UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form

10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended ~~March 31,~~September 30, 2020

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from

001-38627

(Commission File Number)

RIVERVIEW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania		38-3917371
(State of incorporation)		(IRS Employer Identification Number)

3901 North Front Street, Harrisburg, PA		17110
(Address of principal executive offices)		(Zip code)

(717)

957-2196

(Registrant’s telephone number, including area code)

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

☒

No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

during the preceding 12 months or for such shorter period that the registrant was required to submit such

files.

Yes

☒ 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 as defined in Rule

12b-2

of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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

☒

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	RIVE	Nasdaq Global Market

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: ~~9,240,492~~9,281,015 at ~~April~~ October

, 2020.

Table of Contents

RIVERVIEW FINANCIAL CORPORATION

FORM

10-Q

For the Quarter Ended ~~March 31,~~September 30, 2020


Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at ~~March 31,~~September 30, 2020 and December 31, 2019		3
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019		4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019		5
	Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2020 and 2019		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2426
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		4042
Item 4.	Controls and Procedures		4042
PART II	OTHER INFORMATION:
Item 1.	Legal Proceedings		4042
Item 1A.	Risk Factors		4042
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40
~~Item 3.~~	~~Defaults upon Senior Securities~~		40
~~Item 4.~~	~~Mine Safety Disclosures~~		40
~~Item 5.~~	~~Other Information~~		40
~~Item 6.~~	~~Exhibits~~		41
	~~Signatures~~		42
Item 3.	Defaults upon Senior Securities		42
Item 4.	Mine Safety Disclosures		42
Item 5.	Other Information		42
Item 6.	Exhibits		43
	Signatures		44

Table of Contents

Riverview Financial Corporation

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per share data)

   March 31,
2020 December 31,
2019
Assets:

Cash and due from banks
   $ 12,128 $ 11,838
Interest-bearing deposits in other banks
   61,107 38,510
Investment securitiesavailable-for-sale
   68,402 91,247
Loans held for sale
   272 81
Loans, net
   887,449 852,109
Less: allowance for loan losses
   8,251 7,516


Net loans
   879,198 844,593
Premises and equipment, net
   18,875 17,852
Accrued interest receivable
   2,589 2,414
Goodwill
   24,754 24,754
Intangible assets
   2,566 2,736
Other assets
   47,152 45,929


Total assets
   $ 1,117,043 $ 1,079,954


Liabilities:

Deposits:

Noninterest-bearing
   $ 148,633 $ 147,405
Interest-bearing
   809,870 793,075


Total deposits
   958,503 940,480
Short-term borrowings

Long-term debt
   26,992 6,971
Accrued interest payable
   424 435
Other liabilities
   12,683 13,958


Total liabilities
   998,602 961,844


Stockholders’ equity:

Common stock: no par value, authorized 20,000,000 shares; March 31, 2020, issued and outstanding 9,236,039 shares; December 31, 2019, issued and outstanding 9,216,616 shares
   102,386 102,206
Capital surplus
   134 112
Retained earnings
   16,081 16,140
Accumulated other comprehensive loss
   (160 ) (348 )


Total stockholders’ equity
   118,441 118,110


Total liabilities and stockholders’ equity
   $ 1,117,043 $ 1,079,954


	September 30, 2020			December 31, 2019
Assets:
Cash and due from banks	$	10,646		$	11,838
Interest-bearing deposits in other banks		21,312			38,510
Investment securities available-for-sale		98,846			91,247
Loans held for sale		4,547			81
Loans, net		1,163,442			852,109
Less: allowance for loan losses		11,624			7,516

Net loans		1,151,818			844,593
Premises and equipment, net		18,419			17,852
Accrued interest receivable		3,218			2,414
Goodwill					24,754
Intangible assets		2,227			2,736
Other assets		45,739			45,929

Total assets	$	1,356,772		$	1,079,954

Liabilities:
Deposits:
Noninterest-bearing	$	178,168		$	147,405
Interest-bearing		853,145			793,075

Total deposits		1,031,313			940,480
Short-term borrowings
Long-term debt		217,031			6,971
Accrued interest payable		591			435
Other liabilities		12,413			13,958

Total liabilities		1,261,348			961,844

Stockholders’ equity:
Common stock: 0 par value, authorized 20,000,000 shares; September 30, 2020, issued and outstanding 9,279,503 shares; December 31, 2019, issued and outstanding 9,216,616 shares		102,672			102,206
Capital surplus		190			112
Retained earnings (accumulated deficit)		(8,040	)		16,140
Accumulated other comprehensive income (loss)		602			(348	)

Total stockholders’ equity		95,424			118,110

Total liabilities and stockholders’ equity	$	1,356,772		$	1,079,954

See notes to consolidated financial statements.

Table of Contents

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands, except per share data)

For the three months ended March 31,
   2020 2019
Interest income:

Interest and fees on loans:

Taxable
   $ 9,782 $ 10,688
Tax-exempt
   245 230
Interest on investment securitiesavailable-for-sale:

Taxable
   535 740
Tax-exempt
   37 69
Interest on interest-bearing deposits in other banks
   89 231
Interest on federal funds sold



Total interest income
   10,688 11,958


Interest expense:

Interest on deposits
   1,789 2,073
Interest on short-term borrowings
   5
Interest on long-term debt
   123 134


Total interest expense
   1,917 2,207


Net interest income
   8,771 9,751
Provision for loan losses
   1,800 583


Net interest income after provision for loan losses
   6,971 9,168


Noninterest income:

Service charges, fees and commissions
   1,381 1,053
Commission and fees on fiduciary activities
   213 260
Wealth management income
   220 247
Mortgage banking income
   108 106
Bank owned life insurance investment income
   193 187
Net gain (loss) on sale of investment securitiesavailable-for-sale
   815 (42 )


Total noninterest income
   2,930 1,811


Noninterest expense:

Salaries and employee benefits expense
   5,056 7,510
Net occupancy and equipment expense
   1,180 1,089
Amortization of intangible assets
   170 194
Net cost (benefit) of operation of other real estate owned
   (11 ) 127
Other expenses
   2,817 3,044


Total noninterest expense
   9,212 11,964


Income (loss) before income taxes
   689 (985 )
Income tax expense (benefit)
   56 (298 )


Net income (loss)
   633 (687 )


Other comprehensive income (loss):

Unrealized gain (loss) on investment securitiesavailable-for-sale
   $ 1,053 $ 1,023
Reclassification adjustment for net (gain) loss on sale of investment securitiesavailable-for-sale included in net income
   (815 ) 42
Income tax expense related to other comprehensive income
   50 224


Other comprehensive income, net of income taxes
   188 841


Comprehensive income
   $ 821 $ 154


Per share data:

Net income (loss):

Basic
   $ 0.07 $ (0.08 )
Diluted
   $ 0.07 $ (0.08 )
Average common shares outstanding:

Basic
   9,223,445 9,143,316
Diluted
   9,233,060 9,143,316
Dividends declared
   $ 0.08 $ 0.10


	Three Months Ended					Nine Months Ended
September 30,	2020		2019			2020			2019
Interest income:
Interest and fees on loans:
Taxable	$	11,265	$	12,283		$	31,649		$	34,651
Tax-exempt		223		259			704			722
Interest and dividends on investment securities available-for-sale:
Taxable		360		641			1,291			2,113
Tax-exempt		71		43			176			159
Interest on interest-bearing deposits in other banks		11		200			112			647

Total interest income		11,930		13,426			33,932			38,292

Interest expense:
Interest on deposits		1,200		2,027			4,384			6,199
Interest on short-term borrowings							28
Interest on long-term debt		304		127			652			392

Total interest expense		1,504		2,154			5,064			6,591

Net interest income		10,426		11,272			28,868			31,701
Provision for loan losses		1,844		1,049			5,656			2,250

Net interest income after provision for loan losses		8,582		10,223			23,212			29,451

Noninterest income:
Service charges, fees and commissions		1,099		1,129			3,491			3,497
Commission and fees on fiduciary activities		246		314			669			855
Wealth management income		220		226			636			709
Mortgage banking income		401		151			900			357
Bank owned life insurance investment income		192		193			578			574
Net gain (loss) on sale of investment securities available-for-sale				(53	)		815			(95	)

Total noninterest income		2,158		1,960			7,089			5,897

Noninterest expense:
Salaries and employee benefits expense		5,411		5,232			15,452			18,572
Net occupancy and equipment expense		1,428		1,041			3,676			3,174
Amortization of intangible assets		170		194			509			582
Goodwill impairment							24,754
Net cost (benefit) of operation of other real estate owned		51		(15	)		40			20
Other expenses		2,918		2,979			8,713			9,531

Total noninterest expense		9,978		9,431			53,144			31,879

Income (loss) before income taxes		762		2,752			(22,843	)		3,469
Income tax expense (benefit)		67		486			(49	)		456

Net income (loss)		695		2,266			(22,794	)		3,013

Other comprehensive income (loss):
Unrealized (gain) loss on investment securities available-for-sale		114		(256	)		2,007			2,703
Reclassification adjustment for net (gain) loss on sale of investment securities available-for-sale included in net income (loss)				53			(815	)		95
Net change in derivative fair value		49					11

Other comprehensive income (loss)		163		(203	)		1,203			2,798
Income tax expense (benefit) related to other comprehensive income		35		(42	)		253			588

Other comprehensive income (loss), net of income taxes		128		(161	)		950			2,210

Comprehensive income (loss)	$	823	$	2,105		$	(21,844	)	$	5,223

Per share data:
Net income (loss):
Basic	$	0.08	$	0.25		$	(2.46	)	$	0.33
Diluted	$	0.08	$	0.25		$	(2.46	)	$	0.33
Average common shares outstanding:
Basic		9,273,666		9,173,901			9,248,856			9,159,281
Diluted		9,273,666		9,181,076			9,248,856			9,172,015

See notes to consolidated financial statements.

Table of Contents

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

   Common
Stock    Capital
Surplus Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total
Balance, January 1, 2020
   $ 102,206    $ 112 $ 16,140 $ (348 ) $ 118,110
Net income
      633 633
Other comprehensive income, net of income taxes
      188 188
Issuance under ESPP, 401k and Dividend Reinvestment plans: 19,423 shares
   180    180
Stock based compensation
      22 22
Dividends declared, $0.08 per share
      (692 ) (692 )




Balance, March 31, 2020
   $ 102,386    $ 134 $ 16,081 $ (160 ) $ 118,441




Balance, January 1, 2019
   $ 101,134    $ 332 $ 15,063 $ (2,619 ) $ 113,910
Net income (loss)
      (687 ) (687 )
Other comprehensive income, net of income taxes
      841 841
Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,223 shares
   175    175
Exercise of stock options: 17,821 shares
   191    (25 ) 166
Dividends declared, $0.10 per share
      (915 ) (915 )




Balance, March 31, 2019
   $ 101,500    $ 307 $ 13,461 $ (1,778 ) $ 113,490


For the nine months ended September 30,	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2020	$	102,206	$	112		$	16,140		$	(348	)	$	118,110
Net income (loss)							(22,794	)					(22,794	)
Other comprehensive income (loss) , net of income taxes										950			950
Issuance under ESPP, 401k and Dividend Reinvestment plans: 62,887 shares		466											466
Stock based compensation				78									78
Dividends declared, $0.15 per share							(1,386	)					(1,386	)

Balance, September 30, 2020	$	102,672	$	190		$	(8,040	)	$	602		$	95,424

Balance, January 1, 2019	$	101,134	$	332		$	15,063		$	(2,619	)	$	113,910
Net income (loss)							3,013						3,013
Other comprehensive income (loss), net of income taxes										2,210			2,210
Issuance under ESPP, 401k and Dividend Reinvestment plans: 42,518 shares		474											474
Exercise of stock options: 18,492 shares		199		(32	)								167
Dividends declared, $0.28 per shares							(2,519	)					(2,519	)

Balance, September 30, 2019	$	101,807	$	300		$	15,557		$	(409	)	$	117,255


For the three months ended September 30,	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, July 1, 2020	$	102,552	$	161		$	(8,735	)	$	474		$	94,452
Net income (loss)							695						695
Other comprehensive income (loss) , net of income taxes										128			128
Issuance under ESPP, 401k and Dividend Reinvestment plans: 15,806 shares		120											120
Stock based compensation				29									29
Dividends declared, $0.00 per share

Balance, September 30, 2020	$	102,672	$	190		$	(8,040	)	$	602		$	95,424

Balance, July 1, 2019	$	101,644	$	304		$	13,978		$	(248	)	$	115,678
Net income (loss)							2,266						2,266
Other comprehensive income (loss), net of income taxes										(161	)		(161	)
Issuance under ESPP, 401k and Dividend Reinvestment plans: 14,534 shares		159											159
Exercise of stock options: 361 shares		4		(4	)
Dividends declared, $0.08 per shares							(687	)					(687	)

Balance, September 30, 2019	$	101,807	$	300		$	15,557		$	(409	)	$	117,255

See notes to consolidated financial statements.

Table of Contents

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Three Months Ended March 31,
   2020 2019
Cash flows from operating activities:

Net income (loss)
   $ 633 $ (687 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization of premises and equipment
   320 300
Provision for loan losses
   1,800 583
Stock based compensation
   22
Net amortization of investment securitiesavailable-for-sale
   169 216
Net cost (benefit) of operation of other real estate owned
   (11 ) 127
Net (gain) loss on sale of investment securitiesavailable-for-sale
   (815 ) 42
Amortization of purchase adjustment on loans
   (132 ) (439 )
Amortization of intangible assets
   170 194
Amortization of assumed discount on long-term debt
   21 20
Deferred income taxes
   53 (61 )
Proceeds from sale of loans originated for sale
   2,791 4,443
Net gain on sale of loans originated for sale
   (108 ) (106 )
Loans originated for sale
   (2,874 ) (4,395 )
Bank owned life insurance investment income
   (193 ) (187 )
Net change in:

Accrued interest receivable
   (175 ) (8 )
Other assets
   (2 ) (2,613 )
Accrued interest payable
   (11 ) (9 )
Other liabilities
   (1,275 ) 1,363


Net cash provided by (used in) operating activities
   383 (1,217 )


Cash flows from investing activities:

Investment securitiesavailable-for-sale:

Purchases
   (7,317 ) (7,647 )
Proceeds from repayments
   3,878 3,707
Proceeds from sales
   27,168 8,740
Proceeds from the sale of other real estate owned
   68 133
Net (increase) decrease in restricted equity securities
   (867 ) 46
Net (increase) decrease in loans
   (36,594 ) 15,108
Purchases of premises and equipment
   (1,343 ) (447 )


Net cash provided by (used in) investing activities
   (15,007 ) 19,640


Cash flows from financing activities:

Net increase (decrease) in deposits
   18,023 (3,564 )
Net decrease in short-term borrowings

Repayment of long-term debt

Proceeds from long-term debt
   20,000
Issuance under ESPP, 401k and DRP plans
   180 175
Proceeds from exercise of stock options
   166
Cash dividends paid
   (692 ) (915 )


Net cash provided by (used in) financing activities
   37,511 (4,138 )


Net increase in cash and cash equivalents
   22,887 14,285
Cash and cash equivalents—beginning
   50,348 53,816


Cash and cash equivalents—ending
   $ 73,235 $ 68,101


Supplemental disclosures:

Cash paid during the period for:

Interest
   $ 1,928 $ 2,216


Noncash items from operating activities:

Operating leaseright-of-use assets and liabilities
   $ 3,719


Supplemental schedule of noncash investing and financing activities:

Other real estate acquired in settlement of loans
   $ 321


For the Nine Months Ended September 30,	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(22,794	)	$	3,013
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		952			874
Provision for loan losses		5,656			2,250
Stock based compensation		78
Net amortization of investment securities available-for-sale		559			576
Net cost (benefit) of operation of other real estate owned		40			20
Net (gain) loss on sale of investment securities available-for-sale		(815	)		95
Amortization of purchase adjustment on loans		(592	)		(2,868	)
Amortization of intangible assets		509			582
Amortization of assumed discount on long-term debt		63			59
Impairment of goodwill		24,754
Deferred income taxes		(779	)		273
Proceeds from sale of loans originated for sale		26,921			10,335
Net gain on sale of loans originated for sale		(900	)		(357	)
Loans originated for sale		(30,487	)		(9,677	)
Bank owned life insurance investment income		(578	)		(574	)
Net change in:
Accrued interest receivable		(804	)		259
Other assets		2,107			(1,651	)
Accrued interest payable		156			(52	)
Other liabilities		(1,545	)		(715	)

Net cash provided by (used in) operating activities		2,501			2,442

Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(42,151	)		(32,058	)
Proceeds from repayments		8,832			12,458
Proceeds from sales		27,168			19,767
Proceeds from the sale of other real estate owned		355			728
Net (increase) decrease in restricted equity securities		(837	)		(12	)
Net (increase) decrease in loans		(312,627	)		10,931
Purchases of premises and equipment		(1,519	)		(1,321	)
Premium paid on bank owned life insurance		(22	)		(22	)

Net cash provided by (used in) investing activities		(320,801	)		10,471

Cash flows from financing activities:
Net increase (decrease) in deposits		90,833			(35,010	)
Proceeds from long-term debt		209,997
Issuance under ESPP, 401k and DRP plans		466			474
Proceeds from exercise of stock options					167
Cash dividends paid		(1,386	)		(2,519	)

Net cash provided by (used in) financing activities		299,910			(36,888	)

Net increase in cash and cash equivalents		(18,390	)		(23,975	)
Cash and cash equivalents—beginning		50,348			53,816

Cash and cash equivalents—ending	$	31,958		$	29,841

Supplemental disclosures:
Cash paid during the period for:
Interest	$	4,908		$	6,643

Noncash items from operating activities:
Operating lease right-of-use assets and liabilities				$	4,529

Noncash items from investing activities:
Transfer of owned properties to available for sale				$	540

Supplemental schedule of noncash investing and financing activities:
Other real estate acquired in settlement of loans	$	338		$	114

See notes to consolidated financial statements.

Table of Contents

Riverview Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1. Summary of significant accounting policies:

Nature of Operations

Riverview Financial Corporation, (the “Company” or ~~“Riverview��~~“Riverview”), a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Riverview Bank (the “Bank”).

Riverview Bank, with twenty seven (27) full service offices and ~~four (4)~~three (3) limited purpose offices, is a full service commercial bank offering a wide range of traditional banking services and financial advisory, insurance and investment services to individuals, municipalities and

small-to-medium

sized businesses in the Pennsylvania market areas of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties. The Wealth and Trust Management divisions of the Bank provide trust and investment advisory services to the general public and businesses.

Basis of presentation:

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to

Form 10-Q

and Article 8 of

Regulation S-X.

In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The condensed consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for complete financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on

Form 10-K,

filed on March 16, 2020.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual results could differ from those estimates.

