Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain financial information determined by methods other than in accordance with GAAP. These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company's performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Critical Accounting Policies
Critical accounting policies and estimates are discussed in our 2016 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies." That discussion highlights estimates that the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosures contained in the Company's 2016 Form 10-K.
Executive Overview
As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington, and Multnomah and Marion counties of Oregon as its primary market area. The counties of Multnomah, Clark and Skamania are part of the Portland metropolitan area as defined by the U.S. Census Bureau. The Company is engaged predominantly in the business of attracting deposits from the general public and using such funds in its primary market area to originate commercial business, commercial real estate, multi-family real estate, land, real estate construction, residential real estate and other consumer loans. The Company's net loan portfolio totaled $654.1 million at December 31, 2016 compared to $614.9 million at March 31, 2016.
The Bank's subsidiary, the Trust Company, a trust and financial services company located in downtown Vancouver, Washington, provides full-service brokerage activities, trust and asset management services. In January 2017, the Trust Company opened a second office in Portland Oregon. The Bank's Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business banking services.
Vancouver is located in Clark County, Washington, which is just north of Portland, Oregon. Many businesses are located in the Vancouver area because of the favorable tax structure and lower energy costs in Washington as compared to Oregon. Companies located in the Vancouver area include Sharp Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory, Wafer Tech, Nautilus, Barrett Business Services, PeaceHealth, Fisher Investments and Banfield Pet Hospitals, as well as several support industries. In addition to this industry base, the Columbia River Gorge Scenic Area and the Portland metropolitan area are sources of tourism, which has helped to transform the area from its past dependence on the timber industry.
The Company's strategic plan includes targeting the commercial banking customer base in its primary market area for loan originations and deposit growth, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will seek to increase the loan portfolio consistent with its strategic plan and asset/liability and regulatory capital objectives, which includes maintaining a significant amount of commercial and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations – which are mainly concentrated in commercial real estate and real estate construction loans – carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate consumer real estate one-to-four family mortgages.
At December 31, 2016, checking accounts totaled $369.6 million, or 44.0% of our total deposit mix compared to $308.3 million or 41.2% a year ago. Our strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through the Trust Company and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. We believe we are well positioned to attract new customers and to increase our market share through our 17 branches, including ten in Clark County, two in the Portland metropolitan area and three lending centers.
Economic conditions in the Company's market areas have improved overall from the recent recessionary downturn. According to the Washington State Employment Security Department, unemployment in Clark County decreased to 5.7% at November 30, 2016 compared to 6.3% at March 31, 2016 and 6.0% at December 31, 2015. According to the Oregon Employment Department, unemployment in Portland slightly increased to 4.4% at November 30, 2016 compared to 4.0% at March 31, 2016 and decreased compared to 4.7% at December 31, 2015. According to the Regional Multiple Listing Services ("RMLS"), residential home inventory levels in Portland, Oregon remained at 1.3 months at both December 31, 2016 and March 31, 2016 and was 1.2 months at December 31, 2015. Residential home inventory levels in Clark County
have decreased to 1.5 months at December 31, 2016 compared to 1.7 months at March 31, 2016 and 1.9 months at December 31, 2015. According to the RMLS, closed home sales in Clark County increased 4.3% and 9.3% during December 2016 compared to March 2016 and December 2015, respectively. Closed home sales in Portland increased 2.2% and decreased 3.3% during December 2016 compared to March 2016 and December 2015, respectively. The Company has also seen an increase in sales activity for building lots during the past twelve months. Commercial real estate leasing activity and the residential real estate market in the Portland/Vancouver area have been thriving and the vacancy rates in the Portland/Vancouver area have been relatively low.
Operating Strategy
The Company's goal is to deliver returns to shareholders by increasing higher-yielding assets (in particular commercial real estate and commercial business loans), increasing core deposit balances, managing problem assets, reducing expenses, hiring experienced employees with a commercial lending focus and exploring expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:
Execution of our Business Plan
. The Company is focused on increasing its loan portfolio, especially higher yielding commercial and construction loans, and our core deposits by expanding our customer base throughout our primary market areas. By emphasizing total relationship banking, the Company intends to deepen the relationships with its customers and increase individual customer profitability through cross-marketing programs, which allows the Company to better identify lending opportunities and services for customers. To build its core deposit base, the Company will continue to utilize additional product offerings, technology and a focus on customer service in working toward this goal. The Company will also continue to seek to expand its franchise through the selective acquisition of individual branches, loan purchases and whole bank transactions that meet its investment and market objectives, such as the recently announced acquisition of certain assets and liabilities from MBank and Merchants Bancorp. Upon closing, the Company will acquire approximately $118.0 million in loans, consisting mostly of commercial and commercial real estate loans located primarily in the Portland market, where the Company currently has two branches and 48% of its commercial related lending.
Maintain Strong Asset Quality
. The Company believes that strong asset quality is a key to long-term financial success. The Company has actively managed the delinquent loans and nonperforming assets by aggressively pursuing the collection of consumer debts and marketing saleable properties upon foreclosure or repossession, work-outs of classified assets and loan charge-offs. In the past several years, the Company has applied more conservative and stringent underwriting practices to new loans, including, among other things, increasing the amount of required collateral or equity requirements, reducing loan-to-value ratios and increasing debt service coverage ratios resulting in improved credit metrics/asset quality. Although the Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate, real estate construction and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, the Company intends to manage credit exposure through the use of experienced bankers in these areas and a conservative approach to its lending.
Implementation of a Profit Improvement Plan ("PIP")
The Company has formed a committee comprised of several members of management and the board of directors to undertake several initiatives to reduce non-interest expense and continue our on-going efforts to identify cost savings opportunities throughout all aspects of the Company's operations. The PIP committee's mission is not only to find additional cost saving opportunities but also to search for and implement revenue enhancements and additional areas for improvement. The Company has instituted expense control measures such as cancelling certain projects and capital purchases, and reducing travel and entertainment and other noninterest expenditures. In this regard, the Company has reduced its efficiency ratio over the last several years from 98.0% at March 31, 2014 to 75.6% at December 31, 2016.
Introduction of New Products and Services.
The Company continuously reviews new products and services to provide its customers more financial options. All new technology and services are generally reviewed for business development and cost saving purposes. The Company continues to experience growth in customer use of its online banking services, where the Bank provides a full array of traditional cash management products as well as online banking products including mobile banking, mobile deposit, bill pay, e-statements, and text banking. The products are tailored to meet the needs of small to medium size businesses and households in the markets we serve. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank. The Company also intends to selectively add additional products to further diversify revenue sources and to capture more of each customer's banking relationship by cross selling loan and deposit products and additional services to Bank customers, including services provided through the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $403.3 million and $389.1 million at December 31, 2016 and March 31, 2016, respectively. During September 2016, the Company began transitioning its existing debit card holders from Visa
®
to MasterCard
®
. The change in debit card service providers is expected to increase interchange revenue and provide cost savings to the Company. The full transition was completed during the quarter ended December 31, 2016.
