UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-K

(Mark One)

For the fiscal year ended December 31, 20172019

For the transition period from                to                

Commission file number:333-201017001-38627

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: None.

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”filer”, “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).    Yes  ☐    No  ☒

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(as defined in Rule12b-2 of the Exchange Act.Act).    Yes  ☐    No  ☒

The aggregate market value of the registrant’s voting andnon-votingcommon stock held bynon-affiliates of the registrant, on June 30, 2017,2019, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $62,605,000$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, 20182020 was 9,083,770.7,877,659 shares. The number of shares of the registrant’snon-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 20182020 annual meeting of shareholders, within 120 days of the end of registrant’s fiscal year, isare incorporated by reference into Part III of this Annual Report on Form10-K.

Riverview Financial Corporation

Form 10K

For the Year Ended December 31, 20172019

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements.

This Annual Report on Form10-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:

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.

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Part I

General

Riverview Financial Corporation (the “Company”) was formed in 2013 through the consolidation of a corporation of the same name with Union Bancorp, Inc., resulting inas 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 hashad approximately 297 employees.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 its financial services through its operating divisions: Citizens Neighborhood Bank, CBT Bank, Riverview Wealth Management27 community banking offices and CBT Financial and Trust Management. The Bank offers investment advisory services to individuals and small businesses through registered employees and a relationship it has with a third party broker dealer.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 Company’s financial results reflect the merger of equals with CBT Bankadded approximately $382.5 million in loans and $438.8 million in deposits to the Bank under the purchase method of accounting, with the Company treated as the acquirer from an accounting standpoint.consolidated Company.

Unless the context indicates otherwise, all references in this annual report to the “Company”, “Bank”, “we,”“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, Northumberland, 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- andmedium-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 Board of Governors of the Federal Reserve.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 includeone-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, byfrom 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.

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 itsour 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.

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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 insub-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 CBT Financial 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.

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 andnon-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.

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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 forto 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 andweb-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. Federal statutes that apply to the Company and the Bank include the Gramm Leach Bliley Act (“GLB Act”), the Bank Holding Company Act (“BHCA”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Federal Reserve Act, and the Federal Deposit Insurance Act, among others. In general, these statutes, regulations promulgated thereunder, and related interpretations establish the permissible eligible business activities of the Company and the Bank, impose acquisition and merger restrictions, limit intercompany transactions, such as loans and dividends, and dictate capital adequacy requirements, among other things.

The Company is a bank holding company within the meaning of the BHCABank 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.

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 alsoprimarily 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:

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.

Financial Institution Reform, Recovery, and Enforcement Act (“FIRREA”)

FIRREA was enacted to address the financial condition of the Federal Savings and Loan Insurance Corporation, to restructure the regulation of the thrift industry, and to enhance the supervisory and enforcement powers of the federal bank and thrift regulatory agencies. As the primary federal regulator of the Bank, the FDIC, in conjunction with the DOB, is responsible for its supervision. When dealing with capital requirements, those regulatory bodies have the flexibility to impose supervisory agreements on institutions that fail to comply with regulatory requirements. The imposition of a capital plan, termination of deposit insurance, and removal or temporary suspension of an officer, director or other institution-affiliated person may cause enforcement actions.

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There are three levels of civil penalties under FIRREA:

Criminal penalties are increased to $1.1 million per violation and may be up to $5.5 million for continuing violations or for the actual amount of gain or loss. These penalties may be combined with prison sentences of up to five years. These penalties are subject to adjustment in accordance with inflation adjustment procedures prescribed under applicable law.

Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)

FDICIA provides for, among other things:

A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories:

The Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action at December 31, 2017, based on the most recent notification from the FDIC. An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

Beginning January 1, 2015, all insured depository institutions were required to incorporate the revised regulatory capital requirements into the prompt corrective action framework, including the new common equity tier 1 capital asset ratio and a higher tier 1 risk-based capital ratio.

FDICIA generally prohibits a depository institution from making any capital distributions, including payment of a cash dividend or paying any management fees to its holding company, if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized”. Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized and requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator generally within 90 days of the date such institution is determined to be critically undercapitalized.

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FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions that fail to comply with capital or other standards. Such actions may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.

Under FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the federal bank regulatory agencies adopted guidelines establishing general standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. Any institution that fails to meet these standards may be required to develop an acceptable plan, specifying the steps that the institutions will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In July 2010, the federal banking agencies issued Guidance on Sound Incentive Compensation Policies (“Guidance”) that applies to all banking organizations supervised by the agencies, thereby including both the Company and the Bank. Pursuant to the Guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: provide employees with incentives that appropriately balance risk and reward; be compatible with effective controls and risk management; and be supported by strong corporate governance, including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation. The Dodd-Frank Act requires, in part, that the federal banking agencies and the SEC establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The federal banking agencies issued such proposed rules in April 2011 and issued a revised proposed rule in June 2016, implementing these requirements and prohibitions. The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, for which it would go beyond the existing Guidance to (i) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight and (iv) establish minimum recordkeeping and (v) mandate disclosures to the appropriate federal banking agency.

