Riverview Financial Corp - FORM 10-Q

Riverview Financial Corp - FORM 10-Q - August 12, 2016

Attached files

Attached files

Riverview Financial Corp Reports

file	filename
EX-32.2 - EX-32.2 - Riverview Financial Corp	d227124dex322.htm
EX-32.1 - EX-32.1 - Riverview Financial Corp	d227124dex321.htm
EX-31.2 - EX-31.2 - Riverview Financial Corp	d227124dex312.htm
EX-31.1 - EX-31.1 - Riverview Financial Corp	d227124dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

¨	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.

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: 3,224,382 shares of Common Stock, with no par value per share, outstanding as of August 8, 2016.

RIVERVIEW FINANCIAL CORPORATION

INDEX TO FORM 10-Q


		PAGE
PART I.	Financial Information

Item 1.	Financial Statements:

	Consolidated Balance Sheets at June 30, 2016 (unaudited) and December 31, 2015		3

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)		4

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)		5

	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2016 and 2015 (unaudited)		6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)		7

	Notes to Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53

Item 4.	Controls and Procedures		53

PART II.	Other Information

Item 1.	Legal Proceedings		54

Item 1A.	Risk Factors		54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 3.	Defaults Upon Senior Securities		54

Item 4.	Mine Safety Disclosures		54

Item 5.	Other Information		54

Item 6.	Exhibits		54

SIGNATURES			56

Exhibit Index			57

PART I. FINANCIAL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
(In thousands, except share data)	2016		2015
	(Unaudited)		(Audited)
Assets
Cash and due from banks	$	6,193	$	14,679
Interest bearing deposits		8,606		7,018

Cash and cash equivalents		14,799		21,697
Interest bearing time deposits with banks		—		991
Investment securities available for sale		74,253		75,850
Mortgage loans held for sale		318		1,094
Loans, net of allowance for loan losses of $3,609 - 2016; $4,365 - 2015		394,884		405,480
Premises and equipment		12,236		12,373
Accrued interest receivable		1,586		1,594
Restricted investments in bank stocks		588		2,315
Cash value of life insurance		11,949		11,764
Foreclosed assets		842		885
Goodwill		5,408		4,757
Intangible assets		1,593		1,501
Deferred tax assets		6,803		7,444
Other assets		2,054		1,704

Total Assets	$	527,313	$	549,449

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Demand, non-interest bearing	$	70,230	$	70,106
Demand, interest bearing		137,615		131,564
Savings and money market		123,186		110,526
Time		130,416		136,146

Total deposits		461,447		448,342
Short-term borrowings		4,069		42,575
Long-term borrowings		11,335		9,350
Accrued interest payable		221		236
Other liabilities		6,520		6,643

Total Liabilities		483,592		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 3,220,934 shares; 2015 3,205,544 shares		22,077		22,077
Surplus		6,979		6,784
Retained earnings		14,274		13,550
Accumulated other comprehensive income (loss)		391		(108	)

Total Shareholders’ Equity		43,721		42,303

Total Liabilities and Shareholders’ Equity	$	527,313	$	549,449

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

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended						Six Months Ended
(In thousands, except share data)	June 30,						June 30,
	2016			2015			2016			2015
Interest and Dividend Income
Loans, including fees	$	4,425		$	3,874		$	8,938		$	7,707
Investment securities - taxable		435			222			836			465
Investment securities - tax exempt		91			108			227			202
Federal funds sold		1			—			2			—
Interest-bearing deposits		13			9			28			18
Dividends		14			16			43			59

Total Interest Income		4,979			4,229			10,074			8,451

Interest Expense
Deposits		462			436			928			875
Short-term borrowings		13			18			56			33
Long-term debt		81			50			137			105

Total Interest Expense		556			504			1,121			1,013

Net Interest Income		4,423			3,725			8,953			7,438
Provision for Loan Losses		156			450			255			450

Net Interest Income after Provision for Loan Losses		4,267			3,275			8,698			6,988

Noninterest Income
Service charges on deposit accounts		131			97			242			195
Other service charges and fees		185			153			350			290
Earnings on cash value of life insurance		76			74			158			125
Fees and commissions from securities brokerage		213			217			390			426
Gain/(loss) on sale of available for sale securities		334			(41	)		332			(41	)
Loss on sale and valuation of other real estate owned		(69	)		(41	)		(63	)		(67	)
Loss on other assets		—			(53	)		—			(53	)
Gain on sale of mortgage loans		104			116			182			194

Total Noninterest Income		974			522			1,591			1,069

Noninterest Expenses
Salaries and employee benefits		2,126			3,793			4,277			5,871
Occupancy expenses		327			579			708			1,015
Equipment expenses		199			165			371			326
Telecommunication and processing charges		355			310			702			603
Postage and office supplies		119			98			221			186
Loan prepayment penalty		—			238			—			238
FDIC premiums		94			87			214			155
Bank shares tax expense		2			87			107			172
Directors’ compensation		86			89			176			175
Professional services		255			122			348			290
Amortization of intangible assets		78			67			155			134
Other expenses		535			425			1,018			753

Total Noninterest Expenses		4,176			6,060			8,297			9,918

Income (Loss) before Income Taxes		1,065			(2,263	)		1,992			(1,861	)
Applicable Federal Income Tax Expense (Benefit)		210			(919	)		384			(891	)

Net Income (Loss)	$	855		($	1,344	)	$	1,608		($	970	)

Basic Earnings (Loss) Per Share	$	0.27		($	0.50	)	$	0.50		($	0.36	)

Diluted Earnings (Loss) Per Share	$	0.27		($	0.50	)	$	0.50		($	0.36	)

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

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three and Six Months Ended June 30, 2016 and 2015

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(In thousands)
Net income (loss)	$	855		($	1,344	)	$	1,608		($	970	)
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on investment securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax of $198 and ($172) for the three months ended and $370 and ($128) for the six months ended		383			(334	)		718			(248	)
Reclassification adjustment for (gains) losses included in net income, net of tax of ($114) and $14 for the three months ended and ($113) and $14 for the six months ended		(220	)		27			(219	)		27

Total other comprehensive income (loss), net of tax		163			(307	)		499			(221	)

Total comprehensive income (loss)	$	1,018		($	1,651	)	$	2,107		($	1,191	)

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

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Six Months Ended June 30, 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 loss		—		—		(970	)		—			(970	)
Other comprehensive loss		—		—		—			(221	)		(221	)
Compensation cost of option grants		—		16		—			—			16
Issuance of 1,024 shares of common stock to the ESPP		—		13		—			—			13
Cash dividends, $0.275 per share		—		—		(746	)		—			(746	)

Balance – June 30, 2015	$	22,077	$	230	$	14,079		($	86	)	$	36,300

Balance – January 1, 2016	$	22,077	$	6,784	$	13,550		($	108	)	$	42,303
Net income		—		—		1,608			—			1,608
Other comprehensive income		—		—		—			499			499
Compensation cost of option grants		—		21		—			—			21
Issuance of 15,390 shares of common stock to Riverview’s Dividend Reinvestment, 401k and ESPP Plans		—		174		—			—			174
Cash dividends, $0.275 per share		—		—		(884	)		—			(884	)

Balance – June 30, 2016	$	22,077	$	6,979	$	14,274		$	391		$	43,721

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

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(In thousands)	2016			2015
Cash Flows from Operating Activities
Net income (loss)	$	1,608		($	970	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		390			483
Provision for loan losses		255			450
Granting of stock options		21			16
Net amortization of premiums on securities available for sale		279			222
Net realized loss from write-down or sale of foreclosed real estate and other assets		63			67
Net realized (gain) loss on sale or calls of securities available for sale		(332	)		41
Amortization of purchase adjustments on loans		(270	)		(128	)
Amortization of intangible assets		155			136
Deferred income taxes		384			(599	)
Proceeds from sale of mortgage loans		10,877			9,831
Net gain on sale of mortgage loans		(182	)		(194	)
Mortgage loans originated for sale		(9,919	)		(10,577	)
Earnings on cash value of life insurance, net		(158	)		(125	)
(Increase) decrease in accrued interest receivable and other assets		(342	)		(589	)
Increase (decrease) in accrued interest payable and other liabilities		(141	)		1,661

