Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
Certain matters in this Form 10-K may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to:
• statements of our goals, intentions and expectations;
• statements regarding our business plans, prospects, growth and operating strategies;
• statements regarding the quality of our loan and investment portfolios; and
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• estimates of our risks and future costs and benefits.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:
• potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth;
• changes in the interest rate environment, including the recent past increases in the Federal Reserve benchmark rate and duration at which such elevated interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;
• the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto;
• the effects of any federal government shutdowns;
• general economic conditions, either nationally or in our market areas, which are worse than expected;
• changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
• our ability to access cost-effective funding;
• fluctuations in real estate values, and residential, commercial and multifamily real estate market conditions;
• demand for loans and deposits in our market area;
• our ability to implement and change our business strategies;
• competition among depository and other financial institutions and equipment financing companies;
• inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make;
• adverse changes in the securities or secondary mortgage markets;
• changes in the quality or composition of our loan, lease or investment portfolios;
• our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, "denial of service" attacks, "hacking" and identity theft, and other attacks on our information technology systems or on the third-party vendors who perform several of our critical processing functions;
• the inability of third-party providers to perform as expected;
• our ability to manage market risk, credit risk and operational risk in the current economic environment;
• our ability to enter new markets successfully and capitalize on growth opportunities;
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• our ability to retain key employees;
• our compensation expense associated with equity allocated or awarded to our employees;
• changes in the financial condition, results of operations or future prospects of issuers of securities that we own;
• our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
• changes in consumer spending, borrowing and savings habits;
• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
• legislative or regulatory changes such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and its implementing regulations that adversely affect our business, and the availability of resources to address such changes;
• our ability to pay dividends on our common stock;
• the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;
• other economic, competitive, governmental, regulatory, and technical factors affecting our operations, pricing, products and services; and
• the other risks described elsewhere in this Form 10 K and our other reports filed with and furnished to the U.S. Securities and Exchange Commission (“SEC”).
We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.
Additional factors that may affect our results are discussed under Part I, Item 1A in this document under the heading “Risk Factors.”
General
Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases, commercial and industrial loans, and loans secured by commercial and multi-family real estate. We also obtain funds by utilizing FHLB advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds.
Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from the sale of residential mortgage loans originated for sale in the secondary market. We may also recognize income from the sale of investment securities.
At December 31, 2023, on a consolidated basis, we had $ 1.5 billion in assets, $1.1 billion in loans, $1.0 billion in deposits and $134.9 million in stockholders’ equity. First Bank Richmond’s risk-based capital ratio at December 31, 2023 was 14.1%, exceeding the 10.0% requirement for a well-capitalized institution. For the year ended December 31, 2023, we reported net income of $9.5 million, compared with net income of $13.0 million for 2022.
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Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors.
See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements.
Allowance for Credit Losses . The allowance for credit losses applies to all financial instruments carried at amortized cost. We maintain an allowance for credit losses on loans and leases based on expected future credit losses at the balance sheet date. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan or lease balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. A provision for credit losses for loans and leases is charged to operations based on our periodic evaluation of the necessary balance in the allowance.
Determining the appropriateness of the allowance for credit losses is complex and requires judgement by management on future factors that are unknown. We have an established process to determine the adequacy of the allowance for credit losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on similarly-risked loans in their respective segments, the amounts and timing of expected future cash flows on collateral-dependent loans, movement through risk-ratings, economic forecasts, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.
At January 1, 2023, we established an allowance for credit losses on unfunded commitments as part of our transition to CECL. This allowance is held and monitored separately from our allowance for credit losses on loans and leases and is periodically adjusted. Significant estimates are used to determine the allowance, including expected future losses of the loan and lease portfolio, changes in composition, information about specific borrower situations and risk-rating adjustments, probability of funding, economic conditions and other factors, all of which may be susceptible to significant change. A provision for credit losses for unfunded commitments is charged to operations periodically upon evaluation of the necessary balance in the allowance.
Available for Sale Securities . Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized.
