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
• We have established social distancing policies in keeping with federal and
state of
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.
• 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.
• 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.
36
--------------------------------------------------------------------------------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 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 occurs 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 also authorized second draw PPP loans for certain eligible borrowers that had previously received a PPP loan. As ofDecember 31, 2021 , the Bank has made approximately 3,995 PPP loans in the aggregate amount of approximately$251.5 million with approximately$52 million 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 eighteen 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.
37
--------------------------------------------------------------------------------Overview of 2021 Results
• Our net income was
2020. The largest contributing factors leading to the increase in net income
and other highlights include the following: Average interest earning assets
in 2021 were
participation in the Paycheck Protection Program was one of the reasons for
the increase in average interest earning assets. Current year net income was
increased by approximately
fee income that was recognized in 2021 compared to
higher level of interest earning assets led to an increase in net interest
income from $55.3 million in 2020 to $66.1 million in 2021.
• Average loans outstanding in 2021 were
higher than
average balance for total loans outstanding was the primary reason for the
increase of
participation in the Paycheck Protection Program was one of the reasons for
the increase in average loans outstanding.
• The effective yield on our loan portfolio decreased from 5.16% in 2020 to
5.07% in 2021. The decrease in the yield was mainly attributable to the
decrease in interest rates in 2020 and 2021 as well as the effect of the
Paycheck Protection Program loans carry an interest rate of 1.00% which is
well below the average yield on other loans. However, this lower yield is
offset by the recognition of net origination fees paid by the SBA on PPP
loans.
• Average total investment securities in 2021 were
exceeding loan growth during the year. The excess cash was used to purchase
investment securities.
• Average non-interest bearing deposits grew from
the influx of liquidity from government stimulus.
• Our higher net interest income was partially offset by higher operating
expenses, which grew to
The increase in noninterest expense came from organic growth with most of
the increase in salaries and employee benefits.
• Our noninterest income increased from
in 2021. The increase resulted from increases in service charges and fee
income and income from mortgage operations.
38--------------------------------------------------------------------------------
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, 2021 , which are 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.
39
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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
2021 vs. 2020
During the year endedDecember 31, 2021 , our net income was$25.0 million , compared to$17.1 million for the year endedDecember 31, 2020 , an increase of 46.50%. The primary reason for the increase in net income in 2021 compared to 2020 was an increase in net interest income from$55.3 million in 2020 to$66.1 million in 2021 for an increase of$10.8 million , or 19.67%. Our net interest margin decreased from 3.63% in 2020 to 3.25% in 2021. The decrease in the margin resulted from a combination of the decrease in the yield on our loan portfolio from 5.16% in 2020 to 5.07% in 2021 and a decrease in the average cost of funds from 0.76% in 2020 to 0.39% in 2021. Loans also decreased slightly as a percentage of total interest earning assets to 59.8% in 2021 compared to 71.3% in 2020.
Noninterest income increased 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.
