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 2019 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 2019 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, Klickitat and
Skamania counties of Washington, and Multnomah, Washington and Marion counties of Oregon as its primary market area. 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 loans receivable, net, totaled $869.9 million at
September 30, 2019 compared to $864.7 million at March 31, 2019.
The Bank's subsidiary, Riverview Trust Company (the “Trust Company”), is a trust and financial services company with one office located in downtown Vancouver, Washington and one office in Lake
Oswego, Oregon which provides full-service brokerage activities, trust and asset management services. The Bank’s Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business
banking services.
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 business and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations – which are mainly concentrated in commercial business and commercial real estate 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.
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 18 branches, including, among others, ten in Clark County, four in the Portland metropolitan area and three lending centers.
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, WaferTech, Nautilus, Barrett Business Services, PeaceHealth 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.
Economic conditions in the Company’s market areas have generally been positive. However, according to the Washington State Employment Security Department, unemployment in Clark County increased
slightly to 5.5% at August 31, 2019 compared to 5.3% at March 31, 2019 and 4.2% at September 30, 2018. According to the Oregon Employment Department, unemployment in Portland, Oregon decreased to 3.5% at August 31, 2019 compared to 3.9% at March 31,
2019 and 3.6% at September 30, 2018. According to the Regional Multiple Listing Services (“RMLS”), residential home inventory levels in Portland, Oregon have increased to 2.8 months at September 30, 2019 compared to 2.2 months at March 31, 2019 and
decreased compared to 3.1 months at September 30, 2018. Residential home inventory levels in Clark County increased to 2.5 months at September 30, 2019 compared to 2.4 months at March 31, 2019 and decreased compared to 2.9 months at September 30,
2018. According to the RMLS, closed home sales in Clark County increased 8.0% in September 2019 compared to September 2018. Closed home sales during September 2019 in Portland, Oregon increased 4.6% compared to
26
September 2018. Commercial real estate leasing activity and the residential real estate market in the Portland/Vancouver area has been strong and the vacancy rates in the Portland/Vancouver area have been relatively
low.
Operating Strategy
Fiscal year 2020 marks the 97th anniversary since the Bank began operations in 1923. The primary business strategy of the Company is to provide comprehensive banking and related
financial services within its primary market area. The historical emphasis had been on residential real estate lending. Since 1998, however, the Company has been diversifying its loan portfolio through the expansion of its commercial and construction
loan portfolios. At September 30, 2019, commercial and construction loans represented 89.9% of total loans compared to 89.5% at March 31, 2019. Commercial lending, including commercial real estate loans, typically has higher credit risk, greater
interest margins and shorter terms than residential lending which can increase the loan portfolio's profitability.
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 its core deposits by expanding its customer base throughout its 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.
Maintaining Strong Asset Quality. The Company believes that strong asset quality is a key to long-term financial success. The Company has actively
managed delinquent loans and nonperforming assets by aggressively pursuing the collection of consumer debts, marketing saleable properties upon foreclosure or repossession, and through work-outs of classified assets and loan charge-offs. As a result
of these efforts and the application of more stringent underwriting practices over the last several years, the percentage of nonperforming loans to total loans was reduced to 0.17% at September 30, 2019 compared to 0.92% at March 31, 2015. 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’s PIP committee is comprised of several
members of management and the Board of Directors with the purpose of undertaking several initiatives to reduce non-interest expense and continue on-going efforts to identify cost saving 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. As a result, the Company has improved its efficiency
ratio over the last several years from 98.0% at March 31, 2014 to 61.7% at September 30, 2019.
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, whereby
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, text banking and mobile payments. The products are tailored to meet the needs
of small to medium size businesses and households in the markets we serve. Recently, the Company launched a new online mortgage origination platform in June 2019. 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 other 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 $690.5 million and $646.0 million at September 30, 2019 and March 31, 2019, respectively. The
Company also offers a third-party identity theft product to assist our customers in monitoring their credit that includes an identity theft restoration service.
27
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, 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 customers’ 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 $46.7 million at September 30, 2019 compared to March 31, 2019 reflecting the Company’s commitment
to increasing core deposits versus relying on wholesale funding.
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 shareholders through the Company’s employee stock ownership (“ESOP”) and 401(k) plans.
