RIVER FINANCIAL CORPORATION The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto for the year endedDecember 31, 2021 , which are contained in the Annual Report on Form 10-K for the year endedDecember 31, 2021 . In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences are discussed in our 2021 Annual Report on Form 10-K under "Part I, Item 1A - Risk Factors." We assume no obligation to update any of these forward-looking statements.
The following discussion pertains to our historical results on a consolidated basis. However, because we conduct all of our material business operations through our subsidiaries, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
All dollar amounts in the tables in this section are in thousands of dollars, except per share data, yields, percentages and rates or when specifically identified. As used in this Item, the words "we," "us," "our," the "Company," "RFC," "River" and similar terms refer toRiver Financial Corporation and its consolidated affiliate, unless the context indicates otherwise.
Current Developments regarding COVID-19
As a result of the COVID-19 pandemic, and the potential adverse effects it may have on our customers, including our loan and depositor relationships, we continue to assess how such developments could affect our business and operations. We have taken the following steps to operate in an environment that is safe for both our employees and customers (and the public in general) and have implemented guidelines and programs to assist our customers and help ensure the safe and sound operation of our Bank.
Daily Operations
1. We have established social distancing policies in keeping with federal and state ofAlabama guidelines to help ensure the health of our employees. To the extent possible, we have encouraged our employees to work remotely, and we believe such steps have been welcomed by, and helpful to, our employees. 2. Currently, our lobbies at our main office and branches and public areas are open to walk-in business and other in-person visits by customers. As long as our social distancing policies are being complied with, customers may, among other things, have in-person meetings at our facilities and access to their safe deposit boxes. We have installed plexiglass in lobby areas for employees that have regular contact with customers and masks are available for both employees and customers as needed. 3. Our drive-through facilities at all our locations remain open for customer service, and we believe that the drive-through option for customers has worked well and minimized unnecessary contact or exposure. All of our ATM locations are operative.
We expect to continue with the foregoing procedures until both the federal and state guidance provides comfort that a return to a more normal operation environment is advisable and we, too, are comfortable with such return.
Participation in Government Programs
We are participating in several government programs designed to assist customers, to bolster the economy and to provide protection for the Bank.
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--------------------------------------------------------------------------------Paycheck Protection Program
The Bank has participated as a lender in theSmall Business Administration's (SBA) Paycheck Protection Program (PPP) as established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP was established under the CARES Act to provide unsecured low interest rate loans to small businesses that have been impacted by the COVID-19 pandemic. The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest rate of 1% and payments of interest and principal are deferred until the earlier of the date the SBA remits the forgiveness amount to the lender, the forgiveness application is denied, or if no forgiveness application is filed, ten months from the end of the covered period. If originated beforeJune 5, 2020 , loans mature two years from origination, and if origination occurred on or afterJune 5, 2020 , loans mature five years from origination. PPP loans are forgiven by the SBA (which makes forgiveness payments directly to the lender) to the extent the borrower uses the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintains certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which are based on a percentage of the loan amount. OnDecember 27, 2020 , legislation was enacted that renewed the PPP and allocated additional appropriations for both new first-time PPP loans under the existing PPP and second-draw PPP loans for certain eligible borrowers that had previously received a PPP loan. As ofJune 30, 2022 , the Bank has approximately 305 PPP loans in the aggregate amount of approximately$12.4 million outstanding. AtDecember 31, 2021 , the Bank had approximately 2,520 PPP loans in the aggregate amount of approximately$141.7 million outstanding.
Our Business
We are a bank holding company headquartered inPrattville, Alabama . We engage in the business of banking through our wholly-owned banking subsidiary,River Bank & Trust , which we may refer to as the "Bank" or "River Bank ." Through the Bank, we provide a broad array of financial services to businesses, business owners, professionals, and consumers. As ofJune 30, 2022 , we operated twenty full-service banking offices inAlabama in the cities ofMontgomery ,Prattville ,Millbrook ,Wetumpka ,Auburn ,Opelika ,Gadsden ,Alexander City ,Daphne ,Clanton ,Dothan ,Enterprise ,Mobile ,Decatur , andHuntsville, Alabama . We also have two offices approved for full-service banking operations inBirmingham andSaraland, Alabama . Segments While our chief decision makers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented in the accompanying consolidated financial statements.
Overview of Second Quarter 2022 Results
Net income was$7.5 million in the quarter endedJune 30, 2022 , compared with$6.0 million in the quarter endedJune 30, 2021 . Several significant measures from the 2022 second quarter include:
•
Net interest margin (taxable equivalent) of 3.34%, compared with 3.33% for the second quarter of 2021.
•
Net interest income increase of
•
Annualized return on average earning assets for the quarter ended
•
Annualized return on average equity for the quarter ended
•
Loan increase of
•
Securities decrease of
•
Deposit increase of
•
Stockholders' equity decrease of
32
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Book value per share of
•
Tangible book value per share of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to the financial statements for the year endedDecember 31, 2021 , which are contained in our Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgment is necessary when financial assets and liabilities are required to be recorded at or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.
The following briefly describes the more complex policies involving a significant amount of judgments about valuation and the application of complex accounting standards and interpretations.
Allowance for Loan Losses
We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management. Some of the more critical judgments supporting our allowance for loan losses include judgments about: creditworthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions and other factors impacting the level of inherent losses. Under different conditions or using different assumptions, the actual or estimated credit losses that we may ultimately realize may be different than our estimates. In determining the allowance, we estimate losses on individual impaired loans, or groups of loans that are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impact of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see note 1 to our consolidated financial statements for the year endedDecember 31, 2021 , which are contained in our Annual Report on Form 10-K.
Investment Securities Impairment
We assess, on a quarterly basis, whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In such instance, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value through current earnings.
Income Taxes
Deferred income tax assets and liabilities are computed using the asset and
liability method, which recognizes a liability or asset representing the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events recognized in the financial statements. A valuation
allowance may be established to the extent necessary to reduce the deferred tax
asset to a level at which it is "more likely than not" that the tax assets or
benefits will be realized. Realization of tax benefits depends on having
sufficient taxable income, available tax loss carrybacks or credits, the
reversing of taxable temporary differences and/or tax planning strategies within
the reversal period, and whether current tax law allows for the realization of
recorded tax benefits.
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Business Combinations
Assets purchased and liabilities assumed in a business combination are recorded at their fair value. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of purchased assets or assumed liabilities. On the date of acquisition, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. We must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield which will have a positive impact on interest income. In addition, purchased loans without evidence of credit deterioration are also handled under this method.
