RIVER FINANCIAL CORPORATION The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes thereto for the year endedDecember 31, 2021 , which are contained in the Annual Report on Form 10-K for the year endedDecember 31, 2021 . In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences are discussed in our 2021 Annual Report on Form 10-K under "Part I, Item 1A - Risk Factors." We assume no obligation to update any of these forward-looking statements.
The following discussion pertains to our historical results on a consolidated basis. However, because we conduct all of our material business operations through our subsidiaries, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
All dollar amounts in the tables in this section are in thousands of dollars, except per share data, yields, percentages and rates or when specifically identified. As used in this Item, the words "we," "us," "our," the "Company," "RFC," "River" and similar terms refer toRiver Financial Corporation and its consolidated affiliate, unless the context indicates otherwise.
Current Developments regarding COVID-19
As a result of the COVID-19 pandemic, and the potential adverse effects it may have on our customers, including our loan and depositor relationships, we continue to assess how such developments could affect our business and operations. We have taken the following steps to operate in an environment that is safe for both our employees and customers (and the public in general) and have implemented guidelines and programs to assist our customers and help ensure the safe and sound operation of our Bank.
Daily Operations
1. We have established social distancing policies in keeping with federal and state ofAlabama guidelines to help ensure the health of our employees. To the extent possible, we have encouraged our employees to work remotely, and we believe such steps have been welcomed by, and helpful to, our employees. 2. Currently, our lobbies at our main office and branches and public areas are open to walk-in business and other in-person visits by customers. As long as our social distancing policies are being complied with, customers may, among other things, have in-person meetings at our facilities and access to their safe deposit boxes. We have installed plexiglass in lobby areas for employees that have regular contact with customers and masks are available for both employees and customers as needed. 3. Our drive-through facilities at all our locations remain open for customer service, and we believe that the drive-through option for customers has worked well and minimized unnecessary contact or exposure. All of our ATM locations are operative.
We expect to continue with the foregoing procedures until both the federal and state guidance provides comfort that a return to a more normal operation environment is advisable and we, too, are comfortable with such return.
Participation in Government Programs
We are participating in several government programs designed to assist customers, to bolster the economy and to provide protection for the Bank.
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--------------------------------------------------------------------------------Paycheck Protection Program
The Bank has participated as a lender in theSmall Business Administration's (SBA) Paycheck Protection Program (PPP) as established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP was established under the CARES Act to provide unsecured low interest rate loans to small businesses that have been impacted by the COVID-19 pandemic. The PPP loans are 100% guaranteed by the SBA. The loans have a fixed interest rate of 1% and payments of interest and principal are deferred until the earlier of the date the SBA remits the forgiveness amount to the lender, the forgiveness application is denied, or if no forgiveness application is filed, ten months from the end of the covered period. If originated beforeJune 5, 2020 , loans mature two years from origination, and if origination occurred on or afterJune 5, 2020 , loans mature five years from origination. PPP loans are forgiven by the SBA (which makes forgiveness payments directly to the lender) to the extent the borrower uses the proceeds of the loan for certain purposes (primarily to fund payroll costs) during a certain time period following origination and maintains certain employee and compensation levels. Lenders receive processing fees from the SBA for originating the PPP loans which are based on a percentage of the loan amount. OnDecember 27, 2020 , legislation was enacted that renewed the PPP and allocated additional appropriations for both new first-time PPP loans under the existing PPP and second-draw PPP loans for certain eligible borrowers that had previously received a PPP loan. As ofSeptember 30, 2022 , the Bank has approximately 93 PPP loans in the aggregate amount of approximately$4.4 million outstanding. AtDecember 31, 2021 , the Bank had approximately 2,520 PPP loans in the aggregate amount of approximately$141.7 million outstanding.
Our Business
We are a bank holding company headquartered inPrattville, Alabama . We engage in the business of banking through our wholly-owned banking subsidiary,River Bank & Trust , which we may refer to as the "Bank" or "River Bank ." Through the Bank, we provide a broad array of financial services to businesses, business owners, professionals, and consumers. As ofSeptember 30, 2022 , we operated twenty full-service banking offices inAlabama in the cities ofMontgomery ,Prattville ,Millbrook ,Wetumpka ,Auburn ,Opelika ,Gadsden ,Alexander City ,Daphne ,Clanton ,Dothan ,Enterprise ,Mobile ,Decatur , andHuntsville, Alabama . We also have two offices approved for full-service banking operations inBirmingham andSaraland, Alabama . Segments While our chief decision makers monitor the revenue streams of the various banking products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's banking operations are considered by management to be aggregated in one reportable operating segment. Because the overall banking operations comprise substantially all of the consolidated operations, no separate segment disclosures are presented in the accompanying consolidated financial statements.
Overview of Third Quarter 2022 Results
Net income was$6.87 million in the quarter endedSeptember 30, 2022 , compared with$6.83 million in the quarter endedSeptember 30, 2021 . Several significant measures from the 2022 third quarter include:
•
Net interest margin (taxable equivalent) of 3.43%, compared with 3.26% for the third quarter of 2021.
•
Net interest income increase of$4.0 million for the quarter endedSeptember 30, 2022 , representing a 23.20% rate of increase over the quarter endedSeptember 30, 2021 .
•
Annualized return on average earning assets for the quarter ended
•
Annualized return on average equity for the quarter ended
•
Loan increase of
•
Securities decrease of
•
Deposit increase of
•
Stockholders' equity decrease of
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Book value per share of
•
Tangible book value per share of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared based on the application of certain accounting policies, the most significant of which are described in the notes to the financial statements for the year endedDecember 31, 2021 , which are contained in our Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect our reported results and financial position for the current period or future periods. The use of estimates, assumptions, and judgment is necessary when financial assets and liabilities are required to be recorded at or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on our future financial condition and results of operations.
The following briefly describes the more complex policies involving a significant amount of judgments about valuation and the application of complex accounting standards and interpretations.
Allowance for Loan Losses
We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve significant judgments to be made by management. Some of the more critical judgments supporting our allowance for loan losses include judgments about: creditworthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions and other factors impacting the level of inherent losses. Under different conditions or using different assumptions, the actual or estimated credit losses that we may ultimately realize may be different than our estimates. In determining the allowance, we estimate losses on individual impaired loans, or groups of loans that are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impact of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see note 1 to our consolidated financial statements for the year endedDecember 31, 2021 , which are contained in our Annual Report on Form 10-K.
Investment Securities Impairment
We assess, on a quarterly basis, whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis. In such instance, we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and for debt securities, external credit ratings and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value through current earnings.
Income Taxes
Deferred income tax assets and liabilities are computed using the asset and
liability method, which recognizes a liability or asset representing the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events recognized in the financial statements. A valuation
allowance may be established to the extent necessary to reduce the deferred tax
asset to a level at which it is "more likely than not" that the tax assets or
benefits will be realized. Realization of tax benefits depends on having
sufficient taxable income, available tax loss carrybacks or credits, the
reversing of taxable temporary differences and/or tax planning strategies within
the reversal period, and whether current tax law allows for the realization of
recorded tax benefits.
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Business Combinations
Assets purchased and liabilities assumed in a business combination are recorded at their fair value. The fair value of a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment than the remainder of purchased assets or assumed liabilities. On the date of acquisition, when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. We must estimate expected cash flows at each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges and adjusted accretable yield which will have a positive impact on interest income. In addition, purchased loans without evidence of credit deterioration are also handled under this method.
Comparison of the Results of Operations for the three and nine months ended
The following is a narrative discussion and analysis of significant changes in our results of operations for the three and nine months endedSeptember 30, 2022 compared to the three and nine months endedSeptember 30, 2021 .
