(401 |
) |
2,253 |
| ||
|
|
|
|
|
| ||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
737 |
|
(16,950 |
) | ||
|
|
|
|
|
| ||
Cash and Cash Equivalents - Beginning |
|
30,121 |
|
24,833 |
| ||
|
|
|
|
|
| ||
Cash and Cash Equivalents - Ending |
|
$ |
30,858 |
|
$ |
7,883 |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
|
|
2011 |
|
2010 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
| ||||
Supplemental Disclosures of Cash Flows Information |
|
|
|
|
| ||
Interest paid |
|
$ |
958 |
|
$ |
1,116 |
|
Income taxes paid |
|
$ |
67 |
|
$ |
|
|
|
|
|
|
|
| ||
Supplemental Schedule of Noncash Investing and Financing Activities |
|
|
|
|
| ||
Other real estate acquired in settlement of loans |
|
$ |
67 |
|
$ |
15 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RIVERVIEW FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
Note 1 Summary of Significant Accounting Policies
Nature of Operations
Riverview Financial Corporation (Riverview) and its wholly-owned bank subsidiary, Riverview National Bank (the Bank) provide loan, deposit and other commercial banking services through three full service offices in Marysville and Duncannon, Perry County, Pennsylvania, one full service office in Hampden Township, Cumberland County, Pennsylvania, one full service office in Tower City, Schuylkill County, Pennsylvania, and four full service and one drive-up office in Halifax, Millersburg, Elizabethville and Harrisburg, Dauphin County, Pennsylvania. Riverview competes with several other financial institutions to provide its services to individuals, businesses, municipalities and other organizations. Riverview is subject to regulation and supervision by the Federal Reserve Board while the Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. On March 14, 2011, the Bank filed an application with the Pennsylvania Department of Banking to convert from a national banking association to a state-chartered bank. The conversion is expected to take place during the second or third quarter of 2011, pending regulatory approval.
The accounting and reporting policies followed by Riverview conform to generally accepted accounting principles and to general practices within the banking industry. The following paragraphs briefly describe the more significant accounting policies.
Principles of Consolidation and Basis of Accounting
The accompanying unaudited consolidated financial statements include the accounts of Riverview and its wholly owned bank subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Riverview uses the accrual basis of accounting.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included.
Operating results for the three-months ended March 31, 2011, are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. The consolidated financial statements presented in this report should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2010, included in Riverviews Form 10-K filed with the Securities and Exchange Commission on March 29, 2011.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ significantly from those estimates.
Note 1 Summary of Significant Accounting Policies (Continued)
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the potential impairment of goodwill and restricted stock, the valuation of deferred tax assets, the determination of other-than-temporary impairment on securities and the valuation of real estate acquired by foreclosure or in satisfaction of loans. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and foreclosed real estate, management obtains independent appraisals for significant collateral.
While management uses available information to recognize losses on loans and foreclosed real estate, further reductions in the carrying amounts of loans and foreclosed real estate may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans and foreclosed real estate may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Accounting Policies
The accounting policies of Riverview as applied in the interim financial statements presented, are substantially the same as those followed on an annual basis as presented in Riverviews Form 10-K.
Reclassifications
Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation. Such reclassification had no effect on net income.
Subsequent Events
Generally accepted accounting principles establish general standards for accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. In preparing these consolidated financial statements, Riverview evaluated the events and transactions that occurred from the date of the financial statements through the date these consolidated financial statements were issued, and has not identified any events that require recognition or disclosure in the consolidated financial statements.
Note 2 Comprehensive Income
Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains, and losses be included in net income. Changes in certain assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Accumulated other comprehensive income (loss), which represents a component of shareholders equity, represents the net unrealized gains (losses) on securities available for sale, net of taxes.
Note 2 Comprehensive Income (Continued)
The only comprehensive income item that Riverview presently has is unrealized gains on securities available for sale. The components of the change in unrealized gains are as follows:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
(In thousands) |
|
2011 |
|
2010 |
| ||
Unrealized holding gains arising during the period |
|
$ |
256 |
|
$ |
182 |
|
Reclassification of gains realized in net income |
|
(236 |
) |
(4 |
) | ||
|
|
20 |
|
178 |
| ||
Deferred income tax effect |
|
7 |
|
60 |
| ||
Change in accumulated other comprehensive income |
|
$ |
13 |
|
$ |
118 |
|
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
Three Months Ended |
| ||||
|
|
March 31, |
| ||||
(In thousands, except share data) |
|
2011 |
|
2010 |
| ||
Net income applicable to common stock |
|
$ |
549 |
|
$ |
550 |
|
|
|
|
|
|
| ||
Weighted-average common shares outstanding |
|
1,745,247 |
|
1,750,003 |
| ||
Effect of dilutive securities, stock options |
|
|
|
|
| ||
Weighted-average common shares outstanding used to calculate diluted earnings per share |
|
1,745,247 |
|
1,750,003 |
| ||
|
|
|
|
|
| ||
Basic and diluted earnings per share |
|
$ |
0.31 |
|
$ |
0.31 |
|
Note 4 Investment Securities Available for Sale
In April 2009, a new accounting standard was released relating to the Recognition and Presentation of Other-Than-Temporary Impairments. This standard clarified the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it had both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the accounting standard dictates the presentation and the amount of the other-than-temporary impairment that should be recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized
Note 4 Investment Securities Available for Sale (Continued)
in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.
This accounting standard was effective for Riverview for reporting periods June 30, 2009 and after. The adoption of this standard did not have a material impact on Riverviews consolidated financial statements.
The amortized cost and estimated fair values of investment securities available for sale are reflected in the following schedules at March 31, 2011 and December 31 2010:
|
|
March 31, 2011 |
| ||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Fair |
| ||||
|
|
(In thousands) |
| ||||||||||
U.S. Government agencies |
|
$ |
1,607 |
|
$ |
4 |
|
$ |
(2 |
) |
$ |
1,609 |
|
State and municipal |
|
17,351 |
|
179 |
|
(372 |
) |
17,158 |
| ||||
Mortgage-backed securities |
|
27,824 |
|
205 |
|
(39 |
) |
27,990 |
| ||||
|
|
$ |
46,782 |
|
$ |
388 |
|
$ |
(413 |
) |
$ |
46,757 |
|
|
|
December 31, 2010 |
| ||||||||||
U.S. Government agencies |
|
$ |
1,316 |
|
$ |
10 |
|
$ |
|
|
$ |
1,326 |
|
State and municipal |
|
17,350 |
|
50 |
|
(568 |
) |
16,832 |
| ||||
Mortgage-backed securities |
|
30,074 |
|
487 |
|
(23 |
) |
30,538 |
| ||||
|
|
$ |
48,740 |
|
$ |
547 |
|
$ |
(591 |
) |
$ |
48,696 |
|
Securities with an amortized cost of $21,723,000 and a fair value of $21,563,000 on March 31, 2011 were pledged as collateral for public deposits and for other purposes as required or permitted by law.
Information pertaining to securities with gross unrealized losses at March 31, 2011 in comparison with December 31, 2010 is aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:
|
|
Less Than 12 Months |
|
More Than 12 Months |
|
Total |
| ||||||||||||
(In thousands) |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
|
$ |
1,098 |
|
$ |
(2 |
) |
$ |
|
|
$ |
|
|
$ |
1,098 |
|
$ |
(2 |
) |
State and municipal |
|
6,220 |
|
(372 |
) |
|
|
|
|
6,220 |
|
(372 |
) | ||||||
Mortgage-backed securities |
|
11,126 |
|
(39 |
) |
|
|
|
|
11,126 |
|
(39 |
) | ||||||
|
|
$ |
18,444 |
|
$ |
(413 |
) |
$ |
|
|
$ |
|
|
$ |
18,444 |
|
$ |
(413 |
) |
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
State and municipal |
|
$ |
9,640 |
|
$ |
(568 |
) |
$ |
|
|
$ |
|
|
$ |
9,640 |
|
$ |
(568 |
) |
Mortgage-backed securities |
|
2,582 |
|
(23 |
) |
|
|
|
|
2,582 |
|
(23 |
) | ||||||
|
|
$ |
12,222 |
|
$ |
(591 |
) |
$ |
|
|
$ |
|
|
$ |
12,222 |
|
$ |
(591 |
) |
Note 4 Investment Securities Available for Sale (Continued)
At March 31, 2011, nineteen securities had unrealized losses. Management believes the unrealized losses relate to changes in interest rates since the individual securities were purchased as opposed to underlying credit issues. As management does not intend to sell any debt securities, and it is more likely than not that management will not be required to sell any debt securities before the cost bases are recovered, no declines are deemed to be other-than-temporary.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis. In evaluating whether an investment security is other-than-temporarily impaired, consideration is given to the length of time and the extent to which the fair value of a security has been less than cost, and the financial condition and near-term prospects of the issuer. Managements intent is to hold all investments until maturity unless market, economic or specific investment concerns warrant a sale of the securities. None of the securities in the portfolio were considered to be other than temporarily impaired at March 31, 2011.
As part of the Banks strategy to reduce some of the risk inherent within the investment portfolio, Riverview sold six available for sale securities during the first three months of 2011 and received proceeds of $14,246,000. On a year to date basis, gross realized gains amounted to $236,000 and gross realized losses were zero, resulting in a $236,000 net gain on the sale.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses
The Bank monitors its loan portfolio on a regular basis with consideration given to detailed analysis of loans by portfolio segment. Portfolio segments represent pools of loans with similar risk characteristics. There are eight portfolio segments commercial loans; non-owner occupied commercial real estate loans; owner occupied commercial real estate loans; one-to-four family investment property loans; commercial land/land development/construction loans; residential real estate loans; home equity lines of credit; and consumer loans. Internal policy requires that the Chief Credit Officer report to the Board of Directors on a quarterly basis as to the status of the loan portfolio and any related credit quality issues. These reports include information on past due and nonaccrual loans, impaired loans, the allowance for loan losses and changes in the allowance for loan losses, credit quality indicators and foreclosed assets.
