As used in this Form 10-Q, the terms “we,” “our,” “us,” “Riverview” and “Company” refer to Riverview Bancorp, Inc. and its consolidated subsidiaries, including its wholly-owned subsidiary,
Riverview Community Bank, unless the context indicates otherwise.
“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-Q, the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,”
“intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could,” or similar expressions are intended to identify
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions, statements about
future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated
or implied by our forward-looking statements, including, but not limited to: the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on Riverview’s credit quality and business operations, as well as its impact on general economic
and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic
activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in the Company’s allowance for loan losses and provision for loan
losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in the Company’s market areas; changes in the levels of general interest rates, and the
relative differences between short and long-term interest rates, deposit interest rates, the Company’s net interest margin and funding sources; uncertainty regarding the future of the London Interbank Offered Rate ("LIBOR"), and the potential
transition away from LIBOR toward new interest rate benchmarks; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in the Company’s market areas; secondary market
conditions for loans and the Company’s ability to originate loans for sale and sell loans in the secondary market; results of examinations of our bank subsidiary, Riverview Community Bank, by the Office of the Comptroller of the Currency and of the
Company by the Board of Governors of the Federal Reserve System, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its allowance for loan losses,
write-down assets, reclassify its assets, change Riverview Community Bank’s regulatory capital position or affect the Company’s ability to borrow funds or maintain or increase deposits, which could adversely affect its liquidity and earnings;
legislative or regulatory changes that adversely affect the Company’s business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the Company’s
ability to attract and retain deposits; the Company’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company’s assets, which estimates may prove to be incorrect and result in
significant declines in valuation; difficulties in reducing risks associated with the loans on the Company’s consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the
Company’s workforce and potential associated charges; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our
critical processing functions; the Company’s ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company’s ability to implement its business strategies; the Company's
ability to successfully integrate any assets, liabilities, customers, systems, and management personnel it may acquire into its operations and the Company's ability to realize related revenue synergies and cost savings within expected time frames;
future goodwill impairment due to changes in Riverview’s business, changes in market conditions, including as a result of the COVID-19 pandemic or other factors; increased competitive pressures among financial services companies; changes in consumer
spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; the Company’s ability to pay dividends on its common stock; adverse changes in the securities
markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board,
including additional guidance and interpretation on accounting issues and details of the implementation of new accounting standards; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") and the Consolidated
Appropriations Act, 2021 (“CAA 2021”), other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services including as a result of COVID-19; and the other risks
described from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”).
The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only
on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements included in this report or the reasons why actual results could differ from those
contained in such statements, whether as a result of new information or to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for fiscal 2021
and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company’s consolidated financial condition and consolidated results of operations as well as its stock
price performance.
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 accounting principles generally accepted in the United States of America (“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.
Recent Developments Related to COVID-19
Our business has been, and continues to be, impacted by the recent and ongoing outbreak of the novel coronavirus of 2019 (“COVID-19”). COVID-19 has negatively affected the level of economic
activity in our markets, and is expected to continue to negatively affect, our business, financial position and operating results. Efforts to limit the spread of COVID-19 led to shelter-in-place orders, the temporary closure of non-essential
businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. These measures have dramatically
increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers. Although many of these restrictions have been lifted and society has begun to re-open,
the pandemic is ongoing and additional uncertainties exist which may continue to impact our customers, employees and vendors; the financial services and banking industry; and the economy as a whole. These uncertainties include, the extent and
severity of the spread of COVID-19, the length of the outbreak, and future actions taken by governmental authorities to contain the outbreak or to mitigate its impact, including recent vaccination efforts. In light of the uncertainties and continuing
developments related the COVID-19 pandemic, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.
In response to the COVID-19 pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.
Paycheck Protection Program ("PPP") Participation – The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) was
signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under the PPP, a new loan program. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans
upon commencement of the program in April 2020. Under terms of the PPP, all PPP loans have: (a) an interest rate of 1.0% and (b) a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The
entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA provided the borrower meets the SBA loan forgiveness requirements. In addition to the 1% interest earned on these
loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five percent for loans of not more than $350,000; (ii) three percent for loans of more than $350,000 and less than $2,000,000; and one percent for loans of at least
$2,000,000. We may not collect any fees from the loan applicants. Through the conclusion of this initial PPP on August 8, 2020, we had funded PPP loans totaling $113.5 million. The PPP loans that were originated consisted primarily of existing
customers who are small to midsize businesses as well as independent contractors, sole proprietors, partnerships and not-for-profits as allowed under the PPP guidance.
During the third quarter of fiscal 2021, we continued our participation in the SBA PPP by processing applications for PPP loan forgiveness. As of December 31, 2020, the total outstanding loan
balance and unamortized fees related to SBA PPP loans totaled $82.4 million and $1.6 million, respectively, with an average loan amount of $129,000. There were no PPP loans approved awaiting funding as of December 31, 2020. As of December 31, 2020,
we had received SBA PPP loan forgiveness approvals for 198 SBA PPP loans totaling $35.1 million.
We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans at face value as collateral to obtain FRB non-recourse
borrowings. See “Liquidity and Capital Resources” below for additional information.
26
Paycheck Protection Program Part 2 ("PPP2") Participation – The Consolidated Appropriations Act, 2021 (“CAA 2021”) signed into law on
December 27, 2020, reopened the PPP through March 31, 2021, by authorizing $284.5 billion in funding for eligible small businesses and non-profits. In January 2021, the Bank began accepting and processing loan applications under PPP2. The Bank is
also continuing to work with its customers to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as appropriate. The significant terms of PPP2 are as follows.
|
•
|
The maximum for a first-draw PPP loan is $10 million, the same as the initial PPP;
|
|
•
|
Revised lender fee structure;
|
|
o
|
Loans up to $50,000 – lesser of $2,500 or 50% of principal amount;
|
|
o
|
Loans from $50,000 to $349,999 – 5% of principal amount;
|
|
o
|
Loans $350,000 or higher – 3% of principal amount;
|
|
•
|
A second draw is available to original PPP borrowers up to $2.0 million that have:
|
|
o
|
300 or fewer employees;
|
|
o
|
sustained a 25% drop in revenue for any 2020 quarter compared to the same quarter in 2019, and
|
|
o
|
used, or expect to use, 100% of the initial PPP loan.
|
All PPP2 loans have: (a) an interest rate of 1.0% and (b) five-year loan term to maturity. The SBA guarantees 100% of the PPP2 loans made to eligible borrowers. The entire principal amount of the
borrower’s PPP2 loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA, provided the borrower meets the SBA loan forgiveness guidelines.
