UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2019

For the transition period from                  to                 

Commission file number: 001-38627

Riverview Financial Corporation

(Exact name of registrant as specified in its charter)

3901 North Front Street,

Harrisburg, PA 17110

(Address of principal executive offices) (Zip Code)

(717)957-2196

Registrant’s telephone number, including area code

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 (§ 232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant, on June 30, 2019, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $93,607,399 (based on the closing sales price of the registrant’s common stock on that date).

The number of shares of the registrant’s voting common stock outstanding as of February 28, 2020 was 7,877,659 shares. The number of shares of the registrant’s non-voting common stock outstanding as of February 28, 2020 was 1,348,809 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be filed in connection with solicitation of proxies for its 2020 annual meeting of shareholders, within 120 days of the end of registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Riverview Financial Corporation

Form 10K

For the Year Ended December 31, 2019

TABLE OF CONTENTS

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Cautionary Note Regarding Forward-Looking Statements.

This Annual Report on Form 10-K may contain 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, financial conditions, results of operations and expectations of Riverview Financial Corporation and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words such as “may”, “should”, “will”, “could”, “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project”, “plan”, “goal”, “strategy”, “likely”, “seek”, “future”, “target”, “preliminary”, “range” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

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Any forward-looking statement made by us in this document is based only on information currently available to us and speaks only as of the date on which it is made. Riverview Financial Corporation undertakes no obligation, other than as required by law, to update or revise any forward-looking statements as a result of new information, future events or otherwise.

Part I

General

Riverview Financial Corporation (the “Company”) was formed in 2013 as a bank holding company incorporated under the laws of Pennsylvania. The Company is regulated by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”). The Company provides a full range of financial services through its wholly-owned bank subsidiary, Riverview Bank (the “Bank”), which is its sole operating segment. The Company had approximately 276 employees as of December 31, 2019.

The Bank is a state-chartered bank and trust company regulated by the Pennsylvania Department of Banking and Securities (“DOB”) and the Federal Deposit Insurance Corporation (“FDIC”) that offers financial services through 27 community banking offices and three limited purpose offices.

Effective October 1, 2017, the Company merged with CBT Financial Corp. (“CBT”) and its subsidiary, CBT Bank, merged with and into the Bank. The merger of equals with CBT added approximately $382.5 million in loans and $438.8 million in deposits to the consolidated Company.

Unless the context indicates otherwise, all references in this annual report to the “Company”, “Bank”, “we”, “us” and “our” refer to Riverview Financial Corporation, its direct and indirect subsidiaries and its and their respective predecessors.

We primarily generate income through interest income derived from our loan and securities portfolios. Other income is generated primarily from transaction fees, trust and wealth management fees, mortgage banking fees and service charges on deposit accounts. Our primary costs are interest paid on deposits and borrowings and general operating expenses. We provide a variety of commercial and retail banking and financial services to businesses, non-profit organizations, governmental and municipal agencies, professional customers, and retail customers, on a personalized basis.

Market Areas

The Bank’s market area consists of Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties in Central Pennsylvania.

Products and Services

The Bank offers a variety of consumer and commercial banking products and services throughout its market area. Our primary lending products are real estate, commercial and consumer loans. Our primary deposit products are NOW, demand deposit accounts, and certificate of deposit accounts. We also offer ATM access, investment accounts, trust department services and other various lending, depository and related financial services.

Lending Activities

We provide a full range of retail and commercial lending products designed to meet the borrowing needs of consumers and small- and medium-sized businesses in our market area. A significant amount of our loans are made to customers located within our market area. We have no foreign loans or highly leveraged transaction loans, as defined by the Federal Reserve Board. Although we participate in loans originated by other banks, we have originated the majority of the loans in our portfolio.

Our primary commercial products are loans to small- and medium- sized businesses. Our consumer products include one-to-four family residential mortgages, consumer, automobile, home equity, educational and lines of credit loans. Our retail lending products include the following types of loans, among others: residential real estate; automobiles; manufactured housing; personal; student; and home equity. Our commercial lending products include the following types of loans, among others: commercial real estate; working capital; equipment and other commercial needs; construction; and agricultural and mineral rights. The terms offered on a loan vary depending on the type of loan and credit-worthiness of the borrower. We fund our loans, primarily, from our various deposit products which include certificates of deposits, savings, money market and various demand deposit accounts that are offered to both consumer and commercial customers.

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Payment risk is a function of the economic climate in which our lending activities are conducted. Economic downturns in the economy generally, or in a particular sector, could cause cash flow problems for our customers, impairing their ability to repay loans we make to them. We attempt to minimize this risk by avoiding loan concentrations to a single customer or a group of similar customer types, the loss of any one or more of whom would have a materially adverse effect on our financial condition. One element of interest rate risk arises from making fixed rate loans in an environment of changing interest rates. We attempt to mitigate this risk by making adjustable rate loans and by limiting repricing terms to five years or less for commercial customers requiring fixed rate loans.

Our lending activity also exposes us to the risk that any collateral we take as security is not adequate. We attempt to manage collateral risk by avoiding loan concentrations to particular types of borrowers, by perfecting liens on collateral and by obtaining appraisals on property prior to extending loans. We attempt to mitigate our exposure to these and other types of lending risks by stratifying authorization requirements by loan size and complexity.

We are not dependent upon a single customer, or a few customers, the loss of one or more of which would have a materially adverse effect on our operations. In the ordinary course of our business, our operations and earnings are not materially affected by seasonal changes or by Federal, state or local environmental laws or regulations.

We intend to continue to evaluate commercial real estate, commercial business and governmental lending opportunities, including small business lending. We continue to proactively monitor and manage existing credit relationships.

We have not engaged in sub-prime residential mortgage lending, which is defined as mortgage loans advanced to borrowers who do not qualify for market interest rates because of problems with their credit history. We focus our lending efforts within our market area.

Deposit Activities

Our primary source of funds is the cash flow provided by our financing activities, mainly deposit gathering. We offer a variety of deposit accounts with a range of interest rates and terms, including, among others: money market accounts; NOW accounts; savings accounts; certificates of deposit; individual retirement accounts, and demand deposit accounts. These deposits are primarily obtained from areas surrounding our branch offices. We rely primarily on marketing, product innovation, technology, service and long-standing relationships with customers to attract and retain deposits. Other deposit related services include: mobile and online banking; remote deposit capture; automatic clearing house transactions; cash management services; automated teller machines; point of sale transactions; safe deposit boxes; night depository services; direct deposit; and official check services.