Net Cash Provided by (Used in) Operating Activities		2,688			(275	)

Cash Flows from Investing Activities
Net maturities of interest bearing time deposits		991			1
Securities available for sale:
Purchases		(31,265	)		(5,964	)
Proceeds from maturities, calls and principal repayments		5,052			3,766
Proceeds from sales		28,619			—
Proceeds from the sale of foreclosed real estate		1,020			1,002
Net (increase) decrease in restricted investments in bank stock		1,727			(313	)
Net (increase) decrease in loans		9,571			(9,384	)
Acquisition of customer list intangible assets		(244	)		—
Purchases of premises and equipment		(253	)		(194	)
Acquisition of goodwill		(651	)		—
Purchase of life insurance		(27	)		(27	)

Net Cash Provided by (Used in) Investing Activities		14,540			(11,113	)

Cash Flows from Financing Activities
Net increase (decrease) in deposits		13,105			9,550
Increase (decrease) in short-term borrowings		(38,506	)		9,500
Proceeds from long-term debt		2,050			—
Repayment of long-term debt		(65	)		(5,000	)
Payment of capital lease		—			(1,655	)
Issuance of common stock to DRP, 401k and ESPP plans		174			13
Dividends paid		(884	)		(746	)

Net Cash Provided by (Used in) Financing Activities		(24,126	)		11,662

Net Increase (Decrease) in Cash and Cash Equivalents		(6,898	)		274
Cash and Cash Equivalents - Beginning		21,697			14,580

Cash and Cash Equivalents - Ending	$	14,799		$	14,854

RIVERVIEW FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(In thousands)	2016		2015
Supplemental Disclosures of Cash Flows Information
Interest paid	$	1,136	$	1,051

Income taxes paid	$	—	$	275

Supplemental Schedule of Noncash Investing and Financing Activities
Other real estate acquired in settlement of loans	$	1,040	$	394

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

RIVERVIEW FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 and six months ended June 30, 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 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.

Note 1 - Summary of Significant Accounting Policies (continued)

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 August 12, 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 of 344,250 shares of Riverview common stock as of June 30, 2016 and 322,200 shares of Riverview common stock as of June 30, 2015.

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


	Three Months ended June 30,
	Income Numerator			Common Shares Denominator		EPS
	(In thousands, except share data)
2016:
Basic EPS	$	855			3,214,247	$	0.27
Dilutive effect of potential common stock options					31,620

Diluted EPS	$	855			3,245,867	$	0.27

2015:
Basic EPS	($	1,344	)		2,709,538	($	0.50	)
Dilutive effect of potential common stock options					30,379

Diluted EPS	($	1,344	)		2,739,917	($	0.50	)

Note 2 - Earnings Per Common Share (continued)


	Six Months ended June 30,
	Income Numerator			Common Shares Denominator		EPS
	(In thousands, except share data)
2016:
Basic EPS	$	1,608			3,210,374	$	0.50
Dilutive effect of potential common stock options					23,562

Diluted EPS	$	1,608			3,233,936	$	0.50

2015:
Basic EPS	($	970	)		2,709,191	($	0.36	)
Dilutive effect of potential common stock options					40,506

Diluted EPS	($	970	)		2,749,697	($	0.36	)

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


	Three Months Ended June 30,
	2016									2015
(In thousands)	Unrealized Gains and Losses on Available- for-Sale			Defined Benefit Pension Items			Total			Unrealized Gains and Losses on Available- for-Sale			Defined Benefit Pension Items			Total
Beginning balance	$	797		($	569	)	$	228		$	563		($	342	)	$	221
Other comprehensive income (loss) before reclassifications		581			—			581			(506	)		—			(506	)
Amounts reclassified from accumulated other comprehensive income(1)		(334	)		—			(334	)		41			—			41
Tax effect of current period changes(2)		(84	)		—			(84	)		158			—			158

Net current-period other comprehensive income (loss)		163			—			163			(307	)		—			(307	)

Ending balance	$	960		($	569	)	$	391		$	256		($	342	)	($	86	)

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

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

Note 3 – Changes in Accumulated Other Comprehensive Income (continued)


	Six Months Ended June 30,
	2016									2015
(In thousands)	Unrealized Gains and Losses on Available- for-Sale			Defined Benefit Pension Items			Total			Unrealized Gains and Losses on Available- for-Sale			Defined Benefit Pension Items			Total
Beginning balance	$	461		($	569	)	($	108	)	$	477		($	342	)	$	135

Other comprehensive income (loss) before reclassifications		1,088			—			1,088			(376	)		—			(376	)
Amounts reclassified from accumulated other comprehensive income(1)		(332	)		—			(332	)		41			—			41
Tax effect of current period changes(2)		(257	)		—			(257	)		114			—			114

Net current-period other comprehensive income (loss)		499			—			499			(221	)		—			(221	)

Ending balance	$	960		($	569	)	$	391		$	256		($	342	)	($	86	)

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

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

Note 4 - Investment Securities Available-for-Sale

The following tables present the amortized cost and estimated fair values of investment securities at June 30, 2016 and December 31, 2015, all of which were available-for-sale:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
June 30, 2016:
U.S Government agencies	$	2,202	$	61	$	—	$	2,263
State and municipal		44,264		933		14		45,183
U.S. Government agencies and sponsored enterprises (GSEs) - residential:
Mortgage-backed securities		16,100		273		—		16,373
Corporate debt obligations		10,040		262		48		10,254
Equity securities, financial services		193		32		45		180

	$	72,799	$	1,561	$	107	$	74,253


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
December 31, 2015:
U.S Treasuries	$	103	$	—	$	—	$	103
U.S Government agencies		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

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

The amortized cost and fair value of debt securities available-for-sale at June 30, 2016, by contractual maturity, are shown below. Expected maturities may 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	$	231	$	234
Due after one year through five years		1,629		1,667
Due after five years through ten years		11,255		11,492
Due after ten years		43,391		44,307

		56,506		57,700

Mortgage-backed securities		16,100		16,373
Equity securities		193		180

		16,293		16,553

	$	72,799	$	74,253

Securities with an amortized cost of $40,364,000 and a fair value of $41,652,000 were pledged at June 30, 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 amortized cost of $52,384,000 and a fair value of $53,039,000 were pledged for the same purposes.

Information with respect to securities with gross unrealized losses at June 30, 2016 and December 31, 2015 aggregated by investment category and length of time that individual securities have been in a continuous loss position are as follows:


	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
June 30, 2016:
Available-for-sale:
State and municipal	$	4,080	$	9	$	287	$	5	$	4,367	$	14
Corporate debt obligations		3,452		48		—		—		3,452		48
Equity securities, financial services		118		45		—		—		118		45

	$	7,650	$	102	$	287	$	5	$	7,937	$	107

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

At June 30, 2016, eight securities, comprised of five state and municipal securities, one corporate debt obligation and two equity securities, had unrealized losses as compared with a total of sixteen securities 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. As the Company does not intend to sell any of these debt securities, and it is more likely than not that the Company will not be required to sell any debt securities before the cost bases are recovered, no declines were deemed to be other-than-temporary.

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

There were 71 securities sold during the second quarter of 2016, while a total of 92 securities were sold during the six months ended June 30, 2016. The sales were initiated to take advantage of increased market values due to a reduction in the yield curve. For the three months ended June 30, 2016, a gain $338,000 and a loss of $4,000, resulting in a net gain of $334,000 was recorded. For the six months ended June 30, 2016, gains of $338,000 and losses of $6,000, resulting in a net gain of $332,000 were recorded due to the sale of securities as well as several municipal bonds that were either fully or partially called. There were no securities sold during the three and six months ended June 30, 2015. However, a loss of $41,000 was recorded during the six months ended June 30, 2015 due to several municipal bonds that were either fully or partially called, resulting in the acceleration of premium expense associated with those specific securities.

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

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


(Dollars in thousands)	June 30, 2016			December 31, 2015
Commercial	$	46,330		$	46,076
Commercial real estate		206,721			205,500
Commercial land and land development		9,166			18,599
Residential real estate		112,514			117,669
Home equity lines of credit		18,909			17,437
Consumer installment		4,853			4,564

Total loans		398,493			409,845
Allowance for loan losses		(3,609	)		(4,365	)

Total loans, net	$	394,884		$	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.