The Company believes that it meets substantially all the standards that have been adopted. FDICIA also imposed new capital standards on insured depository institutions.

Risk-Based Capital Requirements

The federal banking regulators have adopted certain risk-based capital guidelinesregulations to assist infacilitate assessing capital adequacy of a banking organization’sbank’s operations for both transactionsassets reported on the balance sheet as assets and transactions, such as letters of credit and recourse agreements, which are recorded asoff-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit-equivalent amounts ofoff-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, such as business loans.risk.

A banking organization’sbank’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 includeoff-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.

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In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Thephase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014.federal law. The final rules call forestablished 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 establishestablished a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.insured banks. If a banking organizationbank fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will beis subject to certain restrictions on capital distributions and discretionary bonus payments to executives. Thephase-in period for the capital conservation and countercyclical capital buffers for all banking organizationsbanks began on January 1, 2016, with final phase in to be completed bythe full buffer applicable on January 1, 2019.

Under the proposed rules, accumulated other comprehensive income (“AOCI”) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks were permitted to make aone-time election not to include these additional components of AOCIAccumulated Other Comprehensive Income (“AOCI”) in regulatory capital and instead use the previously existing treatment under the general risk-based capital rules that excludesexcluded most AOCI components from regulatory capital. Theopt-out election was required to be made in the first call report or FRY-9 series report that is filed after the financial institution becomesbecame subject to the final rule. The Bank“opted-out” of the inclusion of the components of AOCI in regulatory capital.

Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existinggross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight.

Under the new rules, mortgage servicing assets (“MSAs”) and certain deferred tax assets (“DTAs”) are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights forpast-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

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

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, 2017,2019, the Bank was “well capitalized” undercomplied with the foregoing requirements with a common equity tier 1 risk-based capital ratio of 9.75%11.5%, tier 1 leverage capital ratio of 7.95%9.1%, tier 1 risk-based capital ratio of 9.75%11.5% and a total capital ratio of 10.43%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.

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.

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Community Reinvestment Act (“CRA”)Commercial Real Estate Guidance

UnderIn December 2015, the CRA,federal banking agencies released a statement entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Statement”). In the Bank has a continuingCRE Statement, the agencies express concerns with institutions that ease commercial real estate underwriting standards, direct financial institutions to maintain underwriting discipline and affirmative obligation, consistent with its safeexercise risk management practices to identify, measure and sound operation,monitor lending risks, and indicate that they will continue to ascertainpay special attention to commercial real estate lending activities and meet the credit needsconcentrations 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 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 January 30, 2017 and received a “satisfactory” rating.

USA Patriot Act of 2001

The Patriot Act contains 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 Acttotal capital and the related regulations imposeoutstanding balance of such institution’s commercial real estate loan portfolio has increased by 50% or more during the following requirements with respect to financial institutions:prior 36 months.

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.

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. Dodd-Frank is intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the Financial Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators the authority to take control of and liquidate financial firms. Dodd-Frank additionally created the Consumer Financial Protection Bureau, an independent federal regulator that administers federal consumer protection laws. Dodd-Frank has and is expected to continue to have a significant impact on our business operations as its provisions take effect. It is expected that, as various implementing rules and regulations continue to be released, they will increase our operating and compliance costs and could increase our interest expense. Among the provisions that affect us or are likely to affect us are the following:

Holding Company Capital Requirements

Dodd-Frank requires the FRB to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion are consistent with safety and soundness.

Deposit Insurance

Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor. Substantially allThe Bank’s deposits of the Bank are insured up to that limit. Dodd-Frank also broadensapplicable limits by the base forDeposit Insurance Fund of the FDIC. Deposit insurance per account owner is $250,000.

The FDIC insurancecharges 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 now based on financial measures and supervisory ratings derived from statistical modeling estimating the average consolidatedprobability 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 capitalinstead of deposits. The FDIC finalized a financial institution. Dodd-Frank requiresrule, effective April 1, 2011, that set the FDICassessment range at 2.5 to increase the reserve ratio45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund (“DIF”) from 1.15% to

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1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio reaches 1.50% of insured deposits. In lieu of the dividend payments, the FDIC has adopted progressively lower assessment rate schedules that become effective when the reserve ratio exceeds 2.0% and 2.5%. In settingachieving 1.15%, the assessment rates necessary to meet the new 1.35% requirement, the FDIC is required to offset the effectrange (inclusive of this provision onpossible adjustments) was reduced for insured depository institutions with total consolidated assets of less than $10 billion so that morein 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 the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets. In October 2010, the FDIC adopted a restoration planestimated insured deposits to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020. Additionally, on December��22, 2017, the Tax Cuts and Jobs Act was enacted, which, among other things, disallows the deduction of FDIC insurance premiums for tax purposes, effective January 1, 2018, where previously, FDIC insurance premiums were fully deductible for tax purposes.