Trust, Wealth Management and Brokerage Services

Through our trust department, we offer a broad range of fiduciary and investment services. Our trust and investment services include:

We provide a comprehensive array of wealth management products and services through Riverview Wealth Management and Trust Management divisions to individuals, small businesses and nonprofit entities. These products and services include the following, among others: investment portfolio management; brokerage; estate planning assistance; annuities; business succession planning; insurance; education funding strategies; and tax planning assistance.

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We have a third-party marketing agreement with a broker-dealer that allows us to offer a full range of securities, brokerage services and annuity sales to our customers. We have three dedicated locations that provide such investor services as well as accommodating customer meetings by appointment within our retail banking offices. Through these divisions, our clients have access to a wide array of financial products including stocks, bonds, mutual funds, annuities and insurance.

Competition

The banking and financial services industries are highly competitive. Within its geographic region, the Bank faces direct competition from other commercial banks, varying in size from local community banks to larger regional and nationwide banks, credit unions and non-bank entities. As a result of the wide availability of electronic delivery channels, the Bank also faces competition from financial institutions that do not have a physical presence in its geographic markets.

Many of our competitors are substantially larger in terms of assets and available resources. Certain of these institutions have significantly higher lending limits than we do and may provide various services to their customers that we presently do not. In addition, we experience competition for deposits from mutual funds and broker dealers, while consumer discount, mortgage and insurance companies compete with us for various types of loans. Credit unions, finance companies and mortgage companies enjoy certain competitive advantages over us, as they are not subject to the same regulatory restrictions and taxation as commercial banks. Principal methods of competing for bank products, permitted nonbanking services and financial activities include price, nature of product, quality of service, convenience of location, and availability of banking convenience technology, including telephone and web-based banking services.

In our market area, interest rates on deposits, especially time deposits, and interest rates and fees charged to customers on loans are very competitive. In the current economic environment, we are experiencing increased competition in view of our loan demand and deposit gathering.

We believe that our most significant competitive advantage originates from our business philosophy, which includes offering direct access to senior management and other officers, providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures, and consistently applied credit policies. In addition, our success has been, and will continue to be, a result of our emphasis on community involvement and customer relationships. With consolidation continuing in the financial industry, and particularly in our market area, smaller community banks like us are gaining opportunities to increase market share as larger institutions reduce their emphasis on, or exit, the markets.

Seasonality

Generally, our operations are not seasonal in nature. Our deposit activities, however, have been somewhat influenced by fiscal funding appropriations related to municipalities and school districts in our market areas, which are to some extent seasonal in nature.

Supervision and Regulation

We are extensively regulated and examined under federal and state laws. Generally, these laws and regulations are intended to protect consumers, not shareholders. The following is a summary description of certain provisions of law that affect the regulation of bank holding companies and banks. This discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in laws and regulations may have a material effect on our business and prospects.

The Company is a bank holding company within the meaning of the Bank Holding Company Act (“BHCA”) and is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) or (“FRB”). We are required to file annual and quarterly reports with the FRB and to provide the FRB with such additional information as the FRB may require. The FRB also conducts periodic examinations of the Company. In addition, under the Pennsylvania Banking Code of 1965 of the Pennsylvania Department of Banking and Securities (“DOB”), the DOB has the authority to examine the books, records and affairs of the Company and to require any documentation deemed necessary to ensure compliance with the Pennsylvania Banking Code.

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With certain limited exceptions, we are required to obtain prior approval from the FRB before acquiring direct or indirect ownership or control of more than 5% of any voting securities or substantially all assets of a bank or bank holding company, or before merging or consolidating with another bank holding company. Additionally, with certain exceptions, any person or entity proposing to acquire control through direct or indirect ownership of 25% or more of our voting securities (or 10% or more under certain circumstances) is required to give 60 days’ written notice of the acquisition to the FRB, which may prohibit the transaction, and to publish notice to the public.

The Bank is primarily regulated by the DOB and the FDIC. The DOB may prohibit an institution, over which it has supervisory authority, from engaging in activities or investments that the agency believes constitute unsafe or unsound banking practices. Federal banking regulators have extensive enforcement authority over the institutions they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to constitute unsafe or unsound practices.

Enforcement actions may include:

We are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons which generally require that such credit extensions be made on substantially the same terms as are available to third parties dealing with us, and do not involve more than the normal risk of repayment or present other unfavorable features. Other laws limit the maximum amount that we may loan to any one customer as a percentage of our capital levels.

Permitted Non-Banking Activities

Generally, a bank holding company may not engage in any activities other than banking, managing or controlling its bank and other authorized subsidiaries, or providing service to those subsidiaries. With prior approval of the FRB, we may acquire more than 5% of the assets or outstanding shares of a company engaging in non-bank activities determined by the FRB to be closely related to the business of banking or of managing or controlling banks. The FRB provides expedited procedures for expansion into approved categories of non-bank activities. A bank holding company that meets certain specified criteria may elect to be regulated as a “financial holding company” and thereby engage in a broader array of nonbanking financial activities, including insurance and investment banking.

Limitations on Dividends and Other Payments and Transactions

Our ability to pay dividends is largely dependent upon the receipt of dividends from the Bank. The Company relies on dividends from the Bank for its own ability to pay dividends to shareholders. Both federal and state laws impose restrictions on the ability of both the Company and the Bank to pay dividends.

Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions on extensions of credit to the bank holding company or its subsidiaries, and on the use of their securities as collateral for loans. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for the payment of dividends, interest and operating expenses. Further, subject to certain exceptions, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements relating to any extension of credit, the lease or sale of property, or furnishing of services.

Under FRB regulations, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to make capital injections into a troubled subsidiary bank. The FRB may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required capital injection may be called for at a time when the holding company does not have the resources to provide it. In addition, depository institutions insured by the FDIC can be held liable for any losses incurred, or reasonably anticipated to be incurred, in connection with the default of or assistance provided to a commonly controlled FDIC-insured depository institution. Such cross-guarantee liabilities generally are superior in priority to the obligation of the depository institutions to its shareholders, due solely to their status as shareholders, and obligations to other affiliates.

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Pennsylvania Law

As a Pennsylvania bank holding company, the Company is subject to various restrictions on its activities as set forth in Pennsylvania law. This is in addition to those restrictions set forth in federal law. Under Pennsylvania law, a bank holding company that desires to acquire a bank or bank holding company that has its principal place of business in Pennsylvania must obtain permission from the DOB.

Risk-Based Capital Requirements

The federal banking regulators have adopted risk-based capital regulations to facilitate assessing capital adequacy of a bank’s operations for assets reported on the balance sheet and transactions, such as letters of credit and recourse agreements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain US Treasury securities, to 100% or more for assets with relatively high credit risk.

A bank’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off-balance-sheet items, against both total qualifying capital, Common Equity Tier 1 capital, and Tier 1 capital.