Commercial and Construction Loan Composition
The following tables set 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
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
167,782
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
167,782
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
67,437
|
|
|
|
67,437
|
|
Office buildings
|
|
|
-
|
|
|
|
113,713
|
|
|
|
-
|
|
|
|
113,713
|
|
Warehouse/industrial
|
|
|
-
|
|
|
|
102,285
|
|
|
|
-
|
|
|
|
102,285
|
|
Retail/shopping centers/strip malls
|
|
|
-
|
|
|
|
65,381
|
|
|
|
-
|
|
|
|
65,381
|
|
Assisted living facilities
|
|
|
-
|
|
|
|
1,117
|
|
|
|
-
|
|
|
|
1,117
|
|
Single purpose facilities
|
|
|
-
|
|
|
|
189,075
|
|
|
|
-
|
|
|
|
189,075
|
|
Land
|
|
|
-
|
|
|
|
14,166
|
|
|
|
-
|
|
|
|
14,166
|
|
Multi-family
|
|
|
-
|
|
|
|
55,978
|
|
|
|
-
|
|
|
|
55,978
|
|
One-to-four family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
15,737
|
|
|
|
15,737
|
|
Total
|
|
$
|
167,782
|
|
|
$
|
541,715
|
|
|
$
|
83,174
|
|
|
$
|
792,671
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
162,796
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
162,796
|
|
Commercial construction
|
|
|
-
|
|
|
|
-
|
|
|
|
70,533
|
|
|
|
70,533
|
|
Office buildings
|
|
|
-
|
|
|
|
118,722
|
|
|
|
-
|
|
|
|
118,722
|
|
Warehouse/industrial
|
|
|
-
|
|
|
|
91,787
|
|
|
|
-
|
|
|
|
91,787
|
|
Retail/shopping centers/strip malls
|
|
|
-
|
|
|
|
64,934
|
|
|
|
-
|
|
|
|
64,934
|
|
Assisted living facilities
|
|
|
-
|
|
|
|
2,740
|
|
|
|
-
|
|
|
|
2,740
|
|
Single purpose facilities
|
|
|
-
|
|
|
|
183,249
|
|
|
|
-
|
|
|
|
183,249
|
|
Land
|
|
|
-
|
|
|
|
17,027
|
|
|
|
-
|
|
|
|
17,027
|
|
Multi-family
|
|
|
-
|
|
|
|
51,570
|
|
|
|
-
|
|
|
|
51,570
|
|
One-to-four family construction
|
|
|
-
|
|
|
|
-
|
|
|
|
20,349
|
|
|
|
20,349
|
|
Total
|
|
$
|
162,796
|
|
|
$
|
530,029
|
|
|
$
|
90,882
|
|
|
$
|
783,707
|
|
28
Comparison of Financial Condition at September 30, 2019 and March 31, 2019
Cash and cash equivalents, including interest-earning accounts, totaled $48.9 million at September 30, 2019 compared to $23.0 million at March 31, 2019. Cash and cash equivalents increased due to
the increase in deposit balances. The Company’s cash balances fluctuate based upon funding needs, and the Company will deploy a portion of excess cash balances to purchase investment securities to earn higher yields than the nominal yield earned on
cash held in interest-earning accounts, based on the Company’s asset/liability management 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 held for investment. All of the certificates of deposit held for investment are fully insured by the FDIC. Certificates of deposits held for investment totaled $249,000 and $747,000 at September 30, 2019 and March 31, 2019,
respectively.
Investment securities totaled $163.7 million and $178.3 million at September 30, 2019 and March 31, 2019, respectively. The decrease was due to regular scheduled investment securities repayments
and an investment call during the six months ended September 30, 2019. During the six months ended September 30, 2019, there were no purchases of investment securities. The Company primarily purchases a combination of securities backed by government
agencies (FHLMC, FNMA, SBA or GNMA). At September 30, 2019, the Company determined that none of its investment securities required an other than temporary impairment (“OTTI”) charge. For additional information on the Company’s investment securities,
see Note 5 of the Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Loans receivable, net, totaled $869.9 million at September 30, 2019 compared to $864.7 million at March 31, 2019, an increase of $5.2 million. The Company has had steady loan demand in its market
areas and anticipates continued organic loan growth. The increase was mainly concentrated in commercial real estate loans which increased $10.1 million or 2.2%. In addition, commercial business loans increased $5.0 million, or 3.1% and multi-family
loans increased $4.4 million, or 8.5%. Partially offsetting these increases were decreases in real estate construction loans of $7.7 million, or 8.5% and consumer loans of $3.8 million, or 4.1%. Due to the timing of the completion of these real
estate construction projects, balances may fluctuate between periods. Once construction projects are completed, these loans will roll to permanent financing and be classified within a category under other real estate mortgage. The Company also
purchases the guaranteed portion of SBA loans as a way to supplement loan originations, further diversify its loan portfolio and earn a higher yield than earned on its cash or short-term investments. These SBA loans are originated through another
financial institution located outside the Company’s primary market area. These loans are purchased with servicing retained by the seller. At September 30, 2019, the Company’s purchased SBA loan portfolio was $68.9 million compared to $67.9 million at
March 31, 2019. During the six months ended September 30, 2019, the Bank purchased $6.9 million of SBA loans, including premiums.
Deposits increased $57.2 million to $982.3 million at September 30, 2019 compared to $925.1 million at March 31, 2019. The increase was due a concentrated effort by the Company to increase
deposits. The Company increased interest rates on certain deposit products to be more competitive in its market area. The Company had no wholesale-brokered deposits at September 30, 2019 and March 31, 2019. Core branch deposits accounted for 97.2% of
total deposits at September 30, 2019 compared to 98.2% at March 31, 2019. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.
The Bank had no advances from the FHLB at September 30, 2019 compared to $56.6 million at March 31, 2019. Based upon the increase in deposit balances, the Company was able to pay off its
outstanding FHLB balances during the second fiscal quarter of 2020.