Attracting Core Deposits and Other Deposit Products
. The Company offers personal checking, savings and money-market accounts, which generally are lower-cost sources of funds than certificates of deposit and are less likely to be withdrawn when interest rates fluctuate. To build its core deposit base, over the past several years, the Company has sought to reduce its dependence on traditional higher cost deposits in favor of stable lower cost core deposits to fund loan growth and decrease its reliance on other wholesale funding sources, including FHLB and FRB advances. The Company believes that its continued focus on building customer relationships will help to increase the level of core deposits and locally-based retail certificates of deposit. In addition, the Company intends to increase demand deposits by growing business banking relationships through expanded product lines tailored to meet its target business customers' needs. The Company maintains technology-based products to encourage the growth of lower cost deposits, such as personal financial management, business cash management, and business remote deposit products, that enable it to meet its customer's cash management needs and compete effectively with banks of all sizes. Core branch deposits (comprised of all demand, savings, interest checking accounts and all time deposits excluding wholesale-brokered deposits, trust account deposits, Interest on Lawyer Trust Accounts ("IOLTA"), public funds and Internet based deposits) increased $2.8 million during the quarter ended December 31, 2016 compared to the prior quarter.
Recruiting and Retaining Highly Competent Personnel With a Focus on Commercial Lending
. The Company's ability to continue to attract and retain banking professionals with strong community relationships and significant knowledge of its markets will be a key to its success. The Company believes that it enhances its market position and adds profitable growth opportunities by focusing on hiring and retaining experienced bankers focused on owner occupied commercial real estate and commercial lending, and the deposit balances that accompany these relationships. The Company emphasizes to its employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with its customers. The goal is to compete with other financial service providers by relying on the strength of the Company's customer service and relationship banking approach. The Company believes that one of its strengths is that its employees are also significant shareholders through the Company's employee stock ownership ("ESOP") and 401(k) plans.
Commercial and Construction Loan Composition
The following table sets forth the composition of the Company's commercial and construction loan portfolios based on loan purpose at the dates indicated (in thousands):
|
|
Commercial
Business
|
|
|
Other Real
Estate
Mortgage
|
|
|
Real Estate
Construction
|
|
|
Commercial &
Construction
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
64,401
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
64,401
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
31,942
|
|
|
|
31,942
|
|
Office buildings
|
|
|
-
|
|
|
|
117,310
|
|
|
|
-
|
|
|
|
117,310
|
|
Warehouse/industrial
|
|
|
-
|
|
|
|
66,739
|
|
|
|
-
|
|
|
|
66,739
|
|
Retail/shopping centers/strip malls
|
|
|
-
|
|
|
|
60,257
|
|
|
|
-
|
|
|
|
60,257
|
|
Assisted living facilities
|
|
|
-
|
|
|
|
1,781
|
|
|
|
-
|
|
|
|
1,781
|
|
Single purpose facilities
|
|
|
-
|
|
|
|
151,258
|
|
|
|
-
|
|
|
|
151,258
|
|
Land
|
|
|
-
|
|
|
|
12,276
|
|
|
|
-
|
|
|
|
12,276
|
|
Multi-family
|
|
|
-
|
|
|
|
23,161
|
|
|
|
-
|
|
|
|
23,161
|
|
One-to-four family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
20,765
|
|
|
|
20,765
|
|
Total
|
|
$
|
64,401
|
|
|
$
|
432,782
|
|
|
$
|
52,707
|
|
|
$
|
549,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
69,397
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
69,397
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
16,716
|
|
|
|
16,716
|
|
Office buildings
|
|
|
-
|
|
|
|
107,986
|
|
|
|
-
|
|
|
|
107,986
|
|
Warehouse/industrial
|
|
|
-
|
|
|
|
55,830
|
|
|
|
-
|
|
|
|
55,830
|
|
Retail/shopping centers/strip malls
|
|
|
-
|
|
|
|
61,600
|
|
|
|
-
|
|
|
|
61,600
|
|
Assisted living facilities
|
|
|
-
|
|
|
|
1,809
|
|
|
|
-
|
|
|
|
1,809
|
|
Single purpose facilities
|
|
|
-
|
|
|
|
126,524
|
|
|
|
-
|
|
|
|
126,524
|
|
Land
|
|
|
-
|
|
|
|
12,045
|
|
|
|
-
|
|
|
|
12,045
|
|
Multi-family
|
|
|
-
|
|
|
|
33,733
|
|
|
|
-
|
|
|
|
33,733
|
|
One-to-four family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
10,015
|
|
|
|
10,015
|
|
Total
|
|
$
|
69,397
|
|
|
$
|
399,527
|
|
|
$
|
26,731
|
|
|
$
|
495,655
|
|
Comparison of Financial Condition at December 31, 2016 and March 31, 2016
Cash and cash equivalents, including interest-earning accounts, totaled $28.3 million at December 31, 2016 compared to $55.4 million at March 31, 2016. The decrease in cash balances was primarily driven by the increase in investment securities. The Company has deployed a portion of its excess cash balances into investment securities to earn higher yields than cash held in interest-earning accounts based on its asset/liability program and liquidity objectives in order to maximize earnings. As a part of this strategy, the Company also invests a portion of its excess cash in short-term certificates of deposit. All of the certificates of deposit held for investment are fully insured by the FDIC. At December 31, 2016, certificates of deposits held for investment totaled $11.3 million compared to $16.8 million at March 31, 2016.
Investment securities totaled $207.3 million and $150.7 million at December 31, 2016 and March 31, 2016, respectively. The Company primarily purchases a combination of securities backed by government agencies (FHLMC, FNMA, SBA or GNMA). During the nine months ended December 31, 2016, the Company purchased $92.4 million of investment securities. For the nine months ended December 31, 2016, the Company determined that its single collateralized debt obligation required an OTTI charge. For additional information, see Note 5 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Loans receivable, net, totaled $654.1 million at December 31, 2016 compared to $614.9 million at March 31, 2016. The Company has had steady loan demand in its market areas and anticipates continuing organic loan growth. A substantial portion of the loan portfolio is secured by real estate, either as primary or secondary collateral, located in the Company's primary market areas. Risks associated with loans secured by real estate include decreases in land and property values, increases in interest rates, deterioration in local economic conditions, tightening credit or refinancing markets, and a geographic concentration of loans. The Company has no option adjustable-rate mortgage (ARM) or teaser residential real estate loans in its portfolio.