The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any impairment exists as defined in ASC 326. If an impairment has occurred, it must be determined if the impairment is due to credit or non-credit related factors. In evaluating the possible impairment of securities, consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any
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anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
If management determines that an investment experienced an impairment that is credit-related, it must then be determined if we intend to sell the security, or if it is more likely than not that we will be required to sell the security, before the recovery of its amortized cost basis. If either of these circumstances are present, then the impairment will be recognized in earnings with a corresponding adjustment to the amortized cost basis of the security. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis, the present values of expected cash flows to be collected from the security will be compared against the amortized cost basis of the security. If the amortized cost basis of the security is greater than the present cash flows expected from the security, a credit loss would exist and it would determine the amount of allowance, if any, that would be deemed needed. A needed allowance would result in an allowance recognized on the balance sheet, with a corresponding adjustment to earnings, limited to the amount that fair value is less than the amortized cost basis of the security. After recognizing a credit loss through an allowance, periodic assessments are necessary to determine increases or decreases to the credit loss, which require adjustments to the allowance. Any adjustments would be recognized through earnings, not to exceed the net amount of the allowance as limited to the amount that amortized cost exceeds fair value.
Management Strategy
We are a community-oriented financial institution dedicated to serving the needs of customers in our primary market area. Our commitment is to offer a full array of consumer and commercial banking products and services to meet the needs of our customers. We offer mortgage lending products to qualified borrowers to give them the broadest access to home ownership in our markets. We offer commercial lending products and services tailored to complement their businesses. Our goal is to maintain asset quality while continuing to build our strong capital position while looking for growth opportunities in the markets we serve. To achieve these goals, we will focus on the following strategies:
Lending. We believe that commercial lending offers an opportunity to enhance our profitability while managing credit, interest rate and operational risk. We seek quality commercial loan opportunities in our existing markets and purchase loan participations that complement our existing portfolios. We will continue to focus our efforts on our existing markets as well as to further develop the Columbus, Ohio market through our loan production office. We anticipate that the majority of our commercial and multi-family real estate and commercial construction loan originations will range in size from $1.0 million to $8.0 million, while the majority of our commercial and industrial loan originations will range in size from $250,000 to $1.5 million. At December 31, 2023, our commercial loan portfolio, which includes commercial and multi-family real estate loans, commercial and industrial loans and construction loans, totaled $753.6 million, or 68.0% of total loans and leases, with approximately $253.5 million of these loans, or 33.6% of our total loans and leases, located in the Columbus, Ohio market.
Deposit Services. Deposits are our primary source of funds for lending and investment. We intend to continue to focus on increasing core deposits (which we define as all deposits except for certificates of deposit of $250,000 or more and brokered certificates of deposit) in our primary market area, with a particular emphasis on noninterest-bearing deposits. We will continue to enhance our offering of retail deposit products to maintain and increase our market share, while continuing to build our product offering of commercial deposit products to strengthen our relationships with our business customers. Core deposits represented 68.7% of our total deposits as of December 31, 2023.
Balance Sheet Growth . As a result of our efforts to build our management and infrastructure, we believe we are well-positioned to increase the size of our balance sheet without a proportional increase in overhead expense or operating risk. Accordingly, we intend to increase, on a managed basis, our assets and liabilities, particularly loans and deposits.
Asset Quality. We believe that strong asset quality is a key to long-term financial success. Our strategy for credit risk management focuses on an experienced team of credit professionals, well-defined credit policies and procedures, appropriate loan underwriting criteria and active credit monitoring. Our non-performing loans to total loans ratio was 0.72% at December 31, 2023.
Capital Position. Our policy has always been to protect the safety and soundness of First Bank Richmond through credit and operational risk management, balance sheet strength, and sound operations. The end result of these activities has been a capital ratio in excess of the well-capitalized standards set by our regulators. We believe that maintaining a strong capital position safeguards the long-term interests of First Bank Richmond.
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Interest Rate Risk Management. Changes in interest rates are our primary market risk as our balance sheet is almost entirely comprised of interest-earning assets and interest-bearing liabilities. As such, fluctuations in interest rates have a significant impact not only upon our net income but also upon the cash flows related to those assets and liabilities and the market value of our assets and liabilities. In order to maintain what we believe to be acceptable levels of net interest income in varying interest rate environments, we actively manage our interest rate risk and assume a moderate amount of interest rate risk consistent with board policies.
Selected Consolidated Financial and Other Data
The Financial Condition Data and Operating Data as of and for the years ended December 31, 2023 and 2022 are derived from the audited financial statements and related notes included elsewhere in this Form 10-K. The following information is only a summary and is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
At December 31,
2023 2022
(In thousands)
Selected Financial Condition Data:
Total assets $ 1,461,024 $ 1,328,026
Loans and leases, net (1)
1,090,073 961,691
Securities available for sale, at fair value 282,688 284,900
Investment securities, at amortized cost 4,950 6,672
FHLB stock 12,647 9,947
Deposits 1,041,140 1,005,261
FHLB advances 271,000 180,000
Stockholders’ equity 134,860 132,385
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(1) Net of allowances for credit losses, loans in process and deferred loan fees.