“Common Equity Tier 1 Capital” includes common equity and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions and retained earnings.

“Tier 1”, or core capital, includes common equity, non-cumulative preferred stock and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions.

“Tier 2”, or supplementary capital, includes, among other things, limited life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations less restricted deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by federal law. The final rules established the following capital requirements:

A minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5%.

A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

A minimum ratio of total capital to risk-weighted assets of 8%.

A minimum leverage ratio of 4%.

In addition, the final rules established a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all insured banks. If a bank fails to hold capital above the minimum capital ratios and the capital conservation buffer, it is subject to certain restrictions on capital distributions and discretionary bonus payments to executives. The phase-in period for the capital conservation buffers for all banks began on January 1, 2016, with the full buffer applicable on January 1, 2019.

Under the rules, community banks were permitted to make a one-time election not to include Accumulated Other Comprehensive Income (“AOCI”) in regulatory capital and instead use the previously existing treatment that excluded most AOCI components from regulatory capital. The opt-out election was required to be made in the first call filed after the institution became subject to the final rule. The Bank “opted-out” of the inclusion of the components of AOCI in regulatory capital.

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions including:

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In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to the Company.

At December 31, 2019, the Bank complied with the foregoing requirements with a common equity tier 1 risk-based capital ratio of 11.5%, tier 1 leverage capital ratio of 9.1%, tier 1 risk-based capital ratio of 11.5% and a total capital ratio of 12.4%.

Legislation enacted in May 2018 required the federal banking agencies, including the FDIC, to establish a “community bank leverage ratio” of between 8 to 10% of average total consolidated assets for qualifying institutions with assets of less than $10 billion. Institutions with capital meeting the specified requirements and electing to follow the alternative framework are deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements. In November 2019, the federal regulators issued a final rule that set the optional “community bank leverage ratio” at 9%, effective January 1, 2020.

Prompt Corrective Action Regulations

Under prompt corrective action regulations, the FDIC is authorized and, under certain circumstances, required, to take supervisory actions against undercapitalized banks. The extent of supervisory action depends upon the degree of the institution’s undercapitalization. For this purpose, a bank is placed in one of the following five categories based on its capital level:

The regulations provide that a capital restoration plan must be filed with the FDIC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by the FDIC, or the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the FDIC notifies the bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters, and the FDIC has the authority to require payment and collect payment under the guarantee. Various restrictions, including on growth and capital distributions, also apply to “undercapitalized” institutions. If an “undercapitalized” institution fails to submit an acceptable capital plan, it is treated as “significantly undercapitalized.” “Significantly undercapitalized” institutions must comply with one or more additional restrictions including, but not limited to, an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss officers or directors and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator within specified timeframes.

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At December 31, 2019, the Bank met the criteria for being considered “well-capitalized”.

The previously referenced final rule establishing an elective “community bank leverage ratio” regulatory capital requirement provides that a qualifying institution whose capital exceeds the community bank leverage ratio and opts to use that framework will be considered “well-capitalized” for purposes of prompt corrective action.

Interest Rate Risk

Regulatory agencies include in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s interest rate risk management includes a measurement of board of directors and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate to the circumstances of the specific banking organization. We utilize internal interest rate risk models to measure and monitor interest rate risk. Finally, regulatory agencies, as part of the scope of their periodic examinations, evaluate our interest rate risk.

Commercial Real Estate Guidance

In December 2015, the federal banking agencies released a statement entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”). In the CRE Statement, the agencies express concerns with institutions that ease commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The agencies previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”, which states that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where total commercial real estate loans represents 300% or more of its total capital and the outstanding balance of such institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

Deposit Insurance

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. Deposit insurance per account owner is $250,000.

The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. That system, effective July 1, 2016, replaced the previous system under which institutions were placed in risk categories.

Federal law required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion in total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.

Federal legislation raised the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The law required insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions were subject to a surcharge to achieve that goal. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets are receiving credits for the portion of their assessments that contributed to increasing the reserve ratio between 1.15% and 1.35%. The FDIC has established a long-range target fund ratio of 2%.

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The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Community Reinvestment Act (“CRA”)

Under the CRA, the Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to ascertain and meet the credit needs of its entire community, including low- and moderate-income areas. CRA is designed to create a system for bank regulatory agencies to evaluate a depository institution’s record in meeting the credit needs of its community. CRA regulations were completely revised as of July 1, 1995, to establish performance-based standards for use in examining for compliance. Assessment by bank regulators of CRA compliance focuses on three tests: (i) a lending test, to evaluate the institution’s record of making loans, including community development loans, in its designated assessment areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and areas and small businesses; and (iii) a service test, to evaluate the institution’s delivery of banking services throughout its CRA assessment area, including low and moderate income areas. The Bank had its last completed CRA compliance examination conducted November 4, 2019 and received a “satisfactory” rating.

Bank Secrecy Act, USA Patriot Act of 2001 (“Patriot Act”), and Related Rules and Regulations

The Patriot Act contained anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Among other requirements, the Patriot Act and the related regulations imposed the following requirements with respect to financial institutions:

Failure to comply with the Patriot Act’s requirements could have serious legal, financial, regulatory and reputational consequences. In addition, bank regulators will consider a holding company’s effectiveness in combating money laundering when ruling on BHCA and Bank Merger Act applications.

In May 2018, a Financial Crimes Enforcement Network rule requiring banks to implement strengthened customer due diligence requirements took effect. Among other requirements, the rules contain explicit customer due diligence requirements and require banks to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.

Consumer Lending Laws

Bank regulatory agencies are increasingly focusing attention on consumer protection laws and regulations. Such laws and regulations include:

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The operations of the Bank are further subject to the:

Holding Company Capital Regulations

Federal law required the Federal Reserve Board to apply consolidated capital requirements to bank holding companies that are no less stringent than those applicable to the institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to bank holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer for bank holding companies was phased in between 2016 and 2019. However, legislation enacted in May 2018 required the FRB to raise the threshold of its “small holding company” exception to the applicability of consolidated holding company capital requirements from $1 billion of consolidated assets to $3 billion of consolidated assets. That change became effective in August 2018. Consequently, holding companies with less than $3 billion of consolidated assets, including the Company, are generally not subject to the requirements unless otherwise advised by the FRB.

Dividends and Stock Repurchases

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend. The guidance also provides for prior regulatory review where the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory review prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction in the amount of such equity instruments outstanding as of the end of a quarter compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

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Federal Reserve System

FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). As of the reporting date, a reserve of 3% is to be maintained against aggregate transaction accounts between $16.3 million and $124.2 million (subject to adjustment annually by the FRB) plus a reserve of 10% (subject to adjustment by the FRB between 8% and 14%) against that portion of total transaction accounts in excess of $124.2 million. The first $16.3 million of otherwise reservable balances (subject to adjustment by the FRB) is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements.