Beginning in 2014, the Company periodically began purchasing pools of used automobile loans from another financial institution as a way to further diversify its loan portfolio and to earn a higher yield than earned on its cash or short-term investments. These automobile loans are originated through a single dealership group located outside the Company's primary market area. These loans are purchased with servicing retained by the seller. At December 31, 2016, the Company's purchased automobile loan portfolio was $26.4 million compared to $37.4 million at March 31, 2016. The Company did not purchase any pools of used automobile loans during the nine months ended December 31, 2016.
Deposits increased $60.6 million to $840.4 million at December 31, 2016 compared to $779.8 million at March 31, 2016. The Company had no wholesale-brokered deposits as of December 31, 2016 or March 31, 2016. Core branch deposits accounted for 97.0% of total deposits at December 31, 2016 compared to 95.8% at March 31, 2016. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.
Shareholders' Equity and Capital Resources
Shareholders' equity increased $1.1 million to $109.4 million at December 31, 2016 from $108.3 million at March 31, 2016. The increase was mainly attributable to net income of $5.4 million. The increase was partially offset by dividends declared of $1.4 million and a decrease in other comprehensive income related to unrealized holding loss on securities available for sale of $3.0 million for the nine months ended December 31, 2016.
The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. As of December 31, 2016, the Bank was "well capitalized" as defined under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain the minimum capital ratios set forth in the table below.
The Bank's actual and required minimum capital amounts and ratios are as follows at the dates indicated (dollars in thousands):
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
"Well Capitalized"
Under Prompt
Corrective Action
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
$
|
111,991
|
|
|
|
15.93
|
%
|
|
$
|
56,243
|
|
|
|
8.0
|
%
|
|
$
|
70,304
|
|
|
|
10.0
|
%
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
103,173
|
|
|
|
14.68
|
|
|
|
42,183
|
|
|
|
6.0
|
|
|
|
56,243
|
|
|
|
8.0
|
|
Common equity tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
103,173
|
|
|
|
14.68
|
|
|
|
31,637
|
|
|
|
4.5
|
|
|
|
45,698
|
|
|
|
6.5
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Adjusted Tangible Assets)
|
|
|
103,173
|
|
|
|
10.81
|
|
|
|
38,160
|
|
|
|
4.0
|
|
|
|
47,701
|
|
|
|
5.0
|
|
Tangible Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Tangible Assets)
|
|
|
103,173
|
|
|
|
10.81
|
|
|
|
14,310
|
|
|
|
1.5
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
"Well Capitalized"
Under Prompt
Corrective Action
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
$
|
105,277
|
|
|
|
16.07
|
%
|
|
$
|
52,405
|
|
|
|
8.0
|
%
|
|
$
|
65,507
|
|
|
|
10.0
|
%
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
97,046
|
|
|
|
14.81
|
|
|
|
39,304
|
|
|
|
6.0
|
|
|
|
52,405
|
|
|
|
8.0
|
|
Common equity tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
97,046
|
|
|
|
14.81
|
|
|
|
29,478
|
|
|
|
4.5
|
|
|
|
42,579
|
|
|
|
6.5
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Adjusted Tangible Assets)
|
|
|
97,046
|
|
|
|
11.18
|
|
|
|
34,718
|
|
|
|
4.0
|
|
|
|
43,397
|
|
|
|
5.0
|
|
Tangible Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Tangible Assets)
|
|
|
97,046
|
|
|
|
11.18
|
|
|
|
13,019
|
|
|
|
1.5
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Liquidity and Capital Resources
Liquidity is essential to our business. The objective of the Bank's liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Core relationship deposits are the primary source of the Bank's liquidity. As such, the Bank focuses on deposit relationships with local consumer and business clients who maintain multiple accounts and services at the Bank.
Liquidity management is both a short and long-term responsibility of the Company's management. The Company 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) its asset/liability management program objectives. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Company requires funds beyond its ability to generate them internally, it has additional diversified and reliable sources of funds with the FHLB, the FRB and other wholesale facilities. These sources of funds may be used on a long or short-term basis to compensate for a reduction in other sources of funds or on a long-term basis to support lending activities.
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, proceeds from the sale of loans, maturing securities, FHLB advances and FRB borrowings. While maturities and scheduled amortization of loans and securities are a predictable source of funds, deposit flows and prepayment of mortgage loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions and competition. Management believes that its focus on core relationship deposits coupled with access to borrowing through reliable counterparties provides reasonable and prudent assurance that ample liquidity is available. However, depositor or counterparty behavior could change in response to competition, economic or market situations or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions.
The Company must maintain an adequate level of liquidity to help ensure the availability of sufficient funds for loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. During the nine months ended December 31, 2016, the Company used its sources of funds primarily to fund loan commitments and purchase investment securities. At December 31, 2016, cash and available for sale investment securities totaled $246.8 million, or 25.0% of total assets. The Bank generally maintains sufficient cash and short-term investment securities to meet short-term liquidity needs; however, its primary liquidity management practice is
to increase or decrease short-term borrowings, including FRB borrowings and FHLB advances. At December 31, 2016, the Company had no advances from the FRB and a borrowing capacity of $62.2 million from the FRB. At December 31, 2016, there were no borrowings from the FHLB and the Company had an available credit facility of $232.0 million. At December 31, 2016, the Company had sufficient unpledged collateral to allow it to utilize its available borrowing capacity from the FRB and the FHLB. Borrowing capacity may, however, fluctuate based on acceptability and risk rating of loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion.
An additional source of wholesale funding includes brokered certificates of deposit. While the Bank has utilized brokered deposits from time to time, the Bank historically has not extensively relied on brokered deposits to fund its operations. At December 31, 2016 and March 31, 2016, the Bank had no wholesale brokered deposits. The Bank participates in the CDARS and ICS deposit products, which allows the Company to accept deposits in excess of the FDIC insurance limit for that depositor and obtain "pass-through" insurance for the total deposit. The Bank's CDARS and ICS balances were $22.4 million, or 2.7% of total deposits, and $27.1 million, or 3.5% of total deposits, at December 31, 2016 and March 31, 2016, respectively. The Bank is enrolled in an internet deposit listing service which it utilizes from time to time. The combination of all the Bank's funding sources gives the Bank available liquidity of $679.7 million, or 69.0% of total assets at December 31, 2016.
