Riverview Financial (RIVE) 10-Q 2020 Q2 Quarterly report

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 June 30, 2020

or

☐ 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.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

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:

9,263,739

at July 3

0

, 2020.

RIVERVIEW FINANCIAL CORPORATION

FORM

10-Q

For the Quarter Ended June 30, 2020

Contents		Page No.
PART I.	FINANCIAL INFORMATION:
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2020 and December 31, 2019		3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019		4
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 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		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
Item 4.	Controls and Procedures		42
PART II	OTHER INFORMATION:
Item 1.	Legal Proceedings		42
Item 1A.	Risk Factors		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		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

Riverview Financial Corporation

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except per share data)

	June 30, 2020			December 31, 2019
Assets:
Cash and due from banks	$	10,195		$	11,838
Interest-bearing deposits in other banks		33,033			38,510
Investment securities available-for-sale		74,134			91,247
Loans held for sale		4,252			81
Loans, net		1,165,453			852,109
Less: allowance for loan losses		9,736			7,516
Net loans		1,155,717			844,593
Premises and equipment, net		18,668			17,852
Accrued interest receivable		1,826			2,414
Goodwill					24,754
Intangible assets		2,397			2,736
Other assets		46,578			45,929
Total assets	$	1,346,800		$	1,079,954
Liabilities:
Deposits:
Noninterest-bearing	$	173,567		$	147,405
Interest-bearing		849,586			793,075
Total deposits		1,023,153			940,480
Short-term borrowings
Long-term debt		217,010			6,971
Accrued interest payable		457			435
Other liabilities		11,728			13,958
Total liabilities		1,252,348			961,844
Stockholders’ equity:
Common stock: 0 par value, authorized 20,000,000 shares; June 30, 2020, issued and outstanding 9,263,697 shares; December 31, 2019, issued and outstanding 9,216,616 shares		102,552			102,206
Capital surplus		161			112
Retained earnings (accumulated deficit)		(8,735	)		16,140
Accumulated other comprehensive income ( loss )		474			(348	)
Total stockholders’ equity		94,452			118,110
Total liabilities and stockholders’ equity	$	1,346,800		$	1,079,954

See notes to consolidated financial statements.

3

Riverview Financial Corporation

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

(Dollars in thousands, except per share data)

	Three Months Ended						Six Months Ended
June 30,	2020			2019			2020			2019
Interest income:
Interest and fees on loans:
Taxable	$	10,602		$	11,680		$	20,384		$	22,368
Tax-exempt		236			233			481			463
Interest and dividends on investment securities available-for-sale:
Taxable		396			732			931			1,472
Tax-exempt		68			47			105			116
Interest on interest-bearing deposits in other banks		12			216			101			447
Total interest income		11,314			12,908			22,002			24,866
Interest expense:
Interest on deposits		1,395			2,099			3,184			4,172
Interest on short-term borrowings		23						28
Interest on long-term debt		225			131			348			265
Total interest expense		1,643			2,230			3,560			4,437
Net interest income		9,671			10,678			18,442			20,429
Provision for loan losses		2,012			618			3,812			1,201
Net interest income after provision for loan losses		7,659			10,060			14,630			19,228
Noninterest income:
Service charges, fees and commissions		1,011			1,315			2,392			2,368
Commission and fees on fiduciary activities		210			281			423			541
Wealth management income		196			236			416			483
Mortgage banking income		391			100			499			206
Bank owned life insurance investment income		193			194			386			381
Net gain (loss) on sale of investment securities available-for-sale								815			(42	)
Total noninterest income		2,001			2,126			4,931			3,937
Noninterest expense:
Salaries and employee benefits expense		4,985			5,830			10,041			13,340
Net occupancy and equipment expense		1,068			1,044			2,248			2,133
Amortization of intangible assets		169			194			339			388
Goodwill impairment		24,754						24,754
Net cost (benefit) of operation of other real estate owned					(92	)		(11	)		35
Other expenses		2,978			3,508			5,795			6,552
Total noninterest expense		33,954			10,484			43,166			22,448
Income before income taxes		(24,294	)		1,702			(23,605	)		717
Income tax expense (benefit)		(172	)		268			(116	)		(30	)
Net income (loss)		(24,122	)		1,434			(23,489	)		747
Other comprehensive income:
Unrealized gain on investment securities available-for-sale		840			1,936			1,893			2,959
Reclassification adjustment for net (gain) loss on sale of investment securities available-for-sale included in net income (loss)								(815	)		42
Net change in derivative fair value		(38	)					(38	)
Other comprehensive income		802			1,936			1,040			3,001
Income tax expense related to other comprehensive income		168			406			218			630
Other comprehensive income, net of income taxes		634			1,530			822			2,371
Comprehensive income (loss)	$	(23,488	)	$	2,964		$	(22,667	)	$	3,118
Per share data:
Net income (loss):
Basic	$	(2.61	)	$	0.16		$	(2.54	)	$	0.08
Diluted	$	(2.61	)	$	0.16		$	(2.54	)	$	0.08
Average common shares outstanding:
Basic		9,249,184			9,160,290			9,236,314			9,151,850
Diluted		9,249,184			9,172,992			9,236,314			9,167,409

See notes to consolidated financial statements.

4

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

For the six months ended June 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							(23,489	)					(23,489	)
Other comprehensive income, net of income taxes										822			822
Compensation cost of option grants
Issuance under ESPP, 401k and Dividend Reinvestment plans: 47,081 shares		346											346
Exercise of stock options
Stock based compensation				49									49
Dividends declared, $0.15 per share							(1,386	)					(1,386	)
Balance, June 30, 2020	$	102,552	$	161		$	(8,735	)	$	474		$	94,452
Balance, January 1, 2019	$	101,134	$	332		$	15,063		$	(2,619	)	$	113,910
Net income							747						747
Other comprehensive income (loss), net of income taxes										2,371			2,371
Compensation cost of option grants
Issuance under ESPP, 401k and Dividend Reinvestment plans: 27,984 shares		316											316
Exercise of stock options: 18,131 shares		194		(28	)								166
Dividends declared, $0.20 per shares							(1,832	)					(1,832	)
Balance, June 30, 2019	$	101,644	$	304		$	13,978		$	(248	)	$	115,678

For the three months ended June 30,	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, April 1, 2020	$	102,386	$	134		$	16,081		$	(160	)	$	118,441
Net income							(24,122	)					(24,122	)
Other comprehensive income, net of income taxes										634			634
Compensation cost of option grants
I ssuance under ESPP, 401k and Dividend Reinvestment plans: 27,658 shares		166											166
Exercise of stock options
Stock based compensation				27									27
Dividends declared, $0.08 per share							(694	)					(694	)
Balance, June 30, 2020	$	102,552	$	161		$	(8,735	)	$	474		$	94,452
Balance, April 1, 2019	$	101,500	$	307		$	13,461		$	(1,778	)	$	113,490
Net income							1,434						1,434
Other comprehensive income (loss), net of income taxes										1,530			1,530
Compensation cost of option grants
Issuance under ESPP, 401k and Dividend Reinvestment plans: 12,761 shares		141											141
Exercise of stock options: 310 shares		3		(3	)
Dividends declared, $0.10 per shares							(917	)					(917	)
Balance, June 30, 2019	$	101,644	$	304		$	13,978		$	(248	)	$	115,678

See notes to consolidated financial statements.

