Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q ("Form 10-Q"), as well as other reports issued by HF Financial Corp. (the "Company") include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the Company's management may make forward-looking statements orally to the media, securities analysts, investors and others from time to time. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as "optimism," "look-forward," "bright," "believe," "expect," "anticipate," "intend," "hope," "plan," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may," are intended to identify these forward-looking statements.
These forward-looking statements might include one or more of the following:
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projections of income, loss, revenues, earnings or losses per share, dividends, capital expenditures, capital structure, tax benefit or other financial items.
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descriptions of plans or objectives of management for future operations, products or services, transactions, investments and use of subordinated debentures payable to trusts.
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forecasts of future economic performance.
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use and descriptions of assumptions and estimates underlying or relating to such matters.
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Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
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the pendency of the proposed merger (the “Merger”) with Great Western Bancorp, Inc. (“Great Western”) pursuant to the agreement and plan of merger (the “Merger Agreement”) between the Company and Great Western dated November 30, 2015 and the related diversion of our management’s attention;
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the business uncertainties and contractual restrictions while the Merger is pending and the impact of these factors on employee retention;
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the possibility that the Merger Agreement is terminated or that the Merger does not close;
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the lawsuit that has been filed challenging the Merger and the potential for further lawsuits challenging the Merger;
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adverse economic and market conditions of the financial services industry in general, including, without limitation, the credit markets;
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the effect of recent legislation to help stabilize the financial markets;
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increase of non-performing loans and additional provisions for loan losses;
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the failure of assumptions underlying the establishment of reserves for loan losses and other estimates;
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the failure to maintain our reputation in our market area;
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prevailing economic, political and business conditions in South Dakota, Minnesota and North Dakota;
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the effects of competition from a wide variety of local, regional, national and other providers of financial services;
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compliance with existing and future banking laws and regulations, including, without limitation, regulatory capital requirements and FDIC insurance coverages and costs;
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changes in the availability and cost of credit and capital in the financial markets;
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the effects of FDIC deposit insurance premiums and assessments;
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the risks of changes in market interest rates on the composition and costs of deposits, loan demand, net interest income, and the values and liquidity of loan collateral, and our ability or inability to manage interest rate and other risks;
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changes in the prices, values and sales volumes of residential and commercial real estate;
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an extended period of low commodity prices, significantly reduced yields on crops, reduced levels of governmental assistance to the agricultural industry, and reduced farmland values;
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soundness of other financial institutions;
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the risks of future acquisitions and other expansion opportunities, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and expense savings from such transactions;
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security and operations risks associated with the use of technology;
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the loss of one or more of our key personnel, or the failure to attract, assimilate and retain other highly qualified personnel in the future;
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changes in or interpretations of accounting standards, rules or principles; and
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other factors and risks described under the caption "Risk Factors" in our most recent Annual Report on Form 10-K and subsequently filed quarterly reports on Form 10-Q.
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Forward-looking statements speak only as of the date they are made. Forward-looking statements are based upon management's then-current beliefs and assumptions, but management does not give any assurance that such beliefs and assumptions will prove to be correct. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this Form 10-Q 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, except to the extent required by federal securities laws. Based upon changing conditions, should any one or more of the above risks or uncertainties materialize, or should any of our underlying beliefs or assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statement.
References in this Form 10-Q to "we," "our," "us" and other similar references are to the Company, unless otherwise expressly stated or the context requires otherwise.
Executive Summary
The Company's net income for the first
nine
months of
fiscal 2016
was
$7.4 million
, or
$1.05
in basic and diluted earnings per common share, compared to
$1.7 million
, or
$0.24
in basic and diluted earnings per common share, for the first
nine
months of
fiscal 2015
. This resulted in a return on average equity (i.e., net income divided by average equity) of
9.16%
and
2.16%
, respectively, in the year-over-year comparison, while the return on average assets (i.e., net income divided by average assets) was
0.84%
and
0.18%
, respectively.
Core diluted earnings per share, a non-GAAP measure, was
$0.88
compared to
$0.75
for the
nine
months ended
March 2016
and 2015, respectively. This financial measure is adjusted from GAAP net income and diluted earnings per share for the effects of the net gains or losses on investment security sales, charges incurred from prepayment of borrowings, net gain on sale of bank branch, net gains or losses on sales of real property, merger related costs, and effects of branch closure costs. See “Reconciliation of GAAP Earnings and Core Earnings” for a reconciliation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful.
During the first quarter of the 2016 fiscal year, the Bank sold its branch office in Pierre, SD with approximately $21.4 million in deposits, for a $2.8 million pre-tax net gain. Included in the sale were $24.2 million of loan receivables.
On November 30, 2015, HFFC announced its entry into the Merger Agreement with Great Western. Under the terms of the Merger Agreement, 75% of HFFC’s common stock will be converted into Great Western common stock and the remaining 25% will be exchanged for cash. HFFC stockholders will have the option to elect to receive either 0.650 shares of Great Western common stock or $19.50 in cash for each HFFC common share, subject to proration to ensure that, in the aggregate, 75% of HFFC shares will be converted into stock. The Merger has been unanimously approved by the Board of Directors of both Great Western and HFFC and is expected to close in the second quarter of calendar 2016, subject to certain conditions, including the approval by HFFC’s stockholders and customary regulatory approvals.
Net interest income for the first
nine
months of
fiscal 2016
was
$28.7 million
, an
increase
of
$2.2 million
, or
8.3%
, compared to the same period a year ago. For the comparative periods, average interest-earning assets and average interest-bearing liabilities
decrease
d
5.9%
and
7.5%
, respectively. The average yield on interest-earning assets
increase
d to
3.97%
for the first
nine
months of
fiscal 2016
, compared to
3.64%
a year ago, an
increase
of
33
basis points, due primarily to the
8.2%
growth in average loan balances of
$69.1 million
, and a
decrease
by
43.6%
, or
$135.0 million
in the average balances of lower-yielding investment securities. This was complemented by a
15
basis point decrease in the average rates paid on interest-bearing liabilities stemming from a reduction in rates paid and average balances for FHLB advances. The improved mix of earning assets, which featured over 83% of assets in higher-earning loan assets, and the repayment of higher-rate term borrowings in December 2014, contributed to the majority of the overall improvement in net interest margin of
45
basis points when comparing the first nine months of fiscal 2016 with the same period of the prior year. For the
nine
months ended
March 31, 2016
, cost of deposits, which include all interest-bearing and noninterest-bearing deposits, increased one basis point to
0.39%
, when compared to the prior fiscal year.
The net interest margin expressed on a fully taxable equivalent basis (“Net Interest Margin, TE”) for the
nine
months ended
March 31, 2016
was
3.56%
, which is an
increase
of
45
basis points from the same period of the prior fiscal year. Net Interest Margin, TE is a non-GAAP financial measure. See “Analysis of Net Interest Income” for a calculation of this non-GAAP financial measure and for further discussion as to the reasons we believe this non-GAAP financial measure is useful. Net interest income attributable to the improvement in the mix of earning assets and the decrease in balances of interest-bearing liabilities amounted to a net increase of
$1.8 million
in net interest margin for the
nine
month period when compared to the
same period of the prior year. Also, changes due to rates amounted to a
$421,000
increase in the net interest margin. The combined effects of volume and rate changes resulted in an overall net interest income
increase
of
$2.2 million
for the
nine
months ended
March 31, 2016
when compared to the same period of the prior year.
Average loans and leases receivable balances
increase
d by
$69.1 million
, when compared to the same period of the prior year, and were funded by a reduction in average investment securities of
$135.0 million
and FHLB stock of
$2.2 million
. This decrease in investment securities also supported a net
decrease
in interest-bearing liabilities of
$71.4 million
. Average balances of interest-bearing deposits
decrease
d
$15.6 million
for the year-over-year comparison, while FHLB advances and other borrowings
decrease
d by
$55.6 million
, which resulted in a mix of liabilities that lessened the average rates paid on the interest-bearing liabilities compared to the same period of the prior fiscal year.
Total loans
decrease
d by
$22.2 million
during the first nine months of fiscal 2016 to
$892.2 million
at
March 31, 2016
, compared to
$914.4 million
at
June 30, 2015
, primarily due to the sale of $24.2 million of loans associated with the branch sale in July 2015. When compared to the
March 31, 2015
balance of
$871.6 million
, loans have increased by
$20.6 million
. During this time-frame, commercial real estate balances have increased by $51.8 million and single family loans increased by $8.8 million, which were the primary components of the increase, but were partially offset by a decrease in agricultural loans of $32.3 million. For the nine months of fiscal 2016, commercial real estate loans have increased by $28.5 million, while business and agricultural loans decreased by
$12.7 million
and $38.4 million, respectively. Management believes the overall increase in average loan balances was attributable to a gradual improvement in general economic conditions, resulting in the willingness of borrowers to consider incurring more debt to support growth in their businesses, while also acknowledging that we continue to operate in uncertain national economic and fiscal conditions. Management believes that the operating environment has resulted in increased competition among financial institutions for loan demand from credit-worthy borrowers.
The allowance for loan and lease losses
increase
d by
$362,000
to
$11.6 million
at
March 31, 2016
, compared to
June 30, 2015
. The ratio of allowance for loan and lease losses to total loans and leases was
1.30%
compared to
1.23%
at
June 30, 2015
. The overall loan balances decreased by
$22.2 million
during the first
nine
months of
fiscal 2016
, while nonperforming loans
increase
d by
$2.7 million
to
$15.8 million
. The amount of classified assets
increase
d to
$27.0 million
at
March 31, 2016
as compared to $22.0 million at
June 30, 2015
, which contributed in part to the increase in the allowance. The Company continues to pro-actively manage its problem assets through procedural guidance and dedicated personnel to create an environment of early detection and resolution of assets in this segment. This has been supported by improved conditions in the regional commercial and agricultural markets, including livestock and dairy operations. The provision for loan and lease losses, which results from adjusting the allowance for loan and lease losses to the estimated amount needed to reserve for the loan and lease portfolio, was
$532,000
for the first
nine
months of
fiscal 2016
. Total nonperforming assets at
March 31, 2016
were
$15.9 million
as compared to
$13.3 million
at
June 30, 2015
. The ratio of nonperforming assets to total assets
increase
d to
1.40%
at
March 31, 2016
, compared to
1.12%
at
June 30, 2015
. Net
charge-offs
for the
nine
month period ended
March 31, 2016
were
$170,000
and represent
0.02%
of average loans and leases for the period annualized. The allowance recorded in accordance with ASC 450
decrease
d by
$77,000
due to adjustments based on management's assessment of the allowance using historical charge-off activity and environmental factor information and applied to applicable loan balances. The allowance recorded in accordance with ASC 310 on identified impaired loans
increase
d by
$439,000
to
$718,000
at
March 31, 2016
, and consisted primarily of agriculture business and commercial real estate loans. All identified impaired loans are reviewed to assess the borrower's ability to make payments under the terms of the loan and/or a shortfall in collateral value that would result in charging off the loan or the portion of the loan that was impaired.
Foreclosed real estate and other properties totaled
$99,000
at
March 31, 2016
, compared to
$157,000
at
June 30, 2015
, or a
decrease
of
$58,000
. The balance at
March 31, 2016
consisted primarily of residential real estate. Overall, foreclosed property assets and the related costs have continued to be minimal when compared to the overall loan portfolio.
The allowance for loan and lease losses is calculated based on loan and lease levels, loan and lease loss history over 36 month rolling time periods, credit quality of the loan and lease portfolio, and environmental factors such as economic health of the region and management experience. This risk rating analysis is designed to give the Company a consistent and systematic methodology to determine proper levels for the allowance at a given time. Management intends to continue its disciplined credit administration and loan underwriting processes and to remain focused on the creditworthiness of new loan originations. Management believes that it has identified the most significant nonperforming assets in the loan portfolio and is working to clarify and resolve the credit, credit administration, and environmental factor issues related to these assets to obtain the most favorable outcome for the Company.
Total deposits at
March 31, 2016
were
$910.6 million
, a
decrease
of
$52.7 million
from
June 30, 2015
. This
decrease
was primarily due to a
decrease
of
$41.5 million
from seasonal public fund deposits and a decrease in out-of-market certificates of deposits of
$32.1 million
. These decreases were partially offset by an
increase
of
$21.0 million
from in-market, non-public fund customer deposits. The Pierre branch sale in July 2015 included $21.4 million of deposits which were primarily in-market non-public fund deposits. Public funds have seasonal fluctuations due to semiannual tax collection and subsequent disbursement to entities. Interest rates on deposits increased one basis point at an average rate paid of
0.46%
on interest-bearing deposits for the
nine
month period ended
March 31, 2016
, compared to the same period of the prior year.
On
April 25, 2016
, the Company announced it will pay a quarterly cash dividend of
$11.25 cent
s per common share for the
third
quarter of
fiscal 2016
. The dividend will be paid on
May 12, 2016
, to stockholders of record on
May 6, 2016
.
The Bank total risk-based capital ratio of
13.90%
at
March 31, 2016
,
increase
d by
61
basis points from
13.29%
at
June 30, 2015
. Tier I capital
increase
d
55
basis points to
10.94%
at
March 31, 2016
when compared to
10.39%
at
June 30, 2015
. The
increase
in total risk-based capital resulted from an increase in earnings and overall equity retained. The tier 1 capital to risk-weighted assets ratio and common equity tier 1 capital to risk-weighted assets ratio were 12.72% versus 12.16% at June 30, 2015. These ratios continue to place the Bank in the “well-capitalized” category within financial institution regulations at
March 31, 2016
and are consistent with the “well-capitalized” regulatory category in which the Bank plans to operate. The Bank historically has been able to manage the size of its assets through secondary market loan sales of single-family mortgages. See Note 2 of "Notes to Consolidated Financial Statements" of this Form 10-Q for additional information on regulatory capital for the Bank and the Company.