At December 31, 2016, the Company had total commitments of $135.7 million, which includes commitments to extend credit of $29.6 million, unused lines of credit and undisbursed balances of $104.7 million and standby letters of credit totaling $1.4 million. The Company anticipates that it will have sufficient funds available to meet current loan commitments. Certificates of deposit that are scheduled to mature in less than one year totaled $72.7 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature. Offsetting these cash outflows are scheduled loan maturities of less than one year totaling $76.3 million.
As a separate legal entity from the Bank, Riverview Bancorp, Inc. must provide for its own liquidity. Sources of capital and liquidity for Riverview Bancorp, Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At December 31, 2016, Riverview Bancorp, Inc. had $1.4 million in cash to meet liquidity needs.
Asset Quality
Nonperforming assets, consisting of nonperforming loans and REO, totaled $3.1 million or 0.31% of total assets at December 31, 2016 compared to $3.3 million or 0.36% of total assets at March 31, 2016.
The following table sets forth information regarding the Company's nonperforming loans at the dates indicated (dollars in thousands):
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
|
|
Number
of Loans
|
|
|
Balance
|
|
|
Number
of Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
1
|
|
|
$
|
189
|
|
|
|
-
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
2
|
|
|
|
1,478
|
|
|
|
2
|
|
|
|
1,559
|
|
Land
|
|
|
1
|
|
|
|
801
|
|
|
|
1
|
|
|
|
801
|
|
Consumer
|
|
|
22
|
|
|
|
319
|
|
|
|
12
|
|
|
|
354
|
|
Total
|
|
|
26
|
|
|
$
|
2,787
|
|
|
|
15
|
|
|
$
|
2,714
|
|
The Company continues to focus on managing the residential construction and land acquisition and development portfolios. At December 31, 2016, the Company's residential construction and land acquisition and development loan portfolios were $20.8 million and $12.3 million, respectively, as compared to $10.0 million and $12.0 million, respectively at March 31, 2016. The percentage of nonperforming loans in the land acquisition and development portfolios at December 31, 2016 was 6.52%, compared to 6.65% at March 31, 2016. There were no nonperforming residential construction loans at December 31, 2016 or March 31, 2016. For the nine months ended December 31, 2016, there were no charge-offs or recoveries in the residential construction portfolio. Net recoveries in the land development portfolio totaled $320,000 for the nine months ended December 31, 2016.
REO totaled $298,000 at December 31, 2016 compared to $595,000 at March 31, 2016. During the nine months ended December 31, 2016, REO sales totaled $267,000 and valuation write-downs were $30,000. There were no transfers to REO for the nine months ended December 31, 2016. The $298,000 balance of REO is comprised of a one-to-four family real estate property located in Washington.
The allowance for loan losses was $10.3 million, or 1.55% of total loans, at December 31, 2016 compared to $9.9 million, or 1.58% of total loans, at March 31, 2016. The ----balance of the allowance for loan losses at December 31, 2016 reflects the relatively low levels of delinquent, nonperforming and classified loans, elevated levels of net recoveries, as well as stabilizing real estate values in our market areas. The Company recorded no provision for loan losses for the nine months ended December 31, 2016.
The coverage ratio of allowance for loan losses to nonperforming loans was 369.18% at December 31, 2016 compared to 364.22% at March 31, 2016. At December 31, 2016, the Company identified $2.5 million or 88.5% of its nonperforming loans as impaired and performed a specific valuation analysis on each loan resulting in no specific reserves being required for these impaired loans. Management considers the allowance for loan losses to be adequate at December 31, 2016 to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio, and the Company believes it has established its existing allowance for loan losses in accordance with GAAP. However, a decline in local economic conditions, results of examinations by the Company's regulators, or other factors could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses will be adequate or that substantial increases will not be necessary should the quality of any loans deteriorate or should collateral values decline as a result of the factors discussed elsewhere in this document. For further information regarding the Company's impaired loans and allowance for loan losses, see Note 7 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Troubled debt restructurings ("TDRs") are loans for which the Company, for economic or legal reasons related to the borrower's financial condition, has granted a concession to the borrower that it would otherwise not consider. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk.
TDRs are considered impaired loans and as such, when a loan is deemed to be impaired, the amount of the impairment is measured using discounted cash flows using the original note rate, except when the loan is collateral dependent. In these cases, the estimated fair value of the collateral (less any selling costs, if applicable) is used. Impairment is recognized as a specific component within the allowance for loan losses if the estimated value of the impaired loan is less than the recorded investment in the loan. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses. At December 31, 2016, the Company had TDRs totaling $12.1 million of which $9.6 million were on accrual status. However, all of the Company's TDRs at December 31, 2016 were paying as agreed except for one TDR commercial business loan of $189,000 and two TDR commercial real estate loans totaling $1.5 million that defaulted since the loans were modified. The related amount of interest income recognized on TDRs was $394,000 and $509,000 for the nine months ended December 31, 2016 and 2015, respectively.
The Company has determined that, in certain circumstances, it is appropriate to split a loan into multiple notes. This typically includes a nonperforming charged-off loan that is not supported by the cash flow of the relationship and a performing loan that is supported by the cash flow. These may also be split into multiple notes to align portions of the loan balance with the various sources of repayment when more than one exists. Generally the new loans are restructured based on customary underwriting standards. In situations where they were not, the policy exception qualifies as a concession, and if the borrower is experiencing financial difficulties, the loans are accounted for as TDRs.
The accrual status of a loan may change after it has been classified as a TDR. The Company's general policy related to TDRs is to perform a credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. This evaluation includes consideration of the borrower's sustained historical repayment performance for a reasonable period of time. A sustained period of repayment performance generally would be a minimum of six months and may include repayments made prior to the restructuring date. If repayment of principal and interest appears doubtful, it is placed on non-accrual status.
The following table sets forth information regarding the Company's nonperforming assets at the dates indicated (dollars in thousands):
|
|
December 31,
2016
|
|
|
March 31,
2016
|
|
Loans accounted for on a non-accrual basis:
|
|
|
|
|
|
|
Commercial business
|
|
$
|
189
|
|
|
$
|
-
|
|
Other real estate mortgage
|
|
|
2,279
|
|
|
|
2,360
|
|
Consumer
|
|
|
309
|
|
|
|
334
|
|
Total
|
|
|
2,777
|
|
|
|
2,694
|
|
Accruing loans which are contractually
past due 90 days or more
|
|
|
10
|
|
|
|
20
|
|
Total nonperforming loans
|
|
|
2,787
|
|
|
|
2,714
|
|
REO
|
|
|
298
|
|
|
|
595
|
|
Total nonperforming assets
|
|
$
|
3,085
|
|
|
$
|
3,309
|
|
|
|
|
|
|
|
|
|
|
Foregone interest on non-accrual loans
(1)
|
|
$
|
56
|
|
|
$
|
112
|
|
Total nonperforming loans to total loans
|
|
|
0.42
|
%
|
|
|
0.43
|
%
|
Total nonperforming loans to total assets
|
|
|
0.28
|
%
|
|
|
0.29
|
%
|
Total nonperforming assets to total assets
|
|
|
0.31
|
%
|
|
|
0.36
|
%
|
|
|
|
|
|
|
|
|
|
(1)
Nine months ended December 31, 2016 and year ended March 31, 2016.