Net Income
During the three months endedSeptember 30, 2022 , our net income was$6.87 million , compared to$6.83 million for the three months endedSeptember 30, 2021 , an increase of$34.0 thousand , or 0.50%. The primary reason for the increase in net income for the third quarter of 2022 as compared to the third quarter of 2021 was an increase in net interest income. During the three months endedSeptember 30, 2022 , net interest income was$21.2 million compared to$17.2 million for the three months endedSeptember 30, 2021 , an increase of$4.0 million , or 23.20%. This increase is a result of higher levels of loan and securities volume and other earning assets from organic growth. The provision for loan losses also increased approximately$143 thousand from the third quarter of 2021 to the third quarter of 2022. The increase in the provision for loan loss was a result of the loan growth during the third quarter of 2022 . Total noninterest income for the third quarter of 2022 was$2.5 million compared to$3.9 million for the quarter endedSeptember 30, 2021 . This decrease in noninterest income was primarily the result of the$796 thousand loss on sale of investment securities and a$1.04 million decrease in mortgage operations revenue for the third quarter of 2022. Total noninterest expense in the third quarter of 2022 increased$2.2 million , or 19.87%, from the third quarter of 2021. The most significant increase was an increase of$991 thousand in salaries and employee benefits. During the nine months endedSeptember 30, 2022 , our net income was$22.1 million , compared to$19.7 million for the nine months endedSeptember 30, 2021 , an increase of$2.6 million , or 12.63%. The primary reason for the increase in net income for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 was an increase in net interest income. During this period in 2022, net interest income was$58.7 million compared to$49.5 million for the same period in 2021, an increase of$9.2 million , or 18.49%. This increase is a result of higher levels of loan and securities volume and other earning assets from organic growth. The provision for loan losses decreased approximately$1.3 million from the third quarter of 2021 to the third quarter of 2022. The decrease in the provision for loan loss was a result of improving economic conditions as the local economy has improved. Total noninterest income for the first nine months of 2022 was$9.3 million compared to$11.0 million in the first nine months of 2021. This decrease was primarily the result of the$2.1 million loss on sale of investment securities for the nine months endedSeptember 30, 2022 as compared to the$7 thousand gain on sale of investment securities for the nine months endedSeptember 30, 2021 . There was also a decrease of$1.1 million in mortgage operations revenue. Total noninterest expense in the first nine months of 2022 increased$5.2 million , or 16.39%, from the first nine months of 2021. The most significant increase was an increase of$2.9 million in salaries and employee benefits. 34 --------------------------------------------------------------------------------
Net Interest Income and Net Interest Margin Analysis
The largest component of our net income is net interest income - the difference between the income earned on interest earning assets and the interest paid on deposits and borrowed funds used to support assets. Net interest income divided by average interest earning assets represents our net interest margin. The major factors that affect net interest income and net interest margin are changes in volumes, the yield on interest earning assets and the cost of interest bearing liabilities. Our net interest margin can also be affected by economic conditions, the competitive environment, loan demand, and deposit flow. Management's ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the primary source of earnings. This is discussed in greater detail under the heading "Interest Sensitivity and Market Risk".
Comparison of net interest income for the three months ended
The following table shows, for the three months endedSeptember 30, 2022 and 2021, the average balances of each principal category of our earning assets and interest bearing liabilities and the average taxable equivalent yields on assets and average costs of liabilities. These yields and costs are calculated by dividing the income or expense by the average daily balance of the associated assets or liabilities (amounts in thousands). Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate Interest earning assets Loans$ 1,539,788 $ 18,948 4.88 %$ 1,224,244 $ 15,901 5.15 % Mortgage loans held for sale 10,591 92 3.44 % 23,743 103 1.84 % Investment securities: Taxable securities 827,568 3,481 1.67 % 716,354 2,093 1.16 % Tax-exempt securities 78,861 562 2.83 % 90,603 697 3.05 % Interest bearing balances in other banks 21,671 114 2.10 % 55,351 34 0.24 % Federal funds sold - - 0.00 % 10,349 7 0.25 %
Total interest earning assets
3.71 %$ 2,120,644 $ 18,835 3.52 % Interest bearing liabilities Interest bearing transaction accounts $ 536,614$ 177 0.13 %$ 478,154 $ 98 0.08 % Savings and money market accounts 851,386 525 0.24 % 686,134 355 0.21 % Time deposits 288,240 608 0.84 % 290,339 525 0.72 % Short-term debt 9,846 14 0.59 % 10,143 3 0.11 % Federal Home Loan Bank advances 6,304 19 1.17 % - - 0.00 % Subordinated debt 40,000 419 4.16 % 39,327 410 4.13 % Total interest bearing liabilities$ 1,732,390 $ 1,762 0.40 %$ 1,504,097 $ 1,391 0.37 % Noninterest-bearing funding of earning assets 746,089 - 0.00 % 616,547 - 0.00 % Total cost of funding earning assets$ 2,478,479 $ 1,762 0.28 %$ 2,120,644 $ 1,391 0.26 % Net interest rate spread 3.31 % 3.15 % Net interest income/margin (taxable equivalent)$ 21,435 3.43 %$ 17,444 3.26 % Tax equivalent adjustment (196 ) (205 ) Net interest income/margin$ 21,239 3.40 %$ 17,239 3.23 % 35
-------------------------------------------------------------------------------- The following table reflects, for the three months endedSeptember 30, 2022 and 2021, the changes in our net interest income due to variances in the volume of interest earning assets and interest bearing liabilities and variances in the associated rates earned or paid on these assets and liabilities (amounts in thousands). Three Months Ended September 30, 2022 vs. Three Months Ended September 30, 2021 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 4,095 $ (1,048 )$ 3,047 Mortgage loans held for sale (54 ) 43 (11 ) Investment securities: Taxable securities 324 1,064 1,388 Tax-exempt securities (91 ) (44 ) (135 ) Interest bearing balances in other banks (22 ) 102 80 Federal funds sold (7 ) - (7 ) Total interest earning assets$ 4,245 $ 117$ 4,362 Interest bearing liabilities Interest bearing transaction accounts $ 12 $ 67 $ 79 Savings and money market accounts 87 83 170 Time deposits 1 82 83 Short-term debt (1 ) 12 11 Subordinated debentures 7 2 9 Total interest bearing liabilities $ 106 $
265 $ 371
Net interest income Net interest income (taxable equivalent)$ 4,139 $ (148 )$ 3,991 Taxable equivalent adjustment - 9 9 Net interest income$ 4,139 $ (139 )$ 4,000 Total interest income for the three months endedSeptember 30, 2022 was$23.0 million and total interest expense was$1.8 million , resulting in net interest income of$21.2 million for the period. For the same period of 2021, total interest income was$18.6 million and total interest expense was$1.4 million , resulting in net interest income of$17.2 million for the period. This represents a 23.20% increase in net interest income when comparing the same period from 2022 and 2021. When comparing the variances related to interest income for the three months endedSeptember 30, 2022 and 2021, the increase was primarily attributed to increases in average volumes in loans and investment securities. The volume related increase in interest income for the three months endedSeptember 30, 2022 was accompanied by a decrease in the yield on loans and an increase in the yields on investment securities. When comparing variances related to interest expense for the three months endedSeptember 30, 2022 and 2021, the increase primarily resulted from an increase in deposit rates in 2022. 36 --------------------------------------------------------------------------------
Comparison of net interest income for the nine months ended
The following table shows, for the nine months endedSeptember 30, 2022 and 2021, the average balances of each principal category of our earning assets and interest bearing liabilities and the average taxable equivalent yields on assets and average costs of liabilities. These yields and costs are calculated by dividing the income or expense by the average daily balance of the associated assets or liabilities. Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 Interest Interest Average Income/ Average Average Income/ Average Balance Expense Yield/Rate Balance Expense Yield/Rate Interest earning assets Loans$ 1,405,947 $ 51,153 4.86 %$ 1,210,272 $ 46,817 5.17 % Mortgage loans held for sale 12,771 301 3.15 % 22,801 332 1.95 % Investment securities: Taxable securities 846,619 10,053 1.59 % 582,115 5,119 1.18 % Tax-exempt securities 82,049 1,739 2.83 % 89,531 2,055 3.07 % Interest bearing balances in other banks 26,147 199 1.02 % 55,222 95 0.23 % Federal funds sold 1,842 2 0.15 % 11,111 21 0.25 %