Past Due Loans and Nonaccrual Loans
Loans are considered to be past due when they are not paid in accordance with contractual terms. Past due loans are monitored by portfolio segment and by severity of delinquency 30-59 days past due; 60-89 days past due; and 90 days and greater past due. The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it can be documented that it is well secured and in the process of collection. When a loan is placed on nonaccrual status, all unpaid interest credited to income in the current calendar year is reversed and all unpaid interest accrued in prior calendar years is charged against the allowance for loan losses. Interest payments received on nonaccrual loans are either applied against principal or reported as interest income according to managements judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
The following presents an aging analysis by loan portfolio segments as of March 31, 2011 and December 31, 2010 of past due loans, which include nonaccrual loans and loans past due 90 days or more and still accruing:
(In thousands) |
|
30-59 Days |
|
60-89 Days |
|
90 Days |
|
Total |
|
Current |
|
Total |
|
Recorded |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
$ |
77 |
|
$ |
50 |
|
$ |
618 |
|
$ |
745 |
|
$ |
11,552 |
|
$ |
12,297 |
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Non-owner occupied |
|
|
|
|
|
1,093 |
|
1,093 |
|
34,485 |
|
35,578 |
|
|
| |||||||
Owner occupied |
|
|
|
|
|
778 |
|
778 |
|
30,406 |
|
31,184 |
|
|
| |||||||
1-4 family investment |
|
47 |
|
|
|
|
|
47 |
|
28,739 |
|
28,786 |
|
|
| |||||||
Commercial land and land development |
|
|
|
|
|
1,010 |
|
1,010 |
|
10,711 |
|
11,721 |
|
|
| |||||||
Residential real estate |
|
124 |
|
559 |
|
|
|
683 |
|
45,548 |
|
46,231 |
|
|
| |||||||
Home equity lines of credit |
|
|
|
|
|
103 |
|
103 |
|
10,646 |
|
10,749 |
|
|
| |||||||
Consumer |
|
28 |
|
|
|
|
|
28 |
|
2,632 |
|
2,660 |
|
|
| |||||||
Total |
|
$ |
276 |
|
$ |
609 |
|
$ |
3,602 |
|
$ |
4,487 |
|
$ |
174,719 |
|
$ |
179,206 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial |
|
$ |
|
|
$ |
81 |
|
$ |
269 |
|
$ |
350 |
|
$ |
12,214 |
|
$ |
12,564 |
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Non-owner occupied |
|
|
|
|
|
|
|
|
|
32,898 |
|
32,898 |
|
|
| |||||||
Owner occupied |
|
348 |
|
|
|
384 |
|
732 |
|
31,208 |
|
31,940 |
|
|
| |||||||
1-4 family investment |
|
112 |
|
95 |
|
67 |
|
274 |
|
28,937 |
|
29,211 |
|
|
| |||||||
Commercial land and land development |
|
229 |
|
|
|
1,010 |
|
1,239 |
|
10,508 |
|
11,747 |
|
|
| |||||||
Residential real estate |
|
250 |
|
98 |
|
1,230 |
|
1,578 |
|
44,904 |
|
46,482 |
|
1,111 |
| |||||||
Home equity lines of credit |
|
|
|
|
|
527 |
|
527 |
|
9,738 |
|
10,265 |
|
424 |
| |||||||
Consumer |
|
62 |
|
|
|
|
|
62 |
|
2,868 |
|
2,930 |
|
|
| |||||||
Total |
|
$ |
1,001 |
|
$ |
274 |
|
$ |
3,487 |
|
$ |
4,762 |
|
$ |
173,275 |
|
$ |
178,037 |
|
$ |
1,535 |
|
The recorded investment in loans greater than 90 days and still accruing was zero at March 31, 2011 as compared with $1,535,000 at December 31, 2010.
Included within the loan portfolio are loans in which the Bank discontinued the accrual of interest due to the deterioration in the financial condition of the borrower. Such loans approximated $4,327,000 and $2,779,000 at March 31, 2011 and December 31, 2010, respectively. If the nonaccrual loans had performed in accordance with their original terms, interest income would have increased by $66,000 for the three months ended March 31, 2011 and $138,000 at December 31, 2010, respectively.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
The following presents loans by loan portfolio segments that were on a nonaccrual status as of March 31, 2011 and December 31, 2010:
(In thousands) |
|
March 31, |
|
December 31, |
| ||
Commercial |
|
$ |
669 |
|
$ |
1,010 |
|
Commercial real estate: |
|
|
|
|
| ||
Non-owner occupied |
|
1,581 |
|
|
| ||
Owner occupied |
|
778 |
|
384 |
| ||
1-4 family investment |
|
74 |
|
144 |
| ||
Commercial land and land development |
|
1,010 |
|
1,010 |
| ||
Residential real estate |
|
112 |
|
128 |
| ||
Home equity lines of credit |
|
103 |
|
103 |
| ||
Consumer |
|
|
|
|
| ||
Total |
|
$ |
4,327 |
|
$ |
2,779 |
|
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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 borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank further identifies all loans in nonaccrual status and troubled debt restructured loans as impaired loans, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless the loans are the subject of a restructuring agreement. 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 loans effective interest rate, or the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent. When the measure of an impaired loan results in a realizable value that is less than the recorded investment in the loan, the difference is recorded as a specific valuation allowance against that loan and the Bank will make the appropriate adjustment to the allowance for loan losses.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
The following presents impaired loans by loan portfolio segments as of March 31, 2011 and December 31, 2010:
(In thousands) |
|
Recorded |
|
Unpaid |
|
Related |
|
Average |
|
Interest |
| |||||
March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans with no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
$ |
890 |
|
$ |
890 |
|
$ |
|
|
$ |
872 |
|
$ |
35 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
1,582 |
|
1,582 |
|
|
|
1,582 |
|
|
| |||||
Owner occupied |
|
606 |
|
606 |
|
|
|
606 |
|
|
| |||||
1-4 family investment |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial land and land development |
|
1,010 |
|
1,010 |
|
|
|
1,010 |
|
|
| |||||
Residential real estate |
|
1,086 |
|
1,086 |
|
|
|
1,088 |
|
15 |
| |||||
Home equity lines of credit |
|
424 |
|
424 |
|
|
|
424 |
|
3 |
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans with an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
541 |
|
541 |
|
311 |
|
579 |
|
|
| |||||
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner occupied |
|
287 |
|
287 |
|
124 |
|
428 |
|
2 |
| |||||
1-4 family investment |
|
74 |
|
74 |
|
6 |
|
75 |
|
|
| |||||
Commercial land and land development |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate |
|
548 |
|
548 |
|
211 |
|
549 |
|
8 |
| |||||
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
1,431 |
|
1,431 |
|
311 |
|
1,451 |
|
35 |
| |||||
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
1,582 |
|
1,582 |
|
|
|
1,582 |
|
|
| |||||
Owner occupied |
|
893 |
|
893 |
|
124 |
|
1,034 |
|
2 |
| |||||
1-4 family investment |
|
74 |
|
74 |
|
6 |
|
75 |
|
0 |
| |||||
Commercial land and land development |
|
1,010 |
|
1,010 |
|
|
|
1,010 |
|
|
| |||||
Residential real estate |
|
1,634 |
|
1,634 |
|
211 |
|
1,637 |
|
23 |
| |||||
Home equity lines of credit |
|
424 |
|
424 |
|
|
|
424 |
|
3 |
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
$ |
7,048 |
|
$ |
7,048 |
|
$ |
652 |
|
$ |
7,213 |
|
$ |
63 |
|
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
(In thousands) |
|
Recorded |
|
Unpaid |
|
Related |
|
Average |
|
Interest |
| |||||
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans with no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
$ |
741 |
|
$ |
741 |
|
$ |
|
|
$ |
759 |
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner occupied |
|
|
|
|
|
|
|
|
|
|
| |||||
1-4 family investment |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial land and land development |
|
1,010 |
|
1,010 |
|
|
|
1,255 |
|
|
| |||||
Residential real estate |
|
1,090 |
|
1,090 |
|
|
|
1,095 |
|
64 |
| |||||
Home equity lines of credit |
|
424 |
|
424 |
|
|
|
424 |
|
14 |
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loans with an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
245 |
|
245 |
|
97 |
|
274 |
|
|
| |||||
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner occupied |
|
499 |
|
499 |
|
170 |
|
501 |
|
7 |
| |||||
1-4 family investment |
|
77 |
|
77 |
|
9 |
|
79 |
|
|
| |||||
Commercial land and land development |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential real estate |
|
551 |
|
551 |
|
215 |
|
552 |
|
28 |
| |||||
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
|
$ |
986 |
|
$ |
986 |
|
$ |
97 |
|
$ |
1,033 |
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
| |||||
Owner occupied |
|
499 |
|
499 |
|
170 |
|
501 |
|
7 |
| |||||
1-4 family investment |
|
77 |
|
77 |
|
9 |
|
79 |
|
|
| |||||
Commercial land and land development |
|
1,010 |
|
1,010 |
|
|
|
1,255 |
|
|
| |||||
Residential real estate |
|
1,641 |
|
1,641 |
|
215 |
|
1,647 |
|
92 |
| |||||
Home equity lines of credit |
|
424 |
|
424 |
|
|
|
424 |
|
14 |
| |||||
Consumer |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
$ |
4,637 |
|
$ |
4,637 |
|
$ |
491 |
|
$ |
4,939 |
|
$ |
113 |
|
The recorded investment in impaired loans increased by $2,411,000 at March 31, 2011 since December 31, 2010. This increase is attributable to two commercial loan relationships that were identified as impaired in the latter part of the first quarter. These loans were measured for impairment and additions as deemed appropriate by management were made to the allowance for loan losses.
Impaired loans include three restructured residential real estate loans for two borrowers who were experiencing financial difficulty. These three loans total $1,499,000 at March 31, 2011. One loan was modified to reduce the interest rate and extend the maturity date. The second loan was modified to reduce the interest rate and allow for interest-only payments for six months. The third loan was modified to allow for interest-only payments for six months. There are no commitments to extend additional funds to any impaired loans.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
Allowance for Loan Losses
The allowance for loan losses is composed of individual valuation allowances to absorb probable and quantifiable losses based upon current knowledge of the loan portfolio, and loan pool valuation allowances to absorb losses which are not specifically identified but are inherent in the portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. If the allowance for loan losses is not sufficient to cover actual loan losses, the Banks earnings may be reduced.
Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing. Such a valuation, which includes a review of loans for which full collectability in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loans observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to policy, loan losses must be charged off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management in conjunction with outside sources are used to determine whether full collectability of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loans observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are performed quarterly on specific loans considered to be impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.
Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with the Banks lending activity, but which, unlike individual allowances, have been allocated to unimpaired loans within the following eight portfolio segments: commercial loans; non-owner occupied commercial real estate loans; owner occupied commercial real estate loans; one-to-four family investment property loans; commercial land/land development/construction loans; residential real estate loans; home equity lines of credit; and consumer loans. The Bank measures estimated credit losses on each of these groups of loans based on the historical loss rate of each group. The historical loss rate is calculated based on the average annualized net charge-offs over the most recent eight calendar quarters. Unimpaired criticized and classified loans are further segregated as sub-pools within each of these eight segments. A separate, higher loss factor is ascribed to each of these sub-pools based on the relative risk in each segment as indicated by historical loss ratios, the level of criticized/classified assets, and the nature of each segment in terms of collateral and inherent risk of the loan type. Management believes that historical losses or even recent trends in losses do not form a sufficient basis to determine the appropriate level for the allowance. Management therefore also considers the following qualitative factors that are likely to cause estimated credit losses associated with each of the portfolio segments to differ from historical loss experience:
· Changes in lending policies and procedures, including changes in underwriting standards;
· Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;
· Changes in the nature and volume of the portfolio and in the terms of loans;
· Changes in the experience, ability and depth of lending management and other relevant staff;
· Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified loans;
· Changes in the quality of the Banks loan review system;
· The existence and effect of any concentrations of credit, and the changes in the level of such concentrations; and
· The effect of other external factors such as competition and legal and regulatory requirements in the level of estimated credit losses in the existing portfolio.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
Each portfolio segment is examined quarterly with regard to the impact of each of these factors on the quality and risk profile of the pool, and adjustments ranging from zero to fifty basis points per factor are calculated. The sum of these qualitative factor adjustments are added to the historical loss ratio for each segment and the resulting percentage is applied to the loan balance of the segment to arrive at the required loan pool valuation allowance. The loan pool valuation allowance for each segment is summed and added to the individual valuation allowance for impaired loans to arrive at the total allowance for loan losses.
These evaluations are inherently subjective because even though they are based on objective data, it is managements interpretation of the data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio resulting in additions to the allowance for loan losses and a reduction in Bank earnings.
Loan Charge Offs
Charge offs of commercial and industrial loans and commercial real estate and construction loans are recorded promptly upon determination that all or a portion of any loan balance is uncollectible. A loan is considered uncollectible when the borrower is 90 days or more delinquent in principal or interest repayment and the following conditions exist:
· It is unlikely that the borrower will have the ability to pay the debt in a timely manner.
· Collateral value is insufficient to cover the outstanding indebtedness.
· Guarantors do not provide adequate support.
All unsecured consumer loans are charged-off when they become 120 days delinquent or when it is determined that the debt is uncollectible. Overdrafts are charged off when it is determined recovery is not likely or the overdraft becomes 45 days old, whichever comes first.
All secured consumer loans, except those secured by a primary or secondary residence, are charged off when they become 120 days delinquent, or when it is determined that the debt is uncollectible.
Uncollateralized portions of first mortgage residential real estate loans and consumer loans secured by real estate are charged off upon completion of a sheriffs sale, but prior to the transfer of the fair value carrying balance to other real estate owned. Current appraisals are obtained to determine the appropriate carrying balance with any exposed portion of the loan principal balance being charged off.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
The allowance for loan losses is presented by loan portfolio segments with the outstanding balances of loans for the three months ended March 31, 2011 and the year ended December 31, 2010 as follows:
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
(In thousands) |
|
Commercial |
|
Non-Owner |
|
Owner |
|
1-4 Family |
|
Commercial |
|
Residential |
|
Home |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Allowance for Loan Losses as of March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Beginning balance |
|
$ |
585 |
|
$ |
397 |
|
$ |
567 |
|
$ |
361 |
|
$ |
327 |
|
$ |
648 |
|
$ |
63 |
|
$ |
25 |
|
$ |
|
|
$ |
2,973 |
|
Charge-offs |
|
3 |
|
|
|
5 |
|
5 |
|
|
|
1 |
|
|
|
1 |
|
|
|
15 |
| ||||||||||
Recoveries |
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
| ||||||||||
Provision |
|
187 |
|
1 |
|
(83 |
) |
14 |
|
2 |
|
(7 |
) |
2 |
|
|
|
|
|
116 |
| ||||||||||
Ending balance |
|
$ |
778 |
|
$ |
398 |
|
$ |
479 |
|
$ |
370 |
|
$ |
329 |
|
$ |
640 |
|
$ |
65 |
|
$ |
24 |
|
$ |
|
|
$ |
3,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: individually evaluated for impairment |
|
$ |
311 |
|
$ |
|
|
$ |
124 |
|
$ |
6 |
|
$ |
|
|
$ |
211 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: collectively evaluated for impairment |
|
$ |
467 |
|
$ |
398 |
|
$ |
355 |
|
$ |
364 |
|
$ |
329 |
|
$ |
429 |
|
$ |
65 |
|
$ |
24 |
|
$ |
|
|
$ |
2,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Loans as of March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance |
|
$ |
12,297 |
|
$ |
35,578 |
|
$ |
31,184 |
|
$ |
28,786 |
|
$ |
11,721 |
|
$ |
46,231 |
|
$ |
10,749 |
|
$ |
2,660 |
|
$ |
|
|
$ |
179,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: individually evaluated for impairment |
|
$ |
1,431 |
|
$ |
1,582 |
|
$ |
893 |
|
$ |
74 |
|
$ |
1,010 |
|
$ |
1,634 |
|
$ |
424 |
|
$ |
|
|
$ |
|
|
$ |
7,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: collectively evaluated for impairment |
|
$ |
10,866 |
|
$ |
33,996 |
|
$ |
30,291 |
|
$ |
28,712 |
|
$ |
10,711 |
|
$ |
44,597 |
|
$ |
10,325 |
|
$ |
2,660 |
|
$ |
|
|
$ |
172,158 |
|
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
(In thousands) |
|
Commercial |
|
Non-Owner |
|
Owner |
|
1-4 Family |
|
Commercial |
|
Residential |
|
Home |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Allowance for Loan Losses as of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance |
|
$ |
585 |
|
$ |
397 |
|
$ |
567 |
|
$ |
361 |
|
$ |
327 |
|
$ |
648 |
|
$ |
63 |
|
$ |
25 |
|
$ |
|
|
$ |
2,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: individually evaluated for impairment |
|
$ |
97 |
|
$ |
|
|
$ |
170 |
|
$ |
9 |
|
$ |
|
|
$ |
215 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: collectively evaluated for impairment |
|
$ |
488 |
|
$ |
397 |
|
$ |
397 |
|
$ |
352 |
|
$ |
327 |
|
$ |
433 |
|
$ |
63 |
|
$ |
25 |
|
$ |
|
|
$ |
2,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Loans as of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance |
|
$ |
12,564 |
|
$ |
32,898 |
|
$ |
31,940 |
|
$ |
29,211 |
|
$ |
11,747 |
|
$ |
46,482 |
|
$ |
10,265 |
|
$ |
2,930 |
|
$ |
|
|
$ |
178,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: individually evaluated for impairment |
|
$ |
986 |
|
$ |
|
|
$ |
499 |
|
$ |
77 |
|
$ |
1,010 |
|
$ |
1,641 |
|
$ |
424 |
|
$ |
|
|
$ |
|
|
$ |
4,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance: collectively evaluated for impairment |
|
$ |
11,578 |
|
$ |
32,898 |
|
$ |
31,441 |
|
$ |
29,134 |
|
$ |
10,737 |
|
$ |
44,841 |
|
$ |
9,841 |
|
$ |
2,930 |
|
$ |
|
|
$ |
173,400 |
|
The following summarizes the changes in the allowance for loan losses for the three months ended March 31, 2011 and the year ended December 31, 2010:
|
|
March 31, |
|
December 31, |
| ||
|
|
(In thousands) |
| ||||
Beginning balance January 1 |
|
$ |
2,973 |
|
$ |
2,560 |
|
Provision charged to operations |
|
116 |
|
1,506 |
| ||
Recoveries on charged off loans |
|
9 |
|
14 |
| ||
Loans charged off |
|
(15 |
) |
(1,107 |
) | ||
|
|
|
|
|
| ||
Ending balance |
|
$ |
3,083 |
|
$ |
2,973 |
|
Credit Quality Indicators
The Bank has established a credit risk rating system to quantify the risk in the Banks loan portfolio. This system is a critical tool for managing the Banks lending activities and for evaluating appropriate loan loss reserves. This rating system is dynamic with risk ratings subject to change at any time when circumstances warrant. The system rates the strength of the borrower and is designed to be a tool for senior management to manage the Banks credit risk and provide an early warning system for negative migration of credits. The system also provides for recognition of improvement in credits. Risk ratings move dynamically, both negatively and positively.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
Each new, renewed or modified credit facility is given a risk rating that takes into consideration factors that affect credit quality. The primary determinants of the risk rating assigned are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The rating also reflects current economic and industry conditions. Major factors used in determining the rating include the following variables:
· Capitalization
· Liquidity
· Cash flow
· Revenue and earnings trends
· Management strength or weakness
· Quality of financial information
· Reputation and credit history
· Industry, including economic climate
In addition, the following factors may contribute to enhance the risk rating derived from the above factors:
Collateral: The rating may be affected by the type and quality of collateral, the level of coverage, the economic life of the collateral, liquidation value, and the Banks ability to dispose of the collateral.
Guarantors: Guarantees can differ substantially in enhancing the risk rating assigned to a loan or lending commitment. In order to provide enough support to impact the assigned rating by one or more levels, the guarantee must be unconditional and be from an individual or entity with substantial financial strength and a vested interest in the success of the borrower.
The Bank assigns risk ratings based on a scale from 1 to 8 with 1 being the highest quality rating and 8 being the lowest quality grade.
· Levels 1-4 are Pass grades
· Level 5 is Special Mention (criticized loan)
· Level 6 is Substandard (classified loan)
· Level 7 is Doubtful (classified loan)
· Level 8 is Loss (classified loan)
Risk Rating Definitions
1 - Excellent
This category is reserved for loans that contain a virtual absence of any credit risk. The loan is secured by properly margined cash collateral (in accordance with loan policy). Loans that are unquestionably guaranteed by the U.S. government, or any agency thereof, would also fit this category.
2 Good
Loans in this category would be characterized by nominal risk and strong repayment certainty. This would include loans to companies or individuals that are paying as agreed and that are either unsecured or secured where reliance is placed on non-liquid or less than good quality liquid collateral.
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
3 -Satisfactory
Loans in this category are considered to exhibit an average level of credit risk. However, these loans have certain risk characteristics, whether due to management, industry, economic or financial concerns. Credits with satisfactory liquidity and leverage, with losses considered to be of a temporary nature for which there is only minor concern would be so rated. Loans for start-up businesses or loans to firms exhibiting high leverage could receive this rating. Loans in this category would also include borrowers whose underlying financial strength may be relatively weak. However, risk of loss is considered minimal due to adequate, well-margined and controlled collateral.