Noninterest income was
$12.3 million
for the
nine
months ended
March 31, 2016
, compared to
$8.5 million
for the same period in the prior fiscal year, an
increase
of
$3.8 million
. This
increase
was due primarily to the bank branch sale which netted a pre-tax gain of $2.8 million in the first quarter of fiscal year 2016. In comparison year-over-year, the prior year net loss on the sale of securities of $1.1 million and the $461,000 loss on the disposal of closed-branch fixed assets for which no losses were incurred in the current fiscal year, provided for a large increase when compared to the prior fiscal year. A decrease in fees on deposits of $487,000 partially offset these year-over-year increases noted earlier. The mortgage banking revenue was relatively flat in the year-over-year comparison due to an increase in net gain on sale of loans of
$464,000
and offset by a decrease in net loan servicing income of $470,000. Mortgage activity increased in this comparison period, however in the third fiscal quarter of 2016, a provision for a valuation allowance for servicing rights of $407,000 was recorded due in part to effects of lower market rates. Fees on deposits
decrease
d by
$487,000
for the first
nine
months of
fiscal 2016
when compared to the same period of the prior year primarily due to
decrease
s in NSF/Overdraft fees of
$253,000
, point-of-sale income reductions of
$141,000
, and reduced service charge income of
$85,000
.
Noninterest expense was
$29.3 million
for the
nine
months ended
March 31, 2016
, as compared to
$32.0 million
for the same period of the prior fiscal year, a
decrease
of
$2.7 million
, or
8.4%
. The prior fiscal year included the prepayment of $84.9 million in FHLB term borrowings which resulted in a one-time pre-tax charge to other noninterest expense of $4.1 million. When excluding this charge, noninterest expense increased $1.4 million over the same nine month period of the prior fiscal year. Professional fees have increased $716,000 or 47.4% over the prior year period, primarily attributable to expenses related to the proposed merger transaction. An additional component of the increase was compensation and employee benefits expense, which increased by
$658,000
, or
4.0%
, when compared to the same period from the prior fiscal year. Of the total change in compensation and employee benefits, health and insurance benefits increased by $409,000 resulting from specific claim incidents in addition to higher costs due to utilization. Salaries and wages and retirement plan costs decreased by $68,000 and $116,000, respectively. Average FTEs for the first nine months of fiscal 2016 totaled 281, which is six FTEs lower than the average FTEs for the same period a year earlier, and contributed to reduced salary and wage expense from the prior fiscal year. The pension plan freeze for contributions starting in July of 2015 resulted in a decrease in expense for the current fiscal year to date period. Variable commissions related to mortgage increased by $146,000 due to increased mortgage origination activity, other incentive compensation increased by $175,000 due to improved outcomes during the current fiscal year, and stock compensation expense increased $167,000 due to the appreciation and exercise of fully vested stock appreciation rights.
Reconciliation of GAAP Earnings and Core Earnings
Although core earnings are not a measure of performance calculated in accordance with GAAP, the Company believes that its core earnings are an important indication of performance from operations. The Company believes that core earnings are useful to management and investors in evaluating its operating performance, and in comparing its performance with other companies in the banking industry. Core earnings should not be considered in isolation or as a substitute for GAAP earnings. During the periods presented, the Company calculated core earnings by adding back or subtracting, net of tax, the various components indicated in the following table.
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Three Months Ended
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Nine Months Ended
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March 31,
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December 31,
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March 31,
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March 31,
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2016
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2015
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2015
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2016
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2015
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(Dollars in Thousands, except share data)
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GAAP earnings before income taxes
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$
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3,072
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$
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2,171
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$
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842
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$
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11,185
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$
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1,869
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Net (gain) loss on sale of securities
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—
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(15
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)
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1,076
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(20
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)
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1,117
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Charges incurred from prepayment of borrowings
(1)
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—
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—
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—
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—
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4,065
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Gain on sale of bank branch
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—
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—
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—
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(2,847
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)
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—
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Net (gain) on sale of property
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—
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—
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(313
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)
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—
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(249
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)
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Merger related costs
(2)
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350
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712
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—
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1,062
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—
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Costs incurred for branch closures
(3)
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—
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—
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695
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—
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896
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Core earnings before income taxes
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3,422
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2,868
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2,300
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9,380
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7,698
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Provision for income tax on core earnings
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1,136
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958
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677
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3,100
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2,421
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Core earnings
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$
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2,286
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$
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1,910
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$
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1,623
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$
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6,280
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$
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5,277
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GAAP diluted earnings per share
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$
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0.29
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$
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0.21
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$
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0.10
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$
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1.05
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$
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0.24
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Net (gain) loss on sale of securities, net of tax
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—
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—
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0.10
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—
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0.10
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Charges incurred from prepayment of borrowings, net of tax
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—
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—
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—
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—
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0.36
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Gain on sale of bank branch, net of tax
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—
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—
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—
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(0.25
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)
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—
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Net (gain) on sale of property, net of tax
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—
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—
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(0.03
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)
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—
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(0.02
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)
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Merger related costs, net of tax
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0.03
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0.06
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—
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0.08
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—
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Costs incurred for branch closures, net of tax
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—
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—
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0.06
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—
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0.07
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Core diluted earnings per share
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$
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0.32
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$
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0.27
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$
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0.23
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$
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0.88
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$
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0.75
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(1)
Charges incurred from prepayment of borrowings is included as Other noninterest expense on the income statement.
(2)
Costs incurred are included as professional fees, compensation and employee benefits and other noninterest expense on the income statement.
(3)
Branch closure costs include loss on disposal of closed branch fixed assets in noninterest income and other costs
associated with the closure and are included in the respective categories within noninterest expenses.
General
The Company is a financial services provider and, as such, has inherent risks that must be managed in order to achieve net income. Primary risks that affect net income include credit risk, liquidity risk, operational risk, regulatory compliance risk and reputation risk. The Company's net income is derived by management of the net interest margin, the ability to collect fees from services provided, by controlling the costs of delivering services and the management of loan and lease losses. The primary source of revenues is the net interest margin, which represents the difference between income on interest-earning assets (i.e. loans and investment securities) and expense on interest-bearing liabilities (i.e. deposits and borrowed funding). The net interest margin is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and
deposit flows. Fees earned include charges for deposit and debit card services, trust services and loan services. Personnel costs are the primary expenses required to deliver the services to customers. Other costs include occupancy and equipment and general and administrative expenses.
Financial Condition Data
At
March 31, 2016
, the Company had total assets of
$1.14 billion
, a
decrease
of
$43.3 million
from the amount at
June 30, 2015
. Total investment securities
decrease
d
$10.7 million
, while loans and leases receivable, net,
decrease
d
$22.6 million
. Total liabilities
decrease
d
$49.7 million
due to a
decrease
in deposits of
$52.7 million
and partially offset by an
increase
in advances by borrowers for taxes and insurance of
$3.4 million
. Stockholders' equity
increase
d
$6.4 million
since
June 30, 2015
, due to improvements in accumulated other comprehensive loss and an
increase
in retained earnings. In July 2015, the Bank sold its branch office in Pierre, SD with a book value of $21.4 million in deposits on July 24, 2015, for a $2.8 million net pre-tax gain. In addition, loans receivable of $24.2 million and other assets, which included cash on hand, property and equipment, and accrued interest receivable, totaling $503,000, were included in the transaction. The resulting impact attributed to this transaction was a net decrease in assets of $21.4 million.
The
decrease
in loans and leases receivable, net, which excludes loans in process and deferred fees, was
$22.6 million
due in large part to seasonal reductions in the utilization of commercial and agricultural lines of credit. In addition, $24.2 million in loan balances were sold as part of the sale of a Bank branch in the first quarter of fiscal 2016. Commercial real estate increased
$28.5 million
, while agricultural and commercial business loans decreased by
$38.4 million
and
$12.7 million
, respectively.
The investment securities, which includes available for sale and held to maturity securities,
decrease
d by
$10.7 million
due to the sale of available for sale investment securities, principal payments, maturities, and net of purchased investment securities during the first
nine
months of
fiscal 2016
. The book value of investment securities sold, called or matured were
$19.6 million
, while repayments of principal balances of investments securities totaled
$18.5 million
. These reductions in the balance were partially offset by the purchase of investment securities of
$26.8 million
. The remaining change in investment securities was the net premium amortization of investment securities and change in market value which decreased the recorded balance by
$708,000
for the first
nine
months of
fiscal 2016
. The Company classifies its investment securities as available for sale and held to maturity. Investment securities available for sale
decrease
d by
$10.5 million
for the
nine
months ended
March 31, 2016
, and investment securities held to maturity
decrease
d by
$238,000
.
Loans held for sale
decrease
d
$6.5 million
, to
$2.6 million
at
March 31, 2016
. The amount held was dependent on the timing of the sales to secondary markets versus the current loan origination activity. New home financing remains sound in the local marketplace.
See the Consolidated Statement of Cash Flows for a detailed analysis of the change in cash and cash equivalents.
Deposits
decrease
d
$52.7 million
, to
$910.6 million
at
March 31, 2016
, due to a
$41.5 million
decrease in public fund deposits and a decrease in out-of-market certificates of deposits of
$32.1 million
. These were partially offset by an
increase
of
$21.0 million
from in-market, non-public fund customer deposits. Advances from the FHLB and other borrowings
decrease
d
$191,000
, to
$65.4 million
at
March 31, 2016
as compared to
June 30, 2015
, due to a reduction of overnight funding.
Stockholders' equity
increase
d
$6.4 million
at
March 31, 2016
when compared to
June 30, 2015
. Accumulated other comprehensive loss, net of related deferred tax effect, reflected a
decrease
of unrealized losses of
$1.1 million
since
June 30, 2015
and improved stockholders' equity. Retained earnings increased by
$5.0 million
due to net income of
$7.4 million
and partially offset by the payment of cash dividends of
$2.4 million
.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them.
Average Balances, Interest Rates and Yields.
The following tables present for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The tables do not reflect any effect of income taxes. Average balances consist of daily average balances for the Bank with simple average balances for all other subsidiaries of the Company. The average balances include nonaccruing loans and leases. The yields on loans and leases include origination fees, net of costs, which are considered adjustments to yield.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
(1)(3)
|
$
|
903,698
|
|
|
$
|
10,131
|
|
|
4.51
|
%
|
|
$
|
861,736
|
|
|
$
|
9,197
|
|
|
4.33
|
%
|
|
Investment securities
(2)(3)
|
170,839
|
|
|
780
|
|
|
1.84
|
|
|
233,962
|
|
|
830
|
|
|
1.44
|
|
|
Correspondent bank stock
|
4,348
|
|
|
27
|
|
|
2.50
|
|
|
5,143
|
|
|
33
|
|
|
2.60
|
|
|
Total interest-earning assets
|
1,078,885
|
|
|
$
|
10,938
|
|
|
4.08
|
%
|
|
1,100,841
|
|
|
$
|
10,060
|
|
|
3.71
|
%
|
|
Noninterest-earning assets
|
74,301
|
|
|
|
|
|
|
|
|
78,432
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,153,186
|
|
|
|
|
|
|
|
|
$
|
1,179,273
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking and money market
|
$
|
415,108
|
|
|
$
|
296
|
|
|
0.29
|
%
|
|
$
|
391,645
|
|
|
$
|
225
|
|
|
0.23
|
%
|
|
Savings
|
115,298
|
|
|
59
|
|
|
0.21
|
|
|
99,196
|
|
|
49
|
|
|
0.20
|
|
|
Certificates of deposit
|
249,763
|
|
|
592
|
|
|
0.95
|
|
|
294,573
|
|
|
572
|
|
|
0.79
|
|
|
Total interest-bearing deposits
|
780,169
|
|
|
947
|
|
|
0.49
|
|
|
785,414
|
|
|
846
|
|
|
0.44
|
|
|
FHLB advances and other borrowings
|
70,406
|
|
|
110
|
|
|
0.63
|
|
|
90,707
|
|
|
79
|
|
|
0.35
|
|
|
Subordinated debentures payable to trusts
|
24,661
|
|
|
279
|
|
|
4.55
|
|
|
24,837
|
|
|
286
|
|
|
4.67
|
|
|
Total interest-bearing liabilities
|
$
|
875,236
|
|
|
$
|
1,336
|
|
|
0.61
|
%
|
|
$
|
900,958
|
|
|
$
|
1,211
|
|
|
0.55
|
%
|
|
Noninterest-bearing deposits
|
136,876
|
|
|
|
|
|
|
|
|
141,370
|
|
|
|
|
|
|
|
|
Other liabilities
|
32,125
|
|
|
|
|
|
|
|
|
34,495
|
|
|
|
|
|
|
|
|
Total liabilities
|
1,044,237
|
|
|
|
|
|
|
|
|
1,076,823
|
|
|
|
|
|
|
|
|
Equity
|
108,949
|
|
|
|
|
|
|
|
|
102,450
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
$
|
1,153,186
|
|
|
|
|
|
|
|
|
$
|
1,179,273
|
|
|
|
|
|
|
|
|
Net interest income; interest rate spread
(4)
|
|
|
|
$
|
9,602
|
|
|
3.47
|
%
|
|
|
|
|
$
|
8,849
|
|
|
3.16
|
%
|
|
Net interest margin
(4)(5)
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
3.26
|
%
|
|
Net interest margin, TE
(6)
|
|
|
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
3.33
|
%
|
_____________________________________
|
|
|
|
(1)
|
Includes loan fees and interest on accruing loans and leases past due 90 days or more.
|
|
|
|
|
(2)
|
Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.
|
|
|
|
|
(3)
|
Yields do not reflect the tax-exempt nature of loans, equipment leases and municipal securities.
|
|
|
|
|
(4)
|
Percentages for the three months ended
March 31, 2016
and
2015
have been annualized.
|
|
|
|
|
(5)
|
Net interest income divided by average interest-earning assets.