Total interest earning assets
3.58 %$ 1,971,052 $ 54,439 3.70 % Interest bearing liabilities Interest bearing transaction accounts$ 533,687 $ 387 0.10 %$ 438,365 $ 275 0.08 % Savings and money market accounts 813,613 1,282 0.21 % 629,382 1,088 0.23 % Time deposits 266,957 1,229 0.62 % 285,165 1,776 0.83 % Securities sold under repurchase agreements 10,197 25 0.33 % 10,856 8 0.10 % Federal Home Loan Bank advances 7,619 60 1.05 % - - 0.00 % Subordinated debentures 40,000 1,256 4.20 % 27,450 939 4.57 % Note payable - - 0.00 % 6,537 242 4.95 %
Total interest bearing liabilities
0.34 %$ 1,397,755 $ 4,328 0.41 % Noninterest-bearing funding of earning assets 703,302 - 0.00 % 573,297 - 0.00 %
Total cost of funding earning assets
0.24 %$ 1,971,052 $ 4,328 0.29 % Net interest rate spread 3.24 % 3.29 % Net interest income/margin (taxable equivalent)$ 59,208 3.33 %$ 50,111 3.40 % Tax equivalent adjustment (550 ) (606 ) Net interest income/margin$ 58,658 3.30 %$ 49,505 3.36 % 37
-------------------------------------------------------------------------------- The following table reflects, for the nine months endedSeptember 30, 2022 and 2021, the changes in our net interest income due to variances in the volume of interest earning assets and interest bearing liabilities and variances in the associated rates earned or paid on these assets and liabilities. Nine Months Ended September 30, 2022 vs. Nine Months Ended September 30, 2021 Variance due to Volume Yield/Rate Total Interest earning assets Loans$ 7,596 $ (3,260 ) $ 4,336 Mortgage loans held for sale (146 ) 115 (31 ) Investment securities: Taxable securities 2,338 2,596 4,934 Tax-exempt securities (169 ) (147 ) (316 ) Interest bearing balances in other banks (50 ) 154 104 Federal funds sold (11 ) (8 ) (19 ) Total interest earning assets$ 9,558 $ (550 )$ 9,008 Interest bearing liabilities Interest bearing transaction accounts $ 56 $ 56 $ 112 Savings and money market accounts 316 (122 ) 194 Time deposits (110 ) (437 ) (547 ) Short-term debt (1 ) 18 17 Federal Home Loan Bank advances - 60 60 Subordinated debentures 428 (111 ) 317 Note payable (242 ) - (242 ) Total interest bearing liabilities $ 447 $
(536 ) $ (89 )
Net interest income Net interest income (taxable equivalent)$ 9,111 $ (14 )$ 9,097 Taxable equivalent adjustment 15 41 56 Net interest income$ 9,126 $ 27$ 9,153 Total interest income for the nine months endedSeptember 30, 2022 was$62.9 million and total interest expense was$4.2 million , resulting in net interest income of$58.7 million for the period. For the same period of 2021, total interest income was$53.8 million and total interest expense was$4.3 million , resulting in net interest income of$49.5 million for the period. This represents a 18.49% increase in net interest income when comparing the same period from 2022 and 2021. When comparing the variances related to interest income for the nine months endedSeptember 30, 2022 and 2021, the increase was primarily attributed to increases in average volumes in loans and investment securities as well as from the recognition of origination fee income from the SBA Paycheck Protection Program. The volume related increase in interest income for the period was partially offset by a decrease in the yield on loans. When comparing variances related to interest expense for the nine months endedSeptember 30, 2022 and 2021, the decrease resulted primarily from a decrease in deposits rates. The decrease in deposit rates was partially offset by an increase in the average volume of non-maturity deposits and subordinated debentures. 38 --------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, is adequate to provide coverage for estimated losses on outstanding loans and to provide for uncertainties in the economy. As a result of evaluating the allowance for loan losses atSeptember 30, 2022 , management recorded a provision of$1.3 million in the third quarter of 2022 compared to a provision of$1.2 million in the third quarter of 2021. The increase in provision allocated was primarily due to continued loan growth in new markets for the Bank.. The allowance for loan losses is increased by a provision for loan losses, which is a charge to earnings, and it is decreased by loan charge-offs and increased by recoveries on loans previously charged off. In determining the adequacy of the allowance for loan losses, we consider our historical loan loss experience, the general economic environment, our overall portfolio composition and other relevant information. As these factors change, the level of loan loss provision changes. When individual loans are evaluated for impairment and impairment is deemed necessary, a specific allowance is required for the impaired portion of the loan amount. Subsequent changes in the impairment amount will generally cause corresponding changes in the allowance related to the impaired loan and corresponding changes to the loan loss provision. As ofSeptember 30, 2022 , the recorded allowance related to impaired loans was$340 thousand . As ofSeptember 30, 2021 , the recorded allowance related to impaired loans was$285 thousand .
Noninterest Income
In addition to net interest income, we generate various types of noninterest income from our operations. Our banking operations generate revenue from service charges and fees mainly on deposit accounts. Our mortgage division generates revenue from originating and selling mortgage loans. Our investment brokerage division generates revenue through a revenue-sharing relationship with a registered broker-dealer. We also own life insurance policies on several key employees and record income on the increase in the cash surrender value of these policies.
The following table sets forth the principal components of noninterest income for the periods indicated (amounts in thousands).
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Service charges and fees $ 1,787 $ 1,527 $ 5,121 $ 4,313
Investment brokerage revenue 116 70 519 195
Mortgage operations 908 1,946 4,209 5,354
Bank owned life insurance income 312 292 922 835
Net (loss) gain on sales of investment
securities (796 ) - (2,062 ) 7
Other noninterest income 129 95 552 311
Total noninterest income $ 2,456 $ 3,930 $ 9,261 $ 11,015
Noninterest income for the three months ended September 30, 2022 was $2.5
million compared to $3.9 million for the same period in 2021. The most
significant increase was a $260 thousand increase in service charges and fees
which was primarily a result of deposit growth while the most significant
decreases were a $796 thousand loss on the sale of investment securities and a
$1 million decrease in mortgage operations revenue.
Noninterest income for the nine months ended September 30, 2022 was $9.3 million
compared to $11.0 million for the same period of 2021. The most significant
increase was a $808 thousand increase in service charges and fees while the most
significant decreases were a $2.1 million loss on the sale of investment
securities and a $1.2 million decrease in mortgage operations revenue.
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Noninterest Expense
Noninterest expenses consist primarily of salaries and employee benefits, building occupancy and equipment expenses, advertising and promotion expenses, data processing expenses, legal and professional services and miscellaneous other operating expenses.
The following table sets forth the principal components of noninterest expense for the periods indicated (amounts in thousands).
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2022 2021 2022 2021
Salaries and employee benefits $ 8,108 $ 7,117 $ 22,598 $ 19,681
Occupancy expenses 764 598 2,054 1,776
Equipment rentals, depreciation, and
maintenance 410 240 1,089 804
Telephone and communications 132 132 343 445
Advertising and business development 311 196 687 508
Data processing 913 740 2,635 2,169
Foreclosed assets, net 22 50 (20 ) 136
Federal deposit insurance and other
regulatory assessments 248 331 902 880
Legal and other professional services 376 309 983 932
Other operating expense 2,219 1,552 5,790 4,511
Total noninterest expense $ 13,503 $ 11,265 $ 37,061 $ 31,842
Noninterest expense for the three months ended September 30, 2022 totaled $13.5
million compared with $11.3 million for the same period of 2021. The overall
increase was primarily a result of increases in salaries and employee benefits.