4 -Watch
Loans in this category would typically be experiencing some negative trends due to financial, operational, economic, or regulatory reasons. A deteriorating collateral position or guarantor, in isolation, could also justify this rating. Such loans must have elevated monitoring as a result of negative trends which, if not addressed, could result in an unacceptable increase in credit risk.
5 - Special Mention
A special mention loan has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Banks credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. Loans for which economic or market conditions which are beginning to adversely affect the borrower may be so rated. An adverse trend in the borrowers operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be best handled by this rating. Loans in which actual weaknesses are evident and significant should be considered for more serious criticism. In cases where the credit is weak but trends are improving, and/or collateral support is within normal advance margins, consideration should be given for the next higher rating.
6 Substandard
A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. All loans in nonaccrual status may be rated no higher than substandard.
7 - Doubtful
A doubtful loan has all of the weaknesses inherent in a loan classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending events that may work to strengthen the asset, its classification as a loss is deferred until its most exact status may be determined. Generally, pending events should be resolved within a relatively short period and the rating will be adjusted based on the new information. Because of high probability of loss, loans rated doubtful must be in non-accrual status.
8 - Loss
Loans classified loss are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically
Note 5 Credit Quality for Loans and the Allowance for Loan Losses (Continued)
worthless asset even though a partial recovery may be effected in the future. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, the Bank will not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are recorded in the period the asset becomes uncollectible.
The following presents the credit quality indicators and total credit exposure for each segment in the loan portfolio by internally assigned grades as of March 31, 2011 and December 31, 2010:
|
|
|
|
Commercial Real Estate |
|
|
|
|
|
|
|
|
| |||||||||||||||
(In thousands) |
|
Commercial |
|
Non- |
|
Owner |
|
1-4 Family |
|
Commercial |
|
Residential |
|
Home |
|
Consumer |
|
Total |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
1 Excellent |
|
$ |
21 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
21 |
|
2 Good |
|
1,534 |
|
640 |
|
2,945 |
|
|
|
285 |
|
|
|
|
|
|
|
5,404 |
| |||||||||
3 Satisfactory |
|
7,037 |
|
26,046 |
|
19,196 |
|
23,320 |
|
8,201 |
|
43,629 |
|
9,446 |
|
2,660 |
|
139,535 |
| |||||||||
4 Watch |
|
809 |
|
4,064 |
|
5,725 |
|
3,449 |
|
1,591 |
|
335 |
|
710 |
|
|
|
16,683 |
| |||||||||
5 Special Mention |
|
960 |
|
4,199 |
|
1,493 |
|
1,111 |
|
384 |
|
198 |
|
38 |
|
|
|
8,383 |
| |||||||||
6 Substandard |
|
1,936 |
|
629 |
|
1,825 |
|
906 |
|
1,260 |
|
2,069 |
|
555 |
|
|
|
9,180 |
| |||||||||
7 Doubtful |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
8 Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
|
$ |
12,297 |
|
$ |
35,578 |
|
$ |
31,184 |
|
$ |
28,786 |
|
$ |
11,721 |
|
$ |
46,231 |
|
$ |
10,749 |
|
$ |
2,660 |
|
$ |
179,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
1 Excellent |
|
$ |
22 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
22 |
|
2 Good |
|
1,394 |
|
597 |
|
2,990 |
|
|
|
295 |
|
|
|
|
|
|
|
5,276 |
| |||||||||
3 Satisfactory |
|
7,130 |
|
23,748 |
|
19,654 |
|
23,428 |
|
8,047 |
|
44,001 |
|
8,818 |
|
2,930 |
|
137,756 |
| |||||||||
4 Watch |
|
1,677 |
|
4,099 |
|
6,361 |
|
3,134 |
|
1,703 |
|
300 |
|
852 |
|
|
|
18,126 |
| |||||||||
5 Special Mention |
|
987 |
|
3,856 |
|
1,501 |
|
1,450 |
|
442 |
|
60 |
|
40 |
|
|
|
8,336 |
| |||||||||
6 Substandard |
|
1,194 |
|
598 |
|
1,434 |
|
1,199 |
|
1,260 |
|
2,121 |
|
555 |
|
|
|
8,361 |
| |||||||||
7 Doubtful |
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160 |
| |||||||||
8 Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total |
|
$ |
12,564 |
|
$ |
32,898 |
|
$ |
31,940 |
|
$ |
29,211 |
|
$ |
11,747 |
|
$ |
46,482 |
|
$ |
10,265 |
|
$ |
2,930 |
|
$ |
178,037 |
|
The adequacy of the allowance is analyzed quarterly, with any adjustment to the level deemed appropriate by credit administration management, based upon its risk assessment of the entire portfolio. Based upon credit administrations review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2011, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the loan portfolio.
Note 6 Stock Option Plan
In January 2009, Riverview implemented a non-qualified stock option plan. The purpose of the 2009 Stock Option Plan was to advance the development, growth and financial condition of Riverview by providing incentives through participation in the appreciation of Riverviews common stock to secure, retain and motivate Riverviews directors, officers and key employees and to align such persons interests with those of the shareholders. Shares of Riverviews common stock that may be issued or transferred under this plan shall not exceed 170,000 shares at an exercise price of $13.00 per share. The vesting schedule is a seven year cliff, which means that the options are 100% vested in the seventh year following
Note 6 Stock Option Plan (Continued)
the grant date, and the expiration date is ten years following the grant date. As of March 31, 2011, none of the option grants were vested or exercisable.
During 2009, Riverview granted 155,000 options on January 21, 2009, of which 7,000 options were forfeited in April 2009, and an additional 22,000 options were granted on September 16, 2009 for a total of 170,000 options. Each award had a fair value of $0.72, based on the following: fair value of stock on the date of grant $13.00; exercise price $13.00; life 7 years; volatility 12.22%; dividend yield 5.00%; discount rate 3.10%.
Riverview accounts for these awards in accordance with generally accepted accounting principles related to Share Based Payments, which requires that the fair value of the equity awards be recognized as compensation expense over the period during which the employee is required to provide service in exchange for such an award. Riverview is amortizing compensation expense over the vesting period, or 7 years. Total compensation expense relating to the options that has been recognized is $46,000, out of which $5,000 was recorded during the first three months of 2011. The remaining unrecognized compensation expense as of March 31, 2011 is $75,000.
Note 7 Guarantees
In the ordinary course of business, the Bank is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they become payable. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit that are written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Bank generally holds collateral and/or personal guarantees supporting these commitments. The Bank had $1,720,000 in financial and performance letters of credit as of March 31, 2011. Management believes that the proceeds obtained through liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of March 31, 2011 for guarantees under letters of credit is not material.
Note 8 Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of Riverviews financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts Riverview could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
In September 2006, a new accounting standard was released relating to Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The standard establishes a fair value
Note 8 Fair Value Measurements and Fair Values of Financial Instruments (Continued)
hierarchy regarding the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard was effective for Riverview as of January 1, 2008. However, in February 2008 the effective date of this standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) was extended to the fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of this standard did not have a material effect on Riverviews consolidated financial statements upon adoption on January 1, 2009.
In October 2008, a new accounting standard was issued related to Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active to clarify the application of the provisions of Fair Value Measurements in an active market and how an entity would determine fair value in an inactive market. This standard was effective immediately and applied to Riverviews December 31, 2008 and later consolidated financial statements.
In April 2009, a new accounting standard with regard to Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly was issued. The standard for Fair Value Measurements defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The new standard provides additional guidance for determining when the volume and level of activity for the asset or liability has significantly decreased. The standard also includes guidance on identifying circumstances when a transaction may not be considered orderly. This standard also provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the Fair Value Measurements standard. This standard clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The standard provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. This standard is effective for Riverview for interim and annual reporting periods ending June 30, 2009 and after. Adoption of this pronouncement did not have a material impact on Riverviews financial statements.
The Fair Value Measurements standard establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
Note 8 Fair Value Measurements and Fair Values of Financial Instruments (Continued)
An assets or liabilitys level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. At March 31, 2011, Riverview had no liabilities subject to fair value reporting requirements.
For investment securities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2011 and December 31, 2010 are as follows:
Description |
|
Balance |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
(In thousands) |
| ||||||||||
March 31, 2011: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
|
$ |
1,609 |
|
$ |
|
|
$ |
1,609 |
|
$ |
|
|
State and municipal |
|
17,158 |
|
|
|
17,158 |
|
|
| ||||
Mortgage-backed securities |
|
27,990 |
|
|
|
27,990 |
|
|
| ||||
Securities available for sale |
|
$ |
46,757 |
|
$ |
|
|
$ |
46,757 |
|
$ |
|
|
December 31, 2010: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
|
$ |
1,326 |
|
$ |
|
|
$ |
1,326 |
|
$ |
|
|
State and municipal |
|
16,832 |
|
|
|
16,832 |
|
|
| ||||
Mortgage-backed securities |
|
30,538 |
|
|
|
30,538 |
|
|
| ||||
Securities available for sale |
|
$ |
48,696 |
|
$ |
|
|
$ |
48,696 |
|
$ |
|
|
For financial assets measured at estimated fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2011 and December 31, 2010 are as follows:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Total |
| |||||
|
|
|
|
(In thousands) |
|
|
|
|
| |||||||
March 31, 2011: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for sale |
|
$ |
|
|
$ |
379 |
|
$ |
|
|
$ |
379 |
|
$ |
|
|
Other real estate owned |
|
|
|
297 |
|
|
|
297 |
|
|
| |||||
Impaired loans, net of related allowance |
|
|
|
276 |
|
522 |
|
798 |
|
|
| |||||
Total |
|
$ |
|
|
$ |
952 |
|
$ |
522 |
|
$ |
1,474 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans held for sale |
|
$ |
|
|
$ |
322 |
|
$ |
|
|
$ |
322 |
|
$ |
|
|
Other real estate owned |
|
|
|
230 |
|
|
|
230 |
|
|
| |||||
Impaired loans, net of related allowance |
|
|
|
|
|
881 |
|
881 |
|
|
| |||||
Total |
|
$ |
|
|
$ |
552 |
|
$ |
881 |
|
$ |
1,433 |
|
$ |
|
|
In April 2009, the FASB issued a new standard related to Interim Disclosures about Fair Value of Financial Instruments. This standard amends the Disclosures about Fair Value of Financial Instruments standard, to require disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also amends the Interim Financial Reporting standards, to require those disclosures in summarized financial information at interim reporting periods.