40
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The following table shows, for the years 2021 and 2020, 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, 2021 Year Ended December 31, 2020
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate Interest earning assets Loans
$ 1,217,901 $ 61,808 5.07 %$ 1,087,007 $ 56,063 5.16 % Mortgage loans held for sale 23,144 442 1.91 % 16,798 435 2.59 % Investment securities: Taxable securities 627,642 7,409 1.18 % 295,856 4,888 1.65 % Tax-exempt securities 95,545 2,745 2.87 % 81,582 2,495 3.06 % Interest bearing balances in other banks 61,238 134 0.22 % 37,178 228 0.61 % Federal funds sold 10,705 26 0.24 % 6,312 16 0.25 % Total interest earning assets$ 2,036,175 $ 72,564 3.56 %$ 1,524,733 $ 64,125 4.21 % Interest bearing liabilities Interest bearing transaction accounts$ 459,228 $ 382 0.08 %$ 310,385 $ 561 0.18 % Savings and money market accounts 650,394 1,432 0.22 % 459,354 2,307 0.50 % Time deposits 285,514 2,221 0.78 % 263,569 3,900 1.48 % Securities sold under agreement to repurchase 10,847 11 0.10 % 9,333 16 0.17 % Federal Home Loan Bank advances - - 0.00 % - - 0.00 % Federal funds purchased 11 - 0.00 % - - 0.00 % Note payable 3,229 222 6.88 % 21,667 1,348 6.22 % Subordinated debentures, net of loan costs 32,964 1,381 4.19 % - - 0.00 % Total interest bearing liabilities$ 1,442,187 $ 5,649 0.39 %$ 1,064,308 $ 8,132 0.76 % Noninterest-bearing funding of earning assets 593,988 - 0.00 % 460,425 - 0.00 % Total cost of funding earning assets$ 2,036,175 $ 5,649 0.28 %$ 1,524,733 $ 8,132 0.53 % Net interest rate spread 3.17 % 3.45 % Net interest income/margin (taxable equivalent)$ 66,915 3.28 %$ 55,993 3.68 % Tax equivalent adjustment (766 ) (718 ) Net interest income/margin$ 66,149 3.25 %$ 55,275 3.63 %
Comparison of net interest income for the years ended
Net interest income increased$10.8 million , or 19.67%, to$66.1 million for the year endedDecember 31, 2021 , compared to$55.3 million for 2020. The increase was due to an increase in interest income of$8.4 million , resulting from higher levels of loan volume. The increase in interest income was primarily due to a 12.04% increase in average loans outstanding during 2021 compared to 2020. Current year net interest income was also increased by approximately$6.5 million of Paycheck Protection Program loan fee income that was recognized in 2021 compared to$3.1 million in 2020. The resulting net interest margin decreased to 3.25% for 2021 from 3.63% for 2020. During 2021, non-interest bearing deposits averaged$546.9 million , compared to$410.8 million during 2020, an increase of$136.1 million , or 33.13%. The average cost of funds also decreased from 0.76% in 2020 to 0.39% in 2021. Interest-earning assets averaged$2.04 billion for 2021, compared to$1.52 billion for 2020, an increase of$511.4 million , or 33.54%. Average loans increased$130.9 million during 2021 to$1.22 billion from$1.09 billion in 2020. The mix of average earning assets also shifted from loans to investment securities. As a percentage of average total earning assets, average loans decreased from 71.3% in 2020 to 59.8% in 2021. The yield on average interest-earning assets decreased 65 basis points to 3.56% during 2021, compared to 4.21% for 2020. The yield on earning assets decreased primarily due to the decrease in interest rates during 2020 and 2021 as well as a result of the addition of the approximately$84.4 million of Paycheck Protection Program loans. Paycheck Protection Program loans carry an interest rate of 1.00% which is well below the average yield on other loans. However, this lower yield is offset by the recognition of net origination fees paid by the SBA on PPP loans. During 2021, loan yields decreased 9 basis points to 5.07%. 41 -------------------------------------------------------------------------------- Interest-bearing liabilities averaged$1.44 billion for 2021, compared to$1.06 billion for 2020, an increase of$377.9 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 0.39% for 2021, compared to 0.76% for 2020. 