Loan Modifications –
As of December 31, 2020, the Bank’s loan portfolio exposures to industries most affected by the COVID-19 pandemic were as follows (dollars in thousands):
|
|
|
Balance
|
|
Percent
to total
loans
|
|
Weighted Average
Loan-To-Value
Percentage
|
|
Weighted Average
Debt-Service-
Coverage Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel/Motel
|
|
$
|
107,483
|
|
|
11.5
|
%
|
|
53.13
|
%
|
|
1.93
|
|
|
Retail strip centers
|
|
|
84,901
|
|
|
9.1
|
|
|
52.18
|
|
|
1.61
|
|
|
Restaurant/fast food
|
|
|
14,405
|
|
|
1.5
|
|
|
55.26
|
|
|
1.82
|
|
The Company is continuing to offer payment and financial relief programs for borrowers impacted by COVID-19. The Company has made available the following short-term relief option to all borrowers
affected by COVID-19:
|
•
|
Interest only payments or full payment deferrals based upon the respective borrowers’ circumstances subject to credit administration review and approval which may include submission of
specified documentation and recovery plans;
|
|
•
|
Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the deferment period;
|
|
•
|
Covenant waivers and resets; and
|
|
•
|
Extension of up to six months on maturing loans.
|
All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further
modification should be granted and if a downgrade in risk rating is appropriate.
As of December 31, 2020, the Company had approved payment deferrals for eight commercial loans that were impacted by the COVID-19 pandemic totaling $26.6 million which consisted of deferral of
regularly scheduled principal and interest payments which is a significant decrease compared to September 30, 2020 when the Company had 13 commercial loans that were impacted by the COVID-19 pandemic totaling $49.7 million and compared to June 30,
2020 when the Company had 98 commercial loans totaling $161.6 million. In general, the payment deferral period for these loans was 90 days. In certain situations, depending on economic conditions, extensions to the initial payment deferral periods
were necessary. Subsequent to December 31, 2020, the Company approved or expected to approve five payment deferrals totaling $20.4 million. As of December 31, 2020, two consumer and mortgage loans totaling $462,000 were approved for payment deferrals
which is comparable to September 30, 2020 where there were four consumer and mortgage loans totaling $471,000, however, consumer and mortgage loan modifications have significantly decreased compared to June 30, 2020 when the Company had 43 consumer
and mortgage loans totaling $10.1 million. Further, three mortgage loans serviced for FHLMC totaling $916,000 were approved for payment deferrals as of December 31, 2020. These modifications were not classified as TDRs in accordance with the guidance
of the CARES Act, CAA 2021 and bank regulatory guidance.
27
The primary method of relief granted by the Company has been to allow the borrower to defer their loan payments for up to 90 days with a possibility depending on economic conditions to defer their
loan payments for an additional 90 days subject to an evaluation by the Company prior to granting the additional 90 day deferral. After the deferral period, normal loan payments will continue, however, payments will be applied first to interest until
the deferred interest is repaid and thereafter applied to both principal and interest with any deficiency in amortized principal payments added to the balloon payment due at maturity. We believe the steps we are taking are necessary to effectively
manage our portfolio and assist our customers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.
Branch Operations and Additional Customer Support – We have taken various steps to ensure the safety of our customers and our
personnel. Many of our employees are working remotely or have flexible work schedules, and we have established measures within our offices to help ensure the safety of those employees who must work on-site. The Family First Coronavirus Response Act
also provides additional flexibility to our employees to help navigate their individual challenges.
The COVID-19 pandemic has caused significant disruptions to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and
community needs. To ensure the safety of our customers and employees, we encourage our customers to utilize services that are offered through drive up facilities, ATMs, online banking, and our call center operations.
Critical Accounting Policies
Critical accounting policies and estimates are discussed in our 2020 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 2020 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 $912.3 million at
December 31, 2020 compared to $898.9 million at March 31, 2020.
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, other than SBA PPP loans, are mainly concentrated in commercial business and commercial
real estate loans which 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.
28
Economic conditions in the Company’s market areas have deteriorated due to the COVID-19 pandemic. According to the Washington State Employment Security Department, unemployment in Clark County
increased to 7.0% at November 30, 2020 compared to 4.3% at March 31, 2020 and 4.2% at December 31, 2019. According to the Oregon Employment Department, unemployment in Portland, Oregon increased to 6.0% at November 30, 2020 compared to 3.4% at March
31, 2020 and December 31, 2019. Unemployment rates have increased; however, unemployment rates are lower compared to the onset of the COVID-19 pandemic in March 2020. Residential home inventory levels and sales continue to remain strong despite the
increase in unemployment rates. According to the Regional Multiple Listing Services (“RMLS”), residential home inventory levels in Portland, Oregon have decreased to 0.8 months at December 31, 2020 compared to 1.8 months at March 31, 2020 and
December 31, 2019. Residential home inventory levels in Clark County decreased to 0.6 months at December 31, 2020 compared to 2.1 months at March 31, 2020 and 1.8 months at December 31, 2019. According to the RMLS, closed home sales in Clark County
increased 16.4% in December 2020 compared to December 2019. Closed home sales during December 2020 in Portland, Oregon increased 26.0% compared to December 2019.
Operating Strategy
Fiscal year 2021 marks the 98th 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 December 31, 2020, commercial and construction loans represented 92.9% of total loans compared to 90.4% at March 31, 2020. 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 de novo branches, the selective acquisition of individual branches, loan purchases and whole bank
transactions that meet its investment and market objectives. In this regard, the Company moved to a new, more modern branch in Camas in June 2020 and the Cascade Park neighborhood of Vancouver in September 2020 and will open one additional new branch
location in Ridgefield in 2021.
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. The
Company’s approach to credit management uses well defined policies and procedures and disciplined underwriting criteria resulting in its asset quality and credit metrics remaining steady during the COVID-19 pandemic. The Company will continue to
proactively monitor modified loans and other loans considered to be at heightened risk due to the COVID-19 pandemic and has added to its allowance for loan losses for probable COVID-19 pandemic related credit weakness. Regardless, there may be added
pressures on asset quality in future quarters that may require additional provision for loan losses. The Company also intends to continue prudently increasing 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, while managing its 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 63.4% at December 31, 2020.
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 Company intends to selectively add other products to
29
further diversify revenue sources and to capture more of each customer’s banking relationship by cross selling loan and deposit products and additional services, including services provided
through the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $1.3 billion and $1.2 billion at December 31, 2020 and March 31, 2020, respectively.
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, which exclude IOLTA and public funds accounts, increased $245.3 million at December 31, 2020 compared to
March 31, 2020 reflecting the Company’s commitment to increasing core deposits through organic growth in customer relationships versus relying on wholesale funding as well as deposits generated from SBA PPP loans, government stimulus checks being
deposited directly into customer accounts and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.