The operating results and financial position of the Company for the three and nine months ended as of ~~March 31,~~September 30, 2020, are not necessarily indicative of the results of operations and financial position that may be expected in the future. This is especially true given the ~~recent~~ outbreak of the Coronavirus

(“COVID-19”)

pandemic which may adversely affect the Company’s business results of operations and financial ~~conditions~~condition for an indefinite period.

Beginning in the first quarter of 2020, the

COVID-19

pandemic ~~has~~ caused disruption in economic and social activity, both globally and in the United States. The spread of

COVID-19

and the related government actions to mandate or encourage quarantines and social distancing, have caused severe disruptions in the U.S. economy, which has and will likely continue to ~~in turn,~~ disrupt the business, activities, and operations of our customers, as well as our own business and operations.

The national public health crisis arising from the

COVID-19

pandemic and public expectations about it, combined with certain

pre-existing

factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the markets in which Riverview operates. The resulting impacts of the pandemic on consumers, including the sudden significant increase in the unemployment rate, is expected to cause changes in consumer and business spending, borrowing needs and saving habits, which will likely affect the demand for loans and other products and services Riverview offers, as well as the creditworthiness of potential and current borrowers. The significant decrease in commercial activity associated with the pandemic, both nationally and in Riverview’s markets, may cause customers, vendors, and counterparties to be unable to meet existing ~~payment~~payments or other obligations to Riverview and the Bank.

Riverview’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. Riverview expects the pandemic to limit, at least for a period of time, customer demand for many banking activities. Many companies and residents in our market area are subject to mandatory

“non-essential

business” shut-downs and “stay at home” orders, which have reduced banking activity across our market area. In response to these mandates, Riverview has temporarily limited ~~most~~

some

locations to

drive-up

and ATM services, with lobby access available by appointment only, reduced hours

of operation at some

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locations and encouraged our customers to use electronic banking platforms. We expect these measures to remain in place for an undetermined period of time. In addition, the use of quarantines and social distancing methods to curtail the spread of~~COVID-19—~~

COVID-19

—whether mandated by governmental authorities or recommended as a public health ~~practice—~~practice — may adversely affect Riverview’s operations as key personnel, employees and customers avoid physical interaction. The continued spread of

COVID-19

could also negatively impact the business and operations of third-party service providers who perform critical services for Riverview’s business. It is not yet known what impact these operational changes may have on Riverview’s financial performance.

There ~~continue~~continues to be broad concerns related to the potential effects of the

COVID-19

pandemic. ~~Even after government mandated stay at home orders expire, the aftereffects of the~~The pandemic ~~may continue~~continues to have an adverse effect on, among other things, (i) our ability to attract customer deposits, (ii) the ability of our borrowers to satisfy their obligations to us, (iii) the demand for our loans or our other products and services and/or (iv) unemployment rates, financial markets, real estate markets or economic growth.

The outbreak of

COVID-19

has significantly affected the financial markets and has resulted in a number of responses by the U.S. government, including a reduction in interest rates by the Federal Reserve. These reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability.

The

COVID-19

pandemic and its impact on the economy heighten the risks related to economic conditions in our market areas, interest rates, loan losses and reliance on our executives and third-party service providers. For example, borrower loan defaults that adversely affect Riverview’s earnings correlate with deteriorating economic conditions, which in turn, may impact borrowers’ creditworthiness. If our borrowers are unable to meet their payment obligations to us, we will be required to increase our allowance for the losses through provisions for credit losses. In addition, loan programs adopted by the federal government, such as the Paycheck Protection Program (“PPP”), while intended to lessen the impact of the pandemic on businesses, may result in a decreased demand for Riverview’s loan products.

The impact of the pandemic on Riverview’s financial results is evolving and uncertain. The Company expects ~~Riverview’s~~its net interest income and

non-interest

income to decline and credit-related losses to increase for an uncertain period given the decline in economic activity occurring due to ~~the coronavirus~~

COVID-19

and the actions by the Federal Reserve with respect to interest rates. We believe that we may experience a material adverse effect inon our business, results of operations and financial condition as a result of the

COVID-19

pandemic for an indefinite period. Material adverse impacts may include all or a combination of valuation impairments on Riverview’s intangible assets, investments, loans or deferred taxes.

The Company determined a triggering event occurred as a result of the ~~March 31, 2020,~~onset of the

COVID-19

pandemic causing management to evaluate goodwill for impairment as of June 30, 2020. The result of the quantitative testing concluded that the Company ~~does not believe there exists any~~recognized an impairment charge of $24,754 at June 30, 2020. The impairment expense is a noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity and the Company’s cash balances. It is uncertain whether a prolonged effect of the

COVID-19

pandemic will result in future impairment charges related to ~~our goodwill,~~ intangible assets, long-lived assets, right of use assets or~~available-for-sale~~ available for sale investment ~~securities due to theCOVID-19~~ ~~pandemic. The Company assessed goodwill and concluded there was no impairment present based on the results of a qualitative test as of March 31, 2020. It is uncertain whether prolonged effects of theCOVID-19~~ ~~pandemic will result in future impairment charges related to any of the aforementioned assets.~~

securities.

Accounting Standards Adopted in 2020

In August 2016, the FASB issued ASU

No. 2016-15, ~~“Statement~~

“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This accounting guidance became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.

In January 2017, the FASB issued ASU

No. 2017-04, ~~“Intangibles~~

“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of the new guidance on January 1, 2020 did not have a material effect on the Company’s financial position, results of operations or disclosures.

In August 2018, the FASB issued ASU

2018-13, ~~“Fair~~

“Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments in this Update improve the effectiveness of fair value measurement disclosures by modifying the disclosure requirements on fair value measurements in Topic 820, Fair Value

Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The ASU became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.

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In August 2018, the FASB issued ASU

No. 2018-15, ~~“Customer’s~~

“Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining

internal-use

software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to

internal-use

software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., prepaid expense). The new guidance provides that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. This update became effective on January 1, 2020. The adoption of the guidance did not have a material effect on the Company’s financial position, results of operations or disclosures.

Recent Accounting Standards

In June 2016, the FASB issued ASU

No. 2016-13, ~~“Financial~~

“Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU No.

2016-13 requires

an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in earlier recognition of credit losses. ASU

No. 2016-13

also requires new disclosures for financial assets measured at amortized cost, loans and

available-for-sale

debt securities. In November 2018, the FASB issued ASU No.

2018-19—Codification

Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic

326-20.

Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In May 2019, the FASB issued ASU

No. 2019-05 ~~“Financial~~

“Financial Instruments-Credit Losses (Topic 326)-Targeted Transition Relief” which amends ASU

No. 2016-13

to allow companies to irrevocably elect, upon adoption of ASU No,

2016-13,

the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC

326-20

if the instruments are eligible for the fair value option under ASC

825-10.

The fair value option election does not apply to

held-to-maturity

debt securities. Entities are required to make this election on an

instrument-by-instrument

basis. In November 2019, the FASB issued ASU

No. 2019-11, ~~“Codification~~

“Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, which provides specific improvements and clarifications to the guidance in Topic 326. Addresses expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, financial assets secured by collateral maintenance provisions, and conforming cross-references to Subtopic

805-20.

In December 2018, the federal bank regulatory agencies approved a final rule that modifies their regulatory capital rules and provides institutions the option to phase in over a three-year period any

day-one

regulatory capital effects of the new accounting standard. The Company has formed an internal management committee and engaged a third-party vendor to assist with the transition to the guidance set forth in this update. The committee is currently evaluating the impact of this update on the Company’s Consolidated Financial Statements, but the ALLL is expected to increase upon adoption since the allowance will be required to cover the full expected life of the portfolio. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the loan and lease portfolio at the time of adoption. Management is currently evaluating the preliminary modeling results, including a qualitative framework to account for the drivers of credit losses that are not captured by the quantitative model. In October 2019, the FASB affirmed its previously proposed amendment to delay the effective date for small reporting public companies to interim and annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company currently expects as of January 1, 2023 to recognize a

one-time

cumulative effect adjustment to increase the ALLL with an offsetting reduction to the retained earnings component of equity.

In August 2018, the FASB issued ASU

No. 2018-14, ~~“Compensation—~~

“Compensation—Retirement Benefits—Defined Benefit Plans—General

(Subtopic 715-20)

—Disclosure ~~Framework—~~ Framework — Changes to the Disclosure Requirements for Defined Benefit Plans”.

Subtopic 715-20

addresses the disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The amendments in this Update remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board’s efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the FASB Concepts Statement, Conceptual Framework for Financial ~~Reporting—~~Reporting — Chapter 8: Notes to Financial Statements. The amendments in this Update apply to all employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for all entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.

In December 2019, the FASB issued ASU

No. 2019-12, ~~“Income~~

“Income Taxes”, an update to simplify the accounting for income taxes by removing certain exceptions in Topic 740 Income Taxes. In addition, ASU

No. 2019-12

improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Company’s financial position, results of operations or disclosures.

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In March 2020, the FASB issued ASU

No. 2020-04, ~~“Reference~~

“Reference Rate Reform (Topic 848)”. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU

2020-04

provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU

2020-04

also provides numerous optional expedients for derivative accounting. ASU

2020-04

is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU

2020-04

for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have a material effect on our business operations and consolidated financial statements.

2. Other comprehensive income (loss):

The components of other comprehensive income (loss) and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income (Loss). The accumulated other comprehensive income (loss) included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities

available-for-sale

and benefit plan and derivative adjustments.

The components of accumulated other comprehensive income (loss) included in stockholders’ equity at ~~March 31,~~September 30, 2020 and December 31, 2019 is as follows:

   March 31,
2020    December 31,
2019
Net unrealized loss on investment securitiesavailable-for-sale
   $ 914    $ 676
Income tax benefit
   192    142




Net of income taxes
   722    534




Benefit plan adjustments
   (1,117 )    (1,117 )
Income tax benefit
   (235 )    (235 )




Net of income taxes
   (882 )    (882 )




Accumulated other comprehensive loss
   $ (160 )    $ (348 )


	September 30, 2020			December 31, 2019
Net unrealized gain ( loss ) on investment securities available-for-sale	$	1,868		$	676
Income tax expense		392			142

Net of income taxes		1,476			534

Benefit plan adjustments		(1,117	)		(1,117	)
Income tax benefit		(235	)		(235	)

Net of income taxes		(882	)		(882	)

Derivative fair value adjustment		11
Income tax benefit		3

Net of income taxes		8

Accumulated other comprehensive income (loss)	$	602		$	(348	)

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Other comprehensive income (loss) and related tax effects for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 is as follows:

Three months ended March 31,
   2020    2019
Unrealized gain (loss) on investment securitiesavailable-for-sale
   $ 1,053    $ 1,023
Net loss (gain) on the sale of investment securitiesavailable-for-sale ⁽¹⁾
   (815 )    42




Other comprehensive gain (loss) before taxes
   238    1,065
Income tax expense (benefit)
   50    224




Other comprehensive gain (loss)
   $ 188    $ 841


Three months ended September 30,	2020		2019
Unrealized gain (loss) on investment securities available-for-sale	$	114	$	(256	)
Net (gain) loss on the sale of investment securities available-for-sale (1)				53
Net change in derivative fair value		49

Other comprehensive income (loss) before taxes		163		(203	)
Income tax expense (benefit)		35		(42	)

Other comprehensive income (loss)	$	128	$	(161	)


Nine months ended September 30,	2020			2019
Unrealized gain on investment securities available-for-sale	$	2,007		$	2,703
Net (gain) loss on the sale of investment securities available-for-sale (1)		(815	)		95
Net change in derivative fair value		11

Other comprehensive income before taxes		1,203			2,798
Income tax expense		253			588

Other comprehensive income	$	950		$	2,210

⁽¹⁾	Represents amounts reclassified out of accumulated other comprehensive income and included in ~~net loss (gain)~~gains on sale of investment securities on the consolidated statements of income and comprehensive income.

3. Earnings per share:

Basic earnings per share is computed by dividing net income (loss) divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The following table provides a reconciliation between the computation of basic earnings per share and diluted earnings per share for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:

Three months ended March 31,
   2020    2019
Numerator:

Net income (loss)
   $ 633    $ (687 )




Denominator:

Basic
   9,223,445    9,143,316
Dilutive options
   9,615




Diluted
   9,233,060    9,143,316




Earnings per share:

Basic
   $ 0.07    $ (0.08 )
Diluted
   $ 0.07    $ (0.08 )


Three months ended September 30,	2020		2019
Numerator:
Net income	$	695	$	2,266

Denominator:
Basic		9,273,666		9,173,901
Dilutive options				7,175

Diluted		9,273,666		9,181,076

Earnings per share:
Basic	$	0.08	$	0.25
Diluted	$	0.08	$	0.25


Nine months ended September 30,	2020			2019
Numerator:
Net income (loss)	$	(22,794	)	$	3,013

Denominator:
Basic		9,248,856			9,159,281
Dilutive options					12,734

Diluted		9,248,856			9,172,015

Earnings per share:
Basic	$	(2.46	)	$	0.33
Diluted	$	(2.46	)	$	0.33

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For the three and nine months ended ~~March 31,~~September 30, 2020 there were ~~37,200~~172,964

outstanding

stock

options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and nine months ended September 30, 2019, there were 59,350 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. ~~None of the outstanding stock options for the three months ended March 31, 2019 were included in the diluted earnings per share calculation because the Company recognized a net loss for the quarter.~~

4. Investment securities:

The amortized cost and fair value of investment securities

available-for-sale

aggregated by investment category at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows:

March 31, 2020
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Fair
Value
State and municipals:

Taxable
   $ 9,736    $ 423    $ 6    $ 10,153
Tax-exempt
   8,448    36    142    8,342
Mortgage-backed securities:

U.S. Government agencies
   28,508    800       29,308
U.S. Government-sponsored enterprises
   17,296    546       17,842
Corporate debt obligations
   3,500       743    2,757








Total
   $ 67,488    $ 1,805    $ 891    $ 68,402


September 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State and municipals:
Taxable	$	20,483	$	392	$	34	$	20,841
Tax-exempt		20,523		358		44		20,837
Mortgage-backed securities:
U.S. Government agencies		26,792		835				27,627
U.S. Government-sponsored enterprises		23,180		505		20		23,665
Corporate debt obligations		6,000		9		133		5,876

Total	$	96,978	$	2,099	$	231	$	98,846


December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State and municipals:
Taxable	$	24,365	$	466	$	7	$	24,824
Tax-exempt		4,260		73				4,333
Mortgage-backed securities:
U.S. Government agencies		36,024		294		184		36,134
U.S. Government-sponsored enterprises		22,422		265		42		22,645
Corporate debt obligations		3,500				189		3,311

Total	$	90,571	$	1,098	$	422	$	91,247

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as

available-for-sale

at ~~March 31,~~September 30, 2020, is summarized as follows:

March 31, 2020
   Fair
Value
Within one year
   $ 477
After one but within five years
   5,423
After five but within ten years
   6,486
After ten years
   8,866


   21,252
Mortgage-backed securities
   47,150


Total
   $ 68,402


September 30, 2020	Fair Value
Within one year	$	543
After one but within five years		5,623
After five but within ten years		11,290
After ten years		30,099

		47,555
Mortgage-backed securities		51,291

Total	$	98,846

Securities with a fair value of ~~$46,152~~$68,604 and $63,389 at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits as required or permitted by law.

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a

case-by-case

basis. At ~~March 31,~~September 30, 2020 and December 31, 2019, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.

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The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at ~~March 31,~~September 30, 2020 and December 31, 2019, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

   Less Than 12 Months    12 Months or More    Total
March 31, 2020
   Fair
Value    Unrealized
Losses    Fair
Value    Unrealized
Losses    Fair
Value    Unrealized
Losses
State and municipals:

Taxable
   $ 785    $ 6    $    $    $ 785    $ 6
Tax-exempt

Mortgage-backed securities:

U.S. Government agencies
   4,094    142          4,094    142
U.S. Government-sponsored enterprises

Corporate debt obligation
         2,757    743    2,757    743












Total
   $ 4,879    $ 148    $ 2,757    $ 743    $ 7,636    $ 891

   Less Than 12 Months    12 Months or More    Total
December 31, 2019
   Fair
Value    Unrealized
Losses    Fair
Value    Unrealized
Losses    Fair
Value    Unrealized
Losses
State and municipals:

Taxable
   1,280    $ 7    $    $    $ 1,280    $ 7
Tax-exempt

Mortgage-backed securities:

U.S. Government agencies
   15,799    184          15,799    184
U.S. Government-sponsored enterprises
         3,245    42    3,245    42
Corporate debt obligations
         3,311    189    3,311    189












Total
   $ 17,079    $ 191    $ 6,556    $ 231    $ 23,635    $ 422


	Less Than 12 Months				12 Months or More				Total
September 30, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State and municipals:
Taxable	$	6,082	$	33	$	280	$	1	$	6,362	$	34
Tax-exempt		9,040		44						9,040		44
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises		5,312		20						5,312		20
Corporate debt obligations						3,367		133		3,367		133

Total	$	20,434	$	97	$	3,647	$	134	$	24,081	$	231


	Less Than 12 Months				12 Months or More				Total
December 31, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State and municipals:
Taxable	$	1,280	$	7	$		$		$	1,280	$	7
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies		15,799		184						15,799		184
U.S. Government-sponsored enterprises						3,245		42		3,245		42
Corporate debt obligations						3,311		189		3,311		189

Total	$	17,079	$	191	$	6,556	$	231	$	23,635	$	422

The Company had 1022 investment securities, consisting of ~~two~~5 taxable state and municipal obligations, ~~seven mortgage-backed securities,~~

13 tax-exempt state and ~~one~~municipal obligations,

3 U.S. Government

-sponsored enterprises

and 1 corporate debt obligation that were in unrealized loss positions at ~~March 31,~~September 30, 2020. Of these securities, ~~one~~1 taxable

state and

municipal

obligations

and 1 corporate debt obligation ~~was~~were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, resulting from changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at ~~March 31,~~September 30, 2020. There was no OTTI recognized for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019.

The Company had 22 investment securities, consisting of ~~two~~2 taxable state and municipal obligations, 19 mortgage-backed securities and ~~one~~1 corporate obligation that were in unrealized loss positions at December 31, 2019. Of these securities, ~~four~~4 mortgage-backed securities and ~~one~~1 corporate obligation were in a continuous unrealized loss position for twelve months or more.

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows. Net deferred loan fees were $5,264 at September 30, 2020 and net deferred loan costs were ~~$885 and~~ $1,129 at ~~March 31, 2020 and~~ December 31, 2019.

   March 31,
2020    December 31,
2019
Commercial
   $ 121,128    $ 118,658
Real estate:

Construction
   72,580    61,831
Commercial
   476,573    455,901
Residential
   209,749    207,354
Consumer
   7,419    8,365




Total
   $ 887,449    $ 852,109


	September 30, 2020		December 31, 2019
Commercial	$	382,518	$	118,658
Real estate:
Construction		64,322		61,831
Commercial		507,795		455,901
Residential		202,132		207,354
Consumer		6,675		8,365

Total	$	1,163,442	$	852,109

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The Company participated in the

Coronavirus

Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program (“PPP”), a multi-billion dollar specialized

low-interest

loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. As of September 30, 2020, the Company

had

1,274 PPP loans totaling $

273,813

. The Company is utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to meet the funding needs of its borrowers of PPP loans.