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

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.

The following table presents an aging of loans receivable by loan portfolio segments as of June 30, 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
June 30, 2016:
Commercial	$	741	$	1	$	215	$	957	$	45,373	$	46,330	$	—
Commercial real estate:
Non-owner occupied		2,232		—		—		2,232		102,398		104,630		—
Owner occupied		381		—		285		666		76,196		76,862		—
1-4 family investment		130		576		30		736		24,493		25,229		30
Commercial land and land development		218		—		—		218		8,948		9,166		—
Residential real estate		640		194		568		1,402		111,112		112,514		319
Home equity lines of credit		112		30		—		142		18,767		18,909		—
Consumer		1		—		—		1		4,852		4,853		—

Total	$	4,455	$	801	$	1,098	$	6,354	$	392,139	$	398,493	$	349

	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 above include net deferred loan fees of $873,000 and $764,000 at June 30, 2016 and December 31, 2015, respectively.

Included within the loan portfolio are loans in which the Bank discontinued the accrual of interest due to the deterioration in the financial condition of the borrower. Such loans approximated $1,575,000 and $3,182,000 at June 30, 2016 and December 31, 2015, respectively. If the nonaccrual loans had performed in accordance with their original terms, interest income would have increased by $28,000 for the three months ended June 30, 2016 and $56,000 for the six months ended June 30, 2016. These amounts compare to an increase in interest income of $45,000 for the three months ended June 30, 2015 and $88,000 for the six months ended June 30, 2015.

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 June 30, 2016 and December 31, 2015:


(In thousands)	June 30, 2016		December 31, 2015
Commercial	$	355	$	1,143
Commercial real estate:
Non-owner occupied		—		24
Owner occupied		493		766
1-4 family investment		120		328
Residential real estate		607		885
Home equity lines of credit		—		36

Total	$	1,575	$	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.

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:


	June 30, 2016						Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
(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	$	848	$	848	$	—	$	850	$	7	$	852	$	14
Commercial real estate:
Non-owner occupied		2,150		2,150		—		2,156		20		2,160		39
Owner occupied		972		972		—		976		18		981		37
1-4 family investment		854		854		—		861		7		868		14
Residential real estate		2,365		2,502		—		2,522		30		2,555		61
Home equity lines of credit		361		361		—		403		4		404		7

	$	7,550	$	7,687	$	—	$	7,768	$	86	$	7,820	$	172

Loans with an allowance recorded:
Commercial	$	131	$	131	$	1	$	132	$	—	$	134	$	—
Commercial real estate:
Owner Occupied		207		207		2		209		—		212		—
Residential real estate		119		119		33		120		1		120		2

	$	457	$	457	$	36	$	461	$	1	$	466	$	2

Total
Commercial	$	979	$	979	$	1	$	982	$	7	$	986	$	14
Commercial real estate:
Non-owner occupied		2,150		2,150		—		2,156		20		2,160		39
Owner occupied		1,179		1,179		2		1,185		18		1,193		37
1-4 family investment		854		854		0		861		7		868		14
Residential real estate		2,484		2,621		33		2,642		31		2,675		63
Home equity lines of credit		361		361		—		403		4		404		7

	$	8,007	$	8,144	$	36	$	8,229	$	87	$	8,286	$	174

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


	December 31, 2015						Three Months Ended June 30, 2015				Six Months Ended June 30, 2015
(In thousands)	Recorded Investment in Impaired Loans		Unpaid Principal Balance of Impaired Loans		Related Allowance		Average Recorded Investment in Impaired Loans		Interest Income Recognized		Average Recorded Investment in Impaired Loans		Interest Income Recognized
Loans with no related allowance recorded:
Commercial	$	994	$	994	$	—	$	511	$	20	$	512	$	27
Commercial real estate:
Non-owner occupied		2,163		2,163		—		2,182		20		2,184		39
Owner occupied		1,462		1,462		—		1,198		31		1,007		46
1-4 family investment		879		879		—		814		6		817		11
Commercial land and land development		—		—		—		219		—		218		—
Residential real estate		2,526		2,644		—		2,431		41		2,530		86
Home equity lines of credit		400		400		—		445		16		448		16

	$	8,424	$	8,562	$	—	$	7,800	$	134	$	7,716	$	225

Loans with an allowance recorded:
Commercial	$	793	$	1,193	$	700	$	1,062	$	—	$	866	$	15
Commercial real estate:
Non-owner occupied		24		155		1		—		—		—		—
1-4 family investment		186		193		7		193		—		192		—
Residential real estate		121		121		7		123		1		123		2

	$	1,124	$	1,662	$	715	$	1,378	$	1	$	1,181	$	17

Total
Commercial	$	1,787	$	2,187	$	700	$	1,573	$	20	$	1,378	$	42
Commercial real estate:
Non-owner occupied		2,187		2,318		1		2,182		20		2,184		39
Owner occupied		1,462		1,462		—		1,198		31		1,007		46
1-4 family investment		1,065		1,072		7		1,007		6		1,009		11
Commercial land and land development		—		—		—		219		—		218		—
Residential real estate		2,647		2,785		7		2,554		42		2,653		88
Home equity lines of credit		400		400		—		445		16		448		16

	$	9,548	$	10,224	$	715	$	9,178	$	135	$	8,897	$	242

The recorded investment in impaired loans decreased by $1,541,000 at June 30, 2016 as compared to December 31, 2015. This decrease resulted primarily from the charge-off of one large commercial loan in the amount of $723,000, and the transfer of two commercial real estate loans in the amount of $457,000 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 June 30, 2016, there were twenty nine restructured loans, totaling $6,853,000, involving twenty two 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, involving twenty six separate and unrelated borrowers who were experiencing financial difficulty.

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 and six months ended June 30, 2015. There were no defaults or TDRs occurring within 12 months of modification during the three and six month periods ended June 30, 2016 and 2015. Defaulted loans are those for which payment is 30 days or more past due under the modified terms. There were no troubled debt restructurings during the three and six months ended June 30, 2016.


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

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:

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

•

Changes in lending policies and procedures, including changes in underwriting standards;

•

Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;

•

Changes in the nature and volume of the portfolio and in the terms of loans;

•

Changes in the experience, ability and depth of lending management and other relevant staff;

•

Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified loans;

•

Changes in the quality of the Bank’s loan review system;

•

The existence and effect of any concentrations of credit, and the changes in the level of such concentrations; and

•

The effect of other external factors, such as competition and legal and regulatory requirements.

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.

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 for the Three Months Ended June 30, 2016:
Beginning balance	$	566		$	1,320		$	621		$	270	$	93	$	650		$	104	$	30	$	63		$	3,717
Charge-offs		—			—			—			41		249		8			—		5		—			303
Recoveries		36			—			—			—		—		2			—		1		—			39
Provision		(44	)		(135	)		11			54		326		(9	)		6		10		(63	)		156

Ending balance	$	558		$	1,185		$	632		$	283	$	170	$	635		$	110	$	36	$	0		$	3,609

Ending balance: individually evaluated for impairment	$	1		$	—		$	2		$	—	$	—	$	33		$	—	$	—	$	—		$	36

Ending balance: collectively evaluated for impairment	$	557		$	1,185		$	630		$	283	$	170	$	602		$	110	$	36	$	—		$	3,573

Allowance for Loan Losses for the Three Months Ended June 30, 2015:
Beginning balance	$	363		$	1,297		$	731		$	395	$	113	$	672		$	107	$	19	$	38		$	3,735
Charge-offs		—			—			—			11		—		12			10		16		—			49
Recoveries		8			—			—			—		—		—			—		1		—			9
Provision		269			(6	)		(12	)		14		3		20			19		18		125			450

Ending balance	$	640		$	1,291		$	719		$	398	$	116	$	680		$	116	$	22	$	163		$	4,145

Ending balance: individually evaluated for impairment	$	272		$	—		$	—		$	14	$	—	$	6		$	—	$	—	$	—		$	292