The FDIC annually establishes for the DIF a designated reserve ratio, or DRR, of estimated insured deposits. The FDIC announced thatwas required to seek to achieve the DRR for 2018 will remain at 2.00%, which is the same1.35% ratio that has been in effect since January 1, 2011.by September 30, 2020. The FDIC is authorized to change deposit insurance assessment rates as necessary to maintain the DRR, without furthernotice-and-comment rulemaking, provided that: (i) no such adjustment can be greater than three basis points from one quarter to the next, (ii) adjustments cannot result in rates more than three basis points above or below the base rates and (iii) rates cannot be negative. On October 22, 2015, the FDIC issued a proposal to increase the reserve ratio for the DIF to the minimum level of 1.35%. The FDIC adopted the final rule on March 15, 2016, which imposes onlaw required insured depository institutions with assets of $10 billion or more in total consolidated assets, a quarterly surcharge equal to an annual rate of 4.5 basis points appliedfund the increase from 1.15% to the deposit insurance assessment base, after making certain adjustments. The rule became1.35% and, effective on July 1, 2016.

Pursuant to the Dodd-Frank Act, the FDIC has backup enforcement authority over a depository institution holding company,2016, such as the Company, if the conduct or threatened conduct of such holding company poses a risk to the DIF, although such authority may not be used if the holding company is generally in sound condition and does not pose a foreseeable and material risk to the DIF.

Corporate Governance

Dodd-Frank requires publicly-traded companies to give stockholders anon-binding vote on executive compensation at least every three years, anon-binding vote regarding the frequency of the vote on executive compensation at least every six years, and anon-binding vote on “golden parachute” payments in connection with approvals of mergers and acquisitions unless previously voted on by stockholders. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions

Dodd-Frank prohibits a depository institution from converting from a statewere subject to a federal charter, or vice versa, while it issurcharge to achieve that goal. The FDIC indicated that the subject1.35% ratio was exceeded in November 2018. Insured institutions of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matters. The converting institution must also file a copy of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action, and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permittedout-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.

Limits on Interstate Acquisitions and Mergers

Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition–the acquisition of a bank outside its home state–unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with a bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

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Limits on Interchange Fees

Dodd-Frank amended the Electronic Fund Transfer Act to give the Federal Reserve the authority, among other things, to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve issued its final rule, Regulation II, effective October 1, 2011. Consistent with Dodd-Frank, issuers with 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%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in assets, likeinsurance premiums would likely have an adverse effect on the Company, are exempt from debit card interchange fee standards.

Consumer Financial Protection Bureau

Dodd-Frank created the CFPB, which is granted broad rulemaking, supervisoryoperating expenses and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, TILA, RESPA, Fair Credit Reporting Act, Fair Debt Collection Act, Consumer Financial Privacy provisionsresults of operations of the Gramm-Leach-BlileyBank. 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, includinglow- 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 certain other statutes. The CFPB has examination and primary enforcement authoritythe related regulations imposed the following requirements with respect to depository institutionsfinancial 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 assets. Smaller institutions arecombating 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 rules promulgated by the CFPB, but continue to be examinedcertain exclusions and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.exemptions.

Ability to Repay and Qualified Mortgage Rule

Pursuant to the Dodd Frank Act, the Consumer Financial Protection Bureau issued a final rule on January 10, 2013, which became effective January 10, 2014, amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision:

Alternatively, the mortgage lender can originate “qualified mortgages”, which are entitled to a presumption that the creditor making the loan satisfied theability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages, and as a result will generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with theability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. The final rule, as issued, is not expected to have a material impact on our lending activities or our results of operations or financial condition.

TILA/RESPA Integrated Disclosures (“TRID”)

On October 3, 2015, the CFPB implemented a final rule combining the mortgage disclosures consumers previously received under TILA and RESPA. For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board and the U.S. Department of Housing and Urban Development. The final rule requires lenders to provide applicants with the new Loan Estimate and Closing Disclosure and generally applies to mostclosed-end consumer mortgage loans for which the creditor or mortgage broker receives an application on or after October 3, 2015.

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Consumer Lending Laws

Bank regulatory agencies are increasingly focusing attention on consumer protection laws and regulations. To promote fairnessSuch laws and transparencyregulations include:

The operations of the Bank becomingare further subject to formal or informal enforcement actions,the:

The Bank is subjectHolding Company Capital Regulations

Federal law required the Federal Reserve Board to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLB Act. The guidelines describe the federalapply consolidated capital requirements to bank regulatory agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriateholding companies that are no less stringent than those applicable to the sizeinstitutions 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 complexity of2019. However, legislation enacted in May 2018 required the institution andFRB to raise the nature and scopethreshold of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards“small holding company” exception to the security or integrityapplicability of such records and protect against unauthorized accessconsolidated holding company capital requirements from $1 billion of consolidated assets to or use$3 billion of such records or information that could resultconsolidated assets. That change became effective in substantial harm or inconvenience to any customer. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. In October 2016, the federal banking agencies issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would apply to large and interconnected banking organizations and to services provided by third parties to these firms. These enhanced standards would apply only to depository institutions and depository institutionAugust 2018. Consequently, holding companies with totalless 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 $50 billiondividends 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 more.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.