|
|
The composition of the Company's nonperforming assets by loan type and geographical area is as follows at the dates indicated (in thousands):
|
|
Northwest
Oregon
|
|
|
Other
Oregon
|
|
|
Southwest
Washington
|
|
|
Other
Washington
|
|
|
Other
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
189
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
189
|
|
Commercial real estate
|
|
|
-
|
|
|
|
1,262
|
|
|
|
216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,478
|
|
Land
|
|
|
-
|
|
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
173
|
|
|
|
-
|
|
|
|
146
|
|
|
|
319
|
|
Total nonperforming loans
|
|
|
-
|
|
|
|
2,063
|
|
|
|
578
|
|
|
|
-
|
|
|
|
146
|
|
|
|
2,787
|
|
REO
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
|
|
-
|
|
|
|
298
|
|
Total nonperforming assets
|
|
$
|
-
|
|
|
$
|
2,063
|
|
|
$
|
578
|
|
|
$
|
298
|
|
|
$
|
146
|
|
|
$
|
3,085
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
269
|
|
|
$
|
1,290
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,559
|
|
Land
|
|
|
-
|
|
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Consumer
|
|
|
112
|
|
|
|
-
|
|
|
|
139
|
|
|
|
-
|
|
|
|
103
|
|
|
|
354
|
|
Total nonperforming loans
|
|
|
381
|
|
|
|
2,091
|
|
|
|
139
|
|
|
|
-
|
|
|
|
103
|
|
|
|
2,714
|
|
REO
|
|
|
271
|
|
|
|
-
|
|
|
|
26
|
|
|
|
298
|
|
|
|
-
|
|
|
|
595
|
|
Total nonperforming assets
|
|
$
|
652
|
|
|
$
|
2,091
|
|
|
$
|
165
|
|
|
$
|
298
|
|
|
$
|
103
|
|
|
$
|
3,309
|
|
The composition of the land development and speculative construction loan portfolios by geographical area is as follows at the dates indicated (in thousands):
|
|
Northwest
Oregon
|
|
|
Other
Oregon
|
|
|
Southwest
Washington
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
89
|
|
|
$
|
2,563
|
|
|
$
|
9,624
|
|
|
$
|
12,276
|
|
Speculative construction
|
|
|
954
|
|
|
|
119
|
|
|
|
16,298
|
|
|
|
17,371
|
|
Total land and speculative construction
|
|
$
|
1,043
|
|
|
$
|
2,682
|
|
|
$
|
25,922
|
|
|
$
|
29,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
97
|
|
|
$
|
2,766
|
|
|
$
|
9,182
|
|
|
$
|
12,045
|
|
Speculative construction
|
|
|
400
|
|
|
|
-
|
|
|
|
7,711
|
|
|
|
8,111
|
|
Total land and speculative construction
|
|
$
|
497
|
|
|
$
|
2,766
|
|
|
$
|
16,893
|
|
|
$
|
20,156
|
|
Other loans of concern, which are classified as substandard loans and are not presently included in the non-accrual category, consist of loans where the borrowers have cash flow problems, or the collateral securing the respective loans may be inadequate. In either or both of these situations, the borrowers may be unable to comply with the present loan repayment terms, and the loans may subsequently be included in the non-accrual category. Management considers the allowance for loan losses to be adequate to cover the probable losses inherent in these and other loans.
The following table sets forth information regarding the Company's other loans of concern at the dates indicated (dollars in thousands):
|
|
December 31, 2016
|
|
|
March 31, 2016
|
|
|
|
Number of
Loans
|
|
|
Balance
|
|
|
Number of
Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
4
|
|
|
$
|
1,081
|
|
|
|
5
|
|
|
$
|
363
|
|
Commercial real estate
|
|
|
1
|
|
|
|
174
|
|
|
|
4
|
|
|
|
1,225
|
|
Multi-family
|
|
|
1
|
|
|
|
12
|
|
|
|
1
|
|
|
|
12
|
|
Total
|
|
|
6
|
|
|
$
|
1,267
|
|
|
|
10
|
|
|
$
|
1,600
|
|
At December 31, 2016 and March 31, 2016, loans delinquent 30 - 89 days were 0.14% and 0.10%, respectively, of total loans. At December 31, 2016, the delinquency rate in the commercial real estate portfolio was 0.06% of commercial real estate loans. At December 31, 2016, there were no 30 - 89 days delinquent loans in the commercial business portfolio. At that date, commercial real estate loans represented the largest portion of the loan portfolio at 59.81% of total loans and commercial business loans represented 9.69% of total loans.
Off-Balance Sheet Arrangements and Other Contractual Obligations
In the normal course of operations, the Company enters into certain contractual obligations and other commitments. Obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Commitments generally relate to lending operations.
The Company has obligations under long-term operating and capital leases, principally for building space and land. Lease terms generally cover five-year periods, with options to extend, and are not subject to cancellation. During the second quarter of fiscal 2016, the Company modified its lease agreement on its operations center reducing the Company's square footage leased and extending the lease agreement to November 2039.
The Company has commitments to originate fixed and variable rate mortgage loans to customers. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed but committed to construction projects and home equity and commercial lines of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
For further information regarding the Company's off-balance sheet arrangements and other contractual obligations, see Note 12 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Goodwill Valuation
Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Goodwill is presumed to have an indefinite useful life and is tested, at least annually, for impairment at the reporting unit level. The Company has two reporting units, the Bank and the Trust Company, for purposes of evaluating goodwill for impairment. All of the Company's goodwill has been allocated to the Bank reporting unit. The Company performs an annual review in the third quarter of each fiscal year, or more frequently if indications of potential impairment exist, to determine if the recorded goodwill is impaired. If the fair value exceeds the carrying value, goodwill at the reporting unit level is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit is greater than its fair value, there is an indication that impairment may exist and additional analysis must be performed to measure the amount of impairment loss, if any. The amount of impairment is determined by comparing the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company's consolidated financial statements.
