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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 March 31, 2016

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: 3,217,434 shares of Common Stock, with no par value per share, outstanding as of May 5, 2016.

 

 

 


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

INDEX TO FORM 10-Q

 

          PAGE  
PART I.    Financial Information   
        Item 1.   

Financial Statements:

  
  

Consolidated Balance Sheets at March 31, 2016 (unaudited) and  December 31, 2015

     3   
  

Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)

     4   
  

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 (unaudited)

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and 2015 (unaudited)

     5   
  

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015(unaudited)

     6   
  

Notes to Consolidated Financial Statements

     7   
        Item 2.   

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

     33   
        Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     46   
        Item 4.   

Controls and Procedures

     46   
PART II.   

Other Information

  
        Item 1.   

Legal Proceedings

     47   
        Item 1A.   

Risk Factors

     47   
        Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     47   
        Item 3.   

Defaults Upon Senior Securities

     47   
        Item 4.   

Mine Safety Disclosures

     47   
        Item 5.   

Other Information

     47   
        Item 6.   

Exhibits

     47   
SIGNATURES      49   
Exhibit Index      50   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)    March 31,
2016
     December 31,
2015
 
     (Unaudited)      (Audited)  
Assets      

Cash and due from banks

   $ 13,145       $ 14,679   

Interest bearing deposits

     11,204         7,018   
  

 

 

    

 

 

 

Cash and cash equivalents

     24,349         21,697   

Interest bearing time deposits with banks

     990         991   

Investment securities available for sale

     73,317         75,850   

Mortgage loans held for sale

     594         1,094   

Loans, net of allowance for loan losses of $3,717 - 2016; $4,365 - 2015

     397,765         405,480   

Premises and equipment

     12,349         12,373   

Accrued interest receivable

     1,610         1,594   

Restricted investments in bank stocks

     1,596         2,315   

Cash value of life insurance

     11,846         11,764   

Foreclosed assets

     1,043         885   

Goodwill

     4,757         4,757   

Intangible assets

     1,425         1,501   

Deferred tax assets

     7,097         7,444   

Other assets

     2,177         1,704   
  

 

 

    

 

 

 

Total Assets

   $ 540,915       $ 549,449   
  

 

 

    

 

 

 
Liabilities and Shareholders’ Equity      

Liabilities

     

Deposits:

     

Demand, non-interest bearing

   $ 69,935       $ 70,106   

Demand, interest bearing

     135,663         131,564   

Savings and money market

     114,753         110,526   

Time

     135,153         136,146   
  

 

 

    

 

 

 

Total deposits

     455,504         448,342   

Short-term borrowings

     25,000         42,575   

Long-term borrowings

     11,400         9,350   

Accrued interest payable

     267         236   

Other liabilities

     5,766         6,643   
  

 

 

    

 

 

 

Total Liabilities

     497,937         507,146   
  

 

 

    

 

 

 

Shareholders’ Equity

     

Preferred stock, 2016 and 2015, no par value; authorized 3,000,000 shares

     —           —     

Common stock, 2016 and 2015 no par value; authorized 5,000,000 shares; issued and outstanding 2016 3,206,927 shares and 2015 3,205,544 shares

     22,077         22,077   

Surplus

     6,812         6,784   

Retained earnings

     13,861         13,550   

Accumulated other comprehensive income (loss)

     228         (108
  

 

 

    

 

 

 

Total Shareholders’ Equity

     42,978         42,303   
  

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 540,915       $ 549,449   
  

 

 

    

 

 

 

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

 

3


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

(In thousands, except share data)    Three Months Ended
March 31,
 
     2016     2015  

Interest and Dividend Income

    

Loans, including fees

   $ 4,513      $ 3,833   

Investment securities - taxable

     401        243   

Investment securities - tax exempt

     136        94   

Federal funds sold

     1        —     

Interest-bearing deposits

     15        9   

Dividends

     29        43   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     5,095        4,222   
  

 

 

   

 

 

 

Interest Expense

    

Deposits

     466        439   

Short-term borrowings

     43        15   

Long-term debt

     56        55   
  

 

 

   

 

 

 

Total Interest Expense

     565        509   
  

 

 

   

 

 

 

Net Interest Income

     4,530        3,713   

Provision for Loan Losses

     99        —     
  

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     4,431        3,713   
  

 

 

   

 

 

 

Noninterest Income

    

Service charges on deposit accounts

     111        98   

Other service charges and fees

     165        137   

Earnings on cash value of life insurance

     82        51   

Fees and commissions from securities brokerage

     177        209   

Loss on sale of available for sale securities

     (2     —     

Gain (loss) on sale and valuation of other real estate owned

     6        (26

Gain on sale of mortgage loans

     78        78   
  

 

 

   

 

 

 

Total Noninterest Income

     617        547   
  

 

 

   

 

 

 

Noninterest Expenses

    

Salaries and employee benefits

     2,151        2,078   

Occupancy expenses

     381        436   

Equipment expenses

     172        161   

Telecommunication and processing charges

     347        293   

Postage and office supplies

     102        88   

FDIC premiums

     120        68   

Bank shares tax expense

     105        85   

Directors’ compensation

     90        86   

Professional services

     93        168   

Amortization of intangible assets

     77        67   

Other expenses

     483        328   
  

 

 

   

 

 

 

Total Noninterest Expenses

     4,121        3,858   
  

 

 

   

 

 

 

Income before Income Taxes

     927        402   

Applicable Federal Income Tax Expense

     174        28   
  

 

 

   

 

 

 

Net Income

   $ 753      $ 374   
  

 

 

   

 

 

 

Basic and Diluted Earnings Per Share

   $ 0.23      $ 0.14   
  

 

 

   

 

 

 

Dividends Per Share

   $ 0.14      $ 0.14   
  

 

 

   

 

 

 

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

 

4


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended March 31, 2016 and 2015

(Unaudited)

 

     Three Months Ended
March 31,
 
(In thousands)    2016      2015  
     (In thousands)  

Net income

   $ 753       $ 374   

Other comprehensive income, net of tax:

     

Unrealized gains and losses on securities available for sale:

     

Net unrealized gains arising during the period, net of tax of ($173) and ($45)

     334         86   

Reclassification adjustment for losses included in net income

     2         —     
  

 

 

    

 

 

 

Net change in unrealized gains

     336         86   
  

 

 

    

 

 

 

Total other comprehensive income, net of tax

     336         86   
  

 

 

    

 

 

 

Total comprehensive income

   $ 1,089       $ 460   
  

 

 

    

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended March 31, 2016 and 2015

(Unaudited)

 

(In thousands, except share data)    Common
Stock
     Surplus      Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance – January 1, 2015

   $ 22,077       $ 201       $ 15,795      $ 135      $ 38,208   

Net income

     —           —           374        —          374   

Other comprehensive income

     —           —           —          86        86   

Compensation cost of option grants

     —           8         —          —          8   

Cash dividends, $0.1375 per share

     —           —           (373     —          (373
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – March 31, 2015

   $ 22,077       $ 209       $ 15,796      $ 221      $ 38,303   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – January 1, 2016

   $ 22,077       $ 6,784       $ 13,550      ($ 108   $ 42,303   

Net income

     —           —           753        —          753   

Other comprehensive income

     —           —           —          336        336   

Compensation cost of option grants

     —           11         —          —          11   

Issuance of 1,383 shares of common stock to ESPP

     —           17         —          —          17   

Cash dividends, $0.1375 per share

     —           —           (442     —          (442
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance – March 31, 2016

   $ 22,077       $ 6,812       $ 13,861      $ 228      $ 42,978   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

     Three Months Ended March 31,  
(In thousands)    2016     2015  

Cash Flows from Operating Activities

    

Net income

   $ 753      $ 374   

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

    

Depreciation

     175        154   

Provision for loan losses

     99        —     

Granting of stock options

     11        8   

Net amortization of premiums on securities available for sale

     138        108   

Net (gain) loss from write-down or sale of foreclosed real estate and other assets

     (6     26   

Net loss on sale of securities – available for sale

     2        —     

Accretion of purchase adjustment on loans

     (115     (49

Amortization of intangible assets

     77        67   

Deferred income taxes

     186        (76

Proceeds from sale of mortgage loans

     4,769        3,993   

Net gain on sale of mortgage loans

     (78     (78

Mortgage loans originated for sale

     (4,191     (4,115

Earnings on cash value of life insurance, net

     (82     (51

Increase in accrued interest receivable and other assets

     (502     (179

Decrease in accrued interest payable and other liabilities

     (846     (499
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     390        (317
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Net maturities of interest bearing time deposits

     1        —     

Securities available for sale:

    

Purchases

     (1,038     —     

Proceeds from maturities, calls and principal repayments

     1,845        1,463   

Proceeds from sales

     2,095        —     

Proceeds from the sale of foreclosed real estate

     724        244   

Net (increase) decrease in restricted investments in bank stock

     719        (460

Net (increase) decrease in loans

     6,855        (7,203

Purchases of premises and equipment

     (151     (209
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Investing Activities

     11,050        (6,165
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net increase in deposits

     7,162        633   

Increase (decrease) in short-term borrowings

     (17,575     9,500   

Proceeds from long-term debt

     2,050        —     

Payment of capital lease

     —          (1,655

Proceeds from issuance of common stock

     17        —     

Dividends paid

     (442     (373
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (8,788     8,105   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     2,652        1,623   

Cash and Cash Equivalents - Beginning

     21,697        14,580   
  

 

 

   

 

 

 

Cash and Cash Equivalents - Ending

   $ 24,349      $ 16,203   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flows Information

    

Interest paid

   $ 534      $ 509   
  

 

 

   

 

 

 

Income taxes paid

   $ —        $ —     
  

 

 

   

 

 

 

Supplemental Schedule of Noncash Investing and Financing Activities

    

Other real estate acquired in settlement of loans

   $ 876      $ 369   
  

 

 

   

 

 

 

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

 

6


Table of Contents

RIVERVIEW FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Nature of Operations

Effective November 1, 2013, Riverview and Union Bancorp, Inc. (“Union”) consolidated to form a new Pennsylvania corporation under the name of Riverview Financial Corporation (the “Company”). Riverview Bank (the “Bank”) is the wholly-owned subsidiary of the Company. Effective December 31, 2015, The Citizens National Bank of Meyersdale (“Citizens”) merged with and into Riverview Bank, with Riverview Bank surviving. The balance sheet as of December 31, 2015, includes the former Citizens’ assets and liabilities.