The change in the allowance for loan losses account by major loan classifications for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 is summarized as follows:

   Real Estate
March 31, 2020
   Commercial Construction    Commercial Residential Consumer Unallocated    Total
Allowance for loan losses:

Beginning Balance, January 1, 2020
   $ 1,953 $ 473    $ 3,115 $ 1,820 $ 155    $ 7,516
Charge-offs
   (899 )    (95 ) (130 )    (1,124 )
Recoveries
   2    1 56    59
Provisions
   615 222    896 (107 ) 71 $ 103    1,800






Ending balance
   $ 1,671 $ 695    $ 3,917 $ 1,713 $ 152 $ 103    $ 8,251

   Real Estate
March 31, 2019
   Commercial Construction Commercial    Residential    Consumer Unallocated Total
Allowance for loan losses:

Beginning Balance, January 1, 2019
   $ 1,162 $ 404 $ 3,298    $ 1,286    $ 50 $ 148 $ 6,348
Charge-offs
   (376 )       (144 ) (520 )
Recoveries
   5 1    1    68 75
Provisions
   232 (123 ) 160    279    183 (148 ) 583






Ending balance
   $ 1,023 $ 281 $ 3,459    $ 1,566    $ 157 $ $ 6,486


				Real Estate
September 30, 2020	Commercial			Construction		Commercial			Residential			Consumer			Unallocated	Total
Allowance for loan losses:
Beginning Balance, July 1, 2020	$	1,685		$	741	$	5,078		$	2,070		$	162		$	$	9,736
Charge-offs													(42	)			(42	)
Recoveries		2					57						27				86
Provisions		173			145		1,015			490			21				1,844

Ending balance	$	1,860		$	886	$	6,150		$	2,560		$	168		$	$	11,624


				Real Estate
September 30, 2020	Commercial			Construction		Commercial			Residential			Consumer			Unallocated	Total
Allowance for loan losses:
Beginning Balance, January 1, 2020	$	1,953		$	473	$	3,115		$	1,820		$	155		$	$	7,516
Charge-offs		(899	)				(595	)		(2	)		(243	)			(1,739	)
Recoveries		11					59			1			120				191
Provisions		795			413		3,571			741			136				5,656

Ending balance	$	1,860		$	886	$	6,150		$	2,560		$	168		$	$	11,624


				Real Estate
September 30, 2019	Commercial			Construction		Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance, July 1, 2019	$	1,117		$	491	$	3,591		$	1,649		$	154		$		$	7,002
Charge-off		(759	)				(110	)		(5	)		(111	)				(985	)
Recoveries		1					2						28					31
Provisions		876			30		95			(28	)		74			2		1,049

Ending balance	$	1,235		$	521	$	3,578		$	1,616		$	145		$	2	$	7,097


				Real Estate
September 30, 2019	Commercial			Construction		Commercial			Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance, January 1, 2019	$	1,162		$	404	$	3,298		$	1,286		$	50		$	148		$	6,348
Charge-offs		(1,148	)				(110	)		(25	)		(364	)					(1,647	)
Recoveries		12					4			4			126						146
Provisions		1,209			117		386			351			333			(146	)		2,250

Ending balance	$	1,235		$	521	$	3,578		$	1,616		$	145		$	2		$	7,097

Table of Contents

The allocation of the allowance for loan losses and ~~the~~ related loans by ~~major~~ classifications of loans at ~~March 31,~~September 30, 2020 and December 31, 2019 is summarized as follows:

      Real Estate
March 31, 2020
   Commercial    Construction    Commercial    Residential    Consumer    Unallocated    Total
Allowance for loan losses:

Ending balance
   $ 1,671    $ 695    $ 3,917    $ 1,713    $ 152    $ 103    $ 8,251














Ending balance:

individually evaluated for impairment
   29       87             116














Ending balance:

collectively evaluated for impairment
   1,642    695    3,830    1,713    152    103    8,135














Ending balance:

purchased credit impaired loans
   $    $    $    $    $    $    $














Loans receivable:

Ending balance
   $ 121,128    $ 72,580    $ 476,573    $ 209,749    $ 7,419    $    $ 887,449














Ending balance:

individually evaluated for impairment
   1,218       1,405    2,062          4,685














Ending balance:

collectively evaluated for impairment
   119,909    72,580    473,656    207,456    7,419       881,020














Ending balance:

purchased credit impaired loans
   $ 1    $    $ 1,512    $ 231    $    $    $ 1,744


			Real Estate
September 30, 2020	Commercial		Construction		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	1,860	$	886	$	6,150	$	2,560	$	168	$	$	11,624

Ending balance:
individually evaluated for impairment		32				1							33

Ending balance:
collectively evaluated for impairment		1,828		886		6,149		2,560		168			11,591

Ending balance:
purchased credit impaired loans	$		$		$		$		$		$	$

Loans receivable:
Ending balance	$	382,518	$	64,322	$	507,795	$	202,132	$	6,675	$	$	1,163,442

Ending balance:
individually evaluated for impairment		1,853				7,545		2,480					11,878

Ending balance:
collectively evaluated for impairment		380,665		64,322		498,902		199,480		6,675			1,150,044

Ending balance:
purchased credit impaired loans	$		$		$	1,348	$	172	$		$	$	1,520

Table of Contents


			Real Estate
December 31, 2019	Commercial		Construction		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	1,953	$	473	$	3,115	$	1,820	$	155	$	$	7,516

Ending balance:
individually evaluated for impairment		712				218							930

Ending balance:
collectively evaluated for impairment		1,241		473		2,897		1,820		155			6,586

Ending balance:
purchased credit impaired loans	$		$		$		$		$		$	$

Loans receivable:
Ending balance	$	118,658	$	61,831	$	455,901	$	207,354	$	8,365	$	$	852,109

Ending balance:
individually evaluated for impairment		2,260				1,224		2,085					5,569

Ending balance:
collectively evaluated for impairment		116,390		61,831		453,156		205,026		8,365			844,768

Ending balance:
purchased credit impaired loans	$	8	$		$	1,521	$	243	$		$	$	1,772

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. ~~Loans~~

Non-homogeneous

loans are individually analyzed ~~for~~fo

credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

~~Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.~~

•

Pass—A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss or designated as Special Mention.

•

Special Mention—A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

•

Substandard—A loan that is inadequately protected by the current sound worth and paying capacity of the obligor 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. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful—A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

•

Loss—A loan classified as Loss is considered uncollectible and of such little value that its continuance as a bankable loan is not warranted. This classification does not mean that the loan 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 partial recovery may occur in the future. Homogeneous loans not meeting the criteria above are considered pass rated loans and evaluated based on delinquency performance.

Table of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

Contents

The following tables present the major ~~classification~~classifications of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at ~~March 31,~~September 30, 2020 and December 31, 2019:

March 31, 2020
   Pass    Special
Mention    Substandard    Doubtful    Total
Commercial
   $ 111,111    $ 5,964    $ 4,053    $              $ 121,128
Real estate:

Construction
   71,454    1,126          72,580
Commercial
   453,374    8,430    14,769       476,573
Residential
   205,926    1,418    2,405       209,749
Consumer
   7,419             7,419










Total
   $ 849,284    $ 16,938    $ 21,227    $    $ 887,449










December 31, 2019
   Pass    Special
Mention    Substandard    Doubtful    Total
Commercial
   $ 109,190    $ 5,992    $ 3,476    $    $ 118,658
Real estate:

Construction
   61,678    153          61,831
Commercial
   430,771    9,271    15,859       455,901
Residential
   203,381    1,437    2,536       207,354
Consumer
   8,365             8,365










Total
   $ 813,385    $ 16,853    $ 21,871    $    $ 852,109


September 30, 2020	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	374,721	$	3,319	$	4,478	$	$	382,518
Real estate:
Construction		55,072		8,252		998			64,322
Commercial		452,958		30,048		24,789			507,795
Residential		197,405		1,570		3,157			202,132
Consumer		6,675							6,675

Total	$	1,086,831	$	43,189	$	33,422	$	$	1,163,442


December 31, 2019	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	109,190	$	5,992	$	3,476	$	$	118,658
Real estate:
Construction		61,678		153					61,831
Commercial		430,771		9,271		15,859			455,901
Residential		203,381		1,437		2,536			207,354
Consumer		8,365							8,365

Total	$	813,385	$	16,853	$	21,871	$	$	852,109

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of ~~March 31,~~September 30, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.

   Accrual Loans
March 31, 2020
   30-59 Days
Past Due    60-89 Days
Past Due    90 or More
Days Past
Due    Total Past
Due    Current    Nonaccrual
Loans    Total Loans
Commercial
   $ 385    $ 15    $ 23    $ 423    $ 119,917    $ 787    $ 121,127
Real estate:

Construction
   584    978       1,562    71,018       72,580
Commercial
   9,577    1,361       10,938    463,481    642    475,061
Residential
   5,062    137    652    5,851    203,048    619    209,518
Consumer
   65    17    16    98    7,321       7,419














Total
   $ 15,673    $ 2,508    $ 691    $ 18,872    $ 864,785    $ 2,048    $ 885,705














Purchased credit impaired loans
                     1,744


Total Loans
                     $ 887,449

   Accrual Loans    Nonaccrual
Loans    Total Loans
December 31, 2019
   30-59 Days
Past Due    60-89 Days
Past Due    90 or More
Days Past
Due    Total Past
Due    Current
Commercial
   $ 137    $    $    $ 137    $ 117,354    $ 1,159    $ 118,650
Real estate:

Construction
   9          9    61,822       61,831
Commercial
   147          147    453,774    459    454,380
Residential
   3,402    820    18    4,240    202,202    669    207,111
Consumer
   84    14    27    125    8,240       8,365














Total
   $ 3,779    $ 834    $ 45    $ 4,658    $ 843,392    $ 2,287    $ 850,337














Purchased credit impaired loans
                     1,772


Total Loans
                     $ 852,109


	Accrual Loans
September 30, 2020	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
Commercial	$	20	$	78	$	108	$	206	$	381,521	$	791	$	382,518
Real estate:
Construction				208				208		64,114				64,322
Commercial										505,216		1,231		506,447
Residential		650		219				869		199,888		1,203		201,960
Consumer		20		1				21		6,654				6,675

Total	$	690	$	506	$	108	$	1,304	$	1,157,393	$	3,225	$	1,161,922

Purchased credit impaired loans														1,520

Total Loans													$	1,163,442


	Accrual Loans
December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
Commercial	$	137	$		$		$	137	$	117,354	$	1,159	$	118,650
Real estate:
Construction		9						9		61,822				61,831
Commercial		147						147		453,774		459		454,380
Residential		3,402		820		18		4,240		202,202		669		207,111
Consumer		84		14		27		125		8,240				8,365

Total	$	3,779	$	834	$	45	$	4,658	$	843,392	$	2,287	$	850,337

Purchased credit impaired loans														1,772

Total Loans													$	852,109

Table of Contents

The following tables summarize information concerning impaired loans as of and for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, and as of and for the year ended, December 31, 2019 by major loan classification:

   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance    This Quarter
March 31, 2020
   Average
Recorded
Investment    Interest
Income
Recognized
With no related allowance:

Commercial
   $ 1,098    $ 1,208       $ 873    $ 68
Real estate:

Construction

Commercial
   2,550    2,550       2,837    47
Residential
   2,292    2,422       2,345    25
Consumer











Total
   5,940    6,180       6,055    140










With an allowance recorded:

Commercial
   121    121    $ 29    653
Real estate:

Construction

Commercial
   367    367    87    513    4
Residential
            45
Consumer











Total
   488    488    116    1,211    4










Commercial
   1,219    1,329    29    1,526    68
Real estate:

Construction

Commercial
   2,917    2,917    87    3,350    51
Residential
   2,292    2,422       2,390    25
Consumer











Total
   $ 6,428    $ 6,668    $ 116    $ 7,266    $ 144


							This Quarter				Year-to-Date
September 30, 2020	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	1,732	$	1,842			$	1,896	$	154	$	1,630	$	354
Real estate:
Construction
Commercial		3,124		3,510				6,141		10		4,944		76
Residential		2,652		2,782				2,700		12		2,564		118
Consumer

Total		7,508		8,134				10,737		176		9,138		548

With an allowance recorded:
Commercial		121		121	$	32		121				121
Real estate:
Construction
Commercial		5,769		5,769		1		2,885		61		2,045		65
Residential
Consumer

Total		5,890		5,890		33		3,006		61		2,166		65

Commercial		1,853		1,963		32		2,017		154		1,751		354
Real estate:
Construction
Commercial		8,893		9,279		1		9,026		71		6,989		141
Residential		2,652		2,782				2,700		12		2,564		118
Consumer

Total	$	13,398	$	14,024	$	33	$	13,743	$	237	$	11,304	$	613


	Recorded Investment		Unpaid Principal Balance		Related Allowance		For the Year Ended
December 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	1,147	$	1,257			$	648	$	660
Real estate:
Construction
Commercial		1,963		1,963				3,124		1,456
Residential		2,329		2,467				2,397		173
Consumer

Total		5,439		5,687				6,169		2,289

With an allowance recorded:
Commercial		1,121		1,121	$	712		685
Real estate:
Construction
Commercial		782		936		218		658		17
Residential								91
Consumer

Total		1,903		2,057		930		1,434		17

Commercial		2,268		2,378		712		1,333		660
Real estate:
Construction
Commercial		2,745		2,899		218		3,782		1,473
Residential		2,329		2,467				2,488		173
Consumer

Total	$	7,342	$	7,744	$	930	$	7,603	$	2,306

   Recorded
Investment    Unpaid
Principal
Balance    Related
Allowance    This Quarter
March 31, 2019
   Average
Recorded
Investment    Interest
Income
Recognized
With no related allowance:

Commercial
   $ 189    $ 189       $ 169    $ 23
Real estate:

Construction
   85    85       43
Commercial
   4,257    4,257       4,271    100
Residential
   2,217    2,217       2,342    91
Consumer











Total
   6,748    6,748       6,825    214










With an allowance recorded:

Commercial
   841    841    $ 77    1,045
Real estate:

Construction

Commercial
   371    371    91    453    4
Residential
   180    318    55    181    1
Consumer











Total
   1,392    1,530    223    1,679    5










Commercial
   1,030    1,030    77    1,214    23
Real estate:

Construction
   85    85       43
Commercial
   4,628    4,628    91    4,724    104
Residential
   2,397    2,535    55    2,523    92
Consumer











Total
   $ 8,140    $ 8,278    $ 223    $ 8,504    $ 219

Table of Contents


							This Quarter				Year-to-Date
September 30, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	1,617	$	2,256			$	871	$	96	$	399	$	604
Real estate:
Construction												29
Commercial		2,048		2,048				3,135		1,204		3,882		1,408
Residential		2,178		2,178				2,189		33		2,247		158
Consumer

Total		5,843		6,482				6,195		1,333		6,557		2,170

With an allowance recorded:
Commercial		121		121	$	29		448				767
Real estate:
Construction
Commercial		785		939		251		579		4		468		12
Residential		177		315		45		178		2		179		5
Consumer

Total		1,083		1,375		325		1,205		6		1,414		17

Commercial		1,738		2,377		29		1,319		96		1,166		604
Real estate:
Construction												29
Commercial		2,833		2,987		251		3,714		1,208		4,350		1,420
Residential		2,355		2,493		45		2,367		35		2,426		163
Consumer

Total	$	6,926	$	7,857	$	325	$	7,400	$	1,339	$	7,971	$	2,187

For the three and nine months ended ~~March 31,~~September 30, interest income related to impaired loans, would have been ~~$21~~$33 and $89 in 2020 and ~~$60~~$48 and $133 in 2019 had the loans been current and the terms of the loans not been modified.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

Rate Modification—A modification in which the interest rate is changed to a below market rate.

Term Modification—A modification in which the maturity date, timing of payments or frequency of payments is changed.

Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification—A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification—Any other type of modification, including the use of multiple categories above.

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructures that are classified as impaired. Troubled debt restructures totaled ~~$2,680~~$9,893 at ~~March 31,~~September 30, 2020, $2,701 at December 31, 2019 and ~~$2,765~~$2,729 at ~~March 31,~~September 30, 2019.

There were no0 loans modified as troubled debt restructures ~~for~~during the ~~three~~third quarter of 2020 and 9 loans modified during the nine months ended ~~March 31, 2020.~~September 30, 2020 totaling $7,817. There ~~was one~~were 0 loans modified as troubled debt restructures during the third quarter of 2019 and 1 loan modified ~~as a troubled debt restructure for~~during the ~~three~~nine months ended ~~March 31,~~September 30, 2019.

During the three months ended ~~March 31,~~September 30, 2020, there ~~was one~~were 0 defaults on loans restructured and 1 default ~~for~~on a ~~commercial real estate~~restructured loan totaling $368 ~~on loans restructured.~~during the nine months ended September 30, 2020. During the three months ended ~~March 31,~~September 30, 2019, there ~~was one~~were 0 defaults on loans restructured and 1 default on a restructured ~~residential loan.~~

loan totaling $222 during the nine months ended September 30, 2019.

Table of Contents

The Company is a 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, unused portions of lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk over and above the amount recognized in the consolidated balance sheets.

~~Unused portions~~

Distribution of

off-balance

sheet commitments


	September 30, 2020		December 31, 2019
Unused portions of lines of credit	$	93,694	$	81,665
Construction loans		26,216		41,168
Commitments to extend credit		13,086		24,954
Deposit overdraft protection		22,231		23,730
Standby and performance letters of credit		3,973		4,726

Total	$	159,200	$	176,243

We record a valuation allowance for

off-balance

sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $95 at ~~March 31,~~September 30, 2020 ~~totaled $160,714, consisting of $85,796 in lines of credit, $32,263 in construction loans, $14,395 in commitments to extend credit, $23,745 in deposit overdraft protection~~ and ~~$4,515 in standby letters of credit. In comparison, unused portions ofoff-balance~~ ~~sheet commitments,~~$89 at December 31, ~~2019, totaled $176,243, consisting~~2019. We do not anticipate that losses, if any, that may occur as a result of ~~$81,665 in lines of credit, $41,168 in construction loans, $24,954 in~~funding

off-balance

sheet commitments, ~~to extend credit, $23,730 in deposit overdraft protection and $4,726 in standby letters of credit.~~

would have a material adverse effect on our operating results or financial position.