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
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
171,902
|
|
$
|
-
|
|
$
|
-
|
|
$
|
171,902
|
|
SBA PPP
|
|
80,785
|
|
|
-
|
|
|
-
|
|
|
80,785
|
|
Commercial construction
|
|
-
|
|
|
-
|
|
|
10,440
|
|
|
10,440
|
|
Office buildings
|
|
-
|
|
|
132,756
|
|
|
-
|
|
|
132,756
|
|
Warehouse/industrial
|
|
-
|
|
|
86,833
|
|
|
-
|
|
|
86,833
|
|
Retail/shopping centers/strip malls
|
|
-
|
|
|
84,901
|
|
|
-
|
|
|
84,901
|
|
Assisted living facilities
|
|
-
|
|
|
901
|
|
|
-
|
|
|
901
|
|
Single purpose facilities
|
|
-
|
|
|
236,026
|
|
|
-
|
|
|
236,026
|
|
Land
|
|
-
|
|
|
12,126
|
|
|
-
|
|
|
12,126
|
|
Multi-family
|
|
-
|
|
|
42,166
|
|
|
-
|
|
|
42,166
|
|
One-to-four family construction
|
|
-
|
|
|
-
|
|
|
6,482
|
|
|
6,482
|
|
Total
|
$
|
252,687
|
|
$
|
595,709
|
|
$
|
16,922
|
|
$
|
865,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
179,029
|
|
$
|
-
|
|
$
|
-
|
|
$
|
179,029
|
|
Commercial construction
|
|
-
|
|
|
-
|
|
|
52,608
|
|
|
52,608
|
|
Office buildings
|
|
-
|
|
|
113,433
|
|
|
-
|
|
|
113,433
|
|
Warehouse/industrial
|
|
-
|
|
|
91,764
|
|
|
-
|
|
|
91,764
|
|
Retail/shopping centers/strip malls
|
|
-
|
|
|
76,802
|
|
|
-
|
|
|
76,802
|
|
Assisted living facilities
|
|
-
|
|
|
1,033
|
|
|
-
|
|
|
1,033
|
|
Single purpose facilities
|
|
-
|
|
|
224,839
|
|
|
-
|
|
|
224,839
|
|
Land
|
|
-
|
|
|
14,026
|
|
|
-
|
|
|
14,026
|
|
Multi-family
|
|
-
|
|
|
58,374
|
|
|
-
|
|
|
58,374
|
|
One-to-four family construction
|
|
-
|
|
|
-
|
|
|
12,235
|
|
|
12,235
|
|
Total
|
$
|
179,029
|
|
$
|
580,271
|
|
$
|
64,843
|
|
$
|
824,143
|
30
Comparison of Financial Condition at December 31, 2020 and March 31, 2020
Cash and cash equivalents, including interest-earning accounts, totaled $235.8 million at December 31, 2020 compared to $42.0 million at March 31, 2020. Deposit growth outpaced the growth in loans
receivable providing significant excess funds invested in these interest-earning accounts. The Company’s cash balances typically 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 at both December 31, 2020 and March 31, 2020.
Investment securities totaled $186.6 million and $148.3 million at December 31, 2020 and March 31, 2020, respectively. The increase was due to investment purchases offset by normal pay downs,
calls and maturities. During the nine months ended December 31, 2020, purchases of investment securities totaled $72.9 million. During the nine months ended December 31, 2019, purchases of investment securities totaled $18.1 million. The Company
primarily purchases a combination of securities backed by government agencies (FHLMC, FNMA, SBA or GNMA). At December 31, 2020, 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 $912.3 million at December 31, 2020 compared to $898.9 million at March 31, 2020, an increase of $13.4 million. The increase was mainly due to the origination of SBA
PPP loans partially offset by normal pay downs of principal and loan payoffs. At December 31, 2020, SBA PPP loans totaled $80.8 million which are included in the commercial business loan category. In addition, commercial real estate loans increased
$33.5 million or 6.6%. These increases were offset by a decrease in real estate construction loans of $47.9 million, or 73.9%. Due to the timing of the completion of these real estate construction projects, balances may fluctuate in these categories.
Once these projects are completed, these loans will roll to permanent financing and be classified within a category under other real estate mortgage. In addition, consumer and multifamily loans decreased $21.2 million, or 24.3%, and $16.2 million or
27.8%, respectively. The Company also purchases the guaranteed portion of SBA loans 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 December 31, 2020, the Company’s purchased SBA loan portfolio was $53.7 million
compared to $74.8 million at March 31, 2020. During the nine months ended December 31, 2020, the Bank purchased $2.5 million of SBA loans, including premiums.
Prepaid expenses and other assets increased $5.9 million to $13.4 million at December 31, 2020 compared to $7.5 million at March 31, 2020. The increase is mainly due to the recording of three
operating lease right-of-use assets totaling $5.8 million with a corresponding increase in operating lease liabilities which are recorded in accrued expenses and other liabilities. For additional information on the Company’s leases, see Note 15 of
the Notes to the Consolidated Financial Statements contained in Item 1 of this Form 10-Q
Deposits increased $246.5 million to $1.2 billion at December 31, 2020 compared to $990.4 million at March 31, 2020. The increase was mainly due to proceeds from SBA PPP loans deposited directly
into customer accounts, government stimulus checks and an increase in savings trends and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. The Company had no wholesale-brokered deposits at December
31, 2020 and March 31, 2020. Core branch deposits accounted for 98.0% and 97.6% of total deposits at December 31, 2020 and March 31, 2020, respectively. 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 increased $3.0 million to $151.9 million at December 31, 2020 from $148.8 million at March 31, 2020. The increase was mainly attributable to net income of $7.1 million for the
nine months ended December 31, 2020 and an increase in the accumulated other comprehensive income related to the unrealized holding gains on available for sale investment securities, net of tax, of $429,000. These increases were offset by the
payments of cash dividends totaling $3.3 million and the repurchase of 295,900 shares of common stock totaling $1.4 million for the nine months ended December 31, 2020.
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
31
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.
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
December 31, 2020.