Federal Reserve System

FRB regulations require depository institutions to maintain cash reserves against their transaction accounts (primarily NOW and demand deposit accounts). AAs of the reporting date, a reserve of 3% is to be maintained against aggregate transaction accounts between $15.5$16.3 million and $115.1$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 $115.1$124.2 million. The first $15.5$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.

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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. The interest rate paid on required reserve balances is currently the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest target federal funds rate in effect during the reserve maintenance period.

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, 2017,2019, we had 297276 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 iswas 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”) under the Exchange Act.. The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at Station Place, 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. Also, 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 athttp://www.sec.gov.

In addition, we maintain an Internet website atwww.riverviewbankpa.com. We make available, free of charge, through the “Investor Relations” link on our Internet website, our annual report on Form10-K, quarterly reports on Form10-Q, current reports onForm 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 headquartersheadquarter 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, BSABank 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.

The Bank operates 3027 community banking offices and three limited purpose offices within Berks, Blair, Bucks, Centre, Clearfield, Cumberland, Dauphin, Huntingdon, Lebanon, Lehigh, Lycoming, Northumberland, Perry, Schuylkill and Somerset Counties in Pennsylvania. EightFourteen of the branch offices are leased by the Bank, while the remainder of theremaining 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.

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In the opinion of the Company, after review with legal counsel, as of December 31, 2019, there arewere 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, 2018,2020, there were approximately 1,1541,065 registered holders of our common stock, no par value. Our common stock trades on the OTCQXNasdaq Global Market under the symbol “RIVE.”“RIVE”.

The Company has paid cash dividends since its formation in 2008.2008 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 consolidatedconsolidate financial statements and notes to these statements filed as Item 8 to this report and incorporated in their entirety by reference under this Item 5.

The high and low closing sale prices and dividends per shareCompany did not repurchase any shares of the Company’sits common stock forduring the four quarters of 2017 and 2016 are summarized in the following table:year ended December 31, 2019.

Not required for smaller reporting companies

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 Form10-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, determination of other-than-temporary impairment of investment securities, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or satisfaction of loans, the valuation of deferred tax assets the valuation of acquired assets and liabilities assumed in business combinations 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.

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.

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In determining the requirement to record an other-than-temporary impairment on securities owned by us, four main characteristics are considered including: (i) the length of time and the extent to which the fair value has been less than amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) whether the market decline was affected by macroeconomic conditions and (iv) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary impairment exists involves a high degree of subjectivity and judgment and is based on information available to us at a point in time.

Fair values of financial instruments, in cases where quoted market prices are not available, are based on estimates using present value or other valuation techniques which are subject to change.

Real estate acquired through foreclosure, deeds in lieu of foreclosure, or in satisfaction of loans is adjusted to fair value based upon current estimates derived through independent appraisals less anticipated costs to sell. However, proceeds realized from sales may ultimately be higher or lower than those estimates.

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.

The acquired assets and liabilities assumed in business combinations are measured at fair value as of the acquisition date. In many cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest, which require the utilization of significant estimates and judgment in accounting for the acquisition.

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 2017, nearly doubling the 1.5% pace2019, as compared to 2.9% in 2016.2018. The accelerationdeceleration in annualreal GDP reflects upturns in personal consumption expenditures,2019, compared to 2018, primarily reflected decelerations in nonresidential fixed investment and exports offset partially by a decline in private inventory investment. Despite the annual improvement, the GDP for the fourth quarter of 2017 declined to 2.5% from 3.2% in the prior quarter, reflectingpersonal consumption expenditures and a downturn in private inventory investment that was partiallyexports, which were partly offset by accelerationaccelerations in personal consumption spending, exports,both state and local government spending, nonresidential fixed investment and federal government spending. Inflationary concerns continue to be containedabated in 2019 as the consumer price index (“CPI”) was unchanged at 2.1% in both 2017 and 2016. The Federal Reserve Board’s Federal Open Market Committee’s (“FOMC”) preferred measure of inflation, which excludesthe personal consumption expenditures price index excluding food and energy costs, rose 1.5%decreased to 1.2% in 20172019, a reduction from 1.9% in 2018 and continued to bewas below the FOMC’s benchmark of 2.0%. Despite keeping inflation in check,In reversing course from 2018, the FOMC increaseddecreased rates three times in 20172019 for a total of 75 basis points based on expectations there was emerging weakness in the economy. Current forecasts show an FOMC stance that the job market and the economy will continueranges from neutral to strengthen further. The FOMC stated at its December 2017 meeting that they anticipate the pending need for more rate increases throughout 2018, with determinations to be made based on information at the time rate change decisions are considered.accommodative regarding 2020 overnight rates.