Ending balance: collectively evaluated for impairment	$	368		$	1,291		$	719		$	384	$	116	$	674		$	116	$	22	$	163		$	3,853

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		Unallocated		Total
Allowance for Loan Losses for the Six Months Ended June 30, 2016:
Beginning balance	$	1,298		$	1,372		$	552	$	303	$	202	$	520	$	93	$	25	$	—	$	4,365
Charge-offs		723			24			—		41		249		8		—		16		—		1,061
Recoveries		46			—			—		—		—		2		—		2		—		50
Provision		(63	)		(163	)		80		21		217		121		17		25		—		255

Ending balance	$	558		$	1,185		$	632	$	283	$	170	$	635	$	110	$	36	$	—	$	3,609

Ending balance: individually evaluated for impairment	$	1		$	—		$	2	$	—	$	—	$	33	$	—	$	—	$	—	$	36

Ending balance: collectively evaluated for impairment	$	557		$	1,185		$	630	$	283	$	170	$	602	$	110	$	36	$	—	$	3,573

Allowance for Loan Losses for the Six Months Ended June 30, 2015:
Beginning balance	$	330		$	1,380		$	713	$	369	$	115	$	701	$	104	$	15	$	65	$	3,792
Charge-offs		—			—			39		11		—		27		10		22		—		109
Recoveries		8			—			—		—		—		—		—		4		—		12
Provision		302			(89	)		45		40		1		6		22		25		98		450

Ending balance	$	640		$	1,291		$	719	$	398	$	116	$	680	$	116	$	22	$	163	$	4,145

Ending balance: individually evaluated for impairment	$	272		$	—		$	—	$	14	$	—	$	6	$	—	$	—	$	—	$	292

Ending balance: collectively evaluated for impairment	$	368		$	1,291		$	719	$	384	$	116	$	674	$	116	$	22	$	163	$	3,853

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		Unallocated	Total
Loans as of June 30, 2016:
Ending balance	$	46,330	$	104,630	$	76,862	$	25,229	$	9,166	$	112,514	$	18,909	$	4,853		$	398,493

Ending balance: individually evaluated for impairment	$	979	$	2,150	$	1,179	$	854	$	—	$	2,484	$	361	$	—		$	8,007

Ending balance: collectively evaluated for impairment	$	45,351	$	102,480	$	75,683	$	24,375	$	9,166	$	110,030	$	18,548	$	4,853		$	390,486

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

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.

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

In addition, the following factors may affect the risk rating derived from the above factors:

Collateral: The rating may be affected by the type and quality of collateral, the level of coverage, the economic life of the collateral, liquidation value, and the Bank’s ability to dispose of the collateral.

Guarantors: Guarantees can differ substantially in enhancing the risk rating assigned to a loan or lending commitment. In order to provide enough support to impact the assigned rating by one or more levels, the guarantee must be unconditional and must be from an individual or entity with substantial financial strength and a vested interest in the success of the borrower.

The Bank assigns risk ratings based on a scale from 1 to 8 with 1 being the highest quality rating and 8 being the lowest quality grade.

•

Levels 1-4 are “Pass” grades;

•

Level 5 is “Special Mention” (criticized loan);

•

Level 6 is “Substandard” (classified loan);

•

Level 7 is “Doubtful” (classified loan);

•

Level 8 is “Loss” (classified loan).

Risk Rating Definitions

1 - Excellent

This category is reserved for loans that contain a virtual absence of any credit risk. The loan is secured by properly margined cash collateral (in accordance with loan policy). Loans that are 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.

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.

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

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 June 30, 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
June 30, 2016
1 – Excellent	$	241	$	—	$	—	$	—	$	—	$	—	$	—	$	106	$	347
2 – Good		2,607		34		1,134		28		179		—		—		—		3,982
3 – Satisfactory		40,563		94,055		69,844		18,123		8,738		108,872		18,185		4,747		363,127
4 – Watch		1,046		5,377		2,895		5,168		249		398		335		—		15,468
5 – Special Mention		475		2,252		1,466		1,254		—		161		28		—		5,636
6 – Substandard		1,398		2,912		1,523		656		—		3,083		361		—		9,933
7 – Doubtful		—		—		—		—		—		—		—		—		—
8 – Loss		—		—		—		—		—		—		—		—		—

Total	$	46,330	$	104,630	$	76,862	$	25,229	$	9,166	$	112,514	$	18,909	$	4,853	$	398,493


			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

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

The adequacy of the allowance is analyzed quarterly, and adjusted to the level deemed appropriate by management, based upon its risk assessment of the entire portfolio. Based upon credit administration’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at June 30, 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.

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

Union

(In thousands)

Contractually required principal and interest at acquisition

10,290

92,704

102,994

Contractual cash flows not expected to be collected

(5,487

)

(9,492

)

(14,979

)

Expected cash flows at acquisition

4,803

83,212

88,015

Interest component of expected cash flows

(386

)

(12,278

)

(12,664

)

Basis in acquired loans at acquisition – estimated fair value

4,417

70,934

75,351

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 Union acquired loans as of June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016		December 31, 2015
	(In thousands)
Credit impaired purchased loans evaluated individually for incurred credit losses
Outstanding balance	$	1,303	$	1,478
Carrying Amount		580		668
Other purchased loans evaluated collectively for incurred credit losses
Outstanding balance		43,647		49,762
Carrying Amount		42,719		47,723
Total Purchased Loans
Outstanding balance		44,950		51,240
Carrying Amount		43,299		48,391

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


	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
(In thousands)
Balance – beginning of period	$	259		$	300		$	307		$	310
Accretion recognized during the period		(21	)		(30	)		(115	)		(56	)
Net reclassification from non-accretable to accretable		13			56			59			72

Balance – end of period	$	251		$	326		$	251		$	326

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

Citizens

(In thousands)

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

The unpaid principal balances and the related carrying amount of Citizens acquired loans as of June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016		December 31, 2015
	(In thousands)
Credit impaired purchased loans evaluated individually for incurred credit losses
Outstanding balance	$	610	$	608
Carrying Amount		431		440
Other purchased loans evaluated collectively for incurred credit losses
Outstanding balance		51,933		57,581
Carrying Amount		51,677		57,422
Total Purchased Loans
Outstanding balance		52,543		58,189
Carrying Amount		52,108		57,862

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

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


	Three Months Ended					Six Months Ended
	June 30, 2016			June 30, 2015		June 30, 2016			June 30, 2015
(In thousands)
Balance – beginning of period	$	213		$	—	$	217		$	—
Accretion recognized during the period		(8	)		—		(14	)		—
Net reclassification from non-accretable to accretable		1			—		3			—

Balance – end of period	$	206		$	—	$	206		$	—

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 June 30, 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 June 30, 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

5.1 years

$10.48

171,000

$9.83

1.7 years

There was intrinsic value associated with 318,950 stock options out of 344,250 outstanding stock options at June 30, 2016 considering that the market value of the stock as of the close of business at quarter end was $12.10 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 $349,000, of which $21,000 was recorded for the six months ended June 30, 2016. The remaining unrecognized compensation expense as of June 30, 2016 was $212,000. In comparison with 2015, $16,000 in option compensation expense was recorded for the six months ended June 30, 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 six months ended June 30, 2016 and 2015, no options were granted or exercised.

Note 7 - Financial Instruments with Off Balance Sheet Risk

In the ordinary course of business, the Bank is party to financial instruments with off balance sheet risk to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit, typically residential mortgage loans and commercial loans and, to a lesser extent, letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet.

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

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


	Contract or Notional Amount
	June 30, 2016		December 31, 2015
	(In thousands)
Commitments to grant loans	$	22,310	$	19,602
Unfunded commitments of existing loans		32,279		26,479
Standby and performance letters of credit		3,413		3,316

	$	58,002	$	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 June 30, 2016, $1,256,000 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.

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). As of June 30, 2016, the Bank met all applicable capital adequacy requirements.

As of June 30, 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.