Shareholders' equity increased $10.0 million to $143.1 million at September 30, 2019 from $133.1 million at March 31, 2019. The increase was mainly attributable to net income of $8.7 million and
an increase in the accumulated other comprehensive income related to the unrealized holding gain on securities available for sale, net of tax, of $2.8 million for the six months ended September 30, 2019. These increases were partially offset by cash
dividends declared of $2.0 million. The Company did not repurchase any shares of common stock for the six months ended September 30, 2019 and 2018.
Capital Resources
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 result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
29
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and tier I capital to risk-weighted assets, core capital
to total assets and tangible capital to tangible assets (set forth in the table below). Management believes the Bank met all capital adequacy requirements to which it was subject as of
September 30, 2019.
As of September 30, 2019, the most recent notification from the OCC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. The Bank’s actual and
required minimum capital amounts and ratios were 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
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
$
|
143,999
|
|
17.27
|
%
|
$
|
66,702
|
|
8.0
|
%
|
$
|
83,378
|
|
10.0
|
%
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
133,559
|
|
16.02
|
|
|
50,027
|
|
6.0
|
|
|
66,702
|
|
8.0
|
|
Common equity tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
133,559
|
|
16.02
|
|
|
37,520
|
|
4.5
|
|
|
54,196
|
|
6.5
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Average Tangible Assets)
|
|
133,559
|
|
11.79
|
|
|
45,310
|
|
4.0
|
|
|
56,638
|
|
5.0
|
|
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
“Well Capitalized”
Under Prompt
Corrective Action
|
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
$
|
140,062
|
|
16.88
|
%
|
$
|
66,379
|
|
8.0
|
%
|
$
|
82,974
|
|
10.0
|
%
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
129,671
|
|
15.63
|
|
|
49,784
|
|
6.0
|
|
|
66,379
|
|
8.0
|
|
Common equity tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
129,671
|
|
15.63
|
|
|
37,338
|
|
4.5
|
|
|
53,933
|
|
6.5
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Average Tangible Assets)
|
|
129,671
|
|
11.56
|
|
|
44,874
|
|
4.0
|
|
|
56,092
|
|
5.0
|
|
In addition to the minimum common equity tier 1 (“CET1”), Tier 1 and total capital ratios, the Bank is required to maintain a capital conservation buffer consisting of additional CET1 capital in
order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. The capital conservation buffer is required to
be an amount greater than 2.5% of risk-weighted assets. As of September 30, 2019, the Bank’s CET1 capital exceeded the required capital conservation buffer at an amount greater than 2.5%.
For a savings and loan holding company, such as the Company, the capital guidelines apply on a bank only basis. The Federal Reserve expects the holding company’s subsidiary banks to be well
capitalized under the prompt corrective action regulations. If the Company was subject to regulatory guidelines for bank holding companies at September 30, 2019, the Company would have exceeded all regulatory capital requirements.
At periodic intervals, the OCC and the FDIC routinely examine the Bank’s financial condition and risk management processes as part of their legally prescribed oversight. Based on their
examinations, these regulators can direct that the Company’s consolidated financial statements be adjusted in accordance with their findings. A future examination by the OCC or the FDIC could include a review of certain transactions or other amounts
reported in the Company’s 2019 consolidated financial statements.
30
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, fund the borrowing needs of
loan customers, and 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 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 six months ended September 30, 2019, the Bank used its sources of funds primarily to fund loan commitments. At September 30, 2019, cash and cash equivalents,
certificates of deposit held for investment and available for sale investment securities totaled $212.8 million, or 18.1% of total assets. The Bank generally maintains sufficient cash and short-term investments 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 September 30, 2019, the Bank had no advances from the FRB and had a borrowing capacity of $58.7
million from the FRB, subject to sufficient collateral. At September 30, 2019, the Bank had no advances from FHLB and had an available borrowing capacity of $231.1 million, subject to sufficient collateral and stock investment. At September 30, 2019,
the Bank 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 Company has utilized brokered deposits from time to time, the Company historically has not
extensively relied on brokered deposits to fund its operations. At September 30, 2019 and March 31, 2019, the Bank had no wholesale brokered deposits. The Bank also participates in the CDARS and ICS deposit products, which allow 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 $8.2 million, or 0.83% of total deposits, and $14.5 million, or 1.6% of total
deposits, at September 30, 2019 and March 31, 2019, respectively. In addition, the Bank is enrolled in an internet deposit listing service. Under this listing service, the Bank may post time deposit rates on an internet site where institutional
investors have the ability to deposit funds with the Bank. At September 30, 2019 and March 31, 2019, the Company had no deposits through this listing service. Although the Company did not originate any internet based deposits during the six months
ended September 30, 2019, the Company may do so in the future consistent with its asset/liability objectives. The combination of all the Bank’s funding sources gives the Bank available liquidity of $678.9 million, or 57.9% of total assets at
September 30, 2019.
At September 30, 2019, the Company had total commitments of $165.5 million, which includes commitments to extend credit of $28.9 million, unused lines of credit totaling $81.5 million, undisbursed
construction loans totaling $53.0 million, and standby letters of credit totaling $2.1 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 from September 30, 2019 totaled $51.5 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 $46.2 million at September 30, 2019.
Riverview Bancorp, Inc., as a separate legal entity from the Bank, 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 September 30, 2019, Riverview Bancorp, Inc. had $7.5 million in cash to meet its liquidity needs.