5

Riverview Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

For the Six Months Ended June 30,	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(23,489	)	$	747
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		640			589
Provision for loan losses		3,812			1,201
Stock based compensation		49
Net amortization of investment securities available-for-sale		312			399
Net cost (benefit) of operation of other real estate owned		(11	)		35
Net (gain) loss on sale of investment securities available-for-sale		(815	)		42
Amortization of purchase adjustment on loans		(292	)		(1,495	)
Amortization of intangible assets		339			388
Amortization of assumed discount on long-term debt		42			40
Impairment of goodwill		24,754
Deferred income taxes		(465	)		(111	)
Proceeds from sale of loans originated for sale		13,557			7,599
Net gain on sale of loans originated for sale		(499	)		(206	)
Loans originated for sale		(17,229	)		(6,926	)
Bank owned life insurance investment income		(386	)		(381	)
Net change in:
Accrued interest receivable		588			140
Other assets		1,028			(1,169	)
Accrued interest payable		22			(39	)
Other liabilities		(2,230	)		1,107
Net cash provided by (used in) operating activities		(273	)		1,960
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases		(14,215	)		(10,485	)
Proceeds from repayments		5,741			8,728
Proceeds from sales		27,168			8,740
Proceeds from the sale of other real estate owned		68			627
Net (increase) decrease in restricted equity securities		(779	)		119
Net (increase) decrease in loans		(314,982	)		4,800
Purchases of premises and equipment		(1,456	)		(1,065	)
Premium paid on bank owned life insurance		(22	)		(22	)
Net cash provided by (used in) investing activities		(298,477	)		11,442
Cash flows from financing activities:
Net increase (decrease) in deposits		82,673			(24,893	)
Proceeds from long-term debt		209,997
Issuance under ESPP, 401k and DRP plans		346			316
Proceeds from exercise of stock options					166
Cash dividends paid		(1,386	)		(1,832	)
Net cash provided by (used in) financing activities		291,630			(26,243	)
Net increase in cash and cash equivalents		(7,120	)		(12,841	)
Cash and cash equivalents—beginning		50,348			53,816
Cash and cash equivalents—ending	$	43,228		$	40,975
Supplemental disclosures:
Cash paid during the period for:
Interest	$	3,538		$	4,476
Noncash items from operating activities:
Operating lease right-of-use assets and liabilities				$	4,612
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		$	27

See notes to consolidated financial statements.

6

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”), 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 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 six months ended as of June 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 outbreak of the Coronavirus

(“COVID-19”)

pandemic which may adversely affect the Company’s business results of operations and financial conditions 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 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 locations to

drive-up

and ATM services, with lobby access available by appointment only, reduced hours of operation at some

7

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

—whether mandated by governmental authorities or recommended as a public health 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 continues to be broad concerns related to the potential effects of the

COVID-19

pandemic. The pandemic 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 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

COVID-19

and the actions by the Federal Reserve with respect to interest rates. 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. 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 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 recognized an impairment charge of $24,754 at

June 30, 202

0.

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 intangible assets, long-lived assets, right of use assets or available for sale investment securities.

Accounting Standards Adopted in 2020

In August 2016, the FASB issued ASU

No. 2016-15,

“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 - 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 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.

8

In August 2018, the FASB issued ASU

No. 2018-15,

“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 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 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 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—Retirement Benefits—Defined Benefit Plans—General

(Subtopic 715-20)

— Disclosure 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 — 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.

9

In December 2019, the FASB issued ASU

No. 2019-12,

“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.

In March 2020, the FASB issued ASU

No. 2020-04,

“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 June 30, 2020 and December 31, 2019 is as follows:

	June 30, 2020			December 31, 2019
Net unrealized loss on investment securities available-for-sale	$	1,754		$	676
Income tax expense		368			142
Net of income taxes		1,386			534
Benefit plan adjustments		(1,117	)		(1,117	)
Income tax benefit		(235	)		(235	)
Net of income taxes		(882	)		(882	)
Derivative fair value adjustment		(38	)
Income tax benefit		(8	)
Net of income taxes		(30	)
Accumulated other comprehensive income (loss)	$	474		$	(348	)

10

Other comprehensive income (loss) and related tax effects for the three and six months ended June 30, 2020 and 2019 is as follows:

Three months ended June 30,	2020			2019
Unrealized gain (loss) on investment securities available-for-sale	$	840		$	1,936
Net (gain) loss on the sale of investment securities available-for-sale (1)
Net change in derivative fair value		(38	)
Other comprehensive income before taxes		802			1,936
Income tax expense		168			406
Other comprehensive income	$	634		$	1,530

Six months ended June 30,	2020			2019
Unrealized gain (loss) on investment securities available-for-sale	$	1,893		$	2,959
Net (gain) loss on the sale of investment securities available-for-sale (1)		(815	)		42
Net change in derivative fair value		(38	)
Other comprehensive income before taxes		1,040			3,001
Income tax expense		218			630
Other comprehensive income	$	822		$	2,371

(1)  Represents amounts reclassified out of accumulated other comprehensive income and included in 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 six months ended June 30, 2020 and 2019:

Three months ended June 30,	2020			2019
Numerator:
Net income (loss)	$	(24,122)		$	1,434
Denominator:
Basic		9,249,184			9,160,290
Dilutive options					12,702
Diluted		9,249,184			9,172,992
Earnings per share:
Basic	$	(2.61	)	$	0.16
Diluted	$	(2.61	)	$	0.16

Six months ended June 30,	2020			2019
Numerator:
Net income (loss)	$	(23,489	)	$	747
Denominator:
Basic		9,236,314			9,151,850
Dilutive options					15,559
Diluted		9,236,314			9,167,409
Earnings per share:
Basic	$	(2.54	)	$	0.08
Diluted	$	(2.54	)	$	0.08

11

For the three and six months ended June 30, 2020 there were 172,964 outstanding stock options that were excluded from the dilutive earnings per share calculation because their effect was antidilutive. For the three and six months ended June 30, 2019, there were 43,350 outstanding stock

options

that were excluded from the dilutive earnings per share calculation because their effect was antidilutive.