Comparison of the Results of Operations for the three and six months ended
The following is a narrative discussion and analysis of significant changes in
our results of operations for the three and six months ended
Net Income
During the three months endedJune 30, 2022 , our net income was$7.5 million , compared to$6.0 million for the three months endedJune 30, 2021 , an increase of$1.5 million , or 24.55%. The primary reason for the increase in net income for the second quarter of 2022 as compared to the second quarter of 2021 was an increase in net interest income. During the three months endedJune 30, 2022 , net interest income was$19.5 million compared to$16.2 million for the three months endedJune 30, 2021 , an increase of$3.3 million , or 19.92%. This increase is a result of higher levels of loan and securities volume and other earning assets from organic growth. The provision for loan losses also decreased approximately$255 thousand from the second quarter of 2021 to the second quarter of 2022. The decrease in the provision for loan loss was a result of improving economic conditions as the local economy has improved. Total noninterest income for the second quarter of 2022 was$3.3 million compared to$3.4 million for the quarter endedJune 30, 2021 . This decrease in noninterest income was primarily the result of the$678 thousand loss on sale of investment securities for the second quarter of 2022. Total noninterest expense in the second quarter of 2022 increased$1.4 million , or 12.73%, from the second quarter of 2021. The most significant increase was an increase of$834 thousand in salaries and employee benefits. During the six months endedJune 30, 2022 , our net income was$15.3 million , compared to$12.8 million for the six months endedJune 30, 2021 , an increase of$2.5 million , or 19.09%. The primary reason for the increase in net income for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 was an increase in net interest income and a decrease in interest expense. During this period in 2022, net interest income was$37.4 million compared to$32.3 million for the same period in 2021, an increase of$5.1 million , or 15.97%. This increase is a result of higher levels of loan and securities volume and other earning assets from organic growth. The provision for loan losses also decreased approximately$1.4 million from the second quarter of 2021 to the second quarter of 2022. The decrease in the provision for loan loss was a result of improving economic conditions as the local economy has improved. Total noninterest income for the first six months of 2022 was$6.8 million compared to$7.1 million in the first six months of 2021. This decrease was primarily the result of the$1.3 million loss on sale of investment securities for the six months endedJune 30, 2022 as compared to the$7 thousand gain on sale of investment securities for the six months endedJune 30, 2021 . Total noninterest expense in the first six months of 2022 increased$3.0 million , or 14.49%, from the first six months of 2021. The most significant increase was an increase of$1.9 million in salaries and employee benefits. 34 --------------------------------------------------------------------------------
Net Interest Income and Net Interest Margin Analysis
The largest component of our net income is net interest income - the difference between the income earned on interest earning assets and the interest paid on deposits and borrowed funds used to support assets. Net interest income divided by average interest earning assets represents our net interest margin. The major factors that affect net interest income and net interest margin are changes in volumes, the yield on interest earning assets and the cost of interest bearing liabilities. Our net interest margin can also be affected by economic conditions, the competitive environment, loan demand, and deposit flow. Management's ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the primary source of earnings. This is discussed in greater detail under the heading "Interest Sensitivity and Market Risk".
Comparison of net interest income for the three months ended
The following table shows, for the three months endedJune 30, 2022 and 2021, the average balances of each principal category of our earning assets and interest bearing liabilities and the average taxable equivalent yields on assets and average costs of liabilities. These yields and costs are calculated by dividing the income or expense by the average daily balance of the associated assets or liabilities (amounts in thousands). Three Months Ended June 30, 2022 Three Months Ended June 30, 2021 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate Interest earning assets Loans$ 1,386,522 $ 16,793 4.86 %$ 1,219,256 $ 15,425 5.07 % Mortgage loans held for sale 12,372 104 3.36 % 21,654 110 2.02 % Investment securities: Taxable securities 862,231 3,399 1.58 % 579,588 1,663 1.15 % Tax-exempt securities 78,708 543 2.76 % 89,162 683 3.07 % Interest bearing balances in other banks 24,180 60 0.99 % 62,201 32 0.22 % Federal funds sold - - 0.00 % 11,501 7 0.25 % Total interest earning assets$ 2,364,013 $ 20,899 3.55 %$ 1,983,362 $ 17,920 3.62 % Interest bearing liabilities Interest bearing transaction accounts$ 537,029 $ 107 0.08 %$ 440,410 $ 82 0.07 % Savings and money market accounts 815,461 391 0.19 % 621,493 380 0.25 % Time deposits 244,844 275 0.45 % 287,051 577 0.83 % Short-term debt 10,734 7 0.23 % 11,173 2 0.10 % Subordinated debt 40,000 418 4.20 % 39,984 423 4.25 % Note payable - - 0.00 % - - 0.00 % Total interest bearing liabilities$ 1,664,552 $ 1,239 0.30 %$ 1,400,111 $ 1,464 0.42 % Noninterest-bearing funding of earning assets 699,461 - 0.00 % 583,251 - 0.00 % Total cost of funding earning assets$ 2,364,013 $ 1,239 0.21 %$ 1,983,362 $ 1,464 0.30 % Net interest rate spread 3.25 % 3.20 % Net interest income/margin (taxable equivalent)$ 19,660 3.34 %$ 16,456 3.33 % Tax equivalent adjustment (176 ) (208 ) Net interest income/margin$ 19,484 3.31 %$ 16,248 3.28 % 35
-------------------------------------------------------------------------------- The following table reflects, for the three months endedJune 30, 2022 and 2021, the changes in our net interest income due to variances in the volume of interest earning assets and interest bearing liabilities and variances in the associated rates earned or paid on these assets and liabilities (amounts in thousands). Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2021 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 2,094 $ (726 ) $ 1,368 Mortgage loans held for sale (47 ) 41 (6 ) Investment securities: Taxable securities 812 924 1,736 Tax-exempt securities (79 ) (61 ) (140 ) Interest bearing balances in other banks (18 ) 46 28 Federal funds sold (7 ) - (7 ) Total interest earning assets$ 2,755 $ 224$ 2,979 Interest bearing liabilities Interest bearing transaction accounts $ 17 $ 8 $ 25 Savings and money market accounts 121 (110 ) 11 Time deposits (72 ) (230 ) (302 ) Short-term debt 1 4 5 Subordinated debentures - (5 ) (5 ) Total interest bearing liabilities $ 67 $
(292 )
Net interest income Net interest income (taxable equivalent)$ 2,688 $ 516$ 3,204 Taxable equivalent adjustment 12 20 32 Net interest income$ 2,700 $ 536$ 3,236 Total interest income for the three months endedJune 30, 2022 was$20.7 million and total interest expense was$1.2 million , resulting in net interest income of$19.5 million for the period. For the same period of 2021, total interest income was$17.7 million and total interest expense was$1.5 million , resulting in net interest income of$16.2 million for the period. This represents a 19.92% increase in net interest income when comparing the same period from 2022 and 2021. When comparing the variances related to interest income for the three months endedJune 30, 2022 and 2021, the increase was primarily attributed to increases in average volumes in loans and investment securities. The volume related increase in interest income for the three months endedJune 30, 2022 was accompanied by a decrease in the yield on loans and an increase in the yields on investment securities. When comparing variances related to interest expense for the three months endedJune 30, 2022 and 2021, the decrease primarily resulted from a decrease in deposit rates continuing into 2021 and 2022. This decrease was partially offset by an increase in the average volume of non-maturity deposits. 36 --------------------------------------------------------------------------------
Comparison of net interest income for the six months ended
