Table of Contents

 

 

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 June 30, 2015

or

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

333-201017

Commission File Number

 

 

RIVERVIEW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania		38-3917371
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

3901 North Front Street, Harrisburg, PA 17110

(Address of principal executive offices)

Registrant’s telephone number: 717-957-2196

 

 

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  ¨

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  x    NO  ¨

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.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		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  ¨    NO  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,711,258 shares of Common Stock, with no par value per share, outstanding as of August 5, 2015.

 

 

 

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Table of Contents

RIVERVIEW FINANCIAL CORPORATION

INDEX TO FORM 10-Q

 

				PAGE
PART I.		Financial Information
Item 1.		Financial Statements:
		Consolidated Balance Sheets at June 30, 2015 (unaudited) and December 31, 2014			3
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)			4
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)			5
		Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2015 and 2014 (unaudited)			6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)			7
		Notes to Consolidated Financial Statements			9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			54
Item 4.		Controls and Procedures			54
PART II.		Other Information
Item 1.		Legal Proceedings			55
Item 1A.		Risk Factors			55
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3.		Defaults Upon Senior Securities			55
Item 4.		Mine Safety Disclosures			55
Item 5.		Other Information			55
Item 6.		Exhibits			55
SIGNATURES					57
Exhibit Index					58

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1:

FINANCIAL STATEMENTS

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

		June 30,				December 31,
(In thousands, except share data)		2015				2014
		(Unaudited)				(Audited)
Assets
Cash and due from banks		$	6,285			$	8,477
Interest bearing deposits			8,569				6,103
Cash and cash equivalents			14,854				14,580
Interest bearing time deposits with banks			991				992
Investment securities available for sale			50,417				48,818
Mortgage loans held for sale			1,156				216
Loans, net of allowance for loan losses of $4,145 - 2015; $3,792 - 2014			347,569				338,901
Premises and equipment			11,151				11,440
Accrued interest receivable			1,335				1,237
Restricted investments in bank stocks			1,315				1,002
Cash value of life insurance			8,739				8,587
Foreclosed assets			347				1,022
Goodwill			2,297				2,297
Intangible assets			1,245				1,381
Other assets			6,878				5,673
Total Assets		$	448,294			$	436,146
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand, non-interest bearing		$	62,469			$	53,620
Demand, interest bearing			135,288				132,860
Savings and money market			89,005				83,748
Time			95,050				102,034
Total deposits			381,812				372,262
Capital lease payable			—				1,655
Short-term borrowings			22,000				12,500
Long-term borrowings			2,000				7,000
Accrued interest payable			116				154
Other liabilities			6,066				4,367
Total Liabilities			411,994				397,938
Shareholders’ Equity
Preferred stock, 2015 and 2014, no par value; authorized 3,000,000 shares			—				—
Common stock, 2015 and 2014, no par value; authorized 5,000,000 shares; issued and outstanding 2015 2,709,864 shares; 2014 2,708,840 shares			22,077				22,077
Surplus			230				201
Retained earnings			14,079				15,795
Accumulated other comprehensive income (loss)			(86	)			135
Total Shareholders’ Equity			36,300				38,208
Total Liabilities and Shareholders’ Equity		$	448,294			$	436,146

The accompanying notes are an integral part of these consolidated financial statements.

 

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RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended								Six Months Ended
(In thousands, except share data)		June 30,								June 30,
		2015				2014				2015				2014
Interest and Dividend Income
Loans, including fees		$	3,874			$	4,340			$	7,707			$	8,251
Investment securities - taxable			224				295				471				584
Investment securities - tax exempt			108				178				202				364
Federal funds sold			—				1				—				1
Interest-bearing deposits			9				12				18				20
Dividends			14				11				53				19
Total Interest Income			4,229				4,837				8,451				9,239
Interest Expense
Deposits			436				461				875				968
Short-term borrowings			18				3				33				5
Long-term debt			50				64				105				131
Total Interest Expense			504				528				1,013				1,104
Net Interest Income			3,725				4,309				7,438				8,135
Provision for Loan Losses			450				—				450				—
Net Interest Income after Provision for Loan Losses			3,275				4,309				6,988				8,135
Noninterest Income
Service charges on deposit accounts			97				119				195				227
Other service charges and fees			153				134				290				491
Earnings on cash value of life insurance			74				50				125				101
Fees and commissions from securities brokerage			217				196				426				418
Gain/(loss) on sale of available for sale securities			(41	)			47				(41	)			47
Loss on sale and valuation of other real estate owned			(41	)			(239	)			(67	)			(233	)
Loss on other assets			(53	)			(8	)			(53	)			(2	)
Gain on sale of mortgage loans			116				74				194				149
Total Noninterest Income			522				373				1,069				1,198
Noninterest Expenses
Salaries and employee benefits			3,793				1,959				5,871				3,769
Occupancy expenses			579				310				1,015				697
Equipment expenses			165				157				326				306
Telecommunication and processing charges			310				281				603				548
Postage and office supplies			98				94				186				194
Loan prepayment penalty			238				—				238				—
FDIC premiums			87				93				155				183
Bank shares tax expense			87				78				172				160
Directors’ compensation			89				83				175				167
Professional services			122				68				290				134
Amortization of intangible assets			67				74				134				148
Other expenses			425				691				753				916
Total Noninterest Expenses			6,060				3,888				9,918				7,222
Income (Loss) before Income Taxes			(2,263	)			794				(1,861	)			2,111
Applicable Federal Income Tax Expense (Benefit)			(919	)			252				(891	)			559
Net Income (Loss)		($	1,344	)		$	542			($	970	)		$	1,552
Basic Earnings (Loss) Per Share		($	0.50	)		$	0.20			($	0.36	)		$	0.57
Diluted Earnings (Loss) Per Share		($	0.50	)		$	0.20			($	0.36	)		$	0.57

The accompanying notes are an integral part of these consolidated financial statements.

 

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RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
		(In thousands)
Net income (loss)		($	1,344	)		$	542			($	970	)		$	1,552
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax of ($172) and $266 for the three months ended and ($128) and $523 for the six months ended			(334	)			517				(248	)			1,015
Reclassification adjustment for (gains) losses included in net income, net of tax of $14 and ($16) for the three and six months ended			27				(31	)			27				(31	)
Total other comprehensive income (loss), net of tax			(307	)			486				(221	)			984
Total comprehensive income (loss)		($	1,651	)		$	1,028			($	1,191	)		$	2,536

The accompanying notes are an integral part of these consolidated financial statements.

 

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RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

(In thousands, except share data)		Common Stock				Surplus				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Shareholders’ Equity
Balance – January 1, 2014		$	22,077			$	124			$	14,562			($	535	)		$	36,228
Net income			—				—				1,552				—				1,552
Other comprehensive income			—				—				—				984				984
Compensation cost of option grants			—				8				—				—				8
Cash dividends, $0.265 per share			—				—				(716	)			—				(716	)
Balance – June 30, 2014		$	22,077			$	132			$	15,398			$	449			$	38,056
Balance – January 1, 2015		$	22,077			$	201			$	15,795			$	135			$	38,208
Net loss			—				—				(970	)			—				(970	)
Other comprehensive loss			—				—				—				(221	)			(221	)
Compensation cost of option grants			—				16				—				—				16
Issuance of 1,024 shares of common stock to the ESPP, $13.13 per share			—				13				—				—				13
Cash dividends, $0.275 per share			—				—				(746	)			—				(746	)
Balance – June 30, 2015		$	22,077			$	230			$	14,079			($	86	)		$	36,300

The accompanying notes are an integral part of these consolidated financial statements.

 

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RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
(In thousands)		2015				2014
Cash Flows from Operating Activities
Net income (loss)		($	970	)		$	1,552
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation			483				348
Provision for loan losses			450				—
Granting of stock options			16				8
Net amortization (accretion) of premiums on securities available for sale			222				184
Net realized loss from write-down or sale of foreclosed real estate and other assets			67				233
Net realized (gain) loss on sale or calls of securities available for sale			41				(47	)
Amortization of intangible assets			136				146
Deferred income taxes			(599	)			272
Proceeds from sale of mortgage loans			9,831				6,989
Net gain on sale of mortgage loans			(194	)			(149	)
Mortgage loans originated for sale			(10,577	)			(6,757	)
Earnings on cash value of life insurance, net			(125	)			(101	)
(Increase) decrease in accrued interest receivable and other assets			(589	)			253
Increase (decrease) in accrued interest payable and other liabilities			1,661				(193	)
Net Cash Provided by (Used in) Operating Activities			(147	)			2,738
Cash Flows from Investing Activities
Net maturities of interest bearing time deposits			1				1
Securities available for sale:
Purchases			(5,964	)			(11,046	)
Proceeds from maturities, calls and principal repayments			3,766				3,150
Proceeds from sales			—				2,560
Proceeds from the sale of foreclosed real estate			1,002				35
Net increase in restricted investments in bank stock			(313	)			(529	)
Net increase in loans			(9,512	)			(6,839	)
Purchases of premises and equipment			(194	)			(2,204	)
Purchase of life insurance			(27	)			(5	)
Net Cash Used in Investing Activities			(11,241	)			(14,877	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits			9,550				(7,226	)
Increase in short-term borrowings			9,500				15,713
Repayment of long-term debt			(5,000	)			(3,000	)
Payment of capital lease			(1,655	)			—
Issuance of common stock to ESPP			13				—
Dividends paid			(746	)			(716	)
Net Cash Provided by Financing Activities			11,662				4,771
Net Increase (Decrease) in Cash and Cash Equivalents			274				(7,368	)
Cash and Cash Equivalents - Beginning			14,580				24,062
Cash and Cash Equivalents - Ending		$	14,854			$	16,694

 

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RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED

(Unaudited)

 

		Six Months Ended June 30,
		2015				2014
		(In thousands)
Supplemental Disclosures of Cash Flows Information
Interest paid		$	1,051			$	1,141
Income taxes paid		$	275			$	250
Supplemental Schedule of Noncash Investing and Financing Activities
Other real estate acquired in settlement of loans		$	394			$	299

The accompanying notes are an integral part of these consolidated financial statements.

 

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RIVERVIEW FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Nature of Operations

On November 1, 2013, Riverview Financial Corporation and Union Bancorp, Inc. (“Union”) consolidated to form a new Pennsylvania corporation under the name of Riverview Financial Corporation (the “Company”). The Company and its wholly-owned bank subsidiary, Riverview Bank (the “Bank”), provide loan, deposit and a full range of banking services to individuals, businesses and municipalities through two full service offices in Marysville and Duncannon, Perry County, Pennsylvania, one full service office in Enola, Cumberland County, Pennsylvania, six full service offices in Tower City, Cressona, Pottsville and Orwigsburg, Schuylkill County, Pennsylvania, three full service and one drive-up office in Halifax, Millersburg and Elizabethville, Dauphin County, Pennsylvania and a full service branch office in Wyomissing, Berks County, Pennsylvania. Effective December 27, 2012, Riverview Bank purchased a wealth management company located in Orwigsburg, Schuylkill County, Pennsylvania that provides financial advisory, insurance, trust and investment services relating to non-deposit type investment products. The wealth management company is a division of the Bank. Riverview Bank competes with several other financial institutions within its geographic footprint to provide its services to individuals, businesses, municipalities and other organizations.

The Company and The Citizens National Bank of Meyersdale, PA (“Citizens”) entered into an Agreement and Plan of Merger, dated October 30, 2014 (the “Merger Agreement”), pursuant to which Citizens will merge with and into Riverview Bank, with Riverview Bank surviving (the “Merger”). Citizens’ shareholders have approved the Merger, subject to receipt of approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities (“DOB”). In July, 2015, the Company withdrew its previously filed merger applications with these bank regulators with plans to re-submit the applications during the third quarter of 2015.

The Bank is a Pennsylvania state-chartered financial institution. The Company and the Bank are subject to regulations of state and federal agencies, including the DOB, Federal Reserve and FDIC. These regulatory agencies periodically examine the Company and the Bank for adherence to laws and regulations as well as safety and soundness.

The accounting and reporting policies followed by the Company conform to generally accepted accounting principles and to general practices within the banking industry. The following paragraphs briefly describe the Company’s most significant accounting policies.

Principles of Consolidation and Basis of Accounting

The Company’s unaudited consolidated financial statements include the accounts of the Company and its wholly-owned bank subsidiary and its operating divisions. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company uses the accrual basis of accounting.

The Company’s unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and predominant practices within the banking industry, and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of 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 and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015 or any other future period.

The consolidated financial statements presented in this report should be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2014, included in the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 30, 2015.

 

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Note 1 - Summary of Significant Accounting Policies (continued)

 

Use of Estimates

The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

The Company evaluates estimates on an ongoing basis. 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, 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, further reductions in the carrying amounts of loans 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. 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 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 the Company, as applied in the interim consolidated financial statements presented, are substantially the same as those followed on an annual basis, as applied in the Company’s annual consolidated audited financial statements included in the Company’s Form 10-K. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for Riverview Financial Corporation for the year ended December 31, 2014. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Segment Reporting

The Company operates in a single business segment consisting of traditional banking activities.

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, the Company evaluated the events and transactions that occurred from the date of the financial statements through August 14, 2015, the date this Form 10-Q was filed, and has identified the following event that requires recognition or disclosure in the consolidated financial statements:

 

•

While working through the regulatory approval process, in July 2015, the Company withdrew its previously filed applications with the FDIC, DOB and Federal Reserve to merge with Citizens. It is the Company’s intention to submit new applications to the bank regulators during the third quarter of 2015 for the purpose of re-applying for approval of the merger.