The Company’s financial results reflect the consolidation of Riverview and Union with and into Riverview Bank and the merger of Citizens with and into Riverview Bank under the purchase method of accounting, with the Company treated as the acquirer from an accounting standpoint. In the case of the consolidation of Riverview and Union, 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 effective date of the consolidation.

The Bank is a Pennsylvania state chartered bank. The Company and the Bank are subject to regulation by certain state and federal agencies. These regulatory agencies periodically examine the Company and the Bank for adherence to laws and regulations.

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 more 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 subsidiary, the Bank and its operating divisions, Marysville Bank, Halifax Bank, Citizens Neighborhood Bank and Riverview Financial Wealth Management. 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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016 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, 2015, included in the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 30, 2016.

Use of Estimates

These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and predominant practices within the banking industry. 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

 

7


Table of Contents

Note 1 - Summary of Significant Accounting Policies (continued)

 

or in satisfaction of loans. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly affected by 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 of the value of 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 any such change 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, 2015. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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 May 13, 2016, the date this Form 10-Q was filed, and has not identified any events, that require recognition or disclosure in the consolidated financial statements.

Note 2 - 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 344,250 shares of Riverview common stock as of March 31, 2016 and 322,200 shares as of March 31, 2015.

The following table presents the computation of earnings per share for the three months ended March 31, 2016 and 2015.

 

     Income
Numerator
     Common Shares
Denominator
     EPS  
     (In thousands, except share data)  

2016:

        

Basic EPS

   $ 753         3,206,501       $ 0.23   

Dilutive effect of potential common stock options

        15,504      
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 753         3,222,005       $ 0.23   
  

 

 

    

 

 

    

 

 

 
     Income
Numerator
     Common Shares
Denominator
     EPS  

2015:

        

Basic EPS

   $ 374         2,708,840       $ 0.14   

Dilutive effect of potential common stock options

        50,632      
  

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 374         2,759,472       $ 0.14   
  

 

 

    

 

 

    

 

 

 

 

8


Table of Contents

Note 3 – 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.

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

 

     March 31, 2016  
(In thousands)    Unrealized
Gains and
Losses on
Available-for-
Sale
     Defined Benefit
Pension Items
     Total  

Beginning balance

   $ 461       ($ 569    ($ 108
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss) before reclassifications

     507         —           507   

Amounts reclassified from accumulated other comprehensive income(1)

     2         —           2   

Tax effect of current period changes(2)

     (173      —           (173
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     336         —           336   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 797       ($ 569    $ 228   
  

 

 

    

 

 

    

 

 

 

 

(1)  Included in (gain) loss on sale of available for sale securities on the Consolidated Statements of Income.
(2)  $1,000 included in tax expense on the Consolidated Statements of Income and the remainder is included in Accumulated Other Comprehensive Income.

 

     March 31, 2015  
     Unrealized
Gains and
Losses on
Available-for-
Sale
     Defined Benefit
Pension Items
     Total  

Beginning balance

   $ 477       ($ 342    $ 135   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss) before reclassifications

     131         —           131   

Amounts reclassified from accumulated other comprehensive loss(1)

     —           —           —     

Tax effect of current period changes(2)

     (45      —           (45
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     86         —           86   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 563       ($ 342    $ 221   
  

 

 

    

 

 

    

 

 

 

 

(1)  Included in gain on sale of available for sale securities on the Consolidated Statements of Income.
(2)  Included in Accumulated Other Comprehensive Income.

 

9


Table of Contents

Note 4 - Investment Securities Available-for-Sale

The following tables present the amortized cost and estimated fair values of investment securities at March 31, 2016 and December 31, 2015, all of which were available-for-sale:

 

     March 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)   

U.S. Government agency securities

   $ 3,895       $ 85       $ —         $ 3,980   

State and municipal

     33,530         724         17         34,237   

U.S. Government agencies and sponsored enterprises (GSEs) – residential:

           

Mortgage-backed securities

     24,565         252         1         24,816   

Collateralized mortgage obligations (CMOs)

     1,659         44         1         1,702   

Corporate debt obligations

     7,991         99         —           8,090   

Equity securities, financial services

     470         38         16         492   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 72,110       $ 1,242       $ 35       $ 73,317   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (In thousands)   

U.S. Treasuries

   $ 103       $ —         $ —         $ 103   

U.S. Government agency securities

     4,708         29         —           4,737   

State and municipal

     34,197         587         14         34,770   

U.S. Government agencies and sponsored enterprises (GSEs) – residential:

           

Mortgage-backed securities

     25,942         116         35         26,023   

Collateralized mortgage obligations (CMOs)

     1,741         35         3         1,773   

Corporate debt obligations

     7,989         17         62         7,945   

Equity securities, financial services

     471         31         2         499   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 75,151       $ 815       $ 116       $ 75,850   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of debt securities available-for-sale at March 31, 2016, 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

   $ 232       $ 235   

Due after one year through five years

     2,509         2,546   

Due after five years through ten years

     18,799         19,130   

Due after ten years

     23,876         24,396   
  

 

 

    

 

 

 
     45,416         46,307   
  

 

 

    

 

 

 

Mortgage-backed securities

     24,565         24,816   

CMOs

     1,659         1,702   

Equity securities

     470         492   
  

 

 

    

 

 

 
     26,694         27,010   
  

 

 

    

 

 

 
   $ 72,110       $ 73,317   
  

 

 

    

 

 

 

Securities with an amortized cost of $50,128,000 and a fair value of $51,127,000 were pledged at March 31, 2016 as collateral for public fund deposits and for other purposes as required or permitted by law. In comparison, at December 31, 2015, securities with an

 

10


Table of Contents

Note 4 - Investment Securities Available-for-Sale (continued)

 

amortized cost of $52,384,000 and a fair value of $53,039,000 were pledged for the same purposes. Information pertaining to securities with gross unrealized losses at March 31, 2016 and December 31, 2015 aggregated by investment category and length of time that individual securities have been in a continuous loss position were 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)   

March 31, 2016:

                 

Available-for-sale:

                 

State and municipal

   $ 1,030       $ 7       $ 654       $ 10       $ 1,684       $ 17   

Mortgage-backed securities

     2,432         1         —           —           2,432         1   

Collateralized mortgage obligations (CMOs)

     712         1         —           —           712         1   

Equity securities, financial services

     179         16         —           —           179         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,353       $ 25       $ 654       $ 10       $ 5,007       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less Than 12 Months      More Than 12 Months      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In thousands)   

December 31, 2015:

                 

Available-for-sale:

                 

State and municipal

   $ —         $ —         $ 652       $ 14       $ 652       $ 14   

Mortgage-backed securities

     9,513         35         —           —           9,513         35   

Collateralized mortgage obligations (CMOs)

     725         3         —           —           725         3   

Corporate debt obligations

     3,937         62         —           —           3,937         62   

Equity securities, financial services

     164         2         —           —           164         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,339       $ 102       $ 652       $ 14       $ 14,991       $ 116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2016, fourteen securities had unrealized losses as compared with a total of sixteen securities with unrealized losses at December 31, 2015. Management believes the unrealized losses relate to changes in interest rates since the time the individual securities were purchased as opposed to underlying credit issues. Because 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 were deemed to be other-than-temporary.

During the three months ended March 31, 2016, one U.S Treasury note, twelve mortgage-backed securities and eight municipal bonds were sold, with no gains or losses from the sale. However, a loss of $2,000 was recorded during the three months ended March 31, 2016 due to one municipal bond that was called. There were no securities sold during the three months ended March 31, 2015.

