RIVER FINANCIAL CORPORATION The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information appearing elsewhere in this document. 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 the sections entitled "Special Note Regarding Forward-Looking Statements" and "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 or when specifically identified.
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 are assessing 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
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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 from home remotely, and we believe such steps have been welcomed by, and helpful to, our employees.
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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. Among other things, customers may have in-person meetings at our facilities, consistent with social distancing policies, including customers who may wish to have 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.
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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. 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 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 were 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 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 matured two years from origination and if origination occurred 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 used the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintained certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which were 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 ofDecember 31, 2022 , the Bank has made approximately 3,995 PPP loans in the aggregate amount of approximately$251.5 million with approximately$781 thousand still outstanding.
Our Business
We are a bank holding company headquartered inPrattville, Alabama . We operate one subsidiary bank -River Bank and Trust ("RB&T" or the "Bank"). Through the Bank, we provide a broad array of financial services to businesses, business owners and professionals through twenty-one full-service banking offices inAlabama .
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.
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Overview of 2022 Results
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Our net income was$27.9 million in 2022, compared with$25.0 million in 2021. The largest contributing factors leading to the increase in net income and other highlights include the following: Average interest earning assets in 2022 were$2.31 billion compared to$2.04 billion in 2021. The higher level of interest earning assets led to an increase in net interest income from$66.1 million in 2021 to$78.9 million in 2022.
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Average loans outstanding in 2022 were
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The effective yield on our loan portfolio decreased from 5.07% in 2021 to 4.91% in 2022. The decrease in the yield was mainly attributable to the Paycheck Protection Program loans that remained on the books during 2022 which carry an interest rate of 1.00% which is well below the average yield on other loans.
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Average total investment securities in 2022 were$789.7 million compared to$723.2 million in 2021. In the first quarter of the year, deposits outpaced loan growth with excess cash being deployed to purchase investment securities. In the last three quarters of 2022, any excess cash was used to fund our robust loan growth.
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Average non-interest bearing deposits grew from$546.9 million in 2021 to$658.7 million in 2022. The increase resulted from organic growth as well as the influx of liquidity from government stimulus.
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Our higher net interest income was partially offset by higher operating
expenses, which grew to
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Our noninterest income decreased from$14.5 million in 2021 to$12.2 million in 2022. The decrease primarily resulted from a decrease in income from mortgage operations due to higher interest rates in 2022. 37
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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 RFC's Notes to the Consolidated Financial Statements. 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 RFC's allowance for loan losses include judgments about: creditworthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimated 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 ultimately realized by RFC may be different than management's estimates provided in our Consolidated Financial Statements included elsewhere in this Form 10-K. 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, 2022 , which is included elsewhere in this document.
Investment Securities Impairment
Periodically, we assess 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. The credit portion of the impairment, if any, is recognized as a realized loss in 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 that current tax law allows for the realization of recorded tax benefits.
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.
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Comparison of Results of Operations for the years ended
The following is a narrative discussion and analysis of significant changes in
our results of operations for the years ended
Net Income
2022 vs. 2021
During the year endedDecember 31, 2022 , our net income was$27.9 million , compared to$25.0 million for the year endedDecember 31, 2021 , an increase of 11.56%. The primary reason for the increase in net income in 2022 compared to 2021 was an increase in net interest income from$66.1 million in 2021 to$78.9 million in 2022 for an increase of$12.8 million , or 19.26%. Our net interest margin increased from 3.25% in 2021 to 3.41% in 2022. Loans also increased slightly as a percentage of total interest earning assets to 64.3% in 2022 compared to 59.8% in 2021.
Noninterest income decreased from
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 our assets. Net interest income
divided by average 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 margin can also be affected by economic conditions, the
competitive environment, loan demand, and deposit flow. Our 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 our primary source of earnings.
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The following table shows, for the years 2022 and 2021, the average balance of
each principal category of our assets and liabilities and the average yields on
assets and average costs of liabilities. Such yields and costs are calculated by
dividing income or expense by the average daily balances of the associated
assets or liabilities.