Years Ended December 31,
2023 2022
(In thousands)
Selected Operations Data:
Total interest income $ 67,410 $ 51,858
Total interest expense 29,748 10,219
Net interest income 37,662 41,639
Provision for credit losses 532 600
Net interest income after provision for credit losses 37,130 41,039
Service charges on deposit accounts 1,115 1,050
Card fee income 1,259 1,210
Loan and lease servicing fees 448 862
Gain on loan and lease sales 518 639
Other income 1,271 1,105
Total non-interest income 4,611 4,866
Total non-interest expenses 30,738 30,157
Income before provision for income taxes 11,003 15,748
Provision for income taxes 1,516 2,783
Net income $ 9,487 $ 12,965
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At or For the
Years Ended December 31,
2023 2022
Selected Financial Ratios and Other Data:
Performance ratios:
Return on average assets (ratio of net income to average total assets) 0.68 % 1.01 %
Return on average equity (ratio of net income to average equity) 7.36 % 8.79 %
Yield on interest-earning assets 4.98 % 4.18 %
Rate paid on interest-bearing liabilities 2.59 % 1.01 %
Interest rate spread information:
Average during period 2.39 % 3.17 %
End of period 2.27 % 3.09 %
Net interest margin (1)
2.78 % 3.36 %
Operating expense to average total assets 2.20 % 2.35 %
Average interest-earning assets to average interest-bearing liabilities 117.81 % 122.34 %
Efficiency ratio (2)
72.71 % 64.85 %
Asset quality ratios:
Non-performing assets to total assets (3)
0.56 % 0.69 %
Non-performing loans and leases to total gross loans and leases (4)
0.72 % 0.94 %
Allowance for credit losses on loans and leases to non-performing loans and leases (4)
195.80 % 135.28 %
Allowance for credit losses on loans and leases to total gross loans and leases 1.42 % 1.27 %
Net charge-offs to average outstanding loans and leases during the period 0.06 % 0.03 %
Capital ratios:
Common equity tier 1 capital (to risk weighted assets) (5)
12.85 % 13.23 %
Tier 1 leverage (core) capital (to adjusted tangible assets) (5)
10.64 % 11.20 %
Tier 1 risk-based capital (to risk weighted assets) (5)
12.85 % 13.23 %
Total risk-based capital (to risk weighted assets) (5)
14.10 % 14.31 %
Equity to total assets at end of period 9.23 % 10.01 %
Average equity to average assets 9.20 % 11.51 %
Per share data:
Basic earnings per share $ 0.91 $ 1.20
Diluted earnings per share 0.91 1.17
Cash dividends paid 0.56 0.40
Book value at year end 12.03 11.28
Tangible book value at year end (6)
12.03 11.28
Other data:
Number of full-service offices 12 12
Full-time equivalent employees 176 181
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(1) Net interest income divided by average interest earning assets.
(2) Total non-interest expenses as a percentage of net interest income and total non-interest income.
(3) Non-performing assets consist of nonaccrual loans and leases, accruing loans and leases more than 90 days past due, and foreclosed assets.
(4) Non-performing loans and leases consist of nonaccrual loans and leases and accruing loans and leases more than 90 days past due.
(5) Capital ratios are for First Bank Richmond.
(6) Tangible book value per share is a non-GAAP measure used by management and others within the financial services industry. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding.
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Financial Condition at December 31, 2023 Compared to December 31, 2022
General. Total assets increased $133.0 million, or 10.0%, to $1.5 billion at December 31, 2023 from December 31, 2022. The increase was driven by a $128.4 million, or 13.3%, increase in the loan and lease portfolio, net of allowance for credit losses on loans and leases, partially offset by a $3.9 million, or 1.3% decrease in investment securities. The increase in loans and leases was primarily funded by a $91.0 million, or 50.6%, increase in FHLB advances and a $35.9 million, or 3.6%, increase in deposits.