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. The decrease in total interest expense from$8.1 million in 2020 to$5.6 million in 2021 was mainly attributable to the steady decrease in our cost of funds as a result of market conditions. The following table reflects, for the years 2021 and 2020, the changes in our net interest income due to changes in the volume of earning assets and interest-bearing liabilities and the associated rates earned or paid on the assets and liabilities. Year Ended December 31, 2021 vs. Year Ended December 31, 2020 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 6,841 $ (1,096 ) $ 5,745 Mortgage loans held for sale 164 (157 ) 7 Investment securities: Taxable securities 5,471 (2,950 ) 2,521 Tax-exempt securities 432 (182 ) 250 Interest bearing balances in other banks 145 (239 ) (94 ) Federal funds sold 11 (1 ) 10 Total interest earning assets$ 13,064 $ (4,625 ) $ 8,439 Interest bearing liabilities Interest bearing transaction accounts$ 268 $ (447 ) $ (179 ) Savings and money market accounts 955 (1,830 ) (875 ) Time deposits 325 (2,004 ) (1,679 ) Securities sold under agreement to repurchase 3 (8 ) (5 ) Note payable (1,147 ) 21 (1,126 ) Subordinated debentures, net of loan costs 1,381 - 1,381 Total interest bearing liabilities$ 1,785 $ (4,268 ) $ (2,483 ) Net interest income Net interest income (taxable equivalent)$ 11,279 $ (357 ) $ 10,922 Taxable equivalent adjustment (113 ) 65 (48 ) Net interest income$ 11,166 $ (292 ) $ 10,874 Provision for Loan Losses During the year endedDecember 31, 2021 , we recorded a provision for loan losses of$4.7 million compared to$8.6 million during the year endedDecember 31, 2020 . 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 increased from$491 thousand in 2020 to$625 thousand in 2021. 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, 2021 and 2020,$424 thousand and$343 thousand of our allowance was related to impaired loans, respectively. 42 --------------------------------------------------------------------------------
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,
2021 2020
Service charges and fees $ 5,922 $ 5,038
Investment brokerage revenue 285 184
Mortgage operations 7,389 5,284
Bank owned life insurance income 1,139 792
Net gains (losses) on sale of investment securities (608 ) 87 Other noninterest income 415 420 Total noninterest income$ 14,542 $ 11,805 Noninterest income for the years endedDecember 31, 2021 and 2020 was$14.5 million and$11.8 million , respectively. The primary reason for the increase in noninterest income was from service charges and fees and income from our mortgage operations. Service charges and fees continued to be one of our largest sources of noninterest income in 2021 with$5.9 million compared to$5.0 million in 2020. These service charges and fees are primarily generated by checking and savings accounts. Our mortgage operations produced noninterest income in 2021 of$7.4 million compared to$5.3 million in 2020. The significant increase in mortgage operations revenue was due to record low mortgage rates.
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,
2021 2020
Salaries and employee benefits $ 27,190 $ 22,127
Occupancy expenses 2,428 2,327
Equipment rentals, depreciation, and maintenance 1,118
1,152
Telephone and communications 662
543
Advertising and business development 764 549 Data processing 3,268 2,788 Foreclosed assets, net (72 ) 234
Federal deposit insurance and other regulatory assessments 1,298
829
Legal and other professional services 841 762 Other operating expense 6,251 5,469 Total noninterest expense$ 43,748 $ 36,780 Noninterest expense for the years endedDecember 31, 2021 and 2020 was$43.7 million and$36.8 million , respectively, an increase of$6.9 million , or 18.9%. The largest component of noninterest expense was salaries and employee benefits. Salaries and benefits increased approximately$5.1 million mainly due to the addition of new employees across our six regions and an expanding mortgage department. The increase is federal deposit insurance and other regulatory assessments was due to the tremendous deposit growth during the year. 43
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Income Tax Provision
Income tax expense of$7.2 million and$4.6 million was recognized during the years endedDecember 31, 2021 and 2020, respectively. The increase in income tax expense during 2021 was mainly due to the increase in net income. The effective tax rate for the year 2021 was 22.2% compared to 21.2% for the year 2020. 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$531.0 million , or 28.5%, from$1.86 billion atDecember 31, 2020 , to$2.40 billion atDecember 31, 2021 . Net loans increased by$76.0 million during 2021 and investment securities increased$383.5 million in 2021. Cash and cash equivalents decreased by$1.7 million during 2021. Deposits atDecember 31, 2021 totaled$2.15 billion , an increase of$497.5 million as compared toDecember 31, 2020 . Noninterest-bearing deposits increased$173.1 million in 2021 and interest-bearing deposits increased$324.4 million . Our deposits increased during 2021 from organic deposit growth and the influx of liquidity from government stimulus.