AVERAGE BALANCE SHEETS & NET INTEREST INCOME
Year Ended December 31, 2022 Year Ended December 31, 2021
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
Interest earning assets
Loans $ 1,486,478 $ 72,970 4.91 % $ 1,217,901 $ 61,808 5.07 %
Mortgage loans held for sale 11,480 347 3.02 % 23,144 442 1.91 %
Investment securities:
Taxable securities 713,652 13,679 1.92 % 627,642 7,409 1.18 %
Tax-exempt securities 76,013 2,287 3.01 % 95,545 2,745 2.87 %
Interest bearing balances in other
banks 23,196 314 1.35 % 61,238 134 0.22 %
Federal funds sold 1,379 2 0.15 % 10,705 26 0.24 %
Total interest earning assets
3.88 %$ 2,036,175 $ 72,564 3.56 % Interest bearing liabilities Interest bearing transaction accounts$ 547,713 $ 1,153 0.21 %$ 459,228 $ 382 0.08 % Savings and money market accounts 805,320 3,338 0.41 % 650,394 1,432 0.22 % Time deposits 307,499 3,310 1.08 % 285,514 2,221 0.78 % Securities sold under agreement to repurchase 9,136 46 0.50 % 10,847 11 0.10 % Federal Home Loan Bank advances 8,849 184 2.08 % - - 0.00 %Federal Reserve Bank discount window borrowings 5,890 231 3.92 % - - 0.00 % Federal funds purchased 1,215 44 3.62 % 11 - 0.00 % Note payable - - 0.00 % 3,229 222 6.88 % Subordinated debentures, net of loan costs 39,385 1,679 4.26 % 32,964 1,381 4.19 %
Total interest bearing liabilities
0.58 %$ 1,442,187 $ 5,649 0.39 % Noninterest-bearing funding of earning assets 587,191 - 0.00 % 593,988 - 0.00 %
Total cost of funding earning assets
0.43 %$ 2,036,175 $ 5,649 0.28 % Net interest rate spread 3.30 % 3.17 % Net interest income/margin (taxable equivalent)$ 79,614 3.45 %$ 66,915 3.28 % Tax equivalent adjustment (725 ) (766 ) Net interest income/margin$ 78,889 3.41 %$ 66,149 3.25 %
Comparison of net interest income for the years ended
Net interest income increased$12.8 million , or 19.26%, to$78.9 million for the year endedDecember 31, 2022 , compared to$66.1 million for 2021. The increase was due to an increase in interest income of$17.1 million , resulting from higher levels of loan volume. The increase in interest income was primarily due to a 22.05% increase in average loans outstanding during 2022 compared to 2021. The resulting net interest margin increased to 3.41% for 2022 from 3.25% for 2021. During 2022, non-interest bearing deposits averaged$658.7 million , compared to$546.9 million during 2021, an increase of$111.8 million , or 20.43%. The average cost of funds also increased from 0.39% in 2021 to 0.58% in 2022. Interest-earning assets averaged$2.31 billion for 2022, compared to$2.04 billion for 2021, an increase of$276.0 million , or 13.56%. Average loans increased$268.6 million during 2022 to$1.49 billion from$1.22 billion in 2021. The mix of average earning assets also shifted from investment securities to loans. As a percentage of average total earning assets, average loans increased from 59.8% in 2021 to 64.3% in 2022. The yield on average interest-earning assets increased 32 basis points to 3.88% during 2022, compared to 3.56% for 2021. The yield on earning assets increased primarily due to the increase in interest rates from 2021 to 2022 . During 2022, loan yields decreased 16 basis points to 4.91%, but that was offset by significant growth in loan average volume. 40
-------------------------------------------------------------------------------- Interest-bearing liabilities averaged$1.73 billion for 2022, compared to$1.44 billion for 2021, an increase of$282.8 million . The increase in average volume occurred from organic growth as well as the influx of liquidity from government stimulus. The average rate paid on interest-bearing liabilities was 0.58% for 2022, compared to 0.39% for 2021. During recent years, we have benefited from the historically low interest rates and repriced time deposits at maturity at the lower current market rates, and we have also lowered rates on other deposit accounts to lower market rates where possible. However, the increase in total interest expense from$5.6 million in 2021 to$10.0 million in 2022 was mainly attributable to the steady increase in our cost of funds as a result of market conditions where deposit rates had to be increased to keep up with market demands. The following table reflects, for the years 2022 and 2021, the changes in our net interest income due to changes in the volume of earning assets and interest-bearing liabilities and the associated rates earned or paid on the assets and liabilities. Year Ended December 31, 2022 vs. Year Ended December 31, 2021 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 13,540 $ (2,378 ) $ 11,162 Mortgage loans held for sale (222 ) 127 (95 ) Investment securities: Taxable securities 989 5,281 6,270 Tax-exempt securities (564 ) 106 (458 ) Interest bearing balances in other banks (82 ) 262 180 Federal funds sold (23 ) (1 ) (24 ) Total interest earning assets$ 13,638 $ 3,397 $ 17,035 Interest bearing liabilities Interest bearing transaction accounts$ 71 $ 700 $ 771 Savings and money market accounts 341 1,565 1,906 Time deposits 171 918 1,089 Securities sold under agreement to repurchase (2 ) 37 35 Federal Home Loan Bank advances - 184 184 Federal Reserve Bank discount window borrowings - 231 231 Federal funds purchased - 44 44 Note payable (222 ) - (222 ) Subordinated debentures, net of loan costs 269 29 298 Total interest bearing liabilities$ 628 $ 3,708 $ 4,336 Net interest income Net interest income (taxable equivalent)$ 13,010 $ (311 ) $ 12,699 Taxable equivalent adjustment 74 (33 ) 41 Net interest income$ 13,084 $ (344 ) $ 12,740 Provision for Loan Losses During the year endedDecember 31, 2022 , we recorded a provision for loan losses of$3.8 million compared to$4.7 million during the year endedDecember 31, 2021 . The decrease in the provision for loan losses resulted from the fact that potential credit concerns as a result of the pandemic did not materialize. Net loan charge-offs decreased from$625 thousand in 2021 to$452 thousand in 2022. The allowance for loan losses is increased by a provision for loan losses, which is a charge to earnings, and is decreased by charge-offs and increased by loan recoveries. In determining the adequacy of our allowance for loan losses, we consider our historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated for impairment, and impairment is deemed necessary, the impaired portion of the loan amount is generally charged off. As ofDecember 31, 2022 and 2021,$605 thousand and$424 thousand of our allowance was related to impaired loans, respectively. 41
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Noninterest Income
In addition to net interest margin, we generate other types of recurring
noninterest income from our operations. Our banking operations generate revenue
from service charges and fees on deposit accounts. We have a mortgage division
that generates revenue from originating and selling mortgages and from the sale
of non-deposit investment products through an arrangement with a registered
broker-dealer with which we have a revenue-sharing arrangement. In addition to
these types of recurring noninterest income, the Bank owns insurance on several
key employees and records 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.