 

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Table of Contents

Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses

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

 

(Dollars in thousands)    March 31,
2016
     December 31,
2015
 

Commercial

   $ 45,420       $ 46,076   

Commercial real estate

     208,720         205,500   

Commercial land and land development

     9,527         18,599   

Residential real estate

     115,282         117,669   

Home equity lines of credit

     18,047         17,437   

Consumer installment

     4,486         4,564   
  

 

 

    

 

 

 

Total loans

   $ 401,482       $ 409,845   

Allowance for loan losses

     (3,717      (4,365
  

 

 

    

 

 

 

Total loans, net

   $ 397,765       $ 405,480   
  

 

 

    

 

 

 

The Bank takes a balanced approach to its lending activities, managing risk associated with its loan portfolio by maintaining diversification within the portfolio, consistently applying prudent underwriting standards, engaging in ongoing monitoring efforts with attention to portfolio dynamics and mix, and using 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, among other things, an evaluation of how the Bank’s established underwriting criteria is applied in originating credits. Separately, every loan booked and every loan application turned down undergoes an internal review for conformity with established policies and compliance with lending laws. The Bank has maintained its loan underwriting criteria, and management believes its standards are conservative. All of the Bank’s loans are to domestic borrowers.

The Bank’s management monitors the loan portfolio on a regular basis, performing a 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, purchased loan participations in 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. In addition, the Company separately evaluates the acquired Union Bank and Citizens portfolios.

Internal policy requires that the Chief Credit Officer make a quarterly report to the Board of Directors 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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Table of Contents

Note 5 - 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 March 31, 2016 and December 31, 2015, 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
 

March 31, 2016:

                    

Commercial

   $ 174       $ —         $ 293       $ 467       $ 44,953       $ 45,420       $ 34   

Commercial real estate:

                    

Non-owner occupied

     144         2,134         —           2,278         105,463         107,741         —     

Owner occupied

     276         102         282         660         74,974         75,634         —     

1-4 family investment

     130         —           318         448         24,897         25,345         —     

Commercial land and land development

     —           —           —           —           9,527         9,527         —     

Residential real estate

     3,221         215         396         3,832         111,450         115,282         165   

Home equity lines of credit

     419         —           36         455         17,592         18,047         —     

Consumer

     3         —           —           3         4,483         4,486         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,367       $ 2,451       $ 1,325       $ 8,143       $ 393,339       $ 401,482       $ 199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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, 2015

                    

Commercial

   $ 34       $ —        $ 1,007       $ 1,041       $ 45,035       $ 46,076       $ —    

Commercial real estate:

                    

Non-owner occupied

     —           —          24         24         110,431         110,455         —    

Owner occupied

     172         447         270         889         68,758         69,647         —    

1-4 family investment

     131         —          265         396         25,002         25,398         —    

Commercial land and land development

     —           250         —           250         18,349         18,599         —    

Residential real estate

     1,163         1,025         595         2,783         114,886         117,669         89   

Home equity lines of credit

     46         412         36         494         16,943         17,437         —    

Consumer

     10         —           1         11         4,553         4,564         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,556       $ 2,134       $ 2,198       $ 5,888       $ 403,957       $ 409,845       $ 89   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan balances presented above include net deferred loan fees of $821,000 and $764,000 at March 31, 2016 and December 31, 2015, respectively.

Included within the loan portfolio are loans for which the Bank discontinued the accrual of interest due to the deterioration in the financial condition of the borrower. Such loans approximated $1,949,000 and $3,182,000 at March 31, 2016 and December 31, 2015, respectively. If the nonaccrual loans had performed in accordance with their original terms, interest income would have increased by $47,000 and $43,000 for the three months ended March 31, 2016 and March 31, 2015, respectively.

 

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Note 5 - 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 March 31, 2016 and December 31, 2015:

 

(In thousands)    March 31,
2016
     December 31,
2015
 

Commercial

   $ 394       $ 1,143   

Commercial real estate:

     

Non-owner occupied

     —           24   

Owner occupied

     496         766   

1-4 family investment

     318         328   

Commercial land and land development

     —           —     

Residential real estate

     705         885   

Home equity lines of credit

     36         36   
  

 

 

    

 

 

 

Total

   $ 1,949       $ 3,182   
  

 

 

    

 

 

 

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 for 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 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

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

 

     March 31, 2016      March 31, 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

   $ 898       $ 2,021       $ —         $ 1,395       $ 7       $ 1,183       $ 7   

Commercial real estate:

                    

Non-owner occupied

     2,156         2,156         —           2,163         19         2,203         19   

Owner occupied

     975         975         —           978         19         914         15   

1-4 family investment

     866         873         —           875         7         819         5   

Commercial land and land development

     —           —           —           —           —           218         —     

Residential real estate

     2,383         2,520         —           2,574         31         2,343         19   

Home equity lines of credit

     398         398         —           441         3         416         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,676       $ 8,943       $ —         $ 8,426       $ 86       $ 8,096       $ 65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with an allowance recorded:

                    

Commercial

   $ 135       $ 135       $ 1       $ 136       $ —         $ —         $ —     

Commercial real estate:

                    

Owner occupied

     214         214         1         214         —           —           —     

1-4 family investment

     187         187         6         186         —           192         —     

Residential real estate

     120         120         33         121         1         124         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 656       $ 656       $ 41       $ 657       $ 1       $ 316       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Commercial

   $ 1,033       $ 2,156       $ 1       $ 1,531       $ 7       $ 1,183       $ 7   

Commercial real estate:

                    

Non-owner occupied

     2,156         2,156         —           2,163         19         2,203         19   

Owner occupied

     1,189         1,189         1         1,192         19         914         15   

1-4 family investment

     1,053         1,060         6         1,061         7         1,011         5   

Commercial land and land development

     —           —           —           —           —           218         —     

Residential real estate

     2,503         2,640         33         2,695         32         2,467         20   

Home equity lines of credit

     398         398         —           441         3         416         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,332       $ 9,599       $ 41       $ 9,083       $ 87       $ 8,412       $ 66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

 

(In thousands)    Recorded
Investment in

Impaired
Loans
     Unpaid
Principal
Balance of

Impaired Loans
     Related
Allowance
     Average
Recorded
Investment in

Impaired Loans
     Interest
Income
Recognized
 

December 31, 2015:

              

Loans with no related allowance recorded:

              

Commercial

   $ 994       $ 994       $ —         $ 1,018       $ 28   

Commercial real estate:

              

Non-owner occupied

     2,163         2,163         —           2,178         78   

Owner occupied

     1,462         1,462         —           999         100   

1-4 family investment

     879         879         —           892         29   

Residential real estate

     2,526         2,644         —           2,325         122   

Home equity lines of credit

     400         400         —           445         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     8,424         8,562         —           7,857         368   

Loans with an allowance recorded:

              

Commercial

     793         1,193         700         663         21   

Commercial real estate:

              

Non-owner occupied

     24         155         1         8         4   

1-4 family investment

     186         193         7         190         —     

Residential real estate

     121         121         7         123         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     1,124         1,662         715         984         30   

Total

              

Commercial

     1,787         2,187         700         1,681         49   

Commercial real estate:

              

Non-owner occupied

     2,187         2,318         1         2,186         82   

Owner occupied

     1,462         1,462         —           999         100   

1-4 family investment

     1,065         1,072         7         1,082         29   

Residential real estate

     2,647         2,785         7         2,448         127   

Home equity lines of credit

     400         400         —           445         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,548       $ 10,224       $ 715       $ 8,841       $ 398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in impaired loans decreased by $1,216,000 at March 31, 2016 as compared to December 31, 2015. This decrease resulted primarily from the charge-off of one large commercial loan in the amount of $722,000, and the transfer of one commercial real estate loan in the amount of $270,000 to other real estate owned, offset by payments and payoffs received on impaired loans.

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 March 31, 2016, there were thirty-two restructured loans, totaling $6,998,000, involving twenty-six separate and unrelated borrowers who were experiencing financial difficulty. The modifications to 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, 2015, there were thirty-two restructured loans, totaling $7,083,000, each involving separate and unrelated borrowers who were experiencing financial difficulty.

 

16


Table of Contents

Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The following table presents the number of loans and recorded investment in loans restructured and identified as TDRs for the three months ended March 31, 2015. There were no troubled debt restructurings at March 31, 2016 and none of the loans classified as TDRs at March 31, 2015 subsequently went into default. Defaulted loans are those for which payment is 30 days or more past due under the modified terms.

 

(In thousands, except contracts data)    Number of
Contracts
     Pre-Modification Outstanding
Recorded Investment
     Post-Modification
Outstanding Recorded
Investment
 

March 31, 2015:

        

Troubled Debt Restructurings:

        

Commercial real estate:

        

Owner occupied

     1       $ 149       $ 149   

Residential real estate

     3         473         473   

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, provisions for loan losses may be recorded and, as a result, 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 recognized 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 reasonably assured or not. 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. Loan participations purchased in 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. In addition, separate evaluations are made for the acquired Union Bank and Citizens loan portfolios.

The Bank measures estimated credit losses in each of these groups of loans based, in part, 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.

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, by themselves, 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;

 

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Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

    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.

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 the risks associated with the growing book of loans in the Berks, Schuylkill and Somerset County regions;

 

    other potential exposure in the acquired Union Bank and Citizens loan portfolios;

 

    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 the Bank’s 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; and

 

    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 that recovery is not likely, or the overdraft becomes 45 days old, whichever comes first.