4. Investment securities:

The amortized cost and fair value of investment securities

available-for-sale

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

June 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
State and municipals:
Taxable	$	9,491	$	288	$	6	$	9,773
Tax-exempt		8,430		361				8,791
Mortgage-backed securities:
U.S. Government agencies		27,740		755				28,495
U.S. Government-sponsored enterprises		23,219		584				23,803
Corporate debt obligations		3,500				228		3,272
Total	$	72,380	$	1,988	$	234	$	74,134

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 June 30, 2020, is summarized as follows:

June 30, 2020	Fair Value
Within one year	$	251
After one but within five years		5,734
After five but within ten years		6,909
After ten years		8,942
		21,836
Mortgage-backed securities		52,298
Total	$	74,134

Securities with a fair value of $57,865 and $63,389 at June 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 June 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.

12

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 June 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
June 30, 2020	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State and municipals:
Taxable	$	1,347	$	6	$		$		$	1,347	$	6
Tax-exempt
Mortgage-backed securities:
U.S. Government agencies
U.S. Government-sponsored enterprises
Corporate debt obligation						3,273		228		3,273		228
Total	$	1,347	$	6	$	3,273	$	228	$	4,619	$	234

	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 4 investment securities, consisting of 3 taxable state and municipal obligations, and 1 corporate debt obligation that were in unrealized loss positions at June 30, 2020. Of these securities, one corporate debt obligation was 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 June 30, 2020. There was no OTTI recognized for the three and six months ended June 30, 2020 and 2019.

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

13

5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2020 and December 31, 2019 are summarized as follows. Net deferred loan fees were $6,183 at June 30, 2020 and net deferred loan costs were $1,129 at December 31, 2019.

	June 30, 2020		December 31, 2019
Commercial	$	380,998	$	118,658
Real estate:
Construction		79,299		61,831
Commercial		494,642		455,901
Residential		203,752		207,354
Consumer		6,762		8,365
Total	$	1,165,453	$	852,109

The Company participated in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), 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 June 30, 2020, the Company originated 1,273 PPP loans totaling $274,313 under the PPP. 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 six months ended June 30, 2020 and 2019 is summarized as follows:

				Real Estate
June 30, 2020	Commercial			Construction		Commercial			Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance, April 1, 2020	$	1,671		$	695	$	3,917		$	1,713		$	152		$	103		$	8,251
Charge-offs							(501	)		(2	)		(71	)					(574	)
Recoveries		7					2			1			37						47
Provisions		7			46		1,660			358			44			(103	)		2,012
Ending balance	$	1,685		$	741	$	5,078		$	2,070		$	162		$			$	9,736
				Real Estate
June 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	)		(201	)					(1,697	)
Recoveries		9					2			1			93						105
Provisions		622			268		2,556			251			115						3,812
Ending balance	$	1,685		$	741	$	5,078		$	2,070		$	162		$			$	9,736
				Real Estate
June 30, 2019	Commercial			Construction		Commercial			Residential			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning Balance, April 1, 2019	$	1,023		$	281	$	3,459		$	1,566		$	157		$			$	6,486
Charge-off		(13	)							(20	)		(109	)					(142	)
Recoveries		6					1			2			31						40
Provisions		101			210		131			101			75						618
Ending balance	$	1,117		$	491	$	3,591		$	1,649		$	154		$			$	7,002

14

				Real Estate
June 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		(389	)						(20	)		(253	)					(662	)
Recoveries		11					2		3			99						115
Provisions		333			87		291		380			258			(148	)		1,201
Ending balance	$	1,117		$	491	$	3,591	$	1,649		$	154		$			$	7,002

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

			Real Estate
June 30, 2020	Commercial		Construction		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	1,685	$	741	$	5,078	$	2,070	$	162	$	$	9,736
Ending balance:
individually evaluated for impairment		29											29
Ending balance:
collectively evaluated for impairment		1,656		741		5,078		2,070		162			9,707
Ending balance:
purchased credit impaired loans	$		$		$		$		$		$	$
Loans receivable:
Ending balance	$	380,998	$	79,299	$	494,642	$	203,752	$	6,762	$	$	1,165,453
Ending balance:
individually evaluated for impairment		2,180				7,761		2,568					12,509
Ending balance:
collectively evaluated for impairment		378,818		79,299		485,484		201,004		6,762			1,151,367
Ending balance:
purchased credit impaired loans	$		$		$	1,397	$	180	$		$	$	1,577

15

			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 are individually analyzed for 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.

• 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.

1

6

The following tables present the major classification 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 June 30, 2020 and December 31, 2019:

June 30, 2020	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	369,429	$	5,411	$	6,158	$	$	380,998
Real estate:
Construction		78,153		1,146					79,299
Commercial		453,072		26,775		14,795			494,642
Residential		198,363		2,182		3,207			203,752
Consumer		6,762							6,762
Total	$	1,105,779	$	35,514	$	24,160	$	$	1,165,453
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 June 30, 2020 and December 31, 2019. Purchase credit impaired (“PCI”) loans are excluded from the aging and nonaccrual loan schedules.

	Accrual Loans
June 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	$	77	$	25	$		$	102	$	380,077	$	819	$	380,998
Real estate:
Construction										79,299				79,299
Commercial		160						160		491,778		1,307		493,245
Residential		363		448		170		981		201,476		1,115		203,572
Consumer		33		21		13		67		6,695				6,762
Total	$	633	$	494	$	183	$	1,310	$	1,159,325	$	3,241	$	1,163,876
Purchased credit impaired loans														1,577
Total Loans													$	1,165,453
	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

17

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

							This Quarter				Year-to-Date
June 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	$	2,059	$	2,169	$		$	1,579	$	132	$	1,603	$	200
Real estate:
Construction
Commercial		9,158		9,659				5,854		19		5,561		66
Residential		2,748		2,878				2,520		81		2,539		106
Consumer
Total		13,965		14,706				9,953		232		9,703		372
With an allowance recorded:
Commercial		121		121		29		121				621
Real estate:
Construction
Commercial								184				391		4
Residential
Consumer
Total		121		121		29		305				1,012		4
Commercial		2,180		2,290		29		1,700		132		2,224		200
Real estate:
Construction
Commercial		9,158		9,659				6,038		19		5,952		70
R esidential		2,748		2,878				2,520		81		2,539		106
Consumer
Total		14,086	$	14,827	$	29	$	10,258	$	232	$	10,715	$	376

	Recorded Investment		Unpaid Principal Balance		Related Allowance		For the Year Ended
December 31, 2019							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

18

							This Quarter				Year-to-Date
June 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	$	125	$	125	$		$	157	$	485	$	163	$	508
Real estate:
Construction								43				43
Commercial		4,222		4,222				4,240		104		4,255		204
Residential		2,201		2,201				2,209		34		2,276		125
Consumer
Total		6,548		6,548				6,649		623		6,737		837
With an allowance recorded:
Commercial		774		774		103		808				926
Real estate:
Construction
Commercial		373		373		92		372		4		413		8
Residential		178		316		50		179		2		180		3
Consumer
Total		1,325		1,463		245		1,359		6		1,519		11
Commercial		899		899		103		965		485		1,089		508
Real estate:
Construction								43				43
Commercial		4,595		4,595		92		4,612		108		4,668		212
Residential		2,379		2,517		50		2,388		36		2,456		128
Consumer
Total	$	7,873	$	8,011	$	245	$	8,008	$	629	$	8,256	$	848

For the three and six months ended June 30, interest income related to impaired loans, would have been $35 and $56 in 2020 and $25 and $85 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 $9,988 at June 30, 2020, $2,701 at December 31, 2019 and $2,753 at June 30, 2019.