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$1.22 billion during the year endedDecember 31, 2021 , or 59.8% of average earning assets, as compared to$1.09 billion or 71.3% of average earning assets, for the year endedDecember 31, 2020 . AtDecember 31, 2021 , total loans, net of unearned income, were$1.27 billion , compared to$1.2 billion atDecember 31, 2020 , an increase of$80.1 million , or 6.7%. 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. 44
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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, 2021 December 31, 2020
% of % of
Amount Total Amount Total
Residential real estate:
Closed-end 1-4 family - first lien $ 317,754 25.5 % $ 252,528 21.6 %
Closed-end 1-4 family - junior lien 5,434 0.4 % 8,343 0.7 %
Multi-family 9,981 0.8 % 10,817 0.9 %
Total residential real estate 333,169 26.7 % 271,688 23.2 %
Commercial real estate:
Nonfarm nonresidential 350,373 28.1 % 317,279 27.1 %
Farmland 38,808 3.1 % 34,586 3.0 %
Total commercial real estate 389,181 31.2 % 351,865 30.1 %
Construction and land development:
Residential 90,924 7.3 % 71,784 6.1 %
Other 105,192 8.4 % 78,818 6.7 %
Total construction and land development 196,116 15.7 % 150,602 12.8 %
Home equity lines of credit 49,569 4.0 % 43,424 3.7 %
Commercial loans:
Other commercial loans 201,922 16.2 % 279,385 23.9 %
Agricultural 36,063 2.9 % 29,854 2.6 %
State, county, and municipal loans 23,939 2.0 % 25,922 2.2 %
Total commercial loans 261,924 21.1 % 335,161 28.7 %
Consumer loans 43,080 3.5 % 40,646 3.5 %
Total gross loans 1,273,039 102.2 % 1,193,386 102.0 %
Allowance for loan losses (20,922 ) -1.7 % (16,803 ) -1.4 %
Net discounts (400 ) 0.0 % (1,010 ) -0.1 %
Net deferred loan fees (5,974 ) -0.5 % (5,794 ) -0.5 %
Net loans $ 1,245,743 100.0 % $ 1,169,779 100.0 %
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.
45-------------------------------------------------------------------------------- The principal component of our loan portfolio is real estate mortgage loans on residential and commercial properties. AtDecember 31, 2021 , this category totaled$771.9 million and represented 61.9% of the total loan portfolio, compared to$667.0 million , or 57.0% of the total loan portfolio at year-end 2020. Residential real estate loans increased$61.5 million in 2021, or 22.6%, and commercial real estate loans increased$37.3 million , or 10.6%. Home equity lines of credit increased$6.1 million , or 14.2%. Real estate construction loans totaled$196.1 million atDecember 31, 2021 , an increase$45.5 million , or 30.2%, over$150.6 million atDecember 31, 2020 . This loan type accounted for 15.7% and 12.8% of our total loan portfolio atDecember 31, 2021 andDecember 31, 2020 , respectively. Commercial and industrial loans totaled$261.9 million atDecember 31, 2021 , compared to$335.2 million atDecember 31, 2020 , a decrease of$73.2 million , or 21.9% during 2021. A majority of the decrease was from loans guaranteed under the Paycheck Protection Program which had a balance outstanding of approximately$52 million at year-end 2021 compared to approximately$139 million at year-end 2020. 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 atDecember 31, 2021 . 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 $ 3,881 $ 535 $ 5,696 $ 94,344 $ 104,456