Note 8 - Regulatory Matters and Shareholders’ Equity (continued)

The Bank’s actual capital ratios, which include the impact of the merger of Citizens at June 30, 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 June 30, 2016:
Total risk-based capital (to risk-weighted assets)*	$	42,854		11.0	%	$	33,658	³8.625%				$	39,024		³10.0	%
Tier 1 capital (to risk-weighted assets)*		39,188		10.0	%		25,853	³6.625%					31,219		³8.0	%
Tier 1 capital (to average total assets)		39,188		7.5	%		20,906	³4.0%					26,133		³5.0	%
Common equity tier 1 risk-based capital (to risk-weighted assets)*		39,188		10.0	%		20,000	³5.125%					25,365		³6.5	%

	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			³8.0	%	$	40,370		³10.0	%
Tier 1 capital (to risk-weighted assets)		38,710		9.6	%		24,222			³6.0	%		32,296		³8.0	%
Tier 1 capital (to average total assets)		38,710		7.2	%		21,611			³4.0	%		27,014		³5.0	%
Common equity tier 1 risk-based capital (to risk-weighted assets)		38,710		9.6	%		18,167			³4.5	%		26,241		³6.5	%

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 June 30, 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 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).

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

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. At June 30, 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 June 30, 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)
June 30, 2016:
U.S. Government agency securities	$	2,263	$	—	$	2,263	$	—
State and municipal		45,183	$	—		45,183		—
U.S. Government agencies and sponsored enterprises (GSEs) – residential:
Mortgage-backed securities		16,373		—		16,373		—
Corporate debt obligations		10,254		—		10,254		—
Equity securities, financial services		180		180		—		—

Securities available-for- sale	$	74,253	$	180	$	74,073	$	—

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 result 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.

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.

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

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 $8,007,000 at June 30, 2016, of which $457,000 required a valuation allowance of $36,000. 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 recorded goodwill of $651,000 during the six months ended June 30, 2016 due to the acquisition of the two wealth management companies, and did not record any goodwill impairment during the six months ended June 30, 2016.

A summary of assets at June 30, 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)
June 30, 2016:
Loans held for sale	$	—	$	318	$	—	$	318	$	—
Other real estate owned		—		842		—		842		—
Impaired loans, net of related allowance		—		421		—		421		—

Total	$	—	$	1,581	$	—	$	1,581	$	—


	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 measured 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 June 30, 2016.

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


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 June 30, 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 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.

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

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. The fair value of off-balance sheet financial instruments was not material at June 30, 2016 and December 31, 2015.

The estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015 are presented as follows:

Fair Value Measurements at June 30, 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

14,799

—

Investment securities

74,253

180

74,073

—

Mortgage loans held for sale

318

—

318

—

Loans, net

394,884

398,827

—

398,827

—

Accrued interest receivable

1,586

—

Restricted investments in bank stocks

588

—

588

Financial liabilities:

Deposits

461,447

467,865

—

467,865

—

Short-term borrowings

4,069

4,070

—

4,070

—

Long-term borrowings

11,335

11,317

—

11,317

—

Accrued interest payable

221

—

Off balance sheet financial instruments

—

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


			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.

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

Note 10 – Recent Accounting Pronouncements (continued)

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.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting”. The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (1) income tax consequences; (2) classification of awards as either equity or liabilities; and (3) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for years, and intermit periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF RIVERVIEW FINANCIAL CORPORATION

The following discussion and analysis summarizes the Company’s results of operations and highlights material changes for the three and six months ended June 30, 2016 and June 30, 2015 and its financial condition as of June 30, 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.

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 June 30, 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 $527,313,000 as of June 30, 2016, a decrease of $22,136,000, or 4.0%, from $549,449,000 at December 31, 2015. The decrease in assets was attributable to a decrease in loans of $10,596,000 to $394,884,000 and a decrease of $6,898,000 in cash and cash equivalents. The Company’s deposits increased $13,105,000, or 2.9%, to $461,447,000. Cash and the proceeds of deposit growth were used to pay off $42,575,000 in short-term borrowings that were outstanding as of the 2015 year-end, as compared with $4,069,000 in short-term borrowings at June 30, 2016.

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 $8,953,000 at June 30, 2016 as compared with $7,438,000 at June 30, 2015. For the six months ended June 30, 2016, the Company recorded net income of $1,608,000 as compared with a net loss of ($970,000) for the six months ended June 30, 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 in 2016 were further enhanced by the effects of strategic efficiency initiatives completed and recorded during 2015. In addition, net gains of $332,000 from the sale of investment securities were recorded during the first half of 2016 as compared with net losses of $41,000 that were recorded during the first half of 2015. The provision for loan losses in the first six months of 2016 was $255,000 as compared with $450,000 in the first six months of 2015. Basic and diluted earnings per share of $0.50 per share for the six months ended June 30, 2016 increased from basic and diluted loss per share of ($0.36) per share for the six months ended June 30, 2015. The increase in earnings per share was attributable to the increase in net income period over period, which positively impacted the return on average assets, which was 0.60% for the six months ended June 30, 2016, an increase from (0.44%) for the six months ended June 30, 2015, and the return on average equity, which was 7.52% for the six month period ended June 30, 2016 as compared to (5.11%) for the same period ended June 30, 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.

Results of Operations

Net Interest Income and Net Interest Margin

The following table presents Riverview’s average balances, interest rates, interest income and expense, interest rate spread and net interest margin, adjusted to a fully-tax equivalent basis (a non-GAAP financial measurement), for the three months ended June 30, 2016 and 2015.

Average Balances and Average Interest Rates

(Dollars in thousands)


	For the Three Months Ended
	June 30,
	2016								2015
	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
Assets
Interest earning assets:
Securities:
Taxable	$	58,957	$	435			2.97	%	$	32,228	$	222			2.76	%
Tax-exempt		12,203		138			4.55	%		15,103		164			4.36	%

Total securities		71,160		573			3.24	%		47,331		386			3.27	%

Loans:
Consumer		3,917		67			6.88	%		2,261		23			4.08	%
Commercial		46,640		466			4.02	%		40,962		388			3.80	%
Real estate		349,952		3,938			4.53	%		308,304		3,501			4.55	%

Total loans		400,509		4,471			4.49	%		351,527		3,912			4.46	%

Other interest earning assets		12,008		28			0.94	%		10,807		25			0.93	%

Total earning assets		483,677		5,072			4.22	%		409,665		4,323			4.23	%

Non-interest earning assets		49,656								36,957

Total assets	$	533,333							$	446,622

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposit accounts:
Interest-bearing demand	$	137,511	$	103			0.30	%	$	132,928	$	121			0.37	%
Savings		120,747		81			0.27	%		89,003		52			0.23	%
Time deposits		134,085		278			0.83	%		97,533		263			1.08	%

Total deposits		392,343		462			0.47	%		319,464		436			0.55	%

Borrowings:
Short-term borrowings		9,451		13			0.55	%		22,188		18			0.33	%
Long-term borrowings		11,360		81			2.86	%		6, 231		50			3.22	%

Total borrowings		20,811		94			1.82	%		28,419		68			0.96	%

Total interest bearing liabilities		413,154		556			0.54	%		347,883		504			0.58	%

Demand deposits		70,342								56,143
Other liabilities		6,425								4,299
Shareholders’ equity		43,412								38,297

Total liabilities and shareholders’ equity	$	533,333							$	446,622

Net interest income (non-GAAP)			$	4,516							$	3,819
Tax benefit on tax-exempt securities				(47	)							(56	)
Tax benefit on tax-exempt loans				(46	)							(38	)

Total tax-equivalent adjustment				(93	)							(94	)

Net interest income (GAAP)			$	4,423							$	3,725

Net interest spread							3.68	%							3.65	%

Net interest margin							3.76	%							3.74	%

Tax-exempt income is presented on a fully tax-equivalent basis assuming a tax rate of 34%.

For yield computation purposes, non-accruing loans are included in average loan balances and any income recognized on these loans is included in interest income.

Securities held as available-for-sale are carried at amortized cost for purposes of calculating average yield.

For the three months ended June 30, 2016, total interest income increased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $749,000, to $5,072,000 from $4,323,000, for the three months ended June 30, 2015. Contributing to the increase in second quarter 2016 interest income was the acquisition of Citizens as of the 2015 year-end, which resulted in an 18.1% increase in total average interest-earning assets to $483,677,000 as compared with the second quarter of 2015. There was a slight decline in the yield on average interest earning assets, which decreased to 4.22% for the three months ended June 30, 2016 from 4.23% for the three months ended June 30, 2015.