Salaries and employee benefits increased $991 thousand , or 13.92%, to $8.1
million in the third quarter of 2022 from $7.1 million in the third quarter of
2021. The number of full-time equivalent employees increased from approximately
259 at September 30, 2021 to approximately 304 at September 30, 2022 for an
increase of approximately 17.37%.
Noninterest expense for the nine months ended September 30, 2022 totaled $37.1
million compared with $31.8 million for the same period of 2021. The increase
was primarily a result of increases in salaries and employee benefits expense.
Salaries and employee benefits increased $2.9 million , or 14.82%, to $22.6
million in the first nine months of 2022 from $19.7 million in the first nine
months of 2021.
Provision for Income Taxes
We recognized income tax expense of $2.0 million for the three months ended
September 30, 2022 , compared to $1.9 million for the three months ended
September 30, 2021 . The effective tax rate for the three months ended September
30, 2022 was 22.5% compared to 21.6% for the same period in 2021. The effective
tax rate is affected by levels of items of income that are not subject to
federal and/or state taxation and by levels of items of expense that are not
deductible for federal and/or state income tax purposes.
We recognized income tax expense of $6.5 million for the nine months ended
September 30, 2022 , compared to $5.5 million for the nine months ended September
30, 2021 . The increase of approximately $997 thousand , or 18.22%, resulted from
the increase in net income before taxes of $3.5 million in the first nine months
of 2022 as compared to the first nine months of 2021. The effective tax rate for
the nine months ended September 30, 2022 was 22.6% compared to 21.8% for the
same period in 2021. The effective tax rate is affected by levels of items of
income that are not subject to federal and/or state taxation and by levels of
items of expense that are not deductible for federal and/or state income tax
purposes.
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Comparison of Financial Condition at
Overview
Our total assets increased$244.1 million , or 10.19%, fromDecember 31, 2021 toSeptember 30, 2022 . Loans, net of deferred fees and discounts, increased$380.7 million , or 30.06%, fromDecember 31, 2021 toSeptember 30, 2022 . Securities available-for-sale decreased by$214.5 million , or -24.47%, and securities held-to-maturity increased by$82.7 million , or 164.71%, fromDecember 31, 2021 toSeptember 30, 2022 , respectively. Cash and cash equivalents decreased$25.1 million , or -40.44% fromDecember 31, 2021 toSeptember 30, 2022 . Total deposits increased$282.7 million , or 13.14%, fromDecember 31, 2021 toSeptember 30, 2022 which funded a majority of our loan growth. Total stockholders' equity decreased$58.7 million , or -32.68% fromDecember 31, 2021 toSeptember 30, 2022 primarily due to the change in accumulated other comprehensive loss of$78.1 million during the period.Investment Securities We use our securities portfolio primarily to enhance our overall yield on interest-earning assets and as a source of liquidity, as a tool to manage our balance sheet sensitivity and regulatory capital ratios, and as a base upon which to pledge assets for public deposits. When our liquidity position exceeds current needs and our expected loan demand, other investments are considered as a secondary earnings alternative. As investments mature, they are used to meet current cash needs, or they are reinvested to maintain our desired liquidity position. We have designated the majority of our securities as available-for-sale to provide flexibility, in case an immediate need for liquidity arises, and we believe that the composition of the portfolio offers needed flexibility in managing our liquidity position and interest rate sensitivity without adversely impacting our regulatory capital levels. In certain cases, we have designated securities as held-to-maturity to protect capital from changes in the value of the securities portfolio. Securities available-for-sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive loss, net of related deferred taxes while securities held-to-maturity are reported at amortized cost. Purchase premiums and discounts are recognized in income using the interest method over the terms of the securities.
During the nine months ended
The following tables summarize the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of debt securities atSeptember 30, 2022 andDecember 31, 2021 (amounts in thousands). Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair ValueSeptember 30, 2022 : Securities available-for-sale: Residential mortgage-backed$ 457,382 $ -$ (65,359 ) $ 392,023 U.S. treasury securities 131,036 - (14,843 ) 116,193 U.S. govt. sponsored enterprises 73,454 18 (6,649 ) 66,823 State, county, and municipal 85,268 - (14,214 ) 71,054 Corporate debt obligations 17,890 19 (1,792 ) 16,117 Total available-for-sale$ 765,030 $ 37$ (102,857 ) $ 662,210 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value September 30, 2022: Securities held-to-maturity: Residential mortgage-backed$ 69,929 $ -$ (14,232 ) $ 55,697 State, county, and municipal 62,906 - (14,147 ) 48,759 Total held-to-maturity$ 132,835 $ -$ (28,379 ) $ 104,456 41
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Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 2021 :
Securities available-for-sale:
Residential mortgage-backed $ 562,109 $ 1,512 $ (6,063 ) $ 557,558
U.S. treasury securities 151,331 - (1,803 ) 149,528
U.S. govt. sponsored enterprises 54,005 555 (65 ) 54,495
State, county, and municipal 94,976 4,405 (127 ) 99,254
Corporate debt obligations 15,942 49 (67 ) 15,924
Total available-for-sale $ 878,363 $ 6,521 $ (8,125 ) $ 876,759
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
December 31, 2021:
Securities held-to-maturity:
State, county, and municipal $ 50,182 $ 139 $ (156 ) $ 50,165
Total held-to-maturity $ 50,182 $ 139 $ (156 ) $ 50,165
42--------------------------------------------------------------------------------
Loans
Loans are the largest category of interest earning assets and typically provide higher yields than other types of interest earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Total loans averaged$1.54 billion during the three months endedSeptember 30, 2022 , or 62.1% of average interest earning assets, as compared to$1.22 billion , or 57.7% of average interest earning assets, for the three months endedSeptember 30, 2021 . AtSeptember 30, 2022 , total loans, net of deferred loan fees and discounts, were$1.65 billion , compared to$1.27 billion atDecember 31, 2021 , an increase of$380.7 million , or 30.06%. The organic, or non-acquired, growth in our loan portfolio is attributable both to our ability to attract new customers and to our ability to benefit from the overall growth in our markets. We seek to build relationships with new customers, maintain and even improve our relationships with existing customers, and encourage our bankers to be involved in their communities. We expect our bankers to recognize business development efforts and to maintain healthy relationships with clients, and our philosophy is to be responsive to customer needs by providing decisions in a timely manner. In addition to our business development efforts, many of the markets that we serve have shown signs of economic recovery over the last few years.
The following table provides a summary of the loan portfolio as of
September 30, 2022 December 31, 2021
Amount % of Total Amount % of Total
Residential real estate:
Closed-end 1-4 family - first lien $ 500,927 30.8 % $ 317,754 25.5 %
Closed-end 1-4 family - junior lien 8,627 0.5 % 5,434 0.4 %
Multi-family 14,192 0.9 % 9,981 0.8 %
Total residential real estate 523,746 32.2 % 333,169 26.7 %
Commercial real estate:
Nonfarm nonresidential 456,055 28.1 % 350,373 28.1 %
Farmland 51,551 3.2 % 38,808 3.1 %
Total commercial real estate 507,606 31.3 % 389,181 31.2 %
Construction and land development:
Residential 116,903 7.2 % 90,924 7.3 %
Other 127,039 7.8 % 105,192 8.4 %
Total construction and land development 243,942 15.0 % 196,116 15.7 %
Home equity lines of credit 60,736 3.7 % 49,569 4.0 %
Commercial loans:
Other commercial loans 185,351 11.4 % 201,922 16.2 %
Agricultural 47,762 2.9 % 36,063 2.9 %
State, county, and municipal loans 36,549 2.3 % 23,939 2.0 %
Total commercial loans 269,662 16.6 % 261,924 21.1 %
Consumer loans 47,362 2.9 % 43,080 3.5 %
Total gross loans 1,653,054 101.7 % 1,273,039 102.2 %
Allowance for loan losses (23,091 ) -1.4 % (20,922 ) -1.7 %
Net discounts (297 ) 0.0 % (400 ) 0.0 %
Net deferred loan fees (5,371 ) -0.3 % (5,974 ) -0.5 %
Net loans $ 1,624,295 100.0 % $ 1,245,743 100.0 %
In this context, a "real estate loan" is defined as any loan, secured by real
estate, regardless of the purpose of the loan. It is common practice for
financial institutions in our market areas, and for our Bank, to obtain a
security interest or lien in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood
of the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio component. In general, we prefer real estate
collateral to many other potential collateral sources, such as accounts
receivable, inventory and equipment.