Closed-end 1-4 family - junior lien 77 1 - 302 380
Multi-family 315 284 330 - 929
Total residential real estate 4,273 820 6,026 94,646 105,765
Commercial real estate:
Nonfarm nonresidential 4,977 5,391 1,799 4,879 17,046
Farmland 1,736 4,499 - - 6,235
Total commercial real estate 6,713 9,890 1,799 4,879 23,281
Construction and land development:
Residential 24,295 - 93 7,845 32,233
Other 5,844 5,861 2,902 156 14,763
Total construction and land development 30,139 5,861 2,995 8,001 46,996
Home equity lines of credit 3,889 4,102 40,518 22 48,531
Commercial loans:
Other commercial loans 35,065 13,769 3,234 - 52,068
Agricultural 26,117 37 - - 26,154
State, county, and municipal loans - - - - -
Total commercial loans 61,182 13,806 3,234 - 78,222
Consumer loans 1,161 973 182 - 2,316
Total gross variable rate loans $ 107,357 $ 35,452 $ 54,754 $ 107,548 $ 305,111
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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 $ 24,643 $ 92,165 $ 56,784 $ 39,706 $ 213,298
Closed-end 1-4 family - junior lien 400 2,561 1,859 234 5,054
Multi-family 1,513 1,661 5,398 480 9,052
Total residential real estate 26,556 96,387 64,041 40,420 227,404
Commercial real estate:
Nonfarm nonresidential 30,985 154,063 143,293 4,986 333,327
Farmland 2,832 20,450 9,291 - 32,573
Total commercial real estate 33,817 174,513 152,584 4,986 365,900
Construction and land development:
Residential 57,011 1,210 390 80 58,691
Other 20,255 39,562 30,612 - 90,429
Total construction and land development 77,266 40,772 31,002 80 149,120
Home equity lines of credit 198 840 - - 1,038
Commercial loans:
Other commercial loans 12,364 117,805 19,685 - 149,854
Agricultural 1,348 8,291 270 - 9,909
State, county, and municipal loans 1,492 3,361 14,724 4,362 23,939
Total commercial loans 15,204 129,457 34,679 4,362 183,702
Consumer loans 4,308 23,216 13,229 11 40,764
Total fixed rate gross loans $ 157,349 $ 465,185 $ 295,535 $ 49,859 $ 967,928
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
477 2,562 1,859 536 5,434
Multi-family 1,828 1,945 5,728 480 9,981
Total residential real estate 30,829 97,207 70,067 135,066 333,169
Commercial real estate:
Nonfarm nonresidential 35,962 159,454 145,092 9,865 350,373
Farmland 4,568 24,949 9,291 - 38,808
Total commercial real estate 40,530 184,403 154,383 9,865 389,181
Construction and land development:
Residential 81,306 1,210 483 7,925 90,924
Other 26,099 45,423 33,514 156 105,192
Total construction and land development 107,405 46,633 33,997 8,081 196,116
Home equity lines of credit 4,087 4,942 40,518 22 49,569
Commercial loans:
Other commercial loans 47,429 131,574 22,919 - 201,922
Agricultural 27,465 8,328 270 - 36,063
State, county, and municipal loans 1,492 3,361 14,724 4,362 23,939
Total commercial loans 76,386 143,263 37,913 4,362 261,924
Consumer loans 5,469 24,189 13,411 11 43,080
Total gross loans $ 264,706 $ 500,637 $ 350,289 $ 157,407 $ 1,273,039
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.