|
|
|
|
|
(6)
|
Net interest margin expressed on a fully taxable equivalent basis ("Net Interest Margin, TE") is a non-GAAP financial measure. See the following Non-GAAP Disclosure Reconciliation of Net Interest Income (GAAP) to Net Interest Margin, TE (Non-GAAP). The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income and certain other permanent income tax differences. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. As a non-GAAP financial measure, Net Interest Margin, TE should be considered supplemental to and not a substitute for or superior to, financial measures calculated in
|
accordance with GAAP. As other companies may use different calculations for Net Interest Margin, TE, this presentation may not be comparable to similarly titled measures reported by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
Average
Outstanding
Balance
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable(1)(3)
|
$
|
911,184
|
|
|
$
|
30,194
|
|
|
4.41
|
%
|
|
$
|
842,062
|
|
|
$
|
28,549
|
|
|
4.52
|
%
|
|
Investment securities(2)(3)
|
174,523
|
|
|
2,275
|
|
|
1.73
|
|
|
309,539
|
|
|
2,984
|
|
|
1.28
|
|
|
Correspondent bank stock
|
4,547
|
|
|
85
|
|
|
2.49
|
|
|
6,766
|
|
|
144
|
|
|
2.84
|
|
|
Total interest-earning assets
|
1,090,254
|
|
|
$
|
32,554
|
|
|
3.97
|
%
|
|
1,158,367
|
|
|
$
|
31,677
|
|
|
3.64
|
%
|
|
Noninterest-earning assets
|
75,612
|
|
|
|
|
|
|
|
|
76,064
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,165,866
|
|
|
|
|
|
|
|
|
$
|
1,234,431
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking and money market
|
$
|
394,784
|
|
|
$
|
775
|
|
|
0.26
|
%
|
|
$
|
395,476
|
|
|
$
|
701
|
|
|
0.24
|
%
|
|
Savings
|
107,045
|
|
|
164
|
|
|
0.20
|
|
|
118,616
|
|
|
180
|
|
|
0.20
|
|
|
Certificates of deposit
|
277,135
|
|
|
1,781
|
|
|
0.86
|
|
|
280,474
|
|
|
1,780
|
|
|
0.85
|
|
|
Total interest-bearing deposits
|
778,964
|
|
|
2,720
|
|
|
0.46
|
|
|
794,566
|
|
|
2,661
|
|
|
0.45
|
|
|
FHLB advances and other borrowings
|
75,542
|
|
|
294
|
|
|
0.52
|
|
|
131,175
|
|
|
1,632
|
|
|
1.66
|
|
|
Subordinated debentures payable to trusts
|
24,658
|
|
|
845
|
|
|
4.56
|
|
|
24,837
|
|
|
885
|
|
|
4.75
|
|
|
Total interest-bearing liabilities
|
$
|
879,164
|
|
|
$
|
3,859
|
|
|
0.58
|
%
|
|
$
|
950,578
|
|
|
$
|
5,178
|
|
|
0.73
|
%
|
|
Noninterest-bearing deposits
|
147,821
|
|
|
|
|
|
|
|
|
148,988
|
|
|
|
|
|
|
|
|
Other liabilities
|
31,340
|
|
|
|
|
|
|
|
|
32,262
|
|
|
|
|
|
|
|
|
Total liabilities
|
1,058,325
|
|
|
|
|
|
|
|
|
1,131,828
|
|
|
|
|
|
|
|
|
Equity
|
107,541
|
|
|
|
|
|
|
|
|
102,603
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
$
|
1,165,866
|
|
|
|
|
|
|
|
|
$
|
1,234,431
|
|
|
|
|
|
|
|
|
Net interest income; interest rate spread(4)
|
|
|
|
$
|
28,695
|
|
|
3.39
|
%
|
|
|
|
|
$
|
26,499
|
|
|
2.91
|
%
|
|
Net interest margin(4)(5)
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
3.05
|
%
|
|
Net interest margin, TE(6)
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
3.11
|
%
|
_____________________________________
|
|
|
|
(1)
|
Includes loan fees and interest on accruing loans and leases past due 90 days or more.
|
|
|
|
|
(2)
|
Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.
|
|
|
|
|
(3)
|
Yields do not reflect the tax-exempt nature of loans, equipment leases and municipal securities.
|
|
|
|
|
(4)
|
Percentages for the nine months ended
March 31, 2016
and
2015
have been annualized.
|
|
|
|
|
(5)
|
Net interest income divided by average interest-earning assets.
|
|
|
|
|
(6)
|
Net interest margin expressed on a fully taxable equivalent basis ("Net Interest Margin, TE") is a non-GAAP financial measure. See the following Non-GAAP Disclosure Reconciliation of Net Interest Income (GAAP) to Net Interest Margin, TE (Non-GAAP). The tax-equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income and certain other permanent income tax differences. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. As a non-GAAP financial measure, Net Interest Margin, TE should be considered supplemental to and not a substitute for or superior to, financial measures calculated in accordance with GAAP. As other companies may use different calculations for Net Interest Margin, TE, this presentation may not be comparable to similarly titled measures reported by other companies.
|
The reconciliation of the Net Interest Income (GAAP) to Net Interest Margin, TE (non-GAAP) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in Thousands)
|
|
Net interest income
|
$
|
9,602
|
|
|
$
|
8,849
|
|
|
$
|
28,695
|
|
|
$
|
26,499
|
|
|
Taxable equivalent adjustment
|
162
|
|
|
183
|
|
|
504
|
|
|
561
|
|
|
Adjusted net interest income
|
9,764
|
|
|
9,032
|
|
|
$
|
29,199
|
|
|
$
|
27,060
|
|
|
Average interest-earning assets
|
1,078,885
|
|
|
1,100,841
|
|
|
1,090,254
|
|
|
1,158,367
|
|
|
Net interest margin, TE
|
3.64
|
%
|
|
3.33
|
%
|
|
3.56
|
%
|
|
3.11
|
%
|
Rate/Volume Analysis of Net Interest Income
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 increases and decreases resulting from fluctuating outstanding balances that are due to the levels and volatility of 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 previous rate) and (ii) changes in rate (i.e., changes in rate multiplied by previous 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2016 vs 2015
|
|
2016 vs 2015
|
|
|
Increase
(Decrease)
Due to
Volume
|
|
Increase
(Decrease)
Due to
Rate
|
|
Total
Increase
(Decrease)
|
|
Increase
(Decrease)
Due to
Volume
|
|
Increase
(Decrease)
Due to
Rate
|
|
Total
Increase
(Decrease)
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
(1)
|
$
|
493
|
|
|
$
|
441
|
|
|
$
|
934
|
|
|
$
|
2,386
|
|
|
$
|
(741
|
)
|
|
$
|
1,645
|
|
|
Investment securities
(2)
|
(223
|
)
|
|
173
|
|
|
(50
|
)
|
|
(1,299
|
)
|
|
590
|
|
|
(709
|
)
|
|
Correspondent bank stock
|
(5
|
)
|
|
(1
|
)
|
|
(6
|
)
|
|
(47
|
)
|
|
(12
|
)
|
|
(59
|
)
|
|
Total interest-earning assets
|
$
|
265
|
|
|
$
|
613
|
|
|
$
|
878
|
|
|
$
|
1,040
|
|
|
$
|
(163
|
)
|
|
$
|
877
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Checking and money market
|
$
|
12
|
|
|
$
|
59
|
|
|
$
|
71
|
|
|
$
|
(1
|
)
|
|
$
|
75
|
|
|
$
|
74
|
|
|
Savings
|
7
|
|
|
3
|
|
|
10
|
|
|
(16
|
)
|
|
—
|
|
|
(16
|
)
|
|
Certificates of deposit
|
(84
|
)
|
|
104
|
|
|
20
|
|
|
(20
|
)
|
|
21
|
|
|
1
|
|
|
Total interest-bearing deposits
|
(65
|
)
|
|
166
|
|
|
101
|
|
|
(37
|
)
|
|
96
|
|
|
59
|
|
|
FHLB advances and other borrowings
|
(18
|
)
|
|
49
|
|
|
31
|
|
|
(692
|
)
|
|
(646
|
)
|
|
(1,338
|
)
|
|
Subordinated debentures payable to trusts
|
(2
|
)
|
|
(5
|
)
|
|
(7
|
)
|
|
(6
|
)
|
|
(34
|
)
|
|
(40
|
)
|
|
Total interest-bearing liabilities
|
$
|
(85
|
)
|
|
$
|
210
|
|
|
$
|
125
|
|
|
$
|
(735
|
)
|
|
$
|
(584
|
)
|
|
$
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income increase
|
$
|
350
|
|
|
$
|
403
|
|
|
$
|
753
|
|
|
$
|
1,775
|
|
|
$
|
421
|
|
|
$
|
2,196
|
|
_____________________________________
|
|
|
|
(1)
|
Includes loan fees and interest on accruing loans and leases past due 90 days or more.
|
|
|
|
|
(2)
|
Includes federal funds sold and interest earning reserve balances at the Federal Reserve Bank.
|
Application of Critical Accounting Policies
GAAP requires management to utilize estimates when reporting financial results. The Company has identified the policies discussed below as Critical Accounting Policies because the accounting estimates require management to make certain assumptions about matters that may be uncertain at the time the estimate was made and a different method of estimating could have been reasonably made that could have a material impact on the presentation of the Company's financial condition, changes in financial condition or results of operations.
Investment Securities.
Management determines the appropriate classification of securities at the date individual securities are acquired and evaluates the appropriateness of such classifications at each statement of financial condition date.
Investment securities classified as held to maturity are those debt securities that management has the positive intent and ability to hold to maturity, and are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts, using a method that approximates level yield. Investment securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but may not hold necessarily to maturity, and all equity securities. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Investment securities available for sale are carried at fair value and unrealized gains or losses are reported as increases or decreases in other comprehensive income net of the related deferred tax effect. Sales of securities available for sale are recorded on a trade date basis.
Premiums and discounts on securities are amortized over the contractual lives of those securities, except for agency residential mortgage-backed securities, for which prepayments are probable and predictable, which are amortized over the estimated expected repayment terms of the underlying mortgages. The method of amortization results in a constant effective yield on those securities (the interest method). Interest on debt securities is recognized in income as accrued. Realized gains and losses on the sale of securities are determined using the specific identification method.
Investment Securities Impairment.
Management has a process in place to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating of the security, cash flow projections, and the Company's intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity. To the extent we determine that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, less any current period credit loss, the Company recognizes an other-than-temporary impairment in net income for the difference between amortized cost and fair value. If we do not expect to recover the amortized cost basis, we do not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of it amortized cost, less any current period credit loss, the recognition of the other-than-temporary impairment is bifurcated. For those securities, the Company separates the total impairment into a credit loss component recognized in net income, and the amount of the loss related to other factors is recognized in other comprehensive income net of taxes.
The amount of the credit loss component of a security impairment is estimated as the difference between amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. At
March 31, 2016
, the Company does not have other-than-temporarily impaired securities for which credit losses exist.
Level 3 Fair Value Measurement.
GAAP requires the Company to measure the fair value of financial instruments under a standard which describes three levels of inputs that may be used to measure fair value. Level 3 measurement includes significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This valuation process may take into consideration factors such as market liquidity. Imprecision in estimating these factors can impact the amount recorded on the balance sheet for a particular asset or liability with related impacts to earnings or other comprehensive income (loss).
Although management believes that it uses a best estimate of information available to determine fair value, due to the uncertainty of future events, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP.
Loans Held for Sale.
Loans receivable, which the Bank may sell or intend to sell prior to maturity, are carried at the lower of net book value or fair value on an aggregate basis. Such loans held for sale include loans receivable that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk or other similar factors.
Loans and Leases Receivable.
Loans receivable are stated at unpaid principal balances and net of deferred loan origination fees, costs and discounts.
The Company's leases receivable are classified as direct finance leases. Under the direct financing method of accounting for leases, the total net payments receivable under the lease contracts and the residual value of the leased equipment, net of unearned income, are recorded as a net investment in direct financing leases and the unearned income is recognized each month on a basis which approximates the interest method.
In accordance with ASC 310, the loan portfolio was disaggregated into segments and then further disaggregated into classes for certain disclosures. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity's method for monitoring and assessing credit risk. Residential and Consumer loan portfolio segments include classes of one-to- four- family, construction, consumer direct, consumer home equity, and consumer overdraft and reserves. Commercial, Commercial Real Estate and Agriculture loan portfolio segments include the classes of commercial business, equipment finance leases, commercial real estate, multi-family real estate, construction, agricultural business, and agricultural real estate.
Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs as well as premiums and discounts are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on a straight-line basis over the commitment period.
Impaired loans are generally carried on a nonaccrual status when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days past due, except loans which are well secured and in the process of collection. For all portfolio segments and classes accrued but uncollected, interest is reversed and charged against interest income when the loan is placed on nonaccrual status. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to recover the principal balance and accrued interest. Interest payments received on nonaccrual and impaired loans are normally applied to principal. Once all principal has been received, additional interest payments are recognized on a cash basis as interest income.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and insignificant payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial, commercial real estate and agricultural loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent.
As part of the Company's ongoing risk management practices, management attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, the Company identifies and reports that loan as a troubled debt restructuring ("TDR"). Management considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower's current and prospective ability to comply with the modified terms of the loan. Additionally, the Company structures loan modifications with the intent of strengthening repayment prospects.
The Company considers whether a borrower is experiencing financial difficulties, as well as whether a concession has been granted to a borrower determined to be troubled, when determining whether a modification meets the criteria of being a TDR under ASC 310-40. For such purposes, evidence which may indicate that a borrower is troubled includes, among other factors, the borrower's default on debt, the borrower's declaration of bankruptcy or preparation for the declaration of bankruptcy, the borrower's forecast that entity-specific cash flows will be insufficient to service the related debt, or the
borrower's inability to obtain funds from sources other than existing creditors at an effective interest rate equal to the current market interest rate for similar debt for a non-troubled debtor. If a borrower is determined to be troubled based on such factors or similar evidence, a concession will be deemed to have been granted if a modification of the terms of the debt occurred that management would not otherwise consider. Such concessions may include, among other modifications, a reduction of the stated interest for the remaining original life of the debt, an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, a reduction of accrued interest, or a reduction of the face amount or maturity amount of the debt. Quarterly, TDRs are reviewed and classified as compliant or non-compliant. Non-compliant TDRs are restructured contracts that have not complied with the restructured terms of the agreement or whereby the Company has begun its collection process. The Company considers payments or maturities of loans that are greater than 90 days past due as being non-compliant with the terms of the restructured agreement.