6. Other assets:

The components of other assets at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows:

   March 31,
2020    December 31,
2019
Other real estate owned
   $ 346    $ 82
Bank owned life insurance
   30,840    30,647
Restricted equity securities
   1,857    990
Deferred tax assets
   4,169    4,272
Leaseright-of-use assets
   3,678    3,856
Other assets
   6,262    6,082




Total
   $ 47,152    $ 45,929


	September 30, 2020		December 31, 2019
Other real estate owned	$	25	$	82
Bank owned life insurance		31,247		30,647
Restricted equity securities		1,827		990
Deferred tax assets		4,798		4,272
Lease right-of-use assets		3,336		3,856
Other assets		4,506		6,082

Total	$	45,739	$	45,929

7. Leases:

On ~~March 31,~~September 30, 2020, the Company leased ~~14 of its 31~~13 locations. The Company’s operating lease

right-of-use

(“ROU”) assets and related lease liabilities were ~~$3,678~~$3,336 and ~~$3,723,~~$3,397, respectively, and have remaining terms ranging from 1 to 3433 years, including extension options that the Company is reasonably certain will be exercised. For the three and nine months ended ~~March 31,~~September 30, 2020, operating lease cost totaled ~~$199.~~$346 and $954, respectively. On ~~March 31,~~September 30, 2019 the Company’s lease ROU assets and related lease liabilities were ~~$3,606~~$4,136 and ~~$3,616,~~$4,165, respectively. For the ~~quarter~~three and nine months ended ~~March 31,~~September 30, 2019, operating lease cost totaled ~~$147.~~

$203 and $538, respectively.

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The table below summarizes other information related to our operating leases:

   Three Months Ended
March 31, 2020 Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases
   $ 199 $ 136
ROU assets obtained in exchange for lease liabilities
   $ —   $ 3,719
Weighted average remaining lease term—operating leases, in years
   9.13 12.10
Weighted average discount rate—operating leases
   3.01 % 3.29 %


	Nine Months Ended September 30, 2020			Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	584		$	465
ROU assets obtained in exchange for lease liabilities				$	4,529
Weighted average remaining lease term—operating leases, in years		9.12			10.46
Weighted average discount rate—operating leases		3.04	%		3.06	%

The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five years and thereafter in addition to a reconcilement to the Company’s current lease liability.

2020
   $ 572
2021
   754
2022
   697
2023
   485
2024
   317
Thereafter
   1,567


Total lease payments
   4,392
Less imputed interest
   669


   $ 3,723


2020	$	187
2021		754
2022		697
2023		485
2024		317
Thereafter		1,568

Total lease payments		4,008
Less imputed interest		611

	$3,397

For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, the Company did not enter into any new lease arrangements.

8. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument. Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued, and the reliability of the assumptions used to determine fair value. These levels include:

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of assets and liabilities measured at fair value on a recurring basis:

Investment securities:

The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Assets and liabilities measured at fair value on a recurring basis at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows:

   Fair Value Measurement Using
March 31, 2020
   Amount    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)    Significant
Other Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
State and Municipals:

Taxable
   $ 10,153                    $ 10,153
Tax-exempt
   8,342       8,342
Mortgage-backed securities:

U.S. Government agencies
   29,308       29,308
U.S. Government-sponsored enterprises
   17,842       17,842
Corporate debt obligations
   2,757       2,757








Total
   $ 68,402       $ 68,402








   Fair Value Measurement Using
December 31, 2019
   Amount    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)    Significant
Other Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
State and municipals:

Taxable
   $ 24,824                    $ 24,824
Tax-exempt
   4,333       4,333
Mortgage-backed securities:

U.S. Government agencies
   36,134       36,134
U.S. Government-sponsored enterprises
   22,645       22,645
Corporate debt obligations
   3,311       3,311








Total
   $ 91,247       $ 91,247

Fair Value Measurement Using

September 30, 2020

Amount

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

State and Municipals:

Taxable
   $ 20,841       $ 20,841
Tax-exempt
   20,837       20,837
Mortgage-backed securities:

U.S. Government agencies
   27,627       27,627
U.S. Government-sponsored enterprises
   23,665       23,665
Corporate debt obligations
   5,876       3,876    $ 2,000








Total
   $ 98,846       $ 96,846    $ 2,000









Fair Value Measurement Using

December 31, 2019

Amount

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

State and municipals:

Taxable
   $ 24,824       $ 24,824
Tax-exempt
   4,333       4,333
Mortgage-backed securities:

U.S. Government agencies
   36,134       36,134
U.S. Government-sponsored enterprises
   22,645       22,645
Corporate debt obligations
   3,311       3,311








Total
   $ 91,247       $ 91,247

Other real estate owned

: Assets acquired through loan foreclosure are recorded at fair value less estimated costs to sell, with any difference between the fair value of the property and the carrying value of the loan recorded as a

charge-off.

If the fair value is higher than the carrying amount of the loan, the excess is recognized first as a recovery and then as noninterest income. Subsequent changes in value are reported as adjustments to the carrying amount and are recorded in noninterest expense. The carrying value of other real estate owned is not

re-measured

to fair value on a recurring basis but is subject to fair value adjustments when the carrying value differs from the fair value, less estimated selling costs. Fair value is based on recent real estate appraisals, current sale value assessments by real estate agents or pending offers to acquire by independent buyers and is updated at least annually. The Company classifies other real estate owned in level 3 of the fair value hierarchy.

Impaired loans

: The fair value of impaired loans is specifically reviewed for purposes of determining the appropriate amount of impairment to be allocated to the ALLL. Fair value is generally measured based on the value of the collateral securing the loans.

Collateral may include but is not necessarily limited to real estate, personal or business assets including vehicles, equipment, inventory, accounts receivable or marketable securities. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed third-party appraiser (Level 3). The value of business

equipment

is based on an outside appraisal, if deemed significant, or the net book value on the applicable borrower financial

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statements. Likewise, values for inventory, accounts receivable or marketable security collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate or custodian account statements (Level 3). Impaired loans are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan and lease losses on the Consolidated Statements of Income (Loss).

Assets and liabilities measured at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2020 and December 31, 2019 are summarized as follows:

   Fair Value Measurement Using
March 31, 2020
   Amount    (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets    (Level 2)
Significant
Other
Observable
Inputs    (Level 3)
Significant
Unobservable
Inputs
Other real estate owned
   $ 346                                    $ 346
Impaired loans, net of related allowance
   372          372








Total
   $ 718          $ 718








   Fair Value Measurement Using
December 31, 2019
   Amount    (Level 1)
Quoted Prices
in Active
Markets for
Identical
Assets    (Level 2)
Significant
Other
Observable
Inputs    (Level 3)
Significant
Unobservable
Inputs
Other real estate owned
   $ 82          $ 82
Impaired loans, net of related allowance
   973          973








Total
   $ 1,055          $ 1,055


	Fair Value Measurement Using
September 30, 2020	Amount		(Level 1) Quoted Prices in Active Markets for Identical Assets	(Level 2) Significant Other Observable Inputs	(Level 3) Significant Unobservable Inputs
Other real estate owned	$	25			$	25
Impaired loans, net of related allowance		5,857				5,857

Total	$	5,882			$	5,882


	Fair Value Measurement Using
December 31, 2019	Amount		(Level 1) Quoted Prices in Active Markets for Identical Assets	(Level 2) Significant Other Observable Inputs	(Level 3) Significant Unobservable Inputs
Other real estate owned	$	82			$	82
Impaired loans, net of related allowance		973				973

Total	$	1,055			$	1,055

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value at ~~March 31,~~September 30, 2020 and December 31, 2019.

   Quantitative Information about Level 3 Fair Value Measurements
March 31, 2020
   Fair Value
Estimate
Valuation Techniques

Unobservable Input
   Range
(Weighted Average)
Other real estate owned
   $ 346
Appraisal of collateral

Appraisal adjustments
   46.0% to 60.0% (47.0)%

Liquidation expenses
   10.0% to 10.0% (10.0)%
Impaired loans
   $ 372
Appraisal of collateral

Appraisal adjustments
   10.0% to 50.0% (32.0)%

Liquidation expenses
   0.0% to 12.3% (5.7)%
   Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019
   Fair Value
Estimate
Valuation Techniques

Unobservable Input
   Range
(Weighted Average)
Other real estate owned
   $ 82
Appraisal of collateral

Appraisal adjustments
   42.0% to 60.0% (52.0)%

Liquidation expenses
   10.0% to 10.0% (10.0)%
Impaired loans
   $ 973
Appraisal of collateral

Appraisal adjustments
   10.0% to 50.0% (22.0)%

Liquidation expenses
   9.5% to 12.3% (8.8)%

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2020

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Other real estate owned

Appraisal of collateral

Appraisal adjustments

60.0% to 60.0% (60.0)%

Liquidation expenses

10.0% to 10.0% (10.0)%

Impaired loans

5,857

Appraisal of collateral

Appraisal adjustments

15.0% to 20.0% (15.0)%

Liquidation expenses

7.0% to 7.0% (7.0)%

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2019

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Other real estate owned

Appraisal of collateral

Appraisal adjustments

42.0% to 60.0% (52.0)%

Liquidation expenses

10.0% to 10.0% (10.0)%

Impaired loans

973

Appraisal of collateral

Appraisal adjustments

10.0% to 50.0% (22.0)%

Liquidation expenses

9.5% to 12.3% (8.8)%

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The carrying and fair values of the Company’s financial instruments at ~~March 31,~~September 30, 2020 and December 31, 2019 and their placement within the fair value hierarchy are as follows:

   Carrying
Amount    Fair Value Hierarchy
March 31, 2020
   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
   $ 73,235    $ 73,235    $ 73,235
Investment securities
   68,402    68,402       $ 68,402
Loans held for sale
   272    272       272
Net loans⁽¹⁾
   879,198    860,456          860,456
Accrued interest receivable
   2,589    2,589       345    2,244
Financial liabilities:

Deposits
   $ 958,503    $ 962,450       $ 962,450
Long-term debt
   26,992    26,575       26,575
Accrued interest payable
   424    424       424
   Carrying
Amount    Fair Value Hierarchy
December 31, 2019
   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
   $ 50,348    $ 50,348    $ 50,348
Investment securitiesavailable-for-sale
   91,247    91,247       $ 91,247
Loans held for sale
   81    81       81
Net loans⁽¹⁾
   844,593    836,074          $ 836,074
Accrued interest receivable
   2,414    2,414       461    1,953
Financial liabilities:

Deposits
   $ 940,480    $ 940,546       $ 940,546
Long-term debt
   6,971    6,971       6,971
Accrued interest payable
   435    435       435


	Carrying Amount		Fair Value Hierarchy
September 30, 2020	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	$	31,958	$	31,958	$	31,958
Investment securities		98,846		98,846			$	96,846	$	2,000
Loans held for sale		4,547		4,547				4,547
Net loans (1)		1,151,818		1,142,187						1,142,187
Accrued interest receivable		3,218		3,218				406		2,812
Financial liabilities:
Deposits	$	1,031,313	$	989,122			$	989,122
Long-term debt		217,031		218,150				218,150
Accrued interest payable		591		591				591


	Carrying Amount		Fair Value Hierarchy
December 31, 2019	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	$	50,348	$	50,348	$	50,348
Investment securities available-for-sale		91,247		91,247			$	91,247
Loans held for sale		81		81				81
Net loans (1)		844,593		836,074					$	836,074
Accrued interest receivable		2,414		2,414				461		1,953
Financial liabilities:
Deposits	$	940,480	$	940,546			$	940,546
Long-term debt		6,971		6,971				6,971
Accrued interest payable		435		435				435

¹⁾	The carrying amount is net of unearned income and the allowance for loan losses in accordance with the adoption of ASU No. 2016-01 where the fair value of loans as of ~~March 31,~~September 30, 2020 and December 31, 2019 was measured using an exit price ~~notion.~~ notion

9. ~~Subsequent Events:~~

~~In December 2019,~~Goodwill

The following table summarizes activity related to the carrying value of goodwill for the nine months ended September 30, 2020:


Balance, January 1, 2020	$	24,754
Less: Goodwill impairment		24,754

Balance, September 30, 2020	$

Accounting guidance requires the Company to test its goodwill impairment at least annually, or more frequently, if an event occurs or circumstances change which are considered to be a triggering event that would more likely than not reduce the fair value of its goodwill below the carrying value of the reporting unit, Riverview Bank. The Company noted that at the end of the first quarter of 2020, as a result of the onset of the

COVID-19 ~~surfaced~~

pandemic, the market price of its common shares decreased significantly below the carrying value of its equity per share and that it did not recover during the second quarter. This decrease prompted the Company to assess its goodwill utilizing a quantitative test to determine whether it was

more-likely-than-not

the fair value of the Company was less than the carrying amount as of the end of the second quarter of 2020.

The Company utilized multiple valuations approaches, including discounted income, change in ~~Wuhan, China,~~control premium to parent market price and ~~has since spread around~~change in control premium to peer market price to determine the ~~world, resulting in significant business and socialdisruption. COVID-19~~fair value of its goodwill. Each approach was ~~declared~~assigned a ~~Public Health Emergency~~

Table of ~~International Concern by~~Contents

weight to arrive at the ~~World Health Organization~~fair value of the reporting unit. Based on ~~January 30, 2020. The operations and business~~the results of the quantitative test, it was determined the carrying amount of a reporting unit exceeded its fair value and that an impairment loss must be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the quantitative test, the Company ~~are being materially affected by~~recognized an impairment charge equal to the ~~pandemic. As~~entire amount of ~~April~~its recorded goodwill on the balance sheet at June 30, 2020 wetotaling $24,754.

10. Subsequent Events:

On October 6,

2020,

the Company announced the completion of its private placement of

25 million of

its

5.75%

Fixed to Floating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The Notes will have ~~granted temporary modifications~~a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until

October 15, 2025

. Commencing on that date, the interest rate applicable to ~~consumer and commercial loan customers for 355 loans with~~the outstanding ~~balances totaling $185,188, or 20.9%~~principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus

563 basis points

, ~~of total loans. The deferral of interest payments on these loans total $2,024.~~payable quarterly until maturity. The Company ~~has also participated~~may redeem the Notes at par, in ~~the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), Paycheck Protection Program, a multi-billion dollar specializedlow-interest~~ loan program funded by the U.S. Treasury Department and administered by the U.S. Small Business Administration. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs. Through April 30, 2020, the Company has submitted 1,534 PPP loans totaling $297,400, mostwhole or in part, at its option, anytime beginning on October 15, 2025.

Table of which have been approved and await customer execution of the loan documents. The Company is utilizing the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) to meet the funding needs of its borrowers of PPP loans.

The extent to which the coronavirus may impact business activity or financial results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions required to contain the coronavirus or treat its impact, among others.

Contents

Riverview Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS

(Dollars in thousands, except per share data)

Item 2.

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

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on

Form 10-K

for the year ended December 31, 2019.

Cautionary Note Regarding Forward-Looking Statements:

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Riverview Financial Corporation and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: our ability to achieve the intended benefits of acquisitions and integration of previously acquired businesses; restructuring initiatives; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; and inability of third party service providers to perform. Most recently, the risk factors associated with the onset of

COVID-19

could have a material adverse effect on significant estimates, operations and business results of Riverview. For a discussion of the risks and potential impacts of the

COVID-19

refer to Note 1 entitled “Summary of Significant Accounting Policies-Basis of presentation” in the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Riverview Financial Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts have been reclassified to conform with the current year’s presentation and did not have any effect on the operating results or financial position of the Company.

Critical Accounting Policies:

Disclosure of our significant accounting policies are included in Note 1 to the Consolidated Financial Statements of the Annual Report on

Form 10-K

for the year ended December 31, 2019. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in Note 1 to the consolidated financial statements in the Company’s Annual Report on

Form 10-K

for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020.

Operating Environment:

Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, increased at an annualized rate of 33.1% in the third quarter of 2020. This more than offset the decline in the second quarter when the economy decreased at an annualized rate of ~~4.8%~~31.4%. The strong bounce back in ~~the first quarter of 2020. The decline in first quarter~~ GDP was ~~primarily~~ in ~~response to the spread~~dimension and character much as

Table of~~COVID-19,~~ ~~as governments issued“stay-at-home”~~ ~~orders~~ Contents

expected. The strongest rebounds were in ~~March. This led to rapid changes in demand, as businesses~~business equipment spending, residential investment and ~~schools switched to remote work or canceled operations, and consumers canceled, restricted or redirected their~~

spending. The decrease in GDP in the first quarter reflected negative contributions from personal consumption expenditures (“PCE”), nonresidential fixed investment, exports, and private inventory investment that were partly offset by positive contributions from residential fixed investment, federalconsumer spending, while government spending and ~~state and local government spending.~~nonresidential structures investment declined. A cessation of inventory reduction resulted in a strong addition to output growth, while overall growth was tempered by a deterioration in the trade deficit. The ~~decrease in PCE reflected decreases in services, led~~annualized rate of growth declined only 2.9% over the past twelve month ended September 30, 2020 despite the major headwinds caused by ~~health care and travel, and goods, led by motor vehicles and parts and services.~~

the onset of the pandemic.

The impact of the virus has been felt nationally and within our primary market area as unemployment rates have ~~begun to escalate. Unemployment~~been elevated. The unemployment rate declined sharply in the United States to 7.9% in the third quarter of 2020 from 11.1% in the second quarter of 2020 but was ~~4.4% and 3.8%~~still elevated compared to 3.5% in ~~March 2020 and~~the third quarter of 2019. ~~respectively.~~ With respect to the markets we serve, the unemployment rate ~~increased~~decreased in all the counties in which we have office ~~locations.~~locations comparing the third and second quarters of 2020. The average unemployment rate for counties in our market area ~~increased~~improved to ~~6.3%~~6.8% in ~~March~~September 2020 compared to ~~4.5%~~12.0% in ~~March 2019.~~June 2020. The resulting impacts of the pandemic on consumer and business customers, including the sudden significant increase in the unemployment rate, ~~is expected to~~has cause changes in consumer and business spending, borrowing needs and saving habits, which ~~will likely affect~~has affected the demand for loans and other products and services we offer, as well as the creditworthiness of potential and current borrowers and delinquency rates. Our business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect borrowers’ ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn may influence the recognition of credit losses in our loan portfolios and has increased our allowance for loan losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Disruptions to our customers’ businesses ~~could~~has also ~~result~~resulted in declines in, among other things, trust and wealth management revenue. These developments, as a consequence of the pandemic, are materially impacting our business, the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our ~~first quarter~~quarterly results.

Inflationary pressure ~~was tempered~~has increased, as reflected by the Personal Consumption Expenditures (“PCE”) Price Index,

increasing at a rate of 3.7% in the third quarter of 2020, as compared with a decrease of 1.6% in the second quarter. Excluding food and energy prices, the PCE price ~~indexincreasing at~~index increased 3.5 percent in the third quarter of 2020, in contrast to a ~~lower rate~~decrease of ~~1.3~~0.8 percent ~~compared with an increase of 1.4 percent.~~in the prior quarter. The Consumer Price Index

(“~~CPU”~~CPI-U”) ~~declined 0.4 percent~~

increased 0.2% in ~~March~~September on a seasonally adjusted basis after increasing 0.4% in the ~~largest monthly decline since January 2015.~~prior month. Over the last 12 months, the ~~CPU~~

CPI-U

increased ~~1.5 percent caused primarily by a~~1.4% as prices have recovered after sharp ~~decline~~declines in ~~gasoline prices along with decreases in airline fares, lodging and apparel costs.~~the first quarter of 2020. Concerns about the spread of the ~~disease~~virus and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate to a range of 0% to 0.25%, including a

50-basis

point reduction on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. Accordingly, these monetary policy actions have already adversely impacted and may continue to impact our net interest margin if we are unable to reduce fund costs at the same magnitude or pace as repricing earning assets. Based on the aforementioned economic conditions, we believe that we may experience a material adverse effect in our business, results of operations and financial condition as a result of the

COVID-19

pandemic for an indefinite period.