47
--------------------------------------------------------------------------------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 income (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, 2021 December 31, 2020
Amortized Fair Amortized Fair
Cost Value Cost Value
Securities available for sale:
Residential mortgage-backed $ 562,109 $ 557,558 $ 346,001 $ 350,597
U.S. treasury securities 151,331 149,528 - -
36,231
State, county, and municipal 94,976 99,254 98,026 103,229 Corporate debt obligations 15,942 15,924 3,166 3,217 Totals$ 878,363 $ 876,759 $ 482,156 $ 493,274 December 31, 2021 December 31, 2020 Amortized Fair Amortized Fair Cost Value Cost Value Securities held-to-maturity: State, county, and municipal$ 50,182 $ 50,165 $ - $ - Totals$ 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 $ 8,077 2.71 % $ 20,670 1.70 %
3,605 2.45 % 9,926 2.54 % 7,935 2.08 % 77,788 2.26 % - --- %
U.S. treasury securities - --- % 125,202 0.87 % 24,326 1.22 % - --- % - --- %
Corporate debt obligations - --- % 2,001 1.68 % 13,923 3.16 % - --- % - --- %
Residential mortgage-backed - --- % - --- % - --- % - --- % 557,558 1.36 %
Totals $ 11,682 2.63 % $ 157,799 1.10 % $ 70,959 1.73 % $ 78,761 2.26 % $ 557,558 1.36 %
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 $ - --- % $ - --- % $ 1,132 2.14 % $ 49,033 2.26 % $ - --- %
Totals $ - --- % $ - --- % $ 1,132 --- % $ 49,033 --- % $ - --- %
48-------------------------------------------------------------------------------- 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 all periods presented, we have used most of our excess liquidity to invest in securities, as our loan demand has not kept up with our tremendous deposit growth. 49 --------------------------------------------------------------------------------
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.
50--------------------------------------------------------------------------------
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) 2021 2020
Allowance for loan losses at beginning of period$ 16,803 $ 8,679 Charge-offs: Mortgage loans on real estate: Residential 127 52 Commercial real estate 241
186
Construction and land development 2 59 Equity lines of credit - - Total mortgage loans on real estate 370 297 Commercial 514 406 Consumer 103 114 Total charge-offs 987 817 Recoveries: Mortgage loans on real estate: Residential 60 7 Commercial real estate 35 24 Construction and land development 11
109
Equity lines of credit - 19 Total mortgage loans on real estate 106 159 Commercial 189 127 Consumer 67 40 Total recoveries 362 326 Net charge-offs 625 491 Provision for loan losses 4,744 8,615 Allowance for loan losses at end of period$ 20,922
$ 1,266,665 $ 1,186,582 Average loans outstanding, net of deferred loan fees$ 1,217,901 $ 1,087,007 Allowance for loan losses to period end loans 1.65 % 1.42 % Net charge-offs to average loans (annualized) 0.05 %
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, 2021 As of December 31, 2020 Peoples Peoples Southern Keystone Southern Keystone Bank Bank Trinity Bank Total Bank Bank Trinity Bank Total Acquired loan portfolio at year-end $ 7,379$ 12,320 $ 30,194 $ 49,893 $ 12,735 $ 19,483 $ 70,609 $ 102,827 Remaining accretable loan discount at year-end 48 71 281 400 105 163 742 1,010 Discount accretion recognized in interest income on loans 57 92 461 610 335 264 1,040 1,639 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, 2021 and 2020, we recorded provision expense of$4.7 million and$8.6 million , respectively. 51
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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,
2021 2020
Percent of Percent of
Allowance in each Allowance in each
Category to Category to
Amount Total Allowance Amount Total Allowance
Residential real estate $ 2,596 12.4 % $ 1,676 10.0 %
Commercial real estate 8,038 38.4 % 6,807 40.5 %
Construction and land development 2,992 14.3 % 1,749 10.4 %
Home equity lines of credit 396 1.9 % 268 1.6 %
Commercial 6,486 31.0 % 5,897 35.1 %
Consumer 414 2.0 % 406 2.4 %
Total $ 20,922 100.0 % $ 16,803 100.0 %
Nonperforming Assets
The following table presents our nonperforming assets for the dates indicated.