For the Year Ended
December 31,
2022 2021
Service charges and fees $ 6,814 $ 5,922
Investment brokerage revenue 643 285
Mortgage operations 4,739 7,389
Bank owned life insurance income 1,226 1,139
Net gains (losses) on sale of investment securities (2,066 ) (608 ) Other noninterest income 885 415 Total noninterest income$ 12,241 $ 14,542 Noninterest income for the years endedDecember 31, 2022 and 2021 was$12.2 million and$14.5 million , respectively. The primary reason for the decrease in noninterest income was from the decrease in income from our mortgage operations and increase in losses on sales of investment securities. Service charges and fees continued to be one of our largest sources of noninterest income in 2022 with$6.8 million compared to$5.9 million in 2021. These service charges and fees are primarily generated by checking and savings accounts. Our mortgage operations produced noninterest income in 2022 of$4.7 million compared to$7.4 million in 2021. The significant decrease in mortgage operations revenue was due to higher mortgage rates than in previous years.
Noninterest expense
Our total noninterest expense increase reflects our continued growth, as well as
the expansion of our operational framework, employee expansion, and facility
expansion, as we build the foundation to support our recent and future growth.
We believe that some of our overhead costs will reduce as a percentage of our
revenue as we grow and gain operating leverage by spreading these costs over a
larger revenue base.
The following table presents the primary components of noninterest expense for
the periods indicated.
For the Years Ended
December 31,
2022 2021
Salaries and employee benefits $ 30,758 $ 27,190
Occupancy expenses 2,946 2,428
Equipment rentals, depreciation, and maintenance 1,596
1,118
Telephone and communications 469
662
Advertising and business development 1,131 764 Data processing 3,992 3,268 Foreclosed assets, net (2 ) (72 ) Federal deposit insurance and other regulatory assessments 1,324
1,298
Legal and other professional services 809 841 Other operating expense 8,390 6,251 Total noninterest expense$ 51,413 $ 43,748 Noninterest expense for the years endedDecember 31, 2022 and 2021 was$51.4 million and$43.7 million , respectively, an increase of$7.7 million , or 17.52%. The largest component of noninterest expense was salaries and employee benefits. Salaries and benefits increased approximately$3.6 million mainly due to the addition of new employees across our seven regions and an expanding mortgage department. The increase in other operating expense was due to the growth in new markets during the year. 42
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Income Tax Provision
Income tax expense of$7.9 million and$7.2 million was recognized during the years endedDecember 31, 2022 and 2021, respectively. The increase in income tax expense during 2022 was mainly due to the increase in net income. The effective tax rate for the year 2022 was 22.2% compared to 22.2% for the year 2021. The effective tax rates are affected by items of income and expense that are not subject to federal and state taxation.
Comparison of Balance Sheets at
Overview
Our total assets increased$437.7 million , or 18.27%, from$2.40 billion atDecember 31, 2021 , to$2.83 billion atDecember 31, 2022 . Net loans increased by$533.1 million during 2022 and investment securities decreased$129.5 million in 2022. Cash and cash equivalents increased by$12.9 million during 2022. Deposits atDecember 31, 2022 totaled$2.51 billion , an increase of$363.0 million as compared toDecember 31, 2021 . Noninterest-bearing deposits increased$63.0 million in 2022 and interest-bearing deposits increased$300.0 million . Our deposits increased during 2022 from organic deposit growth.
Loans
Loans are our largest category of earning assets and typically provide higher yields than other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that we attempt to control and counterbalance. Total loans averaged$1.49 billion during the year endedDecember 31, 2022 , or 64.3% of average earning assets, as compared to$1.22 billion or 59.8% of average earning assets, for the year endedDecember 31, 2021 . AtDecember 31, 2022 , total loans, net of unearned income, were$1.8 billion , compared to$1.3 billion atDecember 31, 2021 , an increase of$536.5 million , or 42.35%. The organic, or non-acquired, growth in our loan portfolio is attributable to our ability to attract new customers from other financial institutions and overall growth in our markets. Much of our loan growth has come from moving customers from other financial institutions to RB&T. We have also been successful in building banking relationships with new customers. We have hired several new bankers in the markets that we serve, and these employees have been successful in transitioning their former clients and attracting new clients to RB&T. Our bankers are expected to be involved in their communities and to maintain business development efforts to develop 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. 43
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The table below provides a summary of the loan portfolio composition as of the
periods indicated.