The Company performed its annual goodwill impairment test during the quarter ended December 31, 2016. The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value of the Company. The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized as the value of a company from the perspective of a controlling interest and is generally higher than the widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transactional history. The income approach uses a reporting unit's projection of estimated operating results and cash flows that is discounted using a rate that reflects current market conditions. The projection uses management's best estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 8.0%, a net interest margin that approximated 4.0% and a return on assets that ranged from 0.83% to 1.23% (average of 1.04%). In addition to utilizing the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 13.85% utilized for our cash flow estimates and a terminal value estimated at 1.56 times the ending book value of the reporting unit. The Company used a build-up approach in developing the discount rate that included: an assessment of the risk free interest rate, the rate of return expected from publicly traded stocks, the industry the Company operates in and the size of the Company. The market approach estimates fair value by applying tangible book value multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting unit. In applying the market approach method, the Company selected eight publicly traded comparable institutions based on a variety of financial metrics (tangible equity, leverage ratio, return on
assets, return on equity, net interest margin, nonperforming assets, net charge-offs, and reserves for loan losses) and other relevant qualitative factors (geographical location, lines of business, business model, risk profile, availability of financial information, etc.). After selecting comparable institutions, the Company derived the fair value of the reporting unit by completing a comparative analysis of the relationship between their financial metrics listed above and their market values utilizing a market multiple of 1.0 times tangible book value. The Company calculated a fair value of its reporting unit of $159.3 million using the corporate value approach, $151.8 million using the income approach and $150.0 million using the market approach, with a final concluded value of $152.0 million, with primary weight given to the market approach. The results of the Company's step one test indicated that the reporting unit's fair value was greater than its carrying value and therefore no impairment of goodwill exists.
Even though the Company determined that there was no goodwill impairment, a decline in the value of its stock price as well as values of other financial institutions, declines in revenue for the Company beyond our current forecasts, significant adverse changes in the operating environment for the financial industry or an increase in the value of our assets without an increase in the value of the reporting unit may result in a future impairment charge.
It is possible that changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management's judgments, assumptions and estimates made in assessing the fair value of our goodwill, could result in an impairment charge of a portion or all of our goodwill. If the Company recorded an impairment charge, its financial position and results of operations would be adversely affected; however, such an impairment charge would have no impact on our liquidity, operations or regulatory capital.
Comparison of Operating Results for the Three and Nine Months Ended December 31, 2016 and 2015
Net Income.
Net income for the three months ended December 31, 2016 and 2015 was $2.0 million, or $0.09 per diluted share, and $1.7 million, or $0.08 per diluted share, respectively. Net income for the nine months ended December 31, 2016 and 2015 was $5.4 million, or $0.24 per diluted share, and $5.0 million, or $0.22 per diluted share, respectively. The earnings for the three and nine months ended December 31, 2016 compared to the same prior year periods primarily reflect the growth in the Company's loan portfolio which resulted in an improvement in net interest income. There was no provision for loan losses for the nine months ended December 31, 2016. Net income for the nine months ended December 31, 2015 included a recapture of loan losses of $800,000.
Net Interest Income.
The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and the interest paid on deposits and borrowings. When the rate earned on interest-earning assets equals or exceeds the rate paid on interest-bearing liabilities, this positive interest rate spread will generate net interest income. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies.
Net interest income for the three and nine months ended December 31, 2016 was $8.5 million and $24.4 million, respectively, representing a $1.0 million and $2.6 million increase, respectively, compared to the three and nine months ended December 31, 2015. The net interest margin for the three and nine months ended December 31, 2016 was 3.75% and 3.73%, respectively, compared to 3.69% and 3.67% for the three and nine months ended December 31, 2015, respectively. This increase in the net interest margin was primarily the result of the increase in the average balance on loans receivable.
The Company achieves better net interest margins in a stable or increasing interest rate environment as a result of the consolidated balance sheet being slightly asset interest rate sensitive. At December 31, 2016, 7.26% of our loan portfolio had adjustable (floating) interest rates. At December 31, 2016, $27.5 million, or 56.98% of our adjustable (floating) loan portfolio contained interest rate floors, below which the loans' contractual interest rates may not adjust. The inability of these loans to adjust downward has contributed to increased income in the currently low interest rate environment; however, net interest income will be reduced in a rising interest rate environment until such time as the current rate exceeds these interest rate floors. At December 31, 2016, $10.8 million or 1.63% of the loans in the Company's loan portfolio were at the floor interest rate of which $8.8 million or 81.89% had yields that would begin floating again once the Wall Street Journal Prime Rate increases at least 150 basis points.
Interest and Dividend Income.
Interest and dividend income for the three and nine months ended December 31, 2016 was $9.0 million and $25.7 million, respectively, compared to $7.9 million and $23.1 million, respectively, for the same periods in the prior year. The increases were due primarily to an increase in interest income on loans receivable as a result of an increase in the average balance of net loans.
The average balance of net loans increased $51.5 million and $59.7 million to $658.2 million and $645.6 million for the three and nine months ended December 31, 2016, respectively, from $606.8 million and $585.9 million for the same prior year periods, respectively. The average yield on net loans was 4.75% and 4.72% for the three and nine months ended December 31, 2016, respectively, compared to 4.66% and 4.72% for the same three and nine months in the prior year, respectively.
Interest Expense.
Interest expense increased $16,000 to $450,000 for the three months ended December 31, 2016, compared to $434,000 for the same prior year period. Interest expense remained constant at $1.3 million for the nine months ended December 31, 2016 and 2015. Although deposit balances increased, the Company's decision to maintain low interest offerings on its deposit products in addition to the downward shift in the percentage of deposits representing certificates of deposit that yield a higher interest rate compared to savings and demand deposit accounts that yield a lower interest rate has resulted in a decline in the average cost of deposits. The weighted average interest rate on interest-bearing deposits decreased to 0.18% for both the three and nine months ended December 31, 2016 from 0.20% and 0.21%, respectively, for the same periods in the prior year.