Loans and Leases. Our loan and lease portfolio, net of allowance for credit losses on loans and leases, increased $128.4 million, or 13.3%, to $1.1 billion at December 31, 2023 from $961.7 million at December 31, 2022. The majority of the growth occurred in commercial real estate loans which increased $43.5 million, or 14.6%, to $341.6 million, and in direct financing leases which increased $23.1 million, or 17.3%, to $156.6 million at December 31, 2023 compared to the prior year. We also experienced a $13.8 million, or 11.1%, increase in multi-family loans, a $15.9 million, or 10.1%, increase in residential real estate loans (including home equity lines of credit), a $17.9 million, or 12.8%, increase in construction and development loans, a $15.0 million, or 14.9% increase in commercial and industrial loans, and a $2.2 million, or 10.5%, increase in consumer loans.
The following table presents information concerning the composition of our loan and lease portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for credit losses on loans and leases) as of the dates indicated.
At December 31,
2023 2022
Amount Percent Amount Percent
(Dollars in thousands)
Real estate loans:
Residential mortgage (1)
$ 162,123 14.65 % $ 146,129 14.99 %
Home equity lines of credit 10,904 0.99 11,010 1.13
Multi-family 138,757 12.54 124,914 12.81
Commercial mortgage 341,633 30.87 298,087 30.57
Construction and development 157,805 14.26 139,923 14.35
Total real estate loans 811,222 73.31 720,063 73.85
Consumer loans 23,264 2.10 21,048 2.16
Commercial business loans and leases:
Commercial and industrial 115,428 10.43 100,420 10.30
Leases 156,598 14.15 133,469 13.69
Total commercial business loans and leases 272,026 24.58 233,889 23.99
Total loans and leases 1,106,512 100.00 % 975,000 100.00 %
Less:
Deferred fees and discounts 776 896
Allowance for credit losses on loans and leases 15,663 12,413
Total loans and leases, net $ 1,090,073 $ 961,691
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(1) Includes $6.4 million and $4.7 million of loans secured by second mortgages on residential properties at December 31, 2023 and 2022, respectively.
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Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loan and leases more than 90 days past due, totaled $8.0 million, or 0.72% of total loans and leases at December 31, 2023, compared to $9.2 million, or 0.94% of total loans and leases at December 31, 2022. The decrease in nonperforming loans was primarily attributable to a $1.3 million decrease in commercial and industrial loans, primarily due to one loan of $1.3 million secured by business assets and a second mortgage, previously past due more than 90 days and still accruing that was paid off in 2023. At December 31, 2023, our largest nonperforming loan was a $4.9 million nonaccrual commercial construction and development loan that is currently subject to litigation between the developer and other parties. At the time of origination, this loan had a loan to value ratio of 73%.
Allowance for Credit Losses. On January 1, 2023, the Company adopted the accounting standard referred to as CECL. As a result of the change in methodology from the incurred loss method to the CECL method, on January 1, 2023 the Company recorded a one-time adjustment from equity into the allowance for credit losses on loans and leases in the amount of $2.0 million, net of tax. The allowance for credit losses on loans and leases totaled $15.7 million, or 1.42% of total loans and leases outstanding at December 31, 2023. At December 31, 2022, prior to the adoption of CECL, the allowance for loan and lease losses totaled $12.4 million, or 1.27% of total loans and leases outstanding. Additionally, as a part of CECL adoption, the Company established an allowance for credit losses on unfunded commitments by recording a one-time adjustment from equity of $1.8 million. This allowance, which is reported in other liabilities on the Condensed Consolidated Balance Sheets, totaled $1.6 million at December 31, 2023. Net charge-offs during 2023 were $678,000 compared to net charge-offs of $295,000 during 2022.
Management regularly analyzes conditions within its geographic markets and evaluates its loan and lease portfolio. The Company evaluated its exposure to potential loan and lease losses as of December 31, 2023, which evaluation included consideration of persistent inflation, higher interest rates, a weakened economic growth and unemployment outlook, stock market volatility, and increased geopolitical risk. Credit metrics are being reviewed and stress testing is being performed on the loan portfolio on an ongoing basis. Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored.
Investment Securities. Investment securities decreased $3.9 million, or 1.3%, to $287.6 million at December 31, 2023, from $291.6 million at December 31, 2022. The decrease was primarily due to maturities and paydowns of securities of $22.5 million, partially offset by a $8.5 million upward mark-to-market adjustment in the fair value of securities available for sale and the purchase of $11.2 million of new securities.