Required reserves must be maintained in the form of vault cash, an account at a Federal Reserve Bank or a pass-through account as defined by the FRB. Pursuant to the Emergency Economic Stabilization Act of 2008, the Federal Reserve Banks pay interest on depository institution required and excess reserve balances.

Future Legislation

Proposed legislation is introduced in almost every legislative session that would dramatically affect the regulation of the banking industry. We cannot predict if any such legislation will be adopted nor if adopted how it would affect our business. History has demonstrated that new legislation or changes to existing laws or regulations usually results in greater compliance burden and therefore generally increases the cost of doing business.

Employees

As of December 31, 2019, we had 276 employees. We are not parties to any collective bargaining agreements and we consider our employee relations to be good.

Availability of Securities Filings

Effective February 11, 2015, the Company became a reporting company and was required to file certain periodic reports under the Securities and Exchange Act of 1934 as required by Section 15(d) of that act. Effective August 10, 2018, the Company registered its stock under Section 12(b) of the Exchange Act and thereby became required to file certain additional periodic reports under the Exchange Act. We file the required annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.

In addition, we maintain an Internet website at www.riverviewbankpa.com. We make available, free of charge, through the “Investor Relations” link on our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Not required for smaller reporting companies.

None.

Our corporate headquarter is located at 3901 North Front Street, Harrisburg, Pennsylvania, and includes our executive offices as well as portions of our finance, information services, credit, and branch administration departments. Portions of our deposit operations, human resource administration, as well as trust service offices are located at 2638 Woodglen Road, Pottsville, Pennsylvania. Portions of our loan operations, credit administration, Bank Secrecy Act (“BSA”) compliance and IT departments are located at 200 Front Street, Marysville, Pennsylvania. Additionally, compliance and portions of finance operations, human resource administration and operations, loan and deposit operations, credit administration and trust operations and services are located at 11 North Second Street, Clearfield, Pennsylvania. Each of these facilities is owned by the Bank.

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The Bank operates 27 community banking offices and three limited purpose offices within Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Perry, Schuylkill and Somerset Counties in Pennsylvania. Fourteen of the branch offices are leased by the Bank, while the remaining facilities are owned. All retail banking offices have ATMs and are equipped with closed circuit security monitoring.

We consider our properties to be suitable and adequate for our current and immediate future purposes.

In the opinion of the Company, after review with legal counsel, as of December 31, 2019, there were no proceedings pending to which the Company is party to or to which its property is subject, which, if determined to be adverse to the Company, would be material in relation to the Company’s consolidated financial condition. In addition, as of December 31, 2019, no material proceedings are pending or are known to be threatened or contemplated against the Company by governmental authorities.

Not applicable.

As of February 28, 2020, there were approximately 1,065 registered holders of our common stock, no par value. Our common stock trades on the Nasdaq Global Market under the symbol “RIVE”.

The Company has paid cash dividends since its formation in 2008 and currently is paying $0.075 per shares quarterly. The payment of future dividends is dependent upon earnings, financial position, appropriate restrictions under applicable laws and other factors relevant at the time our board of directors considers any declaration of dividends. For information relating to dividend restrictions applicable to the Company and the Bank, refer to the consolidate financial statements and notes to these statements as Item 8 to this report and incorporated in their entirety by reference under this Item 5.

The Company did not repurchase any shares of its common stock during the year ended December 31, 2019.

Not required for smaller reporting companies

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Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

Management’s Discussion and Analysis appearing on the following pages should be read in conjunction with the Consolidated Financial Statements contained in this Annual Report on Form 10-K.

Forward-Looking Discussion:

In addition to the historical information contained in this document, the discussion presented may contain and, from time to time, may make, certain statements that constitute forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. These statements are not historical facts, but instead represent the current expectations, plans or forecasts of the Company and its subsidiary regarding its future operating results, financial position, asset quality, credit reserves, credit losses, capital levels, dividends, liquidity, service charges, cost savings, effective tax rate, impact of changes in fair value of financial assets and liabilities, impact of new accounting and regulatory guidance, legal proceedings and other matters relating to us and the securities that we may offer from time to time. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict, change over time and are often beyond our control. Actual outcomes and results may differ materially from those expressed in, or implied by, forward-looking statements.

You should not place undue reliance on any forward-looking statements, which speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. 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.

Critical Accounting Policies:

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of consolidated financial statements in conformity with GAAP requires us to establish critical accounting policies and make accounting estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during those reporting periods.

For a discussion of the recent Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”), refer to Note 1 entitled “Summary of significant accounting policies — Recent accounting standards”, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

An accounting estimate requires assumptions about uncertain matters that could have a material effect on the consolidated financial statements if a different amount within a range of estimates was used or if estimates changed from period to period. Readers of this report should understand that estimates are made considering facts and circumstances at a point in time, and changes in those facts and circumstances could produce results that differ from when those estimates were made. Significant estimates that are particularly susceptible to material change within the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets and the impairment of goodwill. Actual amounts could differ from those estimates.

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions.

The allowance for loan losses account consists of an allocated element and an unallocated element. The allocated element consists of a specific portion for the impairment of loans individually evaluated and a formula portion for loss contingencies on those loans collectively evaluated. The unallocated element, if any, is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using our impairment evaluation methodology due to limitations in the process.

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We monitor the adequacy of the allocated portion of the allowance quarterly and adjust the allowance as necessary through normal operations. This ongoing evaluation reduces potential differences between estimates and actual observed losses. The determination of the level of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Accordingly, management cannot ensure that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required, resulting in an adverse impact on operating results.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences by applying enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Goodwill is evaluated at least annually for impairment, or more frequently if conditions indicate potential impairment exists. Any impairment losses arising from such testing are reported in the income statement in the current period as a separate line item within operations.

For a further discussion of our critical accounting policies refer to Note 1 entitled “Summary of significant accounting policies” in the Notes to Consolidated Financial Statements to this Annual Report. This Note lists the significant accounting policies used by us in the development and presentation of the consolidated financial statements. This MD&A, the Notes to Consolidated Financial Statements and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary to understand and evaluate our financial position, results of operations and cash flows.

Operating Environment:

The banking industry operating performance declined in 2019 as net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks totaled $233.1 billion, a decrease of $3.6 billion, or 1.5%, from 2018. The leading factors for the industry were declining margins, as the net interest margin declined four basis points to 3.36% in 2019 from 3.40% in 2018, and higher loan loss provisions, which were up $5.0 billion, or 9.9%, over the prior year.