Total interest expense increased $52,000, or 10.3%, to $556,000 for the three months ended June 30, 2016 from $504,000 for the three months ended June 30, 2015. This increase was attributable to the additional deposits obtained as a result of the Citizens acquisition, which increased $72,879,000 to $392,343,000 as of the end of the second quarter of 2016 from $319,464,000 as of the second quarter of 2015. In addition, the Company utilized the proceeds from the deposit growth to pay down total borrowings to $20,811,000 as of the end of the second quarter of 2016 from $28,419,000 as of the end of the second quarter of 2015. Although total interest bearing liabilities increased $65,271,000 to $413,154,000 for the three months ended June 30, 2016, cost of funds declined to 0.54% at the end of the second quarter of 2016 as compared with 0.58% at the end of the second quarter of 2015. This was due to a decline in interest rates paid on deposits and borrowing quarter over quarter.

Net interest income calculated on a fully tax equivalent basis increased to $4,516,000 for the three months ended June 30, 2016 from $3,819,000 for the three months ended June 30, 2015. Riverview’s net interest spread increased to 3.68% for the three months ended June 30, 2016 from 3.65% for the three months ended June 30, 2015, while its net interest margin increased to 3.76% for the three months ended June 30, 2016 from 3.74% at June 30, 2015.

The following table presents the Company’s average balances, interest rates, interest income and expense, interest rate spread and net interest margin, adjusted to a fully-tax equivalent basis (a non-GAAP financial measurement), for the six months ended June 30, 2016 and June 30, 2015:

Average Balances and Average Interest Rates

(Dollars in thousands)


	For the Six Months Ended
	June 30,
	2016								2015
	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
Assets
Interest earning assets:
Securities:
Taxable	$	56,117	$	836			3.00	%	$	32,879	$	465			2.85	%
Tax-exempt		15,724		344			4.40	%		14,266		306			4.33	%

Total securities		71,841		1,180			3.30	%		47,145		771			3.30	%

Loans:
Consumer		3,862		151			7.86	%		2,165		54			5.03	%
Commercial		46,456		924			4.00	%		39,931		793			4.00	%
Real estate		353,182		7,955			4.53	%		307,013		6,931			4.55	%

Total loans		403,500		9,030			4.50	%		349,109		7,778			4.49	%

Other interest earning assets		12,042		73			1.22	%		10,773		77			1.44	%

Total earning assets		487,383		10,283			4.24	%		407,027		8,626			4.27	%

Non-interest earning assets		51,825								36,795

Total assets	$	539,208							$	443,822

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Deposit accounts:
Interest-bearing demand	$	138,722	$	216			0.31	%	$	132,872	$	237			0.36	%
Savings		116,610		155			0.27	%		86,660		100			0.23	%
Time deposits		134,998		557			0.83	%		99,166		538			1.09	%

Total deposits		390,330		928			0.48	%		318,698		875			0.55	%

Borrowings:
Short-term borrowings		19,522		56			0.58	%		20,863		33			0.32	%
Long-term borrowings		10,400		137			2.65	%		6, 613		105			3.20	%

Total borrowings		29,922		193			1.30	%		27,476		138			1.01	%

Total interest bearing liabilities		420,252		1,121			0.54	%		346,174		1,013			0.59	%

Demand deposits		69,308								54,952
Other liabilities		6,524								4,428
Shareholders’ equity		43,124								38,268

Total liabilities and shareholders’ equity	$	539,208							$	443,822

Net interest income (non-GAAP)			$	9,162							$	7,613
Tax benefit on tax-exempt securities				(117	)							(104	)
Tax benefit on tax-exempt loans				(92	)							(71	)

Total tax-equivalent adjustment				(209	)							(175	)

Net interest income (GAAP)			$	8,953							$	7,438

Net interest spread							3.70	%							3.68	%

Net interest margin							3.78	%							3.77	%

Tax-exempt income is presented on a fully tax-equivalent basis assuming a tax rate of 34%.

For yield computation purposes, non-accruing loans are included in average loan balances and any income recognized on these loans is included in interest income.

Securities held as available-for-sale are carried at amortized cost for purposes of calculating average yield.

For the six months ended June 30, 2016, total interest income increased on a fully tax equivalent basis (as adjusted for the tax benefit derived from tax-exempt assets) by $1,657,000, to $10,283,000 from $8,626,000, for the six months ended June 30, 2015. The increase was attributable to higher total interest-earning assets, which increased $80,356,000, or 19.7%, due to the Citizens acquisition as of the 2015 year-end. The yield on interest earning assets decreased three basis points to 4.24% for the six months ended June 30, 2016 from 4.27% for the same period in 2015.

Total interest expense increased $108,000, to $1,121,000, for the six months ended June 30, 2016 from $1,013,000 for the six months ended June 30, 2015. This increase was attributable to higher total interest bearing liabilities, which increased $74,078,000, or 21.4%, due to the Citizens acquisition. Cost of funds declined to 0.54% as of the six months ended June 30, 2016 from 0.59% for the same period in 2015. The decrease is due to a decline in interest rates paid on total deposits.

Net interest income calculated on a fully tax equivalent basis increased $1,549,000, to $9,162,000, for the six months ended June 30, 2016 from $7,613,000 for the six months ended June 30, 2015. Riverview’s net interest spread increased to 3.70% for the six months ended June 30, 2016 from 3.68% for the six months ended June 30, 2015, while its net interest margin also increased to 3.78% for the six months ended June 30, 2016 from 3.77% for the six months ended June 30, 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 $255,000 was recorded for the six months ended June 30, 2016 as compared with $450,000 recorded for the six months ended June 30, 2015. The lower provision recorded during the first six months of 2016 as compared with the same period in 2015 was driven primarily by a reduction in impaired loans for which specific allocations had been recorded, and a decrease in the unallocated portion of the allowance. The allowance for loan losses was $3,609,000, or 0.91% of total loans outstanding, at June 30, 2016, as compared with $4,365,000, or 1.07% of total loans, at December 31, 2015, and $4,145,000, or 1.18% of total loans, at June 30, 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 June 30, 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 June 30, 2016 and 2015.


Non-Interest Income
	Three Months Ended June 30,
				Increase/(Decrease)
(Dollars in thousands)	2016			Amount			%			2015
Service charges on deposit accounts	$	131		$	34			35.1	%	$	97
Other service charges and fees		185			32			20.9	%		153
Earnings on cash value of life insurance		76			2			2.7	%		74
Fees and commissions from securities brokerage		213			(4	)		(1.8	%)		217
Gain (loss) on sale of available for sale securities		334			375			914.6	%		(41	)
Gain (loss) on sale and valuation of other real estate owned		(69	)		(28	)		(68.3	%)		(41	)
Gain on other assets		—			53			100.0	%		(53	)
Gain on sale of mortgage loans		104			(12	)		(10.3	%)		116

	$	974		$	452			86.6	%	$	522

Non-interest income continues to be an important source of income for the Company, representing 18.0% of total revenues (comprised of net interest income and non-interest income) for the second quarter of 2016 as compared with 12.3% for the second quarter of 2015. Non-interest income increased 86.6% in comparing the financial results for the second 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 the gain from the sale of investment securities during the second quarter of 2016 as well as service charges and fee income associated with the deposit accounts acquired as part of the Citizens acquisition.

The following table sets forth changes in non-interest income for the six months ended June 30, 2016 and 2015.


Non-Interest Income
	Six Months Ended June 30,
				Increase/(Decrease)
(Dollars in thousands)	2016			Amount			%			2015
Service charges on deposit accounts	$	242		$	47			24.1	%	$	195
Other service charges and fees		350			60			20.7	%		290
Earnings on cash value of life insurance		158			33			26.4	%		125
Fees and commissions from securities brokerage		390			(36	)		(8.5	%)		426
Gain (loss) on sale of available for sale securities		332			373			909.8	%		(41	)
Gain (loss) on sale and valuation of other real estate owned		(63	)		4			5.97	%		(67	)
Gain on other assets		—			53			100.0	%		(53	)
Gain on sale of mortgage loans		182			(12	)		(6.2	%)		194

	$	1,591		$	522			48.8	%	$	1,069

Non-interest income represented 15.1% of total revenues (comprised of net interest income and non-interest income) in June 30, 2016 as compared with 12.6% in June 30, 2015. The majority of the increase in non-interest income year over year was attributable to gains from the sale of investment securities. Due to an increase in account and transaction volume as a result of the Citizens acquisition, there was an increase in service charges and fee income.