The following table shows, for the six months endedJune 30, 2022 and 2021, the average balances of each principal category of our earning assets and interest bearing liabilities and the average taxable equivalent yields on assets and average costs of liabilities. These yields and costs are calculated by dividing the income or expense by the average daily balance of the associated assets or liabilities. Six Months Ended June 30, 2022 Six Months Ended June 30, 2021 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate Interest earning assets Loans$ 1,337,917 $ 32,206 4.85 %$ 1,203,169 $ 30,919 5.18 % Mortgage loans held for sale 13,879 209 3.04 % 22,322 222 2.01 % Investment securities: Taxable securities 856,302 6,572 1.55 % 513,883 3,026 1.19 % Tax-exempt securities 83,669 1,177 2.84 % 88,986 1,360 3.08 % Interest bearing balances in other banks 28,421 85 0.60 % 55,157 61 0.22 % Federal funds sold 2,780 2 0.15 % 11,500 14 0.25 % Total interest earning assets$ 2,322,968 $ 40,251 3.50 %$ 1,895,017 $ 35,602 3.80 % Interest bearing liabilities Interest bearing transaction accounts$ 532,198 $ 211 0.08 %$ 418,141 $ 176 0.08 % Savings and money market accounts 794,413 758 0.19 % 600,535 733 0.25 % Time deposits 256,139 619 0.49 % 282,536 1,249 0.89 % Securities sold under repurchase agreements 10,376 11 0.21 % 11,218 5 0.09 % Federal Home Loan Bank advances 8,287 41 1.00 % - - 0.00 % Subordinated debentures 40,000 837 4.22 % 22,865 529 4.67 % Note payable - - 0.00 % 9,338 242 5.23 %
Total interest bearing liabilities
0.30 %$ 1,344,633 $ 2,934 0.44 % Noninterest-bearing funding of earning assets 681,555 - 0.00 % 550,384 - 0.00 % Total cost of funding earning assets$ 2,322,968 $ 2,477 0.22 %$ 1,895,017 $ 2,934 0.31 % Net interest rate spread 3.20 % 3.36 % Net interest income/margin (taxable equivalent)$ 37,774 3.28 %$ 32,668 3.48 % Tax equivalent adjustment (355 ) (402 ) Net interest income/margin$ 37,419 3.25 %$ 32,266 3.43 % 37
-------------------------------------------------------------------------------- The following table reflects, for the six months endedJune 30, 2022 and 2021, the changes in our net interest income due to variances in the volume of interest earning assets and interest bearing liabilities and variances in the associated rates earned or paid on these assets and liabilities. Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 3,476 $ (2,189 ) $ 1,287 Mortgage loans held for sale (85 ) 72 (13 ) Investment securities: Taxable securities 2,017 1,529 3,546 Tax-exempt securities (79 ) (104 ) (183 ) Interest bearing balances in other banks (28 ) 52 24 Federal funds sold (8 ) (4 ) (12 ) Total interest earning assets$ 5,293 $ (644 ) $ 4,649 Interest bearing liabilities Interest bearing transaction accounts$ 52 $ (17 )$ 35 Savings and money market accounts 241 (216 ) 25 Time deposits (118 ) (512 ) (630 ) Short-term debt - 6 6 Federal Home Loan Bank advances - 41 41 Subordinated debentures 393 (85 ) 308 Note payable (242 ) - (242 ) Total interest bearing liabilities$ 326 $ (783 )
Net interest income Net interest income (taxable equivalent)$ 4,967 $ 139$ 5,106 Taxable equivalent adjustment 16 31 47 Net interest income$ 4,983 $ 170$ 5,153 Total interest income for the six months endedJune 30, 2022 was$39.9 million and total interest expense was$2.5 million , resulting in net interest income of$37.4 million for the period. For the same period of 2021, total interest income was$35.2 million and total interest expense was$2.9 million , resulting in net interest income of$32.3 million for the period. This represents a 15.97% increase in net interest income when comparing the same period from 2022 and 2021. When comparing the variances related to interest income for the six months endedJune 30, 2022 and 2021, the increase was primarily attributed to increases in average volumes in loans and investment securities as well as from the recognition of origination fee income from the SBA Paycheck Protection Program. The volume related increase in interest income for the period was partially offset by a decrease in the yield on loans. When comparing variances related to interest expense for the six months endedJune 30, 2022 and 2021, the decrease resulted primarily from a decrease in deposits rates. The decrease in deposit rates was partially offset by an increase in the average volume of non-maturity deposits and subordinated debentures. 38 --------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. As a result of evaluating the allowance for loan losses atJune 30, 2022 , management recorded a provision of$930 thousand in the second quarter of 2022 compared to a provision of$1.2 million in the second quarter of 2021. The decrease in provision allocated was primarily due to continued improvement in economic conditions as the country recovers from the COVID-19 pandemic. The allowance for loan losses is increased by a provision for loan losses, which is a charge to earnings, and it is decreased by loan charge-offs and increased by recoveries on loans previously charged off. In determining the adequacy of the allowance for loan losses, we consider our historical loan loss experience, the general economic environment, our overall portfolio composition and other relevant information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated for impairment and impairment is deemed necessary, a specific allowance is required for the impaired portion of the loan amount. Subsequent changes in the impairment amount will generally cause corresponding changes in the allowance related to the impaired loan and corresponding changes to the loan loss provision. As ofJune 30, 2022 , the recorded allowance related to impaired loans was$345 thousand . As ofJune 30, 2021 , the recorded allowance related to impaired loans was$323 thousand .
Noninterest Income
In addition to net interest income, we generate various types of noninterest income from our operations. Our banking operations generate revenue from service charges and fees mainly on deposit accounts. Our mortgage division generates revenue from originating and selling mortgage loans. Our investment brokerage division generates revenue through a revenue-sharing relationship with a registered broker-dealer. We also own life insurance policies on several key employees and record income on the increase in the cash surrender value of these policies.
The following table sets forth the principal components of noninterest income for the periods indicated (amounts in thousands).
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
Service charges and fees $ 1,731 $ 1,444 $ 3,334 $ 2,786
Investment brokerage revenue 260 62 403 125
Mortgage operations 1,402 1,560 3,301 3,408
Bank owned life insurance income 307 274 610 543
Net (loss) gain on sales of investment
securities (678 ) - (1,266 ) 7
Other noninterest income 276 85 423 216
Total noninterest income $ 3,298 $ 3,425 $ 6,805 $ 7,085
Noninterest income for the three months ended June 30, 2022 was $3.3 million
compared to $3.4 million for the same period in 2021. The most significant
increase was a $287 thousand increase in service charges and fees which was
primarily a result of deposit growth while the most significant decrease was a
$678 thousand loss on the sale of investment securities.
Noninterest income for the six months ended
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Noninterest Expense
Noninterest expenses consist primarily of salaries and employee benefits, building occupancy and equipment expenses, advertising and promotion expenses, data processing expenses, legal and professional services and miscellaneous other operating expenses.
The following table sets forth the principal components of noninterest expense for the periods indicated (amounts in thousands).
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2022 2021 2022 2021
Salaries and employee benefits $ 7,483 $ 6,649 $ 14,490 $ 12,564
Occupancy expenses 645 604 1,290 1,178
Equipment rentals, depreciation, and
maintenance 363 289 679 564
Telephone and communications 125 136 211 313
Advertising and business development 225 176 376 312
Data processing 873 765 1,722 1,429
Foreclosed assets, net (40 ) 45 (42 ) 86
Federal deposit insurance and other
regulatory assessments 289 256 654 549
Legal and other professional services 296 344 607 623
Other operating expense 1,897 1,519 3,571 2,959
Total noninterest expense $ 12,156 $ 10,783 $ 23,558 $ 20,577
Noninterest expense for the three months ended June 30, 2022 totaled $12.2
million compared with $10.8 million for the same period of 2021. The overall
increase was primarily a result of increases in salaries and employee benefits.
Salaries and employee benefits increased $834 thousand , or 12.54%, to $7.5
million in the second quarter of 2022 from $6.6 million in the second quarter of
2021. The number of full-time equivalent employees increased from approximately
252 at June 30, 2021 to approximately 290 at June 30, 2022 for an increase of
approximately 15.08%.