FOMC actions have a direct impact on our business and profitability. Similar to most banks, we have experienced deposit disintermediation from time deposits to interest-bearingnon-maturity transaction accounts as a result of the continuation of the relatively low interest rate environment. Further FOMC actions resulting in acceleration of the increasing interestprofitability and are monitored closely by management. A declining rate cycle may increase ourreduce the Company’s cost of funds as competitive rates decline and help reduce earnings variability in future cycles as depositors may be enticedchoose to transfer funds fromextend the overall duration of their deposits. An additional benefit of a lower cost interest-bearing transaction accounts to higher cost time deposits. Many of our competitors have a high dependence on short-term borrowed funds. If rates continue to rise, these banks may aggressively increase rates offered on their deposits in an effort to mitigate the risk of corresponding changes in their funding costs with changes in the federal funds rate. These actions may impact us as we may have to raise rates to retain customers and provide liquidity for funding loans. A continuation in the rising rate cycle can also impact our primary business of lending in a

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number of ways. In order to offset increases in funding costs we may have to seek higher yielding loan typesenvironment is that could have an impact on loan concentration levels. Our asset quality may be adverselypositively impacted ifas borrowers with adjustable rate loans are unable tomay more easily cover debt service in the future as rates rise.payments decrease. We continually monitor adjustable rate relationships to mitigate this risk through stress testing over various rate scenarios. In addition, adjustableConversely, reductions in general market rates have an adverse impact on the yield on earning assets and compress net interest income as fixed rate borrowers may requestwish to renegotiation ofhigher rates on existing loans to longer-term fixed rate loans to avoid the possibility of future increases in their debt service costs. Thereloans. Moreover, there is a possibility we may lose customers to competitors if we are unable or unwilling to provide longerlower term fixed rate funding.rates.

Employment conditions overall improved in the United States in 2017.2019. The number of people employed increased at a greater pace as compared to the increase in the civilian labor force in 2016.2018. As a result, the annual unemployment rate for the United States fell to 4.1%a fifty-year low at 3.5% in 20172019 from 4.7%3.9% in 2016. The improvements in job growth were offset partially by slower wage growth in 2017.2018. Average hourly earnings continued to grow at an average rate of 3.1% throughout 2019.

Employment conditions in 2017 improved2019 weakened for the Commonwealth of Pennsylvania as evidenced by a decreasean increase in the unemployment rate to 4.4% in 20174.6% at December 31, 2019 from 4.8% in 2016.3.9% at December 31, 2018. With respect to the markets we serve, the unemployment rate decreasedincreased in all but two of the twelve counties in which we have branchoffice locations. The average unemployment rate for Countiescounties in our market area decreasedincreased to 4.9%5.0% in 20172019 from 5.4%4.0% in 2016.2018. The lowest 20172019 unemployment rate within the counties we serve waswere in Centre Countyand Cumberland at 3.3%3.4%. Continued improvementincreases in unemployment rates could favorablyunfavorably impact the rate of economic growth in our market, the growth of loans and may have a corresponding impact on our loandeposits, asset quality and deposit growth andoverall profitability.

National, Pennsylvania and our market area’snon-seasonally-adjustednon-seasonally adjusted annual unemployment rates in 2017at December 31, 2019 and 20162018 are summarized as follows:

The banking industry operating performance declined in 2017 as net income for all Federal Deposit Insurance Corporation (“FDIC”)-insured banks in 2017 totaled $164.8 billion, a decrease of $6.0 billion, or 3.5%, from 2016. Excludingone-time income tax expenses associated with the enactment of the new tax law in the fourth quarter, net income for all FDIC insured banks in 2017 would have been $183.1 billion, an increase of 7.2% over 2016 industry results. FDIC-insured community banks outperformed the overall banking industry as their net income in 2017 improved to $20.6 billion, an increase of $757 million, or 4.0%, over 2016. Excluding theone-time income tax expense, net income for all FDIC-insured community banks in 2017 would have been $22.3 billion, an increase of 12.6% when compared to 2016. The improvement in earnings was largely the result of increases in net interest income of $1.6 billion, or 9.4% offset partially by an increase in noninterest expense of $502.8 million, or 3.4%.