Note 2 – Acquisition of Citizens National Bank of Meyersdale

The Company and Citizens National Bank of Meyersdale (“Citizens”) entered into an Agreement and Plan of Merger, dated October 30, 2014 (the “Merger Agreement”), pursuant to which Citizens will merge with and into Riverview Bank, with Riverview Bank surviving (the “Merger”). In the Merger, each share of Citizens common stock that is outstanding, other than treasury stock, will be converted into either (1) $38.46 in cash or (2) 2.9586 shares of the Company’s common stock, at the election of each Citizens shareholder, subject to proration in order to ensure that no more than 20% of the outstanding Citizens shares are converted into cash consideration. Riverview Bank and Citizens will be combined in a statutory merger under the provisions of the Pennsylvania Banking Code, and Riverview Bank will survive as the resulting institution.

 

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Note 2 – Acquisition of Citizens National Bank of Meyersdale (continued)

 

Citizens’ shareholders have approved the Merger, subject to receipt of approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities (“DOB”). In July 2015, the Company withdrew its previously filed applications with the FDIC, DOB and the Federal Reserve to merge with Citizens with the intent to re-file its applications with the FDIC, the DOB and the Federal Reserve during the third quarter of 2015. The Merger Agreement may be terminated by either Party if Closing has not occurred by December 31, 2015.

Note 3 - Earnings Per Common Share

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. For diluted earnings per share, net income is divided by the weighted average number of shares outstanding plus the incremental number of shares that would have been outstanding if dilutive potential common shares had been issued. The Company’s potential common stock equivalents consist of outstanding common stock options for 322,200 shares of Riverview common stock as of June 30, 2015 and June 30, 2014.

The following table presents the computation of earnings per share for the periods presented.

 

		Three Months ended June 30,
		Income Numerator				Common Shares Denominator				EPS
		(In thousands, except share data)
2015:
Basic EPS		($	1,344	)			2,709,538			($	0.50	)
Dilutive effect of potential common stock options							7,594
Diluted EPS		($	1,344	)			2,717,132			($	0.50	)
2014:
Basic EPS		$	542				2,703,840			$	0.20
Dilutive effect of potential common stock options							9,542
Diluted EPS		$	542				2,713,382			$	0.20

 

		Six Months ended June 30,
		Income Numerator				Common Shares Denominator				EPS
		(In thousands, except share data)
2015:
Basic EPS		($	970	)			2,709,191			($	0.36	)
Dilutive effect of potential common stock options							10,126
Diluted EPS		($	970	)			2,719,317			($	0.36	)
2014:
Basic EPS		$	1,552				2,703,840			$	0.57
Dilutive effect of potential common stock options							5,622
Diluted EPS		$	1,552				2,709,462			$	0.57

Note 4 – Changes in Accumulated Other Comprehensive Income

Comprehensive income is divided into net income and other comprehensive income. The components of the Company’s accumulated other comprehensive income are unrealized gains and (losses) on securities available for sale and unrecognized gains and (losses) associated with the defined benefit postretirement plan. Changes to other comprehensive income are presented net of tax in the Statements of Comprehensive Income. Reclassifications out of accumulated other comprehensive income are recorded in the Consolidated Statements of Income.

 

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Note 4 – Changes in Accumulated Other Comprehensive Income (continued)

 

The following tables illustrate the disclosure of changes in the balances of each component of accumulated other comprehensive income for the periods presented:

 

		Three Months Ended June 30,
		2015												2014
(In thousands)		Unrealized Gains and Losses on Available- for-Sale				Defined Benefit Pension Items				Total				Unrealized Gains and Losses on Available- for-Sale				Defined Benefit Pension Items				Total
Beginning balance		$	563			($	342	)		$	221			($	46	)		$	9			($	37	)
Other comprehensive income (loss) before reclassifications			(506	)			—				(506	)			783				—				783
Amounts reclassified from accumulated other comprehensive income(1)			41				—				41				(47	)			—				(47	)
Tax effect of current period changes(2)			158				—				158				(250	)			—				(250	)
Net current-period other comprehensive income (loss)			(307	)			—				(307	)			486				—				486
Ending balance		$	256			($	342	)		($	86	)		$	440			$	9			$	449

 

(1)	Included in gain (loss) on sale of available for sale securities on the Consolidated Statements of Income.

(2)	Included in tax expense on the Consolidated Statements of Income.

 

		Six Months Ended June 30,
		2015												2014
(In thousands)		Unrealized Gains and Losses on Available- for-Sale				Defined Benefit Pension Items				Total				Unrealized Gains and Losses on Available- for-Sale				Defined Benefit Pension Items				Total
Beginning balance		$	477			($	342	)		$	135			($	544	)		$	9			($	535	)
Other comprehensive income (loss) before reclassifications			(376	)			—				(376	)			1,538				—				1,538
Amounts reclassified from accumulated other comprehensive income(1)			41				—				41				(47	)			—				(47	)
Tax effect of current period changes(2)			114				—				114				(507	)			—				(507	)
Net current-period other comprehensive income (loss)			(221	)			—				(221	)			984				—				984
Ending balance		$	256			($	342	)		($	86	)		$	440			$	9			$	449

 

(1)	Included in gain (loss) on sale of available for sale securities on the Consolidated Statements of Income.

(2)	Included in tax expense on the Consolidated Statements of Income.

 

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Note 5 - Investment Securities Available-for-Sale

The following tables present the amortized cost and estimated fair values of investment securities at June 30, 2015 and December 31, 2014, all of which were available-for-sale:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
June 30, 2015:
U.S Government agencies		$	776			$	13			$	—			$	789
State and municipal			27,743				358				196				27,905
U.S. Government agencies and sponsored enterprises (GSEs) - residential:
Mortgage-backed securities			18,532				143				8				18,667
Collateralized mortgage obligations (CMOs)			2,018				35				1				2,052
Corporate debt obligations			490				8				—				498
Equity securities, financial services			471				35				—				506
		$	50,030			$	592			$	205			$	50,417
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
December 31, 2014:
U.S Government agencies		$	798			$	20			$	1			$	817
State and municipal			23,296				474				62				23,708
U.S. Government agencies and sponsored enterprises (GSEs) - residential:
Mortgage-backed securities			20,676				229				3				20,902
Collateralized mortgage obligations (CMOs)			2,364				28				1				2,391
Corporate debt obligations			489				16				—				505
Equity securities, financial services			471				24				—				495
		$	48,094			$	791			$	67			$	48,818

The amortized cost and fair value of debt securities available-for-sale at June 30, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to prepay obligations with or without call or prepayment penalties:

 

		Amortized Cost				Fair Value
		(In thousands)
Due in one year or less		$	—			$	—
Due after one year through five years			2,242				2,291
Due after five years through ten years			10,513				10,631
Due after ten years			16,254				16,270
			29,009				29,192
Mortgage-backed securities			18,532				18,667
CMOs			2,018				2,052
Equity securities			471				506
			21,021				21,225
		$	50,030			$	50,417

Securities with an amortized cost of $49,044,000 and a fair value of $49,387,000 were pledged at June 30, 2015 as collateral for public fund deposits and for other purposes as required or permitted by law. This compares to December 31, 2014, when securities with an amortized cost of $47,084,000 and a fair value of $47,768,000 were pledged for the same purposes.

 

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Note 5 - Investment Securities Available-for-Sale (continued)

 

Information pertaining to securities with gross unrealized losses at June 30, 2015 and December 31, 2014 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
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
June 30, 2015:
Available-for-sale:
U.S. Government agency securities		$	—			$	—			$	25			$	—			$	25			$	—
State and municipal			11,420				179				653				17				12,073				196
Mortgage-backed securities			5,983				8				—				—				5,983				8
Collateralized mortgage obligations (CMOs)			448				1				—				—				448				1
		$	17,851			$	188			$	678			$	17			$	18,529			$	205
December 31, 2014:
Available-for-sale:
U.S. Government agency securities		$	49			$	1			$	—			$	—			$	49			$	1
State and municipal			2,034				5				3,455				57				5,489				62
Mortgage-backed securities			3,699				3				—				—				3,699				3
Collateralized mortgage obligations (CMOs)			423				1				100				—				523				1
		$	6,205			$	10			$	3,555			$	57			$	9,760			$	67

Management evaluates securities for other-than-temporary impairment, on at least a quarterly basis. It is management’s intent to hold all investments until maturity unless market, economic, credit quality or specific investment concerns warrant a sale of securities. Consideration is given to (1) the length of time and the extent to which the fair value of securities has been less than cost, (2) the credit quality or financial condition and near-term prospects of the issuer, and (3) the intent and ability of the corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At June 30, 2015, thirty one securities, comprised of one U.S. Government agency, twenty five state and municipal securities, two mortgage-backed securities and three CMOs, had unrealized losses as compared with a total of sixteen securities at December 31, 2014. Management believes the unrealized losses related to changes in interest rates since the time the individual securities were purchased as opposed to underlying credit issues. As the Company does not intend to sell any of these debt securities, and it is more likely than not that the Company will not be required to sell any debt securities before the cost bases are recovered, no declines are deemed to be other-than-temporary.

There were no securities sold during the three months and six months ended June 30, 2015. However, a loss of $41,000 was recorded during the six months ended June 30, 2015 due to several municipal bonds that were either fully or partially called, resulting in the acceleration of the premium expense associated with those specific securities. One municipal bond was sold during the three months ended June 30, 2014. For the six months ended June 30, 2014, 5,549 shares of financial institution equity securities were redeemed at $2.68 per share, totaling $15,000, and three available for sale municipal bonds, one corporate bond and one mortgage-backed security totaling, $2,545,000, were sold resulting in gross realized gains of $85,000 and gross realized losses of $38,000, resulting in a net gain of $47,000 from both the sale and redemption of securities.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses

The loan portfolio comprises the major component of Riverview’s earning assets and is the highest yielding asset category. Loans receivable are summarized as follows for the periods presented:

 

(Dollars in thousands)		June 30, 2015				December 31, 2014
Commercial		$	41,360			$	37,301
Commercial real estate			203,695				199,782
Commercial land and land development			12,028				11,441
Residential real estate			73,121				73,453
Home equity lines of credit			18,711				18,235
Consumer installment			2,799				2,481
Total loans			351,714				342,693
Allowance for loan losses			(4,145	)			(3,792	)
Total loans, net		$	347,569			$	338,901

The Bank takes a balanced approach to its lending activities by managing risk associated with its loan portfolio. This risk management is achieved by maintaining diversification within the portfolio, consistently applying prudent underwriting standards, ensuring that monitoring efforts are ongoing with attention to portfolio dynamics and mix, and following procedures that are consistently applied and updated on an annual basis. The Bank utilizes an independent third party each year to conduct a credit review of the loan portfolio to provide an independent assessment of asset quality through an evaluation of the established underwriting criteria used in originating credits. Separately, every loan booked and every rejected loan application undergoes an audit review for conformity with established policies and compliance with current regulatory lending laws. The Bank has not changed its loan underwriting criteria, and management believes its standards continue to remain conservative. All of the Bank’s loans are to domestic borrowers.

The Bank’s management monitors the 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. For the purpose of estimating the allowance for loan losses, the segments for commercial loans, non-owner occupied commercial real estate loans, owner occupied commercial real estate loans, one-to-four family investment property loans, and commercial land/land development/construction loans are also separately evaluated for loan participations bought and loans generated by the branches and commercial offices in Schuylkill and Berks Counties, which are new market areas adjacent to the Bank’s traditional geographic footprint. In addition, the Company undertakes separate evaluations for the acquired Union Bank portfolio.

Internal policy requires that the Chief Credit Officer report to the Board of Directors on a quarterly basis to discuss the status of the loan portfolio and any related credit quality issues. These reports include, but are not limited to, information on past due and nonaccrual loans, impaired loans, the allowance for loan losses, 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 management’s 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.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The following table presents an aging of loans receivable by loan portfolio segments as of June 30, 2015 and December 31, 2014, and includes nonaccrual loans and loans past due 90 days or more and still accruing:

 

(In thousands)		30-59 Days Past Due				60-89 Days Past Due				90 Days and Greater				Total Past Due				Current				Total				Recorded Investment Greater Than 90 Days & Accruing
June 30, 2015:
Commercial		$	26			$	25			$	365			$	416			$	40,944			$	41,360			$	—
Commercial real estate:
Non-owner occupied			2,168				—				—				2,168				102,955				105,123				—
Owner occupied			1,993				886				49				2,928				69,446				72,374				—
1-4 family investment			348				466				272				1,086				25,112				26,198				—
Commercial land and land development			—				—				219				219				11,809				12,028
Residential real estate			531				319				793				1,643				71,478				73,121				230
Home equity lines of credit			—				36				90				126				18,585				18,711				40
Consumer			7				8				—				15				2,784				2,799				—
Total		$	5,073			$	1,740			$	1,788			$	8,601			$	343,113			$	351,714			$	270

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days and Greater				Total Past Due				Current				Total				Recorded Investment Greater Than 90 Days & Accruing
December 31, 2014
Commercial		$	24			$	41			$	364			$	429			$	36,872			$	37,301			$	—
Commercial real estate:
Non-owner occupied			15				5,426				162				5,603				97,823				103,426				—
Owner occupied			621				—				758				1,379				70,178				71,557				294
1-4 family investment			—				515				446				961				23,838				24,799				132
Commercial land and land development			16				—				215				231				11,210				11,441				—
Residential real estate			739				425				1,805				2,969				70,484				73,453				214
Home equity lines of credit			103				59				436				598				17,637				18,235				—
Consumer			6				5				3				14				2,467				2,481				3
Total		$	1,524			$	6,471			$	4,189			$	12,184			$	330,509			$	342,693			$	643

Loan balances above include net deferred loan fees of $675,000 and $716,000 at June 30, 2015 and December 31, 2014.