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest earned on average interest-earning assets and interest paid on average interest-bearing liabilities, resultant yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities and net interest margin (dollars in thousands):
|
|
Three Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/Cost
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
548,168
|
|
|
$
|
6,661
|
|
|
|
4.82
|
%
|
|
$
|
473,998
|
|
|
$
|
5,640
|
|
|
|
4.73
|
%
|
Non-mortgage loans
|
|
|
110,044
|
|
|
|
1,222
|
|
|
|
4.41
|
|
|
|
132,761
|
|
|
|
1,469
|
|
|
|
4.40
|
|
Total net loans
(1)
|
|
|
658,212
|
|
|
|
7,883
|
|
|
|
4.75
|
|
|
|
606,759
|
|
|
|
7,109
|
|
|
|
4.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(2)
|
|
|
185,852
|
|
|
|
963
|
|
|
|
2.06
|
|
|
|
133,599
|
|
|
|
702
|
|
|
|
2.09
|
|
Daily interest-bearing assets
|
|
|
95
|
|
|
|
-
|
|
|
|
-
|
|
|
|
712
|
|
|
|
-
|
|
|
|
-
|
|
Other earning assets
|
|
|
56,383
|
|
|
|
112
|
|
|
|
0.79
|
|
|
|
65,690
|
|
|
|
110
|
|
|
|
0.67
|
|
Total interest-earning assets
|
|
|
900,542
|
|
|
|
8,958
|
|
|
|
3.95
|
|
|
|
806,760
|
|
|
|
7,921
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
14,111
|
|
|
|
|
|
|
|
|
|
|
|
14,950
|
|
|
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
|
70,147
|
|
|
|
|
|
|
|
|
|
|
|
70,794
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
984,800
|
|
|
|
|
|
|
|
|
|
|
$
|
892,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
$
|
107,180
|
|
|
|
27
|
|
|
|
0.10
|
|
|
$
|
86,173
|
|
|
|
22
|
|
|
|
0.10
|
|
Interest checking accounts
|
|
|
154,880
|
|
|
|
22
|
|
|
|
0.06
|
|
|
|
125,864
|
|
|
|
25
|
|
|
|
0.08
|
|
Money market deposit accounts
|
|
|
252,390
|
|
|
|
77
|
|
|
|
0.12
|
|
|
|
234,198
|
|
|
|
70
|
|
|
|
0.12
|
|
Certificates of deposit
|
|
|
112,602
|
|
|
|
151
|
|
|
|
0.53
|
|
|
|
126,579
|
|
|
|
173
|
|
|
|
0.54
|
|
Total interest-bearing deposits
|
|
|
627,052
|
|
|
|
277
|
|
|
|
0.18
|
|
|
|
572,814
|
|
|
|
290
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
|
25,143
|
|
|
|
173
|
|
|
|
2.73
|
|
|
|
25,175
|
|
|
|
144
|
|
|
|
2.28
|
|
Total interest-bearing liabilities
|
|
|
652,195
|
|
|
|
450
|
|
|
|
0.27
|
|
|
|
597,989
|
|
|
|
434
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
212,536
|
|
|
|
|
|
|
|
|
|
|
|
180,591
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,625
|
|
|
|
|
|
|
|
|
|
|
|
5,809
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
872,356
|
|
|
|
|
|
|
|
|
|
|
|
784,389
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
112,444
|
|
|
|
|
|
|
|
|
|
|
|
108,115
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
984,800
|
|
|
|
|
|
|
|
|
|
|
$
|
892,504
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
8,508
|
|
|
|
|
|
|
|
|
|
|
$
|
7,487
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
3.62
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
138.08
|
%
|
|
|
|
|
|
|
|
|
|
|
134.91
|
%
|
Tax equivalent adjustment
(3)
|
|
|
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized; therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders' equity.
|
|
(3)
Tax-equivalent adjustment relates to non-taxable investment interest income. Interest and rates are presented on a fully tax–equivalent basis.
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
and
Dividends
|
|
|
Yield/Cost
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
530,232
|
|
|
$
|
19,181
|
|
|
|
4.80
|
%
|
|
$
|
455,206
|
|
|
$
|
16,382
|
|
|
|
4.79
|
%
|
Non-mortgage loans
|
|
|
115,366
|
|
|
|
3,773
|
|
|
|
4.34
|
|
|
|
130,730
|
|
|
|
4,376
|
|
|
|
4.46
|
|
Total net loans
(1)
|
|
|
645,598
|
|
|
|
22,954
|
|
|
|
4.72
|
|
|
|
585,936
|
|
|
|
20,758
|
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
(2)
|
|
|
165,825
|
|
|
|
2,452
|
|
|
|
1.96
|
|
|
|
128,588
|
|
|
|
1,986
|
|
|
|
2.06
|
|
Daily interest-bearing assets
|
|
|
283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
962
|
|
|
|
-
|
|
|
|
-
|
|
Other earning assets
|
|
|
57,658
|
|
|
|
344
|
|
|
|
0.79
|
|
|
|
73,917
|
|
|
|
340
|
|
|
|
0.61
|
|
Total interest-earning assets
|
|
|
869,364
|
|
|
|
25,750
|
|
|
|
3.93
|
|
|
|
789,403
|
|
|
|
23,084
|
|
|
|
3.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
14,320
|
|
|
|
|
|
|
|
|
|
|
|
15,111
|
|
|
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
|
70,896
|
|
|
|
|
|
|
|
|
|
|
|
71,824
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
954,580
|
|
|
|
|
|
|
|
|
|
|
$
|
876,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
$
|
102,253
|
|
|
|
77
|
|
|
|
0.10
|
|
|
$
|
81,828
|
|
|
|
61
|
|
|
|
0.10
|
|
Interest checking accounts
|
|
|
148,557
|
|
|
|
72
|
|
|
|
0.06
|
|
|
|
123,964
|
|
|
|
74
|
|
|
|
0.08
|
|
Money market deposit accounts
|
|
|
245,619
|
|
|
|
220
|
|
|
|
0.12
|
|
|
|
231,356
|
|
|
|
204
|
|
|
|
0.12
|
|
Certificates of deposit
|
|
|
115,210
|
|
|
|
468
|
|
|
|
0.54
|
|
|
|
131,678
|
|
|
|
554
|
|
|
|
0.56
|
|
Total interest-bearing deposits
|
|
|
611,639
|
|
|
|
837
|
|
|
|
0.18
|
|
|
|
568,826
|
|
|
|
893
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
|
25,156
|
|
|
|
494
|
|
|
|
2.61
|
|
|
|
25,025
|
|
|
|
417
|
|
|
|
2.22
|
|
Total interest-bearing liabilities
|
|
|
636,795
|
|
|
|
1,331
|
|
|
|
0.28
|
|
|
|
593,851
|
|
|
|
1,310
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
199,061
|
|
|
|
|
|
|
|
|
|
|
|
169,346
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,463
|
|
|
|
|
|
|
|
|
|
|
|
6,303
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
843,319
|
|
|
|
|
|
|
|
|
|
|
|
769,500
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
111,261
|
|
|
|
|
|
|
|
|
|
|
|
106,838
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
954,580
|
|
|
|
|
|
|
|
|
|
|
$
|
876,338
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
24,419
|
|
|
|
|
|
|
|
|
|
|
$
|
21,774
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
136.52
|
%
|
|
|
|
|
|
|
|
|
|
|
132.93
|
%
|
Tax equivalent adjustment
(3)
|
|
|
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized; therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders' equity.
|
|
(3)
Tax-equivalent adjustment relates to non-taxable investment interest income. Interest and rates are presented on a fully tax–equivalent basis.
|
|
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the periods ended December 31, 2016 compared to December 31, 2015. Variances that were insignificant have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change (In thousands).