This standard is effective for Riverview for reporting periods June 30, 2009 and after. The adoption of this standard did not have a material impact on Riverviews consolidated financial statements.
Note 8 Fair Value Measurements and Fair Values of Financial Instruments (Continued)
The following information should not be interpreted as an estimate of the fair value of Riverview since a fair value calculation is only provided for a limited portion of Riverviews assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between Riverviews disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of Riverviews financial instruments at March 31, 2011:
Cash and cash equivalents (carried at cost):
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets fair values.
Interest bearing time deposit (carried at cost):
Fair values for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Riverview generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.
Securities:
The fair value of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted prices. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, managements best estimate is used. Managements best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.
Mortgage loans held for sale (carried at lower of cost or fair value):
The fair value of mortgages held for sale is determined, when possible, using quoted secondary market prices. If no such quoted prices exist, the fair value of the loan is determined using quoted market prices for a similar loan or loans, adjusted for the specific attributes of that loan.
Loans (carried at cost):
The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired loans (generally carried at fair value):
Impaired loans are those that are accounted for under generally accepted accounting principles relating to Accounting by Creditors for Impairment of a Loan in which Riverview has measured impairment generally based on the fair value of the loans collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Note 8 Fair Value Measurements and Fair Values of Financial Instruments (Continued)
Restricted investment in bank stocks (carried at cost):
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
Accrued interest receivable and payable (carried at cost):
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit liabilities (carried at cost):
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings (carried at cost):
The carrying amounts of short-term borrowings approximate their fair values.
Long-term borrowings (carried at cost):
Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The prices were obtained from an active market and represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.
Off-balance sheet financial instruments (disclosed at cost):
Fair values for Riverviews off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties credit standing. The estimated fair values of the Riverviews financial instruments were as follows:
|
|
March 31, 2011 |
|
December 31, 2010 |
| ||||||||
(In thousands) |
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
30,858 |
|
$ |
30,858 |
|
$ |
30,121 |
|
$ |
30,121 |
|
Interest bearing time deposits |
|
250 |
|
250 |
|
350 |
|
350 |
| ||||
Investment securities |
|
46,757 |
|
46,757 |
|
48,696 |
|
48,696 |
| ||||
Mortgage loans held for sale |
|
379 |
|
379 |
|
322 |
|
322 |
| ||||
Loans, net |
|
176,123 |
|
176,076 |
|
175,064 |
|
175,055 |
| ||||
Accrued interest receivable |
|
925 |
|
925 |
|
896 |
|
896 |
| ||||
Restricted investments in bank stocks |
|
2,217 |
|
2,217 |
|
2,311 |
|
2,311 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
236,938 |
|
234,458 |
|
237,272 |
|
235,883 |
| ||||
Short-term borrowings |
|
1,136 |
|
1,137 |
|
968 |
|
968 |
| ||||
Long-term borrowings |
|
10,682 |
|
10,863 |
|
10,683 |
|
10,963 |
| ||||
Accrued interest payable |
|
238 |
|
238 |
|
271 |
|
271 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Off balance sheet financial instruments |
|
|
|
|
|
|
|
|
| ||||
Note 9 New Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on Riverviews consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance will significantly expand the existing requirements and will lead to greater transparency into a companys exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning or after December 15, 2010. Riverview has included the required disclosures in its consolidated financial statements.
In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on Riverviews consolidated financial statements.
In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on Riverviews consolidated financial statements.
The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, Interactive Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.
In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASBs Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on Riverviews consolidated financial statements.
In April 2011, the FASB issued ASU 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on
Note 9 New Accounting Pronouncements (Continued)
a creditors evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Riverview is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of the significant changes in the consolidated financial condition, results of operations, capital resources and liquidity presented in the accompanying unaudited financial statements for Riverview Financial Corporation (Riverview) and its wholly-owned bank subsidiary, Riverview National Bank (the Bank). Riverviews consolidated financial condition and results of operations consist almost entirely of the Banks financial condition and results of operations. This discussion should be read in conjunction with the preceding consolidated financial statements and related footnotes, as well as Riverviews December 31, 2010 Annual Report on Form 10-K. Current performance does not guarantee and may not be indicative of similar performance in the future.
Forward-Looking Statements
Except for historical information, this report may be deemed to contain forward-looking statements regarding Riverview. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the board of directors, and (c) statements of assumptions, such as economic conditions in Riverviews market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as believes, expects, may, intends, will, should, anticipates, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.
No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact Riverviews operating results include, but are not limited to, (i) the effects of changing economic conditions in Riverviews market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could affect Riverviews operations including the impact of the enactment and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (v) funding costs, (vi) volatilities in the securities markets, (vii) ineffective business strategy, (viii) effects of deteriorating market conditions, specifically the effect on loan customers to repay loans, (ix) inability to achieve merger related cost savings, (x) the effects and unanticipated expenses related to the charter conversion of our banking subsidiary from a national bank to a Pennsylvania chartered bank, and (xi) other external developments which could materially affect Riverviews business and operations.
Critical Accounting Policies
Riverviews consolidated financial statements are prepared based on the application of certain accounting policies. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or are subject to variations which may significantly affect Riverviews reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas can have a material impact on future financial condition and 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 securities, goodwill and other intangible asset impairment and accounting for income taxes.
Riverview performs periodic and systematic detailed reviews of its loan portfolio to assess overall collectability. The level of the allowance for loan losses reflects the estimate of the losses inherent in the loan
portfolio at any point in time. While these estimates are based on substantiated methods for determining allowance requirements, actual outcomes may differ significantly from estimated results, especially when determining allowances for business, construction, and commercial real estate loans. These loans are normally larger and more complex, and their collection rates are harder to predict. Personal loans, including personal mortgage and other consumer loans, are individually smaller and perform in a more homogenous manner, making loss estimates more predictable.
Riverview records its available for sale securities at fair value. Fair value of these securities is determined based on methodologies in accordance with generally accepted accounting principles. Fair values are volatile and may be influenced by a number of factors, including market conditions, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values used are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the marketplace as a result of the illiquid market specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other than temporary impairment condition exists. Available for sale securities are analyzed quarterly for possible other than temporary impairment. The analysis considers (i) whether the bank has the intent to sell the securities prior to recovery and/or maturity and (ii) whether it is more likely than not that the bank will have to sell the securities prior to recovery and/or maturity. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on Riverviews results of operations and financial condition.
Goodwill and other intangible assets are reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment in accordance with generally accepted accounting principles relating to Goodwill and Other Intangible Assets, and Accounting for Impairment or Disposal of Long-Lived Assets. Goodwill is tested for impairment and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Riverview employs general industry practices in evaluating the fair value of its goodwill and other intangible assets. No assurance can be given that future impairment tests will not result in a charge to earnings.
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 valuation allowance on them.
Overview
Net income for the three months ended March 31, 2011 was $549,000 (or $0.31 per share) and was $1,000 less than net income of $550,000 (or $0.31 per share) for the three months ended March 31, 2010. The annualized return on average assets was 0.81% for the three months ended March 31, 2011 as compared with 0.88% for the comparable period in 2010. The annualized return on average equity was 8.83% for the first three months of 2011 as compared with 8.91% for the same period in 2010. The decrease in both ratios is attributable to the increase in average assets and average equity as of the first quarter of 2011 as compared with the first
quarter of 2010.
Results of Operations
Net Interest Income and Net Interest Margin
The following table presents Riverviews average balances, interest rates, interest income and expense, interest rate spread and net interest margin, adjusted to a fully-tax equivalent basis, for the three months ended March 31, 2011 and 2010.
|
|
For the Three Months Ended |
| ||||||||||||||
|
|
2011 |
|
2010 |
| ||||||||||||
Average Balances and Average Interest Rates |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Taxable |
|
$ |
30,194 |
|
$ |
239 |
|
3.21 |
% |
$ |
30,891 |
|
$ |
242 |
|
3.18 |
% |
Tax-exempt |
|
17,350 |
|
244 |
|
5.70 |
% |
14,723 |
|
230 |
|
6.34 |
% | ||||
Total securities |
|
47,544 |
|
483 |
|
4.12 |
% |
45,614 |
|
472 |
|
4.20 |
% | ||||
Other interest earning assets |
|
27,299 |
|
22 |
|
0.33 |
% |
12,718 |
|
20 |
|
0.64 |
% | ||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Consumer |
|
2,039 |
|
37 |
|
7.36 |
% |
2,710 |
|
49 |
|
7.33 |
% | ||||
Commercial |
|
13,655 |
|
204 |
|
6.05 |
% |
12,194 |
|
181 |
|
6.02 |
% | ||||
Real estate |
|
163,486 |
|
2,455 |
|
6.09 |
% |
160,270 |
|
2,430 |
|
6.15 |
% | ||||
Total loans |
|
179,180 |
|
2,696 |
|
6.10 |
% |
175,174 |
|
2,660 |
|
6.16 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total earning assets |
|
254,023 |
|
3,201 |
|
5.11 |
% |
233,506 |
|
3,152 |
|
5.48 |
% | ||||
Non-interest earning assets |
|
21,768 |
|
|
|
|
|
20,099 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
|
$ |
275,791 |
|
|
|
|
|
$ |
253,605 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposit accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing demand |
|
$ |
82,357 |
|
$ |
277 |
|
1.36 |
% |
$ |
72,964 |
|
$ |
258 |
|
1.43 |
% |
Savings |
|
32,766 |
|
36 |
|
0.45 |
% |
28,765 |
|
69 |
|
0.97 |
% | ||||
Time deposits |
|
102,645 |
|
542 |
|
2.14 |
% |
94,406 |
|
643 |
|
2.76 |
% | ||||
Total deposits |
|
217,768 |
|
855 |
|
1.59 |
% |
196,135 |
|
970 |
|
2.01 |
% | ||||
Borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Short-term borrowings |
|
878 |
|
1 |
|
0.46 |
% |
1,053 |
|
2 |
|
0.77 |
% | ||||
Long-term borrowings |
|
10,682 |
|
70 |
|
2.66 |
% |
10,696 |
|
68 |
|
2.58 |
% | ||||
Total borrowings |
|
11,560 |
|
71 |
|
2.49 |
% |
11,749 |
|
70 |
|
2.42 |
% | ||||
Total interest bearing liabilities |
|
229,328 |
|
926 |
|
1.64 |
% |
207,884 |
|
1,040 |
|
2.03 |
% | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Demand deposits |
|
19,980 |
|
|
|
|
|
19,101 |
|
|
|
|
| ||||
Other liabilities |
|
1,277 |
|
|
|
|
|
1,578 |
|
|
|
|
| ||||
Shareholders equity |
|
25,206 |
|
|
|
|
|
25,042 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total liabilities and shareholders equity |
|
$ |
275,791 |
|
|
|
|
|
$ |
253,605 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
$ |
2,275 |
|
|
|
|
|
$ |
2,112 |
|
|
| ||
Net interest spread |
|
|
|
|
|
3.47 |
% |
|
|
|
|
3.45 |
% | ||||
Net interest margin |
|
|
|
|
|
3.63 |
% |
|
|
|
|
3.67 |
% |
Tax-exempt income is presented on a fully tax-equivalent basis assuming a tax rate of 34%.