Deposits. Total deposits increased $35.9 million, or 3.6%, to $1.0 billion at December 31, 2023 compared to December 31, 2022. This increase was primarily due to an increase in non-brokered time deposits of $46.4 million, or 22.9%, as well as an increase in brokered time deposits of $10.9 million, or 4.2%. These increases were partially offset by a decrease of $23.9 million, or 8.5%, in savings and money market accounts, and a $5.6 million, or 3.6%, decrease in interest-bearing demand deposits. Management attributes the shift in funds to customers taking advantage of higher rates being paid on time deposits in 2023 as a result of interest rate hikes enacted by the Federal Reserve. At December 31, 2023, brokered deposits equaled $268.8 million, or 25.8% of total deposits compared to $257.9 million, or 25.7% of total deposits at December 31, 2022. At December 31, 2023, noninterest-bearing deposits totaled $114.4 million, or 11.0% of total deposits, compared to $106.4 million, or 10.6%, of total deposits at December 31, 2022.
As of December 31, 2023, approximately $216.0 million of our deposit portfolio, or 20.7% of total deposits, excluding collateralized public deposits, was uninsured. The uninsured amounts are estimated based on the methodologies and assumptions used for First Bank Richmond’s regulatory reporting requirements.
Borrowings. Borrowings, consisting solely of FHLB advances, totaled $271.0 million at December 31, 2023, compared to $180.0 million at December 31, 2022. The additional borrowings were used to fund loan growth.
Stockholders’ Equity. Stockholders’ equity totaled $134.9 million at December 31, 2023, an increase of $2.5 million, or 1.9%, from December 31, 2022. The increase in stockholders’ equity primarily was the result of net income of $9.5 million and a decrease in Accumulated Other Comprehensive Loss (“AOCL”) of $6.7 million, partially offset by the payment of $5.9 million in dividends to Company stockholders, the repurchase of $6.3 million of Company common stock, and the one-time adjustment to retained earnings of $3.8 million for the adoption of CECL during the first quarter. The decrease in AOCL is primarily due to the improvement in mark-to-market values associated with our available-for-sale investment securities portfolio. At December 31, 2023, the available for sale portfolio had a net unrealized loss of $54.5 million compared to a net unrealized loss of $63.0 million at December 31, 2022. The AOCL impact to equity, after tax effecting the unrealized loss, was $43.0 million at December 31, 2023, compared to $49.8 million at December 31, 2022. First Bank Richmond was considered “well-capitalized” as defined by all regulatory standards as of December 31, 2023.
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Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022
General . Net income totaled $9.5 million for 2023 compared to $13.0 million in 2022, a decrease of $3.5 million or 26.8%. The decrease in net income was due to a $19.5 million, or 191.1%, increase in interest expense, a $256,000, or 5.3%, decrease in non-interest income and a $583,000, or 1.9%, increase in non-interest expense, partially offset by a $15.6 million, or 30.0%, increase in interest income and a $1.3 million, or 45.5%, decrease in income tax expense.
Interest Income . Total interest income for 2023 increased $15.6 million or 30.0% over 2022. The increase primarily was a result of an 80 basis point increase in the average yield on interest earning assets, alongside $114.1 million increase in the average balance of interest earning assets. Interest earned on loans and leases increased $14.2 million, or 31.8%, due to a $146.6 million increase in the average balance of and a 66 basis point increase in the average yield earned on loans and leases. Interest earned on investment securities, excluding FHLB stock, increased $491,000, or 7.3%, due to a 42 basis point increase in the average yield, partially offset by a $33.3 million decrease in the average balance of the portfolio. Dividends on FHLB stock increased $452,000, or 113.3%, during 2023 compared to the prior year. The average yield on FHLB stock during 2023 was 7.92%, up 387 basis points from 4.05% during the prior year, while the average balance of FHLB stock outstanding during 2023 was $10.8 million, up from $9.9 million during 2022. Interest on cash and cash equivalents increased $409,000 due to a 298 basis point increase in the average yield.