Review of Financial Position:

Total assets increased ~~$37,089~~$276,818 to ~~$1,117,043~~$1,356,772 at ~~March 31,~~September 30, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to ~~$887,449~~$1,163,442 at ~~March 31,~~September 30, 2020, compared to $852,109 at December 31, 2019, an increase of ~~$35,340.~~$311,333. The origination of $273,813 under the PPP was primarily responsible for the increase in loans. Business lending, including commercial and commercial real estate loans, increased ~~$23,142,~~$

315,754

, retail lending, including residential mortgages and consumer loans, ~~increased $1,449,~~decreased $6,912, and construction lending increased ~~$10,749~~$

2,491

during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Investment securities ~~decreased $22,845,~~increased $7,599, or ~~25.0%~~8.3%, in the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Noninterest-bearing deposits increased ~~$1,228,~~$30,763, while interest-bearing deposits increased ~~$16,795~~$60,070 during the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Total stockholders’ equity ~~increased $331,~~decreased $22,686, to ~~$118,441~~$95,424 at ~~March 31,~~September 30, 2020 from $118,110 at

year-end

2019. The decrease in stockholders’ equity was caused primarily by the recognition of a goodwill impairment charge of $24,754 at the end of the second quarter 2020. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, total assets averaged ~~$1,085,345, a decrease~~$1,244,576, an increase of ~~$44,305~~$122,066 from ~~$1,129,650~~$1,122,510 for the same period in 2019.

Investment Portfolio:

The Company’s entire investment portfolio is held as

available-for-sale,

which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when favorable market opportunities exist. Investment securities

available-for-sale

totaled ~~$68,402~~$98,846 at ~~March 31,~~September 30, 2020, ~~a decrease~~an increase of ~~$22,845,~~$7,599, or ~~25.0%~~8.3%, from $91,247 at December 31, 2019. During 2019, management put into action a strategic initiative to reconstitute the footprint of its distribution channel from underperforming markets to regions with greater growth and profit potential. As part of this plan, we hired a number of established and seasoned commercial relationship managers to operate in these new markets during the latter part of 2019. As a result, we experienced significant loan growth in the first quarter of 2020. The onset of

COVID-19

caused a marked reduction in general market rates which increased the value of fixed rate securities and lowered the yield on adjustable rate securities. This provided us the opportunity to ~~partially fund our~~aid in funding loan demand and reduce ~~our~~ exposure to falling interest rates through the sale of investment securities at a net gain. Accordingly, we sold $27,168 in investment securities

available-for-sale

which consisted of equal portions of longer-term municipal obligations and adjustable rate US Government mortgage backed securities. The net gain on the sale amounted to $815

in the ~~first quarter of~~nine months ended September 30, 2020 compared to a net loss ~~recognized~~ of ~~$42 in the first quarter~~$95

Table of ~~2019.~~

Contents

~~For the three months ended March 31, 2020, the investment portfolio averaged $82,028, a decrease of $26,228, compared to $108,256~~

recognized for the same period last year. In order to employ excess funds and meet pledging requirements, we purchased $42,151 in investment securities

available-for-sale

in 2020. These purchases consisted of $11,506 of taxable state and municipal obligations, $16,925 of

tax-exempt

state and municipal obligations, $2,500 of corporate debt obligations and $11,220 of U.S. Government agencies and U.S. Government-sponsored enterprise mortgage-backed securities. The weighted average

tax-equivalent

yield was 2.06% on these purchases.

For the nine months ended September 30, 2020, the investment portfolio averaged $75,193, a decrease of $25,885 compared to $101,078 for the same period last year. The

tax-equivalent

yield on the investment portfolio decreased 2537 basis points to ~~2.85%~~2.69% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, from ~~3.10%~~3.06% for the comparable period of 2019.

Securities

available-for-sale

are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported a net unrealized ~~holding gain, included as a separate component~~gains of ~~stockholders’ equity~~$1,868, deferred income tax of ~~$722,~~$392, and accumulated comprehensive income of $1,476 at September 30, 2020. This compares with net unrealized gains of $676, deferred income taxes of ~~$192 at March 31, 2020. This compares with a net unrealized holding gain~~$142, and accumulated comprehensive income of $534 ~~net of deferred income taxes of $142,~~ at December 31, 2019. The increase in the unrealized holding gain was the result of reductions in general market rates.

Loan Portfolio:

Loans, net, increased to ~~$887,449~~$1,163,442 at ~~March 31,~~September 30, 2020 from $852,109 at December 31, 2019, an increase of ~~$35,340,~~$311,333, or ~~4.1%~~36.5%. Business loans, including commercial and commercial real estate loans, increased ~~$23,142,~~$315,754, or ~~4.0%~~55.0%, to ~~$597,701~~$890,313 at ~~March 31,~~September 30, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, ~~increased $1,449,~~decreased $6,912, or ~~0.7%~~3.2%, to ~~$217,168~~$208,807 at ~~March 31,~~September 30, 2020 from $215,719 at December 31, 2019. Construction lending increased ~~$10,749,~~$2,491, or ~~17.4%~~4.0%, to ~~$72,580~~$64,322 at ~~March 31,~~September 30, 2020 from $61,831 at December 31, 2019. Construction loans consisted of $10,005 for residential homes and rental properties and $62,575 for land development loans at March 31, 2020. Residential construction loans included $4,684 for loans to individuals to build personal residences and $5,231 for loans to finance builders of residential properties. Land development loans consisted of $8,285 for residential land developments, $52,129 for commercial land developments and $2,161 for consumer land loans. The increase in the loan ~~growth~~portfolio was ~~due~~attributable to ~~originations in~~the origination of PPP loans along with the remainder generated primarily from new ~~and existing markets and from the addition of relationship managers hired in the latter part of 2020.~~

markets.

For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, loans ~~net~~ averaged ~~$874,420, a decrease~~$1,039,258, an increase of ~~$12,393~~$153,446 compared to ~~$886,813~~$885,812 for the same period in 2019. The

tax-equivalent

yield on the loan portfolio was ~~4.64%~~4.18% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, a~~38-basis~~ 119 basis point decrease from ~~5.02%~~5.37% for the comparable period last year. The decrease in loan yield was caused by declines in general market rates, reductions in loan accretion and lower yield on originated PPP loans. Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted domestic financial markets prompting the Federal Open Market Committee of the Federal Reserve Board to aggressively cut the target Federal Funds rate by

150-basis

points in the first half of 2020. Loan accretion included in loan interest income in the first ~~three~~nine months of 2020 related to acquired loans was ~~$132~~$592 compared to ~~$439~~$2,868 for the same period in 2019.

The yield earned on PPP loans from interest and fees was 2.46% for the nine months ended September 30, 2020.

The economic slowdown associated with

COVID-19

may have an adverse impact on the growth and asset quality of our loan portfolio, especially those industry segments being severely impacted by the pandemic. Specifically, we have identified the following industries, by the amount of aggregate loans and percentage of total loans as of ~~March 31,~~September 30, 2020 in our loan portfolio that may have increased exposure to this pandemic event:

   March 31, 2020
Industry:
   Amount    % of Total
Loans
Mining, Quarry, Oil and Gas
   $ 1,706    0.2 %
Construction-Land Subdivision
   20,232    2.3 %
Manufacturing
   12,606    1.4 %
Wholesale Trade
   4,999    0.6 %
Automobile Dealers
   7,086    0.8 %
Non-Residential Rentals and Leasing
   259,240    29.2 %
Residential Rental and Leasing
   110,028    12.4 %
Health Care
   11,915    1.3 %
Arts, Entertainment and Recreation
   5,683    0.6 %
Hospitality
   56,750    6.4 %
Restaurants
   8,873    1.0 %



   $ 499,118    56.2 %


	September 30, 2020
Industry:	Amount		% of Total Loans
Mining, Quarry, Oil and Gas	$	4,214		0.40	%
Construction-Land Subdivision		23,316		2.00	%
Manufacturing		13,163		1.10	%
Wholesale Trade		4,767		0.40	%
Automobile Dealers		7,062		0.60	%
Non-Residential Rentals and Leasing		261,575		22.50	%
Residential Rental and Leasing		114,451		9.80	%
Health Care		15,897		1.40	%
Arts, Entertainment and Recreation		5,229		0.40	%
Hospitality		65,968		5.70	%
Restaurants		8,374		0.70	%

	$	524,016		45.04	%

There have been a number of initiatives recently instituted by the Federal Government that may help offset the adverse impact on the growth and asset quality of our loan portfolio. In response to the economic slowdown caused by

COVID-19,

President Donald Trump signed into law the CARES Act on March 27, 2020, which included numerous provisions including the institution of the establishment

Table of Contents

of the PPP. The PPP was created to provide funding to small business owners who may have had to temporarily close or scale back production ~~as a result of~~due to the

COVID-19

pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employment-sustaining payroll costs and benefits, as well as other significant costs including the small businesses’ rent, mortgage, and utilities. There has been considerable demand for PPP loans implemented by the CARES Act. As a U.S. Small Business Administration (“SBA”) lender, we have been participating in the PPP and ~~were able to approve 296 PPP~~as of September 30, 2020 had originated 1,274 loans totaling ~~$39,700 in the first round of government funding. On April 24, 2020, the President signed into law a second round of PPP funding. We continue to actively participate in the PPP and as~~

of April 30, 2020 have submitted 1,238 additional applications approximating $257,700 to the SBA in the second round of funding, most of which have been approved and await customer execution of the loan documentation. On April 9, 2020, the$273,813. The FDIC, Federal Reserve and OCC created the PPPLF to bolster the effectiveness of the PPP by providing liquidity to and neutralizing the regulatory capital effects on participating financial institutions. We ~~intend to utilize~~have utilized the liquidity relief offered by the PPPLF to the extent needed and as a result, do not expect our participation in the PPP to have a negative impact on our liquidity position, capital resources, financial condition or results of operations. Offsetting the positive influence offered by the PPP is the fact that most states, including the Commonwealth of Pennsylvania, have placed significant restrictions on

non-essential

businesses as well as enforcing social distancing. The longer these restrictions are in place the more severe the effects of the economic slowdown will be and the greater the negative consequences for our loan customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.

In addition to the risks inherent in our loan portfolio in the normal course of business, we are also a party to financial instruments with

off-balance

sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as

on-balance

sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the consolidated financial statements.

~~Unused portions ofoff-balance~~ sheet commitments at March 31, 2020, totaled $160,714, consisting of $85,796 in lines of credit, $32,263 in construction loans, $14,395 in commitments to extend credit, $23,745 in deposit overdraft protection and $4,515 in standby letters of credit. In comparison, unused portions of~~off-balance~~ sheet commitments, at December 31, 2019, totaled $176,243, consisting of $81,665 in lines of credit, $41,168 in construction loans, $24,954 in commitments to extend credit, $23,730 in deposit overdraft protection and $4,726 in standby letters of credit.

With the onset of the

COVID-19

pandemic, we are continually monitoring draws on unused portions of lines of credit and construction loans. ~~Unused portions~~

The contractual amounts of ~~lines of credit totaled $85,796~~

off-balance

sheet commitments at March 31, 2020, consisting of $52,694 of commercial lines of credit and $33,102 of consumer lines of credit. Comparatively, subsequent to quarter end, unused portions of lines of credit totaled $88,653 at AprilSeptember 30, 2020 ~~consisting of $55,260 of commercial lines of credit~~ and ~~$33,393 of consumer lines of credit. Unused portions of construction loans totaled $32,263 at March~~December 31, 2020 consisting of $29,022 of commercial construction loans and $3,241 of consumer construction loans. In comparison, at April 30, 2020 unused portions of construction loans totaled $24,373 consisting of $22,398 of commercial construction loans and $1,975 of consumer construction loans.

2019 are summarized as follows:


	September 30, 2020		December 31, 2019
Unused portions of lines of credit	$	93,694	$	81,665
Construction loans		26,216		41,168
Commitments to extend credit		13,086		24,954
Deposit overdraft protection		22,231		23,730
Standby and performance letters of credit		3,973		4,726

Total	$	159,200	$	176,243

Asset Quality:

National, Pennsylvania and our market area unemployment rates at ~~March 31,~~September 30, 2020 and 2019 are summarized as follows:

   2020 2019
United States
   4.4 % 3.8 %
Pennsylvania
   6.0 % 4.3 %
Berks County
   5.9 % 4.2 %
Blair County
   6.2 % 4.3 %
Bucks County
   5.2 % 3.8 %
Centre County
   4.4 % 3.0 %
Clearfield County
   8.0 % 5.6 %
Cumberland County
   4.3 % 3.1 %
Dauphin County
   5.3 % 3.7 %
Huntingdon County
   9.4 % 6.6 %
Lebanon County
   5.2 % 3.7 %
Lehigh County
   6.0 % 4.5 %
Lycoming County
   7.4 % 5.2 %
Perry County
   5.0 % 3.7 %
Schuylkill County
   7.1 % 5.5 %
Somerset County
   8.2 % 5.8 %


	2020			2019
United States		7.9	%		3.5	%
Pennsylvania		7.7	%		3.9	%
Berks County		7.5	%		4.2	%
Blair County		6.6	%		4.2	%
Bucks County		7.1	%		3.7	%
Centre County		4.5	%		3.3	%
Clearfield County		6.9	%		4.6	%
Cumberland County		5.4	%		3.3	%
Dauphin County		7.5	%		4.1	%
Huntingdon County		8.3	%		5.1	%
Lebanon County		6.5	%		3.8	%
Lehigh County		8.1	%		4.4	%
Lycoming County		7.5	%		4.5	%
Perry County		5.2	%		3.3	%
Schuylkill County		7.5	%		5.1	%
Somerset County		7.1	%		4.5	%

Employment conditions deteriorated in 2020 for the Nation, Commonwealth of Pennsylvania and within every county in which we have branch locations. The average unemployment rate for all our counties increased to ~~6.3%~~6.8% in 2020 from ~~4.5%~~4.2% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was ~~4.3%~~4.5% which was in ~~Cumberland~~Centre County, and the highest recorded rate being ~~9.4%~~8.3% in Huntingdon County. ~~An increase~~High levels or increases in unemployment rates may have a negative impact on economic growth within these areas and could have a corresponding effect on our business by decreasing loan demand and weakening asset quality.

~~We currently have in place a number~~

Table of ~~processes, procedures and monitoring tools to manage credit risk that will assist us in navigating our Company through this pandemic, including but not limited to:~~

Contents

~~Approval Process – No single approval authorities. All loans are approved by two authorized officers with higher exposures approved by a committee process.~~

~~Concentration Management – Concentration limits by industry are established by policy and monitored and reported to the Board of Directors quarterly.~~

CRE Stress Testing – CRE Stress testing is conducted at the individual transaction level for new loans and with annual reviews of existing relationships. The credit department utilizes a cash flow analysis to stress individual loans for increased interest rate, decreased occupancy, and a combination of these two scenarios. In addition, a break-even interest rate and break-even occupancy level is calculated.

CRE Stress Testing is also conducted quarterly at the portfolio level with results reported to the Board of Directors. The stress testing includes a mild and severe stress test. The stress test factors include: Interest rate shocks for both fixed and variable rate loans; changes or declines in Net Operating Income; and declines in collateral value. Asset quality is quantified by analyzing~~Loan-to-Value~~ and Debt Service Coverage ratios. Stress testing is commensurate with our current and projected credit risk profile. Management will revisit stress testing procedures in the event our risk profile changes. Changes in the risk profile may stem from the introduction of a new product, changes in economic conditions both locally and nationally, or other internal or external factors that may affect credit quality.

A CRE market summary report is prepared and reported to the Board of Directors quarterly. The report provides a detailed analysis of CRE activity for each of the Bank’s geographic markets, and for each property type within each market. Job growth, employment statistics, demographic statistics, supply and demand, absorption rates, vacancy rates, rental and expense data and market sales history are all considered.

Loan Quality Review – A Commercial Loan Quality Review meeting is conducted quarterly by the Chief Credit Officer and Chief Lending Officer. Commercial account officers, the Credit Manager and the Special Assets Manager are required to attend. This process is intended to ensure the accuracy and timeliness of risk ratings, and to provide a framework for monitoring and managing problem accounts. Credits reviewed include all Pass/Watch rated loans over $750, and all Special Mention and all Substandard rated loans over $25.

Collection Committee – The Collection Committee consist of the President and Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Chief Strategy Officer, and Special Assets Manager. The Collection Committee meets~~bi-weekly,~~ ~~or more often if necessary. The Collection Committee reviews all delinquent accounts, allnon-~~ accrual accounts, all bankruptcies and workouts in process. The committee is responsible to approve all charge off recommendations, placement of accounts into and out of nonaccrual status, troubled debt restructurings, OREO transactions and sale of OREO, and other actions to be taken on problem loans.

External Loan Review – The Bank engages an outside independent firm on at least an annual basis to conduct a full scope loan review. The scope of review is determined and structured to ensure that the number of loans and percentage of dollar coverage of the commercial loan and commercial mortgage portfolios reviewed will be sufficient to achieve the below-stated objectives and conform to regulatory standards. The objectives of the review are as follows: (i) to identify, evaluate and appropriately grade loans that have potential or existing credit weaknesses; (ii) to determine the overall quality of commercial and industrial loan and commercial real estate mortgage portfolios, including the effect of any concentrations of credit and the changes in the level of such concentrations; (iii) to identify exceptions in financial, loan and collateral documentation; (iv) to evaluate compliance with laws, regulations and internal policies relating to commercial lending activities, and; (v) to provide recommendations on policies, procedures and practices, if appropriate.

Our asset quality deteriorated ~~slightly~~ in the ~~three~~nine months ended ~~March 31,~~September 30, 2020. Nonperforming assets increased ~~$651, or 12.8%,~~$7,926 to ~~$5,731~~$13,006 at ~~March 31,~~September 30, 2020, from $5,080 at December 31, 2019. We experienced increases in ~~other real estate owned and accruing loans past due 90 days or more partially offset by decreases~~all major categories of nonperforming assets in ~~nonaccrual loans and~~the nine months of 2020 with the majority of this increase coming in the form of accruing troubled debt restructured loans. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled ~~0.65%~~1.12% at ~~March 31,~~September 30, 2020 compared to 0.60% at December 31, 2019.