Noninterest expense for the six months ended
Provision for Income Taxes We recognized income tax expense of$2.2 million for the three months endedJune 30, 2022 , compared to$1.7 million for the three months endedJune 30, 2021 . The effective tax rate for the three months endedJune 30, 2022 was 22.6% compared to 21.8% for the same period in 2021. The effective tax rate is affected by levels of items of income that are not subject to federal and/or state taxation and by levels of items of expense that are not deductible for federal and/or state income tax purposes. We recognized income tax expense of$4.5 million for the six months endedJune 30, 2022 , compared to$3.6 million for the six months endedJune 30, 2021 . The increase of approximately$886 thousand , or 24.69%, resulted from the increase in net income before taxes of$3.3 million in the first six months of 2022 as compared to the first six months of 2021. The effective tax rate for the six months endedJune 30, 2022 was 22.7% compared to 21.9% for the same period in 2021. The effective tax rate is affected by levels of items of income that are not subject to federal and/or state taxation and by levels of items of expense that are not deductible for federal and/or state income tax purposes. 40 --------------------------------------------------------------------------------
Comparison of Financial Condition at
Overview
Our total assets increased$105.7 million , or 4.41%, fromDecember 31, 2021 toJune 30, 2022 . Loans, net of deferred fees and discounts, increased$187.8 million , or 14.83%, fromDecember 31, 2021 toJune 30, 2022 . Securities available-for-sale decreased by$174.8 million , or 19.94%, and securities held-to-maturity increased by$87.5 million , or 174.27%, fromDecember 31, 2021 toJune 30, 2022 , respectively. Cash and cash equivalents decreased$8.4 million , or 13.58% fromDecember 31, 2021 toJune 30, 2022 . Total deposits increased$134.7 million , or 6.26%, fromDecember 31, 2021 toJune 30, 2022 which funded a majority of our loan growth. Total stockholders' equity decreased$47.2 million , or -26.24% fromDecember 31, 2021 toJune 30, 2022 primarily due to the change in accumulated other comprehensive loss of$59.7 million during the period..Investment Securities We use our securities portfolio primarily to enhance our overall yield on interest-earning assets and as a source of liquidity, as a tool to manage our balance sheet sensitivity and regulatory capital ratios, and as a base upon which to pledge assets for public deposits. When our liquidity position exceeds current needs and our expected loan demand, other investments are considered as a secondary earnings alternative. As investments mature, they are used to meet current cash needs, or they are reinvested to maintain our desired liquidity position. We have designated the majority of our securities as available-for-sale to provide flexibility, in case an immediate need for liquidity arises, and we believe that the composition of the portfolio offers needed flexibility in managing our liquidity position and interest rate sensitivity without adversely impacting our regulatory capital levels. In certain cases, we have designated securities as held-to-maturity to protect capital from changes in the value of the securities portfolio. Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive loss, net of related deferred taxes while securities held-to-maturity are reported at amortized cost. Purchase premiums and discounts are recognized in income using the interest method over the terms of the securities. During the six months endedJune 30, 2022 , we purchased investment securities totaling$195.4 million and sold investment securities with proceeds received of$154.4 million including net realized losses of$1.3 million .
The following tables summarize the amortized cost, gross unrealized gains, gross
unrealized losses, and fair value of debt securities at
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
June 30, 2022 :
Securities available-for-sale:
Residential mortgage-backed $ 462,947 $ - $ (51,950 ) $ 410,997
U.S. treasury securities 146,133 - (12,570 ) 133,563
U.S. govt. sponsored enterprises 73,957 26 (4,538 ) 69,445
State, county, and municipal 82,262 7 (10,992 ) 71,277
Corporate debt obligations 17,906 24 (1,263 ) 16,667
Total available-for-sale $ 783,205 $ 57 $ (81,313 ) $ 701,949
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
June 30, 2022:
Securities held-to-maturity:
Residential mortgage-backed $ 74,716 $ - $ (12,281 ) $ 62,435
State, county, and municipal 62,919 - (11,645 ) 51,274
Total held-to-maturity $ 137,635 $ - $ (23,926 ) $ 113,709
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Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 2021 :
Securities available-for-sale:
Residential mortgage-backed $ 562,109 $ 1,512 $ (6,063 ) $ 557,558
U.S. treasury securities 151,331 - (1,803 ) 149,528
U.S. govt. sponsored enterprises 54,005 555 (65 ) 54,495
State, county, and municipal 94,976 4,405 (127 ) 99,254
Corporate debt obligations 15,942 49 (67 ) 15,924
Total available-for-sale $ 878,363 $ 6,521 $ (8,125 ) $ 876,759
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 2021:
Securities held-to-maturity:
State, county, and municipal $ 50,182 $ 139 $ (156 ) $ 50,165
Total held-to-maturity $ 50,182 $ 139 $ (156 ) $ 50,165
42--------------------------------------------------------------------------------
Loans
Loans are the largest category of interest earning assets and typically provide higher yields than other types of interest earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Total loans averaged$1.39 billion during the three months endedJune 30, 2022 , or 58.7% of average interest earning assets, as compared to$1.22 billion , or 61.5% of average interest earning assets, for the three months endedJune 30, 2021 . AtJune 30, 2022 , total loans, net of deferred loan fees and discounts, were$1.45 billion , compared to$1.27 billion atDecember 31, 2021 , an increase of$187.8 million , or 14.83%. The organic, or non-acquired, growth in our loan portfolio is attributable both to our ability to attract new customers and to our ability to benefit from the overall growth in our markets. We seek to build relationships with new customers, maintain and even improve our relationships with existing customers, and encourage our bankers to be involved in their communities. We expect our bankers to recognize business development efforts and to maintain healthy relationships with clients, and our philosophy is to be responsive to customer needs by providing decisions in a timely manner. In addition to our business development efforts, many of the markets that we serve have shown signs of economic recovery over the last few years.
The following table provides a summary of the loan portfolio as of
June 30, 2022
Amount % of Total Amount % of Total
Residential real estate:
Closed-end 1-4 family - first lien $ 408,551 28.5 % $ 317,754 25.5 %
Closed-end 1-4 family - junior lien 6,867 0.5 % 5,434 0.4 %
Multi-family 7,957 0.6 % 9,981 0.8 %
Total residential real estate 423,375 29.6 % 333,169 26.7 %
Commercial real estate:
Nonfarm nonresidential 397,341 27.7 % 350,373 28.1 %
Farmland 45,357 3.2 % 38,808 3.1 %
Total commercial real estate 442,698 30.9 % 389,181 31.2 %
Construction and land development:
Residential 115,995 8.1 % 90,924 7.3 %
Other 125,089 8.7 % 105,192 8.4 %
Total construction and land development 241,084 16.8 % 196,116 15.7 %
Home equity lines of credit 53,167 3.7 % 49,569 4.0 %
Commercial loans:
Other commercial loans 181,086 12.6 % 201,922 16.2 %
Agricultural 39,991 2.8 % 36,063 2.9 %
State, county, and municipal loans 33,268 2.3 % 23,939 2.0 %
Total commercial loans 254,345 17.7 % 261,924 21.1 %
Consumer loans 45,161 3.2 % 43,080 3.5 %
Total gross loans 1,459,830 101.9 % 1,273,039 102.2 %
Allowance for loan losses (21,777 ) -1.5 % (20,922 ) -1.7 %
Net discounts (331 ) 0.0 % (400 ) 0.0 %
Net deferred loan fees (5,015 ) -0.4 % (5,974 ) -0.5 %
Net loans $ 1,432,707 100.0 % $ 1,245,743 100.0 %
In this context, a "real estate loan" is defined as any loan, secured by real
estate, regardless of the purpose of the loan. It is common practice for
financial institutions in our market areas, and for our Bank, to obtain a
security interest or lien in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood
of the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio component. In general, we prefer real estate
collateral to many other potential collateral sources, such as accounts
receivable, inventory and equipment.