43
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Real estate loans are the largest component of our loan portfolio and include
residential real estate loans, commercial real estate loans, and construction
and land development loans. At September 30, 2022 , this category totaled $1.3
billion , or 77.15% of total gross loans, compared to $918.5 million , or 72.15%,
at December 31, 2021 . Real estate loans increased $356.8 million , or 38.85%,
during the period December 31, 2021 to September 30, 2022 . Commercial loans
increased $7.7 million , or 2.95% during the same period. Our management team and
lending officers have a great deal of experience and expertise in real estate
lending and commercial lending.
The federal regulatory agencies recently issued two "guidance" documents that
have a significant impact on real estate related lending and, thus, on the
operations of the Bank. One part of the guidance could require lenders to
restrict lending secured primarily by certain categories of commercial real
estate to a level of 300% of their capital or to raise additional capital. This
factor, combined with the current economic environment, could affect the Bank's
lending strategy away from, or to limit its expansion of, commercial real estate
lending, which has been a material part of River Financial Corporation's lending
strategy. This could also have a negative impact on our lending and
profitability. Management actively monitors the composition of the Bank's loan
portfolio, focusing on concentrations of credit, and the results of that
monitoring activity are periodically reported to the Board of Directors.
The other guidance relates to the structuring of certain types of mortgages that
allow negative amortization of consumer mortgage loans. Although the Bank does
not engage at present in lending using these types of instruments, the guidance
could have the effect of making the Bank less competitive in consumer mortgage
lending if the local market is driving the demand for such an offering.
The repayment of loans is a source of additional liquidity for us. The following
table sets forth our variable rate and fixed rate loans maturing within specific
intervals at September 30, 2022 .
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
Over one Over five
One year year through years through Over fifteen
Variable Rate Loans: or less five years fifteen years years Total
Residential real estate:
Closed-end 1-4 family - first lien $ 2,378 $ 881 $ 4,819 $ 209,584 $ 217,662
Closed-end 1-4 family - junior lien 119 - - 293 412
Multi-family 261 - 296 - 557
Total residential real estate 2,758 881 5,115 209,877 218,631
Commercial real estate:
Nonfarm nonresidential 5,617 7,437 5,078 383 18,515
Farmland 499 1,883 - - 2,382
Total commercial real estate 6,116 9,320 5,078 383 20,897
Construction and land development:
Residential 25,954 - 561 18,874 45,389
Other 14,890 3,485 235 552 19,162
Total construction and land development 40,844 3,485 796 19,426 64,551
Home equity lines of credit 4,076 5,566 49,489 - 59,131
Commercial loans:
Other commercial loans 38,622 13,171 10,449 - 62,242
Agricultural 33,744 174 - - 33,918
State, county, and municipal loans - - - - -
Total commercial loans 72,366 13,345 10,449 - 96,160
Consumer loans 1,649 809 61 - 2,519
Total gross variable rate loans $ 127,809 $ 33,406 $ 70,988 $ 229,686 $ 461,889
44--------------------------------------------------------------------------------
Over one Over five
One year year through years through Over fifteen
Fixed Rate Loans: or less five years fifteen years years Total
Residential real estate:
Closed-end 1-4 family - first lien
952 4,484 2,198 581 8,215
Multi-family 351 1,943 10,942 399 13,635
Total residential real estate 18,534 116,658 86,288 83,635 305,115
Commercial real estate:
Nonfarm nonresidential 28,591 164,351 235,673 8,925 437,540
Farmland 1,668 25,879 21,551 71 49,169
Total commercial real estate 30,259 190,230 257,224 8,996 486,709
Construction and land development:
Residential 64,879 4,019 821 1,795 71,514
Other 13,498 55,188 38,243 948 107,877
Total construction and land development 78,377 59,207 39,064 2,743 179,391
Home equity lines of credit 162 743 700 - 1,605
Commercial loans:
Other commercial loans 10,289 89,559 23,261 - 123,109
Agricultural 1,569 10,233 2,042 - 13,844
State, county, and municipal loans 2,155 11,590 18,557 4,247 36,549
Total commercial loans 14,013 111,382 43,860 4,247 173,502
Consumer loans 3,533 25,106 16,066 138 44,843
Total fixed rate gross loans $ 144,878 $ 503,326 $ 443,202 $ 99,759 $ 1,191,165
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
1,071 4,484 2,198 874 8,627
Multi-family 612 1,943 11,238 399 14,192
Total residential real estate 21,292 117,539 91,403 293,512 523,746
Commercial real estate:
Nonfarm nonresidential 34,208 171,788 240,751 9,308 456,055
Farmland 2,167 27,762 21,551 71 51,551
Total commercial real estate 36,375 199,550 262,302 9,379 507,606
Construction and land development:
Residential 90,833 4,019 1,382 20,669 116,903
Other 28,388 58,673 38,478 1,500 127,039
Total construction and land development 119,221 62,692 39,860 22,169 243,942
Home equity lines of credit 4,238 6,309 50,189 - 60,736
Commercial loans:
Other commercial loans 48,911 102,730 33,710 - 185,351
Agricultural 35,313 10,407 2,042 - 47,762
State, county, and municipal loans 2,155 11,590 18,557 4,247 36,549
Total commercial loans 86,379 124,727 54,309 4,247 269,662
Consumer loans 5,182 25,915 16,127 138 47,362
Total gross loans $ 272,687 $ 536,732 $ 514,190 $ 329,445 $ 1,653,054
The information presented in the table above is based upon the contractual
maturities of the individual loans, which may be subject to renewal at their
contractual maturity. Renewal of such loans is subject to review and credit
approval, as well as modification of terms at their maturity. Consequently, we
believe that this treatment presents fairly the maturity structure of the loan
portfolio.
45
--------------------------------------------------------------------------------Allowance for Loan Losses, Provision for Loan Losses and Asset Quality
Allowance for loan losses and provision for loan losses
The allowance for loan losses represents management's estimate of probable inherent credit losses in the loan portfolio. Management determines the allowance based on an ongoing evaluation of risk as it correlates to potential losses within the portfolio. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Loans deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance for loan losses. Management utilizes a review process for the loan portfolio to identify loans that are deemed to be impaired. A loan is considered impaired when it is probable that the Bank will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement or when the loan is deemed to be a troubled debt restructuring. For loans and loan relationships deemed to be impaired that are$100 thousand or greater, management determines the estimated value of the underlying collateral, less estimated costs to acquire and sell the collateral, or the estimated net present value of the cash flows expected to be received on the loan or loan relationship. These amounts are compared to the current investment in the loan and a specific allowance for the deficiency, if any, is specifically included in the analysis of the allowance for loan losses. For loans and loan relationships less than$100 thousand that are deemed to be impaired, management applies a general loss factor of 15% and includes that amount in the analysis of the allowance for loan losses rather than specifically measuring the impairment for each loan or loan relationship. All other loans are deemed to be unimpaired and are grouped into various homogeneous risk pools primarily utilizing regulatory reporting classification codes. The Bank's historical loss factors are calculated for each of the risk pools based on the percentage of net losses experienced as a percentage of the average loans outstanding. The time periods utilized in these historical loss factor calculations are subjective and vary according to management's estimate of the impact of current economic cycles. As every loan has a risk of loss, minimum loss factors are estimated based on long term trends for the Bank, the banking industry, and the economy. The greater of the calculated historical loss factors or the minimum loss factors are applied to the unimpaired loan amounts currently outstanding for the risk pool and included in the analysis of the allowance for loan losses. In addition, certain qualitative adjustments may be included by management as additional loss factors. These adjustments may include, among other things, changes in loan policy, loan administration, loan geographic or industry concentrations, loan growth rates, and experience levels of our lending officers. Although we have not seen any significant changes in credit quality as a result of the pandemic, management has added several significant qualitative adjustments to our allowance for loan loss calculation that are related to the uncertainties of how the pandemic will affect our loan quality. As a result of these qualitative adjustments, our provision for loan losses and the allowance for loan losses increased significantly during pandemic. The loss allocations for specifically impaired loans, smaller impaired loans not specifically measured for impairment, and unimpaired loans are totaled to determine the total required allowance for loan losses. This total is compared to the current allowance on the Bank's books and adjustments made accordingly by a charge or credit to the provision for loan losses.