All secured consumer loans, except those secured by a primary or secondary residence, are charged off when they become 120 days delinquent, or when it is determined that the debt is uncollectible.

Uncollateralized portions of 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.

 

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Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The allowance for loan losses is presented by loan portfolio segments with the outstanding balances of loans for the 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 as of March 31, 2016:

   

                   

Beginning balance

   $ 1,298      $ 1,372      $ 552      $ 303      $ 202      $ 520      $ 93       $ 25       $ —        $ 4,365   

Charge-offs

     723        24        —          —          —          —          —           11         —          758   

Recoveries

     9        —          —          —          —          1        —           1         —          11   

Provision

     (18     (28     69        (33     (109     129        11         15         63        99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 566      $ 1,320      $ 621      $ 270      $ 93      $ 650      $ 104       $ 30       $ 63      $ 3,717   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1      $ —        $ 1      $ 6      $ —        $ 33      $ —         $ —         $ —        $ 41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 565      $ 1,320      $ 620      $ 264      $ 93      $ 617      $ 104       $ 30       $ 63      $ 3,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Loans as of March 31, 2016:

  

                   

Ending balance

   $ 45,420      $ 107,741      $ 75,634      $ 25,345      $ 9,527      $ 115,282      $ 18,047       $ 4,486         $ 401,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,033      $ 2,156      $ 1,189      $ 1,053      $ —        $ 2,503      $ 398       $ —           $ 8,332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 44,387      $ 105,585      $ 74,445      $ 24,292      $ 9,527      $ 112,779      $ 17,649       $ 4,486         $ 393,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Allowance for Loan Losses

as of December 31, 2015:

                      

Beginning balance

   $ 330      $ 1,380      $ 713      $ 369      $ 115      $ 701      $ 104       $ 15       $ 65      $ 3,792   

Charge-offs

     650        130        39        18        —          26        34         35         —          932   

Recoveries

     8        —          19        —          —          —          —           6         —          33   

Provision

     1,610        122        (141     (48     87        (155     23         39         (65     1,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 1,298      $ 1,372      $ 552      $ 303      $ 202      $ 520      $ 93       $ 25       $ —        $ 4,365   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 700      $ 1      $ —        $ 7      $ —        $ 7      $ —         $ —           $ 715   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 598      $ 1,371      $ 552      $ 296      $ 202      $ 513      $ 93       $ 25         $ 3,650   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Loans as of December 31, 2015:

                      

Ending balance

   $ 46,076      $ 110,455      $ 69,647      $ 25,398      $ 18,599      $ 117,669      $ 17,437       $ 4,564         $ 409,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,787      $ 2,187      $ 1,462      $ 1,065      $ —        $ 2,647      $ 400       $ —           $ 9,548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Ending balance: collectively evaluated for impairment

   $ 44,289      $ 108,268      $ 68,185      $ 24,333      $ 18,599      $ 115,022      $ 17,037       $ 4,564         $ 400,297   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

      

 

 

 

Allowance for Loan Losses as of March 31, 2015:

                      

Beginning balance

   $ 330      $ 1,380      $ 713      $ 369      $ 115      $ 701      $ 104       $ 15       $ 65      $ 3,792   

Charge-offs

     —          —          39        —          —          15        —           6         —          60   

Recoveries

     —          —          —          —          —          0        —           3         —          3   

Provision

     33        (83     57        26        (2     (14     3         7         (27     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 363      $ 1,297      $ 731      $ 395      $ 113      $ 672      $ 107       $ 19       $ 38      $ 3,735   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

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, and risk ratings are 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.

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 fully 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 includes 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, are included in this category. Loans for start-up businesses or loans to firms exhibiting high leverage may receive this rating. Loans in this category also include borrowers whose underlying financial strength may be relatively weak. However, risk of loss of loans in this category is considered minimal due to adequate, well-margined and controlled collateral.

 

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Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

4 - Watch

Loans in this category typically are experiencing some negative trends due to financial, operational, economic, or regulatory reasons. A deteriorating collateral position or guarantor, in isolation, may 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 to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans rated below this category are placed on nonaccrual status.

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 are placed 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 March 31, 2016 and December 31, 2015:

 

            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  

March 31, 2016

                          

1 – Excellent

   $ 245       $ —         $ —         $ —         $ —         $ —         $ —         $ 106       $ 351   

2 – Good

     2,663         88         1,144         30         163         —           —           —           4,088   

3 – Satisfactory

     39,485         96,542         68,542         17,749         8,905         111,570         17,285         4,380         364,458   

4 – Watch

     1,120         5,449         2,909         5,450         209         401         336         —           15,874   

5 – Special Mention

     434         2,260         1,498         1,261         —           165         28         —           5,646   

6 – Substandard

     1,473         3,402         1,541         855         250         3,146         398         —           11,065   

7 – Doubtful

     —           —           —           —           —           —           —           —           —     

8 – Loss

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,420       $ 107,741       $ 75,634       $ 25,345       $ 9,527       $ 115,282       $ 18,047       $ 4,486       $ 401,482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 5 - 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      Total  

December 31, 2015:

                          

1 – Excellent

   $ 249       $ —        $ —         $ —         $ —         $ —         $ —         $ 114       $ 363   

2 – Good

     2,729         111         1,190         35         168         —           —           —           4,233   

3 – Satisfactory

     39,193         99,010         60,806         17,990         18,070         113,681         16,671         4,450         369,871   

4 – Watch

     1,206         5,730         4,290         5,238         111         403         338         —           17,316   

5 – Special Mention

     443         2,270         1,530         1,269         —           164         28         —           5,704   

6 – Substandard

     2,256         3,334         1,831         866         250         3,421         400         —           12,358   

7 – Doubtful

     —           —           —           —           —           —           —           —           —     

8 – Loss

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,076       $ 110,455       $ 69,647       $ 25,398       $ 18,599       $ 117,669       $ 17,437       $ 4,564       $ 409,845   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The adequacy of the allowance is analyzed quarterly, and adjusted to the level deemed appropriate by 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 March 31, 2016, 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 reviews the acquired institution’s loan grading system and the associated risk rating for loans. In performing this review, the Bank considers cash flows, debt service coverage, delinquency status, accrual status, and collateral for the loan. This process allows the Bank to clearly identify the population of acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Bank would be unable to collect all contractually required payments. All such loans identified by the Bank are considered to be within the scope of ASC 310-30, Loan and Debt Securities Acquired with Deteriorated Credit Quality and are identified as “Purchased Credit Impaired Loans”.

As a result of the merger with Citizens, effective December 31, 2015, the Bank identified ten purchased credit impaired (“PCI”) loans. As part of the consolidation with Union, effective November 1, 2013, the Bank identified fourteen 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 into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as 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 into interest income over the remaining life of the loan. The Bank’s evaluation of the amount of future cash flows that it expects to collect is based on a cash flow methodology that involves assumptions and judgments as to credit risk, collateral values, discount rates, payment speeds, and prepayment risk. Charge-offs of the principal amount on purchased impaired loans are first applied to 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.

 

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Table of Contents

Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

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

 

     Purchased
Credit
Impaired
Loans
     Purchased
Non-
Impaired
Loans
     Total
Purchased
Loans
 
     (In thousands)  

Union

  

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   
  

 

 

    

 

 

    

 

 

 

The unpaid principal balances and the related carrying amount of Union acquired loans as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 
     (In thousands)  

Credit impaired purchased loans evaluated individually for incurred credit losses

     

Outstanding balance

   $ 1,319       $ 1,478   

Carrying Amount

     588         668   

Other purchased loans evaluated collectively for incurred credit losses

     

Outstanding balance

     46,516         49,762   

Carrying Amount

     44,378         47,723   

Total Purchased Loans

     

Outstanding balance

     47,835         51,240   

Carrying Amount

     44,966         48,391   

The changes in the accretable discount related to the Union purchased credit impaired loans were as follows:

 

     March 31,
2016
     December 31,
2015
 
     (In thousands)  

Balance – beginning of period

   $ 307       $ 310   

Accretion recognized during the period

     (94      (134

Net reclassification from non-accretable to accretable

     46         131   
  

 

 

    

 

 

 

Balance – end of period

   $ 259       $ 307   
  

 

 

    

 

 

 

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

 

     Purchased
Credit
Impaired
Loans
     Purchased
Non-
Impaired
Loans
     Total
Purchased
Loans
 
     (In thousands)  

Citizens

        

Contractually required principal and interest at acquisition

   $ 894       $ 81,780       $ 82,674   

Contractual cash flows not expected to be collected

     (237      (13,517      (13,754
  

 

 

    

 

 

    

 

 

 

Expected cash flows at acquisition

     657         68,263         68,920   

Interest component of expected cash flows

     (217      (10,841      (11,058
  

 

 

    

 

 

    

 

 

 

Basis in acquired loans at acquisition – estimated fair value

   $ 440       $ 57,422       $ 57,862   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 5 - Loans Receivable, Credit Quality for Loans and the Allowance for Loan Losses (continued)

 

The unpaid principal balances and the related carrying amount of Citizens acquired loans as of March 31, 2016 and December 31, 2015 were as follows:

 

     March 31,
2016
     December 31,
2015
 
     (In thousands)  

Credit impaired purchased loans evaluated individually for incurred credit losses

     

Outstanding balance

   $ 620       $ 608   

Carrying Amount

     437         440   

Other purchased loans evaluated collectively for incurred credit losses

     

Outstanding balance

     56,603         57,581   

Carrying Amount

     56,209         57,422   

Total Purchased Loans

     

Outstanding balance

     57,223         58,189   

Carrying Amount

     56,646         57,862   

The changes in the accretable discount related to the Citizens purchased credit impaired loans were as follows:

 

     March 31,
2016
 
     (In thousands)  

Balance – beginning of period

   $ 217   

Accretion recognized during the period

     (6

Net reclassification from non-accretable to accretable

     2   
  

 

 

 

Balance – end of period

   $ 213   
  

 

 

 

Note 6 - Stock Option Plan

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

The vesting schedule for all option grants 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 of all options 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 shall become fully vested and remain exercisable for the option grant’s remaining term. As of March 31, 2016, there were 171,000 option grants fully vested and exercisable. This vesting status was the result of the Board of Director’s approval as of December 31, 2013 to accelerate the vesting period for these options. There was no acceleration of vesting during 2016 or 2015.