There were 9 loans modified as troubled debt restructures during the second quarter of 2020 and 9 loans modified during the six months ended June 30, 2020

totaling $7,817. There were 0 loans modified as troubled debt restructures during the second quarter of 2019 and 1 loan modified during the six months ended June 30, 2019.

19

During the three months ended June 30, 2020, there were 0 defaults on loans restructured and 1 default on a restructured loan totaling $368 during the six months ended June 30, 2020. During the three months ended June 30, 2019, there were 0 defaults on loans restructured and 1 default on a restructured loan totaling $223 during the six months ended June 30, 2019.

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.

Distribution of

off-balance

sheet commitments

	June 30, 2020		December 31, 2019
Unused portions of lines of credit	$	89,916	$	81,665
Construction loans		28,764		41,168
Commitments to extend credit		20,841		24,954
Deposit overdraft protection		23,964		23,730
Standby and performance letters of credit		4,743		4,726
Total	$	168,228	$	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 June 30, 2020 and $89 at December 31, 2019. We do not anticipate that losses, if any, that may occur as a result of funding

off-balance

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

6. Other assets:

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

	June 30, 2020		December 31, 2019
Other real estate owned	$	363	$	82
Bank owned life insurance		31,055		30,647
Restricted equity securities		1,769		990
Deferred tax assets		4,519		4,272
Lease right-of-use assets		3,508		3,856
Other assets		5,364		6,082
Total	$	46,578	$	45,929

7. Leases:

On June 30, 2020, the Company leased 14 locations. The Company’s operating lease

right-of-use

(“ROU”) assets and related lease liabilities were $3,508 and $3,562, respectively, and have remaining terms ranging from 1 to 34 years, including extension options that the Company is reasonably certain will be exercised. For the three and six months ended June 30, 2020, operating lease cost totaled $200 and $399, respectively. On June 30, 2019 the Company’s lease ROU assets and related lease liabilities were $4,205 and $4,223, respectively. For the three and six months ended June 30, 2019, operating lease cost totaled $188 and $335, respectively.

20

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

	Six Months Ended June 30, 2020			Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	391		$	273
ROU assets obtained in exchange for lease liabilities	$			$	4,612
Weighted average remaining lease term—operating leases, in years		9.11			10.65
Weighted average discount rate—operating leases		3.02	%		3.07	%

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	$	380
2021		754
2022		697
2023		485
2024		317
Thereafter		1568
Total lease payments		4,201
Less imputed interest		639
	$	3,562

For the six months ended June 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.

21

• 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 June 30, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
June 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	$	9,773		$	9,773
Tax-exempt		8,791			8,791
Mortgage-backed securities:
U.S. Government agencies		28,495			28,495
U.S. Government-sponsored enterprises		23,803			23,803
Corporate debt obligations		3,272			3,272
Total	$	74,134		$	74,134

	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

22

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 June 30, 2020 and December 31, 2019 are summarized as follows:

	Fair Value Measurement Using
June 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	$	363			$	363
Impaired loans, net of related allowance		92				92
Total	$	455			$	455

	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 June 30, 2020 and December 31, 2019.

	Quantitative Information about Level 3 Fair Value Measurements
June 30, 2020	Fair Value Estimate		Valuation Techniques		Unobservable Input		Range (Weighted Average)
Other real estate owned	$	363		Appraisal of collateral		Appraisal adjustments		22.0% to 60.0%	(47.0)%
						Liquidation expenses		10.0% to 10.0%	(10.0)%
Impaired loans	$	92		Appraisal of collateral		Appraisal adjustments		50.0% to 50.0%	(50.0)%
						Liquidation expenses		0.0% to 0.0%	(0.0)%

	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	$	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)%

23

The carrying and fair values of the Company’s financial instruments at June 30, 2020 and December 31

,

2019 and their placement within the fair value hierarchy are as follows:

			Fair Value Hierarchy
June 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	$	43,228	$	43,228	$	43,228
Investment securities		74,134		74,134			$	74,134
Loans held for sale		4,252		4,252				4,252
Net loans (1)		1,155,717		1,146,533					$	1,146,533
Accrued interest receivable		1,826		1,826				356		1,470
Financial liabilities:
Deposits	$	1,023,153	$	980,672
Long-term debt		217,010		216,810
Accrued interest payable		457		457				457

			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 June 30, 2020 and December 31, 2019 was measured using an exit price notion

9. Goodwill

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

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

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.

24

The Company utilized multiple valuations

approaches

, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on 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 recognized an impairment charge equal to the entire amount of its recorded goodwill on the balance sheet at June 30, 2020 totaling $24,754.

10. Subsequent Events:

In order to mitigate financial stress brought on by the onset of the

COVID-19

pandemic, the Company formulated a cost reduction strategy subsequent to the end of the second quarter of 2020 aimed at substantially lowering operating costs. This plan implemented in August 2020 is expected to lower salaries and benefits expense by $3,431 annually, effective beginning September 1, 2020. The cost associated with severance and furlough expenses related to such action which will be recognized in the third quarter of 2020 is expected to be approximately $454. In another major action instituted to counteract the effects of the pandemic, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital as a result of recognizing certain material nonrecurring expenses in the first half of 2020. Regulatory bodies recently issued guidance reminding bank management of the 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.

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.

2

5

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

.

2

6

Operating Environment:

Economic growth measured as gross domestic product (“GDP”), the value of all goods and services produced in the United States, decreased at an annualized rate of 32.9% in the second quarter of 2020. The decline in second quarter GDP was primarily in response to the spread of

COVID-19,

as government

“stay-at-home”

orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses. This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted or redirected their spending. The decrease in GDP in the second quarter reflected decreases in personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending.

The impact of the virus has been felt nationally and within our primary market area as unemployment rates have begun to escalate. Unemployment in the United States was 11.1% and 3.7% in June 2020 and 2019. respectively. With respect to the markets we serve, the unemployment rate increased in all the counties in which we have office locations. The average unemployment rate for counties in our market area increased to 12.0% in June 2020 compared to 4.4% in June 2019. The resulting impacts of the pandemic on consumer and business customers, 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 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 also result 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 and second quarter results.