Non-Interest Expenses

The following table presents the components of non-interest expense for the three months ended June 30, 2016 and 2015.


Non-Interest Expenses
	Three Months Ended June 30,
			Increase/(Decrease)
(Dollars in thousands)	2016		Amount			%			2015
Salaries and employee benefits	$	2,126	($	1,667	)		(44.0	%)	$	3,793
Occupancy expense		327		(252	)		(43.5	%)		579
Equipment expense		199		34			20.6	%		165
Telecommunications and processing charges		355		45			14.5	%		310
Postage and office supplies		119		21			21.4	%		98
Loan prepayment penalty		—		(238	)		(100.0	%)		238
FDIC premium		94		7			8.0	%		87
Bank shares tax expense		2		(85	)		(97.7	%)		87
Directors’ compensation		86		(3	)		(3.4	%)		89
Professional services		255		133			109.0	%		122
Amortization of intangibles		78		11			16.4	%		67
Other expenses		535		110			25.9	%		425

	$	4,176	($	1,884	)		(31.1	%)	$	6,060

Non-interest expenses decreased 31.1% in the second quarter of 2016 in comparison to the same period in 2015. The decrease quarter over quarter was attributable to the impact of the restructuring and efficiency initiatives that were recorded during the second quarter of 2015. These initiatives included:

•

the departure of the former CEO during the second quarter of 2015 resulted in severance expense of $1,510,000;

•

the planned closure of the Bank’s branches during the second quarter of 2015 resulted in the payment of a $96,000 lease termination fee and $122,000 in additional expense from accelerating leasehold improvement depreciation; and

•

incurring a prepayment penalty of $238,000 as a result of prepaying two borrowings with the FHLB in order to reduce the Bank’s cost of funds going forward.

In addition, the reduction in the bank shares tax expense was due to recognizing and recording a $90,000 tax credit approved in May 2016 for the 2016 tax year by the Commonwealth of Pennsylvania. The tax credit was associated with the Bank’s contribution to various non-profit organizations approved by Pennsylvania’s Educational Improvement Tax Credit program (“EITC”). Unlike prior years when the credit was recorded in the fourth quarter, the credit was not recorded until the second quarter of 2016 when the Bank received approval for the tax credit. The approval from the Commonwealth of Pennsylvania was delayed until the Commonwealth approved its 2015-2016 budget, which did not occur until May of 2016.

The increase in professional services quarter over quarter was attributable to accounting, consulting and legal expenses associated with the acquisition of two wealth management companies, which settled during the second quarter of 2016. One of the companies is located in Palmyra, Pennsylvania while the other is located in Sunbury, Pennsylvania. Both companies are anticipated to be immediately accretive to earnings and provide increased depth in the Bank’s licensed representatives and wealth management support staff, creating a solid platform for additional growth in this important, strategic fee income line of business for the Bank.

The following table presents the components of non-interest expense for the six months ended June 30, 2016 and 2015.


Non-Interest Expenses
	Six Months Ended June 30,
			Increase/(Decrease)
(Dollars in thousands)	2016		Amount			%			2015
Salaries and employee benefits	$	4,277	($	1,594	)		(27.2	%)	$	5,871
Occupancy expense		708		(307	)		(30.2	%)		1,015
Equipment expense		371		45			13.8	%		326
Telecommunications and processing charges		702		99			16.4	%		603
Postage and office supplies		221		35			18.8	%		186
Loan prepayment penalty		—		(238	)		(100.0	%)		238
FDIC premium		214		59			38.1	%		155
Bank shares tax expense		107		(65	)		(37.8	%)		172
Directors’ compensation		176		1			0.6	%		175
Professional services		348		58			20.0	%		290
Amortization of intangibles		155		21			15.7	%		134
Other expenses		1,018		265			35.2	%		753

	$	8,297	($	1,621	)		(16.3	%)	$	9,918

Non-interest expenses decreased $1,621,000, or 16.3%, in comparing the first six months of 2016 with the same period in 2015. While non-interest expenses, in general, increased because of the Bank’s growth, the majority of the period to period decrease was directly attributable to Citizens merger related expenses, balance sheet restructuring resulting in a prepayment penalty, and other efficiency initiatives implemented during the first six months of 2015.

Provision for Federal Income Taxes.

Income tax expense was $210,000 for the second quarter of 2016, as compared with income tax benefit of $919,000 for the second quarter of 2015. The increase in the second quarter tax provision was attributable to recognizing pre-tax income in 2016 as compared to a pre-tax loss in 2015.

For the six months ended June 30, 2016, the tax expense was $384,000, as compared to a tax benefit of $891,000 for the six months ended June 30, 2015. The increase in the 2016 tax accrual was attributable to a before tax net income of $1,992,000 for the six months ended June 30, 2016, as compared with before tax net loss of $1,861,000 for the six months ended June 30, 2015.

Financial Condition as of June 30, 2016 and December 31, 2015

Securities

The following table sets forth the composition of the investment securities portfolio as of June 30, 2016 and December 31, 2015:


	Amortized Cost as of
	June 30, 2016		December 31, 2015
Available-for-sale securities:
U.S. Treasuries	$	—	$	103
U.S. Government agencies securities		2,202		4,708
State and municipal		44,264		34,197
U.S. Government agencies and sponsored enterprises (GSEs) - residential:
Mortgage-backed securities		16,100		25,942
Collateralized mortgage obligations (CMOs)		—		1,741
Corporate debt obligations		10,040		7,989
Equity securities, financial services		193		471

	$	72,799	$	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 June 30, 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.

Investments in restricted bank stocks declined to $588,000 at June 30, 2016 from $2,315,000 at December 31, 2016. The decline was attributable to the redemption by the FHLB of its capital stock as a result of the Bank’s pay down of its short-term borrowings under its Open Repo Plus line with the FHLB to $4,069,000 at June 30, 2016 from $42,575,000 at December 31, 2015.

Loans

The loan portfolio comprises the major component of the Company’s earning assets and is the highest yielding asset category. The following table presents the composition of the total loan portfolio at June 30, 2016 and December 31, 2015:


	June 30, 2016						December 31, 2015
(Dollars in thousands)	Balance			% of Total			Balance			% of Total
Commercial	$	46,330			11.63	%	$	46,076			11.24	%
Commercial real estate		206,721			51.87	%		205,500			50.14	%
Commercial land and land development		9,166			2.30	%		18,599			4.54	%
Residential real estate		112,514			28.23	%		117,669			28.71	%
Home equity lines of credit		18,909			4.75	%		17,437			4.26	%
Consumer installment		4,853			1.22	%		4,564			1.11	%

Total loans		398,493			100.00	%		409,845			100.00	%
Allowance for loan losses		(3,609	)					(4,365	)

Total loans, net	$	394,844					$	405,480

At June 30, 2016, total loans receivable (net of the allowance for loan losses, unearned fees and origination costs) were $394,844,000, a decrease of $10,636,000, or 2.62%, as compared with $405,480,000 as of December 31, 2015. The decrease in total loans was attributable 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 six 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.

Loans receivable, net of the allowance for loan losses, represented 74.89% of total assets and 85.57% of total deposits as of June 30, 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 June 30, 2016, the Bank’s legal lending limit for loans to one borrower was $6,527,000. 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.

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. Subprime residential real estate loans are not originated without mitigating risk factors and all policy exceptions require approval of the next higher authority.

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 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 lowered its loan underwriting criteria and management believes its underwriting standards continue to remain conservative.