Information pertaining to options outstanding at March 31, 2016 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 - $13.05

     344,250       6 years    $ 10.48         171,000       $ 9.83       2.2 years

 

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Note 6 - Stock Option Plan (continued)

 

There was intrinsic value associated with 318,950 stock options out of 344,250 outstanding stock options at March 31, 2016 considering that the market value of the stock as of the close of business at year end was $11.10 per share as compared with the option exercise price of $10.00 for 107,200 options, $9.75 for 40,750 options, $10.35 for 9,250 options, and $10.60 for 161,750 options.

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. Riverview amortizes compensation expense over the vesting period (seven years). Total compensation expense relating to the options that have been recognized is $339,000, of which $11,000 was recorded for the three months ended March 31, 2016. The remaining unrecognized compensation expense as of March 31, 2016 was $222,000. In comparison with 2015, $8,000 in option compensation expense was recorded for the three months ended March 31, 2015. The increase in option compensation expense in 2016 was due to the granting of 25,300 options during the fourth quarter of 2015.

During the three months ended March 31, 2016 and 2015, no options were granted or exercised.

Note 7 - Financial Instruments with Off Balance Sheet Risk

The Bank 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 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  
     March 31,
2016
     December 31,
2015
 
     (In thousands)  

Commitments to grant loans

   $ 18,974       $ 19,602   

Unfunded commitments of existing loans

     28,584         26,479   

Standby and performance letters of credit

     3,330         3,316   
  

 

 

    

 

 

 
   $ 50,888       $ 49,397   
  

 

 

    

 

 

 

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 8 - 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 March 31, 2016, $812,000 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 adverse effect on the Company and the consolidated financial statements. Under the 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 8 - 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 March 31, 2016, the Bank met all applicable capital adequacy requirements.

As of March 31, 2016, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. 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 quarter-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. In 2015, the Federal Reserve increased the asset limit to qualify as a small bank holding company from $500 million to $1 billion. Currently, the Company meets the eligibility criteria of a small BHC and is exempt from risk-based capital and leverage rules (including Basel III). However, the Bank is not exempt from those requirements.

The Bank’s actual capital ratios, which include the impact of the merger of Citizens at March 31, 2016 and December 31, 2015, and the minimum ratios required for capital adequacy purposes to be considered well capitalized under the prompt corrective action provisions, are summarized below for the periods presented:

 

     Actual     Minimum Regulatory
Capital Ratios under
Basel III (with 2016
0.625% capital
conservation buffer
phase-in*)
    Well Capitalized under
Basel III
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

As of March 31, 2016:

               

Total risk-based capital (to risk-weighted assets)*

   $ 43,517         11.1   $ 33,668       ³ 8.625 %    $ 39,035       ³ 10.0 % 

Tier 1 capital (to risk-weighted assets)*

     39,745         10.2     25,861       ³ 6.625     31,228       ³ 8.0

Tier 1 capital (to average total assets)

     39,745         7.4     21,420       ³ 4.0     26,775       ³ 5.0

Common equity tier 1 risk-based capital (to risk-weighted assets)*

     39,745         10.2     20,005       ³ 5.125 %      25,373       ³ 6.5
     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  

As of December 31, 2015:

               

Total risk-based capital (to risk-weighted assets)

   $ 43,128         10.7   $ 32,296       ³ 8.0   $ 40,370       ³ 10.0

Tier 1 capital (to risk-weighted assets)

     38,710         9.6     24,222       ³ 6.0     32,296       ³ 8.0

Tier 1 capital (to average total assets)

     38,710         7.2     21,611       ³ 4.0     27,014       ³ 5.0

Common equity tier 1 risk-based capital (to risk-weighted assets)

     38,710         9.6     18,167       ³ 4.5     26,241       ³ 6.5

 

* 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. Since the buffer phase-in of the capital rules was effective in January 2016, the presentation for March 31, 2016 takes into account the transitional capital conservation buffer phase-in, which added 0.625% to the minimum regulatory capital ratios, whereas the December 31, 2015 presentation does not reflect the buffer phase-in.

Note 9 – 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

 

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Note 9 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

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 period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-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:

 

  

Level 1:

   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
  

Level 2:

   Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
  

Level 3:

   Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

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 March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015 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)  

March 31, 2016:

        

U.S. Government agency securities

   $ 3,980       $ —         $ 3,980       $ —     

State and municipal

     34,237       $ —           34,237         —     

U.S. Government agencies and sponsored enterprises (GSEs) – residential:

        

Mortgage-backed securities

     24,816         —           24,816         —     

Collateralized mortgage obligations (CMOs)

     1,702         —           1,702         —     

Corporate debt obligations

     8,090         —           8,090         —     

Equity securities, financial services

     492         492         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available-for- sale

   $ 73,317       $ 492       $ 72,825       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015:

        

U.S. Treasuries

   $ 103       $ —         $ 103       $ —     

U.S. Government agency securities

     4,737       $ —           4,737         —     

State and municipal

     34,770         —           34,770         —     

U.S. Government agencies and sponsored enterprises (GSEs) – residential:

        

Mortgage-backed securities

     26,023         —           26,023         —     

Collateralized mortgage obligations (CMOs)

     1,773         —           1,773         —     

Corporate debt obligations

     7,945         —           7,945         —     

Equity securities, financial services

     499         499         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available-for- sale

   $ 75,850       $ 499       $ 75,351       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

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Table of Contents

Note 9 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

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 $8,332,000 at March 31, 2016, of which $656,000 required a valuation allowance of $41,000. This level compares with impaired loans of $9,548,000 at December 31, 2015, of which $1,124,000 required a valuation allowance of $715,000.

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 months ended March 31, 2016 or 2015.

 

28


Table of Contents

Note 9 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

A summary of assets at March 31, 2016 and December 31, 2015, measured at estimated fair value on a nonrecurring basis follows:

 

     Level 1      Level 2      Level 3      Total      Total
Gains/(Losses)
 
     (In thousands)  

March 31, 2016:

              

Loans held for sale

   $ —         $ 594      $ —         $ 594      $ —     

Other real estate owned

     —           1,043         —           1,043         —     

Impaired loans, net of related allowance

     —           615         —           615         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 2,252       $ —         $ 2,252       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Level 1      Level 2      Level 3      Total      Total
Gains/(Losses)
 
     (In thousands)  

December 31, 2015:

              

Loans held for sale

   $ —         $ 1,094       $ —         $ 1,094       $ —     

Other real estate owned

     —           885         —           885         (220

Impaired loans, net of related allowance

     —           316         93        409         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 2,295       $ 93      $ 2,388       ($ 220
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents additional quantitative information about assets measures at fair value on a nonrecurring basis and for which Level 3 inputs have been used to determine fair value (in thousands):

There were no Level 3 inputs at March 31, 2016.

 

December 31,

2015

   Fair Value
Estimate
    

Valuation Technique

  

Unobservable Input

  

Range

 

Inventory

     $93       Estimated salvage (1)    Salvage valuation and liquidation adjustments(2)      88% - 90%   

 

(1) Fair value is generally determined through estimated values of the underlying collateral.
(2) Values may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and adjustments are presented as a percent of the original inventory value.

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 March 31, 2016 and December 31, 2015.

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

 

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Table of Contents

Note 9 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

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.

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.

Restricted investment in Bank stocks (carried at cost):

The carrying amount of restricted investment in Bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued interest receivable and payable (carried at cost):

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Deposit liabilities (carried at cost):

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings (carried at cost):

The carrying amounts of short-term borrowings approximate their fair values.