Management believes the data it uses in determining the allowance for loan losses is sufficient to estimate potential losses in the loan portfolio; however, actual results could differ from management's estimate.
46
--------------------------------------------------------------------------------The following table presents a summary of changes in the allowance for loan losses for the periods indicated (amounts in thousands).
As of and for the As of and for the
Three Months Ended: Nine Months Ended:
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Allowance for loan losses at
beginning of period $ 21,777 $ 18,913 $ 20,922 $ 16,803
Charge-offs:
Mortgage loans on real estate:
Residential real estate - 4 42 105
Commercial real estate - 4 - 181
Construction and land development - 2 - 2
Total mortgage loans on real estate - 10 42 288
Home equity lines of credit - - - -
Commercial 57 170 205 254
Consumer 22 27 22 56
Total 79 207 269 598
Recoveries:
Mortgage loans on real estate:
Residential real estate - 60 - 60
Commercial real estate - - 63 35
Construction and land development - 3 5 7
Total mortgage loans on real estate - 63 68 102
Home equity lines of credit 41 - 41 -
Commercial 16 57 50 122
Consumer 6 34 19 60
Total 63 154 178 284
Net charge-offs 16 53 91 314
Provision for loan losses 1,330 1,187 2,260 3,558
Allowance for loan losses at end of
period $ 23,091 $ 20,047 Total loans outstanding, net of deferred loan fees 1,647,386 1,237,731 1,647,386 1,237,731 Average loans outstanding, net of deferred loan fees 1,539,788 1,224,244 1,405,947 1,210,272 Allowance for loan losses to period end loans 1.40 % 1.62 % 1.40 % 1.62 % Net charge-offs to average loans (annualized) 0.00 % 0.02 % 0.01 % 0.03 %
Allocation of the Allowance for Loan Losses
While no portion of the allowance for loans losses is in any way restricted to
any individual loan or group of loans and the entire allowance is available to
absorb losses from any and all loans, the following table represents
management's allocation of the allowance for loan losses to specific loan
categories as of the dates indicated (amounts in thousands).
September 30, 2022 December 31, 2021
Percent of Percent of
Amount Total Amount Total
Mortgage loans on real estate:
Residential real estate $ 4,494 19.5 % $ 2,596 12.4 %
Commercial real estate 9,386 40.6 % 8,038 38.4 %
Construction and land development 3,314 14.4 % 2,992 14.3 %
Total mortgage loans on real estate 17,194 74.5 % 13,626 65.1 %
Home equity lines of credit 530 2.3 % 396 1.9 %
Commercial 4,953 21.4 % 6,486 31.0 %
Consumer 414 1.8 % 414 2.0 %
Total $ 23,091 100.0 % $ 20,922 100.0 %
47--------------------------------------------------------------------------------
Nonperforming Assets
The following table presents our nonperforming assets as of the dates indicated
(amounts in thousands):
September 30, December 31,
2022 2021 2021
Nonaccrual loans $ 1,561 $ 2,515 $ 2,272
Accruing loans past due 90 days or more 141 123 -
Total nonperforming loans 1,702 2,638 2,272
Foreclosed assets 514 650 256
Total nonperforming assets $ 2,216 $ 3,288 $ 2,528
Allowance for loan losses to period end
loans 1.40 % 1.62 % 1.65 %
Allowance for loan losses to period end
nonperforming loans 1356.70 % 759.93 % 920.86 %
Net charge-offs (recoveries) to average
loans (annualized) 0.01 % 0.03 % 0.05 %
Nonperforming assets to period end loans
and foreclosed property 0.13 % 0.27 % 0.20 %
Nonperforming loans to period end loans 0.10 % 0.21 % 0.18 %
Nonperforming assets to total assets 0.08 % 0.14 % 0.11 %
Period end loans 1,647,386 1,237,731 1,266,665
Period end total assets 2,639,743 2,309,314 2,395,680
Allowance for loan losses 23,091 20,047 20,922
Average loans for the period 1,405,947 1,210,272 1,217,901
Net charge-offs for the period 91 314 625
Period end loans plus foreclosed property 1,647,900 1,238,381
1,266,921
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that the collection of interest is
doubtful. In addition to consideration of these factors, loans that are past due
90 days or more are generally placed on nonaccrual status. When a loan is placed
on nonaccrual status, all accrued interest on the loan is reversed and deducted
from earnings as a reduction of reported interest income. No additional interest
is accrued on the loan balance until collection of both principal and interest
becomes reasonably certain. Payments received while a loan is on nonaccrual
status will generally be applied to the outstanding principal balance. When a
problem loan is finally resolved, there may ultimately be an actual write-down
or charge-off of the principal balance of the loan that would necessitate
additional charges to the allowance for loan losses.
48
--------------------------------------------------------------------------------Deposits
Deposits, which include noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts, and time deposits, are the principal source of funds for the Bank. We offer a variety of products designed to attract and retain customers, with primary focus on building and expanding client relationships. Management continues to focus on establishing a comprehensive relationship with consumer and business borrowers, seeking deposits as well as lending relationships.
The following table details the composition of our deposit portfolio as of
September 30, 2022 December 31, 2021
Percent of Percent of
Amount Total Amount Total
Demand deposits, non-interest bearing $ 687,205 28.2 % $ 610,002 28.4 %
Demand deposits, interest bearing 558,888 23.0 % 519,547 24.2 %
Money market accounts 700,831 28.8 % 623,763 29.0 %
Savings deposits 126,617 5.2 % 117,767 5.5 %
Time certificates of $250 thousand or more 107,600 4.4 % 106,271 4.9 %
Other time certificates 252,717 10.4 % 173,827 8.0 %
Totals $ 2,433,858 100.0 % $ 2,151,177 100.0 %
Total deposits were $2.43 billion at September 30, 2022 , an increase of $282.7
million from December 31, 2021 with the increase resulting mainly in the
balances of money market accounts and demand deposit accounts. Some of our
demand deposit accounts are seasonal and have expected balance fluctuations. The
seasonality of these demand deposits is related to property tax collections and
to agricultural production.