31
Nonperforming assets, consisting of nonperforming loans, were $1.5 million or 0.13% of total assets at both September 30, 2019 and March 31, 2019. The following table sets forth information
regarding the Company’s nonperforming loans at the dates indicated (dollars in thousands):
|
September 30, 2019
|
|
|
March 31, 2019
|
|
|
Number of
Loans
|
|
|
Balance
|
|
|
|
Number of
Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
2
|
|
$
|
243
|
|
|
|
2
|
|
$
|
225
|
Commercial real estate
|
|
2
|
|
|
1,026
|
|
|
|
2
|
|
|
1,081
|
Consumer
|
|
11
|
|
|
216
|
|
|
|
16
|
|
|
213
|
Total
|
|
15
|
|
$
|
1,485
|
|
|
|
20
|
|
$
|
1,519
|
The allowance for loan losses was $11.4 million or 1.30% of total loans at September 30, 2019 compared to $11.5 million or 1.31% of total loans at March 31, 2019. The ----balance of the allowance
for loan losses at September 30, 2019 reflects the lower levels of delinquent, nonperforming and classified loans, low levels of net charge offs, as well as stable real estate values in our market areas. The Company recorded no provision for loan
losses for the six months ended September 30, 2019.
The coverage ratio of allowance for loan losses to nonperforming loans was 770.10% at September 30, 2019 compared to 754.25% at March 31, 2019. At September 30, 2019, the Company identified $1.2
million or 80.96% 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 September 30, 2019 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
future 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, and/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. All of the Company’s TDRs were paying as agreed at
September 30, 2019 with the exception of one commercial business loan totaling $150,000 and two commercial real estate loans totaling $1.0 million. The related amount of interest income recognized on TDRs was $111,000 and $102,000 for the six months
ended September 30, 2019 and 2018, 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 are 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.
32
The following table sets forth information regarding the Company’s nonperforming assets at the dates indicated (dollars in thousands):
|
|
September 30,
2019
|
|
|
March 31,
2019
|
|
|
|
|
|
Loans accounted for on a non-accrual basis:
|
|
|
|
|
|
|
Commercial business
|
$
|
243
|
|
$
|
225
|
|
Commercial real estate
|
|
1,026
|
|
|
1,081
|
|
Consumer
|
|
216
|
|
|
210
|
|
Total
|
|
1,485
|
|
|
1,516
|
|
Accruing loans which are contractually past due 90 days or more
|
|
-
|
|
|
3
|
|
Total nonperforming assets
|
$
|
1,485
|
|
$
|
1,519
|
|
|
|
|
|
|
|
|
Foregone interest on non-accrual loans (1)
|
$
|
37
|
|
$
|
94
|
|
Total nonperforming loans to total loans
|
|
0.17
|
%
|
|
0.17
|
%
|
Total nonperforming loans to total assets
|
|
0.13
|
%
|
|
0.13
|
%
|
Total nonperforming assets to total assets
|
|
0.13
|
%
|
|
0.13
|
%
|
|
|
|
|
|
|
|
(1) Six months ended September 30, 2019 and year ended March 31, 2019.
|
The following tables set forth information regarding the Company’s nonperforming assets by loan type and geographical area at the dates indicated (in thousands):
|
|
Northwest
Oregon
|
|
|
Other
Oregon
|
|
|
Southwest
Washington
|
|
|
Other
|
|
|
Total
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
-
|
|
$
|
-
|
|
$
|
243
|
|
$
|
-
|
|
$
|
243
|
Commercial real estate
|
|
-
|
|
|
851
|
|
|
175
|
|
|
-
|
|
|
1,026
|
Consumer
|
|
-
|
|
|
-
|
|
|
184
|
|
|
32
|
|
|
216
|
Total nonperforming assets
|
$
|
-
|
|
$
|
851
|
|
$
|
602
|
|
$
|
32
|
|
$
|
1,485
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
65
|
|
$
|
-
|
|
$
|
160
|
|
$
|
-
|
|
$
|
225
|
Commercial real estate
|
|
-
|
|
|
896
|
|
|
185
|
|
|
-
|
|
|
1,081
|
Consumer
|
|
-
|
|
|
-
|
|
|
169
|
|
|
44
|
|
|
213
|
Total nonperforming assets
|
$
|
65
|
|
$
|
896
|
|
$
|
514
|
|
$
|
44
|
|
$
|
1,519
|
The composition of land acquisition and development and speculative and custom/presold construction loans by geographical area is as follows at the dates indicated (in thousands):
|
|
Northwest
Oregon
|
|
|
Other
Oregon
|
|
|
Southwest
Washington
|
|
|
Total
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition and development
|
$
|
2,178
|
|
$
|
1,871
|
|
$
|
10,117
|
|
$
|
14,166
|
Speculative and custom/presold construction
|
|
1,158
|
|
|
160
|
|
|
12,782
|
|
|
14,100
|
Total
|
$
|
3,336
|
|
$
|
2,031
|
|
$
|
22,899
|
|
$
|
28,266
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition and development
|
$
|
2,184
|
|
$
|
1,908
|
|
$
|
12,935
|
|
$
|
17,027
|
Speculative and custom/presold construction
|
|
1,680
|
|
|
104
|
|
|
15,284
|
|
|
17,068
|
Total
|
$
|
3,864
|
|
$
|
2,012
|
|
$
|
28,219
|
|
$
|
34,095
|
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.