Long-term borrowings (carried at cost):

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The prices were obtained from an active market and represent a fair value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-balance sheet financial instruments (disclosed at cost):

Fair values for 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 9 – Fair Value Measurements and Fair Values of Financial Instruments (continued)

 

The estimated fair values of the Company’s financial instruments at March 31, 2016 and December 31, 2015 are presented as follows:

 

            Fair Value Measurements at March 31, 2016 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

   $ 24,349       $ 24,349       $ 24,349       $ —         $ —     

Interest-bearing time deposits

     990         990         990         —           —     

Investment securities

     73,317         73,317         492         72,825         —     

Mortgage loans held for sale

     594         594         —           594         —     

Loans, net

     397,765         398,630         —           398,630         —     

Accrued interest receivable

     1,610         1,610         1,610         —           —     

Restricted investments in bank stocks

     1,596         1,596         —           —           1,596   

Financial liabilities:

              

Deposits

     455,504         457,791         —           457,791         —     

Short-term borrowings

     25,000         25,000         —           25,000         —     

Long-term borrowings

     11,400         11,412         —           11,412         —     

Accrued interest payable

     267         267         267         —           —     

Off balance sheet financial instruments

     —           —           —           —           —     
            Fair Value Measurements at December 31, 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

   $ 21,697       $ 21,697       $ 21,697       $ —         $ —     

Interest-bearing time deposits

     991         991         991         —           —     

Investment securities

     75,850         75,850         499         75,351         —     

Mortgage loans held for sale

     1,094         1,094         —           1,094         —     

Loans, net

     405,480         411,521         —           411,428         93   

Accrued interest receivable

     1,594         1,594         1,594         —           —     

Restricted investments in bank stocks

     2,315         2,315         —           —           2,315   

Financial liabilities:

              

Deposits

     448,342         441,413         —           441,413         —     

Short-term borrowings

     42,275         42,275         —           42,275         —     

Long-term borrowings

     9,350         9,343         —           9,343         —     

Accrued interest payable

     236         236         236         —           —     

Off balance sheet financial instruments

     —           —           —           —           —     

Note 10 – Recent Accounting Pronouncements

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company is currently assessing the impact that ASU 2015-14 (or ASU 2014-19) will have on its consolidated financial statements.

 

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Note 10 – Recent Accounting Pronouncements (continued)

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: (1) Requires equity investments (expect those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (3) Requires separate presentation of financial assets and liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and (4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

 

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ITEM 2. MANAGEMENTS 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 months ended March 31, 2016 and March 31, 2015 and its financial condition as of March 31, 2016. 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, 2015 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:

 

    restructuring initiatives and anticipated cost savings may not have the anticipated impact on future profitability;

 

    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 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 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 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 effects of competition from other traditional and non-traditional financial institutions operating in the Company’s market area, including local, regional, national and international based institution;

 

    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.

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.

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.

 

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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 Consolidated Financial Statements for the period ended March 31, 2016 contained in Part I, Item 1, “Notes to Consolidated 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

On November 1, 2013, Riverview Financial Corporation (the “Company”) and Union Bancorp, Inc. (“Union”) consolidated to form a new Pennsylvania corporation under the name of Riverview Financial Corporation (the “Company”). Riverview Bank (the “Bank”) is the wholly-owned subsidiary of the Company.

On December 31, 2015, The Citizens National Bank of Meyersdale (“Citizens”) merged with and into Riverview Bank, with Riverview Bank surviving.

The Company’s financial results reflect the consolidation of Union and the merger of Citizens under the purchase method of accounting with the Company treated as the acquirer from an accounting standpoint. The balance sheet as of December 31, 2015, includes the former Citizens’ assets and liabilities.

Consolidated total assets were $540,915,000 at March 31, 2016, a decrease of $8,534,000, or 1.5%, from $549,449,000 at December 31, 2015, which was attributable to a decrease in loans of $7,715,000 to $397,765,000, which were not yet reinvested in new loans due to loan payoffs. The Company’s deposits increased $7,162,000, or 1.6%, to $455,504,000.

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, which totaled $4,530,000 at March 31, 2016 as compared with $3,713,000 at March 31, 2015. For the three months ended March 31, 2016, the Company recorded net income of $753,000 as compared with net income of $374,000 for the three months ended March 31, 2015. The increase in 2016 earnings was attributable to the added volume of interest earning assets and interest bearing liabilities from the Citizens merger, which resulted in increased net interest income. Operating results were further enhanced by the effects of strategic efficiency initiatives completed during 2015. Partially offsetting the increase in net interest income, the provision for loan losses in the first quarter of 2016 was $99,000 compared with no provision in the first quarter of 2015, driven primarily by an increase in the historical loss factor due to the charge-off of one large commercial loan and an increase in the unallocated portion of the allowance. Basic and diluted earnings per share of $0.23 per share for the three months ended March 31, 2016 increased from basic and diluted earnings per share of $0.14 for the three months ended March 31, 2015. The increase in earnings per share was attributable to the increase in net income period over period, which also positively impacted the return on average assets, which was 0.56% for the three months ended March 31, 2016, an increase from 0.34% for the three months ended March 31, 2015, and the return on average equity, which was 7.13% for the period ended March 31, 2016 as compared to 3.97% for the period ended March 31, 2015.

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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Table of Contents

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 March 31, 2016 and 2015.

 

Average Balances and Average Interest Rates

(Dollars in thousands)

            
     For the Three Months Ended
March 31,
 
     2016     2015  
     Average
Balance
     Interest     Average
Rate
    Average
Balance
     Interest     Average
Rate
 

Assets

              

Interest earning assets:

              

Securities:

              

Taxable

   $ 53,276       $ 401        3.03   $ 33,538       $ 243        2.94

Tax-exempt

     19,244         206        4.31     13,419         142        4.29
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total securities

     72,520         607        3.37     46,957         385        3.33
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

              

Consumer

     3,807         83        8.77     2,068         31        6.08

Commercial

     46,273         457        3.97     38,888         403        4.20

Real estate

     356,412         4,018        4.53     305,708         3,431        4.55
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     406,492         4,558        4.51     346,664         3,865        4.52
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other interest earning assets

     12,076         45        1.50     10,738         52        1.96
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total earning assets

     491,088       $ 5,210        4.27     404,359       $ 4,302        4.32
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Non-interest earning assets

     53,986             36,632        
  

 

 

        

 

 

      

Total assets

   $ 545,074           $ 440,991        
  

 

 

        

 

 

      

Liabilities and shareholders’ equity

              

Interest-bearing liabilities:

              

Deposit accounts:

              

Interest-bearing demand

   $ 139,933       $ 113        0.32   $ 132,815       $ 116        0.35

Savings

     112,473         74        0.26     84,291         48        0.23

Time deposits

     135,911         279        0.83     100,818         275        1.11
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     388,317         466        0.48     317,924         439        0.56
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Borrowings:

              

Short-term borrowings

     29,593         43        0.58     19,524         15        0.31

Long-term borrowings

     9,440         56        2.39     7000         55        3.19
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total borrowings

     39,033         99        1.02     26,524         70        1.07
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     427,350       $ 565        0.53     344,448       $ 509        0.60
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Demand deposits

     68,274             53,782        

Other liabilities

     6,613             4,522        

Shareholders’ equity

     42,837             38,239        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 545,074           $ 440,991        
  

 

 

        

 

 

      

Net interest income (non-GAAP)

      $ 4,645           $ 3,793     

Tax benefit on tax-exempt securities

        (70          (48  

Tax benefit on tax-exempt loans

        (45          (32  
     

 

 

        

 

 

   

Total tax-equivalent adjustment

        (115          (80  
     

 

 

        

 

 

   

Net interest income (GAAP)

      $ 4,530           $ 3,713     
     

 

 

        

 

 

   

Net interest spread

          3.74          3.72
       

 

 

        

 

 

 

Net interest margin

          3.80          3.80
       

 

 

        

 

 

 

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 March 31, 2016, total interest income increased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $908,000, to $5,210,000 from $4,302,000, for the three months ended March 31, 2015. The increase was attributable to higher total interest-earning assets, which increased $86,729,000, or 21.4%, due to the Citizens merger. The yield on interest earning assets decreased to 4.27% for the three months ended March 31, 2016 from 4.32% for the three months ended March 31, 2015.

Total interest expense increased $56,000, or 11%, to $565,000 for the three months ended March 31, 2016 from $509,000 for the three months ended March 31, 2015. This increase was attributable to higher total interest-bearing liabilities, which increased $82,902,000, or 24.1%, due to the Citizens’ merger. The cost of funds declined to 0.53% for the three months ended March 31, 2016 from 0.60% for the three months ended March 31, 2015. The decrease was due to a decline in interest rates paid on deposits and borrowings in comparing the first quarter of 2016 with the first quarter of 2015.

Net interest income calculated on a fully tax equivalent basis increased to $4,645,000 for the three months ended March 31, 2016 from $3,793,000 for the three months ended March 31, 2015. Riverview’s net interest spread increased to 3.74% for the three months ended March 31, 2016 from 3.72% for the three months ended March 31, 2015, while its net interest margin remained at 3.80% for the three months ended March 31, 2016 as compared with the three months ended March 31, 2015.

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, a provision of $99,000 was recorded for the three months ended March 31, 2016 as compared with no provision recorded for the three months ended March 31, 2015. The higher provision recorded during the first quarter of 2016 as compared with the same period in 2015 was driven primarily by an increase in the historical loss factor due to the charge-off of one large commercial loan and an increase in the unallocated portion of the allowance. The allowance for loan losses was $3,717,000, or 0.93% of total loans outstanding, at March 31, 2016, as compared with $4,365,000, or 1.07% of total loans, at December 31, 2015, and $3,735,000, or 1.07% of total loans, at March 31, 2015.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses, if necessary, in order to maintain the adequacy of the allowance. Management believes the allowance for loan losses at March 31, 2016 was adequate to absorb probable and potential losses inherent in the loan portfolio. Notwithstanding this belief, management continues to allocate dedicated resources to continue to manage at-risk credits.