As of December 31, 2020, 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
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
$
|
149,133
|
|
17.58
|
%
|
$
|
67,860
|
|
8.0
|
%
|
$
|
84,825
|
|
10.0
|
%
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
138,418
|
|
16.32
|
|
|
50,895
|
|
6.0
|
|
|
67,860
|
|
8.0
|
|
|
Common equity tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
138,418
|
|
16.32
|
|
|
38,171
|
|
4.5
|
|
|
55,136
|
|
6.5
|
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Average Tangible Assets)
|
|
138,418
|
|
9.80
|
|
|
56,494
|
|
4.0
|
|
|
70,617
|
|
5.0
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
$
|
145,949
|
|
17.01
|
%
|
$
|
68,630
|
|
8.0
|
%
|
$
|
85,787
|
|
10.0
|
%
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
135,196
|
|
15.76
|
|
|
51,472
|
|
6.0
|
|
|
68,630
|
|
8.0
|
|
|
Common equity tier 1 Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
135,196
|
|
15.76
|
|
|
38,604
|
|
4.5
|
|
|
55,762
|
|
6.5
|
|
|
Tier 1 Capital (Leverage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(To Average Tangible Assets)
|
|
135,196
|
|
11.79
|
|
|
45,851
|
|
4.0
|
|
|
57,313
|
|
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 December 31, 2020, 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 December 31, 2020, 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 2021 consolidated financial statements.
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.
32
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 nine months ended December 31, 2020, the Bank used its sources of funds primarily to fund loan commitments. At December 31, 2020, cash and cash equivalents, certificates
of deposit held for investment and available for sale investment securities totaled $389.3 million, or 27.1% 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 manage short-term borrowings, including FRB borrowings and FHLB advances consistent with its asset/liability objectives. At December 31, 2020, the Bank had no advances from the FRB and maintains a credit
facility with the FRB with available borrowing capacity of $52.4 million, subject to sufficient collateral. At December 31, 2020, the Bank had no advances from the FHLB and had an available borrowing capacity of $224.9 million, subject to sufficient
collateral and stock investment. At December 31, 2020, 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. Additionally, the Board of Governors of the Federal Reserve System recently established the PPPLF to bolster the
effectiveness of the SBA PPP. The Bank may utilize the PPPLF pursuant to approval from the FRB to which the Bank would pledge SBA PPP loans at face value as collateral to obtain FRB non-recourse. As of December 31, 2020, the Bank had not sought
approval to utilize PPPLF as it held a substantial cash and cash equivalent position as a result of SBA PPP disbursed funds remaining unused in borrower deposit accounts and due to deposit customers increasing their balances due to COVID-19.
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 December 31, 2020 and March 31, 2020, 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 $26.4 million, or 2.1% of total deposits, and $5.3 million, or 0.01% of total
deposits, at December 31, 2020 and March 31, 2020, 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 December 31, 2020 and March 31, 2020, the Company had no deposits through this listing service. Although the Company did not originate any internet-based deposits during the nine months
ended December 31, 2020, 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 $875.5 million, or 61.0% of total assets at December
31, 2020.
At December 31, 2020, the Company had total commitments of $147.1 million, which includes commitments to extend credit of $22.6 million, unused lines of credit totaling $113.8 million, undisbursed
construction loans totaling $8.7 million, and standby letters of credit totaling $2.0 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 December 31, 2020 totaled $90.6 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 $38.4 million at December 31, 2020.
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 December 31, 2020, Riverview Bancorp, Inc. had $9.8 million in cash to meet its liquidity needs.
33
Asset Quality
Nonperforming assets, consisting of nonperforming loans were $393,000 or 0.03% of total assets at December 31, 2020 compared with $1.4 million or 0.12% of total assets at March 31, 2020.
The following table sets forth information regarding the Company’s nonperforming loans at the dates indicated (dollars in thousands):
|
|
December 31, 2020
|
|
|
March 31, 2020
|
|
|
Number of
Loans
|
|
Balance
|
|
|
Number of
Loans
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
2
|
|
$
|
187
|
|
|
|
2
|
|
$
|
201
|
|
Commercial real estate
|
|
1
|
|
|
149
|
|
|
|
2
|
|
|
1,014
|
|
Consumer
|
|
5
|
|
|
57
|
|
|
|
9
|
|
|
180
|
|
Total
|
|
8
|
|
$
|
393
|
|
|
|
13
|
|
$
|
1,395
|
The allowance for loan losses was $19.2 million or 2.06% of total loans at December 31, 2020 compared to $12.6 million or 1.38% of total loans at March 31, 2020. The Company recorded a provision
for loan losses of $6.3 million for the nine months ended December 31, 2020. There was no provision for loan losses for the nine months ended December 31, 2019. The increase in the allowance for loan losses was necessary due to the evolving
uncertainty around the COVID-19 pandemic, and its adverse economic effect on the respective industry exposures within our loan portfolio. The $80.8 million balance of SBA PPP loans were omitted from the calculation of the required allowance for loan
losses at December 31, 2020 as these loans are fully guaranteed by the SBA and management expects that a majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn, the SBA will reimburse
the Bank for the amount forgiven.
The coverage ratio of allowance for loan losses to nonperforming loans was 4883.46% at December 31, 2020 compared to 904.95% at March 31, 2020. At December 31, 2020, the Company identified
$274,000 or 69.64% 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. Criticized assets increased $45.1 million to $46.5 million
at December 31, 2020 compared to $1.4 million at March 31, 2020. This increase reflects risk rating changes primarily associated with loans that were granted COVID-19 loan modifications. In general, borrowers whose loans were paying as agreed prior
to COVID-19, remain well-secured and have provided acceptable plans for returning to full payment status were downgraded to a pass/watch rating. Modifications that extended beyond six months and beyond December 31, 2020 were generally downgraded to a
special mention/criticized rating unless other mitigating considerations exist that lowered the bank’s credit risk. Borrowers who could not provide a plan, or were closed with no plan for re-opening in a reasonable timeframe, were moved to a
substandard/classified rating. In addition, the risk rating was also downgraded for certain borrowers who were not granted COVID-19 loan modification, but who have still been impacted negatively by the COVID-19 pandemic. Management considers the
allowance for loan losses to be adequate at December 31, 2020 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 further decline in national and local economic conditions (including declines as a result of the COVID-19 pandemic), 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 and 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 December
31, 2020. The related amount of interest income recognized on TDRs was $164,000 and $166,000 for the nine months ended December 31, 2020 and 2019, respectively.
34
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.
For additional information regarding loan modifications related to COVID-19 that are not deemed TDRs pursuant to the CARES Act and CAA 2021 and related bank regulatory guidance see “Recent
Developments Related to COVID-19-Loan Modifications, discussed above.”