33
The following table sets forth information regarding the Company’s other loans of concern at the dates indicated (dollars in thousands):
|
September 30, 2019
|
|
|
March 31, 2019
|
|
|
Number
of Loans
|
|
|
Balance
|
|
|
|
Number
of Loans
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
8
|
|
$
|
1,526
|
|
|
|
9
|
|
$
|
1,734
|
Commercial real estate
|
|
1
|
|
|
582
|
|
|
|
3
|
|
|
2,308
|
Land
|
|
1
|
|
|
720
|
|
|
|
1
|
|
|
728
|
Multi-family
|
|
2
|
|
|
20
|
|
|
|
2
|
|
|
20
|
Total
|
|
12
|
|
$
|
2,848
|
|
|
|
15
|
|
$
|
4,790
|
Loans delinquent 30 - 89 days were 0.04% of total loans at September 30, 2019 and March 31, 2019. At September 30, 2019, loans 30 - 89 days delinquent in the commercial business and consumer
portfolios totaled $187,000 and $171,000, respectively. There were no loans 30-89 days delinquent in any other loan category at September 30, 2019. At that date, commercial real estate loans represented the largest portion of the loan portfolio at
53.51% of total loans and commercial business and consumer loans represented 19.04% and 10.06% of total loans, respectively.
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.
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 Notes 14 and 15 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.
34
The Company performed its annual goodwill impairment test as of October 31, 2018. 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 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 are 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
6.9%, a net interest margin that approximated 4.3% and a return on assets that ranged from 1.33% to 1.53% (average of 1.42%). 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 14.90% utilized for our cash flow estimates and a terminal value estimated at 1.7 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 four publicly traded comparable institutions. 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 1.3 times tangible book value. The Company calculated a fair value of its reporting unit of $254.0 million using the corporate value approach, $194.9
million using the income approach and $259.0 million using the market approach, with a final concluded value of $238.0 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 Six Months Ended September 30, 2019 and 2018
Net Income. Net income was $4.5 million, or $0.20 per diluted share for the three months ended September 30, 2019, compared to $4.2 million, or $0.19 per
diluted share for same prior year period. Net income for each of the six months ended September 30, 2019 and 2018 was $8.7 million, or $0.38 per diluted share. The Company’s earnings for the three and six months ended September 30, 2019 compared to
the same prior year period improved due to increases in both interest and non-interest income, partially offset by an increase in interest expense primarily related to interest on deposits and borrowings.
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 six months ended September 30, 2019 was $11.7 million and $23.2 million, respectively, representing a $59,000 and $259,000 decrease, respectively, compared to
the three and six months ended September 30, 2018. The net interest margin for the three and six months ended September 30, 2019 was 4.36% and 4.35%, respectively, compared to 4.39% and 4.43% for the three and six months ended September 30, 2018.
These decreases in net interest margin were due primarily to increases in the cost of total interest-bearing deposits.
35
Interest and Dividend Income. Interest and dividend income for the three and six months ended September 30, 2019 was $12.9 million and $25.4 million,
respectively, compared to $12.4 million and $24.7 million, respectively, for the same periods in the prior year. The increase was due primarily to an increase in interest on loans receivable of $774,000 and $1.4 million for the three and six months
ended September 30, 2019, respectively, due primarily to higher average balances of net loans partially offset by a decrease in interest on investment securities of $256,000 and $576,000, respectively, for the same prior year periods due primarily to
lower average balances on investment securities.
The average balance of net loans increased $49.7 million and $57.0 million to $889.2 million and $883.4 million for the three and six months ended September 30, 2019, respectively, from $839.5
million and $826.3 million for the same prior year periods. The average yield on net loans was 5.32% and 5.31% for the three and six months ended September 30, 2019, respectively, compared to 5.25% and 5.33% for the same three and six month periods
in the prior year, respectively. The average yield on net loans was negatively impacted by two 25 basis point decreases in the targeted Fed Funds Rate in the current quarter.
Interest Expense. Interest expense increased $552,000 and $1.0 million to $1.2 million and $2.2 million for the three and six months ended September 30,
2019, respectively, compared to $611,000 and $1.2 million for the three and six months ended September 30, 2018, respectively. The increase in interest expense was attributable to the increase in the Company’s utilization of FHLB advances for its
funding needs and an increase of 25 basis points and 16 basis points in the weighted average interest rate on interest-bearing deposits for the three and six months ended September 30, 2019, respectively, compared to the same prior year periods. The
weighted average interest rate on interest-bearing deposits increased to 0.40% and 0.31% for the three and six months ended September 30, 2019, respectively, from 0.15% for both the three and six months ended September 30, 2018. The increase in the
weighted average interest rate on regular savings accounts and certificates of deposit primarily contributed to the overall increase in the expense related to interest-bearing deposits, reflecting increased deposit rates to remain competitive in the
Company’s market area. The average balance of interest-bearing deposits decreased $33.1 million and $41.8 million for the three and six months ended September 30, 2019, respectively, compared to the same periods in the prior year. The decreases in
the average balance of interest-bearing deposits were offset by the utilization of FHLB advances which increased the average balance of FHLB advances $24.8 million and $39.1 million for the three and six months ended September 30, 2019, respectively,
compared to the same prior year periods. The average balance of FHLB advances was $24.8 million and $41.1 million for the three and six months ended September 30, 2019, respectively, compared to $40,000 and $2.0 million, respectively, for the same
periods in the prior year. The average interest rate on FHLB advances was 1.22% and 2.54% for the three and six months ended September 30, 2019, respectively, compared to 1.20% and 1.97%, respectively, for the same prior year periods. The overall
increase in weighted average interest rate on interest-bearing deposits and the utilization of FHLB advances to supplement the decrease in average interest-bearing deposits contributed to the increase in the average cost of interest-bearing
liabilities to 0.65% and 0.63% for the three and six months ended September 30, 2019, respectively, compared to 0.34% for both the same prior year periods.