COMPOSITION OF LOAN PORTFOLIO
December 31, 2022 December 31, 2021
% of % of
Amount Total Amount Total
Residential real estate:
Closed-end 1-4 family - first lien $ 573,033 32.2 % $ 317,754 25.5 %
Closed-end 1-4 family - junior lien 9,422 0.5 % 5,434 0.4 %
Multi-family 14,106 0.8 % 9,981 0.8 %
Total residential real estate 596,561 33.5 % 333,169 26.7 %
Commercial real estate:
Nonfarm nonresidential 497,766 28.0 % 350,373 28.1 %
Farmland 53,691 3.0 % 38,808 3.1 %
Total commercial real estate 551,457 31.0 % 389,181 31.2 %
Construction and land development:
Residential 121,363 6.8 % 90,924 7.3 %
Other 135,127 7.6 % 105,192 8.4 %
Total construction and land development 256,490 14.4 % 196,116 15.7 %
Home equity lines of credit 64,215 3.6 % 49,569 4.0 %
Commercial loans:
Other commercial loans 193,053 10.9 % 201,922 16.2 %
Agricultural 56,946 3.2 % 36,063 2.9 %
State, county, and municipal loans 40,964 2.3 % 23,939 2.0 %
Total commercial loans 290,963 16.4 % 261,924 21.1 %
Consumer loans 49,592 2.8 % 43,080 3.5 %
Total gross loans 1,809,278 101.7 % 1,273,039 102.2 %
Allowance for loan losses (24,310 ) -1.4 % (20,922 ) -1.7 %
Net discounts (279 ) 0.0 % (400 ) 0.0 %
Net deferred loan fees (5,872 ) -0.3 % (5,974 ) -0.5 %
Net loans $ 1,778,817 100.0 % $ 1,245,743 100.0 %
In the context of this discussion, a "real estate mortgage loan" is defined as
any loan, other than a loan for construction purposes, secured by real estate,
regardless of the purpose of the loan. It is common practice for financial
institutions in our market areas, and for us in particular, 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. This practice tends to increase the
magnitude of the real estate loan portfolio. In many cases, we prefer real
estate collateral to many other potential collateral sources, such as accounts
receivable, inventory, and equipment.
The Federal regulatory agencies 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 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
allows 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.
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The principal component of our loan portfolio is real estate mortgage loans on
residential and commercial properties. At December 31, 2022 , this category
totaled $1.2 billion and represented 68.1% of the total loan portfolio, compared
to $771.9 million , or 61.9% of the total loan portfolio at year-end 2021.
Residential real estate loans increased $263.4 million in 2022, or 79.1%, and
commercial real estate loans increased $162.3 million , or 41.7%. Home equity
lines of credit increased $14.6 million , or 29.5%.
Real estate construction loans totaled $256.5 million at December 31, 2022 , an
increase of $60.4 million , or 30.8%, over $196.1 million at December 31, 2021 .
This loan type accounted for 14.4% and 15.7% of our total loan portfolio at
December 31, 2022 and December 31, 2021 , respectively.
Commercial and industrial loans totaled $291.0 million at December 31, 2022 ,
compared to $261.9 million at December 31, 2021 , an increase of $29.0 million ,
or 11.1% during 2022.
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 December 31, 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 $ 1,756 $ 1,004 $ 5,309 $ 265,493 $ 273,562
Closed-end 1-4 family - junior lien 53 - - 291 344
Multi-family 353 - 285 - 638
Total residential real estate 2,162 1,004 5,594 265,784 274,544
Commercial real estate:
Nonfarm nonresidential 5,002 9,523 5,061 378 19,964
Farmland 645 2,018 - - 2,663
Total commercial real estate 5,647 11,541 5,061 378 22,627
Construction and land development:
Residential 24,109 - 698 31,597 56,404
Other 13,733 5,284 190 56 19,263
Total construction and land development 37,842 5,284 888 31,653 75,667
Home equity lines of credit 5,074 7,153 48,520 - 60,747
Commercial loans:
Other commercial loans 43,572 12,435 1,157 - 57,164
Agricultural 40,957 185 - - 41,142
State, county, and municipal loans - - - - -
Total commercial loans 84,529 12,620 1,157 - 98,306
Consumer loans 1,439 865 59 - 2,363
Total gross variable rate loans $ 136,693 $ 38,467 $ 61,279 $ 297,815 $ 534,254
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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
1,210 5,599 1,692 577 9,078
Multi-family 358 8,688 3,887 535 13,468
Total residential real estate 19,732 132,408 82,279 87,598 322,017
Commercial real estate:
Nonfarm nonresidential 29,692 190,403 248,758 8,949 477,802
Farmland 1,500 27,936 21,522 70 51,028
Total commercial real estate 31,192 218,339 270,280 9,019 528,830
Construction and land development:
Residential 60,696 1,963 673 1,627 64,959
Other 15,082 62,668 37,055 1,059 115,864
Total construction and land development 75,778 64,631 37,728 2,686 180,823
Home equity lines of credit 229 1,127 2,112 - 3,468
Commercial loans:
Other commercial loans 13,384 93,932 28,573 - 135,889
Agricultural 1,513 12,197 2,094 - 15,804
State, county, and municipal loans 3,578 9,663 23,514 4,209 40,964
Total commercial loans 18,475 115,792 54,181 4,209 192,657
Consumer loans 4,851 25,886 16,355 137 47,229
Total fixed rate gross loans $ 150,257 $ 558,183 $ 462,935 $ 103,649 $ 1,275,024
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
1,263 5,599 1,692 868 9,422
Multi-family 711 8,688 4,172 535 14,106
Total residential real estate 21,894 133,412 87,873 353,382 596,561
Commercial real estate:
Nonfarm nonresidential 34,694 199,926 253,819 9,327 497,766
Farmland 2,145 29,954 21,522 70 53,691
Total commercial real estate 36,839 229,880 275,341 9,397 551,457
Construction and land development:
Residential 84,805 1,963 1,371 33,224 121,363
Other 28,815 67,952 37,245 1,115 135,127
Total construction and land development 113,620 69,915 38,616 34,339 256,490
Home equity lines of credit 5,303 8,280 50,632 - 64,215
Commercial loans:
Other commercial loans 56,956 106,367 29,730 - 193,053
Agricultural 42,470 12,382 2,094 - 56,946
State, county, and municipal loans 3,578 9,663 23,514 4,209 40,964
Total commercial loans 103,004 128,412 55,338 4,209 290,963
Consumer loans 6,290 26,751 16,414 137 49,592
Total gross loans $ 286,950 $ 596,650 $ 524,214 $ 401,464 $ 1,809,278
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.