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 $4,424,000 and $4,245,000 at June 30, 2015 and December 31, 2014, respectively. If the nonaccrual loans had performed in accordance with their original terms, interest income would have increased by $45,000 for the three months ended June 30, 2015 and $88,000 for the six months ended June 30, 2015. These amounts compare to $41,000 for the three months ended June 30, 2014 and $155,000 for the six months ended June 30, 2014.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The following table presents loans by loan portfolio segments that were on a nonaccrual status as of June 30, 2015 and December 31, 2014:

 

(In thousands)		June 30, 2015				December 31, 2014
Commercial		$	1,703			$	515
Commercial real estate:
Non-owner occupied			—				162
Owner occupied			1,151				701
1-4 family investment			338				384
Commercial land and land development			219				215
Residential real estate			927				1,735
Home equity lines of credit			86				533
Total		$	4,424			$	4,245

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 borrower’s 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 loan’s effective interest rate, or the loan’s 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 then makes the appropriate adjustment to the allowance for loan losses.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The following table presents impaired loans by loan portfolio segments for the periods presented:

 

		June 30, 2015												Three Months Ended June 30, 2015								Six Months Ended June 30, 2015
(In thousands)		Recorded Investment in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance				Average Recorded Investment in Impaired Loans				Interest Income Recognized				Average Recorded Investment in Impaired Loans				Interest Income Recognized
Loans with no related allowance recorded:
Commercial		$	510			$	510			$	—			$	511			$	20			$	512			$	27
Commercial real estate:
Non-owner occupied			2,175				2,175				—				2,182				20				2,184				39
Owner occupied			1,779				1,779				—				1,198				31				1,007				46
1-4 family investment			808				808				—				814				6				817				11
Commercial land and land development			219				219				—				219				—				218				—
Residential real estate			2,281				2,281				—				2,431				41				2,530				86
Home equity lines of credit			401				401				—				445				16				448				16
		$	8,173			$	8,173			$	—			$	7,800			$	134			$	7,716			$	225
Loans with an allowance recorded:
Commercial		$	1,854			$	1,854			$	272			$	1,062			$	—			$	866			$	15
Commercial real estate:
1-4 family investment			193				193				14				193				—				192				—
Residential real estate			123				123				6				123				1				123				2
		$	2,170			$	2,170			$	292			$	1,378			$	1			$	1,181			$	17
Total
Commercial		$	2,364			$	2,364			$	272			$	1,573			$	20			$	1,378			$	42
Commercial real estate:
Non-owner occupied			2,175				2,175				—				2,182				20				2,184				39
Owner occupied			1,779				1,779				—				1,198				31				1,007				46
1-4 family investment			1,001				1,001				14				1,007				6				1,009				11
Commercial land and land development			219				219				—				219				—				218				—
Residential real estate			2,404				2,404				6				2,554				42				2,653				88
Home equity lines of credit			401				401				—				445				16				448				16
		$	10,343			$	10,343			$	292			$	9,178			$	135			$	8,897			$	242

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

		December 31, 2014												Three Months Ended June 30, 2014								Six Months Ended June 30, 2014
(In thousands)		Recorded Investment in Impaired Loans				Unpaid Principal Balance of Impaired Loans				Related Allowance				Average Recorded Investment in Impaired Loans				Interest Income Recognized				Average Recorded Investment in Impaired Loans				Interest Income Recognized
Loans with no related allowance recorded:
Commercial		$	1,193			$	1,193			$	—			$	847			$	8			$	850			$	16
Commercial real estate:
Non-owner occupied			1,893				1,893				—				1,901				17				1,902				34
Owner occupied			904				904				—				1,079				15				1,101				27
1-4 family investment			857				857				—				1,293				7				1,295				12
Commercial land and land development			215				215				—				215				—				215				—
Residential real estate			1,834				1,834				—				1,781				19				1,793				39
Home equity lines of credit			774				774				—				758				2				763				4
		$	7,670			$	7,670			$	—			$	7,874			$	68			$	7,919			$	132
Loans with an allowance recorded:
Commercial		$	—			$	—			$	—			$	159			$	—			$	162			$	—
Commercial real estate:
Non-owner occupied			141				141				50				—				—				—				—
Owner occupied			282				282				22				—				—				—				—
1-4 family investment			191				191				5				200				—				100				3
Residential real estate			124				124				5				126				1				126				2
		$	738			$	738			$	82			$	485			$	1			$	388			$	5
Total
Commercial		$	1,193			$	1,193			$	—			$	1,006			$	8			$	1,012			$	16
Commercial real estate:
Non-owner occupied			2,034				2,034				50				1,901				17				1,902				34
Owner occupied			1,186				1,186				22				1,079				15				1,101				27
1-4 family investment			1,048				1,048				5				1,493				7				1,395				15
Commercial land and land development			215				215				—				215				—				215				—
Residential real estate			1,958				1,958				5				1,907				20				1,919				41
Home equity lines of credit			774				774				—				758				2				763				4
		$	8,408			$	8,408			$	82			$	8,359			$	69			$	8,307			$	137

The recorded investment in impaired loans increased by $1,935,000 at June 30, 2015 as compared to December 31, 2014. This increase resulted primarily from the addition of three residential loans, which became impaired in the first quarter, and the addition of one commercial loan and three owner-occupied commercial real estate loans, which became impaired in the second quarter. This was offset by payments received on impaired loans during the first six months of 2015, along with the transfer of two impaired loans to other real estate owned.

Impaired loans also include all loans modified and identified as troubled debt restructurings (“TDRs”). A loan is deemed to be a TDR when the Bank agrees to a modification to the terms of a loan resulting in a concession made by the Bank in an effort to mitigate potential loss arising from a borrower’s financial difficulty. As of June 30, 2015, there were twenty-six restructured loans, totaling $7,084,000, involving nineteen separate and unrelated borrowers who were experiencing financial difficulty. The modifications on these loans included reductions in interest rates, extension of maturity dates, lengthening of amortization schedules and provisions for interest only payments. There are no commitments to extend additional funds to any of these borrowers. At December 31, 2014, there were twenty-two restructured loans, totaling $6,596,000, involving fifteen separate and unrelated borrowers.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The following tables present the number of loans and recorded investment in loans restructured and identified as troubled debt restructurings for the three and six months ended June 30, 2015 and 2014, as well as the number and recorded investment in these loans that subsequently defaulted. Defaulted loans are those for which payment is 30 days or more past due under the modified terms.

 

		Three Months Ended June 30, 2015												Six Months Ended June 30, 2015
(In thousands, except contracts data)		Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment				Number of Contracts				Pre-Modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial real estate:
Owner occupied			—			$	—			$	—				1			$	149			$	149
Residential real estate			—				—				—				3				473				473

There were no troubled debt restructurings that subsequently defaulted.

There were no new troubled debt restructurings during the three or six months ended June 30, 2014.

Allowance for Loan Losses

The allowance for loan losses is composed of individual valuation allowances deemed necessary to absorb probable and quantifiable losses based upon current knowledge of the loan portfolio, and loan pool valuation allowances, allocated and unallocated, deemed necessary 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 Bank’s 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, or the present value of expected future cash flows, or the loan’s 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 loan’s 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 Bank’s 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. Each of the segments for commercial loans, non-owner occupied commercial real estate loans, owner occupied commercial real estate loans, one-to-four family investment property loans, and commercial land/land development/ construction loans are also separately evaluated for loan participations bought, and for loans generated by the branches and commercial offices in Schuylkill and Berks counties, which are newer market areas adjacent to the Bank’s original geographic footprint. In addition, there are separate evaluations made for the acquired Union Bank loan portfolio.

The Bank measures estimated credit losses in 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. In the case of the acquired Union Bank loan portfolio, the historical loss rate is calculated based on the average annualized net charge-offs over the six calendar quarters since acquisition.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

Loss factors are ascribed to loan segments 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 Bank’s 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, on the level of estimated credit losses in the existing portfolio.

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. An unallocated valuation allowance estimate is also made. Management determines the unallocated portion, which represents the difference between the reported allowance for loan losses and the calculated allowance for loan losses, based generally on the following criteria:

 

•

risk of imprecision in the specific and general reserve allocations;

 

•

other potential exposure in the loan portfolio, including covering the risks in the growing book of loans in the Schuylkill and Berks County regions;

 

•

other potential exposure in the acquired Union Bank loan portfolio;

 

•

variances in management’s assessment of national and local economic conditions; and

 

•

other internal or external factors that management believes appropriate at the time.

The loan pool valuation allowance for each segment, along with the unallocated valuation allowance, is totaled 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 management’s 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; or

 

•

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.

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

Uncollateralized portions of residential real estate loans and consumer loans secured by real estate are charged off no later than when they are 180 days past due. Current appraisals are obtained to determine the appropriate carrying balance with any exposed portion of the loan principal balance being charged off.

The allowance for loan losses is presented by loan portfolio segments with the outstanding balances of loans for the periods presented:

 

						Commercial Real Estate
(In thousands)		Commercial				Non-Owner Occupied				Owner Occupied				1-4 Family Investment				Commercial – Land and Land Development				Residential Real Estate				Home Equity Lines of Credit				Consumer				Unallocated				Total
Allowance for Loan Losses for the Three Months Ended June 30, 2015:
Beginning balance		$	363			$	1,297			$	731			$	395			$	113			$	672			$	107			$	19			$	38			$	3,735
Charge-offs			—				—				—				11				—				12				10				16				—				49
Recoveries			8				—				—				—				—				—				—				1				—				9
Provision			269				(6	)			(12	)			14				3				20				19				18				125				450
Ending balance		$	640			$	1,291			$	719			$	398			$	116			$	680			$	116			$	22			$	163			$	4,145
Ending balance: individually evaluated for impairment		$	272			$	—			$	—			$	14			$	—			$	6			$	—			$	—			$	—			$	292
Ending balance: collectively evaluated for impairment		$	368			$	1,291			$	719			$	384			$	116			$	674			$	116			$	22			$	163			$	3,853

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

						Commercial Real Estate
(In thousands)		Commercial				Non-Owner Occupied				Owner Occupied				1-4 Family Investment				Commercial – Land and Land Development				Residential Real Estate				Home Equity Lines of Credit				Consumer				Unallocated				Total
Allowance for Loan Losses for the Three Months Ended June 30, 2014:
Beginning balance		$	356			$	975			$	800			$	357			$	126			$	569			$	99			$	27			$	301			$	3,610
Charge-offs			36				190				—				—				—				53				—				1				—				280
Recoveries			24				—				—				—				—				—				—				1				—				25
Provision			25				351				(139	)			(1	)			(4	)			31				17				2				(282	)			—
Ending balance		$	369			$	1,136			$	661			$	356			$	122			$	547			$	116			$	29			$	19			$	3,355
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	13			$	—			$	7			$	—			$	—			$	—			$	20
Ending balance: collectively evaluated for impairment		$	369			$	1,136			$	661			$	343			$	122			$	540			$	116			$	29			$	19			$	3,335
Allowance for Loan Losses for the Six Months Ended June 30, 2015:
Beginning balance		$	330			$	1,380			$	713			$	369			$	115			$	701			$	104			$	15			$	65			$	3,792
Charge-offs			—				—				39				11				—				27				10				22				—				109
Recoveries			8				—				—				—				—				—				—				4				—				12
Provision			302				(89	)			45				40				1				6				22				25				98				450
Ending balance		$	640			$	1,291			$	719			$	398			$	116			$	680			$	116			$	22			$	163			$	4,145
Ending balance: individually evaluated for impairment		$	272			$	—			$	—			$	14			$	—			$	6			$	—			$	—			$	—			$	292
Ending balance: collectively evaluated for impairment		$	368			$	1,291			$	719			$	384			$	116			$	674			$	116			$	22			$	163			$	3,853
Allowance for Loan Losses for the Six Months Ended June 30, 2014:
Beginning balance		$	424			$	875			$	831			$	373			$	144			$	567			$	103			$	30			$	316			$	3,663
Charge-offs			36				244				—				—				—				75				—				4				—				359
Recoveries			48				—				—				—				—				—				—				3				—				51
Provision			(67	)			505				(170	)			(17	)			(22	)			55				13				—				(297	)			—
Ending balance		$	369			$	1,136			$	661			$	356			$	122			$	547			$	116			$	29			$	19			$	3,355
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	13			$	—			$	7			$	—			$	—			$	—			$	20
Ending balance: collectively evaluated for impairment		$	369			$	1,136			$	661			$	343			$	122			$	540			$	116			$	29			$	19			$	3,335

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

						Commercial Real Estate
(In thousands)		Commercial				Non-Owner Occupied				Owner Occupied				1-4 Family Investment				Commercial – Land and Land Development				Residential Real Estate				Home Equity Lines of Credit				Consumer				Unallocated		Total
Loans as of June 30, 2015:
Ending balance		$	41,360			$	105,123			$	72,374			$	26,198			$	12,028			$	73,121			$	18,711			$	2,799					$	351,714
Ending balance: individually evaluated for impairment		$	2,364			$	2,175			$	1,779			$	1,001			$	219			$	2,404			$	401			$	—					$	10,343
Ending balance: collectively evaluated for impairment		$	38,996			$	102,948			$	70,595			$	25,197			$	11,809			$	70,717			$	18,310			$	2,799					$	341,371
Loans as of December 31, 2014:
Ending balance		$	37,301			$	103,426			$	71,557			$	24,799			$	11,441			$	73,453			$	18,235			$	2,481					$	342,693
Ending balance: individually evaluated for impairment		$	1,193			$	2,034			$	1,186			$	1,048			$	215			$	1,958			$	774			$	—					$	8,408
Ending balance: collectively evaluated for impairment		$	36,108			$	101,392			$	70,371			$	23,751			$	11,226			$	71,495			$	17,461			$	2,481					$	334,285

Credit Quality Indicators

The Bank has established a credit risk rating system to quantify the risk in the Bank’s loan portfolio. This system is a critical tool for managing the Bank’s 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 management to manage the Bank’s 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.

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

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

In addition, the following factors may affect 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 Bank’s 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 must 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 category 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.