43
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Real estate loans are the largest component of our loan portfolio and include
residential real estate loans, commercial real estate loans, and construction
and land development loans. At June 30, 2022 , this category totaled $1.1
billion , or 75.84% of total gross loans, compared to $918.5 million , or 72.15%,
at December 31, 2021 . Real estate loans increased $188.7 million , or 20.54%,
during the period December 31, 2021 to June 30, 2022 . Commercial loans decreased
$7.6 million , or 2.89% during the same period. Our management team and lending
officers have a great deal of experience and expertise in real estate lending
and commercial lending.
The federal regulatory agencies recently issued two "guidance" documents that
have a significant impact on real estate related lending and, thus, on the
operations of the Bank. One part of the guidance could require lenders to
restrict lending secured primarily by certain categories of commercial real
estate to a level of 300% of their capital or to raise additional capital. This
factor, combined with the current economic environment, could affect the Bank's
lending strategy away from, or to limit its expansion of, commercial real estate
lending, which has been a material part of River Financial Corporation's lending
strategy. This could also have a negative impact on our lending and
profitability. Management actively monitors the composition of the Bank's loan
portfolio, focusing on concentrations of credit, and the results of that
monitoring activity are periodically reported to the Board of Directors.
The other guidance relates to the structuring of certain types of mortgages that
allow negative amortization of consumer mortgage loans. Although the Bank does
not engage at present in lending using these types of instruments, the guidance
could have the effect of making the Bank less competitive in consumer mortgage
lending if the local market is driving the demand for such an offering.
The repayment of loans is a source of additional liquidity for us. The following
table sets forth our variable rate and fixed rate loans maturing within specific
intervals at June 30, 2022 .
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
Over one Over five
One year year through years through Over fifteen
Variable Rate Loans: or less five years fifteen years years Total
Residential real estate:
Closed-end 1-4 family - first lien $ 2,469 $ 354 $ 5,375 $ 147,949 $ 156,147
Closed-end 1-4 family - junior lien 389 12 - 296 697
Multi-family 237 262 307 - 806
Total residential real estate 3,095 628 5,682 148,245 157,650
Commercial real estate:
Nonfarm nonresidential 6,626 4,293 1,742 687 13,348
Farmland 1,750 3,055 - - 4,805
Total commercial real estate 8,376 7,348 1,742 687 18,153
Construction and land development:
Residential 29,115 375 376 15,057 44,923
Other 10,065 5,817 4,017 382 20,281
Total construction and land development 39,180 6,192 4,393 15,439 65,204
Home equity lines of credit 4,545 2,957 43,818 64 51,384
Commercial loans:
Other commercial loans 41,835 12,059 8,985 - 62,879
Agricultural 29,001 28 - - 29,029
State, county, and municipal loans - - - - -
Total commercial loans 70,836 12,087 8,985 - 91,908
Consumer loans 1,118 1,293 70 - 2,481
Total gross variable rate loans $ 127,150 $ 30,505 $ 64,690 $ 164,435 $ 386,780
44--------------------------------------------------------------------------------
Over one Over five
One year year through years through Over fifteen
Fixed Rate Loans: or less five years fifteen years years Total
Residential real estate:
Closed-end 1-4 family - first lien
782 3,148 1,656 584 6,170
Multi-family 191 1,770 4,787 403 7,151
Total residential real estate 17,053 102,394 73,879 72,399 265,725
Commercial real estate:
Nonfarm nonresidential 25,841 153,981 198,854 5,317 383,993
Farmland 2,354 19,913 18,214 71 40,552
Total commercial real estate 28,195 173,894 217,068 5,388 424,545
Construction and land development:
Residential 67,165 1,482 1,881 544 71,072
Other 13,136 45,206 45,533 933 104,808
Total construction and land development 80,301 46,688 47,414 1,477 175,880
Home equity lines of credit 198 885 700 - 1,783
Commercial loans:
Other commercial loans 10,092 88,340 19,775 - 118,207
Agricultural 1,371 8,663 928 - 10,962
State, county, and municipal loans 2,304 5,880 20,104 4,980 33,268
Total commercial loans 13,767 102,883 40,807 4,980 162,437
Consumer loans 4,037 23,793 14,709 141 42,680
Total fixed rate gross loans $ 143,551 $ 450,537 $ 394,577 $ 84,385 $ 1,073,050
Over one Over five
One year year through years through Over fifteen
Total Loans: or less five years fifteen years years Total
Residential real estate:
Closed-end 1-4 family - first lien
1,171 3,160 1,656 880 6,867
Multi-family 428 2,032 5,094 403 7,957
Total residential real estate 20,148 103,022 79,561 220,644 423,375
Commercial real estate:
Nonfarm nonresidential 32,467 158,274 200,596 6,004 397,341
Farmland 4,104 22,968 18,214 71 45,357
Total commercial real estate 36,571 181,242 218,810 6,075 442,698
Construction and land development:
Residential 96,280 1,857 2,257 15,601 115,995
Other 23,201 51,023 49,550 1,315 125,089
Total construction and land development 119,481 52,880 51,807 16,916 241,084
Home equity lines of credit 4,743 3,842 44,518 64 53,167
Commercial loans:
Other commercial loans 51,927 100,399 28,760 - 181,086
Agricultural 30,372 8,691 928 - 39,991
State, county, and municipal loans 2,304 5,880 20,104 4,980 33,268
Total commercial loans 84,603 114,970 49,792 4,980 254,345
Consumer loans 5,155 25,086 14,779 141 45,161
Total gross loans $ 270,701 $ 481,042 $ 459,267 $ 248,820 $ 1,459,830
The information presented in the table above is based upon the contractual
maturities of the individual loans, which may be subject to renewal at their
contractual maturity. Renewal of such loans is subject to review and credit
approval, as well as modification of terms at their maturity. Consequently, we
believe that this treatment presents fairly the maturity structure of the loan
portfolio.
45
--------------------------------------------------------------------------------Allowance for Loan Losses, Provision for Loan Losses and Asset Quality
Allowance for loan losses and provision for loan losses
The allowance for loan losses represents management's estimate of probable inherent credit losses in the loan portfolio. Management determines the allowance based on an ongoing evaluation of risk as it correlates to potential losses within the portfolio. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. Management utilizes a review process for the loan portfolio to identify loans that are deemed to be impaired. A loan is considered impaired when it is probable that the Bank will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement or when the loan is deemed to be a troubled debt restructuring. For loans and loan relationships deemed to be impaired that are$100 thousand or greater, management determines the estimated value of the underlying collateral, less estimated costs to acquire and sell the collateral, or the estimated net present value of the cash flows expected to be received on the loan or loan relationship. These amounts are compared to the current investment in the loan and a specific allowance for the deficiency, if any, is specifically included in the analysis of the allowance for loan losses. For loans and loan relationships less than$100 thousand that are deemed to be impaired, management applies a general loss factor of 15% and includes that amount in the analysis of the allowance for loan losses rather than specifically measuring the impairment for each loan or loan relationship. All other loans are deemed to be unimpaired and are grouped into various homogeneous risk pools primarily utilizing regulatory reporting classification codes. The Bank's historical loss factors are calculated for each of the risk pools based on the percentage of net losses experienced as a percentage of the average loans outstanding. The time periods utilized in these historical loss factor calculations are subjective and vary according to management's estimate of the impact of current economic cycles. As every loan has a risk of loss, minimum loss factors are estimated based on long term trends for the Bank, the banking industry, and the economy. The greater of the calculated historical loss factors or the minimum loss factors are applied to the unimpaired loan amounts currently outstanding for the risk pool and included in the analysis of the allowance for loan losses. In addition, certain qualitative adjustments may be included by management as additional loss factors. These adjustments may include, among other things, changes in loan policy, loan administration, loan geographic or industry concentrations, loan growth rates, and experience levels of our lending officers. Although we have not seen any significant changes in credit quality as a result of the pandemic, management has added several significant qualitative adjustments to our allowance for loan loss calculation that are related to the uncertainties of how the pandemic will affect our loan quality. As a result of these qualitative adjustments, our provision for loan losses and the allowance for loan losses increased significantly during pandemic. The loss allocations for specifically impaired loans, smaller impaired loans not specifically measured for impairment, and unimpaired loans are totaled to determine the total required allowance for loan losses. This total is compared to the current allowance on the Bank's books and adjustments made accordingly by a charge or credit to the provision for loan losses.