A modification of loan terms that management would generally not consider to be a TDR could be a temporary extension of maturity to allow a borrower to complete an asset sale whereby the proceeds of such transaction are to be paid to satisfy the outstanding debt. Additionally, a modification that extends the term of a loan, but does not involve reduction of principal or accrued interest, in which the interest rate is adjusted to reflect current market rates for similarly situated borrowers is not considered a TDR. Nevertheless, each assessment will take into account any modified terms and will be comprehensive to ensure appropriate impairment assessment.
Loans that are reported as TDRs apply the identical criteria in the determination of whether the loan should be accruing or nonaccruing. Typically, the event of classifying the loan as a TDR due to a modification of terms is independent from the determination of accruing interest on a loan in accordance with accounting standards.
For all non-homogeneous loans (including TDRs) that have been placed on nonaccrual status, the Company's policy for returning nonaccruing loans to accrual status requires the following criteria: six months of continued performance, timely payments, positive cash flow and an acceptable loan to value ratio. For homogeneous loans (including TDRs), typical in the residential and consumer portfolio, the policy requires six months of consecutive timely loan payments for returning nonaccrual loans to accruing status.
Allowance for Loan and Lease Losses.
GAAP requires the Company to maintain an allowance for probable loan and lease losses in the loan and lease portfolio. Management must develop a consistent and systematic approach to estimate the appropriate balances that will cover the probable losses.
The allowance for loan and lease losses is maintained at a level that management determines is sufficient to absorb estimated probable incurred losses in the loan portfolio through a provision for loan losses charged to net income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Management charges off loans, or portions of loans, in the period that such loans, or portions thereof, are deemed uncollectible. The collectability of individual impaired loans is determined through an estimate of the fair value of the underlying collateral and/or an assessment of the financial condition and repayment capacity of the borrower. The allowances for loan and lease losses are comprised of both specific valuation allowances and general valuation allowances that are determined in accordance with authoritative accounting guidance. Additions are made to the allowance through periodic provisions charged to current operations and recovery of principal on loans previously charged off.
The allowance for loan and lease losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Specific valuation allowances are established based on the Company's analyses of individual loans that are considered impaired. If a loan is deemed to be impaired, management measures the extent of the impairment and establishes a specific valuation allowance for that amount. The Company applies this classification to loans individually evaluated for impairment in the loan portfolio segments of commercial, commercial real estate and agricultural loans. Smaller balance homogeneous loans are evaluated for impairment on a collective rather than an individual basis. The Company measures impairment on an individual loan and the extent to which a specific valuation allowance is necessary by comparing the loan's outstanding balance to the fair value of the collateral, less the estimated cost to sell, if the loan is collateral dependent, or to the present value of expected cash flows, discounted at the loan's effective interest rate. A specific valuation allowance is established when the fair value of the collateral, net of estimated costs, or the present value of the expected cash flows is less than the recorded investment in the loan.
The Company also follows a process to assign general valuation allowances to loan portfolio segment categories. General valuation allowances are established by applying the Company's loan loss provisioning methodology, and reflect the estimated
probable incurred losses in loans outstanding. The loan loss provisioning methodology considers various factors in determining the appropriate quantified risk factors to use in order to determine the general valuation allowances. The factors assessed begin with the historical loan loss experience for each of the loan portfolio segments. The Company's historical loan loss experience is then adjusted by considering qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including, but not limited to, the following:
|
|
|
|
•
|
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices;
|
|
|
|
|
•
|
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
|
|
|
|
|
•
|
Changes in the nature and volume of the portfolio and in the terms of loans;
|
|
|
|
|
•
|
Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;
|
|
|
|
|
•
|
Changes in the quality of the Company's loan review system;
|
|
|
|
|
•
|
Changes in the value of the underlying collateral for collateral-dependent loans;
|
|
|
|
|
•
|
The existence and effect of any concentrations of credit, and changes in the level of such concentrations;
|
|
|
|
|
•
|
Changes in the experience, ability, and depth of lending management and other relevant staff; and
|
|
|
|
|
•
|
The effect of other external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the existing portfolio.
|
By considering the factors discussed above, the Company determines quantified risk factors that are applied to each non-impaired loan or loan type in the loan portfolio to determine the general valuation allowances.
The time period considered for historical loss experience is a rolling 36 month period.
The process of establishing the loan and lease loss allowances may also involve:
|
|
|
|
•
|
Periodic inspections of the loan collateral;
|
|
|
|
|
•
|
Regular meetings of executive management with the pertinent Board committee, during which observable trends in the local economy, commodity prices and/or the real estate market are discussed; and
|
|
|
|
|
•
|
Analysis of the portfolio in the aggregate, as well as on an individual loan basis, taking into consideration payment history, underwriting analyses, and internal risk ratings.
|
In order to determine the overall adequacy, each loan portfolio segment's respective loan loss allowance is reviewed quarterly by management and by the Audit Committee of the Company's Board of Directors, as applicable.
Future adjustments to the allowance for loan and lease losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates or, if required by regulators, based upon information at the time of their examinations. Such adjustments to estimates are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.
Although management believes that it uses the best information available to determine the allowance, unforeseen market or borrower conditions could result in adjustments and net income being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations.
Mortgage Servicing Rights ("MSRs").
The Company records a servicing asset for contractually separated servicing from the underlying mortgage loans. The asset is initially recorded at fair value and represents an intangible asset backed by an income stream from the serviced assets. The asset is amortized in proportion to and over the period of estimated net servicing income.
At each balance sheet date, the MSRs are analyzed for impairment, which occurs when the fair value of the MSRs is lower than the amortized book value. A portion of the Company's MSRs in the portfolio were acquired from the South Dakota Housing Development Authority's first-time homebuyer's program. Due to the lack of quoted markets for the Company's servicing portfolio, the Company estimates the fair value of the MSRs using a present value of future cash flow analysis. If the fair value is greater than or equal to the amortized book value of the MSRs, no impairment is recognized. If the fair value is
less than the book value, an expense for the difference is charged to net income by initiating an MSR valuation account. If the Company determines this impairment is temporary, any future changes in impairment are recorded as a change in net income and the valuation account. If the Company determines the impairment to be permanent, the valuation is written off against the MSRs, which results in a new amortized balance.
The Company has included MSRs as a critical accounting policy because the use of estimates for determining fair value using present value concepts may produce results which may significantly differ from other fair value analysis, perhaps even to the point of recording impairment. The risk to net income is when the underlying mortgages are paid off significantly faster than the assumptions used in the previously recorded amortization. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. The Company looks at alternative assumptions and projections when preparing a reasonable and supportable analysis. Based on the Company's analysis of MSRs, an impairment valuation of $407,000 has been recorded for temporary impairment at
March 31, 2016
.
Self-Insurance.
The Company has a self-insured healthcare plan and a self-insured dental plan for its employees up to certain limits. To mitigate a portion of the risks involved with a self-insurance health plan, the Company has a stop-loss insurance policy through a commercial insurance carrier for coverage in excess of $75,000 per individual occurrence. The estimate of self-insurance liability for each plan is based upon known claims and an estimate of incurred, but not reported ("IBNR") claims. IBNR claims are estimated using historical claims lag information received by a third party claims administrator. Due to the uncertainty of claims, the approach includes a process that may differ significantly from other methodologies and still produce an estimate that is in accordance with GAAP. Although management believes that it uses the best information available to determine the accrual, unforeseen claims could result in adjustments to the accrual. These adjustments could significantly affect net income if circumstances differ substantially from the assumptions used in estimating the accrual.
Asset Quality
When a borrower fails to make a required payment on a loan within 10 to 15 days after the payment is due, the Bank generally institutes collection procedures by issuing a late notice. The customer is contacted again when the payment is between 17 and 40 days past due. In most cases, delinquencies are cured promptly; however, if a loan has been delinquent for more than 40 days, the Bank attempts additional written as well as verbal contacts and, if necessary, personal contact with the borrower in order to determine the reason for the delinquency and to affect a cure. Where appropriate, Bank personnel review the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank may: (i) accept a repayment program which under appropriate circumstances could involve an extension in the case of consumer loans for the arrearage from the borrower, (ii) seek evidence, in the form of a listing contract, of efforts by the borrower to sell the property if the borrower has stated that he is attempting to sell, or (iii) initiate foreclosure proceedings. When a loan payment is delinquent for 90 days, the Bank generally will initiate foreclosure proceedings unless management is satisfied the credit problem is correctable.
Loans are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest and/or when payment becomes 90 days past due, except loans which are well secured and in the process of collection. Interest collections on nonaccrual loans, for which the ultimate collectability of principal is uncertain, are applied as principal reductions.
Leases are generally classified as nonaccrual when there are reasonable doubts as to the collectability of principal and/or interest. Leases may be placed on nonaccrual when the lease has experienced either four consecutive months with no payments or once the account is five months in arrears. Interest collections on nonaccrual leases, for which the ultimate collectability of principal is uncertain, are applied as principal reductions.
When a lessee fails to make a required lease payment within 10 days after the payment is due, Mid America Capital generally institutes collection procedures. The lessee may be contacted by telephone on the 10th, but no later than the 30th day of delinquency. A late notice is automatically issued by the system on the 11th day of delinquency and is sent to the lessee. The lease may be referred to legal counsel when the lease is past due beyond four payments and no positive response has been received or when other considerations are present.
Nonperforming assets (i.e., nonaccrual loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets)
increase
d
$2.7 million
during the fiscal year to
$15.9 million
at
March 31, 2016
. The ratio of nonperforming assets to total assets, which is one indicator of credit risk exposure,
increase
d to
1.40%
at
March 31, 2016
, from
1.12%
at
June 30, 2015
.
Nonaccruing loans and leases
increase
d to
$15.8 million
at
March 31, 2016
compared to
$13.1 million
at
June 30, 2015
. Included in nonaccruing loans and leases at
March 31, 2016
was
one
consumer residential relationship of
$107,000
,
four
commercial business relationships totaling
$1.3 million
,
five
commercial real estate relationships totaling
$5.7 million
,
seven
agricultura
l real estate relationships totaling
$3.2 million
,
one
agricultural business relationship of
$5.5 million
, and
eight
consumer relationships totaling
$134,000
.
There were
$15,000
of accruing loans and leases delinquent more than 90 days at
March 31, 2016
compared to none at
June 30, 2015
.
The Company's nonperforming loans and leases, which represent nonaccrual loans and leases plus those past due over 90 days and still accruing were
$15.8 million
, an
increase
of
$2.7 million
from the levels at
June 30, 2015
. Dairy related loans included in the nonperforming loans at
March 31, 2016
were less than one-third of the total nonperforming loans, which is less when compared to
June 30, 2015
. The risk rating system in place is designed to identify and manage the nonperforming loans and leases. Commercial and agricultural loans and equipment finance leases will have specific reserve allocations based on collateral values or based on the present value of expected cash flows if the loans or leases are deemed impaired. Loans and leases that are not performing do not necessarily result in a loss.
As of
March 31, 2016
, the Company had
$99,000
of foreclosed assets which was consumer related and primarily comprised of residential real estate collateral.
At
March 31, 2016
, the Company had designated
$27.0 million
of its assets as classified, which management has determined need to be closely monitored because of possible credit problems of the borrowers or the cash flows of the secured properties. This amount includes
$2.7 million
of unused lines of credit for those borrowers that have classified assets. At
March 31, 2016
, the Company had
$29.6 million
in commercial real estate and commercial business loans purchased, of which $5.2 million was classified as substandard. These loans and leases were considered in determining the adequacy of the allowance for loan and lease losses. The allowance for loan and lease losses is established based on management's evaluation of the risks probable in the loan and lease portfolio and changes in the nature and volume of loan and lease activity. Such evaluation, which includes a review of all loans and leases for which full collectability may not be reasonably assured, considers the estimated fair market value of the underlying collateral, present value of expected principal and interest payments, economic conditions, historical loss experience and other factors that warrant recognition in providing for an adequate loan and lease loss allowance.
Although the Company's management believes that the recorded allowance for loan and lease losses was adequate to provide for probable losses on the related loans and leases, there can be no assurance that the allowance existing at
March 31, 2016
will be adequate in the future.
In accordance with the Company's internal classification of assets policy, management evaluates the loan and lease portfolio on a monthly basis to identify loss potential and determines the adequacy of the allowance for loan and lease losses quarterly. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful. Foreclosed assets include assets acquired in settlement of loans.