Non-Interest Income

The following table sets forth changes in non-interest income for the three months ended March 31, 2016 and 2015.

 

Non-Interest Income                           
     Three Months Ended March 31,  
            Increase/(Decrease)        

(Dollars in thousands)

   2016      Amount      %     2015  

Service charges on deposit accounts

   $ 111       $ 13         13.3   $ 98   

Other service charges and fees

     165         28         20.4     137   

Earnings on cash value of life insurance

     82         31         60.8     51   

Fees and commissions from securities brokerage

     177         (32      (15.3 %)      209   

Gain (loss) on sale of available for sale securities

     (2      (2      (100.0 %)      —     

Gain (loss) on sale and valuation of other real estate owned

     6         32         123.1     (26

Gain on sale of mortgage loans

     78         —           —          78   
  

 

 

    

 

 

      

 

 

 
   $ 617       $ 70         12.8   $ 547   
  

 

 

    

 

 

      

 

 

 

 

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Non-interest income continues to be an important source of income for the Company, representing 12% of total revenues (comprised of net interest income and non-interest income) for the first quarter of 2016 as compared with 12.8% for the first quarter of 2015. Non-interest income increased 12.8% in comparing the financial results for the first quarter of 2016 with the results for the same period in 2015. A substantial portion of the increase in non-interest income was attributable to additional earnings from life insurance as well as service charges and fee income associated with the deposit accounts acquired as part of the Citizens’ merger.

Non-Interest Expense

The following table presents the components of non-interest expense for the three months ended March 31, 2016 and 2015.

 

Non-Interest Expense                           
     Three Months Ended March 31,  
(Dollars in thousands)           Increase/(Decrease)        
     2016      Amount      %     2015  

Salaries and employee benefits

   $ 2,151       $ 73         3.5   $ 2,078   

Occupancy expense

     381         (55      (12.6 %)      436   

Equipment expense

     172         11         6.8     161   

Telecommunications and processing charges

     347         54         18.4     293   

Postage and office supplies

     102         14         15.9     88   

FDIC premium

     120         52         76.5     68   

Bank shares tax expense

     105         20         23.5     85   

Directors’ compensation

     90         4         4.7     86   

Professional services

     93         (75      (44.6 %)      168   

Amortization of intangibles

     77         10         14.9     67   

Other expenses

     483         155         47.3     328   
  

 

 

    

 

 

      

 

 

 
   $ 4,121       $ 263         6.8   $ 3,858   
  

 

 

    

 

 

      

 

 

 

Non-interest expenses increased 6.8% in the first quarter of 2016 in comparison to the same period in 2015. The increase quarter over quarter was mostly attributable to the inclusion of three months of Citizens’ expenses following completion of the merger in 2015, particularly higher salaries and benefits, equipment, telecommunications, FDIC premium, bank shares tax and other general types of expenses. The increased expenses of 2016 were tempered by the strategic cost-savings initiatives completed during 2015. Occupancy expenses decreased 12.6% as of March 31, 2016 as compared with March 31, 2015 due to the closure of one Bank branch and two offices during 2015. In addition, expenses associated with professional services, which include accounting and legal fees, were 44.6% lower at March 31, 2016 as compared with March 31, 2015 because of the Citizens merger related expenses incurred and recorded during 2015.

Provision for Federal Income Taxes

Income tax expense was $174,000 for the first quarter of 2016, as compared with income tax expense of $28,000 for the first quarter of 2015. The increase in the first quarter tax provision was attributable to higher net income before tax expense for the first quarter of 2016 as compared with the first quarter of 2015.

Financial Condition as of March 31, 2016 and December 31, 2015

Securities

The following table sets forth the composition of the investment securities portfolio as of March 31, 2016 and December 31, 2015:

 

     Amortized Cost as of  
     March 31,
2016
     December 31,
2015
 

Available-for-sale securities:

     

U.S. Treasuries

   $ —         $ 103   

U.S. Government agencies securities

     3,895         4,708   

State and municipal

     33,530         34,197   

 

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     Amortized Cost as of  
     March 31,
2016
     December 31,
2015
 

U.S. Government agencies and sponsored enterprises (GSEs) - residential:

     

Mortgage-backed securities

     24,565         25,942   

Collateralized mortgage obligations (CMOs)

     1,659         1,741   

Corporate debt obligations

     7,991         7,989   

Equity securities, financial services

     470         471   
  

 

 

    

 

 

 
   $ 72,110       $ 75,151   
  

 

 

    

 

 

 

Since year-end 2015, total investment securities decreased as a result of security sales, calls, 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 March 31, 2016 or December 31, 2015.

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 March 31, 2016 and December 31, 2015:

 

     March 31, 2016     December 31, 2015  
(Dollars in thousands)    Balance      % of Total     Balance      % of Total  

Commercial

   $ 45,420         11.31   $ 46,076         11.24

Commercial real estate

     208,720         51.99     205,500         50.14

Commercial land and land development

     9,527         2.37     18,599         4.54

Residential real estate

     115,282         28.71     117,669         28.71

Home equity lines of credit

     18,047         4.50     17,437         4.26

Consumer installment

     4,486         1.12     4,564         1.11
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     401,482         100.00     409,845         100.00

Allowance for loan losses

     (3,717        (4,365   
  

 

 

      

 

 

    

Total loans, net

   $ 397,765         $ 405,480      
  

 

 

      

 

 

    

At March 31, 2016, total loans receivable (net of the allowance for loan losses, unearned fees and origination costs) were $397,765,000, a decrease of $7,715,000, or 1.9%, as compared with $405,480,000 as of December 31, 2015. The decrease in total loans was attributable primarily to an increase in participations sold in the commercial real estate portfolio and the payoff of a large commercial construction loan.

Partially offsetting new loans recorded during the first three months of 2016 were scheduled loan payments and increased prepayments and payoffs that 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.

 

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Loans receivable, net of the allowance for loan losses, represented 73.5% of total assets and 87.3% of total deposits as of March 31, 2016, as compared to 73.8% and 90.4%, respectively, at December 31, 2015. 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 relatively 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, Chief Lending 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, Chief Lending 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 March 31, 2016, the Bank’s legal lending limit for loans to one borrower was $5,715,000. 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 promptly identify past due loans and attempt to address potential problem loans early.

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.

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 focus 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.

 

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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 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 43%, 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.

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 43%, 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

 

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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, among other things, an evaluation of how the established underwriting criteria in applied in originating credits. Separately, every loan booked and every loan application turned down undergoes a review for conformity with established policies and compliance with lending laws. The Bank has not maintained its loan underwriting criteria across its portfolio, and management believes its underwriting standards are conservative.

Credit Risk and Loan Quality

The following table presents non-performing loans and assets as of March 31, 2016 and December 31, 2015:

 

Non-Performing Assets

(Dollars in thousands)

            
     March 31,
2016
    December 31,
2015
 

Accruing loans past due 90 days

   $ 199      $ 89   

Non-accrual loans

     1,949        3,182   
  

 

 

   

 

 

 

Total non-performing loans

     2,148        3,271   

Foreclosed real estate

     1,043        885   
  

 

 

   

 

 

 

Total non-performing assets

   $ 3,191      $ 4,156   
  

 

 

   

 

 

 

Non-performing loans to total loans

     0.54     0.80

Non-performing assets to total assets

     0.59     0.76

Allowance to non-performing loans

     173.04     133.45

The non-performing asset ratios presented in the table above reflect improvement in the credit quality of the loan portfolio since December 31, 2015. During the first three months of 2016, the Bank experienced a decrease of $1,123,000 in total non-performing loans attributable to a decrease in non-accrual loans of $1,233,000, partially offset by an increase in accruing loans past due 90 days of $110,000. The decrease in non-accrual loans was primarily the result of the charge-off of one large commercial loan, and the transfer to foreclosed real estate of one commercial real estate loan. The $965,000 decrease in total non-performing assets as of March 31, 2016 as compared with December 31, 2015 was attributable to a $1,123,000 decrease in non-performing loans partially offset by a $158,000 increase 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 $1,043,000 in real estate acquired through foreclosure as of March 31, 2016, as compared with $885,000 as of December 31, 2015. The foreclosed real estate as of March 31, 2016 consisted of three mixed use properties totaling $271,000, three commercial properties totaling $403,000, three single family residential properties totaling $105,000 and three parcels of vacant land totaling $264,000. The increase in foreclosed real estate at March 31, 2016 from December 31, 2015 was due to the addition of two commercial properties totaling $197,000, and one residential single family property totaling $71,000, offset by the sale of one single family residential property totaling $95,000, and the write down of two single family residential properties, totaling $15,000. 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 with similar economic characteristics, exceeds 10% of loans outstanding.

The following table presents loan concentrations as of March 31, 2016 and December 31, 2015.