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 management’s close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loan or in the Bank’s 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 are beginning to adversely affect the borrower may be so rated. An adverse trend in the borrower’s 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 are 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 is 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

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

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 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 table presents the credit quality indicators and total credit exposure for each segment in the loan portfolio by internally assigned grades as of June 30, 2015 and December 31, 2014:

 

						Commercial Real Estate
(In thousands)		Commercial				Non- Owner Occupied				Owner Occupied				1-4 Family Investment				Commercial – Land and Land Development				Residential Real Estate				Home Equity Lines of Credit				Consumer				Total
June 30, 2015:
1 – Excellent		$	196			$	—			$	—			$	—			$	—			$	—			$	—			$	150			$	346
2 – Good			3,618				136				1,573				40				176				—				—				—				5,543
3 – Satisfactory			32,278				98,343				61,763				18,810				11,603			$	67,830				17,754				2,649				311,030
4 – Watch			1,330				2,301				6,564				5,156				—				1,730				478				—				17,559
5 – Special Mention			133				2,175				695				1,314				30				15				28				—				4,390
6 – Substandard			3,805				2,168				1,779				878				219				3,546				451				—				12,846
7 – Doubtful			—				—				—				—				—				—				—				—				—
8 – Loss			—				—				—				—				—				—				—				—				—
Total		$	41,360			$	105,123			$	72,374			$	26,198			$	12,028			$	73,121			$	18,711			$	2,799			$	351,714

 

						Commercial Real Estate
(In thousands)		Commercial				Non- Owner Occupied				Owner Occupied				1-4 Family Investment				Commercial – Land and Land Development				Residential Real Estate				Home Equity Lines of Credit				Consumer				Total
December 31, 2014:
1 – Excellent		$	275			$	—			$	—			$	—			$	—			$	—			$	—			$	161			$	436
2 – Good			3,975				169				1,682				46				183				—				—				—				6,055
3 – Satisfactory			30,593				93,180				61,916				18,445				10,671				68,288				16,894				2,320				302,307
4 – Watch			722				4,697				5,743				3,704				154				1,728				489				—				17,237
5 – Special Mention			145				3,031				1,031				1,741				218				124				319				—				6,609
6 – Substandard			1,591				2,349				1,185				863				215				3,313				533				—				10,049
7 – Doubtful			—				—				—				—				—				—				—				—				—
8 – Loss			—				—				—				—				—				—				—				—				—
Total		$	37,301			$	103,426			$	71,557			$	24,799			$	11,441			$	73,453			$	18,235			$	2,481			$	342,693

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The adequacy of the allowance is analyzed quarterly, and adjusted to the level deemed appropriate by credit administration management, based upon its risk assessment of the entire portfolio. Based upon credit administration’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at June 30, 2015, management believes the allowance for loan losses has been established at a level sufficient to cover the probable incurred losses in the loan portfolio.

Purchased Loans

Purchased loans are initially recorded at their acquisition date fair values. The carryover of the allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for purchased loans are based on a cash flow methodology that involves assumptions and judgments as to credit risk, default rates, loss severity, collateral values, discount rates, payment speeds, and prepayment risk.

As part of its acquisition due diligence process, the Bank reviewed the acquired institution’s loan grading system and the associated risk rating for loans. In performing this review, the Bank considered cash flows, debt service coverage, delinquency status, accrual status, and collateral for the loan. This process allowed Riverview to clearly identify the population of acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Bank would be unable to collect all contractually required payments. All such loans identified by the Bank were considered to be within the scope of ASC 310-30, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”.

As part of the consolidation with Union, effective November 1, 2013, the Bank identified fourteen purchased credit impaired (“PCI”) loans. For all PCI loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized as interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require the Bank to evaluate the need for an allowance for loan losses on these loans. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the non-accretable discount which the Bank then reclassifies as an accretable discount that is recognized as interest income over the remaining life of the loan. The Bank’s evaluation of the amount of future cash flows that it expects to collect is based on a cash flow methodology that involves assumptions and judgments as to credit risk, collateral values, discount rates, payment speeds, and prepayment risk. Charge-offs of the principal amount on purchased impaired loans is first applied to the non-accretable discount.

As a result of this accounting methodology, certain credit-related ratios of the Bank, including, for example, the growth rate in non-performing assets, may not necessarily be directly comparable with periods prior to the acquisition of the PCI loans.

For purchased loans that are not deemed impaired at acquisition, credit discounts representing principal losses expected over the life of the loans are a component of the initial fair value, and the discount is accreted to interest income over the life of the asset. Subsequent to the purchase date, the method used to evaluate the sufficiency of the credit discount is similar to originated loans, and if necessary, additional reserves are recognized in the allowance for loan losses.

The following is a summary of the loans purchased in the Union transaction as November 1, 2013, the date of consolidation:

 

		Purchased Credit Impaired Loans				Purchased Non- Impaired Loans				Total Purchased Loans
Union		(In thousands)
Contractually required principal and interest at acquisition		$	10,290			$	92,704			$	102,994
Contractual cash flows not expected to be collected			(5,487	)			(9,492	)			(14,979	)
Expected cash flows at acquisition			4,803				83,212				88,015
Interest component of expected cash flows			(386	)			(12,278	)			(12,664	)
Basis in acquired loans at acquisition – estimated fair value		$	4,417			$	70,934			$	75,351

 

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Note 6 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The unpaid principal balances and the related carrying amounts of acquired loans as of June 30, 2015 and December 31, 2014 were as follows:

 

		June 30, 2015				December 31, 2014
		(In thousands)
Credit impaired purchased loans evaluated individually for incurred credit losses
Outstanding balance		$	1,531			$	2,672
Carrying Amount			687				713
Other purchased loans evaluated collectively for incurred credit losses
Outstanding balance			54,221				59,808
Carrying Amount			52,510				57,920
Total Purchased Loans
Outstanding balance			55,752				62,480
Carrying Amount			53,197				58,633

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

 

		Three Months Ended								Six Months Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
(In thousands)
Balance – beginning of period		$	300			$	343			$	310			$	378
Accretion recognized during the period			(30	)			(633	)			(56	)			(661	)
Net reclassification from non-accretable to accretable			56				622				72				615
Balance – end of period		$	326			$	332			$	326			$	332

Note 7- Stock Option Plan

In January 2009, the Company implemented a nonqualified stock option plan. The purpose of the 2009 Stock Option Plan was to advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation of the common stock of the Company to secure, retain and motivate its directors, officers and key employees and to align those persons’ interests with those of the Company’s shareholders. Originally, 170,000 shares of the Company’s common stock were authorized to be issued under the 2009 Stock Option Plan. On January 4, 2012, the 2009 Stock Option Plan was amended and restated to increase the total number of shares of common stock that may be issued under the Plan to a total of 220,000 shares. On April 16, 2014, the 2009 Stock Option Plan was again amended and restated to increase the total number of shares of common stock by 130,000 shares thus increasing the total number of available shares under the Plan to 350,000 shares.

The vesting schedule for all options is a seven year cliff, which means that the options are 100% vested in the seventh year following the grant date and the expiration date is ten years following the grant date. The Plan states that upon the date of death of a participant, all awards granted pursuant to the agreement for that participant become fully vested and remain exercisable for the option grant’s remaining term. As of June 30, 2015, there were 174,250 option grants fully vested and exercisable.

Information pertaining to options outstanding at June 30, 2015 is as follows:

 

Options Outstanding

Options Exercisable

Range of exercise price

Number Outstanding

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life

$9.75 - $10.60

322,200

7.5 years

$

10.29

174,250

$

10.58

2.7 years

 

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Note 7 - Stock Option Plan (continued)

 

There was intrinsic value associated with all of the stock options outstanding at June 30, 2015 because the exercise prices for the options were lower than the trading price of the stock.

The Company accounts for these options 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. The Company amortizes compensation expense over the vesting period, or seven years. Total compensation expense relating to the options that has been recognized since inception of the Plan through June 30, 2015 was $312,000, of which $8,000 was recorded for the three months ended June 30, 2015 and $16,000 was recorded for the six months ended June 30, 2015. The remaining unrecognized compensation expense as of June 30, 2015 was $178,000. In comparison with 2014, $6,000 in option compensation expense was recorded for the three months ended June 30, 2014 and $8,000 for the six months ended June 30, 2014.

During the three and six months ended June 30, 2015, no options were either granted or exercised. In comparison, 147,950 options were granted during the six months ended June 30, 2014, of which 107,200 were granted during the second quarter of 2014. No options were exercised during the three and six months ended June 30, 2014.

Note 8 - Financial Instruments with Off Balance Sheet Risk

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 consist primarily of commitments to extend credit, typically residential mortgage loans and commercial loans and, to a lesser extent, letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making such commitments and conditional obligations as it does for on balance sheet instruments. The Bank does not anticipate any material losses from those commitments.

The Bank’s exposure to credit loss for loan commitments (unfunded loans and unused lines of credit, including home equity lines of credit) and standby and performance letters of credit was as follows for the periods indicated:

 

		Contract or Notional Amount
		June 30, 2015				December 31, 2014
		(In thousands)
Commitments to grant loans		$	23,411			$	17,046
Unfunded commitments of existing loans			25,745				33,603
Standby and performance letters of credit			3,460				2,667
		$	52,616			$	53,316

Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

Note 9 - Regulatory Matters and Shareholders’ Equity

The ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances is restricted by applicable regulations. Regulatory approval is required if the total of all dividends declared by a state-chartered 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 June 30, 2015, $99,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval.

The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (FDIC). Failure to meet the minimum regulatory capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the consolidated financial statements. Under the Basel III regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

 

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Note 9 - Regulatory Matters and Shareholders’ Equity (continued)

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to average total assets (as defined). Management believes that, as of June 30, 2015, the Bank met all the capital adequacy requirements to which it is subject and meets the criteria to be well capitalized. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events since year end that management believes have changed the Bank’s category.

The Federal Reserve Board approved a final rule in 2006 that expands the definition of a small bank holding company (“BHC”) under the Board’s Small Bank Holding Company Policy Statement and the Board’s risk-based and leverage capital guidelines for bank holding companies. Based on the ruling, the Company meets the eligibility criteria of a small BHC and is exempt from certain regulatory requirements administered by the federal banking agencies.

The Bank’s actual capital ratios, at June 30, 2015 and December 31, 2014, and the minimum ratios required for capital adequacy purposes and to be well capitalized, are summarized as follow:

 

		Actual								Minimum Regulatory Capital Ratios under Basel III (without 2.5% capital conservation buffer phase-in)								Well Capitalized under Basel III
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of June 30, 2015:
Total risk-based capital (to risk-weighted assets)			38,257				10.8	%		$	28,421				³8.0	%		$	35,526				³10.0	%
Tier 1 capital (to risk-weighted assets)			34,096				9.6				21,315				³6.0				28,421				³8.0
Tier 1 capital (to average total assets)			34,096				7.7				17,673				³4.0				22,092				³5.0
Common equity tier 1 risk-based capital (to risk-weighted assets)			34,096				9.6				15,987				³4.5				23,092				³6.5
		Actual								Minimum Regulatory Capital Ratios								Well Capitalized under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2014:
Total risk-based capital (to risk-weighted assets)		$	37,899				11.5	%		$	26,385				³8.0	%		$	32,982				³10.0	%
Tier 1 capital (to risk-weighted assets)			34,096				10.3				13,193				³4.0				19,789				³6.0
Tier 1 capital (to average total assets)			34,096				8.0				17,103				³4.0				21,378				³5.0

The Basel III capital rules became effective for the Bank on January 1, 2015. A new capital ratio - Common equity tier 1 risk-based capital – was introduced under the Basel III capital rules. The presentation does not take into account the 2.5% capital conservation buffer phase-in because the buffer does not apply until 2016, with full phase-in to be effective by 2019.

Note 10 – Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments. However, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates set forth herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not

 

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Note 10 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

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.

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:

 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. At June 30, 2015 and December 31, 2014, the Company had no liabilities subject to fair value reporting measurement requirements.

The fair value of securities available for sale are determined by 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 specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices. For these securities, the Company obtains fair value measurements from an independent pricing service. For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2015 and December 31, 2014 were as follows:

 

Description		Balance				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
		(In thousands)
June 30, 2015:
U.S. Government agency securities		$	789			$	—			$	789			$	—
State and municipal			27,905				—				27,905				—
U.S. Government agencies and sponsored enterprises (GSEs) – residential:
Mortgage-backed securities			18,667				—				18,667				—
Collateralized mortgage obligations (CMOs)			2,052				—				2,052				—
Corporate debt obligations			498				—				498				—
Equity securities, financial services			506				506				—				—
Securities available-for- sale		$	50,417			$	506			$	49,911			$	—
December 31, 2014:
U.S. Government agency securities		$	817			$	—			$	817			$	—
State and municipal			23,708				—				23,708				—
U.S. Government agencies and sponsored enterprises (GSEs) – residential:
Mortgage-backed securities			20,902				—				20,902				—
Collateralized mortgage obligations (CMOs)			2,391				—				2,391				—
Corporate debt obligations			505				—				505				—
Equity securities, financial services			495				495				—				—
Securities available-for- sale		$	48,818			$	495			$	48,323			$	—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with accounting principles generally accepted in the United States of America. Adjustments to the fair value of these assets usually results from the application of

 

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Note 10 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

lower-of-cost-or-market accounting or write-downs of individual assets. The following discussion describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. These loans typically consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value of real estate acquired through foreclosure at an estimated fair value less cost to sell. At or near the time of foreclosure, real estate appraisals are obtained on the properties acquired through foreclosure. The real estate is then valued at the lesser of the appraised value or the loan balance, including interest receivable, at the time of foreclosure less an estimate of costs to sell the property. Appraised values are typically determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the acquired property is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered a Level 3. The estimate of costs to sell the property is based on historical transactions of similar holdings.

Impaired Loans

ASC 820 applies to loans measured for impairment using the practical expedients permitted by generally accepted accounting principles (GAAP), including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of collateral. The value of the collateral is typically determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value of the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans are measured at the lower of cost or fair value of the underlying collateral less estimated costs to sell on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as a provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $10,343,000 at June 30, 2015, out of which $2,170,000 required a valuation allowance of $292,000. This level compares with impaired loans of $8,408,000 at December 31, 2014, out of which $738,000 required a valuation allowance of $82,000.