46--------------------------------------------------------------------------------
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.
The following tables summarize the amortized cost and fair value of securities
available-for-sale and held-to-maturity at
INVESTMENT SECURITIES
December 31, 2022 December 31, 2021
Amortized Fair Amortized Fair
Cost Value Cost Value
Securities available for sale:
Residential mortgage-backed $ 449,348 $ 390,037 $ 562,109 $ 557,558
U.S. treasury securities 130,971 117,629 151,331 149,528
54,495
State, county, and municipal 87,347 75,863 94,976 99,254 Corporate debt obligations 17,873 15,996 15,942 15,924 Totals$ 758,428 $ 665,887 $ 878,363 $ 876,759 December 31, 2022 December 31, 2021 Amortized Fair Amortized Fair Cost Value Cost Value Securities held-to-maturity: Residential mortgage-backed$ 68,688 $ 56,064 $ - $ - State, county, and municipal 62,893 49,213 50,182 50,165 Totals$ 131,581 $ 105,277 $ 50,182 $ 50,165
The following tables show the scheduled maturity and average yields of our
securities at
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
After one year but After five years but
Within one year within five years within ten years After ten years Other securities
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities
available for
sale:
U.S. govt.
sponsored
enterprises $ - --- % $ 15,775 1.06 % $ 39,541 2.27 % $ 11,046 3.92 % $ - --- %
State, county,
and municipal 55 2.75 % 447 2.16 % 7,807 2.22 % 67,554 2.90 % - --- %
U.S. treasury
securities - --- % 109,036 1.00 % 8,593 1.55 % - --- % - --- %
Corporate debt
obligations 999 5.31 % 2,201 2.81 % 12,796 3.59 % - --- % - --- %
Residential
mortgage-backed - --- % - --- % - --- % - --- % 390,037 2.19 %
Totals $ 1,054 5.18 % $ 127,459 1.04 % $ 68,737 2.42 % $ 78,600 3.05 % $ 390,037 2.19 %
After one year but After five years but
Within one year within five years within ten years After ten years Other securities
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities held-to-maturity:
State, county, and municipal $ - --- % $ - --- % $ 10,208 2.05 % $ 52,685 2.36 % $ - --- %
Residential mortgage-backed - --- % - --- % - --- % - --- % 68,688 1.54 %
Totals $ - --- % $ - --- % $ 10,208 --- % $ 52,685 --- % $ 68,688 --- %
47-------------------------------------------------------------------------------- We invest primarily in mortgage-backed securities, municipal securities, and obligations of government-sponsored entities and agencies ofthe United States , though we may in some situations also invest in direct obligations ofthe United States or obligations guaranteed as to the principal and interest bythe United States . All of our mortgage-backed securities are residential securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). During 2021, we used most of our excess liquidity to invest in securities, as our loan demand had not kept up with our deposit growth. During 2022, we used most of our excess liquidity to fund loan growth, as our deposit growth had not kept up with our robust loan growth. 48
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Allowance for Loan Losses, Provision for Loan Losses and Asset Quality
Allowance for loan losses and provision for loan losses
Our allowance for loan losses represents our estimate of probable inherent credit losses in the loan portfolio. We determine the required allowance each quarter based on an ongoing evaluation of risk as it correlates to potential losses within the portfolio. Increases in the allowance 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 our 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 loss factor of 15% and includes that amount in that 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 utilizing regulatory reporting classifications. The Bank's historical loss factors are calculated for each of these risk pools based on the 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 applied to the unimpaired loan risk pools. 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. 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.
49--------------------------------------------------------------------------------
The following table presents a summary of changes in the allowance for loan losses for the periods and dates indicated.