The following table sets forth the amounts and categories of the Company's nonperforming assets from continuing operations for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
June 30, 2015
|
|
|
(Dollars in Thousands)
|
|
Nonaccruing loans and leases:
|
|
|
|
|
One- to four-family
|
$
|
107
|
|
|
$
|
112
|
|
|
Commercial business
|
1,277
|
|
|
2,398
|
|
|
Commercial real estate
|
481
|
|
|
359
|
|
|
Multi-family real estate
|
5,207
|
|
|
—
|
|
|
Agricultural real estate
|
3,153
|
|
|
4,482
|
|
|
Agricultural business
|
5,461
|
|
|
5,474
|
|
|
Consumer direct
|
26
|
|
|
45
|
|
|
Consumer home equity
|
108
|
|
|
237
|
|
|
Total nonaccruing loans and leases
|
15,820
|
|
|
13,107
|
|
|
Accruing loans and leases delinquent more than 90 days:
|
|
|
|
|
One- to four-family
|
15
|
|
|
—
|
|
|
Total accruing loans and leases delinquent more than 90 days
|
15
|
|
|
—
|
|
|
Foreclosed assets:
|
|
|
|
|
One- to four-family
|
95
|
|
|
111
|
|
|
Consumer direct
|
4
|
|
|
—
|
|
|
Consumer home equity
|
—
|
|
|
46
|
|
|
Total foreclosed assets
(1)
|
99
|
|
|
157
|
|
|
Total nonperforming assets
(2)
|
$
|
15,934
|
|
|
$
|
13,264
|
|
|
Ratio of nonperforming assets to total assets
(3)
|
1.40
|
%
|
|
1.12
|
%
|
|
Ratio of nonperforming loans and leases to total loans and leases
(4)
|
1.77
|
%
|
|
1.43
|
%
|
|
Accruing troubled debt restructures
|
$
|
795
|
|
|
$
|
2,767
|
|
_____________________________________
|
|
|
|
(1)
|
Total foreclosed assets do not include land or other real estate owned held for sale.
|
|
|
|
|
(2)
|
Nonperforming assets include nonaccruing loans and leases, accruing loans and leases delinquent more than 90 days and foreclosed assets.
|
|
|
|
|
(3)
|
Percentage is calculated based upon total consolidated assets of the Company.
|
|
|
|
|
(4)
|
Nonperforming loans and leases include nonaccruing loans and leases and accruing loans and leases delinquent more than 90 days.
|
The following table sets forth information with respect to activity in the Company's allowance for loan and lease losses from continuing operations during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in Thousands)
|
|
Balance at beginning of period
|
$
|
11,230
|
|
|
$
|
10,502
|
|
|
Charge-offs:
|
|
|
|
|
Commercial business
|
—
|
|
|
(32
|
)
|
|
Agricultural business
|
(96
|
)
|
|
(462
|
)
|
|
Consumer direct
|
(4
|
)
|
|
(25
|
)
|
|
Consumer home equity
|
(249
|
)
|
|
(159
|
)
|
|
Consumer OD & reserve
|
(92
|
)
|
|
(164
|
)
|
|
Total charge-offs
|
(441
|
)
|
|
(842
|
)
|
|
Recoveries:
|
|
|
|
|
Commercial business
|
64
|
|
|
45
|
|
|
Equipment finance leases
|
1
|
|
|
6
|
|
|
Commercial real estate
|
—
|
|
|
4
|
|
|
Agricultural real estate
|
—
|
|
|
2
|
|
|
Agricultural business
|
125
|
|
|
—
|
|
|
Consumer direct
|
6
|
|
|
12
|
|
|
Consumer home equity
|
35
|
|
|
25
|
|
|
Consumer OD & reserve
|
33
|
|
|
56
|
|
|
Consumer indirect
|
7
|
|
|
1
|
|
|
Total recoveries
|
271
|
|
|
151
|
|
|
Net (charge-offs)
|
(170
|
)
|
|
(691
|
)
|
|
Additions charged to operations
|
532
|
|
|
1,201
|
|
|
Allowance related to assets acquired (sold), net
|
—
|
|
|
—
|
|
|
Balance at end of period
|
$
|
11,592
|
|
|
$
|
11,012
|
|
|
Ratio of net charge-offs during the period to average loans and leases outstanding during the period
(2)
|
0.02
|
%
|
|
0.11
|
%
|
|
Ratio of allowance for loan and lease losses to total loans and leases at end of period
|
1.30
|
%
|
|
1.26
|
%
|
|
Ratio of allowance for loan and lease losses to nonperforming loans and leases at end of period
(1)
|
73.2
|
%
|
|
84.4
|
%
|
_____________________________________
|
|
|
|
(1)
|
Nonperforming loans and leases include nonaccruing loans and leases and accruing loans and leases delinquent more than 90 days.
|
|
|
|
|
(2)
|
Percentages for the
nine
months ended
March 31, 2016
and
2015
have been annualized.
|
The distribution of the Company’s allowance for loan and lease losses and impaired loss summary as required by ASC Topic 310, “Accounting by Creditors for Impairment of a Loan” are summarized in the following tables. The combination of ASC Topic 450, “Accounting for Contingencies” and ASC Topic 310 calculations comprise the Company’s allowance for loan and lease losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Allowance
for Loan and
Lease Losses
|
|
Specific
Impaired Loan
Valuation
Allowance
|
|
General
Allowance
for Loan and
Lease Losses
|
|
Specific
Impaired Loan
Valuation
Allowance
|
|
Loan Type
|
March 31, 2016
|
|
June 30, 2015
|
|
|
(Dollars in Thousands)
|
|
Residential
|
$
|
273
|
|
|
$
|
25
|
|
|
$
|
269
|
|
|
$
|
32
|
|
|
Commercial business
|
726
|
|
|
3
|
|
|
788
|
|
|
7
|
|
|
Commercial real estate
|
5,180
|
|
|
213
|
|
|
4,757
|
|
|
4
|
|
|
Agricultural
|
3,720
|
|
|
362
|
|
|
4,037
|
|
|
—
|
|
|
Consumer
|
975
|
|
|
115
|
|
|
1,100
|
|
|
236
|
|
|
Total
|
$
|
10,874
|
|
|
$
|
718
|
|
|
$
|
10,951
|
|
|
$
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Loan
Customers
|
|
Loan
Balance
|
|
Impaired
Loan
Valuation
Allowance
|
|
Number
of Loan
Customers
|
|
Loan
Balance
|
|
Impaired
Loan
Valuation
Allowance
|
|
Loan Type
|
March 31, 2016
|
|
June 30, 2015
|
|
|
(Dollars in Thousands)
|
|
Residential
|
3
|
|
|
$
|
157
|
|
|
$
|
25
|
|
|
2
|
|
|
$
|
148
|
|
|
$
|
32
|
|
|
Commercial business
|
4
|
|
|
1,277
|
|
|
3
|
|
|
8
|
|
|
2,731
|
|
|
7
|
|
|
Commercial real estate
|
6
|
|
|
5,832
|
|
|
213
|
|
|
5
|
|
|
712
|
|
|
4
|
|
|
Agricultural
|
10
|
|
|
11,625
|
|
|
362
|
|
|
15
|
|
|
14,009
|
|
|
—
|
|
|
Consumer
|
33
|
|
|
902
|
|
|
115
|
|
|
44
|
|
|
1,192
|
|
|
236
|
|
|
Total
|
56
|
|
|
$
|
19,793
|
|
|
$
|
718
|
|
|
74
|
|
|
$
|
18,792
|
|
|
$
|
279
|
|
The allowance for loan and lease losses was
$11.6 million
at
March 31, 2016
, as compared to
$11.2 million
at
June 30, 2015
. The general valuation allowance
decrease
d by
$77,000
due to changes in historical loss data, portfolio performance attributes and loan balances for the
nine
months ended
March 31, 2016
when compared to the beginning of the fiscal year. The specific valuation allowance
increase
d by
$439,000
to
$718,000
and primarily was impacted by an increase in an agriculture business relationship and two commercial real estate relationships. The ratio of the allowance for loan and lease losses to total loans and leases was
1.30%
at
March 31, 2016
, compared to
1.23%
at
June 30, 2015
. The Company's management has considered nonperforming assets and other assets of concern in establishing the allowance for loan and lease losses. The Company continues to monitor its allowance for possible loan and lease losses and make future additions or reductions in light of the level of loans and leases in its portfolio and as economic conditions dictate. The current level of the allowance for loan and lease losses is a result of management's assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on commercial business, agricultural, construction, multi-family and commercial real estate loans, including purchased loans. The Company periodically utilizes an external loan review to assist in the assessment of the appropriateness of risk ratings and of risks within the portfolio. A periodic credit review is performed on all types of loans and leases to establish the necessary reserve based on the estimated risk within the portfolio. This assessment of risk takes into account the composition of the loan and lease portfolio, historical loss experience for each loan and lease category, previous loan and lease experience, concentrations of credit, current economic conditions and other factors that in management's judgment deserve recognition.
Real estate properties acquired through foreclosure are initially recorded at fair value (less a deduction for disposition costs). Valuations are periodically updated by management and a specific provision for losses on such properties is established by a charge to operations if the carrying values of the properties exceed their estimated net realizable values.
At
March 31, 2016
, the Company also had an allowance for credit losses on off-balance sheet credit exposures of
$93,000
. This amount is maintained as a separate liability account to cover estimated potential credit losses associated with off-balance
sheet credit instruments such as off-balance sheet loan commitments, standby letters of credit, and guarantees and is recorded in other liabilities in the Consolidated Statements of Financial Condition.
Losses on mortgage loans previously sold are recorded when the Bank indemnifies or repurchases mortgage loans previously sold. The representations and warranties in our loan sale agreements provide that we repurchase or indemnify the investors for losses or costs on loans we sell under certain limited conditions. At
March 31, 2016
, the Company recorded a
$43,000
recourse liability for mortgage loans sold, which is an increase of $1,000 since
June 30, 2015
.
Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net income being significantly affected if circumstances differ substantially from the assumptions used in making the final determinations. Future additions to the Company's allowances may result from periodic loan, property and collateral reviews and thus cannot be predicted in advance. See Note 1 of "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of the Company's Form 10-K for the year ended
June 30, 2015
, for a description of the Company's policy regarding the provision for losses on loans and leases.
Comparison of the Three Months Ended
March 31, 2016
and
March 31, 2015
General.
The Company's net
income
was
$2.1 million
or
$0.29
for basic and diluted earnings per common share for the quarter ended
March 31, 2016
, a
$1.4 million
increase
compared to of
$719,000
or
$0.10
for basic and diluted earnings per common share for the quarter ended
March 31, 2015
. The
third
quarter of
fiscal 2016
resulted in a return on average equity (i.e., net income divided by average equity) of
7.64%
, compared to
2.85%
for the same quarter of the prior year, while the return on average assets (i.e., net income divided by average assets) was
0.72%
compared to
0.25%
, respectively. As discussed in more detail below, the
increase
s were due primarily to the net loss on the sale on securities of $1.1 million and the loss on the disposition of closed-branch fixed assets recorded in the prior fiscal year's quarter; no entries related to these types of transactions were recorded in the current quarter of fiscal 2016. Noninterest expense decreased by $910,000 in the third quarter of fiscal 2016 when compared to the same period a year ago due primarily to reductions in compensation and employee benefits expense and other costs which have been influenced as the Company prepares for the proposed merger. The overall net increase in pre-tax income resulted in additional provision for income taxes of
$880,000
for the current quarter when compared to the same quarter one year earlier.
Interest, Dividend and Loan Fee Income.
Interest, dividend and loan fee income was
$10.9 million
for the quarter ended
March 31, 2016
, as compared to
$10.1 million
for the same quarter of the prior year, an
increase
of
$878,000
or
8.7%
. Interest earned on loans and leases receivable totaled
$10.1 million
for the current quarter which is an
increase
of
$934,000
when compared to the same quarter of the prior fiscal year. The average balance of loans and leases receivable was
$903.7 million
for the quarter ended
March 31, 2016
, an
increase
of
4.9%
, but the average yield
increase
d by
18
basis points to
4.51%
in the quarter-over-quarter comparison. Interest earned on investment securities and interest-earning deposits
decrease
d by
$56,000
, to
$807,000
for the current quarter compared to
$863,000
for the quarter ended
March 31, 2015
. The average yield on investment securities and interest-earning deposits
increase
d by
39
basis points to
1.85%
, but the average balance
decrease
d by
$63.9 million
to
$175.2 million
for the quarter ended
March 31, 2016
. Overall, the average balance of total interest-earning assets
decrease
d by
2.0%
, however the change in average balance mix from investments to loans and leases receivable resulted in an
increase
in total interest and dividend revenue of
$265,000
. The average yield on interest-earning assets
increase
d by
37
basis points due to the shift in the mix to the higher yielding loan and lease receivable balances and resulted in an
increase
to interest and dividend revenue of
$613,000
attributable to yields when compared to the same quarter a year earlier.
As mentioned above, the average yield on interest-earning assets
increase
d, when compared to the same quarter a year earlier, primarily due to the higher percentage of loans and leases receivable in the interest-earning asset portfolio. Loans and leases receivable comprised
84%
of the interest-earning assets for the quarter ended
March 31, 2016
compared to
78%
for the quarter one year earlier. Since the average rate earned on loans and leases receivable is higher than the other interest-earning assets, the overall yield on interest-earning assets increased. This balance sheet repositioning occurred in the second and third quarters of fiscal 2015 when the Company liquidated lower-yielding available-for-sale investment securities to reduce FHLB term borrowings and improve overall net interest margin.
Interest Expense.
Interest expense was
$1.3 million
for the quarter ended
March 31, 2016
, as compared to
$1.2 million
for the same quarter of the prior year, an
increase
of
$125,000
or
10.3%
. Interest expense related to interest-bearing deposits increased by
$101,000
due to a
$166,000
increase
from higher rates and partially offset by a
$65,000
decrease
attributable to lower average balances. The average rate on interest-bearing deposits
increase
d by
five
basis points to
0.49%
for the quarter ended
March 31, 2016
. Interest expense related to the FHLB advances and other borrowings
increase
d by
$31,000
due to an increase in the rate paid but offset by a reduction in average balances. The average rate paid
increase
d by
28
basis points when comparing the current quarter to the same quarter a year ago and resulted in an interest expense increase of
$49,000
, while the average balance
decrease
of
$20.3 million
resulted in interest savings of
$18,000
.
Net Interest Income.