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 nine 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, 2020
|
|
March 31, 2020
|
|
|
|
|
|
|
|
Loans accounted for on a non-accrual basis:
|
|
|
|
|
|
|
|
Commercial business
|
$
|
187
|
|
$
|
201
|
|
|
Other real estate mortgage
|
|
149
|
|
|
1,014
|
|
|
Consumer
|
|
57
|
|
|
180
|
|
|
Total
|
|
393
|
|
|
1,395
|
|
|
Accruing loans which are contractually past due 90 days or more
|
|
-
|
|
|
-
|
|
|
Total nonperforming assets
|
$
|
393
|
|
$
|
1,395
|
|
|
|
|
|
|
|
|
|
|
Foregone interest on non-accrual loans (1)
|
$
|
42
|
|
$
|
75
|
|
|
Total nonperforming loans to total loans
|
|
0.04
|
%
|
|
0.15
|
%
|
|
Total nonperforming loans to total assets
|
|
0.03
|
%
|
|
0.12
|
%
|
|
Total nonperforming assets to total assets
|
|
0.03
|
%
|
|
0.12
|
%
|
|
|
|
|
|
|
|
|
|
(1) Nine months ended December 31, 2020 and year ended March 31, 2020.
|
The following tables set forth information regarding the Company’s nonperforming assets by loan type and geographical area at the dates indicated (in thousands):
|
|
Other Oregon
|
|
Southwest
Washington
|
|
Other
|
|
Total
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
-
|
|
$
|
187
|
|
$
|
-
|
|
$
|
187
|
|
Commercial real estate
|
|
-
|
|
|
149
|
|
|
-
|
|
|
149
|
|
Consumer
|
|
-
|
|
|
57
|
|
|
-
|
|
|
57
|
|
Total nonperforming assets
|
$
|
-
|
|
$
|
393
|
|
$
|
-
|
|
$
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
$
|
-
|
|
$
|
201
|
|
$
|
-
|
|
$
|
201
|
|
Commercial real estate
|
|
851
|
|
|
163
|
|
|
-
|
|
|
1,014
|
|
Consumer
|
|
-
|
|
|
152
|
|
|
28
|
|
|
180
|
|
Total nonperforming assets
|
$
|
851
|
|
$
|
516
|
|
$
|
28
|
|
$
|
1,395
|
35
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
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition and development
|
$
|
2,248
|
|
$
|
1,786
|
|
$
|
8,092
|
|
$
|
12,126
|
|
Speculative and custom/presold construction
|
|
225
|
|
|
-
|
|
|
4,774
|
|
|
4,999
|
|
Total
|
$
|
2,473
|
|
$
|
1,786
|
|
$
|
12,866
|
|
$
|
17,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition and development
|
$
|
2,124
|
|
$
|
1,834
|
|
$
|
10,068
|
|
$
|
14,026
|
|
Speculative and custom/presold construction
|
|
282
|
|
|
-
|
|
|
11,745
|
|
|
12,027
|
|
Total
|
$
|
2,406
|
|
$
|
1,834
|
|
$
|
21,813
|
|
$
|
26,053
|
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, 2020
|
|
|
March 31, 2020
|
|
|
Number
of Loans
|
|
Balance
|
|
|
Number
of Loans
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
-
|
|
$
|
-
|
|
|
|
3
|
|
$
|
147
|
|
Commercial real estate
|
|
1
|
|
|
3,565
|
|
|
|
-
|
|
|
-
|
|
Multi-family
|
|
2
|
|
|
24
|
|
|
|
3
|
|
|
34
|
|
Total
|
|
3
|
|
$
|
3,589
|
|
|
|
6
|
|
$
|
181
|
At December 31, 2020, loans delinquent 30 - 89 days were 0.04% of total loans compared to 0.03% at March 31, 2020. At December 31, 2020, loans delinquent 30-89 days were comprised of commercial
business and consumer loans. At March 31, 2020, loans delinquent 30-89 days were comprised of consumer loans. There were no loans 30 - 89 days delinquent in the commercial real estate (“CRE”) portfolio or commercial business portfolio. CRE loans
represented the largest portion of the loan portfolio at 58.12% of total loans and commercial business represented 27.13% 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.
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 14 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
36
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 as of October 31, 2020. 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, the whole bank transaction 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 35%, 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 8.1%, a net interest margin that approximated 3.3% and a return on assets that ranged from 0.91% to 1.39% (average of 1.11%). 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 14.86% utilized for our cash flow estimates and a terminal value estimated at 1.43 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 whole bank transaction approach estimates fair value by applying key financial variables in transactions involving acquisitions of similar institutions. In applying the whole bank transaction approach method, the Company identified transactions
that occurred during the first 10 months of calendar 2020 utilizing a multiple of 1.1 times price to book value. 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 0.8 times tangible book value. The Company calculated a fair value of its reporting unit of $143.0 million using the corporate value approach, $179.0 million using the income approach, $184 million using the whole bank transaction
approach and $180.0 million using the market approach, with a final concluded value of $181.0 million, with half the weight given to the income approach and one quarter weight given to the whole bank approach and the market approach. No weight was
given to the corporate value 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 sustained 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.
As a result of the effects of the COVID-19 pandemic and its impacts on the financial markets and economy, the Company completed a qualitative assessment of goodwill and concluded that it is more
likely than not that the fair value of the Bank (the reporting unit), exceeds its carrying value at December 31, 2020. If adverse economic conditions or the recent decrease in the Company’s common stock price and market capitalization as a result of
the COVID-19 pandemic were sustained in the future rather than temporary, it may significantly affect the fair value of the reporting unit and may trigger future goodwill impairment charges. Any impairment charge could have a material adverse effect
on our results of operations and financial condition. However, such an impairment would not impact the Company’s liquidity, operations or regulatory capital.
37
Comparison of Operating Results for the Three and Nine Months Ended December 31, 2020 and 2019
Net Income. Net income was $4.0 million, or $0.18 per diluted share for the three months ended December 31, 2020, compared to $4.1 million, or $0.18 per
diluted share for same prior year period. Net income for the nine months ended December 31, 2020 and 2019 was $7.1 million, or $0.32 per diluted share, and $12.9 million, or $0.57 per diluted share, respectively. The Company’s net income decreased
primarily as a result of the decrease in non-interest income partially offset by an increase in net interest income and a decrease in non-interest expense for the three months ended December 31, 2020 compared to the same three month period in the
prior year. The Company’s net income decreased primarily as a result of the increased provision for loan losses of $6.3 million for the nine months ended December 31, 2020 compared to no provision for loan losses for the nine months ended December
31, 2019, in addition to a decrease in non-interest income which was partially offset by a decrease in non-interest expense.