Interest Expense . Total interest expense increased $19.5 million, or 191.1%, to $29.7 million during 2023 compared to $10.2 million during 2022. The increase primarily was the result of an increase in the average cost of certificate of deposit accounts, savings and money market accounts, and borrowings and, to a lesser extent, an increase in average balance of certificate of deposit accounts and borrowings. The average rate paid on certificate of deposit accounts increased 213 basis points to 3.29% from 1.16% in 2022, while the average balance of certificate of deposit accounts increased $125.3 million, or 32.6%, to $509.3 million in 2023 compared to $384.0 million in 2022, resulting a $12.3 million increase in interest expense. The average rate paid on savings and money market accounts increased 106 basis points to 1.82% from 0.76% in 2022, while the average balance of those accounts decreased $10.2 million, or 3.6%, to $274.5 million in 2023 compared to $284.7 million in 2022, resulting a $2.8 million increase in interest expense. The average balance of interest-bearing checking accounts decreased $17.2 million, or 10.4%, to $148.0 million in 2023 from $165.2 million in 2022, while the average rate paid on interest-bearing checking accounts increased 39 basis points to 0.71% in 2023 from 0.32% in 2022, resulting in a $520,000 increase in interest expense. Interest expense on borrowings, consisting solely of FHLB advances, increased $3.8 million, or 124.4%, due to a 146 basis point increase on the average rate paid to 3.18% in 2023 from 1.72% in 2022, and a $38.1 million, or 21.1%, increase in the average balance of borrowings to $218.0 million in 2023 from $180.0 million in 2022.
Net Interest Income . Net interest income before provision for credit losses decreased $4.0 million, or 9.5%, to $37.7 million in 2023 compared to $41.6 million in 2022, primarily due to a 78 basis point decrease in the average interest rate spread. Our net interest margin in 2023 was 2.78%, a decrease of 58 basis points compared to 2022 as a result of a decline in net interest income coupled with an increase in average-interest earning assets during the year.
Since March 2022, in response to inflation, the Federal Open Market Committee (“FOMC”) of the Federal Reserve System has increased the target range for the federal funds rate by 500 basis points, including 100 basis points during 2023, to a range of 5.25% to 5.50%. While net interest income benefited from the repricing impact of the higher interest rate environment on earning asset yields, the benefits were offset by the higher cost of interest-bearing deposit accounts and borrowings which tend to be shorter in duration than our assets and re-price or reset faster than assets.
Provision for Credit Losses . The provision for credit losses in 2023 was $532,000, a $68,000, or 11.3%, decrease compared to $600,000 in 2022. The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves. As a result of the adoption of CECL on January 1, 2023, the provision for credit losses calculated prior to that date was determined using the previously applied incurred loss methodology rather than the CECL methodology, and as a result the amounts are not directly comparable. Net charge-offs during 2023 were $678,000 compared to net charge-offs of $295,000 in 2022. The allowance for credit losses on loans and leases as a percentage of the total loan and lease portfolio was 1.42% at year-end 2023, compared to 1.27% at year-end 2022. Net charge-offs in 2023 equaled 0.06% of total average loans and leases outstanding compared to net charge-offs of 0.03% of total average loans and leases outstanding in 2022.
Non-interest Income . Total non-interest income decreased $256,000, or 5.3%, to $4.6 million for 2023 compared to $4.9 million for 2022. The decrease was primarily driven by a decrease in loan and lease servicing fees of $414,000, or 48.0%, to $448,000 in 2023 from $862,000 in 2022, as a recovery of mortgage servicing rights of $380,000 was recognized in 2022 and not replicated in 2023. Net gains on loan and lease sales decreased $121,000, or 19.0%, to $518,000 in 2023 from $639,000 in 2022, as mortgage banking activity declined due to lower refinancing activity, a lower supply of houses for sale in the Bank's
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market area, and increases in residential mortgage rates. Partially offsetting these decreases were increases in other income and service charges on deposit accounts. Other income increased $165,000, or 14.9%, to $1.3 million during 2023 compared to $1.1 million during 2022 primarily due to fees earned from our participation in a loan hedging program with a correspondent bank, along with increased wealth management income. Service charges on deposit accounts increased $65,000, or 6.2%, to $1.1 million during 2023 compared to $1.0 million during 2022 as a result of increased demand deposit account service fees and non-sufficient funds fees. In addition, card fee income increased $49,000, or 4.1%, due to increased debit card usage.
Non-interest Expenses . Total non-interest expense increased $582,000, or 1.9%, to $30.7 million during 2023 compared to 2022, primarily due to increases in deposit insurance expense, data processing fees, and legal and professional fees, partially offset by decreases in salaries and employee benefits and equipment expenses.
Deposit insurance expense increased $669,000, or 135.4%, to $1.2 million in 2023 from $494,000 in 2022, due to a change in our asset and deposit mix, as well as an increase in the initial base deposit insurance assessment rate during 2023. Data processing fees increased $636,000, or 23.4%, to $3.3 million in 2023 from $2.7 million in 2022, primarily due to increased software and core provider expenses. Legal and professional fees increased $178,000, or 12.5%, to $1.6 million in 2023 from $1.4 in 2022, primarily due to increased accounting services expense. Salaries and employee benefits decreased $1.0 million, or 5.6%, to $17.4 million in 2023 from $18.5 million in 2022, primarily due to decreased bonus expense. Equipment expenses decreased $141,000, or 11.1%, to $1.1 million in 2023 from $1.3 million in 2022, primarily due to decreased depreciation expenses.