Goodwill

The fair value of goodwill is determined in the same manner as goodwill recognized in a business combination and uses standard valuation methodologies. Fair value may be determined using market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other factors. Estimated cash flows may extend far into the future and by their nature are difficult to determine over an extended time frame. Factors that may significantly affect the estimates include specific industry or market sector conditions, changes in revenue growth trends, customer behavior, competitive forces, cost structures and changes in discount rates. The Company did not record any goodwill impairment during the three and six months ended June 30, 2015 and 2014.

 

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Note 10 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

A summary of assets at June 30, 2015 and December 31, 2014, measured at estimated fair value on a nonrecurring basis follows:

 

		Level 1				Level 2				Level 3				Total				Total Gains/(Losses)
		(In thousands)
June 30, 2015:
Loans held for sale		$	—			$	1,156			$	—			$	1,156			$	—
Other real estate owned			—				347				—				347				(67	)
Impaired loans, net of related allowance			—				1,878				—				1,878				—
Total		$	—			$	3,381			$	—			$	3,381			($	67	)
		Level 1				Level 2				Level 3				Total				Total Gains/(Losses)
		(In thousands)
December 31, 2014:
Loans held for sale		$	—			$	216			$	—			$	216			$	—
Other real estate owned			—				1,022				—				1,022				(317	)
Impaired loans, net of related allowance			—				656				—				656				—
Total		$	—			$	1,894				—			$	1,894			($	317	)

The following information should not be interpreted as an estimate of the fair value of the Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at June 30, 2015 and December 31, 2014.

Cash and cash equivalents (carried at cost):

The carrying amount reported in the balance sheet for cash, due from banks, federal funds sold and interest-bearing deposits approximate those assets’ fair values.

Interest-bearing time deposits with banks (carried at cost):

Fair values for fixed-rate time certificates of deposit approximate cost. The Company generally purchases amounts below the insured limit, thus limiting the amount of credit risk on these time deposits.

Securities (carried at fair value):

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, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that include 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.

 

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Note 10 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

Loans (carried at cost)

The fair values of loans are estimated using discounted cash flow analysis, 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 maturities 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 the standard regarding Accounting by Creditors for Impairment of a Loan, in which the Company has measured impairment generally based on the fair value of the loan’s 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 2 fair values, based upon the lowest level of input that is significant to the fair value measurement.

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.

Lease payable (carried at cost)

The carrying amounts of lease payables approximate their fair values.

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 the Company’s 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.

 

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Note 10 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

The estimated fair values of the Company’s financial instruments at June 30, 2015 and December 31, 2014 are presented as follows:

 

						Fair Value Measurements at June 30, 2015 Using:
(In thousands)		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents		$	14,854			$	14,854			$	14,854			$	—			$	—
Interest-bearing time deposits			991				991				991				—				—
Investment securities			50,417				50,417				506				49,911				—
Mortgage loans held for sale			1,156				1,156				—				1,156				—
Loans, net			347,569				350,399				—				350,399				—
Accrued interest receivable			1,335				1,335				—				1,335				—
Restricted investments in bank stocks			1,315				1,315				—				—				1,315
Financial liabilities:
Deposits			381,812				371,597				—				371,597				—
Short-term borrowings			22,000				22,001				—				22,001				—
Long-term borrowings			2,000				2,000				—				2,000				—
Accrued interest payable			116				116				—				116				—
Off balance sheet financial instruments			—				—				—				—				—

 

						Fair Value Measurements at December 31, 2014 Using:
		Carrying Amount				Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents		$	14,580			$	14,580			$	14,580			$	—			$	—
Interest-bearing time deposits			992				992				992				—				—
Investment securities			48,818				48,818				—				48,818				—
Mortgage loans held for sale			216				216				—				216				—
Loans, net			338,901				341,121				—				341,121				—
Accrued interest receivable			1,237				1,237				—				1,237				—
Restricted investments in bank stocks			1,002				1,002				—				—				1,002
Financial liabilities:
Deposits			372,262				366,510				—				366,510				—
Capital lease payable			1,655				1,655				—				1,655				—
Short-term borrowings			12,500				12,499				—				12,499				—
Long-term borrowings			7,000				7,283				—				7,283				—
Accrued interest payable			154				154				—				154				—
Off balance sheet financial instruments			—				—				—				—				—

Note 11 – Recent Accounting Pronouncements

In June 2014, the FASB issued ASC Update 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASC Update 2014-12 clarifies guidance related to accounting for share-based payment awards with terms that allow an employee to vest in the award regardless of whether the employee is rendering service on the date a performance target is achieved. ASC Update 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASC Update 2014-12 is effective for public business entities’ interim and annual reporting periods beginning after December 15, 2015, with earlier adoption permitted. The adoption of ASC Update 2014-12 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASC Update 2014-15, “Presentation of Financial Statements - Going Concern.” ASC Update 2014-15 provides guidance regarding management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. The standards update describes how

 

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Note 11 – Recent Accounting Pronouncements (continued)

 

an entity’s management should assess whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASC Update 2014-15 is effective for public business entities’ annual reporting periods ending after December 15, 2016, with earlier adoption permitted. The adoption of ASC Update 2014-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”) and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

 

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Note 11 – Recent Accounting Pronouncements (continued)

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting- Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on the Company’s consolidated financial statements.

 

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ITEM 2.

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

The following discussion and analysis summarizes the Company’s results of operations and highlights material changes for the three and six months ended June 30, 2015 and June 30, 2014 and its financial condition as of June 30, 2015. This discussion is intended to provide additional information which may not be readily apparent from the consolidated selected financial data included in this report.

This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related footnotes presented in the Company’s December 31, 2014 Annual Report contained in the Form 10-K. Current performance does not guarantee and may not be indicative of similar performance in the future. Other than as described herein, management does not believe there are any trends, events or uncertainties that are reasonably expected to have a material impact on future results of operations, liquidity or capital resources.

Special Cautionary Notice Regarding Forward-Looking Statements

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

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

 

•

anticipated cost savings and synergies from the acquisition of Citizens National may not be realized;

 

•

delays in receipt of, or failure to receive, regulatory approvals for the acquisition of Citizens National may cause us to incur additional costs and expenses and take management’s attention away from running the Bank;

 

•

acquisitions and integration of previously acquired businesses may not be accomplished on the timeline envisioned by management, may take more time and resources than planned and may not achieve originally anticipated cost savings and synergies;

 

•

the effects of future economic conditions on the Company and the Bank’s customers;

 

•

additional legislative and regulatory requirements;

 

•

the impact of governmental monetary and fiscal policies;

 

•

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

 

•

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

 

•

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

 

•

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

 

•

technological changes;

 

•

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

 

•

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

 

•

acts of war or terrorism; and

 

•

volatilities in the securities market.

All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements. The Company does not undertake any obligation to update forward looking statements.

Critical Accounting Policies and Estimates

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

 

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

The Company has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. The Company’s significant accounting policies are described in Note 1 of the Notes to unaudited consolidated financial statements for the period ended June 30, 2015 herein contained in Part I, Item 1, Financial Statements.

Certain accounting policies involve significant judgments and assumptions by the Company that have a material impact on the carrying value of certain assets and liabilities. The Company considers these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which the Company believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made, actual results could differ from these estimates, which could have a material impact on the carrying values of its assets and liabilities and its results of operations.

Overview

Effective November 1, 2013 (the “effective date”), and pursuant to the Amended and Restated Agreement and Plan of Consolidation (the “Agreement”), dated, April 24, 2013, by and between Riverview and Union, Riverview and Union consolidated to form a new Pennsylvania corporation under the name of Riverview Financial Corporation (the “consolidation”).

The Company’s financial results reflect the consolidation. The combined financial information reflects the impact of the consolidation of Riverview’s and Union’s combined financial condition under the purchase method of accounting with the Company treated as the acquirer from an accounting standpoint. Under this method, the Company was formed and treated as a recapitalization of Riverview, with Riverview’s assets and liabilities recorded at their historical values, and Union’s assets and liabilities recorded at their fair values as of the date the consolidation was completed. The transaction was effective on November 1, 2013.

As a community-focused financial institution, the Company, through its wholly-owned banking subsidiary, generates the majority of its revenues from net interest income derived from its core banking activities. Consolidated total assets were $448,294,000 at June 30, 2015, an increase of $12,148,000, or 2.8%, from $436,164,000 at December 31, 2014. The Company’s loans increased $8,668,000, or 2.6%, to $347,569,000 at June 30, 2015, while deposits increased $9,550,000, or 2.6%, to $381,812,000. For the six months ended June 30, 2015, the Company experienced a net loss of $970,000 as compared with net income of $1,552,000 for the six months ended June 30, 2014. The decrease in earnings was attributable to the implementation of restructuring and efficiency initiatives, which negatively affected earnings in the 2015 periods but are expected to enhance future profitability. It is management’s intent to continue to grow while improving productivity throughout the Company. Basic and diluted earnings per share of ($0.36) per share for the six months ended June 30, 2015 decreased from basic and diluted earnings per share of $0.57 per share for the six months ended June 30, 2014. The decrease in earnings per share was attributable to the decrease in net income year over year, and also negatively impacted the return on average assets which was (0.44%) at June 30, 2015, a decrease from 0.73% at June 30, 2014, and the return on average equity, which was (5.11%) at June 30, 2015 as compared to 8.33% as of June 30, 2014.

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

 

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Results of Operations

Net Interest Income and Net Interest Margin

The following table presents Riverview’s average balances, interest rates, interest income and expense, interest rate spread and net interest margin, adjusted to a fully-tax equivalent basis (a non-GAAP financial measurement), for the three months ended June 30, 2015 and 2014.

 

Average Balances and Average Interest Rates (Dollars in thousands)
		For the Three Months Ended
		June 30,
		2015												2014
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Assets
Interest earning assets:
Securities:
Taxable		$	32,698			$	224				2.75	%		$	33,704			$	295				3.51	%
Tax-exempt			15,103				164				4.36	%			22,138				270				4.89	%
Total securities			47,801				388				3.26	%			55,842				565				4.06	%
Loans:
Consumer			2,261				23				4.08	%			1,900				31				6.54	%
Commercial			40,962				388				3.80	%			39,826				433				4.36	%
Real estate			308,304				3,501				4.55	%			283,008				3,898				5.52	%
Total loans			351,527				3,912				4.46	%			324,734				4,362				5.39	%
Other interest earning assets			10,337				23				0.89	%			12,597				24				0.76	%
Total earning assets			409,665				4,323				4.23	%			393,173				4,951				5.05	%
Non-interest earning assets			36,957												38,042
Total assets		$	446,622											$	431,215
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposit accounts:
Interest-bearing demand		$	132,928			$	121				0.37	%		$	126,918			$	121				0.38	%
Savings			89,003				52				0.23	%			91,476				56				0.25	%
Time deposits			97,533				263				1.08	%			107,114				284				1.06	%
Total deposits			319,464				436				0.55	%			325,508				461				0.57	%
Borrowings:
Short-term borrowings			22,188				18				0.33	%			5,781				3				0.21	%
Long-term borrowings			6,231				50				3.22	%			7,000				64				3.67	%
Total borrowings			28,419				68				0.96	%			12,781				67				2.10	%
Total interest bearing liabilities			347,883				504				0.58	%			338,289				528				0.63	%
Demand deposits			56,143												50,640
Other liabilities			4,299												3,937
Shareholders’ equity			38,297												38,349
Total liabilities and shareholders’ equity		$	446,622											$	431,215
Net interest income (non-GAAP)						$	3,819											$	4,423
Tax-equivalent adjustment							(94	)											(114	)
Net interest income (GAAP)						$	3,725											$	4,309
Net interest spread											3.65	%											4.42	%
Net interest margin											3.74	%											4.51	%

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.

 

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For the three months ended June 30, 2015, total interest income decreased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $628,000, to $4,323,000 from $4,951,000, for the three months ended June 30, 2014. Although total interest-earning assets increased 4.2%, to $409,665,000, for the second quarter of 2015, the yield on interest earning assets declined to 4.23% for the three months ended June 30, 2015 from 5.05% for the three months ended June 30, 2014. Total interest income for the second quarter of 2014 was inflated by a one-time recovery of $603,000 in loan interest income due to a payoff of a purchased impaired loan. This recovery had the effect of also increasing the yield on loans.

Total interest expense decreased $24,000, or 4.5%, to $504,000 for the three months ended June 30, 2015 from $528,000 for the three months ended June 30, 2014. This decrease was attributable to a five basis point decline in total cost of funds, which decreased to 0.58% for the second quarter of 2015 from 0.63% for the same period in 2014. The decline in the cost of funds offset the $9,594,000, or 2.8%, increase in the volume of average interest-bearing liabilities. In addition, there was a shift within interest-bearing liabilities, where deposits, bearing a higher cost of funds, declined, while short-term borrowings, which carry a lower cost of funds, increased.

Net interest income calculated on a fully tax equivalent basis decreased $604,000, to $3,819,000 for the three months ended June 30, 2015 from $4,423,000 for the three months ended June 30, 2014. Riverview’s net interest spread decreased to 3.65% for the three months ended June 30, 2015 from 4.42% for the three months ended June 30, 2014, while its net interest margin decreased to 3.74% for the three months ended June 30, 2015 from 4.51% for the three months ended June 30, 2014. The decrease in the yield on interest-earning assets negatively impacted the net interest spread and margin.