Inflationary pressure has reversed, as reflected by the Personal Consumption Expenditures Price Index,decreasing at a rate of 1.9% in the second quarter of 2020, compared with an increase of 1.3% in the first quarter. The Consumer Price Index

(“CPI-U”)

increased 0.6% in June on a seasonally adjusted basis after declines in the prior three months. Over the last 12 months, the

CPI-U

increased 0.6% as prices have recovered after sharp declines in the first quarter of 2020. Concerns about the spread of the 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 $266,846 to $1,346,800 at June 30, 2020, from $1,079,954 at December 31, 2019. Loans, net, increased to $1,165,453 at June 30, 2020, compared to $852,109 at December 31, 2019, an increase of $313,344. The origination of $274,313 under the PPP was primarily responsible for the increase in loans. Business lending, including commercial and commercial real estate loans, increased $301,081, retail lending, including residential mortgages and consumer loans, decreased $5,205, and construction lending increased $17,468 during the six months ended June 30, 2020. Investment securities decreased $17,113, or 18.8%, in the six months ended June 30, 2020. Noninterest-bearing deposits increased $26,162, while interest-bearing deposits increased $56,511 during the six months ended June 30, 2020. Total stockholders’ equity decreased $23,658, to $94,452 at June 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 six months ended June 30, 2020, total assets averaged $1,189,086, an increase of $60,828 from $1,128,258 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 $74,134 at June 30, 2020, a decrease of $17,113, or 18.8%, from $91,247 at December 31, 2019. 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 the opportunity to aid in funding loan demand and reduce 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 six months of 2020 compared to a net loss of $42 recognized in the first six months of 2019.

27

For the six months ended June 30, 2020, the investment portfolio averaged $74,350, a decrease of $30,829 compared to $105,179 for the same period last year. The

tax-equivalent

yield on the investment portfolio decreased 22 basis points to 2.88% for the six months ended June 30, 2020, from 3.10% 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 of stockholders’ equity of $1,386, net of deferred income taxes of $368 at June 30, 2020. This compares with a net unrealized holding gain 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 $1,165,453 at June 30, 2020 from $852,109 at December 31, 2019, an increase of $313,344, or 36.8%. Business loans, including commercial and commercial real estate loans, increased $301,081, or 52.4%, to $875,640 at June 30, 2020 from $574,559 at December 31, 2019. Retail loans, including residential real estate and consumer loans, decreased $5,205, or 2.4%, to $210,514 at June 30, 2020 from $215,719 at December 31, 2019. Construction lending increased $17,468, or 28.3%, to $79,299 at June 30, 2020 from $61,831 at December 31, 2019. The increase in the loan portfolio was attributable to the origination of $274,313 in PPP loans along with net loan growth of $39,031 generated primarily from new markets.

For the six months ended June 30, 2020, loans averaged $975,152, an increase of $87,721 compared to $887,431 for the same period in 2019. The

tax-equivalent

yield on the loan portfolio was 4.33% for the six months ended June 30, 2020, an

89-basis

point decrease from 5.22% 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 six months of 2020 related to acquired loans was $292 compared to $1,495 for the same period in 2019. The yield earned on PPP loans from interest and fees was 2.45% for the six months ended June 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 June 30, 2020 in our loan portfolio that may have increased exposure to this pandemic event:

	June 30, 2020
Industry:	Amount		% of Total Loans
Mining, Quarry, Oil and Gas	$	1,620		0.14	%
Construction-Land Subdivision		22,336		1.92	%
Manufacturing		13,598		1.17	%
Wholesale Trade		4,832		0.41	%
Automobile Dealers		7,116		0.61	%
Non-Residential Rentals and Leasing		261,321		22.42	%
Residential Rental and Leasing		112,053		9.61	%
Health Care		14,699		1.26	%
Arts, Entertainment and Recreation		5,457		0.47	%
Hospitality		65,754		5.64	%
Restaurants		8,753		0.75	%
	$	517,539		44.41	%

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 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 due to the

COVID-19

pandemic. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives

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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 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 June 30, 2020 we originated 1,273 loans totaling $274,313. On April 9, 2020, 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 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. With the onset of the

COVID-19

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

The contractual amounts of

off-balance

sheet commitments at June 30, 2020 and December 31, 2019 are summarized as follows:

	June 30, 2020		December 31, 2019
Unused portions of lines of credit	$	89,916	$	81,665
Construction loans		28,764		41,168
Commitments to extend credit		20,841		24,954
Deposit overdraft protection		23,964		23,730
Standby and performance letters of credit		4,743		4,726
Total	$	168,228	$	176,243

Asset Quality:

National, Pennsylvania and our market area unemployment rates at June 30, 2020 and 2019 are summarized as follows:

	2020			2019
United States		11.1	%		3.7	%
Pennsylvania		13.1	%		4.0	%
Berks County		13.1	%		4.4	%
Blair County		11.8	%		4.7	%
Bucks County		12.7	%		3.7	%
Centre County		8.4	%		3.6	%
Clearfield County		11.6	%		4.9	%
Cumberland County		9.9	%		3.6	%
Dauphin County		13.3	%		4.2	%
Huntingdon County		13.9	%		5.1	%
Lebanon County		11.8	%		4.0	%
Lehigh County		14.3	%		4.4	%
Lycoming County		12.2	%		4.6	%
Perry County		9.6	%		3.8	%
Schuylkill County		12.9	%		5.4	%
Somerset County		12.4	%		5.0	%

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 12.0% in 2020 from 4.4% in 2019. The lowest unemployment rate in 2020 for all the counties we serve was 8.4% which was in Centre County, and the highest recorded rate being 14.3% in Lehigh County. 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.

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We currently have in place a number 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:

• 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, all non- 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 in the six months ended June 30, 2020. Nonperforming assets increased $8,299, or 163.4%, to $13,379 at June 30, 2020, from $5,080 at December 31, 2019. We experienced increases in all major categories of nonperforming assets in the first half 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 1.15% at June 30, 2020 compared to 0.60% at December 31, 2019.

Loans on nonaccrual status increased $954 to $3,241 at June 30, 2020 from $2,287 at December 31, 2019. The increase in nonaccrual loans was due to increases of $848 in commercial real estate loans and $446 in residential loans partially offset by decreases of $340 in commercial loans. Accruing loans past due 90 days or more increased $138, and other real estate owned increased $281 during the six months ended June 30, 2020.

30

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.

In March 2020, a joint statement was issued by federal and state regulatory agencies 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. The Company reevaluates these credits granted deferrals under 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 in the second quarter of 2020, accruing troubled debt restructured loans increased $6,926, to $9,592 at June 30, 2020 from $2,666 at December 31, 2019.