The United States economy continued to grow at a strong pace in 2019, albeit a slower rate as compared to 2018. The gross domestic product (“GDP”), the value of all goods and services produced in the Nation, increased at an annual rate of 2.3% in 2019, as compared to 2.9% in 2018. The deceleration in real GDP in 2019, compared to 2018, primarily reflected decelerations in nonresidential fixed investment and personal consumption expenditures and a downturn in exports, which were partly offset by accelerations in both state and local and federal government spending. Inflationary concerns abated in 2019 as the Federal Reserve Board’s Federal Open Market Committee’s (“FOMC”) preferred measure of inflation, the personal consumption expenditures price index excluding food and energy decreased to 1.2% in 2019, a reduction from 1.9% in 2018 and was below the FOMC’s benchmark of 2.0%. In reversing course from 2018, the FOMC decreased rates three times in 2019 for a total of 75 basis points based on expectations there was emerging weakness in the economy. Current forecasts show an FOMC stance that ranges from neutral to accommodative regarding 2020 overnight rates.

FOMC actions have a direct impact on our business and profitability and are monitored closely by management. A declining rate cycle may reduce the Company’s cost of funds as competitive rates decline and help reduce earnings variability in future cycles as depositors choose to extend the overall duration of their deposits. An additional benefit of a lower rate environment is that asset quality may be positively impacted as borrowers with adjustable rate loans may more easily cover debt service in the future as payments decrease. We continually monitor adjustable rate relationships through stress testing over various rate scenarios. Conversely, reductions in general market rates have an adverse impact on the yield on earning assets and compress net interest income as fixed rate borrowers wish to renegotiation higher rates on existing loans. Moreover, there is a possibility we may lose customers to competitors if we are unable or unwilling to provide lower term rates.

Employment conditions overall improved in the United States in 2019. The number of people employed increased at a greater pace as compared to the increase in the civilian labor force in 2018. As a result, the annual unemployment rate for the United States fell to a fifty-year low at 3.5% in 2019 from 3.9% in 2018. Average hourly earnings continued to grow at an average rate of 3.1% throughout 2019.

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Employment conditions in 2019 weakened for the Commonwealth of Pennsylvania as evidenced by an increase in the unemployment rate to 4.6% at December 31, 2019 from 3.9% at December 31, 2018. 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 5.0% in 2019 from 4.0% in 2018. The lowest 2019 unemployment rate within the counties we serve were in Centre and Cumberland at 3.4%. Continued increases in unemployment rates could unfavorably impact the rate of economic growth in our market, the growth of loans and deposits, asset quality and overall profitability.

National, Pennsylvania and our market area’s non-seasonally adjusted annual unemployment rates at December 31, 2019 and 2018 are summarized as follows:

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Review of Financial Position:

Riverview Financial Corporation, (“Riverview” or the “Company”), 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 27 community banking offices and three 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 Bank is state-chartered under the jurisdiction of the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. The Bank’s primary product is loans to small- and medium-sized businesses. Other lending products include one-to-four family residential mortgages and consumer loans. The Bank primarily funds its loans by offering interest-bearing transaction accounts to commercial enterprises and individuals. Other deposit product offerings include certificates of deposits and various demand deposit accounts. The Bank offers a broad range of financial advisory, investment and fiduciary services through its wealth management and trust operating divisions.

The wealth management and trust divisions did not meet the quantitative thresholds for required segment disclosure in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Bank’s 27 community banking offices, all similar with respect to economic characteristics, share a majority of the following aggregation criteria: (i) products and services; (ii) operating processes; (iii) customer bases; (iv) delivery systems; and (v) regulatory oversight. Accordingly, they were aggregated into a single operating segment.

The Company faces competition primarily from commercial banks, thrift institutions and credit unions within the northern, central and southwestern Pennsylvania markets, many of which are substantially larger in terms of assets and capital. In addition, mutual funds and security brokers compete for various types of deposits, and consumer, mortgage, leasing and insurance companies compete for various types of loans and leases. Principal methods of competing for banking and permitted nonbanking services include price, nature of product, quality of service and convenience of location.

The Company and the Bank are subject to regulations of certain federal and state regulatory agencies and undergo periodic examinations.

Total assets, loans and deposits were $1.1 billon, $852.1 million and $940.5 million, respectively, at December 31, 2019. Comparatively, total assets, loans and deposits were $1.1 billon, $893.2 million and $1.0 billion, respectively, at December 31, 2018. Construction lending increased $22.3 million, while business lending, including commercial and commercial real estate decreased $46.0 million, and retail lending, including residential mortgages and consumer loans decreased $17.4 million during 2019. Investment securities decreased $13.4 million, or 12.8%, in 2019. Noninterest-bearing deposits decreased $15.2 million, and interest-bearing deposits decreased $48.9 million in 2019.

The loan portfolio consisted of $574.6 million of business loans, including commercial and commercial real estate loans, $61.8 million in construction loans, and $215.7 million in retail loans, including residential mortgage and consumer loans at December 31, 2019. Total investment securities were $91.2 million at December 31, 2019, all of which were classified as available-for sale. Total deposits consisted of $147.4 million in noninterest-bearing deposits and $793.1 million in interest-bearing deposits at December 31, 2019.

Stockholders’ equity equaled $118.1 million, or $12.81 per share, at December 31, 2019, and $113.9 million or $12.49 per share, at December 31, 2018. Dividends declared for 2019 amounted to $0.35 per share, representing an annual yield of 2.8% based on the closing price of the Company’s common stock of $12.49 per share on December 31, 2019.

Nonperforming assets equaled $5,080 or 0.60% of loans, net and foreclosed assets at December 31, 2019, an improvement from $7,202, or 0.81%, at December 31, 2018. The allowance for loan losses equaled $7,516, or 0.88%, of loans, net, at December 31, 2019, compared to $6,348, or 0.71%, of loans, net at year-end 2018. The increase in the ratio of the allowance for loan losses as a percentage of loans, net, was the result of an increase in the provision for loan losses and a reduction in loan balances. Loans charged-off, net of recoveries equaled $1,238, or 0.14%, of average loans in 2019, compared to $573, or 0.06%, of average loans in 2018.

Investment Portfolio:

Our investment portfolio provides a source of liquidity needed to meet expected loan demand and generates a reasonable return in order to increase our profitability. Additionally, we utilize the investment portfolio to meet pledging requirements. At December 31, 2019, our portfolio consisted primarily of taxable and tax-exempt state and municipal bonds and mortgage-backed securities, which provide a source of income and liquidity.

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Our investment portfolio is subject to various risk elements that may negatively impact our liquidity and profitability. The greatest risk element affecting our portfolio is market risk or interest rate risk (“IRR”). Understanding IRR, along with other inherent risks and their potential effects, is essential in effectively managing the investment portfolio.