36
The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income earned on average
interest-earning assets and interest expense 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 September 30,
|
|
2019
|
|
2018
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
699,996
|
|
$
|
9,839
|
|
5.59
|
%
|
|
$
|
659,734
|
|
$
|
8,983
|
|
5.40
|
%
|
Non-mortgage loans
|
|
189,212
|
|
|
2,054
|
|
4.32
|
|
|
|
179,763
|
|
|
2,136
|
|
4.71
|
|
Total net loans (1)
|
|
889,208
|
|
|
11,893
|
|
5.32
|
|
|
|
839,497
|
|
|
11,119
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (2)
|
|
167,899
|
|
|
907
|
|
2.15
|
|
|
|
203,579
|
|
|
1,163
|
|
2.27
|
|
Daily interest-earning assets
|
|
130
|
|
|
-
|
|
-
|
|
|
|
18
|
|
|
-
|
|
-
|
|
Other earning assets
|
|
11,972
|
|
|
93
|
|
3.09
|
|
|
|
21,292
|
|
|
118
|
|
2.20
|
|
Total interest-earning assets
|
|
1,069,209
|
|
|
12,893
|
|
4.80
|
|
|
|
1,064,386
|
|
|
12,400
|
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office properties and equipment, net
|
|
15,455
|
|
|
|
|
|
|
|
|
15,574
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
76,615
|
|
|
|
|
|
|
|
|
66,571
|
|
|
|
|
|
|
Total assets
|
$
|
1,161,279
|
|
|
|
|
|
|
|
$
|
1,146,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
$
|
179,209
|
|
|
276
|
|
0.61
|
|
|
$
|
137,423
|
|
|
35
|
|
0.10
|
|
Interest checking accounts
|
|
180,458
|
|
|
25
|
|
0.06
|
|
|
|
182,799
|
|
|
26
|
|
0.06
|
|
Money market accounts
|
|
193,881
|
|
|
57
|
|
0.12
|
|
|
|
257,175
|
|
|
79
|
|
0.12
|
|
Certificates of deposit
|
|
101,487
|
|
|
302
|
|
1.18
|
|
|
|
110,711
|
|
|
119
|
|
0.43
|
|
Total interest-bearing deposits
|
|
655,035
|
|
|
660
|
|
0.40
|
|
|
|
688,108
|
|
|
259
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
53,811
|
|
|
503
|
|
3.72
|
|
|
|
28,977
|
|
|
352
|
|
4.82
|
|
Total interest-bearing liabilities
|
|
708,846
|
|
|
1,163
|
|
0.65
|
|
|
|
717,085
|
|
|
611
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
297,248
|
|
|
|
|
|
|
|
|
298,840
|
|
|
|
|
|
|
Other liabilities
|
|
12,990
|
|
|
|
|
|
|
|
|
7,976
|
|
|
|
|
|
|
Total liabilities
|
|
1,019,084
|
|
|
|
|
|
|
|
|
1,023,901
|
|
|
|
|
|
|
Shareholders’ equity
|
|
142,195
|
|
|
|
|
|
|
|
|
122,630
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
1,161,279
|
|
|
|
|
|
|
|
$
|
1,146,531
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
11,730
|
|
|
|
|
|
|
|
$
|
11,789
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
4.28
|
%
|
Net interest margin
|
|
|
|
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
4.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
150.84
|
%
|
|
|
|
|
|
|
|
148.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment (3)
|
|
|
|
$
|
11
|
|
|
|
|
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) For purposes of the computation of average yield on investment securities 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 and preferred equity securities dividend income.