NONPERFORMING ASSETS
December 31,
2021 2020
Nonaccrual loans $ 2,272 $ 4,264
Accruing loans past due 90 days or more - 398
Total nonperforming loans 2,272 4,662
Foreclosed assets 256 240
Total nonperforming assets $ 2,528 $ 4,902
Allowance for loan losses to period end loans 1.65 % 1.42 % Allowance for loan losses to period end nonperforming loans
920.86 % 360.42 %
Net charge-offs to average loans (annualized) 0.05 % 0.05 %
Nonperforming assets to period end loans and
foreclosed property 0.20 % 0.41 %
Nonperforming loans to period end loans 0.18 % 0.39 %
Nonperforming assets to total assets 0.11 % 0.26 %
Period end loans 1,266,665 1,186,582
Period end total assets 2,395,680 1,864,650
Allowance for loan losses 20,922 16,803
Average loans for the period 1,217,901 1,087,007
Net charge-offs for the period 625
491
Period end loans plus foreclosed property 1,266,921
1,186,822
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.
52
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Total nonperforming assets decreased $2.4 million to $2.5 million at December
31, 2021 , from $4.9 million at December 31, 2020 . Total nonperforming assets as
a percentage of total assets decreased 0.15% from 0.26% at December 31, 2020 to
0.11% at December 31, 2021 . 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, 2021 December 31, 2020
Percent of Percent of
Amount Total Amount Total
Demand deposits, noninterest-bearing $ 610,002 28.4 % $ 436,885 26.4 %
Demand deposits, interest-bearing 519,547 24.2 % 377,745 22.8 %
Money market accounts 623,763 29.0 % 473,714 28.6 %
Savings deposits 117,767 5.5 % 89,914 5.4 %
Time certificates of $250 or more 106,271 4.9 % 96,839 5.9 %
Other time certificates 173,827 8.0 % 178,538 10.9 %
Totals $ 2,151,177 100.0 % $ 1,653,635 100.0 %
Total deposits were $2.15 billion at December 31, 2021 , an increase of $497.5
million , or 30.1%, from $1.65 billion at December 31, 2020 . Noninterest-bearing
demand deposits and interest-bearing demand deposits increased a combined total
of $314.9 million , or 38.7% from December 31, 2020 to December 31, 2021 . 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 $ 83,192 $ 63,160 $ 20,032
Greater than three months through six months 76,449 55,564 20,885
Greater than six months through one year 69,552 46,435
23,117
Greater than one year through three years 28,792 18,276
10,516
Greater than three years 22,113 17,213 4,900
Total $ 280,098 $ 200,648 $ 79,450 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 (FHLB). There were no borrowings outstanding with FHLB as ofDecember 31, 2021 and 2020. 53 --------------------------------------------------------------------------------
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, and borrowings from the FHLB.
Cash and cash equivalents atDecember 31, 2021 and 2020 were$62.0 million and$60.3 million , respectively. Based on the recorded cash and cash equivalents, our liquidity resources were sufficient atDecember 31, 2021 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
Certificates of deposit of less
than $100 64,034 10,516 4,900 - 79,450
Certificates of deposit of $100 or
more 165,159 18,276 17,213 - 200,648
Securities sold under agreements to
repurchase 9,754 - - - 9,754
Subordinated debentures, net of
loan costs - - - 39,344 39,344
Operating leases 583 1,201 963 2,591 5,338
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, 2021 December 31, 2020
Commitments to extend credit $ 328,646 $ 246,700
Stand-by and performance letters of credit 2,426 2,659
Total $ 331,072 $ 249,359
54--------------------------------------------------------------------------------
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.