Net interest income for the
third
quarter of
fiscal 2016
was
$9.6 million
, an
increase
of
$753,000
or
8.5%
, compared to
fiscal 2015
, due primarily to an increase in loan and lease receivable interest income of
$878,000
, or an 8.7% increase in this comparison. The net interest margin was
3.58%
, compared to
3.26%
for the same quarter of the prior fiscal year, an
increase
of
32
basis points, while the Company's net interest margin on a fully taxable equivalent basis was
3.64%
as compared to
3.33%
. This increase in NIM, TE was strategically executed in the second fiscal quarter of 2015 when the Company prepaid $84.9 million of FHLB term advances and recognized a pre-tax charge of $4.1 million to reposition the balance sheet and improve net interest margins moving forward. The Company also sold available-for-sale investment securities that had lower yielding rates to fund these prepayments, which resulted in a loss on sale of securities in the third quarter of 2015. In the third quarter of fiscal 2016, fees received from prepayment of a loan amounted to $224,000 of income recognized and enhanced the net interest margin percentage by 8 basis points.The yield on interest-earning assets
increase
d
37
basis points to
4.08%
for the
third
quarter of
fiscal 2016
, while the average rate paid on interest-bearing liabilities
increase
d
6
basis points to
0.61%
. Average balances
decrease
d when compared to the same quarter from the prior fiscal year for interest-earning assets and interest-bearing liabilities by
2.0%
and
2.9%
, respectively, due in part to the balance sheet restructuring mentioned earlier. The Company continues to have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and interest rate risk by retaining loan and lease production on the balance sheet or by looking at alternatives through secondary markets.
Provision for Losses on Loans and Leases.
The allowance for loan and lease losses is maintained at a level which is believed by management to be adequate to absorb probable losses on existing loans and leases that may become uncollectible, based on an evaluation of the collectability of the loans and leases and prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in the nature and balances of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense. See "Asset Quality" above for further discussion.
Provision for losses on loans and leases
decrease
d to
$162,000
for the quarter ended
March 31, 2016
, as compared to
$282,000
in the prior year's quarter. Factors impacting the provision recorded during the
third
quarter were net
charge-offs
of
$29,000
, loan and lease receivable
decrease
s of
$13.3 million
, and valuation allowance on impaired loans
increase
s of
$474,000
since
December 31, 2015
. In addition, nonperforming assets
increase
d by
$4.8 million
while classified assets
increase
d by
$4.6 million
during the recent quarter. In comparing the
third
quarter of
fiscal 2016
to
fiscal 2015
, net charge-offs decreased to
$29,000
from
$203,000
in the prior year period and loan and lease balances increased by $16.5 million in the third quarter of fiscal 2015 compared to the reduction in loan balances exhibited during the current quarter. The increase in loan balances in the prior year's quarter and the greater amount of net charge offs was the primary factor in the larger provision in the prior year's quarter. In addition, the valuation allowance on impaired loans was
$718,000
at
March 31, 2016
, compared to
$521,000
a year ago and classified assets
decrease
d by
$3.2 million
to
$27.0 million
. Nonperforming assets
increase
d by
$2.9 million
to
$15.9 million
at
March 31, 2016
, when compared to
March 31, 2015
.
The allowance for losses on loans and leases at
March 31, 2016
, was
$11.6 million
. The allowance increased from the
March 31, 2015
balance of
$11.0 million
due to an increase in the general allowance stemming from the increase in loan balances over the time between period-ends and adjusted for changes in environmental factors and loan loss history and specific valuation allowance recorded on impaired loans. The ratio of allowance for loan and lease losses to nonperforming loans and leases at
March 31, 2016
, was
73.2%
compared to
84.4%
at
March 31, 2015
. The allowance for loan and lease losses to total loans and leases ratio at
March 31, 2016
, was
1.30%
compared to
1.26%
at
March 31, 2015
. Management believes that the
March 31, 2016
, recorded allowance for loan and lease losses is adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.
Noninterest Income.
Noninterest income was
$2.5 million
for the quarter ended
March 31, 2016
, an
increase
of
$447,000
as compared to the quarter ended
March 31, 2015
. For the
third
quarter of
fiscal 2016
, increases from the prior fiscal year's
third
quarter included a net change from prior year period loss on sale of investment securities of
$1.1 million
. Overall, this net increase was partially offset by a decrease in fees on deposits and loan servicing income of
$165,000
and
$419,000
, respectively.
No sale of securities occurred in the current quarter and resulted in a net
increase
of
$1.1 million
change for the
third
quarter of
fiscal 2016
, as compared to a net loss recognized in the
third
quarter of
fiscal 2015
. For the quarter ended
March 31, 2015
, gross proceeds received totaled
$118.7 million
and resulted in a net loss of
$1.1 million
. The larger amount of sales in the previous year's quarter were due to the balance sheet repositioning where the lower interest earning investments were sold to help fund the extinguishment of debt.
Net gain on the sale of loans totaled
$497,000
, an
increase
of
$40,000
for the three months ended
March 31, 2016
, as compared to the prior fiscal year's quarter. This
increase
was due to increased new home purchase and refinance originations
when compared to the same quarter a year ago. Origination activity for residential lending continues to remain sound due to the local economic climate and favorable interest rates relative to historical levels.
Fees on deposits
decrease
d by
$165,000
for the
third
quarter of
fiscal 2016
when compared to the same period of the prior year primarily due to
decrease
s in NSF/overdraft fees of
$86,000
and point-of-sale income reductions of
$64,000
. NSF/overdraft fee decreases were attributed to reduced volume of transactions and point-of-sale income decreases were primarily due to reduced volume and interchange fees per transaction.
Loan servicing income
decrease
d by
$419,000
to a loss in noninterest income of
$100,000
for the
third
quarter of
fiscal 2016
. A provision for a valuation allowance for mortgage servicing rights of $407,000 was recorded during the current quarter due in part to effects of lower market rates. No provision or valuation allowance was recorded in the same quarter a year ago. In the quarter-over-quarter comparison, servicing fee income
decrease
d by
$48,000
due to a decreasing servicing asset base and an overall lesser net servicing fee percentage which is based on investor mix and modified for delinquencies. Amortization expense, which is a component of net loan servicing income, was
$356,000
for the
third
quarter of
fiscal 2016
and represented a
decrease
in expense of
$36,000
when compared to the
third
quarter of
fiscal 2015
due to an assessment of prepayment speeds and lower asset base.
Noninterest Expense.
Noninterest expense was
$8.9 million
for the quarter ended
March 31, 2016
, as compared to
$9.8 million
for the quarter ended
March 31, 2015
, a
decrease
of
$910,000
, or
9.3%
. This decrease was due primarily to the reduction in compensation costs of
$761,000
and complemented by a decrease in occupancy and equipment of $243,000 and a reduction in marketing and community investment costs of $222,000. This decrease was partially offset by an increase in professional fees of $197,000, when compared to the same period of the prior year. For the third quarter of fiscal 2016, there was approximately $350,000 of merger-related costs related to the pending merger with Great Western Bancorp, Inc. announced on November 30, 2015.
Compensation and employee benefits were
$4.9 million
for the three months ended
March 31, 2016
, a
decrease
of
$761,000
, or
13.4%
when compared to the quarter ended
March 31, 2015
. Decreases in base salary compensation, retirement plan costs, and health insurance benefit expense were the primary components to the
decrease
in compensation expense as compared to the the
third
quarter of
fiscal 2015
as they decreased by
$652,000
and
$103,000
, respectively. Total base salaries and wages were impacted by a decrease in average FTEs of
12.4%
, or about
36
FTE, to an average of
257
FTEs for the three months ended
March 31, 2016
when compared to the same quarter of the prior fiscal year. Retirement plan costs were reduced due to the freezing of contributions to the pension plan effective July of 2015, whereas the prior year's quarter included service costs related to the pension plan. Partially offsetting the decreases was an increase in expense of
$145,000
related to appreciated gains recognized for exercised stock appreciation rights. As the Company's stock price increased beyond the exercise price, rights which have been fully vested previously were used to acquire Company stock. This appreciation above the exercise price was expensed in the stock acquisition transaction for various transactions processed in the quarter.
Occupancy and equipment decreased by
$243,000
, or
18.3%
, to
$1.1 million
for the quarter ended March 31, 2016 when compared to the same period of the prior year. This was due in part to a reduction in the number of branch offices, as well as reduced purchases of equipment and the minimizing of capital expenditure expenses during the period.
Marketing and community investment was
$222,000
for the quarter ended March 31, 2016, which is a decrease of $222,000 when compared to the third quarter of fiscal 2015. This reduction was due to reduced branding activity and efforts as the Company prepared to finalize the upcoming merger.
Professional fees were
$644,000
for the three months ended
March 31, 2016
, an
increase
of
$197,000
when compared to the same quarter ended
March 31, 2015
. The increase was due primarily to merger-related activities.
Income tax expense.
The Company's income tax expense for the quarter ended
March 31, 2016
,
increase
d to
$1.0 million
compared to
$123,000
for the same period of the prior fiscal year. The effective tax rates were
32.6%
and
14.6%
for the quarter ended
March 31, 2016
and
2015
, respectively. The previous year's tax rate is lower than the current year's rate due to a higher percentage of permanent tax items to pretax net income in the prior year where earnings were substantially less. This reduced the effective tax rate to a lower than anticipated amount in the previous year.
Comparison of the
Nine Months Ended
March 31, 2016
and
March 31, 2015
General.
The Company's net income was
$7.4 million
or
$1.05
for basic and diluted earnings per common share for the
nine
months ended
March 31, 2016
, a
$5.7 million
increase
in net income compared to
$1.7 million
or
$0.24
for basic and diluted earnings per common share for the same period of the prior year. For the first
nine
months of
fiscal 2016
, the return on average equity (i.e., net income divided by average equity) was
9.16%
, compared to
2.16%
in the same period of the prior year, while the return on average assets (i.e., net income divided by average assets) was
0.84%
and
0.18%
, respectively. During the second and third quarters of fiscal 2015, the Company implemented a balance sheet repositioning initiative to improve net interest margins. In the second fiscal quarter of fiscal 2015, the prepayment of FHLB term advances resulted in a charge of $4.1 million to noninterest expense, or a $2.5 million impact net of tax. In addition, the Company recorded a gain on the sale of a bank branch which resulted in a net pre-tax gain of $2.8 million during the first quarter of fiscal 2016. Other significant changes when comparing to the first
nine
months of fiscal 2016 to the same period a year earlier included: interest expense on borrowings
decrease
d by
$1.3 million
, the provision for loans and leases
decrease
d by
$669,000
, compensation and employee benefits increased by
$658,000
, and professional fees increased by
$716,000
.
Interest, Dividend and Loan Fee Income.
Interest, dividend and loan fee income was
$32.6 million
for the
nine
months ended
March 31, 2016
, as compared to
$31.7 million
for the same period of the prior year, an
increase
of
$877,000
. Interest earned on loans and leases receivable totaled
$30.2 million
for the first
nine
months of
fiscal 2016
which is a net
increase
of
$1.6 million
, when compared to the same period of the prior fiscal year, due primarily to an increase in the average loan balances. The average balance of loans and leases receivable
increase
d by
$69.1 million
, or
8.2%
for the first
nine
months of
fiscal 2016
as compared to the same period in
fiscal 2015
. This change was partially offset by a
decrease
in the average yield on interest earned from loans and leases receivable, which
decrease
d by
11
basis points to
4.41%
in the year-over-year comparison. The previous fiscal year's yield was aided by the net recovery of $569,000 of nonaccrued interest during the year, which improved the yield by approximately 6 basis points. The current fiscal year's yield was aided by the net recovery of $252,000 of nonaccrued interest through the first nine months, which improved the yield by approximately 3 basis points. Interest earned on investment securities and interest-earning deposits
decrease
d by
$768,000
in the year-over-year comparison to
$2.4 million
for the
nine
month period ended
March 31, 2016
, due primarily to the reduction in mortgage-backed securities balances from the sale of investment securities during the third quarter of fiscal 2015, which resulted in reduced average balances of investment securities for fiscal 2016. The average balance of investment securities and interest-earning deposits
decrease
d by
$137.2 million
, or
43.4%
, to
$179.1 million
for the
nine
month period ended
March 31, 2016
, while the average yield
increase
d by
43
basis points to
1.75%
. Overall, the average balance of total interest-earning assets
decrease
d by
5.9%
but resulted in an
increase
to revenue of
$1.0 million
in comparison due to the large increase in loans and leases receivable within the earning asset mix. This increase to revenue was offset by the net reduction of interest income of
$163,000
as a result of the decrease in yield on loans and leases receivable. Even though the yield earned on loans and leases receivable decreased by
11
basis points, the average yield on interest-earning assets
increase
d by
33
basis points due to the higher composition of loans and leases receivable within total earning assets.
Interest Expense.
Interest expense was
$3.9 million
for the
nine
months ended
March 31, 2016
, as compared to
$5.2 million
for the same period of the prior year, a
decrease
of
$1.3 million
or
25.5%
. Interest expense related to FHLB advances and other borrowings
decrease
d by
$1.3 million
due to the reduction of term borrowings from the FHLB which were prepaid in the second fiscal quarter of fiscal 2015. The average balance
decrease
resulted in reduced interest expense of
$692,000
, while the average rate
decrease
of
114
basis points resulted in a reduction in interest expense of
$646,000
. Interest expense on subordinated debentures decreased by
$40,000
for the
nine
months ended
March 31, 2016
, when compared to the prior fiscal year, due primarily to the maturity of two interest rate contracts totaling $5.0 million in notional value which paid a weighted average rate of 6.58% while they were effective. Interest expense related to interest-bearing deposits
increase
d by
$59,000
. A
$96,000
increase
was the result of reduced rates paid and partially offset by a
$37,000
decrease
due to average balance changes. The average rate on interest-bearing deposits was
0.46%
for the
nine
months ended
March 31, 2016
, as compared to
0.45%
for the same period of the prior year. Noninterest-bearing deposits
decrease
d by
$1.2 million
to an average balance of
$147.8 million
for the
nine
months ended
March 31, 2016
, as compared to the prior year.
Net Interest Income.