|
37
|
Six Months Ended September 30,
|
|
2019
|
|
2018
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
694,555
|
|
$
|
19,108
|
|
5.50
|
%
|
|
$
|
648,796
|
|
$
|
17,963
|
|
5.52
|
%
|
Non-mortgage loans
|
|
188,795
|
|
|
4,339
|
|
4.60
|
|
|
|
177,513
|
|
|
4,116
|
|
4.62
|
|
Total net loans (1)
|
|
883,350
|
|
|
23,447
|
|
5.31
|
|
|
|
826,309
|
|
|
22,079
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (2)
|
|
172,745
|
|
|
1,834
|
|
2.12
|
|
|
|
209,735
|
|
|
2,409
|
|
2.29
|
|
Daily interest-earning assets
|
|
121
|
|
|
-
|
|
-
|
|
|
|
33
|
|
|
-
|
|
-
|
|
Other earning assets
|
|
11,521
|
|
|
180
|
|
3.12
|
|
|
|
20,445
|
|
|
211
|
|
2.06
|
|
Total interest-earning assets
|
|
1,067,737
|
|
|
25,461
|
|
4.77
|
|
|
|
1,056,522
|
|
|
24,699
|
|
4.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office properties and equipment, net
|
|
15,447
|
|
|
|
|
|
|
|
|
15,675
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
73,170
|
|
|
|
|
|
|
|
|
66,859
|
|
|
|
|
|
|
Total assets
|
$
|
1,156,354
|
|
|
|
|
|
|
|
$
|
1,139,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
$
|
164,919
|
|
|
391
|
|
0.47
|
|
|
$
|
136,211
|
|
|
68
|
|
0.10
|
|
Interest checking accounts
|
|
181,271
|
|
|
50
|
|
0.06
|
|
|
|
180,053
|
|
|
51
|
|
0.06
|
|
Money market accounts
|
|
208,202
|
|
|
123
|
|
0.12
|
|
|
|
260,173
|
|
|
159
|
|
0.12
|
|
Certificates of deposit
|
|
94,390
|
|
|
447
|
|
0.95
|
|
|
|
114,188
|
|
|
241
|
|
0.42
|
|
Total interest-bearing deposits
|
|
648,782
|
|
|
1,011
|
|
0.31
|
|
|
|
690,625
|
|
|
519
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
70,074
|
|
|
1,238
|
|
3.53
|
|
|
|
30,925
|
|
|
710
|
|
4.58
|
|
Total interest-bearing liabilities
|
|
718,856
|
|
|
2,249
|
|
0.63
|
|
|
|
721,550
|
|
|
1,229
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
287,725
|
|
|
|
|
|
|
|
|
288,716
|
|
|
|
|
|
|
Other liabilities
|
|
10,364
|
|
|
|
|
|
|
|
|
7,977
|
|
|
|
|
|
|
Total liabilities
|
|
1,016,945
|
|
|
|
|
|
|
|
|
1,018,243
|
|
|
|
|
|
|
Shareholders’ equity
|
|
139,409
|
|
|
|
|
|
|
|
|
120,813
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
1,156,354
|
|
|
|
|
|
|
|
$
|
1,139,056
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
23,212
|
|
|
|
|
|
|
|
$
|
23,470
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
4.32
|
%
|
Net interest margin
|
|
|
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
4.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
148.53
|
%
|
|
|
|
|
|
|
|
146.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment (3)
|
|
|
|
$
|
23
|
|
|
|
|
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) For purposes of the computation of average yield on investment securities 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 and preferred equity securities dividend income.
|
38
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the periods ended September 30, 2019 compared to the periods ended September 30,
2018. 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 September 30,
|
|
|
Six Months Ended September 30,
|
|
|
|
2019 vs. 2018
|
|
|
2019 vs. 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net
|
|
|
|
|
|
|
|
|
Total Net
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Increase
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
543
|
|
|
$
|
313
|
|
|
$
|
856
|
|
|
$
|
1,213
|
|
|
$
|
(68
|
)
|
|
$
|
1,145
|
|
Non-mortgage loans
|
|
|
105
|
|
|
|
(187
|
)
|
|
|
(82
|
)
|
|
|
242
|
|
|
|
(19
|
)
|
|
|
223
|
|
Investment securities (1)
|
|
|
(197
|
)
|
|
|
(59
|
)
|
|
|
(256
|
)
|
|
|
(405
|
)
|
|
|
(170
|
)
|
|
|
(575
|
)
|
Other earning assets
|
|
|
(63
|
)
|
|
|
38
|
|
|
|
(25
|
)
|
|
|
(114
|
)
|
|
|
83
|
|
|
|
(31
|
)
|
Total interest income
|
|
|
388
|
|
|
|
105
|
|
|
|
493
|
|
|
|
936
|
|
|
|
(174
|
)
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
|
14
|
|
|
|
227
|
|
|
|
241
|
|
|
|
17
|
|
|
|
306
|
|
|
|
323
|
|
Interest checking accounts
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Money market accounts
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
(36
|
)
|
Certificates of deposit
|
|
|
(11
|
)
|
|
|
194
|
|
|
|
183
|
|
|
|
(49
|
)
|
|
|
255
|
|
|
|
206
|
|
Other interest-bearing liabilities
|
|
|
246
|
|
|
|
(95
|
)
|
|
|
151
|
|
|
|
722
|
|
|
|
(194
|
)
|
|
|
528
|
|
Total interest expense
|
|
|
226
|
|
|
|
326
|
|
|
|
552
|
|
|
|
653
|
|
|
|
367
|
|
|
|
1,020
|
|
Net interest income
|
|
$
|
162
|
|
|
$
|
(221
|
)
|
|
$
|
(59
|
)
|
|
$
|
283
|
|
|
$
|
(541
|
)
|
|
$
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Interest is presented on a fully tax-equivalent basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses. The Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio consistent with
GAAP guidelines. The adequacy of the allowance is evaluated monthly to maintain the allowance at levels sufficient to provide for inherent losses existing at the balance sheet date. The key components to the evaluation are the Company’s internal loan
review function by its credit administration, which reviews and monitors the risk and quality of the loan portfolio; as well as the Company’s external loan reviews and its loan classification systems. Credit officers are expected to monitor their
portfolios and make recommendations to change loan grades whenever changes are warranted. Credit administration approves any changes to loan grades and monitors loan grades.