The following table presents the Bank's time certificates of deposits by various
maturities as of
All Time Time Deposits Time Deposits
Deposits $100 or more less than $100
Three months or less $ 92,367 $ 31,011 $ 61,356
Greater than three months through six months 66,154 48,806 17,348
Greater than six months through one year 95,447 70,336 25,111
Greater than one year through three years 84,289 60,761 23,528
Greater than three years 22,060 17,337 4,723
Total $ 360,317 $ 228,251 $ 132,066
Other Funding Sources
We supplement our deposit funding with wholesale funding when needed for balance
sheet planning and management or when the terms are attractive and will not
disrupt our offering rates in our markets. A source we have used for wholesale
funding is the Federal Home Loan Bank of Atlanta (FHLB). The line of credit with
the FHLB is secured by pledges of various loans in our loan portfolio. At
September 30, 2022 , the FHLB line of credit available was $328.9 million and at
December 31, 2021 it was $257.1 million . As of September 30, 2022 and December
31, 2021 , we had $20 million and no Federal Home Loan Bank advances outstanding,
respectively. We also have lines of credit for federal funds borrowings with
other banks that totaled $88.5 million and $48.5 million at September 30, 2022
and December 31, 2021 , respectively. Furthermore, we have pledged certain loans
to the Federal Reserve Bank (FRB) to secure a line of credit. At September 30,
2022 , the FRB line of credit available was $155.6 million and at December 31,
2021 , the FRB line of credit available was $144.1 million .
On August 9, 2021 , the Company entered into a line of credit agreement with
ServisFirst Bank for $10 million . The line of credit is to be used for general
capital needs and investments. The line when drawn will require quarterly
payments of interest only, and matures two years from the origination date. The
interest rate floats at Wall Street Journal Prime with a floor of 3.25%. The
line of credit is secured by 51% of the Company's stock.
49
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On March 9, 2021 , River Financial Corporation ("the Company") entered into a
Subordinated Note Purchase Agreement (the "Purchase Agreement") with the
purchasers signatory thereto providing for a private placement of $40 million in
aggregate principal amount of 4.00% fixed-to-floating rate Subordinated Notes
due March 15, 2031 (the "Notes"). The Notes were issued by the Company to the
purchasers at a price equal to 100% of their face amount. Interest on the Notes
will accrue from March 9, 2021 , and the Company will pay interest semi-annually
on March 15th and September 15th of each year, beginning on September 15, 2021 ,
until the Notes mature. The Notes will bear interest at a fixed rate of 4.00%
per year, from and including March 9, 2021 to, but excluding, March 15, 2026 .
From and including March 15, 2026 , but excluding the maturity date or early
redemption date, the interest rate will reset quarterly at a variable rate equal
to the then current three-month term SOFR plus 342 basis points. The Notes may
not be prepaid by the Company prior to March 15, 2026 . From and after March 15,
2026 , the Company may prepay all or, from time to time, any part of the Notes at
100% of the principal amount (plus accrued interest) without penalty, subject to
any requirement under Federal Reserve Board regulations to obtain prior approval
from the Board of Governors of the Federal Reserve System before making any
prepayment. The Notes may also be prepaid by the Company at any time after the
occurrence of an event that would preclude the Notes from being included in the
Tier 2 Capital of the Company. The Purchase Agreement contains customary
representations and warranties, events of default, and affirmative and negative
covenants, including the requirement that, subject to certain limitations, the
Company restructure any portion of the Notes that ceases to be deemed Tier 2
Capital. The Company used approximately $19.7 million of the net proceeds from
the issuance of the Notes to pay off its note with CenterState Bank dated
October 31, 2018 , including interest accrued on such notes, and the remaining
proceeds for general corporate purposes, including providing capital to support
the organic growth of its bank subsidiary, River Bank .
Liquidity
Market and public confidence in our financial strength and financial institutions in general will largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our ability to maintain sound asset quality and appropriate levels of capital reserves.
Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure our liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily, weekly and monthly basis. Liquidity risk involves the risk of being unable to fund assets with the appropriate duration and rate-based liabilities, as well as the risk of not being able to meet unexpected cash needs. Liquidity planning and management are necessary to ensure the ability to fund operations cost-effectively and to meet current and future potential obligations such as loan commitments and unexpected deposit outflows. In this process, we focus on assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet our needs. Funds are available from a number of basic banking activity sources, including the core deposit base, the repayment and maturity of loans, and investment cash flows. Other funding sources include federal funds borrowings, brokered certificates of deposit and borrowings from the FHLB and FRB. Cash and cash equivalents atSeptember 30, 2022 andDecember 31, 2021 , were$36.9 million and$62.0 million , respectively. Based on recorded cash and cash equivalents, management believesRiver Financial Corporation's liquidity resources were sufficient atSeptember 30, 2022 to fund loans and meet other cash needs as necessary. 50
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Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized by the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. In most cases, the Company requires collateral or other security to support financial instruments with credit risk.
Financial instruments whose contract amount represents credit risk at
September 30, 2022 December 31, 2021
Commitments to extend credit $ 406,716 $ 328,646
Stand-by and performance letters of credit 4,582 2,426 Total $ 411,298 $ 331,072 Contractual Obligations While our liquidity monitoring and management considers both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations as ofSeptember 30, 2022 (amounts in thousands). Due after 1 Due after 3 Due in 1 through through Due after year or less 3 years 5 years 5 years Total Deposits without a stated maturity$ 2,073,541 $ - $ - $ -$ 2,073,541 Certificates of deposit of less than$100 103,815 23,528 4,524 199 132,066 Certificates of deposit of$100 or more 150,153 60,761 15,850 1,487 228,251 Securities sold under agreements to repurchase 6,951 - - - 6,951 Federal Home Loan Bank advances 20,000 - - - 20,000 Federal funds purchased 1,883 - - - 1,883 Subordinated debt, net of loan costs - - - 39,400 39,400 Operating leases 636 1,119 904 2,278 4,937
Total contractual obligations
Capital Position and Dividends
AtSeptember 30, 2022 andDecember 31, 2021 , total stockholders' equity was$120.9 million and$179.6 million , respectively. The decrease of approximately$58.7 million resulted mainly from the net change in retained earnings and accumulated other comprehensive loss for the nine months endedSeptember 30, 2022 . Retained earnings for the first nine months of 2022 increased$19.2 million and accumulated other comprehensive loss decreased$78.1 million . The ratio of stockholders' equity to total assets was 4.58% and 7.50% atSeptember 30, 2022 andDecember 31, 2021 , respectively.River Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Certain items such as goodwill and other intangible assets are deducted from total capital in arriving at the various regulatory capital measures such as Common Equity Tier 1 capital, Tier 1 capital, and total risk-based capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect onRiver Financial Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,River Bank must meet specific capital guidelines that involve quantitative measures of the bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory regulations and guidelines.River Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
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Quantitative measures, established by regulation to ensure capital adequacy
effective January 1, 2015 , require River Bank to maintain minimum amounts and
ratios (set forth in the table below) of total risk based capital, Common Equity
Tier 1 capital, and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as
defined in the regulations) to average assets (as defined in the regulations).
Management believes, as of September 30, 2022 , that the Bank meets all capital
adequacy requirements to which it is subject. The following table presents the
Bank's capital amounts and ratios as of September 30, 2022 with the required
minimum levels for capital adequacy purposes including the phase in of the
capital conservation buffer under Basel III and minimum levels to be well
capitalized (as defined) under the regulatory prompt corrective action
regulations.
As of
To Be Well Capitalized
Required For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
Total Capital (To Risk-Weighted
Assets) $ 234,423 12.724 % $ 193,447 >= 10.500% $ 184,235 >= 10.00%
Common Equity Tier 1 Capital (To
Risk-Weighted Assets) 211,393 11.474 % 128,964 >= 7.000% 119,753 >= 6.50%
Tier 1 Capital (To Risk-Weighted
Assets) 211,393 11.474 % 156,600 >= 8.500% 147,388 >= 8.00%
Tier 1 Capital (To Average
Assets) 211,393 8.319 % 101,640 >= 4.000% 127,050 >= 5.00%
Management believes, as of December 31, 2021 , that the Bank met all capital
adequacy requirements to which it was subject at the time. The following table
presents the Bank's capital amounts and ratios as of December 31, 2021 with the
required minimum levels for capital adequacy purposes and minimum levels to be
well capitalized (as defined) under the prompt corrective action regulations.