For yield computation purposes, non-accruing loans are included in average loan balances and any income recognized on these loans is included in interest income.
Securities held as available-for-sale are carried at amortized cost for purposes of calculating average yield.
For the three months ended March 31, 2011, total interest income increased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $49,000, or 1.6%, to $3,201,000 from $3,152,000 for the three months ended March 31, 2010. The increase was due to growth of 8.8% in the volume of average interest earning assets which totaled $254,023,000 for the first quarter of 2011 as compared to $233,506,000 for the first quarter of 2010, as a result of loan growth and an increase in other interest earning assets. Even though total interest income increased, the yield on interest earning assets (calculated on a fully tax-equivalent basis) declined to 5.11% for the first quarter of 2011 as compared with 5.48% for the first quarter of 2010.
Total interest expense decreased $114,000, or 11.0% to $926,000 for the three months ended March 31, 2011 from $1,040,000 for the three months ended March 31, 2010. This was attributable to a decline in total cost of funds, which decreased to 1.64% for the first quarter of 2011 from 2.03% for the same period in 2010. The decline in the cost of funds offset the 10.3% increase in the volume of average interest bearing liabilities.
Net interest income calculated on a fully tax equivalent basis increased $163,000, or 7.7%, to $2,275,000 for the three months ended March 31, 2011 from $2,112,000 for the three months ended March 31, 2010. Riverviews net interest spread increased to 3.47% for the three months ended March 31, 2011 from 3.45% for the three months ended March 31, 2010, while its net interest margin decreased to 3.63% for the three months ended March 31, 2011 from 3.67% for the three months ended March 31, 2010. The decrease in cost of funds was enough to offset the decline in the yield on interest earning assets, which caused little change in the net interest spread and net interest margin at March 31, 2011 as compared with March 31, 2010.
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 borrowers 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 three months ended March 31, 2011 was $116,000 as compared with none that was recorded for the three months ended March 31, 2010. The provision passed for the first quarter of 2011 was driven primarily by a specific allocation made to the allowance resulting from an impairment measurement on commercial loans to a business which failed during the quarter. The allowance for loan losses was $3,083,000 or 1.72% of total loans outstanding at March 31, 2011 as compared with $2,026,000, or 1.15% of total loans at March 31, 2010.
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 allowance for loan losses at March 31, 2011 is maintained at a level that is 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
The following table sets forth changes in non-interest income for the three months ended March 31, 2011 and 2010.
|
|
Three Months Ended March 31, |
| |||||||||
Non-Interest Income |
|
|
|
Increase/(Decrease) |
|
|
| |||||
(Dollars in thousands) |
|
2011 |
|
Amount |
|
% |
|
2010 |
| |||
Service charges on deposit accounts |
|
$ |
73 |
|
$ |
1 |
|
1.4 |
% |
$ |
72 |
|
Other service charges and fees |
|
85 |
|
(54 |
) |
(38.8 |
)% |
139 |
| |||
Earnings on cash value of life insurance |
|
60 |
|
(3 |
) |
(4.8 |
)% |
63 |
| |||
Gain on sale of available for sale securities |
|
236 |
|
232 |
|
5800.0 |
% |
4 |
| |||
Gain from the sale of mortgage loans |
|
43 |
|
(29 |
) |
(40.3 |
)% |
72 |
| |||
|
|
$ |
497 |
|
$ |
147 |
|
42.0 |
% |
$ |
350 |
|
Non-interest income is an important component of net income for Riverview, representing 18.6% of total revenues (comprised of net interest income and non-interest income) for the first three months of 2011 as compared with 14.8% for the first three months of 2010. Total non-interest income increased 42.0% in the first three months of 2011 as compared with the first three months of 2010 and is attributable to the gain from the sale of available for sale securities which offset the decline in non-interest income from other service charges and fees, earnings from the cash value of life insurance and gains from the sale of mortgage loans. The 38.8% decrease in other service charges and fees reflects the impact of recording a servicing asset during the earlier part of 2010. During 2011, the Bank recorded less of a gain from the sale of mortgage loans as a result of a decrease in the volume of loans available for sale servicing released to Freddie Mac as compared with 2010.
Non-Interest Expense
Non-interest expenses, which include salary, occupancy, equipment and all other expenses incidental to the operation of Riverview, increased $198,000 or 12.0% in comparing the first quarter of 2011 with the first quarter of 2010.
The following table presents the components of non-interest expense for the first three months of 2011 and 2010.
|
|
Three Months Ended March 31, |
| |||||||||
Non-Interest Expense |
|
|
|
Increase/(Decrease) |
|
|
| |||||
(Dollars in thousands) |
|
2011 |
|
Amount |
|
% |
|
2010 |
| |||
Salaries and employee benefits |
|
$ |
940 |
|
$ |
106 |
|
12.7 |
% |
$ |
834 |
|
Occupancy expense |
|
201 |
|
2 |
|
1.0 |
% |
199 |
| |||
Equipment expense |
|
98 |
|
1 |
|
1.0 |
% |
97 |
| |||
Telecommunications and processing charges |
|
150 |
|
33 |
|
28.2 |
% |
117 |
| |||
Postage and office supplies |
|
50 |
|
4 |
|
8.7 |
% |
46 |
| |||
FDIC premium |
|
99 |
|
9 |
|
10.0 |
% |
90 |
| |||
Bank shares tax expense |
|
69 |
|
2 |
|
3.0 |
% |
67 |
| |||
Directors compensation |
|
60 |
|
(4 |
) |
(6.3 |
)% |
64 |
| |||
Professional services |
|
47 |
|
17 |
|
56.7 |
% |
30 |
| |||
Other expenses |
|
131 |
|
28 |
|
27.2 |
%` |
103 |
| |||
|
|
$ |
1,845 |
|
$ |
198 |
|
12.0 |
% |
$ |
1,647 |
|
The increase of $198,000 or 12.0% in total non-interest expenses is attributable to the Banks overall growth. Specific expenses that had the greatest impact on increasing non-interest expenses included:
· higher salary and payroll tax expenses due to staff additions;
· increased medical benefit premiums;
· higher telecommunications costs associated with temporary telephone system redundancies as part of a conversion process; and
· increased professional services associated with higher legal costs that were related to various projects which included the implementation of a dividend reinvestment plan; the filing of a protective petition to claim tax credits relating to bank shares tax payments made in prior years; and a change in the Banks charter.
Provision for Federal Income Taxes
The income tax expense was $168,000 for the first quarter of 2011, a decrease of $1,000, or 0.6%, compared to $169,000 for the first quarter of 2010. Respectively, the provisions reflect effective tax rates of approximately 23.4% for 2011 and 23.5% for 2010. The effective tax rate remained somewhat consistent from year to year. Riverviews effective tax rate differs from the statutory rate of 34% due to tax-exempt interest income and non-taxable income from bank owned life insurance.
Financial Condition
Securities
The following table sets forth the composition of the investment security portfolio as of March 31, 2011 and December 31, 2010.
Investment Securities |
|
March 31, |
|
December 31, |
| ||
(In thousands) |
|
2011 |
|
2010 |
| ||
Available for Sale Securities (at fair value): |
|
|
|
|
| ||
U.S. Government agencies |
|
$ |
1,609 |
|
$ |
1,326 |
|
State and municipal |
|
17,158 |
|
16,832 |
| ||
Mortgage-backed securities |
|
27,990 |
|
30,538 |
| ||
Total |
|
$ |
46,757 |
|
$ |
48,696 |
|
Since the year end, total investment securities decreased as a result of maturities and repayments. None of the mortgage-backed securities in the portfolio are private label but are comprised of residential mortgage pass-through securities either guaranteed or issued by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by these three agencies contain additional guarantees that make them among the most creditworthy investments available.
No securities are considered other-than-temporarily impaired based on managements evaluation of the individual securities, including the extent and length of any unrealized losses, and Riverviews ability to hold the security until maturity or until the fair value recovers, and managements 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 March 31, 2011.
Riverviews investment in the 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. In late December 2008, the FHLB announced that it suspended the payment of dividends and the repurchase of current excess capital stock to preserve its capital level. That decision was based on FHLBs analysis and consideration of certain negative market trends and the impact those trends had on its
financial condition. Based upon its agreement with its member banks, the FHLB is not generally required to redeem membership stock until five years after the membership has terminated. However, in February 2011, as a good faith gesture, the FHLB redeemed for the second time since October 2010 approximately 5% of current excess outstanding stock. As a result, Riverviews FHLB stock holdings were reduced to 17,867 shares, equivalent to $1,786,700 as of March 31, 2011. Based on the financial results of the FHLB for the year ended December 31, 2010, management believes that the suspension of the dividend payment 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.
Loans
The loan portfolio comprises the major component of Riverviews earning assets and is the highest yielding asset category. Total loans, net of unearned income increased $1,169,000, or 0.7%, to $179,206,000 at March 31, 2011 from $178,037,000 at December 31, 2010. Loan growth since the 2010 year end is centered in commercial and construction real estate loans which increased 1.4% and home equity lines of credit which increased 4.7%. These increases were offset by a 9% decline in consumer installment loans, a 2% decline in commercial loans and a 0.5% decline in residential real estate loans.
