RIVERVIEW BANCORP INC 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance. Our Asset/Liability Management Committee (“ALCO”) is responsible for monitoring and reviewing asset/liability processes and interest rate risk exposure to determine the level of risk appropriate given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of interest rates. Our actions in this regard are taken under the guidance of the ALCO, which is comprised of members of our senior management. The ALCO closely monitors our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances. The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of the Company’s interest-earning assets and interest-bearing liabilities, see the tables under Item 1. “Business – Lending Activities,” “– Investment Activities” and “– Deposit Activities and Other Sources of Funds”. The Company’s principal financial objective is to achieve long-term profitability while limiting its exposure to fluctuating market interest rates. The Company intends to reduce risk where appropriate but accepts a degree of risk when warranted by economic circumstances. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company’s interest-earning assets by retaining in its loan portfolio, short–term loans and loans with interest rates subject to periodic adjustments. Consumer and commercial loans are originated and held in the loan portfolio as the short-term nature of these portfolio loans match durations more closely with the short-term nature of retail deposits such as interest checking, money market accounts and savings accounts. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with longer terms to maturity. Except for immediate short-term cash needs, and depending on the current interest rate environment, FHLB advances will have short or long-term maturities. FRB borrowings have short-term maturities. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained herein. A number of measures are utilized to monitor and manage interest rate risk, including simulation modeling and traditional interest rate gap analysis. While both methods provide an indication of risk for a given change in interest rates, the simulation model is primarily used to assess the impact on earnings that changes in interest rates may produce. Key assumptions in the model include cash flows and maturities of financial instruments, changes in market conditions, loan volumes and pricing, deposit sensitivity, consumer preferences and management’s capital leverage plans. These assumptions are inherently uncertain; therefore, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results may significantly differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and specific strategies among other factors. ​ 60 Table of Contents The following table shows the approximate percentage change in net interest income as of March 31, 2022 over a 12 and 24-month period under several rate scenarios: ​ ​ ​ ​ ​ ​ ​ ​ ​ Percent change in net ​ Percent change in net ​ ​ interest income (12 ​ interest income (24 Change in interest rates (1) months) months) ​ ​ ​ ​ ​ ​ Up 300 basis points 3.2 % 10.8 % Up 200 basis points 0.6 % 5.8 % Up 100 basis points 1.4 % 5.2 % Base case — 1.2 % Down 100 basis points (3.1) % (7.0) % ​ (1) The target federal funds rate as of March 31, 2022 was between 0.25% - 0.50%. No rates in this model are allowed to go below zero and therefore a down 200 and down 300 basis point scenario would not be plausible. Our consolidated balance sheet continues to be asset sensitive, meaning that interest-earning assets reprice faster than interest-bearing liabilities in a given period. However, due to a number of loans in our loan portfolio with interest rate floors, our net interest income will be negatively impacted in a rising interest rate environment until such time as the current rate exceeds these interest rate floors. Net interest income will increase in year one as set forth in the table above as our interest-earning assets are expected to continue to reprice faster than interest-bearing liabilities. In a falling interest rate environment, our net interest income will be negatively impacted as our deposit costs are currently relatively low and interest rates paid cannot decrease significantly. We attempt to limit our interest rate risk through managing the repricing characteristics of our assets and liabilities. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Furthermore, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. 61 Table of Contents The following table shows the Company’s financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments’ fair values at March 31, 2022. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments (dollars in thousands). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ After ​ After ​ After ​ Beyond ​ ​ ​ ​ ​ Average ​ Within ​ 1 – 3 ​ 3 – 5 ​ 5 – 10 ​ 10 ​ ​ ​ ​ Rate 1 Year Years Years Years Years Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-Sensitive Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans receivable ​ 3.97 % $ 44,195 ​ $ 45,709 ​ $ 113,307 ​ $ 525,444 ​ $ 261,753 ​ $ 990,408 Investment securities and other interest-earning assets ​ 1.25 ​ 230,992 ​ 7,811 ​ 31,112 ​ 99,081 ​ 274,723 ​ 643,719 FHLB stock ​ 2.87 ​ 403 ​ 808 ​ 808 ​ — ​ — ​ 2,019 Total assets ​ ​ ​ ​ $ 275,590 ​ $ 54,328 ​ $ 145,227 ​ $ 624,525 ​ $ 536,476 ​ $ 1,636,146 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-Sensitive Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 0.03 ​ $ 57,573 ​ $ 115,144 ​ $ 115,144 ​ $ — ​ $ — ​ $ 287,861 Savings accounts ​ 0.08 ​ 68,016 ​ 136,030 ​ 136,030 ​ — ​ — ​ 340,076 Money market accounts ​ 0.06 ​ 59,948 ​ 119,895 ​ 119,895 ​ — ​ — ​ 299,738 Certificate accounts ​ 0.57 ​ 77,179 ​ 29,470 ​ 3,680 ​ 1,043 ​ — ​ 111,372 Subordinated debentures ​ 2.47 ​ — ​ — ​ — ​ — ​ 26,833 ​ 26,833 Finance lease liability ​ 7.16 ​ 53 ​ 131 ​ 167 ​ 564 ​ 1,368 ​ 2,283 Total liabilities ​ ​ ​ ​ 262,769 ​ 400,670 ​ 374,916 ​ 1,607 ​ 28,201 ​ 1,068,163 Interest sensitivity gap ​ ​ ​ ​ 12,821 ​ (346,342) ​ (229,689) ​ 622,918 ​ 508,275 ​ $ 567,983 Cumulative interest sensitivity gap ​ ​ ​ ​ $ 12,821 ​ $ (333,521) ​ $ (563,210) ​ $ 59,708 ​ $ 567,983 ​ Off-Balance Sheet Items: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commitments to extend credit ​ ​ ​ ​ $ 20,020 ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 20,020 Unused lines of credit ​ ​ ​ ​ $ 137,460 ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 137,460 ​ ​ 62 Table of Contents