Net interest income for
fiscal 2016
was
$28.7 million
, an
increase
of
$2.2 million
, or
8.3%
, compared to
fiscal 2015
, due to a
decrease
in interest expense of
$1.3 million
or
25.5%
and an
increase
in interest income of
$877,000
. The net interest margin for the first
nine
months of
fiscal 2016
was
3.50%
as compared to
3.05%
for the prior fiscal year, an
increase
of
45
basis points. The Company's net interest margin on a fully taxable equivalent basis was
3.56%
for the nine months ended
March 31, 2016
, as compared to
3.11%
for the prior fiscal year. The yield on interest-earning assets
increase
d
33
basis points to
3.97%
for
fiscal 2016
, while the average rate paid on interest-bearing liabilities
decrease
d
15
basis points to
0.58%
in
fiscal 2016
. In
fiscal 2016
, the average balances
decrease
d from a year ago for interest-earning assets and interest-bearing liabilities by
5.9%
and
7.5%
, respectively. The average yield on interest-earning assets
increase
d primarily due to the higher yielding mix of assets related to the increased average loan balances. The Company continues to have a diversified loan portfolio comprised of a mix of consumer and business type lending. This mix helps the Company manage the net interest margin and i
nterest rate risk by retaining loan and lease production on the balance sheet or by looking at alternatives through secondary markets.
Provision for Losses on Loans and Leases.
The allowance for loan and lease losses is maintained at a level which is believed by management to be adequate to absorb probable losses on existing loans and leases that may become uncollectible, based on an evaluation of the collectability of the loans and leases and prior loan and lease loss experience. The evaluation takes into consideration such factors as changes in the nature and balance of the loan and lease portfolio, overall portfolio quality, review of specific problem loans and leases, and current economic conditions that may affect the borrower's ability to pay. The allowance for loan and lease losses is established through a provision for losses on loans and leases charged to expense. See "Asset Quality" above for further discussion.
Provision for losses on loans and leases
decrease
d
$669,000
, to
$532,000
for the
nine
months ended
March 31, 2016
, as compared to
$1.2 million
for the same period in the prior year. The
decrease
in the provision as compared to the same nine month period of the prior fiscal year, is primarily due to the change in net loan growth when comparing the current fiscal year's nine month period to the same period of the prior year. The allowance for loan and lease losses was impacted by an increase in the specific valuation on impaired loans, while a decrease in net charge-offs reduced the amount of provision needed in fiscal 2016. For the
nine
months ended
March 31, 2016
, total loans
decrease
d by
$22.2 million
from
June 30, 2015
, compared to loan growth of
$59.7 million
for the same period of the prior fiscal year. Net charge-offs for the current year-to-date period totaled
$170,000
, compared to the
$691,000
of net charge-offs in the prior year period. The specific valuation allowance on impaired loans in accordance with ASC 310
increase
d by
$439,000
since
June 30, 2015
, while the allowance in accordance with ASC 450
decrease
d
$77,000
, which was primarily due to the reduction in total loan and lease balances. In the prior year, the specific valuation allowance
increase
d
$38,000
from the previous fiscal year end and the general valuation allowance
increase
d
$472,000
. Total nonperforming loans
increase
d by
$2.7 million
during the nine month period ended
March 31, 2016
, as compared to a $4.3 million decrease for the same period of the prior fiscal year.
The allowance for losses on loans and leases at
March 31, 2016
was
$11.6 million
, which is higher than the amount reported at
March 31, 2015
of
$11.0 million
. The ratio of allowance for loan and lease losses to total loans and leases was
1.30%
at
March 31, 2016
, compared to
1.26%
at
March 31, 2015
. The specific valuation allowance of
$718,000
, which is comprised primarily of agriculture and commercial real estate loans,
increase
d by
$197,000
from
March 31, 2015
. At
March 31, 2016
the general valuation allowance of
$10.9 million
is an increase of
$383,000
since
March 31, 2015
, and was evaluated primarily based upon a review of historical loss and environmental factors and applied to loan and lease balances outstanding, which increased since the year ago period. The balance of total loans and leases at
March 31, 2016
was
$892.2 million
, and was an increase of
$20.6 million
from
March 31, 2015
. The ratio of allowance for loan and lease losses to nonperforming loans and leases at
March 31, 2016
, was
73.2%
compared to
84.4%
at
March 31, 2015
. The Bank's management believes that the
March 31, 2016
recorded allowance for loan and lease losses is adequate to provide for probable losses on the related loans and leases, based on its evaluation of the collectability of loans and leases and prior loss experience.
Noninterest Income.
Noninterest income was
$12.3 million
for the
nine
months ended
March 31, 2016
, as compared to
$8.5 million
for the same period of the prior fiscal year, which represents an
increase
of
$3.8 million
or
44.3%
. This
increase
was due primarily to the bank branch sale which netted a pre-tax gain of $2.8 million in the first quarter of fiscal year 2016. In addition, net gain on sale of loans and net gain or loss on sale of investment securities increased by
$464,000
and
$1.1 million
, respectively. The
$461,000
charge for disposal of closed-branch fixed assets in the same period of the prior fiscal year also contributed to the overall increase in noninterest income for the current fiscal year. These increases were partially offset by the decreases in fees on deposits of
$487,000
and net loan servicing income of
$470,000
.
Net gain on the sale of loans totaled
$1.9 million
, an
increase
of
$464,000
for the
nine
months ended
March 31, 2016
, as compared to the same period of the prior fiscal year. This increase was due to increased home purchase and refinance originations when compared to the same nine month period a year ago. Origination activity for residential lending continues to remain sound due to the local economic climate and favorable interest rates relative to historical levels.
Net gain on the sale of securities totaled
$20,000
, for the
nine
months ended
March 31, 2016
and is an
increase
of
$1.1 million
from the net loss reported for the same period of the prior fiscal year. The Company received proceeds of
$12.5 million
for net gains of
$20,000
for the first
nine
months of
fiscal 2016
as compared to proceeds received of
$140.3 million
for net losses of
$1.1 million
for the first
nine
months of
fiscal 2015
.
A retail branch office was closed in the first fiscal quarter of 2015 which resulted in a loss on disposal of closed-branch fixed assets of
$461,000
, which reduced other income. The closure was made in the continued efforts to increase efficiencies through reduced operating expenses.
Loan servicing income, net,
decrease
d by
$470,000
to
$564,000
for the first
nine
months of
fiscal 2016
. A provision for a valuation allowance for mortgage servicing rights of $407,000 was recorded due in part to effects of lower market rates.
Amortization expense, which is a component of net loan servicing income,
decrease
d by
$63,000
while servicing fees received
decrease
d by
$126,000
. Servicing fees decreased primarily due to a decreasing servicing asset base.
Fees on deposits decreased by
$487,000
for the first
nine
months of
fiscal 2016
when compared to the same period of the prior year primarily due to decreases in NSF/overdraft fees, point-of-sale income and net service charge fees of
$253,000
,
$141,000
and
$85,000
, respectively. NSF/overdraft fee decreases were attributed to reduced transactions and point-of-sale incentive income decreases were primarily due to reduced interchange fees per transaction.
Noninterest Expense.
Noninterest expense was
$29.3 million
for the
nine
months ended
March 31, 2016
, compared to
$32.0 million
for the
nine
months ended
March 31, 2015
, a
decrease
of
$2.7 million
, or
8.4%
. During the second quarter of fiscal 2015, a total of $84.9 million in long-term FHLB advances were prepaid, which resulted in a one-time pre-tax charge to other noninterest expense of $4.1 million. When excluding this charge, noninterest expense increased $2.3 million over the same nine month period of the prior fiscal year. The primary drivers of the increase in expense were compensation and employee benefits
increase
s of
$658,000
, professional fees of
$716,000
and other noninterest expense of
$471,000
. In addition, check and data processing increased by
$205,000
. Partially offsetting these increases were a decrease in marketing and community investment of
$351,000
and a decrease in equipment and occupancy costs of
$165,000
, respectively.
Compensation and employee benefits were
$17.1 million
for the
nine
months ended
March 31, 2016
, an
increase
of
$658,000
, or
4.0%
when compared to the same period ended
March 31, 2015
. Increases in variable pay, stock compensation related to stock appreciation rights and health insurance benefit expense were the primary components to the increase in compensation expense as compared to the first nine months of fiscal 2015 as they increased by $306,000,
$167,000
and
$409,000
, respectively. Compared to the prior year period, salaries and wages and retirement plan costs decreased by $68,000 and $116,000, respectively. Variable pay was higher than the prior year period due to increased mortgage commissions of $146,000 and other incentive pay of $175,000. Mortgage commissions increased due to increased mortgages closed during the first nine months of fiscal 2016 when compared to the same period of fiscal 2015. Incentive pay increased due to improved outcomes during the current fiscal year. Stock compensation expense increased by $167,000 due to the appreciation and exercise of fully vested stock appreciation rights. Health and insurance benefit increases resulted from specific claim incidents in addition to higher costs due to utilization. Average FTEs for the first nine months of fiscal 2016 totaled 281, which is six FTEs lower than the average FTEs for the same period a year earlier, which contributed to reduced salary and wage expense from the prior fiscal year. The pension plan freeze for contributions starting in July of 2015 resulted in a decrease in expense for the current fiscal year to date period.
Professional fees were
$2.2 million
for the
nine
months ended
March 31, 2016
, an increase of
$716,000
when compared to the same period ended
March 31, 2015
. The increase was due primarily to merger-related costs incurred as a result of the pending merger with Great Western Bancorp, Inc. announced on November 30, 2015.
Other noninterest expense increased by
$471,000
for the first
nine
months of
fiscal 2016
when compared to the same period of the prior year primarily due to increased loan servicing costs, website expense, repossessed assets and postage. Loan servicing costs increased by $171,000 primarily related to increased mortgage volumes. Website expense was $90,000 higher as a result of the Company's investment into the improvement of its mobile banking platform. Repossessed and foreclosed assets cost increased by $83,000 over the same period of the prior fiscal year. There was also $49,000 in one-time cost in postage and materials incurred for customer communication of the pending merger agreement.
Marketing and community investment costs decreased by $351,000 to
$841,000
for
nine
months ended
March 31, 2016
due to reduced marketing activity.
Income tax expense.
The Company's income tax expense for the
nine
months ended
March 31, 2016
increase
d by
$3.6 million
to
$3.8 million
when compared to the same period of the prior fiscal year. The effective tax rates were
33.8%
and
11.0%
for the
nine
months ended
March 31, 2016
and
2015
, respectively. The previous year's tax rate is lower than the current year's rate due to a higher percentage of permanent tax items to pretax net income in the prior year where earnings were substantially less. This reduced the effective tax rate to a lower than anticipated amount in the previous year.
Liquidity and Capital Resources
The Company's liquidity is comprised of three primary classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Net cash used in financing activities of
$49.4 million
was partially offset by net cash provided by operating and investing activities for the nine months ended
March 31, 2016
of
$15.6 million
and
$31.6 million
, respectively. For the same period ended
March 31, 2015
, net cash used in financing activities of
$139.9 million
was partially offset by cash provided by operating and investing activities of
$9.0 million
and
$126.6 million
, respectively. The results were a
decrease
in cash and cash equivalents of
$2.2 million
for the
nine
months ended
March 31, 2016
compared to a decrease in cash and cash equivalents of
$4.3 million
for the same period of the prior fiscal year.
The Company's primary sources of funds are net interest income, in-market deposits, FHLB advances and other borrowings, repayments of loan principal, agency residential mortgage-backed securities and callable agency securities and, to a lesser extent, sales of mortgage loans, sales and maturities of investment securities, out-of-market deposits, and short-term investments. While scheduled loan payments and maturing securities are relatively predictable, deposit flows and loan and security prepayments are more influenced by interest rates, general economic conditions and competition. The Bank attempts to price its deposits to meet its asset/liability objectives consistent with local market conditions. Excess balances are invested in overnight funds.
Liquidity management is both a daily and long-term responsibility of management. The Bank adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) the objectives of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. During the
nine
months ended
March 31, 2016
, the Bank
decrease
d its borrowings with the FHLB and other borrowings by
$191,000
.
Although in-market deposits is one of the Bank's primary source of funds, the Bank's policy has been to utilize borrowings where the funds can be invested in either loans or securities at a positive rate of return or to use the funds for short-term liquidity purposes. At
March 31, 2016
, the Bank had the following sources of additional borrowings:
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$15.0 million
in an uncommitted, unsecured line of federal funds with First Tennessee Bank, NA;
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$20.0 million
in an uncommitted, unsecured line of federal funds with Zions Bank;
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$52.8 million
of available credit from the Federal Reserve Bank; and
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$260.1 million
of available credit from FHLB of Des Moines (after deducting outstanding borrowings with FHLB of Des Moines).
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The Bank may also seek other sources of contingent liquidity including additional federal funds purchased lines with correspondent banks and lines of credit with the Federal Reserve Bank. There were
no
funds drawn on the uncommitted, unsecured line of federal funds with First Tennessee Bank, NA, Zions Bank and the Federal Reserve Bank at
March 31, 2016
. The Bank, as a member of the FHLB of Des Moines, is required to acquire and hold shares of capital stock in the FHLB of Des Moines equal to 0.12% of the total assets of the Bank at December 31 annually. The Bank is also required to own activity-based stock, which is based on 4.00% of the Bank's outstanding advances. These percentages are subject to change at the discretion of the FHLB Board of Directors.
In addition to the above sources of additional borrowings, the Bank has implemented arrangements to acquire out-of-market certificates of deposit as an additional source of funding. As of
March 31, 2016
, the Bank had
$41.9 million
in out-of-market certificates of deposit.
The Bank anticipates that it will have sufficient funds available to meet current loan commitments. At
March 31, 2016
, the Bank had outstanding commitments to originate and purchase mortgage and commercial loans of
$20.8 million
and to sell mortgage loans of
$2.6 million
. Commitments by the Bank to originate loans are not necessarily executed by the customer. The Bank monitors the ratio of commitments to funding for use in liquidity management. At
March 31, 2016
, the Bank had
no
outstanding commitments to purchase investment securities and
no
commitments to sell investment securities available for sale.
The Company has an available line of credit with United Bankers' Bank for liquidity needs of
$4.0 million
with
no
funds advanced at
March 31, 2016
. The line of credit was renewed on October 1, 2015 and is available through October 1, 2016. The Company has pledged 100% of Bank stock as collateral for this line of credit.