As of June 30, 2020, we have granted temporary modifications to consumer and commercial loan customers for 501 loans with outstanding balances totaling $256,422, or 22.0%, 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 June 30, 2020, by loan classification:

								Weighted Average Loan to Value						Aggregate Deferred Payments
	Number of Loans		Amount		% of Outstanding			% of Total Loan Classification			% of Loans Modified			Principal		Interest
Commercial		110	$	25,858		6.79	%							$	905	$	382
Construction:
Commercial		11		10,635		20.13	%		71.86	%		73.10	%		528		127
Hospitality		4		18,851		71.19	%		66.47	%		69.01	%		55		299
Total		15		29,486		37.18	%								583		426
Commercial Real Estate:
Multi Family		25		15,656		26.42	%		66.46	%		75.49	%		146		149
Owner Occupied		92		41,784		33.46	%		63.00	%		63.37	%		832		436
Non-Owner Occupied		53		76,439		31.46	%		62.53	%		64.69	%		2,228		710
Hospitality		9		24,688		67.40	%		64.81	%		59.57	%		424		443
Agricultural		21		12,156		39.31	%		53.99	%		60.39	%		243		284
Total		200		170,723		34.51	%								3,873		2,022
Residential Real Estate		161		30,043		14.74	%								445		452
Consumer		15		312		4.61	%								11		8
Total		501	$	256,422		22.00	%							$	5,817	$	3,290

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The following table summarizes information concerning loan modifications with expired deferrals as of June 30, 2020 by loan classification:

Loans Modified with Expired Deferrals
	Returning to Repayment				Approved for Additional Deferral				Aggregate Deferred Payments for Loans Approved for Additional Deferral
	Number of Loans		Amount		Number of Loans		Amount		Principal		Interest
Commercial		63	$	10,643		8	$	1,352	$	88	$	26
Construction:
Commercial		5		5,550
Hospitality		1		5,912		1		4,947				97
Total		6		11,462		1		4,947				97
Commercial Real Estate:
Multi Family		13		5,763
Owner Occupied		58		26,441		4		3,458		108		73
Non-Owner Occupied		41		87,234		1		1,278		26		25
Hospitality		4		10,504		2		8,381		252		158
Agricultural		3		1,891		1		100		3		2
Total		119		131,833		8		13,217		389		258
Residential Real Estate		44		9,410		1		513		14		8
Consumer
Total		232	$	163,348		18	$	20,029	$	491	$	389

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 $2,220 to $9,736 at June 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 $3,812 for the first six months of 2020 exceeding net charge-offs for the period. The provision for loan losses totaled $2,012 for the quarter ended June 30, 2020, compared to $618 for the same period in

32

2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors and changes in qualitative factors related to the reserve build associated with the effects of

COVID-19

as of the balance sheet date. For the six months ended June 30, net charge-offs were $1,592, or 0.33%, of average loans outstanding in 2020 compared to $547, or 0.12%, of average loans outstanding for the same period in 2019. The increase in net charge-offs was primarily due to charge off of one large unsecured commercial loan in the amount of $899 and two related commercial real estate loans in the amount of $501, that were charged off due to deterioration in their financial conditions.

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 six months ended June 30, 2020, total deposits increased $82,673 to $1,023,153 from $940,480 at December 31, 2019. Noninterest-bearing transaction accounts increased $26,162, while interest-bearing accounts increased $56,511. Specifically, interest-bearing transaction accounts, including money market, NOW and savings, increased $67,586 and time deposits, including certificates of deposit and individual retirement accounts decreased $11,075 in the six months ended June 30, 2020.

For the six months ended June 30, interest-bearing deposits averaged $816,298 in 2020 compared to $832,327 in 2019. The cost of interest-bearing deposits was 0.78% in 2020 compared to 1.01% in 2019. Consistent with recent FOMC actions to lower short-term rates due to the onset of

COVID-19,

we also took actions 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 market rate impact of recent actions of the FOMC to lower its target federal funds rate in the latter part of March 2020.

We expect core deposits to decrease in the coming 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 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 lifespan at the same time companies that deferred loan payments begin making monthly payments again, which should lead to reductions in accumulated funds.

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 June 30, 2020 and December 31, 2019, we did not have any short-term borrowings outstanding.

Long-term debt totaled $217,010 at June 30, 2020 as compared to $6,971 at December 31, 2019. For the six months ended June 30, long-term debt averaged $67,346 in 2020 and $6,912 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 June 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 were used to bolster our liquidity position and provide necessary funding for new loans. The amount of the term debt was spread equally over three, five and 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 1.04% for the six months ended June 30, 2020, a decrease from 7.73% for the same period last year.

As a result of the significant reduction in market rates during the first half 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%. Prior to entering into the swap arrangement, the interest rate on these securities adjusted quarterly base on three-month LIBOR plus a spread of 2.95% on $5,155 and 1.54% on $4,124 of trust preferred securities.

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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 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 1.43 at June 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 reduce our exposure to the effects of repricing assets.

The current position at June 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 June 30, 2021, would increase 2.94% and decrease 4.61% 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 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.

34

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 June 30, 2020, we had available liquidity of $43,228 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 June 30, 2020,

available-for-sale

investment securities totaled $74,134, and had a net unrealized holding gain of $1,754. Our secondary sources of liquidity consist of the available borrowing capacity at the Federal Home Loan Bank (“FHLB”), Atlantic Community Bankers Bank (“ACBB”), 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 June 30, 2020, our available borrowing capacity was $351,388 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 $202,020 for us based on June 30, 2020. As aforementioned, we intend to utilize the liquidity relief offered by the PPPLF to the extent needed and as such do not expect our participation in the PPP to have a negative impact on our 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 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 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 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 June 30, 2020. Our noncore funds at June 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 highly volatile. At June 30, 2020, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 16.01%, while our net short-term noncore funding ratio, noncore funds maturing within

one-year,

less short-term investments to assets equaled 0.98%. Comparatively, our net noncore dependence ratio was

-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, decreased $7,120 during the six months ended June 30, 2020 as compared with a decrease of $12,841 for the same period last year. For the six months ended June 30, 2020, we realized net cash outflows of $273 from operating activities and $298,477 from investing activities offset partially by a net cash inflow of $291,630 from financing activities. For the same period of 2019, we recognized net cash inflows of $1,960 from operating activities and $11,442 from investing activities, offset by a net cash outflow of $26,243 from financing activities.

35

Operating activities used net cash of $273 for the six months ended June 30, 2020 compared to generating $1,960 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 $298,477 for the six months ended June 30, 2020. For the comparable period in 2019, investing activities provided net cash of $11,442. For the six months ended June 30, 2020, loan originations of $274,313 from PPP loans were the primary factor for the net increase in loans of $314,982. 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 $291,630 for the six months ended June 30, 2020 and used net cash of $26,243 for the same period last year. Liquidity associated with financing PPP loans was generated through funds from deposit gathering and long-term debt. During the six months ended June 30, deposits increased $82,673 in 2020 versus a decrease of $24,893 in 2019, while proceeds from long-term debt were $209,997 for the first six months of 2020.

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 $94,452, or $10.20 per share, at June 30, 2020, and $118,110, or $12.81 per share, at December 31, 2019. The net decrease in stockholders’ equity in the six months ended June 30, 2020 was a result of the recognition of a net loss of $23,489 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 $346, stock-based compensation of $49 and the recognition of a change in other comprehensive income of $822.