Income Tax Expense . Income tax expense decreased $1.3 million in 2023 compared to 2022. This decrease in income tax expense was primarily due to pretax income decreasing $4.7 million, or 30.1%, and a lower effective tax rate in 2023. The effective tax rate for the year ended 2023 was 13.8% compared to 17.7% in 2022. The decline in the effective tax rate primarily was due to the use of a pooled captive insurance company, which was formed during 2022, that allows the Company to assume more control over insurance risks, as well as tax deductions related to the employee stock ownership plan.
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Average Balances, Interest and Average Yields/Cost
The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using daily balances. Average balances of loans and leases receivable include loans held for sale. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.
Years Ended December 31,
2023 2022
Average
Balance
Outstanding Interest
Earned/
Paid Yield/
Rate Average
Balance
Outstanding Interest
Earned/
Paid Yield/
Rate
(Dollars in thousands)
Interest-earning assets:
Loans and leases receivable $ 1,044,471 $ 58,794 5.63 % $ 897,918 $ 44,594 4.97 %
Securities 285,600 7,203 2.52 % 318,917 6,712 2.10 %
FHLB stock 10,750 851 7.92 % 9,856 399 4.05 %
Cash and cash equivalents and other 13,728 562 4.09 % 13,739 153 1.11 %
Total interest-earning assets 1,354,549 67,410 4.98 % 1,240,430 51,858 4.18 %
Non-earning assets 45,212 40,659
Total assets 1,399,761 1,281,089
Interest-bearing liabilities:
Savings and money market accounts 274,497 4,989 1.82 % 284,725 2,153 0.76 %
Interest-bearing checking accounts 147,964 1,054 0.71 % 165,213 534 0.32 %
Certificate accounts 509,316 16,767 3.29 % 384,038 4,441 1.16 %
Borrowings 218,025 6,938 3.18 % 179,966 3,091 1.72 %
Total interest-bearing liabilities 1,149,802 29,748 2.59 % 1,013,942 10,219 1.01 %
Noninterest-bearing demand deposits 107,192 111,990
Other liabilities 13,924 7,686
Stockholders' equity 128,843 147,471
Total liabilities and stockholders' equity 1,399,761 1,281,089
Net interest income $ 37,662 $ 41,639
Net earning assets $ 204,747 $ 226,488
Net interest rate spread (1)
2.39 % 3.17 %
Net interest margin (2)
2.78 % 3.36 %
Average interest-earning assets to average interest-bearing liabilities 117.81 % 122.34 %
_____________________
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
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Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Years Ended
December 31,
2023 vs. 2022
Increase/
(decrease)
due to Total
increase/ (decrease)
Volume Rate
(In thousands)
Interest-earning assets:
Loans and leases receivable $ 7,295 $ 6,905 $ 14,200
Securities (687) 1,178 491
FHLB stock 36 416 452
Cash and cash equivalents and other — 409 409
Total interest-earning assets $ 6,644 $ 8,908 $ 15,552
Interest-bearing liabilities:
Savings and money market accounts $ (78) $ 2,914 $ 2,836
Interest-bearing checking accounts (55) 575 520
Certificate accounts 1,456 10,870 12,326
Borrowings 656 3,191 3,847
Total interest-bearing liabilities $ 1,979 $ 17,550 $ 19,529
Change in net interest income $ (3,977)
Capital and Liquidity
Capital. Shareholders' equity totaled $134.9 million at December 31, 2023 and $132.4 million at December 31, 2022. In addition to net income of $9.5 million, other sources of capital during 2023 included $612,000 related to the allocation of ESOP shares during the year, $1.6 million related to stock-based compensation and a decrease in AOCL of $6.7 million. Uses of capital during 2023 included $5.9 million of dividends paid on common stock and $6.3 million of stock repurchases. The decrease in AOCL primarily was due to the improvement in mark-to-market values associated with the Company's available-for-sale investment securities portfolio.