ALLOWANCE FOR LOAN LOSSES
Year Ended:
December 31 , December 31 ,
Amounts in thousands, (except percentages) 2022 2021
Allowance for loan losses at beginning of period$ 20,922 $ 16,803 Charge-offs: Mortgage loans on real estate: Residential 42
127
Commercial real estate -
241
Construction and land development - 2 Equity lines of credit 14 - Total mortgage loans on real estate 56 370 Commercial 595 514 Consumer 28 103 Total charge-offs 679 987 Recoveries: Mortgage loans on real estate: Residential - 60 Commercial real estate 62 35 Construction and land development 5 11 Equity lines of credit 41 - Total mortgage loans on real estate 108 106 Commercial 98 189 Consumer 21 67 Total recoveries 227 362 Net charge-offs 452 625 Provision for loan losses 3,840 4,744 Allowance for loan losses at end of period$ 24,310
$ 1,803,127 $ 1,266,665 Average loans outstanding, net of deferred loan fees$ 1,486,478 $ 1,217,901 Allowance for loan losses to period end loans 1.35 % 1.65 % Net charge-offs to average loans (annualized) 0.03 % 0.05 % In accordance with ASC Topic 805, Business Combinations, the loans acquired in 2015 fromKeystone Bank , in 2018 fromPeoples Southern Bank and in 2019 fromTrinity Bank were recorded at fair value and any discount to fair value was recorded against the loans rather than as an allowance for loan losses. Approximately$1.6 million of the discount associated with the loans acquired fromTrinity Bank in 2019 was deemed related to credit quality. Approximately$504 thousand of the discount associated with the loans acquired fromPeoples Southern Bank in 2018 was deemed related to credit quality. The total discount was recorded as an accretable discount and is accreted into interest income over the life of the loans using the level yield method. The following table presents a summary of the acquired loan information for the periods and dates indicated. As of December 31, 2022 As of December 31, 2021 Peoples Peoples Southern Southern Keystone Bank Bank Trinity Bank Total Keystone Bank Bank Trinity Bank Total Acquired loan portfolio at year-end $ 4,060$ 7,673 $ 13,783 $ 25,516 $ 7,379$ 12,320 $ 30,194 $ 49,893 Remaining accretable loan discount at year-end 33 41 205 279 48 71 281 400 Discount accretion recognized in interest income on loans 15 30 76 121 57 92 461 610 Overall, asset quality indicators have continued to improve, and, as a result, provision expense has been minimal for the Bank's loan portfolio. During the years endedDecember 31, 2022 and 2021, we recorded provision expense of$3.8 million and$4.7 million , respectively. 50
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Allocation of Our Allowance for Loan Losses
While no portion of our allowance for loan 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 our allowance for loan losses to specific loan
categories for the periods indicated.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
As of December 31,
2022 2021
Percent of Percent of
Allowance in Allowance in
each each
Category to Category to
Total Total
Amount Allowance Amount Allowance
Residential real estate $ 5,088 20.9 % $ 2,596 12.4 %
Commercial real estate 10,057 41.4 % 8,038 38.4 %
Construction and land development 3,377 13.9 % 2,992 14.3 %
Home equity lines of credit 562 2.3 % 396 1.9 %
Commercial 4,778 19.7 % 6,486 31.0 %
Consumer 448 1.8 % 414 2.0 %
Total $ 24,310 100.0 % $ 20,922 100.0 %
Nonperforming Assets
The following table presents our nonperforming assets for the dates indicated.
NONPERFORMING ASSETS
December 31,
2022 2021
Nonaccrual loans $ 1,356 $ 2,272
Accruing loans past due 90 days or more 138 -
Total nonperforming loans 1,494 2,272
Foreclosed assets 609 256
Total nonperforming assets $ 2,103 $ 2,528
Allowance for loan losses to period end loans 1.35 % 1.65 % Allowance for loan losses to period end nonperforming loans
1627.18 % 920.86 %
Net charge-offs to average loans (annualized) 0.03 % 0.05 %
Nonperforming assets to period end loans and
foreclosed property 0.12 % 0.20 %
Nonperforming loans to period end loans 0.08 % 0.18 %
Nonperforming assets to total assets 0.07 % 0.11 %
Period end loans 1,803,127 1,266,665
Period end total assets 2,833,382 2,395,680
Allowance for loan losses 24,310 20,922
Average loans for the period 1,486,478 1,217,901
Net charge-offs for the period 452
625
Period end loans plus foreclosed property 1,803,736 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.
51
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Total nonperforming assets decreased $425 thousand to $2.1 million at December
31, 2022 , from $2.5 million at December 31, 2021 . Total nonperforming assets as
a percentage of total assets decreased 0.04% from 0.11% at December 31, 2021 to
0.07% at December 31, 2022 . Improving asset quality has been and will continue
to be a primary focus of management.
Deposits
Deposits, which include noninterest-bearing demand deposits, interest-bearing
demand deposits, money market accounts, and savings, time, and other deposits,
are the primary funding source for the Bank. We offer a variety of products
designed to attract and retain customers, with primary focus on building and
expanding client relationships. We continue 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 the
dates indicated.
COMPOSITION OF DEPOSITS
December 31, 2022 December 31, 2021
Percent of Percent of
Amount Total Amount Total
Demand deposits, noninterest-bearing $ 672,956 26.8 % $ 610,002 28.4 %
Demand deposits, interest-bearing 610,944 24.3 % 519,547 24.2 %
Money market accounts 664,855 26.4 % 623,763 29.0 %
Savings deposits 120,030 4.8 % 117,767 5.5 %
Time certificates of $250 or more 125,661 5.0 % 106,271 4.9 %
Other time certificates 319,753 12.7 % 173,827 8.0 %
Totals $ 2,514,199 100.0 % $ 2,151,177 100.0 %
Total deposits were $2.51 billion at December 31, 2022 , an increase of $363.0
million , or 16.9%, from $2.15 billion at December 31, 2021 . Noninterest-bearing
demand deposits and interest-bearing demand deposits increased a combined total
of $154.4 million , or 13.7% from December 31, 2021 to December 31, 2022 . These
two categories of deposits are our least expensive source of funding for
interest-earning assets.
The following table details the maturities of our time deposits which consist entirely of certificates of deposit.
MATURITIES OF CERTIFICATES OF DEPOSIT
CDs CDs
$100 Less Than
All CDs or more $100
Three months or less $ 144,368 $ 97,378 $ 46,990
Greater than three months through six months 116,411 92,128 24,283
Greater than six months through one year 106,807 81,293
25,514
Greater than one year through three years 68,547 49,891
18,656 Greater than three years 9,281 6,468 2,813 Total$ 445,414 $ 327,158 $ 118,256
Deposit growth has benefited to a large extent from uncertainty in the financial markets, which has increased the liquidity of many banks as consumers and businesses look for safe places for liquidity, thereby increasing bank deposits.