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 June 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
June 30, 2020:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)	$	106,468		12.2	%	$	91,857	³	10.5	%	$	87,483	³	10.0	%
Tier 1 capital (to risk-weighted assets)		96,637		11.1			74,361	³	8.5			69,987	³	8.0
Common equity tier 1 risk-based capital (to risk-weighted assets)		96,637		11.1			61,238	³	7.0			56,864	³	6.5
Tier 1 capital (to average total assets)		96,637		8.1			47,727	³	4.0			59,659	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

36

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.

In a major action instituted to counteract the effects of the pandemic, the Board of Directors of Riverview decided on July 23, 2020, to suspend the payment of dividends in order to conserve capital as a result of recognizing certain material nonrecurring expenses in the first half of 2020. Regulatory bodies recently issued guidance reminding bank management of the 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 concert with this guidance, the Company is in the process of pursuing the issuance of subordinated debt in the amount of $15,000 at the bank holding company that will be down streamed to the Bank in the form of capital. This issuance is expected to be completed by the end of the third quarter of 2020.

Based on the most recent notification from the FDIC, the Bank was categorized as well capitalized at June 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 loss of $23,489, or $(2.54) per basic and diluted weighted average common share, for the first six months of 2020, compared to a net income of $747, or $0.08 per basic and diluted weighted average common share, for the first six months of 2019. The major factor impacting earnings in the second quarter of 2020 was the recognition of goodwill impairment of $24,754. 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.

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

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.

37

The Company utilized multiple valuations approaches, including discounted income, change in control premium to parent market price and change in control premium to peer market price to determine the fair value of its goodwill. Each approach was assigned a weight to arrive at the fair value of the reporting unit. Based on 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.

Also impacting net income for the first half of 2020 was a provision for loan losses of $3,812, an increase of $2,611 compared to the same period last year. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors, and changes in qualitative factors related to the reserve build associated with the effects of

COVID-19

as of the balance sheet date. As the 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 factor influencing the level of earnings in the first six months of 2020 was the recognition of $1,221 less of net accretion on acquired assets and assumed liabilities as compared to the first six months of 2019. Partially offsetting the impact of these reductions to income was the recognition of an $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 results for the first six months of 2019 included the first quarter recognition of $2,218 in nonrecurring executive separation expenses along with the $456 in severance charges recorded in the second quarter. If the

COVID-19

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

In order to mitigate financial stress brought on by the onset of the

COVID-19

pandemic, the Company formulated a cost reduction strategy subsequent to the end of the second quarter of 2020 aimed at substantially lowering operating costs. This plan implemented in August 2020 is expected to lower salaries and benefits expense by $3,431 annually, effective beginning September 1, 2020. The cost associated with severance and furlough expenses related to such action which will be recognized in the third quarter of 2020 is expected to be approximately $454.

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, 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 six months ended June 30,

tax-equivalent

net interest income decreased $1,985 to $18,598 in 2020 from $20,583 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 and the addition of lower yielding PPP loans and the realization of lower levels of loan accretion from purchase accounting marks. The

tax-equivalent

net interest margin for the six months ended June 30 was 3.43% in 2020 compared to 4.03% in 2019. The net interest spread decreased to 3.29% for the six months ended June 30, 2020 from 3.83% for the six months ended June 30, 2019. The

tax-equivalent

yield on the loan portfolio decreased to 4.33% in 2020 compared to 5.22% in 2019. The actions taken by the Federal Open Market Committee in March 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 earned equating to 2.45% on the addition of PPP loans in the second quarter of 2020. The addition of PPP

38

loans provided a net benefit of $1,022 to net interest income in the first half of 2020. Loan accretion related to purchase accounting marks from mergers declined in the first six months was $292 in 2020 and $1,495 in 2019. Overall, average earning assets increased $59,358 while average interest-bearing liabilities increased $59,108 in comparing the first six months of 2020 with 2019.

For the six months ended June 30,

tax-equivalent

interest income decreased $2,862, to $22,158 in 2020 from $25,020 in 2019. An unfavorable rate variance due to the lower yield earned on PPP loans and reductions in market rates more than offset a favorable volume variance primarily caused by the addition of PPP loans. Specifically, the overall yield on earning assets, on a fully

tax-equivalent

basis, decreased for the six months ended June 30, 2020 to 4.09% as compared to 4.90% for the six months ended June 30, 2019. With respect to the volume variance, average earning assets increased $59,358 to $1,088,834 for the first six months of 2020 from $1,029,476 for the same period in 2019.

Tax-equivalent

loan income decreased $1,961 comparing the first half of 2020 and 2019. The increase in average loans of $87,721 was more than offset by an

89-basis

point decline in yield. The decrease in average investments of $30,829 was the primary cause of the $555 reduction in

tax-equivalent

interest income on investments.

Total interest expense decreased $877 to $3,560 for the six months ended June 30, 2020 from $4,437 for the six months ended June 30, 2019. Reductions in fund costs more than offset increases in average volumes on interest-bearing liabilities. Comparing the first six months of 2020 and 2019, the weighted average cost of funds decreased 27 basis points to 0.80% from 1.07% while the average volume of interest-bearing liabilities increased $59,108 to $898,347 from $839,239. Money market and NOW account costs declined 58 and 38 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 six months ended June 30, 2020 were $67,346 and 1.04%, compared to $6,912 and 7.73% for the same comparison period from 2019. The volume increase was due to liquidity-based borrowings established at FHLB and the Federal Reserve to primarily fund PPP loan 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 June 30,

tax-equivalent

net interest income decreased $1,001 to $9,752 in 2020 from $10,753 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 $163,772 while average earning liabilities increased $152,879 comparing the second quarters of 2020 and 2019. The

tax-equivalent

net interest margin for the three months ended June 30, was 3.29% in 2020 compared to 4.20% in 2019. The net interest spread decreased to 3.18% for the three months ended June 30, 2020 from 4.00% for the three months ended June 30, 2019. Net accretion decreased to $213 from $1,119 comparing the second quarters of 2020 and 2019. Net interest income generated from PPP loans amounted to $1,022 in the second quarter of 2020.

For the three months ended June 30,

tax-equivalent

interest income decreased $1,588, to $11,395 in 2020 from $12,983 in 2019. An unfavorable rate variance in interest income of $12,230 was partially offset by favorable gains of $10,642 due to a greater volume of average earning assets compared to average interest-bearing liabilities. The overall yield on earning assets, on a fully

tax-equivalent

basis, decreased for the three months ended June 30, 2019 to 3.85% as compared to 5.07% for the three months ended June 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 $187,841 comparing the second quarters of 2020 and 2019. The

tax-equivalent

yield on the loan portfolio was 4.08% for the three months ended June 30, 2020 compared to 5.41% for the same period last year. The combined impact of loan rate and volume variances caused an overall decrease in interest earned on loans of $1,074. The yield earned on investments decreased 20 basis points for the second quarter of 2020 to 2.91% from 3.11% for the second quarter of 2019. This coupled with average investments decreasing to $66,672 for the quarter ended June 30, 2020 compared to $102,135 for the same period in 2019, resulted in a decrease in

tax-equivalent

interest income of $310. Overall

tax-equivalent

interest earned on investments was $482 for the three-month period ended June 30, 2020 compared to $792 for the same period in 2019.