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 months ended December 31, 2020 was $11.5 million representing a $37,000 increase compared to the three months ended December 31, 2019. Net interest income for the
nine months ended December 31, 2020 was $33.7 million representing a $960,000 decrease compared to the nine months ended December 31, 2019. The net interest margin for the three and nine months ended December 31, 2020 was 3.40% and 3.46%,
respectively, compared to 4.23% and 4.31% for the three and nine months ended December 31, 2019. These decreases in the net interest margin were primarily the result of the low interest rate environment putting downward pressure on adjustable rate
instruments combined with the impact of the low loan yields on the SBA PPP loan portfolio causing a decrease in the average yield on interest-earning assets partially offset by the decrease in the average yield on interest-bearing liabilities. The
decreases were also due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities as changes in the average rate paid on interest-bearing deposits tend to lag changes in market
interest rate changes.
Interest and Dividend Income. Interest and dividend income for the three and nine months ended December 31, 2020 was $12.3 million and $36.5 million,
respectively, compared to $12.8 million and $38.2 million, respectively, for the same periods in the prior year. The decrease for the three months ended December 31, 2020 was due primarily to the 107 basis point decrease in the average yield on
interest earning assets to 3.63% compared to 4.70% for the three months ended December 31, 2019. The decrease for the nine months ended December 31, 2020 was due primarily to the 100 basis point decrease in the average yield on interest earning
assets to 3.74% compared to 4.74% for the nine months ended December 31, 2019. The substantial increase in the average balance of overnight cash balances as a result in the increase in deposit balances related to SBA PPP loans, is negatively
impacting interest earning assets. Interest and dividend income included $1.5 million and $3.0 million of interest income and fees earned related to SBA PPP loans for the three and nine months ended December 31, 2020, respectively. There was no
interest income and fees related to SBA PPP loans for the three and nine months ended December 31, 2019.
The average balance of net loans increased $76.5 million and $93.4 million to $955.2 million and $975.2 million for the three and nine months ended December 31, 2020, respectively, from $878.7
million and $881.8 million for the same period in the prior year due to SBA PPP loans. Although the average balance of loans increased, the average yield on net loans decreased and was 4.82% and 4.69%, respectively, for the three and nine months
ended December 31, 2020 compared to 5.30% for the same three and nine month periods in the prior year, respectively, due primarily to the decreases in short-term rates over the last year, including the emergency 150 basis point reduction in the
targeted federal funds rate in March 2020 due to the COVID-19 pandemic and secondarily due to the impact of SBA PPP loans. For the three and nine months ended December 31, 2020, the average balance of SBA PPP loans was $99.9 million and $98.5
million, respectively. The average yield on SBA PPP loans was 6.12% and 4.00% for the three and nine months ended December 31, 2020, respectively, which included the recognition of the net deferred fees. This resulted in a positive impact, primarily
due to the accelerated SBA PPP loan fee recognition due to SBA PPP loan forgiveness, to the average loan yield on net loans of 15 basis points and a negative impact, due to the low interest rate of SBA PPP loans and normal SBA PPP loan amortization,
of eight basis points during the three and nine months ended December 31, 2020, respectively. The impact of SBA PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain
criteria are met. This decrease in the average yield on net loans was the primary reason for the overall decrease in interest and dividend income.
38
Interest Expense. Interest expense decreased $511,000 and $765,000 to $763,000 and $2.8 million for the three and nine months ended December 31, 2020,
respectively, compared to $1.3 million and $3.5 million for the three and nine months ended December 31, 2019, respectively. Interest expense on deposits decreased $386,000 to $556,000 for the three months ended December 31, 2020 compared to $942,000
for the same three month period in the prior year. Interest expense on deposits increased $118,000 to $2.1 million for the nine months ended December 31, 2020 compared to $2.0 million for the same nine month period in the prior year. The weighted
average interest rate on interest-bearing deposits decreased to 0.26% for the three months ended December 31, 2020, compared to 0.54% for the three months ended December 31, 2019. The weighted average interest rate on interest-bearing deposits
decreased to 0.34% for the nine months ended December 31, 2020, compared to 0.39% for the nine months ended December 31, 2019 due primarily to the decrease in the weighted average interest rate on deposits excluding certificates of deposit due to the
overall decreasing rate environment. The weighted average interest rate on certificates of deposit increased due to pricing pressures and competition in our local markets. For the three months ended December 31, 2020, interest expense for deposits
decreased compared to the same prior year period as the decrease in the weighted average interest rate offset the overall increase in weighted average deposit balances. For the nine months ended December 31, 2020, interest expense for deposits
increased due to the overall increase in the weighted average balance but was partially offset by the decrease in the weighted average interest rate. The weighted average balance of interest-bearing deposits increased $143.4 million and $133.3
million for the three and nine months ended December 31, 2020, respectively, compared to the same periods in the prior year due primarily to proceeds from SBA PPP loans deposited directly into customer accounts, government stimulus checks and an
increase in savings trends and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19.
Interest expense on borrowings decreased $125,000 and $883,000 for the three and nine months ended December 31, 2020, respectively, compared to the same periods in the prior year. The weighted
average interest rate on other interest-bearing liabilities decreased to 2.17% and 1.86% for the three and nine months ended December 31, 2020, respectively, compared to 4.55% and 3.71% for the same three and nine month periods in the prior year. The
average balance of other interest-bearing liabilities increased to $37.9 million and decreased to $49.0 million for the three and nine months ended December 31, 2020, respectively, compared to $29.0 million and $56.3 million for the same three month
period in the prior year, respectively. Overall, total interest expense decreased primarily as a result of the decrease in the weighted average interest rate on interest-bearing liabilities for the three and nine months ended December 31, 2020 and
2019, respectively.