 

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The following table presents the Company’s average balances, interest rates, interest income and expense, interest rate spread and net interest margin, adjusted to a fully-tax equivalent basis (a non-GAAP financial measurement), for the six months ended June 30, 2015 and June 30, 2014:

 

Average Balances and Average Interest Rates (Dollars in thousands)
		For the Six Months Ended
		June 30,
		2015												2014
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
Assets
Interest earning assets:
Securities:
Taxable		$	33,350			$	471				2.85	%		$	34,077			$	584				3.46	%
Tax-exempt			14,266				306				4.33	%			22,640				552				4.92	%
Total securities			47,616				777				3.29	%			56,717				1,136				4.04	%
Loans:
Consumer			2,165				54				5.03	%			1,875				61				6.56	%
Commercial			39,931				793				4.00	%			39,448				986				5.04	%
Real estate			307,013				6,931				4.55	%			283,891				7,245				5.15	%
Total loans			349,109				7,778				4.49	%			325,214				8,292				5.14	%
Other interest earning assets			10,303				71				1.39	%			11,892				40				0.68	%
Total earning assets			407,028				8,626				4.27	%			393,823				9,468				4.85	%
Non-interest earning assets			36,794												37,284
Total assets		$	443,822											$	431,107
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposit accounts:
Interest-bearing demand		$	132,872			$	237				0.36	%			126,855				258				0.41	%
Savings			86,660				100				0.23	%			91,693				138				0.30	%
Time deposits			99,166				538				1.09	%			108,457				572				1.06	%
Total deposits			318,698				875				0.55	%			327,005				968				0.60	%
Borrowings:
Short-term borrowings			20,863				33				0.32	%			5,313				5				0.19	%
Long-term borrowings			6,613				105				3.20	%			7,149				131				3.70	%
Total borrowings			27,476				138				1.01	%			12,462				136				2.20	%
Total interest bearing liabilities			346,174				1,013				0.59	%			339,467				1,104				0.66	%
Demand deposits			54,952												50,282
Other liabilities			4,428												3,803
Shareholders’ equity			38,268												37,555
Total liabilities and shareholders’ equity		$	443,822											$	431,107
Net interest income (Non-GAAP)							7,613												$8,364
Tax-equivalent adjustment							(175	)											(229	)
Net interest income (GAAP)						$	7,438											$	8,135
Net interest spread											3.68	%											4.19	%
Net interest margin											3.77	%											4.28	%

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 six months ended June 30, 2015, total interest income decreased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $842,000, to $8,626,000 from $9,468,000, for the six months ended June 30, 2014. While total interest-earning assets increased $13,205,000, or 3.4%, the total yield declined 58 basis points to 4.27% for the

 

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six months ended June 30, 2015 from 4.85% for the first six months of 2014. Total interest income for the first six months of 2014 was higher than normal due to the one-time recovery of loan interest income in the amount of $770,400. While yields declined for most of the interest-earning assets for the six months ended June 30, 2015, the one-time recovery of loan interest income had the impact of inflating total interest income and yield for the six months ended June 30, 2014.

Total interest expense decreased $91,000, to $1,013,000, for the six months ended June 30, 2015 from $1,104,000 for the six months ended June 30, 2014. This decrease was attributable to a 7 basis-point decline in total cost of funds, which decreased to 0.59% at June 30, 2015 from 0.66% June 30, 2014. The decline in the cost of funds offset the 2% increase in the volume of total average interest bearing liabilities. The lower cost of funds was attributable to replacing higher fixed rate borrowings with the FHLB with lower fixed rate borrowings with the FHLB.

Net interest income calculated on a fully tax equivalent basis decreased $751,000, to $7,613,000, for the six months ended June 30, 2015 from $8,364,000 for the six months ended June 30, 2014. Riverview’s net interest spread decreased to 3.68% for the six months ended June 30, 2015 from 4.19% for the six months ended June 30, 2014, while its net interest margin also decreased to 3.77% for the six months ended June 30, 2015 from 4.28% for the six months ended June 30, 2014. The decrease in cost of funds helped to offset some of the interest rate compression on the asset side of the balance sheet, which was somewhat mitigated by the increased volume of total earning assets.

Provision for Loan Losses

The provision for loan losses represents management’s determination of the amount necessary to be charged to operations in order to maintain the allowance for loan losses at a level that represents management’s best estimate of the known and inherent losses in the existing 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. Management performs periodic evaluations of the allowance for loan losses with consideration given to historical, internal and external factors. In evaluating the adequacy of the allowance for loan losses, management considers historical loss experience, delinquency trends and charge-off activity, status of past due and non-performing loans, growth within the portfolio, the amount and types of loans comprising the loan portfolio, adverse situations that may affect a borrower’s ability to pay, the estimated value of underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are caused to undergo interpretation and possible revision as events occur or as more information becomes available. Loans are also reviewed for impairment based on discounted cash flows using the loans’ initial effective interest rates or the fair value of the collateral for certain collateral dependent loans as provided under the accounting standard relating to Accounting by Creditors for Impairment of a Loan. After an evaluation of these factors, the Company recorded a provision of $450,000 during the three months ended June 30, 2015, which was also the total amount provisioned for the six months ended June 30, 2015. This provision compares with no provision made during the three and six months ended June 30, 2014. The higher provision during the six months ended June 30, 2015 as compared with the same period in 2014, was driven by an increased specific allocation for impaired loans due primarily to one commercial loan to a business that closed in July 2015, an increase in the unallocated portion of the allowance, increased historical loss ratios in certain commercial real estate pools and in the residential mortgage pool, and the change of historical loss ratios in certain pools of acquired Union Bank and Trust Company loans. The allowance for loan losses was $4,145,000, or 1.18% of total loans outstanding, at June 30, 2015, as compared with $3,792,000, or 1.11% of total loans, at December 31, 2014, and $3,355,000, or 1.02% of total loans, at June 30, 2014.

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 June 30, 2015 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 June 30, 2015 and 2014.

 

Non-Interest Income
		Three Months Ended June 30,
						Increase/(Decrease)
(Dollars in thousands)		2015				Amount				%				2014
Service charges on deposit accounts		$	97			($	22	)			(18.5	%)		$	119
Other service charges and fees			153				19				14.2	%			134
Earnings on cash value of life insurance			74				24				48.0	%			50
Fees and commissions from securities brokerage			217				21				10.7	%			196
Gain (loss) on sale of available for sale securities			(41	)			(88	)			(187.2	%)			47
Gain (loss) on sale and valuation of other real estate owned			(41	)			198				82.8	%			(239	)
Loss on other assets			(53	)			(45	)			(562.5	%)			(8	)
Gain on sale of mortgage loans			116				42				56.8	%			74
		$	522			$	149				39.9	%		$	373

 

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Non-interest income continues to be an important source of income for the Company, representing 12.3% of total revenues (comprised of net interest income and non-interest income) for the second quarter of 2015 as compared with 8.0% for the second quarter of 2014. Non-interest income increased 39.9% in comparing the financial results for the second quarter of 2015 with the results for the same period in 2014. The increase was attributable to recording fewer losses in the second quarter of 2015 associated with either the sale or valuation of other real estate owned as compared with the second quarter of 2014. In addition, there was an increase in most of the other non-interest income categories attributable to increased transactional volume. The decrease in service charges on deposit accounts is due to recording a lower amount of overdraft charges during the second quarter of 2015.

The following table sets forth changes in non-interest income for the six months ended June 30, 2015 and 2014.

 

Non-Interest Income
		Six Months Ended June 30,
(Dollars in thousands)						Increase/(Decrease)
		2015				Amount				%				2014
Service charges on deposit accounts		$	195			($	32	)			(14.1	%)		$	227
Other service charges and fees			290				(201	)			(40.9	%)			491
Earnings on cash value of life insurance			125				24				23.8	%			101
Fees and commissions from securities brokerage			426				8				1.9	%			418
Gain (loss) on sale of available for sale securities			(41	)			(88	)			(187.2	%)			47
Gain (loss) on sale and valuation of other real estate owned			(67	)			166				71.2	%			(233	)
Loss on other assets			(53	)			(51	)			(2550.0	%)			(2	)
Gain on sale of mortgage loans			194				45				30.2	%			149
		$	1,069			($	129	)			(10.8	%)		$	1,198

Non-interest income represented 12.6% of total revenues (comprised of net interest income and non-interest income) for the first six months of 2015 as compared with 12.8% for the first six months of 2014. Total non-interest income was 10.8% lower at June 30, 2015 as compared with June 30, 2014. Included in other services charges and fees for the six months ended June 30, 2014 was a one-time entry for $229,000 relating to the restoration of a Union Bank purchased loan that was previously charged off, which made up a majority of the $201,000 decrease year over year. Losses associated with the sale or valuation of other real estate owned were $166,000 lower during the first six months of 2015, thereby increasing non-interest income. This increase was not enough to offset the decrease in service charge income and the losses associated with the sale of other assets and available for sale securities.

Non-Interest Expense

The following table presents the components of non-interest expense for the three months ended June 30, 2015 and 2014.

 

Non-Interest Expense
		Three Months Ended June 30,
						Increase/(Decrease)
(Dollars in thousands)		2015				Amount				%				2014
Salaries and employee benefits		$	3,793			$	1,834				93.6	%		$	1,959
Occupancy expense			579				269				86.8	%			310
Equipment expense			165				8				5.1	%			157
Telecommunications and processing charges			310				29				10.3	%			281
Postage and office supplies			98				4				4.3	%			94
FDIC premium			87				(6	)			(6.5	%)			93
Loan prepayment penalty			238				238				100.0	%			—
Bank shares tax expense			87				9				11.5	%			78
Directors’ compensation			89				6				7.2	%			83
Professional services			122				54				79.4	%			68
Amortization of intangibles			67				(7	)			(9.5	%)			74
Other expenses			425				(266	)			(38.5	%)			691
		$	6,060			$	2,172				55.9	%		$	3,888

Non-interest expenses increased $2,172,000, or 55.9%, in comparing the second quarter of 2015 with the second quarter of 2014. While non-interest expenses, in general, increased because of the Bank’s growth, the majority of the increase was directly attributable to a restructure, involving:

 

•

the departure of the CEO resulting in severance expense of $1,510,000;

 

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•

the planned closure of one of the Bank’s branches resulting in the payment of a lease termination fee of $96,000 and accelerated leasehold improvement expense of $122,000;

 

•

payment in full of two outstanding loans totaling, $5,000,000 with the FHLB in order to reduce the Bank’s cost of funds which caused the Company to incur a prepayment fee of $238,000; and

 

•

various expenses totaling $79,000, incurred relating to the merger with Citizens.

The $266,000 decrease in other expenses year over year was primarily attributable to the conversion of the Union accounts to the Bank’s computer system, which occurred in the second quarter of 2014.

The following table presents the components of non-interest expense for the six months ended June 30, 2015 and 2014.

 

Non-Interest Expense
		Six Months Ended June 30,
(Dollars in thousands)						Increase/(Decrease)
		2015				Amount				%				2014
Salaries and employee benefits		$	5,871			$	2,102				55.8	%		$	3,769
Occupancy expense			1,015				318				45.6	%			697
Equipment expense			326				20				6.5	%			306
Telecommunications and processing charges			603				55				10.0	%			548
Postage and office supplies			186				(8	)			(4.1	%)			194
FDIC premium			155				(28	)			(15.3	%)			183
Loan prepayment penalty			238				238				100.0	%			—
Bank shares tax expense			172				12				7.5	%			160
Directors’ compensation			175				8				4.8	%			167
Professional services			290				156				116.4	%			134
Amortization of intangibles			134				(14	)			(9.5	%)			148
Other expenses			753				(163	)			(17.8	%)			916
		$	9,918			$	2,696				37.3	%		$	7,222

Non-interest expenses increased 37.3% year over year. In particular, the increases in the expenses relating to salary and employee benefits, occupancy, telecommunications and processing charges, loan prepayment penalty and professional services were associated with the Bank’s restructure, which included the announcement of the departure of its CEO, the promotion of two executives, a prepayment of debt with an associated prepayment fee, closure of a banking facility with an associated termination fee and leasehold improvement expense, and merger-related costs associated with the pending acquisition of Citizens. Further impacting the Bank’s occupancy expense in 2015 was the opening of a new branch location in Wyomissing, Schuylkill County, Pennsylvania in the third quarter of 2014. The decline in other expenses was due to the conversion of Union accounts to the Bank’s computer system, which occurred during the second quarter of 2014.

Provision for Federal Income Taxes.

The income tax benefit was $919,000 for the second quarter of 2015, as compared to a $252,000 tax expense for the second quarter of 2014. The decline in the 2015 second quarter tax provision was attributable to a before tax net loss of $2,263,000 as compared with before tax net income of $794,000 for the second quarter of 2014.

For the six months ended June 30, 2015, the tax benefit was $891,000, compared to a $559,000 tax expense for the six months ended June 30, 2014. The decline in the 2015 tax accrual was attributable to a before tax net loss of $1,861,000, as compared with before tax net income of $2,111,000 for the six months ended June 30, 2014.

 

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Financial Condition as of June 30, 2015 and December 31, 2014

Securities

The following table sets forth the composition of the investment securities portfolio as of June 30, 2015 and December 31, 2014:

 

		Fair Values as of
		June 30, 2015				December 31, 2014
Available-for-sale securities:
U.S. Government agencies securities		$	789			$	817
State and municipal			27,905				23,708
U.S. Government agencies and sponsored enterprises (GSEs) - residential:
Mortgage-backed securities			18,667				20,902
Collateralized mortgage obligations (CMOs)			2,052				2,391
Corporate debt obligations			498				505
Equity securities, financial services			506				495
		$	50,417			$	48,818

Since the year end, total investment securities have increased as a result of purchases which offset security calls, 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 Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”). Securities issued by these agencies contain additional guarantees that make them among the most creditworthy investments available.

No securities are considered other-than-temporarily impaired based on management’s evaluation of the individual securities, including the extent and length of any unrealized losses, the Company’s ability to hold the securities until maturity or until the fair values recover, and management’s opinion that it will not have to sell the securities prior to recovery of value. The Company invests in securities for the cash flow and yields they produce and not to profit from trading. The Company holds no trading securities in its portfolio, and the portfolio did not contain high risk securities or derivatives as of June 30, 2015 or December 31, 2014.