Management believes the data it uses in determining the allowance for loan losses is sufficient to estimate potential losses in the loan portfolio; however, actual results could differ from management's estimate.
46
--------------------------------------------------------------------------------The following table presents a summary of changes in the allowance for loan losses for the periods indicated (amounts in thousands).
As of and for the As of and for the
Three Months Ended: Six Months Ended:
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
Allowance for loan losses at
beginning of period $ 20,894 $ 18,028 $ 20,922 $ 16,803
Charge-offs:
Mortgage loans on real estate:
Residential real estate 42 101 42 101
Commercial real estate - 177 - 177
Construction and land development - - - -
Total mortgage loans on real estate 42 278 42 278
Home equity lines of credit - - - -
Commercial 86 44 148 84
Consumer - 24 - 29
Total 128 346 190 391
Recoveries:
Mortgage loans on real estate:
Residential real estate - - - -
Commercial real estate 58 4 63 35
Construction and land development 1 4 5 4
Total mortgage loans on real estate 59 8 68 39
Home equity lines of credit - - - -
Commercial 18 27 34 65
Consumer 4 11 13 26
Total 81 46 115 130
Net charge-offs 47 300 75 261
Provision for loan losses 930 1,185 930 2,371
Allowance for loan losses at end of
period $ 21,777 $ 18,913 $
21,777
Total loans outstanding, net of deferred loan fees 1,454,484 1,227,578 1,454,484 1,227,578 Average loans outstanding, net of deferred loan fees 1,386,522 1,219,256 1,337,917 1,203,169 Allowance for loan losses to period end loans 1.50 % 1.54 % 1.50 % 1.54 % Net charge-offs to average loans (annualized) 0.01 % 0.10 % 0.01 % 0.04 %
Allocation of the Allowance for Loan Losses
While no portion of the allowance for loans losses is in any way restricted to
any individual loan or group of loans and the entire allowance is available to
absorb losses from any and all loans, the following table represents
management's allocation of the allowance for loan losses to specific loan
categories as of the dates indicated (amounts in thousands).
June 30, 2022 December 31, 2021
Percent of Percent of
Amount Total Amount Total
Mortgage loans on real estate:
Residential real estate $ 3,616 16.6 % $ 2,596 12.4 %
Commercial real estate 8,366 38.4 % 8,038 38.4 %
Construction and land development 3,358 15.4 % 2,992 14.3 %
Total mortgage loans on real estate 15,340 70.4 % 13,626 65.1 %
Home equity lines of credit 462 2.1 % 396 1.9 %
Commercial 5,548 25.5 % 6,486 31.0 %
Consumer 427 2.0 % 414 2.0 %
Total $ 21,777 100.0 % $ 20,922 100.0 %
47--------------------------------------------------------------------------------
Nonperforming Assets
The following table presents our nonperforming assets as of the dates indicated
(amounts in thousands):
June 30, December 31,
2022 2021 2021
Nonaccrual loans $ 1,487 $ 2,875 $ 2,272
Accruing loans past due 90 days or more - 101 -
Total nonperforming loans 1,487 2,976 2,272
Foreclosed assets 529 674 256
Total nonperforming assets $ 2,016 $ 3,650 $ 2,528
Allowance for loan losses to period end
loans 1.50 % 1.54 % 1.65 %
Allowance for loan losses to period end
nonperforming loans 1464.49 % 635.52 % 920.86 %
Net charge-offs (recoveries) to average
loans (annualized) 0.01 % 0.04 % 0.05 %
Nonperforming assets to period end loans
and foreclosed property 0.14 % 0.30 % 0.20 %
Nonperforming loans to period end loans 0.10 % 0.24 % 0.18 %
Nonperforming assets to total assets 0.08 % 0.16 % 0.11 %
Period end loans 1,454,484 1,227,578 1,266,665
Period end total assets 2,501,400 2,226,103 2,395,680
Allowance for loan losses 21,777 18,913 20,922
Average loans for the period 1,337,917 1,203,169 1,217,901
Net charge-offs for the period 75 261 625
Period end loans plus foreclosed property 1,455,013 1,228,252
1,266,921
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. In addition to consideration of these factors, loans that are past due
90 days or more are generally placed on nonaccrual status. When a loan is placed
on nonaccrual status, all accrued interest on the loan is reversed and deducted
from earnings as a reduction of reported interest income. No additional interest
is accrued on the loan balance until collection of both principal and interest
becomes reasonably certain. Payments received while a loan is on nonaccrual
status will generally be applied to the outstanding principal balance. When a
problem loan is finally resolved, there may ultimately be an actual write-down
or charge-off of the principal balance of the loan that would necessitate
additional charges to the allowance for loan losses.
48
--------------------------------------------------------------------------------Deposits
Deposits, which include noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts, and time deposits, are the principal source of funds for the Bank. We offer a variety of products designed to attract and retain customers, with primary focus on building and expanding client relationships. Management continues to focus on establishing a comprehensive relationship with consumer and business borrowers, seeking deposits as well as lending relationships.
The following table details the composition of our deposit portfolio as of
June 30, 2022 December 31, 2021
Percent of Percent of
Amount Total Amount Total
Demand deposits, non-interest bearing $ 665,435 29.1 % $ 610,002 28.4 %
Demand deposits, interest bearing 537,810 23.5 % 519,547 24.2 %
Money market accounts 719,625 31.5 % 623,763 29.0 %
Savings deposits 126,999 5.6 % 117,767 5.5 %
Time certificates of $250 thousand or more 83,612 3.7 % 106,271 4.9 %
Other time certificates 152,382 6.6 % 173,827 8.0 %
Totals $ 2,285,863 100.0 % $ 2,151,177 100.0 %
Total deposits were $2.29 billion at June 30, 2022 , an increase of $134.7
million from December 31, 2021 with the increase resulting mainly in the
balances of money market accounts and demand deposit accounts. Some of our
demand deposit accounts are seasonal and have expected balance fluctuations. The
seasonality of these demand deposits is related to property tax collections and
to agricultural production.