		2019				2018
United States			3.5	%			3.9	%
Pennsylvania			4.6				3.9
Berks County			4.4				3.7
Blair County			5.0				3.9
Bucks County			3.8				3.3
Centre County			3.4				2.9
Clearfield County			6.5				5.0
Cumberland County			3.4				2.9
Dauphin County			4.1				3.5
Huntingdon County			8.0				5.5
Lebanon County			4.1				3.5
Lehigh County			4.7				4.0
Lycoming County			5.6				4.6
Perry County			4.1				3.3
Schuylkill County			5.7				4.8
Somerset County			6.6				5.2

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”) and its operating divisions Halifax Bank, Marysville Bank, Citizens Neighborhood Bank, CBT Bank, Riverview Wealth Management, CBT Investment Services, Inc. and CBT Financial and Trust Management. On October 2, 2017, The Company announced the completion

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of its merger of equals with CBT Financial Corp. (“CBT”), effective October 1, 2017 pursuant to the Agreement and Plan of Merger between Riverview and CBT, dated April 19, 2017. On the effective date, CBT was merged with and into Riverview, with Riverview surviving (the “merger”). Additionally, CBT Bank, the wholly-owned subsidiary of CBT, merged with and into Riverview Bank, the wholly-owned subsidiary of Riverview, with Riverview Bank as the surviving institution. The Company’s financial results reflect the merger of CBT Bank with and into Riverview Bank under the purchase method of accounting, with the Company treated as the acquirer for accounting and reporting purposes. In accordance with the acquisition accounting for the merger, the historical assets and liabilities of CBT have been recorded at their respective estimated fair values on the date of the merger. The estimated fair values are subject to change for up to one year after the date of the merger if information unknown relative to closing date fair values becomes available. The historical financial information included in the Company’s consolidated financial statements and related notes as reported in this Form10-K is that of Riverview and, consequently, comparisons may not be particularly meaningful. The results for the year ended December 31, 2017, include the operating results of Riverview for the entire year and the operating results of the CBT division since October 1, 2017. The merger had a significant impact on the results of operations for the year ended December 31, 2017.

Riverview Bank, with thirty27 community banking offices and three limited purpose offices, is a full servicefull-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, Huntington,Huntingdon, Lebanon, Lehigh, Lycoming, Northumberland, 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- andmedium-sized businesses. Other lending products includeone-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 thirty27 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.

Readers of this Management Discussion and Analysis are encouraged to refer to the note entitled “Merger accounting,” in the Notes to the Consolidated Financial Statements to more fully understand the impact that the merger had on the Company’s financial position and results of operations.

Total assets, loans and deposits were $1.2$1.1 billon, $956.0$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, 2017. Comparatively, total assets, loans2018. Construction lending increased $22.3 million, while business lending, including commercial and deposits were $543.0 million, $409.3commercial real estate decreased $46.0 million, and $452.6retail lending, including residential mortgages and consumer loans decreased $17.4 million respectively, at December 31, 2016. The majority of the increases in 2017 resulted from the merger. However, the Company also experienced significant organic balance sheet growth in 2017 as a result of implementing certain strategic initiatives. During the first quarter of 2017 we successfully completed a $17.0 million private placement of common and convertible preferred securities. The additional capital afforded Riverview the ability to significantly grow its loan portfolio through hiring multiple teams of experienced and established lenders to serve new and existing markets. The addition of our new lending teams provided net organic loan growth of more than $164.2during 2019. Investment securities decreased $13.4 million, or 40.1%12.8%, in 2017. In addition,2019. Noninterest-bearing deposits increased $135.2decreased $15.2 million, or 29.8%, without considering assumed CBTand interest-bearing deposits totaling $438.8decreased $48.9 million in 2017.2019.

The loan portfolio consisted of $700.8$574.6 million of business loans, including construction, commercial and commercial real estate loans, $61.8 million in construction loans, and $255.2$215.7 million in retail loans, including residential mortgage and consumer loans at December 31, 2017.2019. Total investment securities were $93.2$91.2 million at December 31, 2017,2019, all of which were classified asavailable-for sale. Total deposits consisted of $155.9$147.4 million in noninterest-bearing deposits and $870.6$793.1 million in interest-bearing deposits at December 31, 2017.2019.

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Stockholders’ equity equaled $106.3$118.1 million, or $11.72$12.81 per share, at December 31, 2017,2019, and $41.9$113.9 million or $12.95$12.49 per share, at December 31, 2016.2018. Dividends declared for the 20172019 amounted to $0.55$0.35 per share, representing an annual yield of 4.2%2.8% based on the closing price of the Company’s common stock of $13.15$12.49 per share on December 31, 2017.2019.

Nonperforming assets equaled $8,151$5,080 or 0.85%0.60% of loans, net and foreclosed assets at December 31, 2017,2019, an improvement from $8,175$7,202, or 1.99%0.81%, at December 31, 2016. Nonperforming loans at December 31, 2017 and December 31, 2016 exclude $8,512 and $888, respectively, of loans acquired with deteriorated credit quality, which were recorded at their fair value at acquisition.2018. The allowance for loan losses equaled $6,306$7,516, or 0.66%0.88%, of loans, net, at December 31, 2017,2019, compared to $3,732$6,348, or 0.91%0.71%, of loans, net atyear-end 2016.2018. The decreaseincrease in the ratio of the allowance for loan losses as a percentage of loans, net, was primarily a functionthe result of acquisition accounting, wherebyan increase in the historical loan portfolio of CBT was recorded at its estimated fair value, including a discount to reflect credit risk, and the CBT historical allowanceprovision for loan losses was eliminated.and a reduction in loan balances. Loanscharged-off, net of recoveries equaled $160$1,238, or 0.03%0.14%, of average loans in 2017,2019, compared to $1,086$573, or 0.27%0.06%, of average loans in 2016.2018.