Market risk or IRR relates to the inverse relationship between bond prices and market yields. It is defined as the risk that increases in general market interest rates will result in market value depreciation. A marked reduction in the value of the investment portfolio could subject us to liquidity strains and reduced earnings if we are unable or unwilling to sell these investments at a loss. Moreover, the inability to liquidate these assets could require us to seek alternative funding, which may further reduce profitability and expose us to greater risk in the future. In addition, since our entire investment portfolio is designated as available-for-sale and carried at estimated fair value, with net unrealized gains and losses reported as a separate component of stockholders’ equity, market value depreciation could negatively impact our capital position.

During 2019, the FOMC decreased its target federal funds rate 25 basis points three times, totaling 75 basis points for the year. The FOMC has indicated that labor markets remain strong and economic activity has been rising at a moderate rate, and although household spending has been rising at a strong pace, business fixed investment and exports remain weak. Our investment portfolio consists primarily of fixed-rate bonds. As a result, changes in general market interest rates have a significant influence on the fair value of our portfolio. Specifically, the parts of the yield curve most closely related to our investments include the 2-year and 7-year U.S. Treasury securities. The yield on the 2-year U.S. Treasury note affects the values of our U.S. Government agency and U.S. Governments-sponsored enterprises mortgage-backed securities, whereas the 7-year U.S. Treasury note influences the value of taxable and tax-exempt state and municipal obligations. The yield on the 2-year U.S. Treasury decreased from 2.48% at year-end 2018 to 1.58% at year-end 2019. The yield on the 7-year U.S. Treasury decreased 76 basis points from 2.59% at December 31, 2018, to 1.83% at December 31, 2019. Since bond prices move inversely to yields, we reported net unrealized holding gains, included as a separate component of stockholders’ equity of $534, net of income taxes of $142, at December 31, 2019, compared to net unrealized holding losses, included as a separate component of stockholders’ equity of $1,725, net of income taxes of $458, at December 31, 2018.

In order to monitor the potential effects that interest rate fluctuations could have on the value of our investments, we perform stress test modeling on the portfolio. Stress tests conducted on our portfolio at December 31, 2019, indicated that should there be a parallel increase in the yield curve over one year by 100, 200 and 300 basis points, we would anticipate declines of 3.5%, 7.3% and 11.1% in the market value of our portfolio.

The carrying values of the major classifications of investment securities and their respective percentages of total investment securities for the past three years are summarized as follows:

Distribution of investment securities

Investment securities decreased $13.5 million to $91.2 million at December 31, 2019 from $104.7 million at December 31, 2018. At December 31, 2019, the entire investment portfolio was classified 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 purchases totaled $32.1 million in 2019 as compared with $31.0 million in 2018. Repayments of investment securities totaled $17.3 million in 2019 and $12.8 million in 2018. Proceeds from the sale of investment securities available-for-sale totaled $30.2 million in 2019 and consisted of five U.S. Treasury securities, three corporate bonds, 16 taxable municipal securities, 10 tax-exempt municipal securities and three mortgage-backed government agency securities. This compares to proceeds of $4.8 million from the sale of investment securities available-for-sale in 2018, which consisted of U.S. Treasury securities. Gross gains of $321 and gross losses of $343, resulted in a net loss of $22 that was recognized from the sale of investment securities in 2019. Gross gains of $40 and no gross losses, resulting in a net gain of $40, were recognized from the sale of investment securities in 2018.

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The composition of the investment portfolio changed during 2019. U.S. Government agency and U.S. Government-sponsored enterprise mortgage-backed securities comprised 64.4% of the total portfolio at year-end 2019 compared to 47.6% at the end of 2018. Tax-exempt municipal obligations decreased as a percentage of the total portfolio to 4.8% at year-end 2019 from 12.2% at the end of 2018, while taxable municipal securities decreased to 27.2% of the total portfolio at year-end 2019 from 31.8% at the end of 2018. Corporate debt comprised 3.6% of the portfolio at the end of 2019 from 8.4% at year ended 2018. As a result of the changes that occurred within the portfolio during 2019, the average life and the modified duration of the investment portfolio decreased to 3.7 years and 3.4 years, respectively, at December 31, 2019 as compared with 6.5 years and 5.3 years at December 31, 2018.

There were no other-than-temporary impairments (“OTTI”) recognized for the years ended December 31, 2019 and 2018. For additional information related to OTTI refer to Note 3 entitled “Investment securities” in the Notes to Consolidated Financial Statements to this Annual Report.

Investment securities averaged $99.9 million and equaled 9.8% of average earning assets in 2019, compared to $94.3 million and equaled 8.9% of average earning assets in 2018. The tax-equivalent yield on the investment portfolio increased 15 basis points to 2.99% in 2019 from 2.84% in 2018. In addition to measuring our performance using the book yield, we monitor and evaluate our investment portfolio with respect to total return in comparison to national benchmarks. Total return is a comprehensive industry-wide approach measuring investment portfolio performance. This measure is superior to measuring performance strictly on the basis of yield since it not only considers income earned similar to the yield approach, but also includes the reinvestment income on repayments and capital gains and losses, whether realized or unrealized. The total return of our investment portfolio declined to 2.53% at December 31, 2019 from 3.43% at December 31, 2018.

At December 31, 2019 and 2018, there were no securities of any individual issuer, except for U.S. Government agencies and U.S. Government-sponsored enterprises, that exceeded 10.0% of stockholders’ equity.

The maturity distribution based on amortized cost, fair value and weighted-average, tax-equivalent yield of the investment portfolio at December 31, 2019, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed for tax-exempt state and municipals on a tax-equivalent basis using the prevailing federal statutory tax rate. The distributions are based on contractual maturity. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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Maturity distribution of investment securities

Loan Portfolio:

Economic factors and how they affect loan demand are important to us and the overall banking industry, as lending is a primary business activity. Loans are the most significant component of earning assets and they generate the greatest amount of revenue for us. Similar to the investment portfolio there are risks inherent in the loan portfolio that must be understood and considered in managing the lending function. These risks include IRR, credit concentrations and fluctuations in demand. Changes in economic conditions and interest rates affect these risks, which influence loan demand, the composition of the loan portfolio and profitability of the lending function. The composition of the loan portfolio at year-end for the past five years is summarized as follows:

Distribution of loan portfolio

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Loans, net decreased $41.1 million in 2019 to $852.1 million at December 31, 2019 as compared with $893.2 million at December 31, 2018. The reduction in loan volumes was a result of payoffs of large loans resulting from the sale of the underlying collateral and, merger related attrition, including payoffs of acquired purchase credit impaired loans and management’s steadfast adherence to strong credit quality underwriting standards and pricing discipline. Business loans, including commercial loans and commercial real estate loans, were $574.6 million, or 67.4%, of loans, net at December 31, 2019, and $620.5 million, or 69.5%, at year-end 2018. Construction lending was $61.8 million, or 7.3% of loans, net at December 31, 2019 and $39.6 million, or 4.4% of loans, net at December 31, 2018. Residential mortgages and consumer loans totaled $215.7 million, or 25.3%, of loans, net at year-end 2019 and $233.1 million, or 26.1%, at year-end 2018. Loan balances declined by $41.1 million, or 4.6%, in 2019, realizing decreases of $15.1 million in the first quarter, $5.8 million in the third quarter and $31.4 million in the fourth quarter, offset by a $11.2 million increase in the second quarter.