We paid regular quarterly cash dividends of $0.14 per common share during 2023, compared to $0.10 per share during 2022. This equates to a dividend payout ratio of 62.4% in 2023 and 34.0% in 2022. We currently expect to continue the current practice of paying quarterly cash dividends on common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment during 2024 at the current dividend rate of $0.14 per share, our average total dividend paid each quarter would be approximately $1.6 million based on the number of our current outstanding shares at December 31, 2023. The amount of dividends, if any, we may pay may be limited as more fully discussed in "Note 17: Regulatory Capital" in the accompanying notes to consolidated financial statements contained in Item 8 of this Form 10-K.
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Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On June 6, 2023, the Company announced that the Board of Directors approved an amendment to the Company's existing stock repurchase program authorizing the purchase of up to 321,386 shares of the Company's issued and outstanding common stock in addition to the 827,554 shares that remained available for the repurchase at that date under the existing program, and extended the stock repurchase program's expiration date to June 6, 2024, unless completed sooner. As of December 31, 2023, the Company had approximately 868,036 shares available for repurchase under its existing stock repurchase program. The repurchase program does not obligate the Company to purchase any particular number of shares. See Part II, Item 5 - "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets generally include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, sales of fixed rate residential mortgage loans in the secondary market, and federal funds sold and resell agreements. Liability liquidity generally is provided by access to funding sources which include core deposits and advances from the FHLB and other borrowing relationships with third party financial institutions.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs.
As of December 31, 2023, we had approximately $6.7 million held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the FHLB. As of December 31, 2023, based upon available, pledgeable collateral, our total remaining borrowing capacity with the FHLB was approximately $86.4 million. Furthermore, at December 31, 2023, we had approximately $147.3 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed. As of December 31, 2023, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.
In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of December 31, 2023. These include payments related to (i) long-term borrowings (Note 10 - Federal Home Loan Bank Advances), (ii) time deposits with stated maturity dates (Note 9 - Deposits) and (iii) commitments to extend credit and standby letters of credit (Note 13 - Commitments and Contingent Liabilities).
We also incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on our current capital allocation objectives for 2024, management does not expect cash expenditures for capital investment in premises and equipment to have a material effect on our liquidity, capital resources or operations.
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Richmond Mutual Bancorporation is a separate legal entity from First Bank Richmond and must provide for its own liquidity. In addition to its own operating expenses, Richmond Mutual Bancorporation is responsible for paying for any stock repurchases, dividends declared to its stockholders and other general corporate expenses. Since Richmond Mutual Bancorporation is a holding company and does not conduct operations, its primary sources of liquidity are interest on investment securities purchased with proceeds from our initial public offering, dividends up streamed from First Bank Richmond and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid to us by First Bank Richmond. "Note 17: Regulatory Capital" in the accompanying notes to consolidated financial statements contained in Part II, Item 8 and "How We Are Regulated - Dividends" contained in Part I, Item I of this Form 10-K. At December 31, 2023, Richmond Mutual Bancorporation, on an unconsolidated basis, had $13.2 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs.
See also the "Consolidated Statements of Cash Flows" included in "Item 8. Financial Statements and Supplementary Data" of this Form 10-K for further information.
Regulatory Capital Requirements. First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At December 31, 2023, First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards. Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.
Actual Minimum for Capital Adequacy Purposes Minimum to be Categorized as "Well-Capitalized" Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2023 (Dollars in thousands)
Total risk-based capital (to risk weighted assets) $ 174,938 14.1 % $ 99,247 8.0 % $ 124,059 10.0 %
Tier 1 risk-based capital (to risk weighted assets) 159,409 12.8 74,435 6.0 99,247 8.0
Common equity tier 1 capital (to risk weighted assets) 159,409 12.8 55,826 4.5 80,638 6.5
Tier 1 leverage (core) capital (to adjusted tangible assets) 159,409 10.6 59,931 4.0 74,914 5.0
As of December 31, 2022
Total risk-based capital (to risk weighted assets) $ 164,804 14.3 % $ 92,134 8.0 % $ 115,168 10.0 %
Tier 1 risk-based capital (to risk weighted assets) 152,391 13.2 69,101 6.0 92,134 8.0
Common equity tier 1 capital (to risk weighted assets) 152,391 13.2 51,826 4.5 74,859 6.5
Tier 1 leverage (core) capital (to adjusted tangible assets) 152,391 11.2 54,421 4.0 68,026 5.0
Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At December 31, 2023, the Bank’s CET1 capital exceeded the required capital conservation buffer.
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For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve Board expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations. If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2023, it would have exceeded all regulatory capital requirements.