In accordance with GAAP, loans acquired from the purchase and assumption transaction of MBank (“MBank transaction”) were recorded at their estimated fair value, which resulted in a net discount to
the loans’ contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the
acquisition date. The discount recorded on the acquired loans is not reflected in the allowance for loan losses or related allowance coverage ratios. However, we believe it should be considered when comparing certain financial ratios of the Company
calculated in periods after the MBank transaction, compared to the same financial ratios of the Company in periods prior to the MBank transaction. The net discount on these acquired loans was $1.3 million and $1.5 million at September 30, 2019 and
March 31, 2019, respectively.
There was no provision for loan losses for the six months ended September 30, 2019, compared to a provision for loan losses of $50,000 for the six months ended September 30, 2018. The lack of a
provision for loan losses for the six months ended September 30, 2019 compared to 2018 was based primarily upon the low level of charge-offs, recoveries of previously charged off loans and stable real estate values in our market areas.
Net charge-offs for the three and six months ended September 30, 2019 totaled $6,000 and $21,000, respectively. This compares to net charge-offs of $86,000 and net recoveries of $697,000 for the
three and six months ended September 30, 2018, respectively.
Annualized net charge-offs to average net loans for the three and six month periods ended September 30, 2019 was not meaningful. Annualized net charge-offs to average net loans for the three and
six month periods ended September 30, 2018 was 0.04% and (0.17)%, respectively. Nonperforming loans were $1.5 million at September 30, 2019, compared to $2.3 million at September 30, 2018. The ratio of allowance for loan losses to nonperforming loans
was 770.10% at September 30, 2019 compared to 504.29% at September 30, 2018. See “Asset Quality” above for additional information related to asset quality that management considers in determining the provision for loan losses.
39
Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of September 30, 2019, the Company had identified $5.3 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, $5.2 million have no
specific valuation allowance as their estimated collateral value is equal to or exceeds the carrying costs, which in some cases is the result of previous loan charge-offs. At September 30, 2019, charge-offs on these impaired loans totaled $460,000
from their original loan balances. The remaining $145,000 of impaired loans had specific valuation allowances totaling $10,000 at September 30, 2019.
Non-Interest Income. Non-interest income increased $329,000 and $596,000 to $3.2 million and $6.3 million for the three and six months ended September 30,
2019, respectively, compared to the same prior year periods. The increase in non-interest income for the three and six months ended September 30, 2019, compared to the same prior year periods was primarily due to the increase in fees and service
charges of $238,000 and $303,000, respectively, in addition to an increase in asset management fees of $147,000 and $364,000, respectively, reflecting the increase in the Trust Company assets under management. These increases were partially offset by
a decrease in other non-interest income of $88,000 and $61,000, for the three and six months ended September 30, 2019, respectively, compared to the same prior year periods. For the six months ended September 30, 2019, the above increase was offset
by a decrease in net gains on sales of loans held for sale of $54,000 compared to the same prior year period.
Non-Interest Expense. Non-interest expense increased $88,000 and $263,000 to $9.0 million and $18.2 million for the three and six months ended September 30,
2019, respectively, compared to the same prior year periods. The increase in non-interest expense for the three and six months ended September 30, 2019, compared to the same prior year periods was primarily due to increases in salaries and employee
benefits of $414,000 and $551,000, respectively, and data processing expense of $47,000 and 96,000, respectively, due to additional staffing attributable to the overall growth of the Company and continued investments into enhancing our information
technology infrastructure. These increases were offset by decreases in occupancy and depreciation of $74,000 and $113,000, professional fees of $124,000 and $83,000 and other non-interest expense of $97,000 and $146,000 for the three and six months
ended September 30, 2019, respectively, compared to the same prior year periods. FDIC insurance premium expense decreased $85,000 and $81,000 for the three and six months ended September 30, 2019, respectively, compared to the same prior year
periods. The decrease in FDIC insurance premium expense is attributable to credits for previously paid deposit insurance premiums which came as a result of the FDIC exceeding its stated Deposit Insurance Fund Reserve Ratio. The company has $198,000
in credits on future assessments remaining as of September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met.
Income Taxes. The provision for income taxes was $1.4 million and $2.6 million for the three and six months ended September 30, 2019, respectively, compared
to $1.2 million and $2.5 million for the three and six months ended September 30, 2018, respectively. The Company’s effective tax rate for the three and six months ended September 30, 2019 was 23.0% and 22.8%, respectively, compared to 22.4% for both
the three and six months ended September 30, 2018. As of September 30, 2019, management deemed that a valuation allowance related to the Company’s deferred tax asset was not necessary. At September 30, 2019, the Company had a net deferred tax asset
of $3.3 million compared to $4.2 million at March 31, 2019.
40