Loans averaged $879.3 million in 2019 compared to $928.4 million in 2018. Taxable loans averaged $843.1 million, while tax-exempt loans averaged $36.2 million in 2019. The decrease in average loans year-over-year was attributable to payoffs of large loans resulting from the sale of the underlying collateral and, merger related attrition, including payoffs of acquired purchase credit impaired loans and management’s steadfast adherence to strong credit quality underwriting standards and pricing discipline. The loan portfolio continues to play a prominent role in our earning asset mix. As a percentage of earning assets, average loans equaled 86.7% in 2019 as compared with 88.0% in 2018.

The prime rate decreased 75 basis points in 2019 to 4.75% at year end from 5.50% at the beginning of the year. The tax-equivalent yield on our loan portfolio decreased three basis points to 5.24% in 2019 from 5.27% in 2018. Included in loan interest income in 2019 was the recognition of fair value accretion of $3.2 million on acquired loans, which increased the tax-equivalent net interest margin by 32 basis points. Excluding accretion on acquired loans, the tax equivalent yield on the loan portfolio improved 16 basis points to 4.87% in 2019 from 4.71% in 2018.

The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2019, is summarized as follows:

Maturity distribution and interest sensitivity of loan portfolio

As previously mentioned, there are numerous risks inherent in the mortgage loan portfolio. We manage the portfolio by employing sound credit policies and utilizing various modeling techniques in order to limit the effects of such risks. In addition, we utilize private mortgage insurance (“PMI”) to mitigate credit risk in the loan portfolio.

In an attempt to limit IRR and liquidity strains, we continually examine the maturity distribution and interest rate sensitivity of the loan portfolio. Given the potential for rates to rise in the future, we continued to place emphasis on originating short term fixed-rate and adjustable-rate loans. Fixed-rate loans represented 24.3% of the loan portfolio at December 31, 2019, compared to floating or adjustable-rate loans at 75.7%. Approximately 45.7% of the loan portfolio is expected to reprice within the next 12 months.

Additionally, our secondary market mortgage banking program provides us with an additional source of liquidity and a means to limit our exposure to IRR. Through this program, we are able to competitively price conforming one-to-four family residential mortgage loans without taking on IRR which would result from retaining these long-term, low fixed-rate loans on our books. The loans originated are subsequently sold in the secondary market, with the sales price locked in at the time of commitment, thereby greatly reducing our exposure to IRR.

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In addition to the risks inherent in our portfolio in the normal course of business, we are also 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, and may involve, to varying degrees, elements of credit risk and IRR in excess of the amount recognized in the consolidated financial statements.

Credit risk is the principal risk associated with these instruments. Our involvement and exposure to credit loss in the event that the instruments are fully drawn upon and the customer defaults is represented by the contractual amounts of these instruments. In order to control credit risk associated with entering into commitments and issuing letters of credit, we employ the same credit quality and collateral policies in making commitments that we use in other lending activities.

We evaluate each customer’s creditworthiness on a case-by-case basis, and if deemed necessary, obtain collateral and personal guarantees. The amount and nature of the collateral obtained, or personal guarantees are based on our credit evaluation and overall assessment of risk.

The contractual amounts of off-balance sheet commitments at year-end for the past three years are summarized as follows:

Distribution of off-balance sheet commitments

We record a valuation allowance for off-balance sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $89 and $73 at December 31, 2019 and 2018, respectively. 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.

Asset Quality:

We are committed to developing and maintaining sound, quality assets through our credit risk management policies and procedures. Credit risk is the risk to earnings or capital which arises from a borrower’s failure to meet the terms of their loan agreement. We manage credit risk by diversifying the loan portfolio and applying policies and procedures designed to foster sound lending practices. These policies include certain standards that assist lenders in making judgments regarding the character, capacity, cash flow, capital structure and collateral of the borrower.

With regard to managing our exposure to credit risk, we have established maximum loan-to-value ratios for commercial mortgage loans not to exceed 80.0% of the lower of cost or appraised value. With regard to residential mortgages, customers with loan-to-value ratios between 80.0% and 100.0% are generally required to obtain PMI. The 80.0% loan-to-value threshold provides a cushion in the event the property is devalued. PMI is used to protect us from loss in the event loan-to-value ratios exceed 80.0% and the customer defaults on the loan. Appraisals are performed by an independent appraiser engaged by us, not the customer, who is either state certified or state licensed depending upon collateral type and loan amount.

With respect to lending procedures, loan relationship managers, centralized underwriters, working with independent credit department analysts in the case of self-employed borrowers or commercial entities, must determine the borrower’s ability to repay the credit based on prevailing and expected market conditions prior to requesting approval for the loan. The Board of Directors establishes and reviews, at least annually, the lending authority for all approving authorities. Credits beyond centralized underwriting or joint officer signature authorities are elevated to an Officer’s Loan Committee and, if necessary, to a Director’s Loan Committee, for approval. All credit decisions attempt to assure the quality of the loan portfolio through careful analysis of credit applications, adherence to credit policies, and the examination of outstanding loans and delinquencies. These procedures assist in the early detection and timely follow-up of problem loans.

Credit risk is also managed by quarterly loan quality reviews of our loan portfolio by the asset quality committee as well as an annual loan portfolio review conducted by an independent loan review company. These reviews aid us in identifying deteriorating financial conditions of borrowers, allowing us to proactively develop plans to either assist customers in remedying these situations or exit a relationship.

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Nonperforming assets consist of nonperforming loans and foreclosed assets. Nonperforming loans include nonaccrual loans, troubled debt restructured loans and accruing loans past due 90 days or more. For a discussion of our policy regarding nonperforming assets and the recognition of interest income on impaired loans, refer to the notes entitled, “Summary of significant accounting policies — Nonperforming assets,” and “Loans, net and allowance for loan losses” in the Notes to Consolidated Financial Statements to this Annual Report.