39
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 December 31,
|
|
|
2020
|
|
2019
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
669,531
|
|
$
|
8,371
|
|
4.96
|
%
|
|
$
|
692,227
|
|
$
|
9,478
|
|
5.45
|
%
|
|
Non-mortgage loans
|
|
285,652
|
|
|
3,230
|
|
4.49
|
|
|
|
186,429
|
|
|
2,221
|
|
4.74
|
|
|
Total net loans (1)
|
|
955,183
|
|
|
11,601
|
|
4.82
|
|
|
|
878,656
|
|
|
11,699
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (2)
|
|
154,265
|
|
|
607
|
|
1.56
|
|
|
|
159,356
|
|
|
887
|
|
2.21
|
|
|
Daily interest-earning assets
|
|
1,545
|
|
|
-
|
|
-
|
|
|
|
105
|
|
|
-
|
|
-
|
|
|
Other earning assets
|
|
235,331
|
|
|
98
|
|
0.17
|
|
|
|
44,112
|
|
|
189
|
|
1.70
|
|
|
Total interest-earning assets
|
|
1,346,324
|
|
|
12,306
|
|
3.63
|
|
|
|
1,082,229
|
|
|
12,775
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office properties and equipment, net
|
|
18,970
|
|
|
|
|
|
|
|
|
15,811
|
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
78,332
|
|
|
|
|
|
|
|
|
76,116
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,443,626
|
|
|
|
|
|
|
|
$
|
1,174,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
$
|
258,132
|
|
|
57
|
|
0.09
|
|
|
$
|
208,486
|
|
|
354
|
|
0.68
|
|
|
Interest checking accounts
|
|
235,363
|
|
|
19
|
|
0.03
|
|
|
|
176,856
|
|
|
24
|
|
0.05
|
|
|
Money market accounts
|
|
218,490
|
|
|
34
|
|
0.06
|
|
|
|
184,194
|
|
|
54
|
|
0.12
|
|
|
Certificates of deposit
|
|
128,677
|
|
|
446
|
|
1.38
|
|
|
|
127,747
|
|
|
510
|
|
1.59
|
|
|
Total interest-bearing deposits
|
|
840,662
|
|
|
556
|
|
0.26
|
|
|
|
697,283
|
|
|
942
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
37,864
|
|
|
207
|
|
2.17
|
|
|
|
29,011
|
|
|
332
|
|
4.55
|
|
|
Total interest-bearing liabilities
|
|
878,526
|
|
|
763
|
|
0.34
|
|
|
|
726,294
|
|
|
1,274
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
395,939
|
|
|
|
|
|
|
|
|
289,773
|
|
|
|
|
|
|
|
Other liabilities
|
|
17,525
|
|
|
|
|
|
|
|
|
11,999
|
|
|
|
|
|
|
|
Total liabilities
|
|
1,291,990
|
|
|
|
|
|
|
|
|
1,028,066
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
151,636
|
|
|
|
|
|
|
|
|
146,090
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
1,443,626
|
|
|
|
|
|
|
|
$
|
1,174,156
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
11,543
|
|
|
|
|
|
|
|
$
|
11,501
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
4.00
|
%
|
|
Net interest margin
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
4.23
|
%
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
|
|
|
153.25
|
%
|
|
|
|
|
|
|
|
149.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment (3)
|
|
|
|
$
|
14
|
|
|
|
|
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
40
|
|
Nine Months Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
Average
Balance
|
|
Interest
and
Dividends
|
|
Yield/Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
688,044
|
|
$
|
26,078
|
|
5.03
|
%
|
|
$
|
693,776
|
|
$
|
28,586
|
|
5.48
|
%
|
|
Non-mortgage loans
|
|
287,159
|
|
|
8,397
|
|
3.88
|
|
|
|
188,003
|
|
|
6,560
|
|
4.64
|
|
|
Total net loans (1)
|
|
975,203
|
|
|
34,475
|
|
4.69
|
|
|
|
881,779
|
|
|
35,146
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (2)
|
|
140,985
|
|
|
1,813
|
|
1.71
|
|
|
|
168,266
|
|
|
2,721
|
|
2.15
|
|
|
Daily interest-earning assets
|
|
575
|
|
|
-
|
|
-
|
|
|
|
115
|
|
|
-
|
|
-
|
|
|
Other earning assets
|
|
179,440
|
|
|
216
|
|
0.16
|
|
|
|
22,424
|
|
|
369
|
|
2.19
|
|
|
Total interest-earning assets
|
|
1,296,203
|
|
|
36,504
|
|
3.74
|
|
|
|
1,072,584
|
|
|
38,236
|
|
4.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office properties and equipment, net
|
|
18,183
|
|
|
|
|
|
|
|
|
15,569
|
|
|
|
|
|
|
|
Other non-interest-earning assets
|
|
77,881
|
|
|
|
|
|
|
|
|
74,157
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,392,267
|
|
|
|
|
|
|
|
$
|
1,162,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
$
|
250,043
|
|
|
364
|
|
0.19
|
|
|
$
|
179,494
|
|
|
744
|
|
0.55
|
|
|
Interest checking accounts
|
|
219,210
|
|
|
66
|
|
0.04
|
|
|
|
179,794
|
|
|
75
|
|
0.06
|
|
|
Money market accounts
|
|
196,929
|
|
|
121
|
|
0.08
|
|
|
|
200,170
|
|
|
177
|
|
0.12
|
|
|
Certificates of deposit
|
|
132,128
|
|
|
1,520
|
|
1.53
|
|
|
|
105,550
|
|
|
957
|
|
1.21
|
|
|
Total interest-bearing deposits
|
|
798,310
|
|
|
2,071
|
|
0.34
|
|
|
|
665,008
|
|
|
1,953
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
|
49,011
|
|
|
687
|
|
1.86
|
|
|
|
56,337
|
|
|
1,570
|
|
3.71
|
|
|
Total interest-bearing liabilities
|
|
847,321
|
|
|
2,758
|
|
0.43
|
|
|
|
721,345
|
|
|
3,523
|
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
379,516
|
|
|
|
|
|
|
|
|
288,410
|
|
|
|
|
|
|
|
Other liabilities
|
|
14,515
|
|
|
|
|
|
|
|
|
10,911
|
|
|
|
|
|
|
|
Total liabilities
|
|
1,241,352
|
|
|
|
|
|
|
|
|
1,020,666
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
150,915
|
|
|
|
|
|
|
|
|
141,644
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
1,392,267
|
|
|
|
|
|
|
|
$
|
1,162,310
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
33,746
|
|
|
|
|
|
|
|
$
|
34,713
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
4.09
|
%
|
|
Net interest margin
|
|
|
|
|
|
|
3.46
|
%
|
|
|
|
|
|
|
|
4.31
|
%
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
152.98
|
%
|
|
|
|
|
|
|
|
148.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment (3)
|
|
|
|
$
|
25
|
|
|
|
|
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
41
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, 2020 compared to the periods ended September 30,
2019. 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,
|
|
|
2020 vs. 2019
|
|
2020 vs. 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net
|
|
|
|
|
|
|
|
|
Total Net
|
|
|
|
Volume
|
|
Rate
|
|
Increase
(Decrease)
|
|
|
Volume
|
|
Rate
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
(296
|
)
|
$
|
(811
|
)
|
$
|
(1,107
|
)
|
|
$
|
(230
|
)
|
$
|
(2,278
|
)
|
$
|
(2,508
|
)
|
|
Non-mortgage loans
|
|
1,131
|
|
|
(122
|
)
|
|
1,009
|
|
|
|
3,045
|
|
|
(1,208
|
)
|
|
1,837
|
|
|
Investment securities (1)
|
|
(27
|
)
|
|
(253
|
)
|
|
(280
|
)
|
|
|
(401
|
)
|
|
(507
|
)
|
|
(908
|
)
|
|
Other earning assets
|
|
206
|
|
|
(297
|
)
|
|
(91
|
)
|
|
|
471
|
|
|
(624
|
)
|
|
(153
|
)
|
|
Total interest income
|
|
1,014
|
|
|
(1,483
|
)
|
|
(469
|
)
|
|
|
2,885
|
|
|
(4,617
|
)
|
|
(1,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regular savings accounts
|
|
70
|
|
|
(367
|
)
|
|
(297
|
)
|
|
|
223
|
|
|
(603
|
)
|
|
(380
|
)
|
|
Interest checking accounts
|
|
6
|
|
|
(11
|
)
|
|
(5
|
)
|
|
|
18
|
|
|
(27
|
)
|
|
(9
|
)
|
|
Money market accounts
|
|
9
|
|
|
(29
|
)
|
|
(20
|
)
|
|
|
(3
|
)
|
|
(53
|
)
|
|
(56
|
)
|
|
Certificates of deposit
|
|
4
|
|
|
(68
|
)
|
|
(64
|
)
|
|
|
275
|
|
|
288
|
|
|
563
|
|
|
Other interest-bearing liabilities
|
|
82
|
|
|
(207
|
)
|
|
(125
|
)
|
|
|
(183
|
)
|
|
(700
|
)
|
|
(883
|
)
|
|
Total interest expense
|
|
171
|
|
|
(682
|
)
|
|
(511
|
)
|
|
|
330
|
|
|
(1,095
|
)
|
|
(765
|
)
|
|
Net interest income
|
$
|
843
|
|
$
|
(801
|
)
|
$
|
42
|
|
|
$
|
2,555
|
|
$
|
(3,522
|
)
|
$
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 MBank during the fiscal year ended March 31, 2017 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 $813,000 and $1.1 million at December 31, 2020 and March 31, 2020,
respectively.