Loans on nonaccrual status ~~decreased $239~~increased $938 to ~~$2,048~~$3,225 at ~~March 31,~~September 30, 2020 from $2,287 at December 31, 2019. The ~~decrease~~increase in nonaccrual loans was due to ~~decreases~~increases of ~~$372~~$772 in commercial real estate loans and ~~$50~~$534 in residential loans partially offset ~~partially~~ by ~~an increase~~decreases of ~~$183~~$368 in commercial ~~real~~ loans. ~~Accruing troubled debt restructured loans declined $20, to $2,646 at March 31, 2020 from $2,666 at December 31, 2019.~~ Accruing loans past due 90 days or more increased ~~$646,~~$63, and other real estate owned ~~increased $264~~decreased $57 during the ~~three~~nine months ended ~~March 31,~~September 30, 2020.

Nonperforming assets decreased $226 to $5,731 at March 31, 2020 from $5,957 at March 31, 2019. Decreases in nonaccrual loans, accruing troubled debt restructured loans and other real estate owned were partially offset by an increase in accruing loans past due 90 days or more.

In response to the

COVID-19

pandemic and its economic impact to our customers, we implemented short-term modification programs that comply with regulatory and accounting guidance to provide temporary payment relief to those borrowers directly impacted by

COVID-19

who were not more than 30 days past due at the time we implemented our modification programs. These programs allow for a deferral of principal, or principal and interest payments for a maximum of 180 days on a cumulative and successive basis. The deferred payments, including interest accrued during the deferral period, if applicable, result in the extension of the loan due date by the number of months deferred. ~~As of March 31, 2020, we had not granted any deferral of payments under these programs.~~

As of April 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 355 loans with outstanding balances totaling $185,188, or 20.9%, of total loans. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes information concerning loan modifications made as of April 30, 2020, by loan classification:

   Number
of
Loans    Amount    % of
Outstanding Aggregate Deferred Payments
Principal    Interest
Commercial
   83    $ 24,522    20.2 % $ 631    $ 315
Construction:

Commercial
   14    10,013    18.3 % 50    128
Hospitality
   3    15,761    88.9 % 55    185








Total
   17    25,774    35.5 % 105    313








Commercial Real Estate:

Multi Family
   13    4,786    8.4 % 74    44
Owner Occupied
   69    30,897    24.5 % 623    322
Non-Owner Occupied
   29    48,413    21.8 % 1,481    304
Hospitality
   7    21,930    56.6 % 241    276
Agricultural
   10    6,725    20.5 % 102    124








Total
   128    112,751    23.7 % 2,521    1,070








Residential Real Estate
   116    21,897    10.4 % 307    320
Consumer
   11    244    3.3 % 8    6








Total
   355    $ 185,188    20.9 % $ 3,572    $ 2,024

In March 2020, a joint statement was issued by federal and state regulatory agencies ~~after consultation with the FASB,~~ to clarify that short-term loan modifications are not troubled debt restructurings (“TDR”) if made on a good-faith basis in response to

COVID-19

to borrowers who were current prior to the implementation of our deferral programs. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification programs were implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For all borrowers who enroll in these loan modification programs offered as a result of

COVID-19,

the delinquency status of the borrowers is frozen, resulting in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency will resume where it had left off upon entry into the program, and the modifications will not impact a borrower’s repayment history for credit repayment reporting purposes. ~~For borrowers who are 30 days or more past due when enrolling in a loan modification program related to theCOVID-19~~ ~~pandemic, we evaluate the loan modifications~~The Company reevaluates these credit` granted deferrals under ~~our~~this guidance each quarter under its existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR.

As a result of this reevaluation, accruing troubled debt restructured loans increased $6,982, to $9,648 at September 30, 2020 from $2,666 at December 31, 2019.

Table of Contents

As of September 30, 2020, 204 loans with outstanding balances totaling $130,682, or 11.2%, of total loans were currently deferring loan payments. Depending on the circumstances and request from the borrower, modifications were made to defer all payments for loans requiring principal and interest payments, or to defer principal payments only and continue to collect interest payments, or to defer all interest payments for loans requiring interest only payments. The following table summarizes loans actively deferring payments under the above described modification program as of September 30, 2020, by loan classification:


	Number of Loans		Amount		% of Outstanding Including PPP Loans			% of Outstanding Excluding PPP Loans			Weighted Average Loan to Value						Aggregate Deferred Payments
	Number of Loans		Amount		% of Outstanding Including PPP Loans			% of Outstanding Excluding PPP Loans			% of Total Loan Classification			% of Loans Modified			Principal		Interest
Commercial		23	$	11,764		3.08	%		10.25	%							$	270	$	249
Construction:
Commercial		2		246		0.67	%					66.26	%		74.08	%		3		8
Hospitality		4		19,788		71.23	%					67.07	%		70.23	%		55		527

Total		6		20,034		31.15	%											58		535

Commercial Real Estate:
Multi Family		5		7,965		13.85	%					66.28	%		75.68	%		99		143
Owner Occupied		21		10,809		8.74	%					78.63	%		60.12	%		319		133
Non-Owner Occupied		16		33,507		12.67	%					63.14	%		64.39	%		1,855		452
Hospitality		6		16,554		51.75	%					66.17	%		65.01	%		336		367
Agricultural		19		11,332		37.59	%					53.62	%		60.29	%		234		274

Total		67		80,167		15.79	%											2,843		1,369

Residential Real Estate		95		18,666		9.23	%											273		393
Consumer		13		51		7.60	%											10		3

Total		204	$	130,682		11.23	%		14.59	%							$	3,454	$	2,549

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The following table summarizes information concerning loan modifications as of the latest practicable date October 23, 2020 by loan classification:


	Number of Loans		Amount		% of Outstanding Including PPP Loans			% of Outstanding Excluding PPP Loans			Aggregate Deferred Payments				Loans with Second Deferrals
	Number of Loans		Amount		% of Outstanding Including PPP Loans			% of Outstanding Excluding PPP Loans			Principal		Interest		Number of Loans		Amount		% of Outstanding Including PPP Loans			% of Outstanding Excluding PPP Loans
Commercial		10	$	3,003		0.78	%		2.61	%	$	141	$	77
Construction:
Commercial		2		246		0.64	%					3		8
Hospitality		2		13,468		48.42	%					55		398		1		6,755		24.29	%

Total		4		13,714		20.65	%					58		406		1		6,755		10.17	%

Commercial Real Estate:
Multi Family		3		7,709		13.43	%					95		136		1		1,053		1.84	%
Owner Occupied		9		4,745		3.77	%					204		95		1		1,088		0.86	%
Non-Owner Occupied		5		24,962		9.46	%					1,681		334		1		1,541		0.58	%
Hospitality		5		14,232		46.07	%					325		226		2		3,998		12.94	%
Agricultural		16		10,133		35.02	%					210		248

Total		38		61,781		12.19	%					2,.515		1,039		5		7,680		1.51	% 1

Residential Real Estate		40		4,813		2.37	%					119		135		4		1.660		0.82	%
Consumer		5		10		0.15	%					4		1

Total		97	$	83,321		7.14	%		9.28	%	$	2,837	$	1,658		10	$	16,095		1.38	%		1.79	%

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended, and GAAP in assessing the adequacy of the allowance account.

Under GAAP, the adequacy of the allowance account is determined based on the provisions of FASB Accounting Standards Codification (“ASC”) 310, “Receivables”, for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies”, for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, the Chief Credit Officer identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing standard criteria. Grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events. However, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest eight quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. We continue to evaluate risks which may impact our loan portfolios. As a result of the coronavirus pandemic and resultant business shutdowns and unemployment spikes, we reviewed our loan portfolio segments, assessing the likely impact of

COVID-19

on each segment and established specific qualitative adjustment factors. As we weigh additional information on the potential impact of this event on our overall economic prospects coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised as needed, and these revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses”, in the Notes to Consolidated Financial Statements to this Quarterly Report.

The allowance for loan losses increased ~~$735~~$4,108 to ~~$8,251~~$11,624 at ~~March 31,~~September 30, 2020, from $7,516 at the end of 2019. The increase in the allowance was a result of the provision for loan losses of ~~$1,800~~$5,656 for the ~~first three~~nine months ofended September 30, 2020 exceeding net charge-offs for the period. The provision for loan losses totaled ~~$1,800~~$1,844 for the quarter ended ~~March 31,~~September 30, 2020, compared to ~~$583~~$1,049 for the same period in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors ~~primarily due to thecharge-off~~ ~~of one large unsecured credit,~~ and changes in qualitative factors related to the reserve build associated with the effects of

COVID-19

as of the balance sheet date. ~~During the first quarter of 2020, the economy experienced a significant deterioration in the macroeconomic environment driven by theCOVID-19~~ ~~pandemic, which impacted our allowance for loan losses. Our qualitatively determined allowance associated with deterioration in the macroeconomic outlook fromCOVID-19~~ ~~resulted in a $477 additional provision expense for credit losses.~~ For the ~~three~~nine months ended ~~March 31,~~September 30, net ~~charge-offs~~charge offs were ~~$1,065,~~$1,548, or ~~0.49%~~0.20%, of average loans outstanding in 2020 compared to ~~$445,~~$1,501, or ~~0.20%~~0.23%, of average loans outstanding for the same period in 2019. The increase in net charge-offs was primarily due to one commercial account relationship, totaling $899, and one commercial real estate loan, totaling $95, that were charged off due to deterioration in their financial conditions.

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Deposits:

We attract the majority of our deposits from within our

14-county

market area by offering various deposit products including demand deposit accounts, NOW accounts, business checking accounts, money market deposit accounts, savings accounts, club accounts and time deposits, including certificates of deposit and IRA’s. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, total deposits increased ~~$18,023~~$90,833 to ~~$958,503~~$1,031,313 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased ~~$1,228~~$30,763, while interest-bearing accounts increased ~~$16,795.~~$60,070. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, ~~increased $10,806~~increase d $94,045 and time deposits, including certificates of deposit and individual retirement accounts ~~increased $5,989 in~~decreased $33,975 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020.

For the ~~three~~nine months ended ~~March 31,~~September 30, interest-bearing deposits averaged ~~$795,084~~$828,884 in 2020 compared to ~~$835,687~~$824,948 in 2019. The cost of interest-bearing deposits was ~~0.90%~~0.71% in 2020 compared to ~~1.01%~~1.00% in 2019. Consistent with recent FOMC actions to lower short-term rates due to the onset of

COVID-19,

we also took ~~actions~~action to lower deposit rates to fend off net interest margin contraction due to changes in yields on floating and adjustable rate loans. We anticipate deposit costs to continue to decrease in the short term based on the continued market rate impact of ~~recent~~FOMC actions ~~of the FOMC~~ to lower its target federal funds rate in the latter part of March 2020.

~~We expect core~~

Core deposits ~~to increase~~may decrease in the coming ~~months.~~months as unemployment benefits, PPP funds, and loan deferrals come to an end. Many consumers are working from home or temporarily unemployed but still receiving income through unemployment ~~insurance. Additionally, many Americans are receiving~~insurance programs that have provided liquidity for ongoing expenses. Additional liquidity that was created through the advancement of funds through the PPP program should enter the end of their ~~tax refunds for~~lifespan at the ~~2019 filing year~~same time companies that deferred loan payments begin making monthly payments again, which may lead to reductions in accumulated funds and ~~stimulus payments from the CARES Act. Since consumers have fewer ways to spend their money during the stay at home orders and social distancing practices brought on by theCOVID-19~~ ~~pandemic, we expect~~ our ~~retail~~ deposit base to increase, until such time, as the threat from the virus dissipates and states are allowed to open their businesses once again. The increases due to these factors may be offset by deposit decreases as a result of individuals utilizing savings due to job losses along with school districts decreasing reserves.

volumes.

Borrowings:

The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB”) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.

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~~ Atlantic Community Bankers Bank (“ACBB”), Pacific Community Bankers Bank and the FHLB. At ~~March 31,~~September 30, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.

Long-term debt totaled ~~$26,992~~$217,031 at ~~March 31,~~September 30, 2020 as compared to $6,971 at December 31, 2019. For the ~~three~~nine months ended ~~March 31,~~September 30th, long-term debt averaged ~~$11,817~~$117,602 in 2020 and ~~$6,902~~$6,922 in 2019. The large increase in long-term debt is attributable to advances taken through the Federal Reserve’s PPPLF, whereby loans originated through the PPP program can be pledged as security to facilitate advancements made through the program. As of September 30, 2020, we had outstanding borrowing through the program of $189,719 at a rate of 0.35%. At the end of March 2020, we borrowed $20,000 of term debt from the FHLB to take advantage of reductions in general market rates. These funds ~~will~~were used to bolster our liquidity position and provide necessary funding for ~~loans in the process of being closed.~~new loans. The amount of the term debt was spread equally over three, five and ~~seven year~~seven-year maturities. The FHLB borrowing had a weighted average rate of 0.90% and weighted average life of five years. As a FHLB member, we are required to buy a portion of stock in FHLB for each advance. The adjusted weighted average cost of the borrowing decreases to 0.57% considering the addition of the dividend rate on the FHLB stock at the time the borrowing was granted. The average cost of long-term debt was ~~4.19% in~~0.74% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, a decrease from ~~7.87%~~7.57% for the same period last year.

As a result of the significant reduction in market rates during the first nine months of 2020, the Company took advantage of the historically low interest rate environment by entering into a fixed interest rate swap on $9,279 of trust preferred securities at a

10-year

weighted average rate of 2.99%.

On October 6, 2020, the Company announced the completion of its private placement of $25 million of its 5.75% Fixed to Floating Rate Subordinated Notes to certain qualified institutional buyers and accredited institutional investors. The Notes will have a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until October 15, 2025. Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus 563 basis points, payable quarterly until maturity. The Company may redeem the Notes at par, in whole or in part, at its option, anytime beginning on October 15, 2025. The primary purpose of the offering is to enhance the safety and soundness of the Bank’s capital position given the uncertain impact of the

COVID-19

pandemic and to support growth, for general corporate purposes and to take advantage of potential strategic opportunities.

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Market Risk Sensitivity:

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”) associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and

off-balance

sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

As a result of the FOMC’s recent actions to lower short-term interest rates in order to mitigate the impact of the

COVID-19

pandemic on the economy, it has become increasing more challenging to manage IRR. IRR and effectively managing it are very important to both ~~bank~~Bank management and regulators. Bank regulations require us to develop and maintain an IRR management program that is overseen by the Board of Directors and senior management, which involves a comprehensive risk management process to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in a bank’s risk management process or high-risk exposure relative to capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of a bank’s risk management process is a determining factor when evaluating capital adequacy.

The Asset Liability Committee (“ALCO”), comprised of members of our senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. Conversely, a negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

Our cumulative

one-year

RSA/RSL ratio equaled ~~1.54~~1.45 at ~~March 31,~~September 30, 2020. Given the recent monetary policy actions of the FOMC based on uncertainty surrounding the timing of the recovery from the pandemic and the potential for rates to remain at these low levels, the focus of ALCO has been to ~~lower~~reduce our exposure to the ~~effect~~effects of repricing assets.

The current position at ~~March 31,~~September 30, 2020, indicates that the amount of RSA repricing within one year would exceed that of RSL, with declining rates causing a slight decrease in net interest income. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a

one-day

position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Given an instantaneous and parallel shift in interest rates of plus and minus 100 basis points, our projected net interest income for the 12 months ending ~~March 31,~~September 30, 2021, would increase ~~2.76%~~7.9% and decrease ~~5.48%~~4.8% from model results using current interest rates. We will continue to monitor our IRR through employing deposit and loan pricing strategies and directing the reinvestment of loan and investment repayments ~~in order~~ to manage our IRR position.

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.

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Liquidity:

Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:

Funding new and existing loan commitments;

Payment of deposits on demand or at their contractual maturity;

Repayment of borrowings as they mature;

Payment of lease obligations; and

Payment of operating expenses.

These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted, and strategies are developed to ensure adequate liquidity at all times.

Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, when compared to other types of funding sources. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

As a result of the onset of the

COVID-19

pandemic, we have placed increased emphasis on solidifying, monitoring and managing our liquidity position. We believe our liquidity position is strong. At ~~March 31,~~September 30, 2020, we had available liquidity of ~~$73,235~~$31,958 from cash and interest-bearing balances with other banks. Our investment securities portfolio is comprised primarily of highly liquid U.S. Government and Government-Sponsored Enterprises and high credit quality municipal securities. At ~~March 31,~~September 30, 2020,

available-for-sale

investment securities totaled ~~$68,402,~~$98,846, and had a net unrealized holding gain of ~~$914.~~$1,868. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic ~~Coast~~Community Bankers Bank (“ACBB”) ~~and~~, Pacific Coast Bankers Bank (“PCBB”), and through a relationship with StoneCastle Partners, LLC, a third party financial institution who provides cash management services to institutional investors. At ~~March 31,~~September 30, 2020, our available borrowing capacity was ~~$359,350~~$426,045 at the FHLB and was $10,000 each at ACBB and PCBB. StoneCastle provides deposits to community banks up to 15% of their total assets, which would amount to additional liquidity of ~~$167,556~~$203,509 for us based on ~~March 31,~~September 30, 2020. As aforementioned, ~~we intend to utilize~~ the ~~liquidity relief offered by the PPPLF~~issuance of $25 million of Subordinated Notes subsequent to the ~~extent needed and as such do not expect our participation in~~end of the ~~PPP to have a negative impact on our~~third quarter of 2020 will further strengthen the Company’s liquidity position.

With respect to monitoring and managing our liquidity, in addition to our normal quarterly liquidity reporting to the Risk Committee that includes stress testing under moderate, severe and extreme scenarios, we have instituted a formalized monthly presentation ~~monthly~~ using various metrics to assist the ~~entire~~ Board of Directors in assessing our liquidity position. With the changes in the industry related to

COVID-19,

we have focused on maintaining greater liquidity. We believe liquidity needs ~~could~~should be greater during this volatile time within the industry and markets. Based upon this volatility, we took steps to maintain a greater balance of cash and cash equivalents on the balance sheet through the sale of investment securities

available-for-sale

and borrowing from the FHLB.

We employ ~~a number of~~several analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after ~~March 31,~~September 30, 2020. Our noncore funds at ~~March 31,~~September 30, 2020 were comprised of time deposits in denominations of $250 or more and other borrowings. These funds are not considered to be a strong source of liquidity since they are very interest rate sensitive and are considered ~~to be~~ highly volatile. At ~~March 31,~~September 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was~~-1.68%~~ 16.47%, while our net short-term noncore funding ratio, noncore funds maturing within

one-year,

less short-term investments to assets equaled ~~1.56%~~0.85%. Comparatively, our net noncore dependence ratio was~~-1.03%~~ (1.03)% while our net short-term noncore funding ratio was 1.54% at

year-end.

The increase in the net noncore funding dependence ratio is associated with borrowing to fund investment in PPP loans and is anticipated to reduce substantially as these loans enter the forgiveness stage. In addition, as compared to peer levels, our reliance on short-term noncore funds remains low.