Credit Risk and Loan Quality
The following table presents non-performing loans and assets as of March 31, 2011 and December 31, 2010:
Non-Performing Assets |
|
March 31, |
|
December 31, |
| ||
(Dollars in thousands) |
|
2011 |
|
2010 |
| ||
Accruing loans past due 90 days |
|
$ |
|
|
$ |
1,535 |
|
Non-accrual loans |
|
4,327 |
|
2,779 |
| ||
Total non-performing loans |
|
4,327 |
|
4,314 |
| ||
|
|
|
|
|
| ||
Foreclosed real estate |
|
297 |
|
230 |
| ||
Total non-performing assets |
|
$ |
4,624 |
|
$ |
4,544 |
|
|
|
|
|
|
| ||
Non-performing loans to total loans |
|
2.41 |
% |
2.42 |
% | ||
Non-performing assets to total assets |
|
1.68 |
% |
1.65 |
% | ||
Allowance to non-performing loans |
|
71.25 |
% |
68.92 |
% |
The non-performing asset ratios presented in the table reflect some deterioration in the credit quality of the loan portfolio since the 2010 year end. Through the first three months of 2011, the Bank experienced an increase of $13,000 in total non-performing loans due to a decrease of $1,535,000 in accruing loans past due 90 days, which offset the increase of $1,548,000 in non-accrual loans. The increase in total non-performing assets as of March 31, 2011 as compared with the 2010 year end is attributable to an additional property acquired through foreclosure in the first quarter of 2011. 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 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 $297,000 in real estate acquired through foreclosure as of March 31, 2011 as compared with $230,000 as of December 31, 2010. The real estate consists of two residential properties located in one of the communities serviced by Riverview. The increase at March 31, 2011 from December 31, 2010 is due to the foreclosure of one residential property during the first quarter of 2011. Riverview expects to be able to sell the outstanding properties during 2011 with no additional loss. Riverviews 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 generally continue to provide adequate collateral support and management does not anticipate any material decline in the Banks ability to collect on these loans.
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 March 31, 2011 and December 31, 2010.
(Dollars in |
|
March 31, |
|
December 31, |
| ||
Loans to Lessors of: |
|
|
|
|
| ||
Residential buildings and dwellings |
|
$ |
36,359 |
|
$ |
35,232 |
|
Nonresidential buildings |
|
23,133 |
|
21,838 |
| ||
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 regions economy and overall real estate market. Management stress tested significant exposures in these portfolios in 2010 by applying a 10% reduction in rents and determined that the loans can still generally perform as agreed. To date, the performance of these portfolios continues to be good, with acceptable delinquency levels and no losses for the first three months of 2011.
The first quarter of 2011 saw minimal, but positive absorption of available office space, with vacancy rates remaining stable. Riverviews non-residential market has not suffered the serious deterioration evident in certain other areas of the country. As such, management does not believe that this concentration is an adverse trend to Riverview at this time.
Riverviews 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. Riverviews policy is to place all loans in a non-accrual status upon becoming 90 days delinquent in their payments, unless the loan is well secured and there is a documented, reasonable expectation of the collection of the delinquent amount. Loans are reviewed daily as to their status. Management is not aware of any potential loan problems that have not been disclosed in this report.
Allowance for Loan Losses
As a result of managements ongoing assessment as to the adequacy of the allowance for loan losses in consideration of the risks and trends associated with the loan portfolio, a provision of $116,000 was made to the allowance for loan losses for the three months ended March 31, 2011. Management determined that the total of the allocated and unallocated portions of the allowance for loan losses was adequate to absorb any losses inherent in the portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary, and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that material increases will not be necessary should the quality of the loans deteriorate as a result of factors previously discussed.
Analysis of the Allowance for Loan Losses |
|
March 31, |
| ||||
(Dollars in thousands) |
|
2011 |
|
2010 |
| ||
Beginning balance |
|
$ |
2,973 |
|
$ |
2,560 |
|
Provision for loan losses |
|
116 |
|
|
| ||
|
|
|
|
|
| ||
Charge-offs: |
|
|
|
|
| ||
Commercial, financial, agricultural |
|
3 |
|
540 |
| ||
Real estate commercial |
|
5 |
|
|
| ||
Real estate mortgage |
|
6 |
|
|
| ||
Installments |
|
1 |
|
|
| ||
Total charge-offs |
|
15 |
|
540 |
| ||
|
|
|
|
|
| ||
Recoveries: |
|
|
|
|
| ||
Commercial, financial, agricultural |
|
9 |
|
6 |
| ||
Real estate mortgage |
|
|
|
|
| ||
Installments |
|
|
|
|
| ||
Total recoveries |
|
9 |
|
6 |
| ||
|
|
|
|
|
| ||
Net charge-offs |
|
6 |
|
534 |
| ||
|
|
|
|
|
| ||
Ending balance |
|
$ |
3,083 |
|
$ |
2,026 |
|
|
|
|
|
|
| ||
Net charge-offs to average loans (annualized) |
|
0.01 |
% |
1.22 |
% | ||
Allowance for loan losses to total loans |
|
1.72 |
% |
1.15 |
% |
The increase in the allowance for loan losses as a percentage of total loans as of March 31, 2011 as compared with March 31, 2010 is reflective primarily of an increase in the qualitative factors applied to unimpaired loan pools, warranted by an increase in past due, non-performing and criticized/classified assets year over year, along with the continued slow economic recovery. Also in determining the allowance for loan losses, the Bank identified separate loan pools with higher loss factors to segregate unimpaired criticized and classified loans from all other unimpaired loans. This more clearly details the risks inherent in the portfolio by refining the pools of assets with similar risk characteristics. Although management is proactive in identifying and dealing with credit issues that it can control, it anticipates that going forward, additional provisions to its allowance for loan losses may be warranted as a result of economic factors it cannot control.
Deposits
Deposits are the major source of Riverviews funds for lending and investing purposes. Total deposits at March 31, 2011 were $236,938,000, a decrease of $334,000, or (0.1%), from total deposits of $237,272,000 at December 31, 2010. While noninterest bearing deposits increased $3,063,000, or 16.6% at March 31, 2011 since the 2010 year end, interest bearing deposits declined $3,397,000, or (1.6%).
Shareholders Equity and Capital Adequacy
At March 31, 2011, shareholders equity for Riverview totaled $25,260,000, an increase of $333,000 or 1.3%, over December 31, 2010. The increase was due to net income of $549,000, less the payment of dividends for $218,000, an increase of $5,000 to surplus to reflect the compensation cost associated with option grants, a decrease of $16,000 reflecting the repurchase of common stock, and an increase in the net unrealized gains on securities available for sale, which net of tax, affected equity by $13,000.
Banks are evaluated for capital adequacy through regulatory review of capital ratios. The table that follows presents the Banks capital ratios as determined and reported to its regulator. Tier 1 capital includes common stock, surplus, and retained earnings less disallowed goodwill and other intangible assets. Total capital consists of tier 1 capital and the allowance for loan losses. The Bank exceeds both the regulatory minimums and the requirements necessary for designation as a well-capitalized institution.
Capital Ratios (of Bank) |
|
March 31, |
|
December 31, |
|
Regulatory |
|
Well |
|
Tier 1 capital (to average assets) |
|
8.5 |
% |
8.4 |
% |
4.0 |
% |
5.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
13.7 |
% |
13.8 |
% |
4.0 |
% |
6.0 |
% |
Total risk-based capital (to risk-weighted assets) |
|
15.0 |
% |
15.0 |
% |
8.0 |
% |
10.0 |
% |
Banking laws and regulations limit the ability of the Bank to transfer cash to Riverview in the form of cash dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits (as defined) for that year combined with the retained net profits for the two preceding years. At March 31, 2011, $1,391,000 of undistributed earnings of the Bank, included in consolidated shareholders equity, was available for distribution to Riverview as dividends without prior regulatory approval.
The following presents the details of the regular and special quarterly dividends paid to shareholders during the three months ended March 31, 2011, which reduced retained earnings by $218,000:
Declaration |
|
Record Date |
|
Date of |
|
Dividend Type |
|
Dividend Payment |
|
2/21/2011 |
|
3/15/2011 |
|
3/31/2011 |
|
Regular |
|
$0.08/share |
|
2/21/2011 |
|
3/15/2011 |
|
3/31/2011 |
|
Special |
|
$0.045/share |
|
During March 2011, Riverview approved and implemented a Dividend Reinvestment and Stock Purchase Plan (the Plan). The Plan enables registered stockholders to automatically reinvest all or a portion of their cash dividends into the purchase of additional common shares of Riverview. Stockholders enrolled in the Plan will also have the option to make voluntary cash contributions to the Plan on a quarterly basis in order to purchase additional shares of common stock. A 5% discount will be applied to the purchase price of all shares purchased by the Plan. Shares purchased by the Plan will only be made in open market or in privately negotiated transactions (or a combination of both) and will be administered by Riverviews transfer agent. Riverview will not offer or sell any of its treasury shares or authorized but unissued shares to the Plan, and, therefore, will not receive any proceeds from the purchase of common stock by the Plan.
Off-Balance Sheet Arrangements
Riverview is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and to a lesser extent, letters of credit. At March 31, 2011, Riverview had unfunded outstanding commitments to extend credit of $20,087,000 and outstanding letters of credit of $1,720,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. Refer to Note 11 of the 2010 Consolidated Financial Statements for a discussion of the nature, business purpose and importance of Riverviews off-balance sheet arrangements.
Liquidity
Liquidity refers to Riverviews ability to generate adequate amounts of cash to meet financial obligations to its customers in order to fund loans, to respond to deposit outflows and to cover operating expenses. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal
operating expenditures. Sources of liquidity are provided on a continuous basis through scheduled and unscheduled principal reductions and interest payments on outstanding loans and investment securities. Liquidity needs may also be met by converting assets into cash or obtaining sources of additional funding, whether through deposit growth, securities sold under agreements to repurchase or borrowings under lines of credit with correspondent banks.
Liquidity from the asset category is provided through cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold, which totaled $31,108,000 at March 31, 2011 and was comparable to the $30,471,000 that was outstanding at December 31, 2010. While liquidity sources generated from assets include scheduled and prepayments of principle and interest from securities and loans in Riverviews portfolios, longer-term liquidity needs may be met by selling securities available-for-sale, selling loans or raising additional capital. At March 31, 2011, unpledged available-for-sale securities with a carrying value of $25,194,000 were readily available for liquidity purposes as compared with $21,298,000 at December 31, 2010. This increase was attributable to a decline in the amount of investment securities that needed to be pledged as a result of a decrease in public fund deposits.
On the liability side, the primary source of funds available to meet liquidity needs is to attract deposits at competitive rates. The Banks core deposits, which exclude certificates of deposit over $100,000, were $206,567,000 at March 31, 2011 as compared to $201,714,000 at December 31, 2010. Core deposits have historically provided a source of relatively stable and low cost liquidity, as has also been the case for securities sold under agreements to repurchase. Short-term and long-term borrowings utilizing the federal funds line and credit facility established with a correspondent financial institution and the FHLB are also considered to be reliable sources for funding. As of March 31, 2011, Riverview has access to two formal borrowing lines totaling $103,428,000 with the aggregate amount outstanding on these lines totaling $10,678,000.