Restricted Investments in Bank Stocks

The Bank’s investment in restricted stocks reflects a required investment in the common stock of correspondent banks consisting of Atlantic Central Bankers Bank and the Federal Home Loan Bank of Pittsburgh (“FHLB”). These stocks have no readily available market values and are carried at cost since they are not actively traded. Management evaluates restricted stock for impairment based upon its assessment of the ultimate recoverability of the cost rather than by recognizing temporary declines in value. Management believes no impairment charge is necessary with regard to such restricted stock investments.

Loans

The loan portfolio comprises the major component of the Company’s earning assets and is the highest yielding asset category. The following table presents the composition of the total loan portfolio at June 30, 2015 and December 31, 2014:

 

		June 30, 2015								December 31, 2014
(Dollars in thousands)		Balance				% of Total				Balance				% of Total
Commercial		$	41,360				11.76	%		$	37,301				10.88	%
Commercial real estate			203,695				57.91	%			199,782				58.29	%
Commercial land and land development			12,028				3.42	%			11,441				3.34	%
Residential real estate			73,121				20.79	%			73,453				21.43	%
Home equity lines of credit			18,711				5.32	%			18,235				5.34	%
Consumer installment			2,799				.80	%			2,481				0.72	%
Total loans			351,714				100.00	%			342,693				100.00	%
Allowance for loan losses			(4,145	)							(3,792	)
Total loans, net		$	347,569							$	338,901

 

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Since the 2014 year end, there has been modest growth in the loan portfolio. At June 30, 2015, total loans receivable (net of the allowance for loan losses, unearned fees and origination costs) amounted to $347,569,000, an increase of $8,668,000, or 2.6%, as compared with $338,901,000 as of December 31, 2014. The increase in the loan portfolio was attributable to continuing growth in the commercial and commercial real estate portfolios, particularly in the Berks/Schuylkill market.

As new loans were recorded during the first six months of 2015, scheduled loan payments and increased prepayments and payoffs impacted loan growth. In addition, the Bank originated mortgage loans which it continued to sell to Freddie Mac on a service released basis. The decision to sell mortgage loans was generally based upon the Bank’s relationship with the customer, with further consideration given to the interest rate environment, interest rate risk and overall economic conditions.

Loans receivable, net of the allowance for loan losses, represented 77.5% of total assets and 91.0% of total deposits as of June 30, 2015, as compared to 77.7% and 91.0%, respectively, at December 31, 2014. All of the Bank’s loans are to domestic borrowers.

Lending Activities

The Bank focuses its lending activities on making loans to small and medium sized businesses, entrepreneurs, professionals and consumers in our primary market area. Our lending activities consist of commercial loans, commercial real estate loans, commercial land and land development loans, residential real estate loans, home equity lines of credit, and consumer installment loans. Riverview also makes residential real estate loans which are sold to Freddie Mac with servicing rights released.

Credit Policies and Administration

The Bank has established a comprehensive lending policy, which includes rigorous underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. In an effort to manage risk, individual lending officer lending authorities are low. All credit requests in excess of an individual lending officer’s authority up to $750,000 are approved by dual signature of two of the following officers: Chief Executive Officer, President, Chief Credit Officer, and President – Berks Region. Credit requests in excess of $750,000 are approved by the majority vote of a Loan Committee consisting of the Chief Executive Officer, President, Chief Credit Officer and six members of the Bank’s Board of Directors. Credit requests in excess of $2,000,000 are approved by a majority vote of the entire Board of Directors. Management believes that the Bank employs experienced lending officers, requires appropriate collateral, carefully assesses the repayment ability of all borrowers, and adequately monitors both the financial condition of our borrowers and the concentration of loans in the portfolio.

As of June 30, 2015, the Bank’s legal lending limit for loans to one borrower was $5,905,000. As part of our risk management strategy, we may attempt to participate a portion of larger loans to other financial institutions. This strategy allows the Bank to maintain customer relationships while reducing credit exposure. However, this strategy may not always be available.

In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the related effects on the borrower and/or real estate market. Longer term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that past due loans are minimized and potential problem loans are dealt with swiftly.

The Bank also retains an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review. We use the results of the firm’s report to validate our internal loan risk ratings and we review their commentary on specific loans and on our loan administration activities in order to improve our operations.

Commercial Loans

The Bank’s commercial loans consist of revolving and non- revolving lines of credit, term loans, equipment loans, standby letters of credit and unsecured loans. We originate commercial loans to established businesses for any legitimate business purpose including the financing of machinery, equipment, leasehold improvements, inventory, carrying accounts receivable, general working capital and acquisition activities. We have a diverse customer base, and we have no concentration in these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable, equipment, real estate and other collateral such as marketable securities, cash value of life insurance, and time deposits at the Bank.

 

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Commercial business loans generally have a higher degree of risk. These loans typically involve higher average balances, increased difficulty in monitoring and a higher risk of default since repayment primarily depends on the successful operation of the borrower’s business. To help manage this risk, we typically limit these loans to proven businesses, and we obtain appropriate collateral and personal guarantees from the principal owners of the business. We monitor the financial condition of the business by requiring submission of periodic financial statements and annual tax returns.

Commercial Real Estate Loans

The Bank finances both owner occupied and non-owner occupied commercial real estate for its customers. Our underwriting policies and process focuses on the customer’s ability to repay the loan as well as an assessment of the underlying real estate collateral. We originate commercial real estate loans on a fixed rate or floating rate basis. Fixed rates typically are committed for a three to five year time period, after which the rate will become floating unless an additional fixed rate period is negotiated. Repayment terms include amortization schedules from three years to a maximum of 25 years, with the majority of loans amortized over 15 to 20 years. Principal and interest payments are due monthly, with all remaining unpaid principal and interest due at maturity.

Risks inherent in managing a commercial real estate portfolio relate to sudden or gradual declines in property values as well as changes in the economic climate that may detrimentally impact the borrower’s ability to repay. We attempt to mitigate risk by carefully underwriting these loans. Our underwriting includes a cash flow analysis which is conducted by thoroughly examining leases and building operating expenses. A minimum debt coverage ratio of 1.2:1.0 is generally required. The character of the borrower and current and prospective conditions in the market are considered. We generally limit loans in this category to a maximum loan to value ratio of 80%, and require personal guarantees of the principal owners and/or corporate guarantees. We monitor the financial condition and operating performance of these borrowers by a thorough review of annual tax returns, property operating data, and periodic financial statements.

Commercial Land and Land Development Loans

The Bank’s commercial land and land development loan portfolio consists of funds advanced for construction of multifamily housing, commercial buildings, single family homes, and site acquisition and development. This segment is relatively small compared to most other portfolios of the Bank. All of these loans are concentrated in our primary market area, and the Bank is highly selective in making loans in this segment.

Construction and site acquisition and development lending entails significant risks. These loans generally involve large loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. The value of the project is estimated prior to completion of construction, thus it is more difficult to accurately evaluate the total funds required to complete a project and related loan to value ratios. To mitigate risk, we generally limit construction loans to the lesser of 80% of cost or appraised value. Loan to value ratios for site acquisition and development loans is limited to 75%. A first lien position on the property is required. These loans are offered only to experienced builders and commercial entities or individuals who have demonstrated the ability to successfully and profitably complete these types of projects. Loans for multifamily and commercial buildings are typically made with the intent that upon completion of construction, the loan will convert to a permanent loan with the Bank. Loans for site acquisition and development are structured so that all funds advanced for the project are repaid upon the sale of not more than 75% of the total available lots in the development. A complete analysis of borrower and the project is performed, including a review of costs to construct, cash flow available to support the required interest payments during construction, the feasibility of the project based on market conditions, the borrower’s liquidity and ability to absorb any cost overruns, and, in the case of multifamily and commercial buildings, an assessment of the borrower’s ability to repay the loan on an amortizing basis upon completion of construction. Advances for construction are made based on work completed in accordance with budget and subject to inspection by the Bank.

Residential Real Estate Loans

The Bank offers a fixed and adjustable rate residential real estate secured loans to homeowners in our primary market area. These loans are made for the purchase or refinance of a borrower’s primary or secondary residence. These loans also include home equity installment loans granted for a variety of purposes. Our customer base is geographically diverse, reducing our potential risk. The loans are secured with a security interest in the borrower’s primary or secondary residence with a loan to value ratio of no more than 80%. Our underwriting includes an analysis of the borrower’s debt to income ratio which generally may not exceed 40%, collateral value, length and stability of employment and prior credit history. We do not originate nor do we have any subprime residential real estate loans.

 

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Home Equity Lines of Credit

The Bank offers variable rate residential real estate secured revolving lines of credit to homeowners. These home equity lines of credit are made to individuals in our primary market area. Our customer base is geographically diverse, reducing our potential risk. The loans are secured with a security interest in the borrower’s primary or secondary residence with a required loan to value limit of no more than 80%. Our underwriting includes an analysis of the borrower’s debt to income ratio which generally may not exceed 40%, collateral value, length and stability of employment and prior credit history.

Consumer Installment Loans

The Bank offers various types of secured and unsecured consumer purpose installment loans. Consumer purpose non-real estate secured lines of credit also fall into this category. Our underwriting includes an analysis of the borrower’s debt to income ratio which generally may not exceed 40% (35% for unsecured loans), collateral value if any, length and stability of employment and prior credit history. These consumer loans may present greater credit risk than residential real estate loans because some are unsecured or secured by rapidly depreciating assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulty, the loan may not be repaid. Also various federal and state laws, including bankruptcy laws, may limit the amount that can be recovered on such loans.

In summary, the Bank takes a balanced approach to its lending activities and manages risk associated with its loan portfolio by maintaining diversification within the portfolio, consistently applying prudent underwriting standards, ongoing monitoring efforts with attention to portfolio dynamics and mix, and procedures that are consistently applied and updated on an annual basis. The Bank contracts with an independent third party each year to conduct a credit review of the loan portfolio to provide an independent assessment of asset quality through an evaluation of the established underwriting criteria used in originating credits. Separately, every loan booked and every loan turndown undergoes a review for conformity with established policies and compliance with current regulatory lending laws. The Bank has not lessened its loan underwriting criteria during this time, and management believes its underwriting standards continue to remain conservative.

Credit Risk and Loan Quality

The following table presents non-performing loans and assets as of June 30, 2015 and December 31, 2014:

 

Non-Performing Assets
(Dollars in thousands)
		June 30, 2015				December 31, 2014
Accruing loans past due 90 days		$	270			$	643
Non-accrual loans			4,424				4,245
Total non-performing loans			4,694				4,888
Foreclosed real estate			347				1,022
Total non-performing assets		$	5,041			$	5,910
Non-performing loans to total loans			1.33	%			1.43	%
Non-performing assets to total assets			1.12	%			1.36	%
Allowance to non-performing loans			88.30	%			77.58	%

The non-performing asset ratios presented in the table above reflect little change in the credit quality of the loan portfolio since the 2014 year-end. During the first six months of 2015, the Bank experienced a decrease of $194,000 in total non-performing loans attributable to a decrease in accruing loans past due 90 days of $373,000, offset by an increase of $179,000 in non-accrual loans. The increase in non-accrual loans was primarily the result of the return to accrual status of four loans in the first quarter offset by the addition of two loans to non-accrual status in the second quarter. Each of the loans that returned to accruing status had been performing and paying as agreed for a period in excess of the time limits established by Bank policy for return to accrual status. The $869,000 decrease in total non-performing assets as of June 30, 2015 as compared with the 2014 year-end was attributable to the $194,000 decrease in non-performing loans and a $675,000 decrease in foreclosed real estate. Management continues to be vigilant in its efforts to identify, evaluate and minimize 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 structured loan collection process and close monitoring of compliance with underwriting and loan to value guidelines.

The Bank had $347,000 in real estate acquired through foreclosure as of June 30, 2015, as compared with $1,022,000 as of December 31, 2014. The foreclosed real estate as of June 30, 2015 consisted of three mixed use properties

 

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totaling $91,000 and one commercial property totaling $256,000. The decrease at June 30, 2015 from December 31, 2014 was due to the sale of one residential development property totaling $707,000, and the sale of five single family residential properties totaling $269,000, partially offset by the addition of two mixed use properties and one commercial property. Each of the foreclosed properties has been marked to the appropriate realizable value, and, at this time, no material loss is anticipated upon the ultimate sale of these assets.

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.

The following table presents loan concentrations as of June 30, 2015 and December 31, 2014.

 

(Dollars in thousands)		June 30, 2015				December 31, 2014
Loans to Lessors of:
Residential buildings and dwellings		$	52,948			$	51,248
Nonresidential buildings			58,210				56,626

Although the loans listed above were not made to any one particular borrower or industry, the quality of these loans could be affected by the region’s economy and overall real estate market. The performance of these portfolios continues to be acceptable, with no losses for the quarter.

Demand for office space and residential apartment space was solid in 2014 in the Bank’s market area. This demand has continued through the second quarter of 2015. Absorption rates of available space continue to be positive and occupancy and rental rates have become increasingly more stable. As such, management does not believe that this concentration is an adverse condition to the Bank at this time.

The Bank’s lending policy is executed through the assignment of tiered loan limit authorities to individual officers of the Bank and the Board of Directors. Although the Bank maintains sound credit policies, certain loans may deteriorate for a variety of reasons. The Bank’s policy is to place all loans in a non-accrual status upon becoming 90 days delinquent in payments, unless the loan is well secured and there is 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 management’s ongoing assessment as to the adequacy of the allowance for loan losses in consideration of the risks and trends associated with the loan portfolio, the Bank recorded a provision to the allowance for loan losses of $450,000 during the three and six months ended June 30, 2015 and no provision for the six months ended June 30, 2014. Management determined that the total of the allocated and unallocated 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 these 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.