The following table presents the Bank's time certificates of deposits by various
maturities as of
All Time Time Deposits Time Deposits
Deposits $100 or more less than $100
Three months or less $ 60,942 $ 44,110 $ 16,832
Greater than three months through six months 61,374 43,740 17,634
Greater than six months through one year 62,640 41,408 21,232
Greater than one year through three years 35,451 23,813 11,638
Greater than three years 15,587 12,080 3,507
Total $ 235,994 $ 165,151 $ 70,843
Other Funding Sources
We supplement our deposit funding with wholesale funding when needed for balance
sheet planning and management or when the terms are attractive and will not
disrupt our offering rates in our markets. A source we have used for wholesale
funding is the Federal Home Loan Bank of Atlanta (FHLB). The line of credit with
the FHLB is secured by pledges of various loans in our loan portfolio. At June
30, 2022 , the FHLB line of credit available was $294.4 million and at December
31, 2021 it was $257.1 million . As of June 30, 2022 and December 31, 2021 , we
had $20 million and no Federal Home Loan Bank advances outstanding,
respectively. We also have lines of credit for federal funds borrowings with
other banks that totaled $78.5 million and $48.5 million at June 30, 2022 and
December 31, 2021 , respectively. Furthermore, we have pledged certain loans to
the Federal Reserve Bank (FRB) to secure a line of credit. At June 30, 2022 , the
FRB line of credit available was $166.1 million and at December 31, 2021 , the
FRB line of credit available was $144.1 million . We have never drawn on the FRB
line of credit and consider it a contingency line of credit to be used only for
emergency liquidity management.
On August 9, 2021 , the Company entered into a line of credit agreement with
ServisFirst Bank for $10 million . The line of credit is to be used for general
capital needs and investments. The line when drawn will require quarterly
payments of interest only, and matures two years from the origination date. The
interest rate floats at Wall Street Journal Prime with a floor of 3.25%. The
line of credit is secured by 51% of the Company's stock.
49
--------------------------------------------------------------------------------
On March 9, 2021 , River Financial Corporation ("the Company") entered into a
Subordinated Note Purchase Agreement (the "Purchase Agreement") with the
purchasers signatory thereto providing for a private placement of $40 million in
aggregate principal amount of 4.00% fixed-to-floating rate Subordinated Notes
due March 15, 2031 (the "Notes"). The Notes were issued by the Company to the
purchasers at a price equal to 100% of their face amount. Interest on the Notes
will accrue from March 9, 2021 , and the Company will pay interest semi-annually
on March 15th and September 15th of each year, beginning on September 15, 2021 ,
until the Notes mature. The Notes will bear interest at a fixed rate of 4.00%
per year, from and including March 9, 2021 to, but excluding, March 15, 2026 .
From and including March 15, 2026 , but excluding the maturity date or early
redemption date, the interest rate will reset quarterly at a variable rate equal
to the then current three-month term SOFR plus 342 basis points. The Notes may
not be prepaid by the Company prior to March 15, 2026 . From and after March 15,
2026 , the Company may prepay all or, from time to time, any part of the Notes at
100% of the principal amount (plus accrued interest) without penalty, subject to
any requirement under Federal Reserve Board regulations to obtain prior approval
from the Board of Governors of the Federal Reserve System before making any
prepayment. The Notes may also be prepaid by the Company at any time after the
occurrence of an event that would preclude the Notes from being included in the
Tier 2 Capital of the Company. The Purchase Agreement contains customary
representations and warranties, events of default, and affirmative and negative
covenants, including the requirement that, subject to certain limitations, the
Company restructure any portion of the Notes that ceases to be deemed Tier 2
Capital. The Company used approximately $19.7 million of the net proceeds from
the issuance of the Notes to pay off its note with CenterState Bank dated
October 31, 2018 , including interest accrued on such notes, and the remaining
proceeds for general corporate purposes, including providing capital to support
the organic growth of its bank subsidiary, River Bank .
Liquidity
Market and public confidence in our financial strength and financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.
Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily, weekly and monthly basis. Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows. In this process, we focus on assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs. Funds are available from a number of basic banking activity sources, including the core deposit base, the repayment and maturity of loans, and investment cash flows. Other funding sources include federal funds borrowings, brokered certificates of deposit and borrowings from the FHLB and FRB. Cash and cash equivalents atJune 30, 2022 andDecember 31, 2021 , were$53.5 million and$62.0 million , respectively. Based on recorded cash and cash equivalents, management believesRiver Financial Corporation's liquidity resources were sufficient atJune 30, 2022 to fund loans and meet other cash needs as necessary. 50
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Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized by the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. In most cases, the Company requires collateral or other security to support financial instruments with credit risk.
Financial instruments whose contract amount represents credit risk at
June 30, 2022 December 31, 2021
Commitments to extend credit $ 369,313 $ 328,646
Stand-by and performance letters of credit 3,931 2,426 Total$ 373,244 $ 331,072 Contractual Obligations While our liquidity monitoring and management considers both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations as ofJune 30, 2022 (amounts in thousands). Due after 1 Due after 3 Due in 1 through through Due after year or less 3 years 5 years 5 years Total Deposits without a stated maturity$ 2,049,869 $ - $ - $ -$ 2,049,869 Certificates of deposit of less than$100 55,698 11,638 3,507 - 70,843 Certificates of deposit of$100 or more 129,258 23,813 12,080 - 165,151 Securities sold under agreements to repurchase 7,663 - - - 7,663 Federal Home Loan Bank advances 20,000 - - - 20,000 Subordinated debt, net of loan costs - - - 39,381 39,381 Operating leases 629 1,151 921 2,379 5,080
Total contractual obligations
Capital Position and Dividends
AtJune 30, 2022 andDecember 31, 2021 , total stockholders' equity was$132.4 million and$179.6 million , respectively. The decrease of approximately$47.2 million resulted mainly from the net change in retained earnings and accumulated other comprehensive loss for the six months endedJune 30, 2022 . Retained earnings for the first six months of 2022 increased$12.3 million and accumulated other comprehensive loss decreased$59.7 million . The ratio of stockholders' equity to total assets was 5.29% and 7.50% atJune 30, 2022 andDecember 31, 2021 , respectively.River Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Certain items such as goodwill and other intangible assets are deducted from total capital in arriving at the various regulatory capital measures such as Common Equity Tier 1 capital, Tier 1 capital, and total risk-based capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect onRiver Financial Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,River Bank must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory regulations and guidelines.River Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
51
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Quantitative measures, established by regulation to ensure capital adequacy
effective January 1, 2015 , require River Bank to maintain minimum amounts and
ratios (set forth in the table below) of total risk based capital, Common Equity
Tier 1 capital, and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as
defined in the regulations) to average assets (as defined in the regulations).
Management believes, as of June 30, 2022 , that the Bank meets all capital
adequacy requirements to which it is subject. The following table presents the
Bank's capital amounts and ratios as of June 30, 2022 with the required minimum
levels for capital adequacy purposes including the phase in of the capital
conservation buffer under Basel III and minimum levels to be well capitalized
(as defined) under the regulatory prompt corrective action regulations.
As of
To Be Well Capitalized
Required For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
Total Capital (To Risk-Weighted
Assets) $ 224,764 13.440 % $ 175,602 >= 10.500% $ 167,240 >= 10.00%
Common Equity Tier 1 Capital (To
Risk-Weighted Assets) 203,848 12.189 % 117,068 >= 7.000% 108,706 >= 6.50%
Tier 1 Capital (To Risk-Weighted
Assets) 203,848 12.189 % 142,155 >= 8.500% 133,793 >= 8.00%
Tier 1 Capital (To Average
Assets) 203,848 8.363 % 97,506 >= 4.000% 121,882 >= 5.00%
Management believes, as of December 31, 2021 , that the Bank met all capital
adequacy requirements to which it was subject at the time. The following table
presents the Bank's capital amounts and ratios as of December 31, 2021 with the
required minimum levels for capital adequacy purposes and minimum levels to be
well capitalized (as defined) under the prompt corrective action regulations.