Information concerning nonperforming assets for the past five years is summarized as follows. The table includes credits classified for regulatory purposes and all material credits that cause us to have serious doubts as to the borrower’s ability to comply with present loan repayment terms.

Distribution of nonperforming assets

We experienced a decrease in nonperforming assets of $2,122, or 29.5%, to $5,080, or 0.60%, of loans, net of unearned income and foreclosed assets at December 31, 2019, from $7,202, or 0.81%, of loans, net of unearned income and foreclosed assets at December 31, 2018. The improvement resulted from decreases of $247 in accruing troubled debt restructured loans, $639 in other real estate owned, $442 in nonaccrual loans and $794 in accruing loans past due 90 days or more. Nonperforming loans at December 31, 2019 and December 31, 2018 exclude $1,772 and $3,825, respectively, of loans acquired with deteriorated credit quality, which were recorded at their fair value at acquisition. For further discussion of assets classified as nonperforming assets, refer to the note entitled, “Loans, net and the allowance for loan losses”, in the Notes to the Consolidated Financial Statements to this Annual Report.

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We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to individually evaluated loans, as well as probable incurred losses inherent in the remainder of the loan portfolio as of the balance sheet date. The balance in the allowance for loan losses account is based on past events and current economic conditions. We employ the FFIEC 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 for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, 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 our Chief Credit Officer identifies those loans to be individually evaluated for impairment and those to be collectively evaluated for impairment utilizing a standard criterion. Internal risk ratings 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 to assure directional consistency of the allowance for loan loss account. Regulators, in reviewing the loan portfolio as part of the scope of a regulatory examination, may require us to increase our allowance for loan losses or take other actions that would require increases to our allowance for loan losses.

For a further discussion of our accounting policies for determining the amount of the allowance and a description of the systematic analysis and procedural discipline applied, refer to the note entitled, “Summary of significant accounting policies — Allowance for loan losses”, in the Notes to Consolidated Financial Statements to this Annual Report.

A reconciliation of the allowance for loan losses and an illustration of charge-offs and recoveries by major loan category for the past five years are summarized as follows:

Reconciliation of allowance for loan losses

The allowance for loan losses increased $1,168 to $7,516 at December 31, 2019, from $6,348 at the end of 2018. The increase resulted from a provision for loan losses of $2,406, which was partially offset by net loans charged-off of $1,238. The increase in the loan loss provision to $2,406 in 2019 from $615 in 2018 was the result of higher historical loss factors due to an increase in net charge-offs primarily associated with legacy purchased loans. The allowance for loan losses, as a percentage of loans, net of unearned income, was 0.88% at the end of 2019, compared to 0.71% at the end of 2018. The increase in this ratio compared to that of the prior year-end was a result of an increase in the provision for loan losses and a reduction in loan balances.

Past due loans not satisfied through repossession, foreclosure or related actions are evaluated individually to determine if all or part of the outstanding balance should be charged against the allowance for loan losses account. Any subsequent recoveries are credited to the allowance account. Net loans charged-off increased $665 to $1,238 in 2019 from $573 in 2018. Net charge-offs, as a percentage of average loans outstanding, equaled 0.14% in 2019 and 0.06% in 2018.

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Allocation of the allowance for loan losses

The allocation of the allowance for loan losses compared to the percentage of loans by major loan category for the past five years is summarized as follows:

The allocated element of the allowance for loan losses account increased $1,316 to $7,516 at December 31, 2019, compared to $6,200 at December 31, 2018. The specific portion and formula portion of the allowance for loan losses increased from the end of 2018. The specific portion of the allowance for impairment of loans individually evaluated under FASB ASC 310 increased $442 to $930 at December 31, 2019, from $488 at December 31, 2018. The formula portion of the allowance for loans collectively evaluated for impairment under FASB ASC 450, increased $874 to $6,586 at December 31, 2019, from $5,712 at December 31, 2018. The increase in the specific portion of the allowance was the result the addition of a specific allowance related to one commercial real estate loan and one commercial loan offset partially by the charge-off of the allocation for two commercial loans. The increase in the formula portion was due to higher historical loss factors due to an increase in net charge-offs primarily associated with legacy purchased loans and changes in qualitative factors used to evaluate the portfolios. There was no unallocated reserve balance at December 31, 2019 and a $148 unallocated element at December 31, 2018. The unallocated balance is used to cover inherent losses that exist as of the evaluation date, but which have not been identified as part of the allocated allowance using the above impairment evaluation methodology due to limitations in the process. One such limitation is the imprecision of accurately estimating the impact current economic conditions will have on historical loss rates. Variations in the magnitude of impact may cause estimated credit losses associated with the current portfolio to differ from historical loss experience, resulting in an allowance that is higher or lower than the anticipated level. Management establishes the unallocated element of the allowance by considering a number of environmental risks similar to those used to determine the qualitative factors. Management continually monitors trends in historical and qualitative factors, including trends in the volume, composition and credit quality within the portfolio. The reasonableness of the unallocated element is evaluated through monitoring trends in its level to determine if changes from period to period are directionally consistent with changes in the loan portfolio.

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The coverage ratio, the allowance for loan losses account as a percentage of nonperforming loans, is an industry ratio used to test the ability of the allowance account to absorb potential losses arising from nonperforming loans. The coverage ratio was 150.4% at December 31, 2019 and 97.9% at December 31, 2018. We believe that our allowance was adequate to absorb probable credit losses at December 31, 2019.

Deposits:

Our deposit base is the primary source of funds to support our operations. We offer a variety of deposit products to meet the needs of our individual and commercial customers. Total deposits decreased $64.1 million in 2019. Noninterest-bearing deposits decreased $15.2 million, and interest-bearing deposits decreased $48.9 million in 2019. Noninterest-bearing deposits represented 15.7% of total deposits, while interest-bearing deposits accounted for 84.3% of total deposits at December 31, 2019. Total deposits decreased $3.6 million, or 0.4%, in the first quarter, $21.3 million, or 2.1%, in the second quarter, $10.1 million, or 1.0%, in the third quarter and $29.1 million, or 3.0%, in the fourth quarter.

Interest-bearing transaction accounts, which include money market accounts, NOW accounts, and savings accounts, decreased $20.7 million in 2019. The decrease in interest-bearing transaction accounts during 2019 consisted of decreases of $11.8 million in money market accounts and $12.3 million in NOW accounts, offset by an increase of $3.3 million in savings accounts. Total time deposits decreased $28.1 million to $285.8 million at December 31, 2019 from $313.9 million at December 31, 2018. The decrease in deposits was primarily related to the decreased need to compete for deposits as a result of the decrease in loans in 2019.

The average amount of, and the rate paid on major classifications of deposits for the past three years are summarized as follows:

Deposit distribution