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, 2017,2019, our portfolio consisted primarily of taxable andtax-exempt state and municipal bonds and mortgage-backed securities, which provide a source of income and liquidity.

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 asavailable-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 2017,2019, the FOMC increaseddecreased its target federal funds rate 25 basis points three times, totaling 75 basis points for the year. The FOMC statedhas indicated that they expectlabor markets remain strong and economic conditions will continue to improveactivity has been rising at a moderate rate, and may warrant additional increases in the federal funds rate but that the timingalthough household spending has been rising at a strong pace, business fixed investment and magnitude of these changes will depend ultimately on incoming economic data.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 the2-year and7-year U.S. Treasury securities. The yield on the2-year U.S. Treasury note affects the values of our U.S. Government agency and U.S. Governments-sponsored enterprises mortgage-backed securities, whereas the7-year U.S. Treasury note influences the value of taxable andtax-exempt state and municipal obligations. The yield on the2-year U.S. Treasury increaseddecreased from 1.20%2.48% atyear-end 20162018 to 1.89%1.58% atyear-end 2017.2019. The yield on the7-year U.S. Treasury increased 8decreased 76 basis points from 2.25%2.59% at December 31, 2016,2018, to 2.33%1.83% at December 31, 2017.2019. 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 $893,$1,725, net of income taxes of $238,$458, at December 31, 2017.2018.

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, 2017,2019, 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 4.3%3.5%, 8.4%7.3% and 12.4%11.1% in the market value of our portfolio.

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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 increased $20.1decreased $13.5 million to $93.2$91.2 million at December 31, 20172019 from $73.1$104.7 million at December 31, 2016 as a result of the merger with CBT.2018. At December 31, 2017,2019, the entire investment portfolio was classified asavailable-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. There were no securities purchased in 2017. Investment purchases totaled $32.1 million in 2016 were $46.0 million.2019 as compared with $31.0 million in 2018. Repayments of investment securities totaled $5.7$17.3 million in 20172019 and $7.1$12.8 million in 2016.2018. Proceeds from the sale of investment securitiesavailable-for-sale totaled $19.0$30.2 million in 2017. The sales2019 and consisted of five U.S. Treasury securities, U.S. Government-sponsored enterprises,three corporate bonds, 16 taxable municipal bondssecurities, 10tax-exempt municipal securities and equitythree mortgage-backed government agency securities. This compares to proceeds of $38,380$4.8 million from the sale of investment securitiesavailable-for-sale in 2016, where the majority2018, which consisted of the sales were mortgage-backed securities andtax-exempt municipalU.S. Treasury securities. Gross gains of $166$321 and gross losses of $77,$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 $89,$40, were recognized from the sale of investment securities in 2017. Gross gains of $524 and gross losses of $40, resulting in a net gain of $484, were recognized from the sale of investment securities in 2016.2018.

The composition of the investment portfolio changed during 2017 primarily due to the investments acquired from CBT. Short-term U.S. Treasury,2019. U.S. Government agency and U.S. Government-sponsored enterprise mortgage-backed securities comprised 35.3%64.4% of the total portfolio atyear-end 20172019 compared to 21.6%47.6% at the end of 2016.2018.Tax-exempt municipal obligations increaseddecreased as a percentage of the total portfolio to 17.5%4.8% atyear-end 20172019 from 7.8%12.2% at the end of 2016,2018, while taxable municipal securities decreased to 37.6%27.2% of the total portfolio atyear-end 20172019 from 58.0%31.8% at the end of 2016.2018. Corporate debt comprised 9.6%3.6% of the portfolio at the end of 20172019 from 12.4%8.4% at year ended 2016.2018. As a result of the changes that occurred within the portfolio during 2017,2019, the average life and the modified duration of the investment portfolio decreased to 8.43.7 years and 6.73.4 years, respectively, at December 31, 20172019 as compared with 9.96.5 years and 7.05.3 years at December 31, 2016.2018.

There were no other-than-temporary impairments (“OTTI”) recognized for the years ended December 31, 20172019 and 2016.2018. For additional information related to OTTI refer to Note 43 entitled “Investment securities” in the Notes to Consolidated Financial Statements to this Annual Report.

Investment securities averaged $78.4$99.9 million and equaled 11.4%9.8% of average earning assets in 2017,2019, compared to $72.3$94.3 million and equaled 14.9%8.9% of average earning assets in 2016.2018. Thetax-equivalent yield on the investment portfolio decreased 17increased 15 basis points to 3.19%2.99% in 20172019 from 3.36%2.84% in 2016.2018. 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 improveddeclined to 3.0% in 2017 slightly below the Bloomberg Barclays aggregate-bond index, a benchmark used by most investment managers, of 3.5% in 2017.2.53% at December 31, 2019 from 3.43% at December 31, 2018.