As of
To Be Well Capitalized
Required For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
Total Capital (To Risk-Weighted
Assets) $ 203,848 14.071 % $ 152,116 >= 10.500% $ 144,872 >= 10.00%
Common Equity Tier 1 Capital (To
Risk-Weighted Assets) 185,704 12.819 % 101,410 >= 7.000% 94,167 >= 6.50%
Tier 1 Capital (To Risk-Weighted
Assets) 185,704 12.819 % 123,141 >= 8.500% 115,897 >= 8.00%
Tier 1 Capital (To Average
Assets) 185,704 8.013 % 92,707 >= 4.000% 115,884 >= 5.00%
River Financial Corporation's principal source of funds for dividend payments
and debt service is dividends received from River Bank . There are statutory
limitations on the payment of dividends by River Bank to River Financial
Corporation . As of June 30, 2022 , the maximum amount the Bank could dividend to
River Financial Corporation without prior regulatory authority approval was
approximately $55.9 million . In addition to dividend restrictions, federal
statutes prohibit unsecured loans from banks to bank holding companies.
During the six months ending June 30, 2022 there were 13,000 incentive stock
options issued with a weighted average exercise price of $31.82 per share.
During the same period, there were 23,150 incentive stock options exercised at a
weighted average exercise price of $18.24 per share. A total of 337,079
incentive stock options were outstanding as of June 30, 2022 with a weighted
average exercise price of $23.56 per share and a weighted average remaining life
of 5.74 years.
Interest Sensitivity and Market Risk
Management monitors and manages the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by the Bank is simulation analysis.
In simulation analysis, we review each asset and liability category and its
projected behavior in various different interest rate environments. These
projected behaviors are based on management's past experience and on current
competitive environments, including the various environments in the different
markets in which we compete. Using projected behavior and differing rate
scenarios as inputs, the simulation analysis generates projections of net
interest income. We also periodically verify the validity of this approach by
comparing actual results with those that were projected in previous models.
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Another technique used in interest rate management, but to a lesser degree than
simulation analysis, is the measurement of the interest sensitivity "gap", which
is the positive or negative dollar difference between assets and liabilities
that are subject to interest rate repricing within a given period of time.
Interest rate sensitivity can be managed by repricing assets and liabilities,
selling securities available for sale, replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability.
We evaluate interest rate sensitivity risk and then formulate guidelines
regarding asset generation and repricing, and sources and prices of off-balance
sheet commitments in order to maintain interest sensitivity risk at levels
deemed prudent by management. We use computer simulations to measure the net
income effect of various rate scenarios. The modeling reflects interest rate
changes and the related impact on net income over specified periods of time.
The following table illustrates our interest rate sensitivity at
0-1 Mos 1-3 Mos 3-12 Mos 1-2 Yrs 2-3 Yrs >3 Yrs Total
Interest earning assets
Loans $ 258,179 $ 86,708 $ 246,871 $ 205,848 $ 159,424 $ 497,454 $ 1,454,484
Securities 38,324 19,852 47,319 58,120 70,268 605,701 839,584
Certificates of deposit in
banks - - 495 1,967 - 452 2,914
Cash balances in banks 24,789 - - - - - 24,789
Total interest earning assets
Interest bearing liabilities Interest bearing transaction accounts$ 111,668 $ 8,218 $ 36,984 $ 49,314 $ 49,314 $ 282,312 $ 537,810 Savings and money market accounts 263,468 18,964 85,341 113,792 113,792 251,267 846,624 Time deposits 23,630 38,151 121,466 23,030 12,294 17,423 235,994 Securities sold under agreements to repurchase 7,663 - - - - - 7,663Federal Home Loan Bank advances 20,000 - - - - - 20,000 Subordinated debentures, net of loan costs - - - - - 39,381 39,381 Total interest bearing liabilities$ 426,429 $ 65,333 $ 243,791 $ 186,136 $ 175,400 $ 590,383 $ 1,687,472 Interest sensitive gap Period gap$ (105,137 ) $ 41,227 $ 50,894 $ 79,799 $ 54,292 $ 513,224 $ 634,299 Cumulative gap$ (105,137 ) $ (63,910 ) $ (13,016 ) $ 66,783 $ 121,075 $ 634,299 Cumulative gap - Rate Sensitive Assets/ Rate Sensitive Liabilities -4.5 % -2.8 % -0.6 % 2.9 % 5.2 % 27.3 % The Bank generally benefits from increasing market interest rates when it has an asset-sensitive gap (a positive number) and generally benefits from decreasing market interest rates when it is liability sensitive (a negative number). As shown in the table above, the Bank is liability sensitive on a cumulative basis throughout the one year time frame. The interest sensitivity analysis presents only a static view of the timing and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those are viewed by management as significantly less interest sensitive than market-based rates such as those paid on non-core deposits. For this and other reasons, management relies more upon the simulations analysis (as noted above) in managing interest rate risk. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in volume and mix of interest earning assets and interest bearing liabilities. The Bank's earnings are dependent, to a large degree, on its net interest income, which is the difference between interest income earned on all interest earning assets, primarily loans and securities, and interest paid on all interest bearing liabilities, primarily deposits. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our market risk arises primarily from inherent interest rate risk in our lending, investing and deposit gathering activities. We seek to reduce our exposure to market risk through actively monitoring and managing interest rate risk. Management relies on simulations analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 400 basis points below the current prevailing rates to 400 basis points above current prevailing interest rates. Management makes certain assumptions as to the effect varying levels of interest rates have on certain interest earning assets and interest bearing liabilities, which assumptions consider both historical experience and consensus estimates of outside sources. 53 -------------------------------------------------------------------------------- The following table illustrates the results of our simulation analysis to determine the extent to which market risk would affect net interest income for the next twelve months if prevailing interest rates increased or decreased by the specified amounts from current rates. As noted above, this model uses estimates and assumptions in asset and liability account rate reactions to changes in prevailing interest rates. However, to isolate the market risk inherent in the balance sheet, the model assumes that no growth in the balance sheet occurs during the projection period. This model also assumes an immediate and parallel shift in interest rates, which would result in no change in the shape or slope of the interest rate yield curve. Because of the inherent use of the estimates and assumptions in the simulation model to derive this market risk information, the actual results of the future impact of market risk on our net interest income may differ from that found in the table. Given the current level of prevailing interest rates, management believes prevailing market rates falling 300 basis points and 400 basis points are not reasonable assumptions. All other simulated prevailing interest rates changes modeled indicate a level of sensitivity of the Bank's net interest income to those changes that is acceptable to management and within established Bank policy limits as of both dates shown. Impact on net interest income As of As of June 30, 2022 December 31, 2021 Change in prevailing rates: + 400 basis points 0.37 % 2.18 % + 300 basis points 0.31 % 1.87 % + 200 basis points 0.25 % 1.45 % + 100 basis points 0.13 % 0.75 % + 0 basis points - - - 100 basis points (2.88 )% (1.84 )% - 200 basis points (7.65 )% (2.81 )% - 300 basis points (9.73 )% (2.87 )% - 400 basis points (6.90 )% (2.91 )% 54
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