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, ~~increased $22,887~~decreased $18,390 during the ~~three~~nine months ended ~~March 31, 2020. Cash and cash equivalents increased $14,285~~September 30, 2020 as compared with a decrease of $23,975 for the same period last year. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, we realized a net cash ~~inflows~~outflow of ~~$383~~$320,801 from ~~operating activities and $37,511 from financing~~investing activities offset partially by net cash ~~outflows~~inflows of ~~$15,007~~$2,501 from ~~investing~~operating activities and $299,910 from financing activities. For the same period of 2019, we recognized net cash ~~outflows~~inflows of ~~$1,217~~$2,442 from operating activities and ~~$4,138~~$10,471 from ~~financing~~investing activities, offset by a net cash ~~inflows~~outflow of ~~$19,640~~$36,888 from ~~investing~~financing activities.

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Operating activities provided net cash of ~~$383~~$2,501 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 compared to ~~using $1,217~~$2,442 for the same period last year. Net income, adjusted for the effects of gains and losses along with noncash transactions such as goodwill impairment, depreciation, amortization, and the provision for loan losses, is the primary source of funds from operations.

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of ~~$15,007~~$320,801 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020. For the comparable period in 2019, investing activities provided net cash of ~~$19,640.~~$10,471. For the ~~three~~nine months ended ~~March 31,~~September 30, 2020, loan originations ~~more than offset~~of $273,813 from PPP loans were the primary factor for the net ~~proceeds received on the sale~~increase in loans of ~~investment securitiesavailable-for-sale.~~$312,627. For the comparable period of 2019, payments and prepayments on loans exceeding loan originations was the primary factor causing the net cash inflow from investing activities.

Financing activities provided net cash of ~~$37,511~~$299,910 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 and used net cash of ~~$4,138~~$36,888 for the same period last year. ~~Deposit~~Liquidity was generated through funds from deposit gathering ~~is a predominant~~and through long-term debt which primarily utilized the Fed’s PPPLF secured borrowing arrangement to borrow $189,713 for the purpose of financing ~~activity.~~PPP loans. During the ~~three~~nine months ended ~~March 31,~~September 30, deposits increased ~~$18,023~~$90,833 in 2020 ~~and decreased $3,564~~versus a decrease of $35,010 in 2019. ~~In addition, net cash provided by financing activities for the first quarter of 2020 was impacted by the proceeds received from an increase in long-term debt of $20,000.~~

We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds are expected to enable us to meet all cash obligations as they come due.

Capital:

Stockholders’ equity totaled ~~$118,441,~~$95,424, or ~~$12.82~~$10.28 per share, at ~~March 31,~~September 30, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net ~~increase~~decrease in stockholders’ equity in the ~~three~~nine months ended ~~March 31,~~September 30, 2020 was a result of the recognition of a net ~~income~~loss of ~~$633,~~$22,794 and the payout of cash dividends of $1,386, offset by the issuance of common stock through Riverview’s ESPP, 401k and dividend reinvestment plans of ~~$180,~~$466, stock-based compensation of ~~$22~~$78 and the recognition of a change in other comprehensive income of ~~$188, offset by the payout of cash dividends of $692.~~

$950.

Bank regulatory agencies consider capital to be a significant factor in ensuring the safety of a depositor’s accounts. These agencies have adopted minimum capital adequacy requirements that include mandatory and discretionary supervisory actions for noncompliance.

The Bank’s capital ratios and the minimum ratios required for capital adequacy purposes and to be considered well capitalized under the prompt corrective action provisions are summarized below for the periods ended ~~March 31,~~September 30, 2020 and December 31, 2019:

   Actual Minimum Regulatory
Capital Ratios under
Basel III (with 2.5%
capital conservation
buffer phase-in) Well Capitalized under
Basel III
March 31, 2020:
   Amount    Ratio Amount    Ratio Amount    Ratio
Total risk-based capital (to risk-weighted assets)
   $ 104,939    12.1 % $ 91,001    ³ 10.5 % $ 86,667    ³ 10.0 %
Tier 1 capital (to risk-weighted assets)
   96,599    11.1 73,667    ³ 8.5 69,334    ³ 8.0
Common equity tier 1 risk-based capital (to risk-weighted assets)
   96,599    11.1 60,667    ³ 7.0 56,334    ³ 6.5
Tier 1 capital (to average total assets)
   96,599    9.1 42,295    ³ 4.0 52,869    ³ 5.0


	Actual					Minimum Regulatory Capital Ratios under Basel III (with 2.5% capital conservation buffer phase-in)					Well Capitalized under Basel III
September 30, 2020:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	108,601		12.4	%	$	92,065	³	10.5	%	$	87,681	³	10.0	%
Tier 1 capital (to risk-weighted assets)		97,631		11.1			74,529	³	8.5			70,145	³	8.0
Common equity tier 1 risk-based capital (to risk-weighted assets)		97,631		11.1			61,377	³	7.0			56,993	³	6.5
Tier 1 capital (to average total assets)		97,631		8.4			46,419	³	4.0			58,024	³	5.0


	Actual					Minimum Regulatory Capital Ratios under Basel III (with 2.5% capital conservation buffer phase-in)					Well Capitalized under Basel III
December 31, 2019:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	104,010		12.4	%	$	88,132	³	10.5	%	$	83,936	³	10.0	%
Tier 1 capital (to risk-weighted assets)		96,405		11.5			71,345	³	8.5			67,148	³	8.0
Common equity tier 1 risk-based capital (to risk-weighted assets)		96,405		11.5			58,755	³	7.0			54,558	³	6.5
Tier 1 capital (to average total assets)		96,405		9.1			42,489	³	4.0			53,112	³	5.0

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In light of the recent pandemic crisis and its potential adverse impact on capital adequacy within the financial industry, maintaining a high level of capital is of extreme importance to federal regulators as well as our management and Board of Directors. Our asset liability committee continually reviews our capital position. As part of its review, the ALCO considers:

The current and expected capital requirements, including the maintenance of capital ratios in excess of minimum regulatory guidelines;

The market value of our securities and the resulting effect on capital;

Nonperforming asset levels and the effect deterioration in asset quality will have on capital;

Any planned asset growth;

The anticipated level of net earnings and capital position, taking into account the projected asset/liability position and exposure to changes in interest rates;

The source and timing of additional funds to fulfill future capital requirements.

Based on the heightened level of stress on capital caused by the recent events, management maintains a capital plan approved by the Board of Directors. Our capital plan consists of the following areas of focus, among others:

Comprehensive risk assessment including consideration of the following risk elements, among others: credit; liquidity; earnings; economic value of equity; concentration; and economic, both national and local;

Assessing current regulatory capital adequacy levels;

Monitoring procedures consisting of stress testing, using both scenarios of previous historic data of financial crisis periods and the Federal Reserve Board’s Supervisory Capital Assessment Program (“SCAP”), and certain triggering events that would call into question the need to raise additional capital;

Identifying realistic and readily available alternative sources for augmenting capital if higher capital levels are required;

Evaluating dividend levels, and;

Providing a

ten-year

financial projection for analyzing capital adequacy.

~~During~~

Regulatory bodies recently issued guidance reminding bank management of the ~~first~~importance of taking capital preservation actions in these uncertain economic times and encouraging management to remain vigilant on how the current environment impacts their organization’s financial performance, need for capital, and ability to serve customers and communities throughout this crisis. In response to this guidance, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital. In concert with this guidance, on October 6, 2020, the Company completed the issuance of $25 million in subordinated debt at the bank holding company which will be used to support the Bank on an

as-needed

basis. Subsequent to the issuance in the fourth quarter of 2020, ~~Riverview set up a guidance line~~management determined to downstream $15 million of ~~credit with a local~~the available $25 million from the bank ~~for $10,000~~holding company to ~~be utilized as contingency capital funding for~~ the Bank in ~~case~~the form of ~~further deterioration of market condition due toCOVID-19.~~ ~~This borrowing facility, if drawn upon, could be utilized to increase capital levels of the subsidiary bank through the injection of proceeds as~~ additional ~~paid in capital, if needed.~~

capital.

Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at ~~March 31,~~September 30, 2020 and December 31, 2019. There are no conditions or negative events since this notification that we believe have changed the Bank’s well capitalized status.

Review of Financial Performance:

We reported a net ~~income~~loss of ~~$633,~~$22,794, or ~~$0.07~~$2.46 per basic and diluted weighted average common share, for the ~~first quarter of~~nine months ended September 30, 2020, compared to a net ~~loss~~income of ~~$687,~~$3,013, or ~~$(0.08)~~$0.33 per basic and diluted weighted average common share, for the ~~first~~same period last year. For the third quarter ofended September 30, net income was $695 or $0.08 per basic and diluted weighted average common share in 2020 and $2,266 or $0.25 per basic and diluted weighted average common share in 2019.

The major factor impacting earnings in ~~the first quarter of~~ 2020 was the recognition of goodwill impairment of $24,754 in the second quarter of 2020. The impairment expense is a ~~$1,800~~noncash charge and has no impact on tangible book value, regulatory capital ratios, liquidity or the Company’s cash balances. Also impacting net income for the nine months ended September 30, 2020 was a provision for loan ~~losses.~~losses of $5,656, an increase of $3,406 compared to the same period last year. The increase in the year over year provision for loan losses ~~was~~is the combined result of year to date 2020 organic loan growth, ~~increases in historical loss factors primarily due to thecharge-off~~ ~~of one large unsecured credit,~~excluding 100% SBA guaranteed PPP Loans, and changes in qualitative factors ~~related to~~used in our ALLL model, accounting for increased economic risks and the ~~reserve build associated with~~direct impact on our customers resulting from the ~~effects of~~

COVID-19

pandemic as of September 30, 2020. As the ~~balance sheet date. As we weigh~~Company weighs additional information on the potential impact of this event on our overall economic prospects, coupled with our loan officers’ further assessments of the impact on individual borrowers, our delinquencies and loss estimates will be revised, as needed. These revisions could have a material impact on future provisions to the allowance for loan losses and results of operations. Another ~~major~~ factor influencing the level of earnings in the ~~first quarter~~nine months of 2020 was the recognition of ~~$315~~$2,311 less of net accretion on acquired assets and assumed liabilities ~~comparing~~as compared to the ~~first quarters~~nine months of ~~2020 and~~ 2019.

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Partially offsetting the impact of these reductions to income was the recognition of aan $815 net gain on the sale of investment securities in order to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. The Company also recognized interest and fees on origination of loans pursuant to the PPP of $2,776 during the nine months ended September 30, 2020.

The Company began implemented cost reduction strategies beginning in 2019, and those efforts continued subsequent to the end of the second quarter of 2020 by implementing additional efficiency initiatives aimed at substantially lowering operating costs. This action implemented on September 1, 2020 is expected to lower salaries and benefits expense by $3.4 million annually on a

pre-tax

basis. The results for the ~~first three~~nine months ~~of 2019~~ended September 30, included ~~the recognition of a~~$637 in nonrecurring severance expense in 2020 compared to $2,218 in nonrecurring executive separation~~pre-tax~~ ~~expense totaling $2,218, which primarily contributed~~ expenses and $456 in severance charges in 2019 related to ~~the first quarter net loss.~~ these actions.

If the

COVID-19

pandemic persists, it will continue to have a severe effect on economic activity and ~~will~~may cause greater negative consequences for our customers which, in turn, could adversely affect the Company’s financial condition, liquidity and results of operations.

Net Interest Income:

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, comprised of interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

Changes in general market rates; and

The level of nonperforming assets.

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, which is net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities.

Tax-exempt

loans and investments carry

pre-tax

yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable,

tax-exempt

income and yields are reported herein on a

tax-equivalent

basis using the prevailing federal statutory tax rate of 21% in 2020 and 2019, respectively.

For the ~~three~~nine months ended ~~March 31,~~September 30,

tax-equivalent

net interest income decreased ~~$984~~$2,833 to ~~$8,846~~$29,102 in 2020 from ~~$9,830~~$31,935 in 2019. The decrease in

tax-equivalent

net interest income was primarily attributable to a decline in the

tax-equivalent

loan yield due to reductions in market rates, the addition of lower yielding PPP loans, and the realization of lower levels of loan accretion from purchase accounting marks. ~~Overall, average earning assets decreased $10,385 more than the decline in average interest-bearing liabilities in comparing the first three months of 2020 with 2019.~~ The

tax-equivalent

net interest margin for the ~~three~~nine months ended ~~March 31,~~September 30 was ~~3.60%~~3.37% in 2020 compared to ~~3.86%~~4.18% in 2019. The net interest spread decreased to ~~3.44%~~3.25% for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 from ~~3.67%~~3.98% for the ~~three~~nine months ended September 30, 2019. The

tax-equivalent

yield on the loan portfolio decreased to 4.18% in 2020 compared to 5.37% in 2019. The actions taken by the Federal Open Market Committee in March ~~31,~~2020 to reduce its target federal funds rate by 150 basis points impacted the loan portfolio yield as it had a corresponding adverse effect on our floating and adjustable rate loans Also influencing the decline was recognizing the lower yield of 2.46% earned on the addition of PPP loans in 2020. Loan accretion recognized from merger related purchase accounting marks declined $2,276 in 2020. Partially offsetting the negative impact of the reduction in the net interest margin was a net increase in the volume of average earning assets as compared to the increase in average interest-bearing liabilities. Overall, average earning assets increased $130,549 while average interest-bearing liabilities increased $124,382 comparing the nine months ended September 30, 2020 and 2019. ~~Net accretion included in~~

For the nine months ended September 30,

tax-equivalent

interest income decreased $4,360, to $34,166 in 2020 from $38,526 in 2019. An unfavorable rate variance due to reductions in market rates, lower yield earned on PPP loans and decreases in loan accretion income more than offset a favorable volume variance primarily caused by the ~~first three~~addition of PPP loans. Interest and fee accretion generated from the PPP program was $2,776 while loan accretion income was $592 for the nine months of 2020 ~~related~~compared to ~~purchase accounting marks from mergers was $185 resulting in an increase in thetax-equivalent~~ ~~net interest margin of 7 basis points. For~~$2,868 for the same period in ~~2019 net accretion income was $500, resulting in an increase in thetax-equivalent~~ ~~net interest margin of 19 basis points.~~

~~For the three months ended March 31, 2020,tax-equivalent~~ ~~interest income decreased $1,274, to $10,763 from $12,037 for the three months ended March 31,~~ 2019. An unfavorable volume variance in interest income of $478 attributable to changes in the average balance of earning assets coupled with an unfavorable rate variance of $796 due to decreased yields on earning assets caused the overall decline. Specifically, the overall yield on earning assets, on a fully

tax-equivalent

basis, decreased for the ~~three~~nine months ended ~~March 31,~~September 30, to 3.96% in 2020 from 5.04% in 2019. With respect to ~~4.39% as compared~~the volume variance, average earning assets increased $130,549 to ~~4.73% for the three months ended March 31,~~$1,153,448 in 2020 from $1,022,899 in 2019.

Tax-equivalent

loan income decreased $3,025 in 2020. The increase in average loans of $153,446 was more than offset by a 119 basis point decline in yield. The decrease in average investments of $25,885 in 2020 was the primary cause of the $800 reduction in

tax-equivalent

interest income ~~was also impacted by a reduction~~on investments.

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Total interest expense decreased $1,527 to $5,064 for the nine months ended September 30, 2020 from $6,591 for the nine months ended September 30, 2019. Reductions in fund costs more than offset increases in average ~~earning assets, which decreased $45,084 to $986,938 for~~volumes on interest-bearing liabilities. Comparing the ~~first three~~nine months of 2020 and 2019, the weighted average cost of funds decreased 35 basis points to 0.71% from ~~$1,032,022~~1.06% while the average volume of interest-bearing liabilities increased $124,382 to $956,252 from $831,870. Money market and NOW account costs declined 63 and 43 basis points and were the major cause in lowering interest expense on deposits. The average volume and weighted average yield for long-term debt for the nine months ended September 30, 2020 were $117,602 and 0.74%, compared to $6,922 and 7.57% for the same period in 2019. The~~tax-equivalent~~ ~~yield on~~ volume increase was due to liquidity-based borrowings established at FHLB and the Federal Reserve to primarily fund PPP loan portfolio decreased 0.38% to 4.64% for the three months ended March 31, 2020 compared to 5.02% for the same period last year and caused interest income to decline $746. Average loans decreased $12,393 comparing the first three months of 2020 and 2019, which caused a decrease in~~tax-equivalent~~ ~~interest income of $141. Average investments decreased to $82,028 for the three months ended March 31, 2020 compared to $108,256 for the same period in 2019 causing interest income to decrease $302.~~

Total interest expense decreased $290 to $1,917 for the three months ended March 31, 2020 from $2,207 for the three months ended March 31, 2019. The decrease was caused by both volume and rate variances. The average volume of interest-bearing liabilities decreased to $807,890 for the three months ended March 31, 2020, from $842,589 for the three months ended March 31, 2019 and caused interest expense to decline $79. In addition, the cost of funds decreased to 0.95% in 2020 from 1.06% in 2019 resulting in a decrease in interest expense of $211. Money market and Now account costs declined 38 and 26 basis points and were the major impact on lowering interest expense. Overall the cost of interest-bearing deposits decreased 11 basis points when comparing the first three months of 2020 and 2019.originations. We expect that our net interest margin will continue to decrease as our rate sensitive assets decline at a frequency and magnitude greater than our fund costs given the uncertainty in the market as a result of the pandemic.

For the three months ended September 30,

tax-equivalent

net interest income decreased $848 to $10,504 in 2020 from $11,352 in 2019. The decrease in

tax-equivalent

net interest income was attributable to a decline in net accretion from purchased assets and assumed liabilities and reduced earnings from general market rates, partially offset by increased net earnings from PPP loans. Average earning assets increased $271,312 while average earning liabilities increased $253,431 comparing the third quarters of 2020 and 2019. The

tax-equivalent

net interest margin for the three months ended September 30, was 3.26% in 2020 compared to 4.46% in 2019. The net interest spread decreased to 3.17% for the three months ended September 30, 2020 from 4.26% for the three months ended September 30, 2019. Net accretion decreased to $325 from $1,415 comparing the third quarters of 2020 and 2019. Net interest income generated from PPP loans amounted to $1,479 in the third quarter of 2020.