55
--------------------------------------------------------------------------------
The following table illustrates our interest rate sensitivity at December 31,
2021 , 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 $ 252,822 $ 88,253 $ 273,260 $ 177,717 $ 131,332 $ 343,281 $ 1,266,665
Securities 37,345 26,659 86,102 85,672 90,916 600,247 926,941
Certificates of deposit in
banks (28 ) 232 498 2,461 - 249 3,412
Cash balances in banks 36,706 - - - - - 36,706
Federal funds sold 9,500 - - - - - 9,500
Total interest earning assets
$ 265,850 $ 222,248 $ 943,777 $ 2,243,224 Interest bearing liabilities Interest bearing transaction accounts$ 108,087 $ 8,356 $ 37,602 $ 50,134 $ 50,134 $ 265,234 $ 519,547 Savings and money market accounts 230,725 16,528 74,379 99,173 99,173 221,552 741,530 Time deposits 26,239 57,187 144,314 17,981 10,222 24,155 280,098 Securities sold under agreements to repurchase 9,754 - - - - - 9,754 Subordinated debt, net of loan costs - - - - - 39,344 39,344 Total interest bearing liabilities$ 374,805 $ 82,071 $ 256,295 $ 167,288 $ 159,529 $ 550,285 $ 1,590,273 Interest sensitive gap Period gap$ (38,460 ) $ 33,073 $ 103,565 $ 98,562 $ 62,719 $ 393,492 $ 652,951 Cumulative gap$ (38,460 ) $ (5,387 ) $ 98,178 $ 196,740 $ 259,459 $ 652,951 Cumulative gap - Rate Sensitive Assets/ Rate Sensitive Liabilities (1.7 )% (0.2 )% 4.4 % 8.8 % 11.6 % 29.1 % 56
-------------------------------------------------------------------------------- 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 slightly liability-sensitive on a cumulative basis through two 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, 2021 December 31, 2020
Change in prevailing rates:
+ 400 basis points 2.18% (7.80)%
+ 300 basis points 1.87% (5.16)%
+ 200 basis points 1.45% (3.53)%
+ 100 basis points 0.75% (2.19)%
+ 0 basis points - -
- 100 basis points (1.84)% 1.57%
- 200 basis points (2.81)% 1.44%
- 300 basis points (2.87)% 1.35%
- 400 basis points (2.91)% 1.30%
57--------------------------------------------------------------------------------
Capital Resources
Total stockholders' equity atDecember 31, 2021 was$179.6 million , or 7.5% of total assets. AtDecember 31, 2020 , total stockholders' equity was$166.4 million , or 8.9% of total assets. The increase in shareholders' equity for 2021 was mainly attributable to net income of$25.0 million . The increase from net income was partially offset by a$9.5 million decrease in other comprehensive income. 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, 2021 , 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). 58 -------------------------------------------------------------------------------- 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, 2021 and 2020 for the Bank. CAPITAL ADEQUACY ANALYSIS 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 >= 10.000% Common Equity Tier 1 Capital (To Risk- weighted Assets) 185,704 12.819 % 101,410 >= 7.000% 94,167 >= 6.500% Tier 1 Capital (To Risk-Weighted Assets) 185,704 12.819 % 123,141 >= 8.500% 115,897 >= 8.000% Tier 1 Capital (To Average Assets) 185,704 8.013 % 92,707 >= 4.000% 115,884 >= 5.000% To Be Well Capitalized Required For Capital Under Prompt Corrective As of December 31, 2020: Actual Adequacy Purposes Action Regulations Amount Ratio Amount Ratio Amount Ratio Total Capital (To Risk-Weighted Assets)$ 161,566 13.548 %$ 125,219 >= 10.500%$ 119,256 >= 10.00% Common Equity Tier 1 Capital (To Risk- weighted Assets) 146,636 12.296 % 83,479 >= 7.000% 77,516 >= 6.50% Tier 1 Capital (To Risk-Weighted Assets) 146,636 12.296 % 101,368 >= 8.500% 95,405 >= 8.00% Tier 1 Capital (To Average Assets) 146,636 8.229 % 71,277 >= 4.000% 89,096 >= 5.00%
The Bank's Total Capital ratio and Tier 1 Capital (To Risk-weighted Assets) ratio increased from year-end 2020 to year-end 2021 and 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, 2021 , the maximum amount of dividend the Bank could declare payable to the Company was approximately$46.9 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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