Credit Risk and Loan Quality

The following table presents non-performing loans and assets as of June 30, 2016 and December 31, 2015:


Non-Performing Assets
(Dollars in thousands)
	June 30, 2016			December 31, 2015
Accruing loans past due 90 days	$	349		$	89
Non-accrual loans		1,575			3,182

Total non-performing loans		1,924			3,271
Foreclosed real estate		842			885

Total non-performing assets	$	2,766		$	4,156

Non-performing loans to total loans		0.48	%		0.80	%
Non-performing assets to total assets		0.52	%		0.76	%
Allowance to non-performing loans		187.58	%		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 six months of 2016, the Bank experienced a decrease of $1,347,000 in total non-performing loans attributable to a decrease in non-accrual loans of $1,607,000, partially offset by an increase in accruing loans past due 90 days of $260,000. 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 two commercial real estate loans. The $1,390,000 decrease in total non-performing assets

as of June 30, 2016 as compared with December 31, 2015 was attributable to a $1,347,000 decrease in non-performing loans and a $43,000 decrease in foreclosed real estate. Management continues to be vigilant in its efforts to identify, evaluate and minimize credit risk and potential losses. Management is proactive in addressing and managing risk appropriate to the level of loan volume and delinquencies in the loan portfolio through its implementation of an enhanced credit administration process - including a structured loan collection process and close monitoring of compliance with underwriting and loan to value guidelines.

The Bank had $842,000 in real estate acquired through foreclosure as of June 30, 2016, as compared with $885,000 as of December 31, 2015. The foreclosed real estate as of June 30, 2016 consisted of one mixed use property totaling $200,000, three commercial properties totaling $378,000, three single family residential properties totaling $251,000 and one parcel of vacant land totaling $13,000. The decrease in foreclosed real estate at June 30, 2016 from December 31, 2015 was due to the addition of two commercial properties totaling $197,000, and two single family residential properties totaling $228,000, offset by the sale of two mixed use properties totaling $57,000, two single family residential properties totaling $110,000, two parcels of vacant land totaling $251,000 and the write down of one single family residential property, one commercial property and one mixed use property totaling $50,000. 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 June 30, 2016 and December 31, 2015.


(Dollars in thousands)	June 30, 2016		December 31, 2015
Loans to Lessors of:
Residential buildings and dwellings	$	51,384	$	50,773
Nonresidential buildings		61,521		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 second 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 $255,000 for the six months ended June 30, 2016, as compared with $450,000 for the six months ended June 30, 2015. Management determined that the allowance for loan losses was adequate to absorb any losses inherent in the portfolio. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for loan losses may be necessary, and the results of operations could be significantly and adversely affected if circumstances differ substantially from the assumptions used in making 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)
	Six Months Ended
	June 30, 2016			June 30, 2015
Beginning balance	$	4,365		$	3,792
Provision for loan losses		255			450
Charge-offs:
Commercial, financial, agricultural		723			—
Real estate commercial		314			50
Real estate mortgage		8			37
Installments		16			22

Total charge-offs		1,061			109

Recoveries:
Commercial, financial, agricultural		46			8
Real estate commercial		—			—
Real estate mortgage		2			—
Installments		2			4

Total recoveries		50			12

Net (charge-offs)/recoveries		(1,011	)		(97	)

Ending balance	$	3,609		$	4,145

Net (charge-offs)/recoveries to average loans (annualized)		0.50	%		0.06	%
Allowance for loan losses to total loans		0.91	%		1.18	%

The decrease in the allowance for loan losses as a percentage of total loans as of June 30, 2016 as compared with June 30, 2015 was due primarily to the charge off of one large commercial loan, a decrease in the unallocated portion of the allowance and the addition of Citizens loans with no corresponding allowance for loan losses. Despite this decline, management believes that the June 30, 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 June 30, 2016, were $461,447,000, an increase of $13,105,000, or 2.9%, from total deposits of $448,342,000 at December 31, 2015. The increase in total deposits was attributable to opportunities created by the Bank’s expanded geographic footprint and 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 June 30, 2016, short-term borrowings totaled $4,069,000, 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 $11,335,000 at June 30, 2016 as compared with $9,350,000 outstanding at December 31, 2015, and are summarized as follows:

•

At June 30, 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 June 30, 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 June 30, 2016, there was $4,335,000 outstanding as compared with $2,350,000 which was outstanding at December 31, 2015.

Shareholders’ Equity and Capital Adequacy

At June 30, 2016, shareholders’ equity for the Company totaled $43,721,000, an increase of $1,418,000 as compared with shareholder equity of $42,303,000 at December 31, 2015. The increase was due to after tax net income of $1,608,000, the payment of dividends of $884,000, an increase in the net unrealized gains/losses on securities available for sale, which net of tax, increased equity by $499,000, and increases to surplus of $21,000 to reflect the compensation cost associated with option grants and $174,000 representing the proceeds of shares issued under the Company’s Dividend Reinvestment, 401k and Employee Stock Purchase plans.

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.


Capital Ratios (of Bank)
	June 30, 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)		7.5	%		7.2	%		4.0	%		5.0	%		4.0	%
Tier 1 capital (to risk-weighted assets)		10.0	%		9.6	%		6.0	%		8.0	%		6.625	%
Total risk-based capital (to risk-weighted assets)		11.0	%		10.7	%		8.0	%		10.0	%		8.625	%
Common equity tier 1 risk based capital (to risk-weighted assets)		10.0	%		9.6	%		4.5	%		6.5	%		5.125	%

The ratios presented for June 30, 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 June 30, 2016, $1,256,000 of undistributed earnings of the Bank, included in consolidated shareholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval.

The following table presents the details of quarterly cash dividends paid to the Company’s shareholders during the six months ended June 30, 2016 as compared with the six months ended June 30, 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

Second quarter

5/18/2016

6/15/2016

6/30/2016

0.1375

2015:

First quarter

2/25/2015

3/6/2015

3/30/2015

0.1375

Second quarter

5/20/2015

6/9/2015

6/30/2015

0.1375

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. In the event DRP Plan shares are issued from authorized but unissued shares, the Company would receive the proceeds from the purchase of such common stock. During the first six months of 2016, the Company issued 3,500 shares from authorized but unissued shares under the DRP Plan for a total of $38,000, which was recorded as an increase to the surplus account. During the six months ended June 30, 2015, the Company did not issue any authorized / unissued shares for the DRP 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 six months of 2016, the Company issued 3,039 common shares from authorized but unissued shares under the ESPP for a total of $36,000, which was recorded as an increase to the surplus account. This compares with the six months ended June 30, 2015, where the Company issued 1,024 common shares from authorized / unissued shares for the ESPP for a total of $13,000.

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 the first six months of 2016, the Company issued 8,851 common shares from authorized but unissued shares under the 401(k) for a total of $100,000, which was recorded as an increase to the surplus account. During the six months ended June 30, 2015, no shares were issued by Riverview to 401(k) Plan participants.

Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, and to a lesser extent, letters of credit. At June 30, 2016, the Company had unfunded outstanding commitments to extend credit of $54,589,000 and outstanding letters of credit of $3,413,000. 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 June 30, 2016 was positively gapped, which suggests that net interest income 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 $14,799,000 at June 30, 2016, and was $7,889,000 lower 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 June 30, 2016, there was $32,601,000 of unpledged available-for-sale securities readily available for sale for liquidity purposes as compared with $22,811,000 at December 31, 2015.

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 $440,113,000 at June 30, 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 June 30, 2016, the Bank had access to two formal borrowing lines with its correspondent banks totaling $219,180,000, net of the aggregate amounts outstanding on these lines totaling $5,000,000 in the form of 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 at June 30, 2016 as compared with $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 June 30, 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 June 30, 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 June 30, 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.

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:



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.)



10.1		Employment Agreement of Scott A. Seasock. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)

10.2		Amendment to Employment Agreement and Waiver of Certain Rights of Theresa Wasko. (Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)

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).

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:		August 12, 2016

By:		/s/ Scott A. Seasock
		Scott A. Seasock
		Chief Financial Officer
		(Principal Financial Officer)

Date:		August 12, 2016

Exhibit Index


Exhibit No.		Description

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.)

10.1		Employment Agreement of Scott A. Seasock. (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)

10.2		Amendment to Employment Agreement and Waiver of Certain Rights of Theresa Wasko. (Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 3, 2016.)

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).

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company