Other Funding Sources
We supplement our deposit funding with wholesale funding when needed for balance sheet planning or when the terms are attractive and will not disrupt our offering rates in our markets. A source that we have used for wholesale funding is theFederal Home Loan Bank of Atlanta (FHLBA). AtDecember 31, 2022 the Bank had$95 million of borrowings outstanding with FHLBA. There were no borrowings outstanding with FHLBA as ofDecember 31, 2021 . Another source that we have used for wholesale funding is theFederal Reserve Bank discount window. AtDecember 31, 2022 the Bank had$25 million of borrowings outstanding with theFederal Reserve Bank discount window. There were no borrowings outstanding with theFederal Reserve Bank discount window as ofDecember 31, 2021 . 52
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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 in a cost-effective manner and to meet current and future potential obligations such as loan commitments, lease obligations, and unexpected deposit outflows. In this process, we focus on both 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 security cash flows. Other funding sources include federal funds purchased, brokered certificates of deposit, borrowings from the FHLBA, and borrowings from theFederal Reserve Bank discount window. Cash and cash equivalents atDecember 31, 2022 and 2021 were$74.8 million and$62.0 million , respectively. Based on the recorded cash and cash equivalents, our liquidity resources were sufficient atDecember 31, 2022 to fund loans and meet other cash needs as necessary.
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.
Due after 1 Due after 3
Due in 1 through through Due after
year or less 3 years 5 years 5 years Total
Federal Home Loan Bank advances $ 95,000 $ - $ - $ - $ 95,000
Federal Reserve Bank discount
window borrowings 25,000 - - - 25,000
Certificates of deposit of less
than $100 96,787 18,656 2,813 - 118,256
Certificates of deposit of $100 or
more 270,799 49,891 6,468 - 327,158
Securities sold under agreements to
repurchase 8,181 - - - 8,181
Subordinated debentures, net of
loan costs - - - 39,419 39,419
Operating leases 775 1,307 871 2,180 5,133
Total contractual obligations
Off-Balance Sheet Arrangements
We are party to credit-related financial instruments with off-balance sheet
risks in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of amounts recorded on our
balance sheet. Our exposure to credit loss is represented by the contractual
amounts of these commitments. We follow the same credit policies in making
commitments as we do for on-balance sheet instruments.
Our off-balance sheet arrangements are summarized in the following table for the
periods indicated.
CREDIT EXTENSION COMMITMENTS
December 31, 2022 December 31, 2021
Commitments to extend credit $ 420,670 $ 328,646
Stand-by and performance letters of credit 5,027 2,426
Total $ 425,697 $ 331,072
53--------------------------------------------------------------------------------
Interest Sensitivity and Market Risk
Interest Sensitivity
We monitor and manage 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 we employ is simulation analysis and this technique is augmented by "gap" analysis. In simulation analysis, we review each individual asset and liability category and their projected behavior in various different interest rate environments. These projected behaviors are based upon management's past experiences and upon current competitive environments, including the various environments in the different markets in which we compete. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates as output 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. 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 or trading securities, 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 decrease interest sensitivity risk. We use computer simulations to measure the net income effect of various interest 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 atDecember 31, 2022 , assuming that the relevant assets and liabilities are collected and paid, respectively, based upon historical experience rather than their stated maturities. INTEREST SENSITIVITY ANALYSIS 0-1 Mos 1-3 Mos 3-12 Mos 1-2 Yrs 2-3 Yrs >3 Yrs Total
Interest earning assets Loans$ 281,949 $ 87,219 $ 270,945 $ 260,046 $ 207,006 $ 695,962 $ 1,803,127 Securities 37,634 19,290
46,298 60,744 69,938 563,564 797,468 Certificates of deposit in banks
(32 ) 245 2,218 - 1,250 484 4,165
Interest bearing deposits in
banks 42,874 - - - - - 42,874
Total interest earning assets $ 362,425 $ 106,754 $ 319,461 $ 320,790 $ 278,194 $ 1,260,010 $ 2,647,634
Interest bearing liabilities
Interest bearing transaction
accounts $ 188,452 $ 8,934 $
40,203
65,142 79,478 221,886 52,142 15,901 10,865 445,414
Securities sold under agreements
to repurchase 8,181 - - - - - 8,181
Federal Home Loan Bank Advances - - 40,000 55,000 - - 95,000
Federal Reserve Bank discount
window borrowings 25,000 - - - - - 25,000
Subordinated debt, net of loan
costs - - - - - 39,419 39,419
Total interest bearing
liabilities $ 738,857 $ 98,728 $ 348,514 $ 222,646 $ 131,405 $ 468,693 $ 2,008,843
Interest sensitive gap
Period gap $ (376,432 ) $ 8,026 $ (29,053 ) $ 98,144 $ 146,789 $ 791,317 $ 638,791
Cumulative gap $ (376,432 ) $ (368,406 ) $ (397,459 ) $ (299,315 ) $ (152,526 ) $ 638,791
Cumulative gap - Rate Sensitive
Assets/ Rate
Sensitive Liabilities (14.2 )% (13.9 )% (15.0 )% (11.3 )% (5.8 )% 24.1 %
54-------------------------------------------------------------------------------- We generally benefit from increasing market rates of interest when we have an asset-sensitive gap (a positive number) and generally benefit from decreasing market interest rates when we are liability-sensitive (a negative number). As shown in the table above, we are liability-sensitive on a cumulative basis through three years. 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 simulation 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 the volume and mix of earning assets and interest-bearing liabilities.