Total interest expense decreased $587 to $1,643 for the three months ended June 30, 2020 from $2,230 for the three months ended June 30, 2019. A favorable rate variance more than offset an unfavorable volume variance and caused interest expenses to decrease. The cost of funds decreased to 0.67% for the three months ended June 30, 2020 as compared to 1.07% for the same period in 2019. The average volume of interest-bearing liabilities increased to $988,804 for the three months ended June 30, 2020, from $835,925 for the three months ended June 30, 2019. Average interest-bearing deposits increased $8,509 to $837,512 for the second quarter of 2020 from $829,003 for the same period last year. Average long-term debt increased to $112,875 for the second quarter of 2020 from $6,922 for the same period last year to provide funding for PPP loans.

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.

39

	Six months ended
	June 30, 2020							June 30, 2019
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
Assets:
Earning assets:
Loans
Taxable	$	939,993	$	20,384		4.36	%	$	852,427	$	22,368		5.29	%
Tax exempt		35,159		609		3.48	%		35,004		586		3.38	%
Investments
Taxable		67,815		931		2.76	%		96,305		1,472		3.08	%
Tax exempt		6,535		133		4.09	%		8,874		147		3.34	%
Interest bearing deposits		39,332		101		0.52	%		36,866		447		2.45	%
Federal funds sold
Total earning assets		1,088,834		22,158		4.09	%		1,029,476		25,020		4.90	%
Less: allowance for loan losses		7,754							6,457
Other assets		108,006							105,239
Total assets		1,189,086						$	1,128,258
Liabilities and Stockholders’ Equity:
Interest bearing liabilities:
Money market accounts	$	109,502	$	234		0.43	%	$	113,159	$	566		1.01	%
NOW accounts		281,703		460		0.33	%		276,036		978		0.71	%
Savings accounts		138,501		88		0.13	%		131,797		66		0.10	%
Time deposits		286,592		2,402		1.69	%		311,335		2,562		1.66	%
Short term borrowings		14,703		28		0.38	%
Long-term debt		67,346		348		1.04	%		6,912		265		7.73	%
Total interest-bearing liabilities		898,347		3,560		0.80	%		839,239		4,437		1.07	%
Non-interest-bearing demand deposits		158,065							157,908
Other liabilities		13,365							16,975
Stockholders’ equity		119,309							114,136
Total liabilities and stockholders’ equity	$	1,189,086						$	1,128,258
Net interest income/spread			$	18,598		3.29	%			$	20,583		3.83	%
Net interest margin						3.43	%						4.03	%
Tax-equivalent adjustments:
Loans			$	128						$	123
Investments				28							31
Total adjustments			$	156						$	154

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 June 30, 2020.

40

The provision for loan losses totaled $3,812 for the six months ended June 30, 2020, compared to $1,201 in 2019. For the quarter ended June 30, the provision for loan losses was $2,012 in 2020 compared to $618 in 2019. The increase in the provision for loan losses was the combined result of loan growth, increases in historical loss factors and changes in qualitative factors related to the reserve build associated with the effects of

COVID-19

as of the balance sheet date. 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 six months ended June 30, noninterest income totaled $4,931 in 2020, an increase of $994 from $3,937 in 2019. The increase was primarily attributable to recognizing an $815 net gain on the sale of investment securities to provide liquidity to fund loan demand and limit exposure to falling rates through the disposition of adjustable rate securities. This compares to a $42 loss from the sale of investment securities recorded in 2019. Service charges, fees and commissions increased $24 as service charge initiative benefits generated in the first quarter of 2020 decreased due to temporary

COVID-19

induced suspensions and reductions to service charges in the second quarter of 2020. Mortgage banking income increased $293 for the six months ended June 30, 2020 as compared to the same period in 2019 as borrowers took advantage of low interest rates. Trust and wealth management income declined for the first six months of 2020 by $118 and $67 compared to the first six months of 2019 due primarily to a marked slowdown in activities brought on by the impact of

COVID-19.

For the quarter ended June 30, noninterest income totaled $2,001 in 2020, a decrease of $125 from $2,126 in 2019. The decrease in noninterest income for the quarter was due primarily to reductions in services charges, fees and commissions of $304, trust income of $71 and wealth management income of $40 partially offset by increases in mortgage banking income of $291.

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 to control the variable expenses.

Noninterest expense increased $20,718, or 92.3%, to $43,166 for the six months ended June 30, 2020, from $22,448 for the same period last year. The increase was primarily due to the writing off of the entire amount of goodwill on the books totaling $24,754. Excluding this nonrecurring charge, noninterest expense would have decreased $4,036, or 18.0%, comparing the six months ended June 30, 2020 and 2019. Net occupancy expense increased $115, or 5.4%, to $2,248 for the first six months of 2020 from $2,133 for the same period last year. Higher costs related to building and equipment maintenance and repairs caused the increase. Other expenses decreased $757, or 11.6%, to $5,795 in the first six months of 2020 compared to $6,552 for the same period last year. The decrease is a result of implementing cost savings initiatives in the latter part of 2019.

For the three months ended June 30, 2020, noninterest expense increased $23,470, to $33,954 from $10,484 for the same period last year. Excluding goodwill impairment of $24,754 realized in the second quarter of 2020, noninterest expense would have decreased $1,284, or 12.2%. Salaries and employee benefit expense was $4,985 for the quarter ended June 30, 2020, a decrease of $845 over the same period in 2019 due to previously implemented efficiency initiatives. For the second quarter, other expenses decreased to $2,978 in 2020 from $3,508 in 2019, or 15.1%.

Income Taxes:

We recorded an income tax benefit of $116 for the six months ended June 30, 2020 as compared to a tax benefit of $30 for the six months ended June 30, 2019. For the three months ended June 30, we recorded a tax benefit of $172 in 2020 as compared to income tax expense of $268 in 2019.

41

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 June 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 June 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.

The following Exhibits are incorporated by reference hereto:

31.1	Section 302 Certification of the Chief Executive Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
31.2	Section 302 Certification of the Chief Financial Officer (Pursuant to Rule 13a-14(a)/15d-14(a)).
32.1	Chief Executive Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
32.2	Chief Financial Officer’s §1350 Certification (Pursuant to Rule 13a-14(b)/15d-14(b)).
101	Interactive Data File (XBRL).

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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: August 10, 2020

By:	/s/ Scott A. Seasock
	Scott A. Seasock
	Chief Financial Officer
	(Principal Financial Officer)
Date: August 10, 2020

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