There are a number of factors that may impact Riverviews liquidity position. Changes in interest rates, local economic conditions and the competitive marketplace can influence prepayments on investment securities, loan fundings and payments, and deposit flows. Management is of the opinion that its liquidity position at March 31, 2011 is adequate to respond to fluctuations on and off the balance sheet since it manages liquidity on a daily basis and expects to have sufficient funds to meet all of its funding requirements.
Except as discussed above, there are no known demands, trends, commitments, events or uncertainties that may result in, or that are reasonably likely to result in Riverviews inability to meet anticipated or unexpected needs.
Inflation
The impact of inflation upon financial institutions can affect assets and liabilities through the movement of interest rates. The exact impact of inflation on Riverview is difficult to measure. Inflation may cause operating expenses to change at a rate not matched by the change in earnings. Inflation may affect the borrowing needs of consumer and commercial customers, in turn affecting the growth of the Riverviews assets. Inflation may also affect the level of interest rates in the general market, which in turn can affect Riverviews profitability and the market value of assets held. Riverview actively manages its interest rate sensitive assets and liabilities countering the effects of inflation.
Recent Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law. Dodd-Frank is intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank creates a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally creates a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank is expected to have a significant impact on our business operations as its provisions take effect.
It is difficult to predict at this time what specific impact Dodd-Frank and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. Among the provisions that are likely to affect us are the following:
Holding Company Capital Requirements. Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
Deposit Insurance. Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor, and extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. Dodd-Frank also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Effective one year from the date of enactment, Dodd-Frank eliminates the federal statutory prohibition against the payment of interest on business checking accounts.
Corporate Governance. Dodd-Frank requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on golden parachute payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Prohibition Against Charter Conversions of Troubled Institutions. Effective one year after enactment, Dodd-Frank prohibits a depository institution from converting from a state to federal charter or vice versa while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.
Interstate Branching. Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks will be able to enter new markets more freely.
Limits on Interstate Acquisitions and Mergers. Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition the acquisition of a bank outside its home state unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.
Limits on Interchange Fees. Dodd-Frank amends the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
Consumer Financial Protection Bureau. Dodd-Frank creates a new, independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrowers ability to repay. In addition, Dodd-Frank will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a qualified mortgage as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Small Business Jobs Act
The Small Business Jobs Act was signed into law on September 27, 2010, which creates a $30 billion Small Business Lending Fund (the Fund) to provide community banks with capital to increase small business lending. Generally, bank holding companies with assets equal to or less than $10 billion are eligible to apply for and receive a capital investment from the Fund in an amount equal to 3-5% of its risk-weighted assets.
The capital investment will take the form of preferred stock carrying a 5% dividend which has the potential to decrease to as low as 1% if the participant sufficiently increases its small business lending within the first two and one-half years. If the participant does not increase its small business lending at least 2.5% in the first two and one-half years, the dividend rate will increase to 7%. After four and one-half years, the dividend will increase to 9% regardless of the participants small business lending. The deadline to apply to receive capital under the fund is March 31, 2011. Whether the Fund will help spur the economy by increasing small business lending or strengthening the capital position of community banks is uncertain.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information relating to this item.
ITEM 4T. CONTROLS AND PROCEDURES
Riverviews Chief Executive Officer and Chief Financial Officer (Principal Accounting Officer) carried out an evaluation of the effectiveness of the design and the operation of Riverviews disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2011, pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer (Principal Accounting Officer) concluded that Riverviews disclosure controls and procedures as of March 31, 2011, are effective in timely alerting them to material information relating to Riverview that is required to be in Riverviews periodic filings under the Exchange Act.
There have been no changes in Riverviews internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect Riverviews internal control over financial reporting.
In the opinion of Riverview, after review with legal counsel, there are no proceedings pending to which Riverview is a party or to which its property is subject, which, if determined adversely to Riverview, would be material in relation to Riverviews consolidated financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of Riverview. In addition, no material proceedings are pending or are known to be threatened or contemplated against Riverview by governmental authorities.
Not required for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information on repurchases by Riverview of its common stock in each month of the quarter ended March 31, 2011:
|
|
Total Number |
|
Average |
|
Total Number of |
|
Maximum Number |
| |
|
|
|
|
|
|
|
|
|
| |
January 1-31, 2011 |
|
600 |
|
$ |
10.90 |
|
600 |
|
81,063 |
|
February 1-28, 2011 |
|
400 |
|
14.68 |
|
400 |
|
80,663 |
| |
March 1-31, 2011 |
|
300 |
|
13.10 |
|
300 |
|
80,363 |
| |
Total |
|
1,300 |
|
$ |
12.57 |
|
1,300 |
|
80,363 |
|
(1) On March 9, 2011, Riverview announced that it had reaffirmed its Stock Repurchase program to repurchase up to 4.9% of its outstanding common stock. These shares will be purchased in open market or privately negotiated transactions at prevailing market prices from time to time over a twelve-month period depending upon market conditions and other factors including any blackout periods during which the corporation and its insiders may be prohibited from trading in the corporations common stock. As of March 31, 2011, 5,387 shares were purchased under this program.
Item 3. Defaults upon Senior Securities
Nothing to report.
Item 4. (Removed and Reserved).
Nothing to report.
3(i) |
|
The Registrants Articles of Incorporation. (Incorporated by reference to Annex B included in Riverviews Amendment No. 2 to Registration Statement on Form S-4 (Registration No. 333-153486) filed November 4, 2008). |
3(ii) |
|
The Registrants By-laws. (Incorporated by reference to Exhibit 3.2 of Riverviews current report on Form 8-K filed April 7, 2011.) |
|
|
|
10.1 |
|
Amended and Restated Executive Employment Agreement of Robert M. Garst. (Incorporated by reference to Exhibit 10.1 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.2 |
|
Amended and Restated Executive Employment Agreement of Kirk D. Fox. (Incorporated by reference to Exhibit 10.2 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.3 |
|
Employment Agreement of Theresa M. Wasko. (Incorporated by reference to Exhibit 10.3 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.4 |
|
Executive Employment Agreement of Paul B. Zwally. (Incorporated by reference to Exhibit 10.4 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.5 |
|
Employment Agreement of William L. Hummel. (Incorporated by reference to Exhibit 10.5 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.6 |
|
Acknowledgement and Release Agreement of William L. Hummel. (Incorporated by reference to Exhibit 10.6 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.7 |
|
Form of Director Deferred Fee Agreements with Directors Roland R. Alexander, Robert M. Garst and Kirk D. Fox. (Incorporated by reference to Exhibit 10.7 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.8 |
|
2009 Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.9 |
|
Second Amendment to the Supplemental Executive Retirement Agreement Plan Agreement for Kirk D. Fox dated March 29, 2007, amended June 18, 2008 and entered into between Kirk D. Fox and Riverview National Bank on September 2, 2009. (Incorporated by reference to Exhibit 10.11 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 as filed with the Securities and Exchange Commission on November 12, 2009.) |
|
|
|
10.10 |
|
Director Emeritus Agreement of Paul Reigle, dated May 19, 2010. (Incorporated by reference to Exhibit 10.12 of Registrants Form 10-Q as filed with the Securities and Exchange Commission on August 9, 2010.) |
|
|
|
10.11 |
|
Executive Deferred Compensation Agreement of Kirk Fox. (Incorporated by reference to Exhibit 99.1 of Registrants Form 8-K as filed with the Securities and Exchange Commission on July 1, 2010.) |
31.1 |
|
Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). |
|
|
|
31.2 |
|
Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). |
|
|
|
32.1 |
|
Chief Executive Officers §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). |
|
|
|
32.2 |
|
Chief Financial Officers §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
By: |
/s/ Robert M. Garst |
|
|
Robert M. Garst |
|
|
Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
Date: |
May 13, 2011 |
|
|
|
|
|
|
|
By: |
/s/ Theresa M. Wasko |
|
|
Theresa M. Wasko |
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
|
|
Date: |
May13, 2011 |
3(i) |
|
The Registrants Articles of Incorporation. (Incorporated by reference to Annex B included in Riverviews Amendment No. 2 to Registration Statement on Form S-4 (Registration No. 333-153486) filed November 4, 2008). |
|
|
|
3(ii) |
|
The Registrants By-laws. (Incorporated by reference to Exhibit 3.2 of Riverviews current report on Form 8-K filed April 7, 2011.) |
|
|
|
10.1 |
|
Amended and Restated Executive Employment Agreement of Robert M. Garst. (Incorporated by reference to Exhibit 10.1 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.2 |
|
Amended and Restated Executive Employment Agreement of Kirk D. Fox. (Incorporated by reference to Exhibit 10.2 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.3 |
|
Employment Agreement of Theresa M. Wasko. (Incorporated by reference to Exhibit 10.3 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.4 |
|
Executive Employment Agreement of Paul B. Zwally. (Incorporated by reference to Exhibit 10.4 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
|
|
|
10.5 |
|
Employment Agreement of William L. Hummel. (Incorporated by reference to Exhibit 10.5 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
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10.6 |
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Acknowledgement and Release Agreement of William L. Hummel. (Incorporated by reference to Exhibit 10.6 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
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10.7 |
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Form of Director Deferred Fee Agreements with Directors Roland R. Alexander, Robert M. Garst and Kirk D. Fox. (Incorporated by reference to Exhibit 10.7 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
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10.8 |
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2009 Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to Registrants Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on April 10, 2009.) |
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10.9 |
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Second Amendment to the Supplemental Executive Retirement Agreement Plan Agreement for Kirk D. Fox dated March 29, 2007, amended June 18, 2008 and entered into between Kirk D. Fox and Riverview National Bank on September 2, 2009. (Incorporated by reference to Exhibit 10.11 to Registrants Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 as filed with the Securities and Exchange Commission on November 12, 2009.) |
10.10 |
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Director Emeritus Agreement of Paul Reigle, dated May 19, 2010. (Incorporated by reference to Exhibit 10.12 of Registrants Form 10-Q as filed with the Securities and Exchange Commission on August 9, 2010.) |
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10.11 |
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Executive Deferred Compensation Agreement of Kirk Fox. (Incorporated by reference to Exhibit 99.1 of Registrants Form 8-K as filed with the Securities and Exchange Commission on July 1, 2010.) |
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31.1 |
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Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). |
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31.2 |
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Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)). |
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32.1 |
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Chief Executive Officers §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). |
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32.2 |
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Chief Financial Officers §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)). |