Market Risk
Our earnings are dependent, to a large degree, on our net interest income, which
is the difference between interest income earned on all 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
upon static "gap" analysis to determine the degree of mismatch in the maturity
and repricing distribution of interest-earning assets and interest-bearing
liabilities which quantifies, to a large extent, the degree of market risk
inherent in our balance sheet. Gap analysis is further augmented by simulation
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 the current prevailing rates.
Management makes certain assumptions as to the effect that varying levels of
interest rates have on certain earning assets and interest bearing-liabilities,
which assumptions consider both historical experience and consensus estimates of
outside sources.
The following table illustrates the results of our simulation analysis to
determine the extent to which market risk would affect net interest margin for
the next 12 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 these 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
margin may (and most likely will) differ from that found in the table.
MARKET RISK
Impact on net interest income
As of As of
December 31, 2022 December 31, 2021
Change in prevailing rates:
+ 400 basis points (14.25)% 2.18%
+ 300 basis points (10.55)% 1.87%
+ 200 basis points (6.96)% 1.45%
+ 100 basis points (3.49)% 0.75%
+ 0 basis points - -
- 100 basis points 2.68% (1.84)%
- 200 basis points 4.58% (2.81)%
- 300 basis points 2.00% (2.87)%
- 400 basis points (3.21)% (2.91)%
55--------------------------------------------------------------------------------
Capital Resources
Total stockholders' equity atDecember 31, 2022 was$134.0 million , or 4.7% of total assets. AtDecember 31, 2021 , total stockholders' equity was$179.6 million , or 7.5% of total assets. The decrease in shareholders' equity for 2022 was mainly attributable to a$70.3 million decrease in other comprehensive income. The decrease from other comprehensive income was partially offset by net income of$27.9 million . The bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank's capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against "off-balance sheet" activities such as loans sold with recourse, loan commitments, guarantees, and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity, such as preferred stock, that may be included in capital. Certain items, such as goodwill and other intangible assets, are deducted from total capital in arriving at the various regulatory capital measures such as Tier 1 capital and total risk-based capital. Our objective is to maintain the Bank's current status as a "well-capitalized institution," as that term is defined by the Bank's regulators. As ofDecember 31, 2022 , RB&T was "well-capitalized" under the regulatory framework for prompt corrective action. Changes to the regulatory guidelines for bank capital levels that became effectiveJanuary 1, 2015 , the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters of credit) is 8%. The required ratio of "Tier 1 Capital" (consisting generally of shareholders' equity and qualifying preferred stock, less certain goodwill items and other intangible assets) to risk-weighted assets is 6%. While there was previously no required ratio of "Common Equity Tier 1 Capital" (which generally consists of common stock, retained earnings, certain qualifying capital instruments issued by consolidated subsidiaries, and Accumulated Other Comprehensive Income, subject to adjustments) to total risk-weighted assets, a required minimum ratio of 4.5% became effective onJanuary 1, 2015 , as well. The remainder of total capital, or "Tier 2 Capital," may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) preferred stock not qualifying as Tier 1 Capital, (c) hybrid capital instruments, (d) perpetual debt, (e) mandatory convertible securities, and (f) certain subordinated debt and intermediate-term preferred stock up to 50% of Tier 1 Capital. Total Capital is the sum of Tier 1 Capital and Tier 2 Capital (which is included only to the extent of Tier 1 Capital), less reciprocal holdings of other banking organizations' capital instruments, investments in unconsolidated subsidiaries, and any other deductions as determined by the appropriate regulator.
Quantitative measures, established by regulation to ensure capital adequacy effectiveJanuary 1, 2015 , requireRiver Bank & Trust 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), and of Tier 1 capital (as defined) to average assets (as defined). 56 -------------------------------------------------------------------------------- The following table presents the Bank's capital amounts and ratios 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. The following table contains selected capital ratios atDecember 31, 2022 and 2021 for the Bank. CAPITAL ADEQUACY ANALYSIS To Be Well Capitalized Required For Capital Under Prompt Corrective As of December 31, 2022: Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets)$ 242,168 12.296 %$ 206,789 >= 10.500%$ 196,942 >= 10.000% Common Equity Tier 1 Capital (To Risk- weighted Assets) 217,858 11.062 % 137,860 >= 7.000% 128,013 >= 6.500% Tier 1 Capital (To Risk-Weighted Assets) 217,858 11.062 % 167,401 >= 8.500% 157,554 >= 8.000% Tier 1 Capital (To Average Assets) 217,858 8.120 % 107,315 >= 4.000% 134,144 >= 5.000% To Be Well Capitalized Required For Capital Under Prompt Corrective As of December 31, 2021: 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%
The Bank's Total Capital ratio and Tier 1 Capital (To Risk-weighted Assets) ratio decreased from year-end 2021 to year-end 2022, however, the ratios remain well above the levels for the Bank to be deemed well-capitalized.
Banking regulations limit the amount of dividends that a bank may pay without approval of the regulatory authorities. These restrictions are based on the bank's level of regulatory classified assets, prior years' net earnings and ratio of equity capital to assets. As ofDecember 31, 2022 , the maximum amount of dividend the Bank could declare payable to the Company was approximately$60.6 million .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable. However, see Item 8 "Interest Sensitivity and Market Risk"
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