At December 31, 20172019 and 2016,2018, there were no securities of any individual issuer, except for U.S. Government agency mortgage-backed securities,agencies and U.S. Government-sponsored enterprises, that exceeded 10.0% of stockholders’ equity.

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The maturity distribution based on the carryingamortized cost, fair value and weighted-average,tax-equivalent yield of the investment portfolio at December 31, 2017,2019, is summarized as follows. The weighted-average yield, based on amortized cost, has been computed fortax-exempt state and municipals on atax-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.

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 atyear-end for the past five years is summarized as follows:

Distribution of loan portfolio

Loans, net increased $546.7decreased $41.1 million in 20172019 to $956.0$852.1 million at December 31, 20172019 as compared with $409.3$893.2 million at December 31, 2016.2018. 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 construction, commercial loans and commercial real estate loans, were $700.8$574.6 million, or 73.3%67.4%, of loans, net at December 31, 2017,2019, and $272.3$620.5 million, or 66.5%69.5%, atyear-end 2016.2018. 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 $255.2$215.7 million, or 26.7%25.3%, of loans, net atyear-end 20172019 and $137.0$233.1 million, or 33.5%26.1%, atyear-end 2016. Acquired loans from the merger with CBT amounted to $382.5 million at the effective date of the merger. Organic loan growth totaled $164.22018. Loan balances declined by $41.1 million, or 40.1%4.6%, in 2017. Loan volume increased during all four quarters2019, realizing decreases of 2017. Excluding acquired loans, quarterly loan growth in 2017 totaled $55.1$15.1 million or 13.5%, in the first quarter, $40.3$5.8 million or 8.7%, in the second quarter, $55.4 million, or 11.0%, in the third quarter and $13.4$31.4 million or 2.4%, in the fourth quarter, offset by a $11.2 million increase in the second quarter.

Loans averaged $597.1$879.3 million in 20172019 compared to $403.0$928.4 million in 2016.2018. Taxable loans averaged $574.1$843.1 million, whiletax-exempt loans averaged $23.0$36.2 million in 2017.2019. The increasedecrease in average loans year-over-year was primarily attributable to payoffs of large loans resulting from the sale of the underlying collateral and, merger with CBT.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 20172019 as compared with 83.0%88.0% in 2016.2018.

The prime rate increaseddecreased 75 basis points in 20172019 to 4.50%4.75% at year end from 3.75%5.50% at the beginning of the year. Thetax-equivalent yield on our loan portfolio increased sixdecreased three basis points to 4.59%5.24% in 20172019 from 4.53%5.27% in 2016.2018. Included in loan interest income in 20172019 was the recognition of fair value accretion of $736$3.2 million on acquired loans, which increased thetax-equivalent net interest margin by 1232 basis points. Excluding accretion on acquired loans, the tax equivalent yield on the loan portfolio improved during 201716 basis points to 4.87% in 2019 from 4.30%4.71% in the first quarter of 2017 to 4.64% in the fourth quarter of 2017. The quarterly change was attributable to increases in yields on adjustable rate loans from increases in the prime rate along with the addition of higher yielding loans acquired from CBT.2018.

The maturity distribution and sensitivity information of the loan portfolio by major classification at December 31, 2017,2019, 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 26.2%24.3% of the loan portfolio at December 31, 2017,2019, compared to floating or adjustable-rate loans at 73.8%75.7%. Approximately 44.7%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 conformingone-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.

In addition to the risks inherent in our portfolio in the normal course of business, we are also party to financial instruments withoff-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.

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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 acase-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 ofoff-balance sheet commitments atyear-end for the past three years are summarized as follows:

Distribution ofoff-balance sheet commitments

We record a valuation allowance foroff-balance sheet credit losses, if deemed necessary, separately as a liability. The valuation allowance amounted to $66$89 and $81$73 at December 31, 20172019 and 2016,2018, respectively. We do not anticipate that losses, if any, that may occur as a result of fundingoff-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, in light of general devaluations in real estate values, we have established maximumloan-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 withloan-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 eventloan-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 timelyfollow-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.

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.

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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 slight improvement in our asset quality, evidenced by a decrease in nonperforming assets of $24,$2,122, or 0.29%29.5%, to $8,151,$5,080, or 0.85%, of loan, net of unearned income and foreclosed assets at December 31, 2017, from $8,175, or 1.99%0.60%, of loans, net of unearned income and foreclosed assets at December 31, 2016.2019, 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 $327$247 in accruing troubled debt restructured loans, and $389$639 in other real estate owned, assets, which more than offset increases of $359$442 in nonaccrual loans and $333$794 in accruing loans past due 90 days or more. Nonperforming loans at December 31, 20172019 and December 31, 20162018 exclude $8,512$1,772 and $888,$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.

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.

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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 criteria.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