 

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Analysis of the Allowance for Loan Losses
(Dollars in thousands)
		Six Months Ended
		June 30, 2015				June 30, 2014
Beginning balance		$	3,792			$	3,663
Provision for loan losses			450				0
Charge-offs:
Commercial, financial, agricultural			0				36
Real estate commercial			50				244
Real estate mortgage			37				75
Installments			22				4
Total charge-offs			109				359
Recoveries:
Commercial, financial, agricultural			8				48
Real estate commercial			0				0
Real estate mortgage			0				0
Installments			4				3
Total recoveries			12				51
Net (charge-offs)/recoveries			(97	)			(308	)
Ending balance		$	4,145			$	3,355
Net (charge-offs)/recoveries to average loans (annualized)			0.06	%			0.19	%
Allowance for loan losses to total loans			1.18	%			1.02	%

The increase in the allowance for loan losses as a percentage of total loans as of June 30, 2015 as compared with June 30, 2014 primarily reflected increased specific allocation for impaired loans, an increase in the unallocated portion of the allowance, increased historical loss ratios in certain commercial real estate pools and in the residential mortgage pool, and the change of historical loss ratios in certain pools of acquired Union Bank and Trust Company loans. Although management is proactive in identifying and dealing with credit issues that it can control, it anticipates that, going forward, additional provisions to its allowance for loan losses may be warranted as a result of economic factors the Bank cannot control.

Deposits

Deposits are the major source of the Bank’s funds for lending and investing purposes. Total deposits at June 30, 2015 were $381,812,000, an increase of $9,550,000, or 2.6%, from total deposits of $372,262,000 at December 31, 2014. There was a shift in the deposit mix since the 2014 year-end, as time deposits decreased $6,984,000, while there was an increase of $2,428,000 in interest bearing deposits and $5,257,000 in savings and money market accounts. In addition, noninterest bearing deposits increased $8,849,000 since the 2014 year end. As a result of the low interest rate environment, the Bank’s cost of funds associated with interest bearing deposits declined to 0.55% at June 30, 2015 from 0.62% at December 31, 2014 and 0.60% at June 30, 2014.

Borrowings

Short-term borrowings are generally used to meet temporary funding needs and consist of federal funds purchased, securities sold under agreements to repurchase, and overnight and short-term borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”). As of June 30, 2015, short-term borrowings totaled $22,000,000, all of which were borrowed under the Bank’s Open Repo Plus line with the FHLB. This level of short-term borrowings compared with $12,500,000 in outstanding short-term borrowings at December 31, 2014, all of which were borrowed under the Bank’s FHLB Open Repo Plus line.

Long-term borrowings totaled $2,000,000 at June 30, 2015 and as compared with $7,000,000 outstanding at December 31, 2014, and are summarized as follows:

 

•

During the middle of June 2015, the Bank prepaid the balance of the $5,000,000 in long-term borrowings from the FHLB that was outstanding, which carried an interest rate of 2.90%. At June 30, 2015, there were no outstanding long term borrowings from the FHLB as compared with $5,000,000 that was outstanding at December 31, 2014;

 

•

During 2014, the Company borrowed $2,000,000 under a secured term loan agreement with ACNB Bank. This borrowing was outstanding at June 30, 2015 and December 31, 2014; and

 

•

The Company has a $5,000,000 secured guidance line of credit with ACNB Bank, Gettysburg, Pennsylvania with no outstanding borrowings drawn at June 30, 2015 and December 31, 2014.

 

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Shareholders’ Equity and Capital Adequacy

At June 30, 2015, shareholders’ equity for the Company totaled $36,300,000, a decrease of $1,908,000 as compared with shareholder equity of $38,208,000 at December 31, 2014. The decrease was due to a net loss of $970,000, the payment of dividends of $746,000, and a decrease in the net unrealized gains/losses on securities available for sale, which net of tax, decreased equity by $221,000, which were offset by an increase to surplus of $16,000 to reflect the compensation cost associated with option grants and $13,000 representing the proceeds of shares issued to the Company’s Employee Stock Purchase Plan.

The Company meets the eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement. Accordingly, the Company is exempt from certain regulatory requirements administered by the federal banking agencies. However, the Bank is subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board. On January 1, 2015, the Basel III capital rules became effective for the Bank. The table that follows presents the Bank’s capital ratios as determined and reported to its regulator. The Bank’s capital ratios exceed both the regulatory minimums and the requirements necessary for designation as a “well-capitalized” institution under the new Basel III rules.

 

Capital Ratios (of Bank)
		June 30, 2015				December 31, 2014				Regulatory Minimum				“Well Capitalized” Requirement
Tier 1 capital (to average assets)			7.7	%			8.0	%			4.0	%			5.0	%
Tier 1 capital (to risk-weighted assets)			9.6	%			10.3	%			6.0	%			8.0	%
Total risk-based capital (to risk-weighted assets)			10.8	%			11.5	%			8.0	%			10.0	%
Common equity tier 1 risk based capital (to risk-weighted assets)			9.6	%			n/a				4.5	%			6.5	%

The ratios presented do not reflect additional future Basel III requirements, including a 2.5% capital conservation buffer that will apply to minimum regulatory capital ratios beginning in 2016 through 2019.

Banking laws and regulations limit the ability of the Bank to transfer cash to the Company in the form of dividends, loans or advances. Regulatory approval is required if the total of all dividends declared by a state 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 June 30, 2015, $99,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval.

The following table presents the details of quarterly cash dividends paid to the Company’s shareholders during the six months ended June 30, 2015 as compared with the six months ended June 30, 2014:

 

Declaration Date

Record Date

Date of Payment

Per Share Cash Dividends Paid

2015:

First quarter

2/25/2015

3/6/2015

3/30/2015

$

0.1375

Second quarter

5/20/2015

6/9/2015

6/30/2015

$

0.1375

2014:

First quarter

2/21/2014

3/7/2014

3/31/2014

$

0.1250

Second quarter

5/14/2014

6/6/2014

6/30/2014

$

0.1400

During March 2011, the Company approved and implemented a Dividend Reinvestment and Stock Purchase Plan (the “DRP Plan”). The Plan enables registered shareholders to automatically reinvest all or a portion of their cash dividends into the purchase of additional common shares of the Company. Shareholders enrolled in the Plan 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 is applied to the purchase price of all shares purchased by the Plan. Shares purchased by the DRP Plan are made in open market or privately negotiated transactions (or a combination of both), and are administered by the Company’s transfer agent. The Company does not offer or sell any of its authorized but unissued shares to the DRP, and therefore does not receive any proceeds from the purchase of common stock by this Plan.

 

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In June 2014, the Board of Directors and shareholders of the Company approved an Employee Stock Purchase Plan (“ESPP”), giving eligible employees the opportunity to purchase common stock at a 15% discount from the market price. On April 21, 2015, the Company filed a Registration Statement with the Securities and Exchange Commission to register a total of 150,000 common shares, of which 75,000 shares are reserved and could be used for the purchase of common shares by the ESPP and 75,000 shares are reserved and could be used for the purchase of common shares by Riverview Financial Corporation 401(k) Retirement Plan. Shares purchased by the ESPP, which is administered by the Company’s transfer agent, either may be purchased in the open market or privately negotiated transactions, or may be issued from the reserve of 75,000 registered shares. In the event shares are issued from the reserve, the Company would receive the proceeds from the purchase of common stock by the ESPP. During the first six months of 2015, the Company issued from the ESPP reserve 1,024 shares, totaling $13,000, which was recorded as an increase to the surplus account. No shares were issued from the 401(k) Retirement Plan reserve.

Off-Balance Sheet Arrangements

The Company 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 June 30, 2015, the Company had unfunded outstanding commitments to extend credit of $49,156,000 and outstanding letters of credit of $3,460,000. 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 12 of the 2014 Consolidated Financial Statements for a discussion of the nature, business purpose and importance of the Company’s off-balance sheet arrangements.

Interest Rate Sensitivity Analysis and Interest Rate Risk Management

Interest rate risk is the exposure of a bank’s current and future earnings and capital arising from adverse movements in interest rates. Interest rate risk can create exposure for the Bank in two primary areas. Changes in rates may have an impact on the Bank’s liquidity position, and movements in interest rates can create fluctuations in net interest income and changes in the economic value of equity.

The Bank employs various management techniques and analytical tools to monitor and minimize its exposure to interest rate risk. The guidelines used by the Bank are to limit exposure to changes in interest rates that affect the underlying economic value of assets and liabilities, earnings and capital. The Asset/Liability Committee (“ALCO Committee”), consisting of key financial and senior management personnel and directors, meets on a quarterly basis. The ALCO Committee is responsible for reviewing the interest rate sensitivity position of the Bank, approving asset and liability management policies and overseeing the formulation and implementation of strategies regarding balance sheet positions, liquidity and earnings.

The ALCO Committee examines the extent to which the Bank’s assets and liabilities are interest rate sensitive and reviews a variety of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income. The Committee also reviews the interest rate sensitivity gap, which is the difference between interest earning assets and interest bearing liabilities scheduled to mature or re-price within specific time periods using flat rates as a base and rising and declining rates. A positive gap occurs when the amount of interest sensitive assets exceed the amount of interest sensitive liabilities, while a negative gap occurs when the amount of interest sensitive liabilities exceed the amount of interest sensitive assets. During a period of declining interest rates, a negative gap position tends to result in an increase in net interest income, while a positive gap in that particular rate environment tends to adversely affect net interest income. If re-pricing of assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

The Bank’s balance sheet at June 30, 2015 was positively gapped, which suggests that the net yield on interest earning assets may increase during periods of rising rates. However, a simple interest rate gap analysis alone may not be an accurate indicator of how changes in interest rates will affect net interest income. Changes in interest rates may not uniformly affect income associated with interest earning assets and costs associated with interest bearing liabilities. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react differently to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In the event of a change in interest rates, prepayments and early withdrawal levels could also deviate from those assumed in evaluating the interest rate gap.

 

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Liquidity

Liquidity refers to the Company’s 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 $15,845,000 at June 30, 2015, and was $273,000 higher than the $15,572,000 that was outstanding at December 31, 2014. While liquidity sources generated from assets include scheduled payments and prepayments of principal and interest from securities and loans in the Company’s portfolios, longer-term liquidity needs may be met by selling securities available-for-sale, selling loans or raising additional capital. At June 30, 2015, there was $1,030,000 of unpledged available-for-sale securities readily available for sale for liquidity purposes as compared with $555,000 at December 31, 2014. The increase in the volume of unpledged securities was attributable to the increase in the amount of investment securities since the 2014 year-end.

On the liability side, the primary source of funds available to meet liquidity needs is to attract deposits at competitive rates. The Bank’s core deposits, which exclude certificates of deposit over $250,000, were $375,529,000 at June 30, 2015 as compared to $365,137,000 at December 31, 2014. Core deposits have historically provided a source of relatively stable and low cost liquidity. Short-term and long-term borrowings utilizing the federal funds line and credit facilities established with a correspondent financial institution and the FHLB are also considered to be reliable sources for funding. As of June 30, 2015, the Bank had access to two formal borrowing lines with its correspondent banks totaling $176,924,000, net of the aggregate amounts outstanding on these lines totaling $22,000,000 in short-term borrowings. In addition to the Bank’s borrowing capacity, Riverview has a $5,000,000 secured guidance line of credit available from ACNB Bank, with no outstanding draws as of June 30, 2015 and December 31, 2014.

There are a number of factors that may impact the Company’s 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 June 30, 2015 was 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 the Company’s 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 the Company 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 Company’s assets. Inflation may also affect the level of interest rates in the general market, which in turn can affect the Company’s profitability and the market value of assets held. The Company actively manages its interest rate sensitive assets and liabilities, countering the effects of inflation.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to a smaller reporting company.

 

ITEM 4.

CONTROLS AND PROCEDURES

As of June 30, 2015, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer (Principal Accounting Officer), of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2015, pursuant to Exchange Act Rule 15d-15. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and

 

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reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitations, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure. Based upon the evaluation, the Chief Executive Officer along with the Chief Financial Officer (Principal Accounting Officer) concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable and not absolute assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

There have been no changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

In the opinion of the Company, after review with legal counsel, there are no proceedings pending to which the Company is a party or to which its property is subject, which, if determined adversely to the Company, would be material in relation to the Company’s consolidated financial condition. There are no proceedings pending other than ordinary, routine litigation incident to the business of the Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.

 

Item 1A.

Risk Factors

Not required for smaller reporting companies.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase any of its common stock during the first six months of 2015.

 

Item 3.

Defaults upon Senior Securities

Not applicable.

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

Item 5.

Other Information

Not applicable.

 

Item 6.

Exhibits.

The following Exhibits are filed as part of this filing on Form 10-Q, or incorporated by reference hereto:

 

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

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Exhibit Index

 

Exhibit No.		Description
2.1		Amended and Restated Agreement and Plan of Consolidation, dated April 24, 2013, between Riverview Financial Corporation and Union Bancorp, Inc. (Incorporated by reference to Annex A included in Riverview’s Amendment No. 2 to Registration Statement on Form S-4 (Registration No. 333-188193 filed August 5, 2013.)
3.1		Articles of Incorporation of Riverview Financial Corporation. (Incorporated by reference to Exhibit D of Annex A included in Riverview’s Amendment No. 2 to Registration Statement on Form S-4 (Registration No. 333-188193 filed August 5, 2013.)
3.2		Amended and Restated Bylaws of Riverview Financial Corporation. (Incorporated by reference to Exhibit 3(ii) to Riverview’s Current Report on Form 8-K (Registration No. 333-188193 filed March 4, 2015.)
3.3		Registration statement on Form S-8 to register 150,000 shares of Riverview common stock for Riverview Financial Corporation 401k Retirement Plans and Riverview Financial Corporation Employee Stock Purchase Plan (Registration No. 333-203544 filed April 21, 2015.)
10.1		Confidential Separation Agreement and General Release (including Waiver of Claims under the Age Discrimination in Employment Act of 1967, as Amended), dated June 23, 2015. (Incorporated by reference to Exhibit 99.1 of Riverview’s Form 8-K as filed with the Securities and Exchange Commission on June 30, 2015.)
21.1		Subsidiaries of Registrant.
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 Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2		Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101		Interactive Data File (XBRL).

 

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