 

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(Dollars in thousands)    March 31,
2016
     December 31,
2015
 

Loans to Lessors of:

     

Residential buildings and dwellings

   $ 50,846       $ 50,773   

Nonresidential buildings

     61,132         68,535   

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.

Demand for office space and residential apartment space was solid in 2015 in the Bank’s market area. This level of demand continued through the first quarter of 2016. 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 potentially material 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 of $99,000 for the three months ended March 31, 2016, as compared with no provision for the three months ended March 31, 2015. 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.

 

Analysis of the Allowance for Loan Losses

(Dollars in thousands)

            
     Three Months Ended  
     March 31, 2016     March 31, 2015  

Beginning balance

   $ 4,365      $ 3,792   

Provision for loan losses

     99        —     

Charge-offs:

    

Commercial, financial, agricultural

     723        —     

Real estate commercial

     24        39   

Real estate mortgage

     0        15   

Installments

     11        6   
  

 

 

   

 

 

 

Total charge-offs

     758        60   
  

 

 

   

 

 

 

Recoveries:

    

Commercial, financial, agricultural

     9        —     

Real estate commercial

     0        —     

Real estate mortgage

     1        —     

Installments

     1        3   
  

 

 

   

 

 

 

Total recoveries

     11        3   
  

 

 

   

 

 

 

Net (charge-offs)/recoveries

     (747     (57
  

 

 

   

 

 

 

Ending balance

   $ 3,717      $ 3,735   
  

 

 

   

 

 

 

Net (charge-offs)/recoveries to average loans (annualized)

     (0.74 %)      (0.07 %) 

Allowance for loan losses to total loans

     0.93     1.07

 

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The decrease in the allowance for loan losses as a percentage of total loans as of March 31, 2016 as compared with March 31, 2015 was due primarily to the charge off of one large commercial loan and the addition of Citizens loans with no corresponding allowance for loan losses. Despite this slight decline, management believes that the March 31, 2016 allowance for loan losses to total loans is adequate given the improvement in the credit quality of the loan portfolio. 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 factors the Bank cannot control.

Deposits

Deposits are the major source of the Bank’s funds for lending and investing purposes. Total deposits at March 31, 2016, were $455,504,000, an increase of $7,162,000, or 1.6%, from total deposits of $448,342,000 at December 31, 2015. The increase in total deposits was attributable to opportunities created by significant disruption through multiple in-market competitor acquisitions, where Riverview was able to attract and meet the needs of displaced customers.

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 March 31, 2016, short-term borrowings totaled $25,000,000, all of which were borrowed under the Bank’s Open Repo Plus line with the FHLB. This level of short-term borrowings compared with $42,575,000 in outstanding short-term borrowings at December 31, 2015, all of which were borrowed under the Bank’s FHLB Open Repo Plus line.

Long-term borrowings totaled $11,400,000 at March 31, 2016 as compared with $9,350,000 outstanding at December 31, 2015, and are summarized as follows:

 

    At March 31, 2016 and December 31, 2015, there was $5,000,000 in outstanding borrowings from the FHLB, at a fixed rate of 0.85% with a two year final maturity;

 

    During 2014, the Company borrowed $2,000,000 under a secured term loan agreement with ACNB Bank. This borrowing was outstanding at March 31, 2016 and December 31, 2015; and

 

    The Company has a $5,000,000 secured guidance line of credit with ACNB Bank, Gettysburg, Pennsylvania. As of March 31, 2016, there was $4,400,000 outstanding as compared with $2,350,000 which was outstanding at December 31, 2015.

Shareholders’ Equity and Capital Adequacy

At March 31, 2016, shareholders’ equity for the Company totaled $42,978,000, an increase of $675,000 as compared with shareholder equity of $42,303,000 at December 31, 2015. The increase was due to after tax net income of $753,000, the payment of dividends of $442,000, an increase in the net unrealized gains/losses on securities available for sale, which net of tax, increased equity by $336,000, and increases to surplus of $11,000 to reflect the compensation cost associated with option grants and $17,000 representing the proceeds of shares issued under 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 still 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.

 

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Capital Ratios (of Bank)

 

     March 31,
2016
    December 31,
2015
    Regulatory
Minimum (before
2016 Conservation
Buffer)
    “Well
Capitalized”
Requirement
    Regulatory
Minimum (with
2016 Conservation
Buffer)
 

Tier 1 capital (to average assets)

     7.4     7.2     4.0     5.0     4.0

Tier 1 capital (to risk-weighted assets)

     10.2     9.6     6.0     8.0     6.625

Total risk-based capital (to risk-weighted assets)

     11.1     10.7     8.0     10.0     8.625

Common equity tier 1 risk based capital (to risk-weighted assets)

     10.2     9.6     4.5     6.5     5.125

The ratios presented for March 31, 2016 reflect additional Basel III requirements, including the transitional capital conservation buffer phase-in of 0.625% applied to the minimum regulatory capital ratios in 2016, with full implementation of a 2.5% conservation buffer by 2019. The buffer phase-in was not applicable to the December 31, 2015 capital ratios, since it became effective in 2016.

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 March 31, 2016, $812,000 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 three months ended March 31, 2016 as compared with the three months ended March 31, 2015:

 

     Declaration
Date
     Record
Date
     Date of
Payment
     Per Share Cash
Dividends Paid
 

2016:

           

First quarter

     2/17/2016         3/4/2016         3/31/2016       $ 0.1375   

2015:

           

First quarter

     2/25/2015         3/6/2015         3/30/2015       $ 0.1375   

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.

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. A total of 75,000 shares were reserved for the issuance under the ESPP. Shares to be issued by the ESPP, which are administered by the Company’s transfer agent, may either be acquired from the open market or privately negotiated transactions, or may be issued from authorized but unissued shares. In the event ESPP shares are issued from authorized but unissued shares, the Company would receive the proceeds from the purchase of such common stock. During the first three months of 2016, the Company issued 1,383 shares from authorized but unissued shares under the ESPP for a total of $17,000, which was recorded as an increase to the surplus account. During the quarter ended March 31, 2015, the Company did not issue any authorized / unissued shares for the ESPP.

In addition to the authorized but unissued shares reserved for the ESPP, a total of 75,000 shares were reserved for issuance under the Riverview Financial Corporation 401(k) Retirement Plan (“401(k) Plan”). During 2016, no shares were issued by Riverview to 401(k) Plan participants.

 

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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 March 31, 2016, the Company had unfunded outstanding commitments to extend credit of $47,558,000 and outstanding letters of credit of $3,330,000. 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 2015 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 designed 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 March 31, 2016 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, customer behavior or competition, prepayments and early withdrawal levels could also deviate from those assumed in evaluating the interest rate gap.

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, borrowings under lines of credit with correspondent banks or raising additional capital.

Liquidity from the asset category is provided through cash, amounts due from banks, interest-bearing deposits with banks and federal funds sold, which totaled $25,339,000 at March 31, 2016, and was $2,651,000 higher than the $22,688,000 that was outstanding at December 31, 2015. 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 March 31, 2016, there was $22,190,000 of unpledged available-for-sale securities readily available for sale for liquidity purposes as compared with $22,811,000 at December 31, 2015.

 

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On the liability side, the primary source of funds available to meet liquidity needs is deposits. The Bank’s core deposits, which exclude certificates of deposit over $250,000, were $445,465,000 at March 31, 2016 as compared to $440,776,000 at December 31, 2015. 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 March 31, 2016, the Bank had access to two formal borrowing lines with its correspondent banks totaling $156,721,000, net of the aggregate amounts outstanding on these lines totaling $30,000,000 in the form of short-term and long-term borrowings. In addition to the Bank’s borrowing capacity, Riverview has a $2,000,000 secured term loan and a $5,000,000 secured guidance line of credit available from ACNB Bank, with $4,400,000 in outstanding borrowings as of March 31, 2016 and $2,350,000 as of December 31, 2015.

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 March 31, 2016 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, to attempt to counter 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 March 31, 2016, 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 March 31, 2016, 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 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.

 

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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

None.

 

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:

 

    2.1    Agreement and Plan of Merger, dated October 30, 2014, between Riverview Financial Corporation and The Citizens National Bank of Meyersdale. (Incorporated by reference to Annex A included in Riverview’s Registration Statement on Form S-4 (Registration No. 333-201017 filed December 17, 2014.)
    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.)
  21.1    Subsidiaries of Registrant.
  31.1    Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).

 

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  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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SIGNATURES

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

 

By:  

/s/ Kirk D. Fox

  Kirk D. Fox
  Chief Executive Officer
  (Principal Executive Officer)
Date:   May 13, 2016
By:  

/s/ Theresa M. Wasko

  Theresa M. Wasko
  Chief Financial Officer
  (Principal Financial Officer)
Date:   May 13, 2016

 

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Exhibit Index

 

ExhibitNo.

  

Description

    2.1    Agreement and Plan of Merger, dated October 30, 2014, between Riverview Financial Corporation and The Citizens National Bank of Meyersdale. (Incorporated by reference to Annex A included in Riverview’s Registration Statement on Form S-4 (Registration No. 333-201017 filed December 17, 2014.)
    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.)
  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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