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
|
|
2016 vs. 2015
|
|
|
2016 vs. 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
910
|
|
|
$
|
111
|
|
|
$
|
1,021
|
|
|
$
|
2,764
|
|
|
$
|
35
|
|
|
$
|
2,799
|
|
Non-mortgage loans
|
|
|
(250
|
)
|
|
|
3
|
|
|
|
(247
|
)
|
|
|
(491
|
)
|
|
|
(112
|
)
|
|
|
(603
|
)
|
Investment securities
(1)
|
|
|
271
|
|
|
|
(10
|
)
|
|
|
261
|
|
|
|
565
|
|
|
|
(99
|
)
|
|
|
466
|
|
Daily interest-bearing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other earning assets
|
|
|
(17
|
)
|
|
|
19
|
|
|
|
2
|
|
|
|
(84
|
)
|
|
|
88
|
|
|
|
4
|
|
Total interest income
|
|
|
914
|
|
|
|
123
|
|
|
|
1,037
|
|
|
|
2,754
|
|
|
|
(88
|
)
|
|
|
2,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
Interest checking accounts
|
|
|
4
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
16
|
|
|
|
(18
|
)
|
|
|
(2
|
)
|
Money market deposit accounts
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
|
|
16
|
|
|
|
-
|
|
|
|
16
|
|
Certificates of deposit
|
|
|
(19
|
)
|
|
|
(3
|
)
|
|
|
(22
|
)
|
|
|
(67
|
)
|
|
|
(19
|
)
|
|
|
(86
|
)
|
Other interest-bearing liabilities
|
|
|
-
|
|
|
|
29
|
|
|
|
29
|
|
|
|
2
|
|
|
|
75
|
|
|
|
77
|
|
Total interest expense
|
|
|
(3
|
)
|
|
|
19
|
|
|
|
16
|
|
|
|
(17
|
)
|
|
|
38
|
|
|
|
21
|
|
Net interest income
|
|
$
|
917
|
|
|
$
|
104
|
|
|
$
|
1,021
|
|
|
$
|
2,771
|
|
|
$
|
(126
|
)
|
|
$
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest is presented on a fully tax-equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses.
There was no provision for loan losses for the three and nine months ended December 31, 2016. There was no provision for loan losses for the three months ended December 31, 2015. The recapture of loan losses for the nine months ended December 31, 2015 was $800,000. The lack of a provision for loan losses for the three and nine months ended December 31, 2016 and the recapture of loan losses for nine months ended December 31, 2015 continue to be driven by the elevated level of net recoveries and the low levels of delinquent, nonperforming and classified loans, as well as the stabilization of real estate values in our market areas.
Net recoveries for the three and nine months ended December 31, 2016 were $226,000 and $404,000, respectively, compared to net recoveries for the three and nine months ended December 31, 2015 totaling $60,000 and $211,000, respectively. The net recoveries occurred primarily as a result of the decrease in charge-offs as nonperforming loans declined and the improvement and stabilization of real estate values in our market areas as well as an increase in recoveries on previously charged off loans. Nonperforming loans were $2.8 million at December 31, 2016 compared to $3.9 million at December 31, 2015. The ratio of allowance for loan losses to nonperforming loans was 369.18% at December 31, 2016 compared to 258.13% at December 31, 2015. See "Asset Quality" above for additional information related to asset quality that management considers in determining the provision for loan losses.
Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of December 31, 2016, the Company had identified $12.1 million of impaired loans. Because the significant majority of the impaired loans are collateral dependent, nearly all of the specific allowances are calculated based on the estimated fair value of the collateral. Of those impaired loans, $10.9 million have no specific valuation allowance as their estimated collateral value is equal to or exceeds the carrying cost, which in some cases is the result of previous loan charge-offs. At December 31, 2016, charge-offs on these impaired loans totaled $333,000 from their original loan balances. The remaining $1.2 million have specific valuation allowances totaling $102,000.
Non-Interest Income.
Non-interest income decreased $84,000 for the three months ended December 31, 2016 compared to the same prior year period. The decrease for the three months ended December 31, 2016 compared to the same period in 2015 was primarily due to a decrease in asset management fees of $121,000. This decrease was partially offset by an increase on the net gain on sales of loans held for sale of $66,000 for the three months ended December 31, 2016 compared to the same prior year period.
Non-interest income increased $246,000 for the nine months ended December 31, 2016 compared to the same prior year period. The increase for the nine months ended December 31, 2016 compared to the same period in 2015 was due to an increase in fees and service charges and gain on sale of loans of $75,000 and $68,000, respectively. Additionally, non-interest income also included a BOLI death benefit on a former employee of $407,000. These increases were partially offset by a decrease in asset management fees of $197,000 for the nine months ended December 31, 2016 compared to the same prior year period. Other non-interest income decreased during the nine months ended December 31, 2016 due to a $240,000 OTTI charge related to a collateralized debt obligation security. Additionally, losses on sales of REO decreased $145,000 for the nine months ended December 31, 2016 compared to the same prior year period.
Non-Interest Expense.
Non-interest expense increased $502,000 and $1.7 million to $7.9 million and $24.1 million for the three and nine months ended December 31, 2016, respectively, compared to $7.3 million and $22.4 million for the three and nine months ended December 31, 2015. The increase for the three and nine months ended December 31, 2016 was due to increases of $398,000 and $919,000, respectively in salaries and employee benefits, and $133,000 and $393,000, respectively, in professional fees mainly due to the purchase and assumption agreement with MBank. For the nine months ended December 31, 2016, the increase was also attributed to cost associated with a litigation settlement of $500,000. For the three and nine months ended December 31, 2016, the above increases were partially offset by a decrease of $50,000 and $102,000, respectively, in FDIC insurance premiums and a decrease of $63,000 and $459,000, respectively in real estate owned expenses compared to the same prior year periods.
Income Taxes.
The provision for income taxes was $991,000 and $2.4 million for the three and nine months ended December 31, 2016, respectively, compared to a provision for income taxes of $849,000 and $2.4 million for the three and nine months ended December 31, 2015, respectively. The effective tax rate was 33.2% and 31.0% for the three and nine months ended December 31, 2016, respectively, compared to 33.2% and 32.9% for the three and nine months ended December 31, 2015, respectively. As of December 31, 2016, management deemed that a deferred tax asset valuation allowance related to the Company's deferred tax asset was not necessary. At December 31, 2016, the Company had a deferred tax asset of $8.7 million compared to $9.2 million at March 31, 2016.