The Company uses its capital resources to pay dividends to its stockholders, to support organic growth, to make acquisitions, to service its debt obligations and to provide funding for investment into the Bank as Tier 1 capital.
The Company is subject to various regulatory capital requirements both at the Holding Company and at the Bank level administered by the Federal Reserve and the South Dakota Division of Banking, respectively. If a requirement is not met, regulatory authorities may take legal or administrative actions, including restrictions on growth or operations or, in extreme cases, seizure. Institutions not in compliance may apply for an exemption from the requirements and submit a recapitalization plan. At
March 31, 2016
, the Bank met all current capital requirements.
In July 2013, the Federal Reserve and other regulatory agencies issued final rules establishing a new comprehensive capital framework for U.S. banking organizations that would implement the Basel III capital framework and certain provisions of the Dodd-Frank Act. Under the final rules, compliance was required beginning January 1, 2015 for the Holding Company and Home Federal Bank, and included new minimum capital ratio requirements and modified regulatory capital adjustments and deductions. In addition, a transition period of the final rules is included for the capital conservation buffer which will become effective beginning January 1, 2016 through January 1, 2019, and will increase each risk-weighted asset minimum ratio requirements by 2.50% during the four year transition in equal increments annually. We believe we will continue to exceed all estimated well-capitalized regulatory requirements under these new rules on a fully phased-in basis. The Bank had a tier I capital ratio of
10.94%
at
March 31, 2016
, which was higher than both the adequate-capitalized minimum ratio required of 4.00% and the well-capitalized minimum ratio requirement of
5.00%
. The minimum total risk-based capital ratio requirement for well-capitalized institutions is
10.00%
of risk-weighted assets. The Bank had a total risk-based capital ratio of
13.90%
at
March 31, 2016
. For further details on capital and capital ratios for the Bank and the Company, see Note 2 of “Notes to Consolidated Financial Statements” of this Form 10-Q for additional information.
The Company has entered into interest rate swap contracts which are classified as cash flow hedge contracts, fair value hedge contracts, or non-designated derivative contracts. At
March 31, 2016
, the total notional amount of interest rate swap contracts was
$38.4 million
with a fair value net loss of
$1.1 million
. The Company is exposed to losses if the counterparties fail to make their payments under the contract in which the Company is in a receiving status. The Company minimizes its risk by monitoring the credit standing of the counterparties. The Company anticipates the counterparties will be able to fully satisfy their obligations under the remaining agreements. See Note 14 of "Notes to Consolidated Financial Statements" of this Form 10-Q for additional information.
Impact of Inflation and Changing Prices
The unaudited Consolidated Financial Statements and Notes thereto presented in this Quarterly Report on Form 10-Q have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes use of a number of different financial instruments to help meet the financial needs of its customers. In accordance with GAAP, the full notional amounts of these transactions are not recorded in the accompanying consolidated financial statements and are referred to as off-balance sheet instruments. These transactions and activities include commitments to extend lines of credit and standby letters of credit, and a recourse liability on the repurchase of mortgage loans previously sold. Off-balance sheet arrangements are discussed further in Part II, Item 8 “Financial Statements and Supplementary Data” of the Company's Annual Report on Form 10-K for fiscal 2015, under Note 20 in the “Notes to Consolidated Financial Statements.”
Off-balance sheet arrangements also include trust preferred securities, which have been de-consolidated in this report. Further information regarding trust preferred securities can be found in Note 13 in the "Notes to Consolidated Financial Statements" of this Form 10-Q.
Recent Accounting Pronouncements
In June 2014, FASB issued ASU 2014-12 “Compensation-Stock Compensation” (ASC Topic 718), regarding when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company anticipates to adopt this update in the first quarter of fiscal 2017 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In August 2014, FASB issued ASU 2014-13 “Consolidation” (ASC Topic 810), measuring the financial assets and the financial liabilities of a consolidated collateralized financing entity. For entities that consolidate a collateralized financing entity within the scope of this update, an option to elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement is provided. The guidance is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The Company anticipates to adopt this update in the first quarter of fiscal 2017 and does not expect the adoption to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In August 2014, FASB issued ASU 2014-14 “Receivables-Troubled Debt Restructurings by Creditors” (ASC Subtopic 310-40), require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The guidance is effective for fiscal years beginning after December 15, 2014, and the interim periods within those fiscal years. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted Update 2014-04. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In September 2014, FASB issued ASU 2014-15 “Presentation of Financial Statements-Going Concern” (ASC Topic 205-40), disclosing the uncertainties about an Entity's ability to continue as a going concern. There may be conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. Financial statements should be presented using the going concern basis of accounting, but the amendment in this update should be followed to determine whether to disclose information about the relevant conditions and events. The guidance is effective for fiscal years ending after December 15, 2016, and for annual period and interim periods thereafter. Early application is permitted. The Company anticipates to apply this update in the annual report for fiscal 2017 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In January 2015, FASB issued ASU 2015-01 “Income Statement-Extraordinary and Unusual Items” (Subtopic 225-20), eliminating the presentation of extraordinary items from income statement presentation. While this update removes the presentation and the need to evaluate the existence of extraordinary items for presentation on the income statement, presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and required to be reported within the document accordingly. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted provided that the guideline is applied from the beginning of the fiscal year of adoption. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In January 2015, FASB issued ASU 2015-03 “Interest-Imputation of Interest” (Subtopic 835-30), simplifying the presentation of debt issuance costs. This update is designed to simplify reporting on debt issuance costs incurred and is requiring the presentation of the unamortized debt issue costs to be a direct deduction from the carrying amount of the debt, rather than a separate asset which provides no future economic benefit. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. Entities will apply the new guidance on a retrospective basis, wherein the balance sheet of
each period represented should be adjusted accordingly and applicable disclosures for a change in accounting principle will be needed. The Company adopted this update in the first quarter of fiscal 2016 and did not have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In January 2016, FASB issued ASU 2016-01 “Financial Instruments-Overall” (ASC Topic 825-10), amending certain recognition guidelines pertaining to entities who hold financial assets or owe financial liabilities. The amendments supercede the guidance in the treatment and reporting of equity securities, with the fair value changes reported through net income. The guidance is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods. Early application is not permitted. The Company anticipates to apply this update in the first quarter for fiscal 2019 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In February 2016, FASB issued ASU 2016-02 “Leases” (ASC Topic 842), disclosing the treatment and recognition of lease accounting for the lessee and lessor, whereby the lease creates a right-of-use asset for the lessee and a related lease liability for the lessee. Leases shorter than 12 months are not required in the application of this update. The guidance is effective for fiscal years beginning after December 15, 2018, including the interim periods within those periods. Early application is permitted. The Company anticipates that this will have a material impact to the Company's consolidated financial condition and results of operations and will further determine the impact on the related financial statements.
In March 2016, FASB issued ASU 2016-04 “Liabilities-Extinguishments of Liabilities” (Subtopic 405-20), providing guidance for consistency in determining and recording breakage costs related to prepaid store-valued products, such as vendor rewards programs where points are earned and used for purchasing goods. The guidance is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2019 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In March 2016, FASB issued ASU 2016-05 “Derivatives and Hedging” (Topic 815), providing guidance for which a change in counterparties to a hedging arrangement. This guidance provides that a change in counterparty itself does not de-designate the hedging instrument. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2018 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
In March 2016, FASB issued ASU 2016-09 “Compensation-Stock Compensation” (Topic 718), providing updated accounting guidance and rules in recording share-based payment transactions, including income tax consequences to the Company's employees. The guidance is effective for fiscal years beginning after December 15, 2016, including the interim periods within those periods. Early application is permitted. The Company anticipates to apply this update in the first quarter for fiscal 2018 and does not expect the application to have a material effect on the Company's consolidated financial condition, results of operations or cash flows.
Since January 1, 2016, the FASB issued ASU No. 2016-01 through 2016-10. Those not specifically detailed above were determined to not be applicable or have any impact on the Company's financial statements.
Subsequent Event
Management has evaluated subsequent events for potential disclosure or recognition through
May 5, 2016
, the date of the filing of the consolidated financial statements with the Securities and Exchange Commission.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk Management
The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities with short- and medium-term maturities mature or reprice more rapidly than its interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net income.
In an attempt to manage its exposure to change in interest rates, management monitors the Company's interest rate risk. The Company's Asset/Liability Committee meets periodically to review the Company's interest rate risk position and profitability, and to recommend adjustments for consideration by executive management. Management also reviews the Bank's securities portfolio, formulates investment strategies, and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In managing market risk and the asset/liability mix, the Bank has placed its emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. Notwithstanding the Company's interest rate risk management activities, the potential for changing interest rates is an uncertainty which may have an adverse effect on net income.
The Company adjusts its asset/liability position to mitigate the Company's interest rate risk. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, management may increase the Company's interest rate risk position in order to increase its net interest margin. The Company's results of operations and net portfolio values remain vulnerable to increases in interest rates and to fluctuations in the difference between long- and short-term interest rates.
As set forth below, the volatility of a rate change, the change in asset or liability mix of the Company or other factors may produce a decrease in net interest margin in an upward moving rate environment even as the net portfolio value (“NPV”) estimate indicates an increase in net value. The inverse situation may also occur. One approach used by the Company to quantify interest rate risk is an NPV analysis. This analysis calculates the difference between the present value of the liabilities and the present value of expected cash flows from assets and off-balance sheet contracts. The following tables set forth, at
March 31, 2016
and
June 30, 2015
, an analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve. Management does not believe that the Company has experienced any material changes in its market risk position from that disclosed in the Company's Annual Report on Form 10-K for fiscal
2015
or that the Company's primary market risk exposures and how those exposures were managed during the
nine
months ended
March 31, 2016
changed significantly when compared to
June 30, 2015
.
Even if interest rates change in the designated amounts, there can be no assurance that the Company's assets and liabilities would perform as set forth below. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
Estimated Increase (Decrease) in NPV
|
|
Change in
Interest Rates
|
|
Estimated
NPV Amount
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in Thousands)
|
|
Basis Points
|
|
|
|
|
|
|
|
+300
|
|
$
|
235,522
|
|
|
$
|
32,204
|
|
|
16
|
%
|
|
+200
|
|
228,458
|
|
|
25,140
|
|
|
12
|
|
|
+100
|
|
218,080
|
|
|
14,762
|
|
|
7
|
|
|
—
|
|
203,318
|
|
|
—
|
|
|
—
|
|
|
-100
|
|
163,458
|
|
|
(39,860
|
)
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
Estimated Increase (Decrease) in NPV
|
|
Change in
Interest Rates
|
|
Estimated
NPV Amount
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in Thousands)
|
|
Basis Points
|
|
|
|
|
|
|
|
+300
|
|
$
|
245,413
|
|
|
$
|
19,823
|
|
|
9
|
%
|
|
+200
|
|
242,176
|
|
|
16,586
|
|
|
7
|
|
|
+100
|
|
235,938
|
|
|
10,348
|
|
|
5
|
|
|
—
|
|
225,590
|
|
|
—
|
|
|
—
|
|
|
-100
|
|
188,195
|
|
|
(37,395
|
)
|
|
(17
|
)
|
In managing market risk and the asset/liability mix, the Bank has placed an emphasis on developing a portfolio in which, to the extent practicable, assets and liabilities reprice within similar periods. The goal of this policy is to provide a relatively consistent level of net interest income in varying interest rate cycles and to minimize the potential for significant fluctuations from period to period.
The Bank utilizes a third party to perform interest rate risk analysis, which utilizes a modeling program to measure the
Bank’s exposure to potential interest rate changes. Measuring and managing interest rate risk is a dynamic process that
management performs continually with the objective of maintaining a stable net interest margin. This process relies on the
simulation of net interest income over multiple interest rate scenarios or “shocks.” Management considers net interest income
simulation as the best method to evaluate shorter-term interest rate risk (12-24 month time frame). The modeled scenarios begin
with a base case in which rates are unchanged and include parallel and nonparallel rate shocks. The results of these shocks are
measured in two forms: first, the impact on the net interest margin and earnings over one and two year timeframes; and second,
the impact on the market value of equity otherwise known as NPV.
The following table shows the anticipated effect on net interest income from instantaneous parallel shocks (up and down)
in interest rates over the subsequent twelve month and twenty-four month period. As of
March 31, 2016
, the effect of an
immediate and sustained 200 basis point increase in interest rates would be a
decrease
in net interest income of approximately
$1.7 million
, or
4.5%
in the first year, while the subsequent twelve month period is modeled to
increase
in net interest income by approximately
$51,000
, or
0.1%
. Although unlikely in the current low interest rate environment, a 100 basis point decrease in rates would
decrease
net interest income by approximately
$278,000
, or
0.7%
in the first year, while the subsequent twelve
month period is modeled to
decrease
in net interest income by approximately
$1.1 million
or
2.9%
.
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Year 1
|
|
Year 2
|
|
Change in
Interest Rates
|
|
Estimated Net Interest Income
|
|
Net Interest Income Impact
|
|
Percent
|
|
Estimated Net Interest Income
|
|
Net Interest Income Impact
|
|
Percent
|
|
Basis Points
|
|
(Dollars in Thousands)
|
|
+300
|
|
$
|
34,346
|
|
|
$
|
(2,748
|
)
|
|
(7
|
)%
|
|
$
|
36,694
|
|
|
$
|
(534
|
)
|
|
(1
|
)%
|
|
+200
|
|
35,436
|
|
|
(1,658
|
)
|
|
(4
|
)
|
|
37,279
|
|
|
51
|
|
|
—
|
|
|
+100
|
|
36,340
|
|
|
(754
|
)
|
|
(2
|
)
|
|
37,480
|
|
|
252
|
|
|
1
|
|
|
—
|
|
37,094
|
|
|
—
|
|
|
—
|
|
|
37,228
|
|
|
—
|
|
|
—
|
|
|
-100
|
|
36,816
|
|
|
(278
|
)
|
|
(1
|
)
|
|
36,152
|
|
|
(1,076
|
)
|
|
(3
|
)
|