For the three months ended September 30,

tax-equivalent

interest income decreased $1,498, to $12,008 in 2020 from $13,506 in 2019. The overall yield on earning assets, on a fully

tax-equivalent

basis, decreased 158 basis points for the three months ended September 30, 2020 to 3.73% as compared to 5.31% for the three months ended September 30, 2019. This decrease was a result of the combined impact of lower loan yields from declines in market rates and the addition of low yielding PPP loans along with the effects of reduced accretion on purchased loans. Average loans increased $283,450 comparing the third quarters of 2020 and 2019 primarily due to PPP loans. The

tax-equivalent

yield on the loan portfolio was 3.94% for the three months ended September 30, 2020 compared to 5.67% for the same period last year. The combined impact of rate and volume variances caused an overall decrease in interest earned on loans of $1,064. The yield earned on investments decreased 63 basis points for the third quarter of 2020 to 2.33% from 2.96% for the third quarter of 2019. This coupled with average investments decreasing to $76,861 for the quarter ended September 30, 2020 compared to $93,010 for the same period in 2019, resulted in a decrease in

tax-equivalent

interest income of $245. Overall

tax-equivalent

interest earned on investments was $450 for the three months ended September 30, 2020 compared to $695 for the same period in 2019.

Total interest expense decreased $650 to $1,504 for the three months ended September 30, 2020 from $2,154 for the three months ended September 30, 2019. A favorable rate variance more than offset an unfavorable volume variance and caused interest expense to decrease. The cost of funds decreased to 0.56% for the three months ended September 30, 2020 as compared to 1.05% for the same period in 2019. The average volume of interest-bearing liabilities increased to $1,070,803 for the three months ended September 30, 2020, from $817,372 for the three months ended September 30, 2019. Average interest-bearing deposits increased $43,352 to $853,782 for the third quarter of 2020 from $810,430 for the same period last year. Average long-term debt increased to $217,021 for the third quarter of 2020 from $6,942 for the same period last year to provide funding for PPP loans.

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The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Average balances were calculated using average daily balances. Averages for earning assets include nonaccrual loans. Loan fees are included in interest income on loans. Investment averages include

available-for-sale

securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate.

   Three months ended
   March 31, 2020 March 31, 2019
   Average
Balance    Interest    Yield/
Rate Average
Balance    Interest    Yield/
Rate
Assets:

Earning assets:

Loans

Taxable
   $ 838,825    $ 9,782    4.69 % $ 851,515    $ 10,688    5.09 %
Tax exempt
   35,595    310    3.50 % 35,298    291    3.34 %
Investments

Taxable
   77,400    535    2.78 % 97,041    740    3.09 %
Tax exempt
   4,628    47    4.08 % 11,215    87    3.15 %
Interest bearing deposits
   30,490    89    1.17 % 36,953    231    2.54 %
Federal funds sold










Total earning assets
   986,938    10,763    4.39 % 1,032,022    12,037    4.73 %
Less: allowance for loan losses
   7,273       6,377
Other assets
   105,680       104,005





Total assets
   $ 1,085,345       $ 1,129,650





Liabilities and Stockholders’ Equity:

Interest bearing liabilities:

Money market accounts
   $ 102,072    171    0.67 % $ 113,602    293    1.05 %
NOW accounts
   270,559    319    0.47 % 281,052    505    0.73 %
Savings accounts
   133,267    60    0.18 % 129,259    30    0.09 %
Time deposits
   289,186    1,239    1.72 % 311,774    1,245    1.62 %
Short term borrowings
   989    5    2.03 %
Long-term debt
   11,817    123    4.19 % 6,902    134    7.87 %









Total interest-bearing liabilities
   807,890    1,917    0.95 % 842,589    2,207    1.06 %
Non-interest-bearing demand deposits
   144,630       156,735
Other liabilities
   13,668       17,006
Stockholders’ equity
   119,157       113,320





Total liabilities and stockholders’ equity
   $ 1,085,345       $ 1,129,650









Net interest income/spread
      $ 8,846    3.44 %    $ 9,830    3.67 %





Net interest margin
         3.60 %       3.86 %
Tax-equivalent adjustments:

Loans
      $ 65       $ 61
Investments
      10       18





Total adjustments
      $ 75       $ 79


	Nine months ended
	September 30, 2020							September 30, 2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Assets:
Earning assets:
Loans:
Taxable	$	1,005,344	$	31,649		4.21	%	$	849,959	$	34,651		5.45	%
Tax exempt		33,914		891		3.51	%		35,853		914		3.41	%
Investments:
Taxable		67,222		1,291		2.57	%		93,423		2,113		3.02	%
Tax exempt		7,971		223		3.74	%		7,655		201		3.51	%
Interest bearing deposits		38,997		112		0.38	%		36,009		647		2.40	%
Federal funds sold

Total earning assets		1,153,448		34,166		3.96	%		1,022,899		38,526		5.04	%
Less: allowance for loan losses		8,431							6,636
Other assets		99,559							106,247

Total assets	$	1,244,576						$	1,122,510

Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
Money market accounts	$	116,504	$	288		0.33	%	$	112,598	$	806		0.96	%
NOW accounts		291,182		574		0.26	%		273,199		1,415		0.69	%
Savings accounts		142,385		117		0.11	%		133,347		127		0.13	%
Time deposits		278,813		3,405		1.63	%		305,804		3,851		1.68	%
Short term borrowings		9,766		28		0.38	%
Long-term debt		117,602		652		0.74	%		6,922		392		7.57	%

Total interest-bearing liabilities		956,252		5,064		0.71	%		831,870		6,591		1.06	%
Non-interest-bearing demand deposits		163,886							158,384
Other liabilities		12,952							16,842
Stockholders’ equity		111,486							115,414

Total liabilities and stockholders’ equity	$	1,244,576						$	1,122,510

Net interest income/spread			$	29,102		3.25	%			$	31,935		3.98	%

Net interest margin						3.37	%						4.18	%
Tax-equivalent adjustments:
Loans			$	187						$	192
Investments				47							42

Total adjustments			$	234						$	234

Provision for Loan Losses:

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of ~~March 31,~~September 30, 2020.

The provision for loan losses totaled ~~$1,800~~$5,656 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, compared to ~~$583~~$2,250 in 2019. For the quarter ended September 30, the provision for loan losses was $1,844 in 2020 compared to $1,049 in 2019. The increase in the

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provision for loan losses ~~was~~is the combined result of organic loan growth, ~~increases in historical loss factors primarily due to the~~

~~charge-off~~ ~~of one large unsecured credit,~~excluding 100% SBA guaranteed PPP loans, and changes in qualitative factors ~~related to~~used in our ALLL model, accounting for increased economic risks and the ~~reserve build associated with~~direct impact on our customers resulting from the ~~effects of~~

COVID-19

pandemic as of ~~the balance sheet date.~~September 30, 2020. The pandemic effects are expected to continue to weigh heavily on businesses and their ability to service debt along with increasing unemployment for those individuals depending on these businesses for income. As a result, our future provisions may increase by the growth of loan delinquencies and charge-offs resulting from

COVID-19

pandemic related financial stress.

Noninterest Income:

For the ~~quarter~~nine months ended ~~March 31,~~September 30, noninterest income totaled ~~$2,930~~$7,089 in 2020, an increase of ~~$1,119~~$1,192 from ~~$1,811~~$5,897 in 2019. The increase was primarily attributable to recognizing aan $815 net gain on the sale of investment securities ~~in order~~ to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. This compares to a $95 loss from the sale of investment securities recorded in 2019. Mortgage banking income increased $543 for the nine months ended September 30, 2020 as compared to the same period in 2019 due to an increase in refinancing activity brought on by reductions in mortgage interest rates. Partially offsetting these positive influences were reductions in service charges, commissions and fees on fiduciary activities and wealth management income. Service charges, fees and commissions ~~increased $328~~decreased due to

COVID-19

induced suspensions and reductions to service charges along with reductions in customer activity. Specifically, the Company experienced reductions in overdraft fee income, ATM income, and reduced late charge fee income as ~~a result~~it proactively worked with customers and noncustomers alike in an effort to minimize the financial impact of ~~recognizing a $130 loan swap fee and reaping~~

COVID-19

within the ~~benefits of implementing strategic initiates in the fourth quarter of 2019 to enhance service fee income.~~communities served. Trust and wealth management income declined for the ~~first quarter of~~nine months ended September 30, 2020 by ~~$47~~$186 and ~~$27, respectively, when~~$73 compared ~~against~~to the ~~first quarter~~same period of 2019 ~~due primarily to~~driven partially by the impact that

COVID-19

has had upon equity market valuations in 2020.

For the quarter ended September 30, noninterest income totaled $2,158 in 2020, an increase of~~COVID-19.~~

$198 from $1,960 in 2019. An increase of $250 in mortgage banking income was partially offset primarily by reductions in services charges, fees and commissions of $30 and trust income of $68.

Noninterest Expenses:

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, lease expense and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, FDIC assessments, other taxes, and supplies. Several of these costs and expenses are variable, while the remainder are fixed. We utilize budgets and other related strategies ~~in an effort~~ to control the variable expenses.

Noninterest expense ~~decreased $2,752, or 23.0%,~~increased $21,265, to ~~$9,212~~$53,144 for the ~~three~~nine months ended ~~March 31,~~September 30, 2020, from ~~$11,964~~$31,879 for the same period last year. The ~~decrease~~increase was primarily due to writing off the entire amount of goodwill on the books totaling $24,754. Excluding this nonrecurring charge, noninterest expense would have decreased $3,489, or 10.9%, comparing the nine months ended September 30, 2020 and 2019. For the nine months ended September 30, salaries and employee benefit expenses decreased $3,120, or 16.8%, to $15,452 in 2020 from $18,572 in 2019 due primarily to

one-time

charges of $2,218 taken in ~~nonrecurring expense from an executive~~2019 related to a separation ~~agreement recognized in the first quarter of 2019.~~agreement. Net occupancy expense increased ~~$91,~~$502, or ~~8.4%~~15.8%, to ~~$1,180~~$3,676 in 2020 from $3,174 in 2019. The primary cause for the ~~first quarter of 2020 from $1,089~~increase in cost was a $356

one-time

charge for the ~~same period last year. Higher costs related to building and equipment maintenance and repairs caused the increase.~~acceleration of lease expense on a closed office. Other expenses decreased ~~$227,~~$818, or ~~7.5%~~8.6%, to ~~$2,817~~$8,713 in ~~the first quarter of~~ 2020 compared to ~~$3,044 for the same period last year.~~$9,531 in 2019. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.

For the three months ended September 30, 2020, noninterest expense increased $547, to $9,978 from $9,431 for the same period last year. Salaries and employee benefit expense was $5,411 for the quarter ended September 30, 2020, an increase of $179 over the same period in 2019 due to the recognition of severance and furlough expenses. Net occupancy expense increased $387, to $1,428 in the third quarter of 2020 as compared to $1,041 in the third quarter of 2019 caused by the lease acceleration expense. For the third quarter, other expenses decreased to $2,918 in 2020 from $2,979 in 2019.

Income Taxes:

We recorded an income tax benefit of $49 for the nine months ended September 30, 2020 as compared to income tax expense of ~~$56~~$456 for the nine months ended September 30, 2019. For the three months ended ~~March 31,~~September 30, we recorded income tax expense of $67 in 2020 as compared to ~~an income tax benefit~~$486 in 2019.

Table of ~~$298 for the three months ended March 31, 2019.~~

Contents

Riverview Financial Corporation

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable to a smaller reporting company.

Item 4.

Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

At ~~March 31,~~September 30, 2020, the end of the period covered by this Quarterly Report on Form

10-Q,

the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in

Rule 13a-15(e)

under the Exchange Act. Based upon that evaluation, the CEO and CFO concluded that the disclosure controls and procedures, at ~~March 31,~~September 30, 2020, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosure.

(b) Changes in internal control.

There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s 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 have a material effect on the consolidated results of operations or 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.

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Item 6.

~~Exhibits.~~

Exhibits

The following Exhibits are incorporated by reference hereto:


31.1		Section 302 Certification of the Chief Executive Officer (Pursuant to Rule13a-14(a)/15d-14(a)).

31.2		Section 302 Certification of the Chief Financial Officer (Pursuant to Rule13a-14(a)/15d-14(a)).

32.1		Chief Executive Officer’s§1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).

32.2		Chief Financial Officer’s§1350 Certification (Pursuant to Rule13a-14(b)/15d-14(b)).

101		Interactive Data File (XBRL).

104		Cover Page Interactive Data File (embedded within the Inline XBRL document).

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SIGNATURES

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


By:		/s/ Brett D. Fulk
		Brett D. Fulk
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~May 8,~~November 5, 2020


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

Date: ~~May 8,~~November 5, 2020


	March 31, 2020			December 31, 2019
Assets:
Cash and due from banks	$	12,128		$	11,838
Interest-bearing deposits in other banks		61,107			38,510
Investment securitiesavailable-for-sale		68,402			91,247
Loans held for sale		272			81
Loans, net		887,449			852,109
Less: allowance for loan losses		8,251			7,516

Net loans		879,198			844,593
Premises and equipment, net		18,875			17,852
Accrued interest receivable		2,589			2,414
Goodwill		24,754			24,754
Intangible assets		2,566			2,736
Other assets		47,152			45,929

Total assets	$	1,117,043		$	1,079,954

Liabilities:
Deposits:
Noninterest-bearing	$	148,633		$	147,405
Interest-bearing		809,870			793,075

Total deposits		958,503			940,480
Short-term borrowings
Long-term debt		26,992			6,971
Accrued interest payable		424			435
Other liabilities		12,683			13,958

Total liabilities		998,602			961,844

Stockholders’ equity:
Common stock: no par value, authorized 20,000,000 shares; March 31, 2020, issued and outstanding 9,236,039 shares; December 31, 2019, issued and outstanding 9,216,616 shares		102,386			102,206
Capital surplus		134			112
Retained earnings		16,081			16,140
Accumulated other comprehensive loss		(160	)		(348	)

Total stockholders’ equity		118,441			118,110

Total liabilities and stockholders’ equity	$	1,117,043		$	1,079,954


For the three months ended March 31,	2020			2019
Interest income:
Interest and fees on loans:
Taxable	$	9,782		$	10,688
Tax-exempt		245			230
Interest on investment securitiesavailable-for-sale:
Taxable		535			740
Tax-exempt		37			69
Interest on interest-bearing deposits in other banks		89			231
Interest on federal funds sold

Total interest income		10,688			11,958

Interest expense:
Interest on deposits		1,789			2,073
Interest on short-term borrowings		5
Interest on long-term debt		123			134

Total interest expense		1,917			2,207

Net interest income		8,771			9,751
Provision for loan losses		1,800			583

Net interest income after provision for loan losses		6,971			9,168

Noninterest income:
Service charges, fees and commissions		1,381			1,053
Commission and fees on fiduciary activities		213			260
Wealth management income		220			247
Mortgage banking income		108			106
Bank owned life insurance investment income		193			187
Net gain (loss) on sale of investment securitiesavailable-for-sale		815			(42	)

Total noninterest income		2,930			1,811

Noninterest expense:
Salaries and employee benefits expense		5,056			7,510
Net occupancy and equipment expense		1,180			1,089
Amortization of intangible assets		170			194
Net cost (benefit) of operation of other real estate owned		(11	)		127
Other expenses		2,817			3,044

Total noninterest expense		9,212			11,964

Income (loss) before income taxes		689			(985	)
Income tax expense (benefit)		56			(298	)

Net income (loss)		633			(687	)

Other comprehensive income (loss):
Unrealized gain (loss) on investment securitiesavailable-for-sale	$	1,053		$	1,023
Reclassification adjustment for net (gain) loss on sale of investment securitiesavailable-for-sale included in net income		(815	)		42
Income tax expense related to other comprehensive income		50			224

Other comprehensive income, net of income taxes		188			841

Comprehensive income	$	821		$	154

Per share data:
Net income (loss):
Basic	$	0.07		$	(0.08	)
Diluted	$	0.07		$	(0.08	)
Average common shares outstanding:
Basic		9,223,445			9,143,316
Diluted		9,233,060			9,143,316
Dividends declared	$	0.08		$	0.10


	March 31, 2020			December 31, 2019
Net unrealized loss on investment securitiesavailable-for-sale	$	914		$	676
Income tax benefit		192			142

Net of income taxes		722			534

Benefit plan adjustments		(1,117	)		(1,117	)
Income tax benefit		(235	)		(235	)

Net of income taxes		(882	)		(882	)

Accumulated other comprehensive loss	$	(160	)	$	(348	)


Three months ended March 31,	2020			2019
Unrealized gain (loss) on investment securitiesavailable-for-sale	$	1,053		$	1,023
Net loss (gain) on the sale of investment securitiesavailable-for-sale ⁽¹⁾		(815	)		42

Other comprehensive gain (loss) before taxes		238			1,065
Income tax expense (benefit)		50			224

Other comprehensive gain (loss)	$	188		$	841


March 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State and municipals:
Taxable	$	9,736	$	423	$	6	$	10,153
Tax-exempt		8,448		36		142		8,342
Mortgage-backed securities:
U.S. Government agencies		28,508		800				29,308
U.S. Government-sponsored enterprises		17,296		546				17,842
Corporate debt obligations		3,500				743		2,757

Total	$	67,488	$	1,805	$	891	$	68,402


				Real Estate
March 31, 2019	Commercial			Construction			Commercial		Residential		Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance, January 1, 2019	$	1,162		$	404		$	3,298	$	1,286	$	50		$	148		$	6,348
Charge-offs		(376	)									(144	)					(520	)
Recoveries		5						1		1		68						75
Provisions		232			(123	)		160		279		183			(148	)		583

Ending balance	$	1,023		$	281		$	3,459	$	1,566	$	157		$			$	6,486


	Accrual Loans
March 31, 2020	30-59 Days Past Due		60-89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
Commercial	$	385	$	15	$	23	$	423	$	119,917	$	787	$	121,127
Real estate:
Construction		584		978				1,562		71,018				72,580
Commercial		9,577		1,361				10,938		463,481		642		475,061
Residential		5,062		137		652		5,851		203,048		619		209,518
Consumer		65		17		16		98		7,321				7,419

Total	$	15,673	$	2,508	$	691	$	18,872	$	864,785	$	2,048	$	885,705

Purchased credit impaired loans														1,744

Total Loans													$	887,449


	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	199		$	136
ROU assets obtained in exchange for lease liabilities	$	—		$	3,719
Weighted average remaining lease term—operating leases, in years		9.13			12.10
Weighted average discount rate—operating leases		3.01	%		3.29	%


	Number of Loans		Amount		% of Outstanding			Aggregate Deferred Payments
	Number of Loans		Amount		% of Outstanding			Principal		Interest
Commercial		83	$	24,522		20.2	%	$	631	$	315

Construction:
Commercial		14		10,013		18.3	%		50		128
Hospitality		3		15,761		88.9	%		55		185

Total		17		25,774		35.5	%		105		313

Commercial Real Estate:
Multi Family		13		4,786		8.4	%		74		44
Owner Occupied		69		30,897		24.5	%		623		322
Non-Owner Occupied		29		48,413		21.8	%		1,481		304
Hospitality		7		21,930		56.6	%		241		276
Agricultural		10		6,725		20.5	%		102		124

Total		128		112,751		23.7	%		2,521		1,070

Residential Real Estate		116		21,897		10.4	%		307		320

Consumer		11		244		3.3	%		8		6

Total		355	$	185,188		20.9	%	$	3,572	$	2,024

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