As of
To Be Well Capitalized
Required For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
Total Capital (To Risk-Weighted
Assets) $ 203,848 14.071 % $ 152,116 >= 10.500% $ 144,872 >= 10.00%
Common Equity Tier 1 Capital (To
Risk-Weighted Assets) 185,704 12.819 % 101,410 >= 7.000% 94,167 >= 6.50%
Tier 1 Capital (To Risk-Weighted
Assets) 185,704 12.819 % 123,141 >= 8.500% 115,897 >= 8.00%
Tier 1 Capital (To Average
Assets) 185,704 8.013 % 92,707 >= 4.000% 115,884 >= 5.00%
River Financial Corporation's principal source of funds for dividend payments
and debt service is dividends received from River Bank . There are statutory
limitations on the payment of dividends by River Bank to River Financial
Corporation . As of September 30, 2022 , the maximum amount the Bank could
dividend to River Financial Corporation without prior regulatory authority
approval was approximately $58.8 million . In addition to dividend restrictions,
federal statutes prohibit unsecured loans from banks to bank holding companies.
During the nine months ending September 30, 2022 there were 22,500 incentive
stock options issued with a weighted average exercise price of $32.94 per share.
During the same period, there were 24,150 incentive stock options exercised at a
weighted average exercise price of $18.63 per share. A total of 345,579
incentive stock options were outstanding as of September 30, 2022 with a
weighted average exercise price of $23.85 per share and a weighted average
remaining life of 5.61 years.
Interest Sensitivity and Market Risk
Management monitors and manages the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by the Bank is simulation analysis.
In simulation analysis, we review each asset and liability category and its
projected behavior in various different interest rate environments. These
projected behaviors are based on management's past experience and on current
competitive environments, including the various environments in the different
markets in which we compete. Using projected behavior and differing rate
scenarios as inputs, the simulation analysis generates projections of net
interest income. We also periodically verify the validity of this approach by
comparing actual results with those that were projected in previous models.
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Another technique used in interest rate management, but to a lesser degree than
simulation analysis, is the measurement of the interest sensitivity "gap", which
is the positive or negative dollar difference between assets and liabilities
that are subject to interest rate repricing within a given period of time.
Interest rate sensitivity can be managed by repricing assets and liabilities,
selling securities available for sale, replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability.
We evaluate interest rate sensitivity risk and then formulate guidelines
regarding asset generation and repricing, and sources and prices of off-balance
sheet commitments in order to maintain interest sensitivity risk at levels
deemed prudent by management. We use computer simulations to measure the net
income effect of various rate scenarios. The modeling reflects interest rate
changes and the related impact on net income over specified periods of time.
The following table illustrates our interest rate sensitivity at
0-1 Mos 1-3 Mos 3-12 Mos 1-2 Yrs 2-3 Yrs >3 Yrs Total
Interest earning assets
Loans $ 263,136 $ 81,399 $ 261,143 $ 235,149 $ 188,581 $ 617,978 $ 1,647,386
Securities 37,865 19,025 46,695 61,145 60,313 570,002 795,045
Certificates of deposit in
banks - - 723 1,740 - 452 2,915
Cash balances in banks 212 - - - - - 212
Total interest earning assets $ 301,213 $ 100,424 $ 308,561 $ 298,034 $ 248,894 $ 1,188,432 $ 2,445,558
Interest bearing liabilities
Interest bearing transaction
accounts $ 115,841 $ 8,158 $ 36,708 $ 48,944 $ 48,944 $ 300,293 $ 558,888
Savings and money market
accounts 257,172 17,876 80,445 107,262 107,262 257,431 827,448
Time deposits 29,831 73,214 201,614 22,073 18,633 14,952 360,317
Securities sold under
agreements to repurchase 6,951 - - - - - 6,951
Federal Home Loan Bank advances 20,000 - - - - - 20,000
Subordinated debentures, net of
loan costs - - - - - 39,400 39,400
Total interest bearing
liabilities $ 431,678 $ 99,248 $ 318,767 $ 178,279 $ 174,839 $ 612,076 $ 1,814,887
Interest sensitive gap
Period gap $ (130,465 ) $ 1,176 $ (10,206 ) $ 119,755 $ 74,055 $ 576,356 $ 630,671
Cumulative gap $ (130,465 ) $ (129,289 ) $ (139,495 ) $ (19,740 ) $ 54,315 $ 630,671
Cumulative gap - Rate Sensitive
Assets/ Rate
Sensitive Liabilities -5.3 % -5.3 % -5.7 % -0.8 % 2.2 % 25.8 %
The Bank generally benefits from increasing market interest rates when it has an
asset-sensitive gap (a positive number) and generally benefits from decreasing
market interest rates when it is liability sensitive (a negative number). As
shown in the table above, the Bank is liability sensitive on a cumulative basis
throughout the one year time frame. The interest sensitivity analysis presents
only a static view of the timing and repricing opportunities, without taking
into consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those are viewed by management as significantly less interest sensitive than
market-based rates such as those paid on non-core deposits. For this and other
reasons, management relies more upon the simulations analysis (as noted above)
in managing interest rate risk. Net interest income may be impacted by other
significant factors in a given interest rate environment, including changes in
volume and mix of interest earning assets and interest bearing liabilities.
The Bank's earnings are dependent, to a large degree, on its net interest
income, which is the difference between interest income earned on all interest
earning assets, primarily loans and securities, and interest paid on all
interest bearing liabilities, primarily deposits. Market risk is the risk of
loss from adverse changes in market prices and interest rates. Our market risk
arises primarily from inherent interest rate risk in our lending, investing and
deposit gathering activities. We seek to reduce our exposure to market risk
through actively monitoring and managing interest rate risk. Management relies
on simulations analysis to evaluate the impact of varying levels of prevailing
interest rates and the sensitivity of specific earning assets and interest
bearing liabilities to changes in those prevailing rates. Simulation analysis
consists of evaluating the impact on net interest income given changes from 400
basis points below the current prevailing rates to 400 basis points above
current prevailing interest rates. Management makes certain assumptions as to
the effect varying levels of interest rates have on certain interest earning
assets and interest bearing liabilities, which assumptions consider both
historical experience and consensus estimates of outside sources.
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The following table illustrates the results of our simulation analysis to
determine the extent to which market risk would affect net interest income for
the next twelve months if prevailing interest rates increased or decreased by
the specified amounts from current rates. As noted above, this model uses
estimates and assumptions in asset and liability account rate reactions to
changes in prevailing interest rates. However, to isolate the market risk
inherent in the balance sheet, the model assumes that no growth in the balance
sheet occurs during the projection period. This model also assumes an immediate
and parallel shift in interest rates, which would result in no change in the
shape or slope of the interest rate yield curve. Because of the inherent use of
the estimates and assumptions in the simulation model to derive this market risk
information, the actual results of the future impact of market risk on our net
interest income may differ from that found in the table. Given the current level
of prevailing interest rates, management believes prevailing market rates
falling 300 basis points and 400 basis points are not reasonable assumptions.
All other simulated prevailing interest rates changes modeled indicate a level
of sensitivity of the Bank's net interest income to those changes that is
acceptable to management and within established Bank policy limits as of both
dates shown.
Impact on net interest income
As of As of
September 30, 2022 December 31, 2021
Change in prevailing rates:
+ 400 basis points (3.69 )% 2.18 %
+ 300 basis points (2.72 )% 1.87 %
+ 200 basis points (1.76 )% 1.45 %
+ 100 basis points (0.87 )% 0.75 %
+ 0 basis points - -
- 100 basis points (0.18 )% (1.84 )%
- 200 basis points (1.89 )% (2.81 )%
- 300 basis points (4.84 )% (2.87 )%
- 400 basis points (6.94 )% (2.91 )%
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