There was no provision for loan losses for the three months ended December 31, 2020 and 2019. The provision for loan losses was $6.3 million for the nine months ended December 31, 2020 compared to
no provision for loan losses for the nine months ended December 31, 2019. The provision for loan losses for the nine months ended December 31, 2020 is based primarily upon the evolving uncertainty around the COVID-19 pandemic and its adverse economic
effect on the respective industry exposures within our loan portfolio.
Net recoveries totaled $326,000 and $268,000 for the three and nine months ended December 31, 2020, respectively, compared to net charge-offs of $3,000 and $24,000 for the three and months ended
December 31, 2019, respectively. Annualized net recoveries to average net loans was (0.14)% and (0.03)% for the three and nine months ended December 31, 2020, respectively. Annualized net charge-offs were not meaningful for the three and nine months
ended December 31, 2019. Nonperforming loans were $393,000 at December 31, 2020, compared to $1.5 million at December 31, 2019. The decrease in nonperforming loans was primarily due to one nonperforming loan totaling $851,000 which was resolved
through a payoff during December 2020. The ratio of allowance for loan losses to nonperforming loans was 4883.46% at December 31, 2020 compared to 753.66% at December 31, 2019. See “Asset Quality” above for additional information related to asset
quality that management considers in determining the provision for loan losses.
42
Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of December 31, 2020, the Company had identified $4.0 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, $3.8 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 December 31, 2020, charge-offs on these impaired loans totaled $85,000 from
their original loan balances. The remaining $256,000 of impaired loans has specific valuation allowances totaling $13,000 at December 31, 2020.
Non-Interest Income. Non-interest income decreased $351,000 and $1.2 million to $2.8 million and $8.3 million for the three and nine months ended December
31, 2020, respectively, compared to the same prior year periods. The decrease in non-interest income was due to the decrease in fees and service charges of $7,000 and $335,000 for the three and nine months ended December 31, 2020, respectively,
compared the same periods in the prior year reflecting primarily from a decrease in transactions due to a change in customer spending habits during the COVID-19 pandemic. Additionally, the decrease in non-interest income was due to the decrease in
asset management fees of $247,000 and $623,000 for the three and nine months ended December 31, 2020, respectively, compared to the same periods in the prior year as a result of the decline in interest rates on fee generating products. Furthermore,
net gains on sales of loans held for sale decreased $68,000 and $182,000 for the three and nine months ended December 31, 2020, respectively, compared to the same periods in the prior year as the Company has transitioned to a model where mortgage
loan originations are brokered to various third-party mortgage companies.
Non-Interest Expense. Non-interest expense decreased $141,000 and $817,000 to $9.1 million and $26.6 million for the three and nine months ended December
31, 2020, respectively, compared to the same periods in the prior year. The decrease in non-interest expense for the three and nine months ended December 31, 2020, compared to the same prior year periods was primarily due to a decrease in salaries
and employee benefits of $243,000 and $1.1 million, respectively, which is mainly attributable to the loan origination cost offset related to the origination of the SBA PPP loans and the Company’s focus to manage controllable costs such as salaries
and employee benefits. In addition, advertising and marketing expenses decreased $37,000 and $306,000 for the three and nine months ended December 31, 2020, respectively, primarily due to reduced opportunities for community sponsorships and
cancellations of sponsored events due to COVID-19 restrictions. Partially offsetting these decreases was an increase in FDIC insurance premiums of $89,000 and $140,000 for the three and nine months ended December 31, 2020, respectively, as
assessments returned to normal levels. The Bank utilized its remaining FDIC credits for previously paid deposit insurance premiums to partially offset current assessments in the prior quarter. In addition, occupancy and depreciation expense decreased
$27,000 and increased $283,000 for the three and nine months ended December 31, 2020, respectively, compared to the same periods in the prior year due to continued investments into enhancing our information technology infrastructure and technology
expenditures incurred as a result of employees working from home during the COVID-19 pandemic.
Income Taxes. The provision for income taxes was $1.2 million and $2.0 million for the three and nine months ended December 31, 2020, respectively, compared
to $1.3 million and $3.9 million for the three and nine months ended December 31, 2019, respectively, due to lower pre-tax income. Income before income taxes was $5.2 million and $9.0 million for the three and nine months ended December 31, 2020,
respectively, compared to the same prior year periods of $5.4 million and $16.7 million, respectively. The Company’s effective tax rate for the three and nine months ended December 31, 2020 was 22.9% and 22.0%, respectively, compared to 23.7% and
23.0% for the three and nine months ended December 31, 2019, respectively. The decrease in the effective tax rate can be attributed to investments in tax-exempt bank owned life insurance. As of December 31, 2020, management deemed that a valuation
allowance related to the Company’s deferred tax asset was not necessary. At December 31, 2020, the Company had a net deferred tax asset of $3.1 million compared to $3.3 million at March 31, 2020.
43