RIVERVIEW BANCORP, INC. This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted inthe 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.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are discussed in our 2022 Form 10-K under Part II. Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Note 1 of the Notes to the Consolidated Financial Statements." 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 2022 Form 10-K.
Executive Overview
As a progressive, community-oriented financial services business, the Company emphasizes local, personal service to residents of its primary market area. The Company considersClark ,Klickitat andSkamania counties ofWashington , andMultnomah ,Washington andMarion counties ofOregon 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$1.0 billion atDecember 31, 2022 compared to$975.9 million atMarch 31, 2022 . The Bank's subsidiary,Riverview Trust Company (the "Trust Company "), is a trust and financial services company with one office located in downtownVancouver, Washington and one office inLake Oswego, Oregon .The Trust Company provides full-service brokerage activities, trust and asset management services. The Bank's Business and Professional Banking Division, with two lending offices inVancouver and one inPortland , 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 recent loan originations are concentrated in commercial business and commercial real estate loans which carry adjustable rates, higher yields and shorter terms and higher credit risk than traditional fixed-rate consumer real estate one-to-four family mortgages. The strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management services through theTrust Company and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. We believe we are well positioned to attract new customers and to increase our market share through our 17 branches, including, among others, ten inClark County , three in thePortland metropolitan area and three lending centers. 33
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Vancouver is located inClark County, Washington , which is just north ofPortland, Oregon . Many businesses are located in theVancouver area because of the favorable tax structure and lower energy costs inWashington as compared toOregon . Companies located in theVancouver 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, theColumbia River Gorge Scenic Area and thePortland metropolitan area are sources of tourism, which has helped to transform the area from its past dependence on
the timber industry. Operating Strategy Fiscal year 2023 marks the 100th 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 real estate construction loan portfolios. AtDecember 31, 2022 , commercial and real estate construction loans represented 89.9% of total loans compared to 91.6% atMarch 31, 2022 . 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 real estate 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 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 our strong asset quality and credit metrics. Although the Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate, real estate construction and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, the Company intends to manage credit exposure through the use of experienced bankers in these areas and a conservative approach to its lending. 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 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 theTrust Company to increase its fee income. Assets under management by theTrust Company totaled$855.9 million and$1.3 billion atDecember 31, 2022 andMarch 31, 2022 , respectively. 34
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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.
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.
COVID-19 Related Information
The Company maintains its commitment to supporting its community and customers during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its customers. As ofDecember 31, 2022 , all Bank branches were open with normal hours. The Bank will continue to monitor and follow governmental restrictions and public health authority guidelines. 35 Table of Contents
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):
Other Commercial and
Commercial Real Estate Real Estate Construction
Business Mortgage Construction Total
December 31, 2022
Commercial business $ 238,730 $ - $ - $ 238,730
SBA Paycheck Protection Program ("PPP") 10 -
- 10
Commercial construction - - 31,810 31,810
Office buildings - 116,980 - 116,980
Warehouse/industrial - 99,075 - 99,075Retail/shopping centers/strip malls - 83,265 - 83,265 Assisted living facilities - 511 - 511 Single purpose facilities - 262,349
- 262,349
Land - 6,481 - 6,481
Multi-family - 55,157 - 55,157One-to-four family construction - -
19,343 19,343
Total $ 238,740 $ 623,818 $ 51,153 $ 913,711
March 31, 2022
Commercial business $ 225,006 $ - $ - $ 225,006
SBA PPP 3,085 - - 3,085
Commercial construction - - 12,741 12,741
Office buildings - 124,690 - 124,690
Warehouse/industrial - 100,184 - 100,184Retail/shopping centers/strip malls - 97,192 -
97,192 Assisted living facilities - 663 - 663 Single purpose facilities - 260,108 - 260,108 Land - 11,556 - 11,556 Multi-family - 60,211 - 60,211
One-to-four family construction - - 11,419
11,419 Total$ 228,091 $ 654,604 $ 24,160 $ 906,855
Comparison of Financial Condition at
Cash and cash equivalents, including interest-earning accounts, totaled$24.3 million atDecember 31, 2022 compared to$241.4 million atMarch 31, 2022 . The Company's cash balances typically fluctuate based upon funding needs, deposit activity and investment securities purchases. Based on the Company's asset/liability management program and liquidity objectives, the Company may deploy excess cash balances to purchase investment securities depending on the rate environment and other considerations. 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 theFederal Deposit Insurance Corporation ("FDIC"). Certificates of deposits held for investment totaled$249,000 at bothDecember 31, 2022 andMarch 31, 2022 . Investment securities totaled$458.9 million and$418.9 million atDecember 31, 2022 andMarch 31, 2022 , respectively. The increase is due to investment purchases partially offset by normal pay downs, calls and maturities. During the nine months endedDecember 31, 2022 and 2021, purchases of investment securities totaled$81.8 million and$178.7 million , respectively. The Company primarily purchases a combination of securities backed by government agencies (FHLMC,FNMA , SBA or GNMA). AtDecember 31, 2022 , 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. 36 Table of Contents Loans receivable, net, totaled$1.0 billion atDecember 31, 2022 compared to$975.9 million atMarch 31, 2022 , an increase of$26.1 million . The increase was primarily attributed to increases in real estate construction loans of$27.0 million , commercial business loans of$10.6 million and real estate one-to-four family loans of$19.1 million with the increases in commercial business loans and real estate one-to-four family loans attributable to the purchase of$11.4 million and$26.8 million of such loans, respectively. The increases were partially offset by decreases in commercial real estate, multi-family and land loans of$20.7 million ,$5.1 million and$5.1 million , respectively, sinceMarch 31, 2022 . In addition, the increases were offset by a decrease in SBA PPP loans related to forgiveness repayments. AtDecember 31, 2022 , SBA PPP loans, net of deferred fees which are included in the commercial business loan category were insignificant compared to$3.1 million atMarch 31, 2022 . The Company no longer originates one-to-four family mortgage loans and will from time to time purchase these loans consistent with its asset/liability objectives. Additionally, the Company will purchase commercial business loans as a way to supplement loan originations and diversify the commercial loan portfolio. These loans are originated by a third-party located outside the Company's primary market area. Commercial loans purchased atDecember 31, 2022 totaled$24.4 million compared to$14.7 million atMarch 31, 2022 . The Company also purchases the guaranteed portion of SBA loans to help loan portfolio diversification, supplement loan originations and generate a higher yield than overnight cash investments or short-term investments. These SBA loans are originated through another financial institution located outside the Company's primary market area and are purchased with servicing retained by the seller. AtDecember 31, 2022 , the Company's purchased SBA loan portfolio was$57.1 million compared to$59.4 million atMarch 31, 2022 . Deposits decreased$167.9 million to$1.37 billion atDecember 31, 2022 from$1.53 billion atMarch 31, 2022 due to increased competition and pricing pressures. The change in deposits were mainly attributable to a$49.9 million and$58.9 million decrease in regular savings and money market deposit accounts, respectively, with an overall decrease affecting all deposit classifications. The Company had no wholesale-brokered deposits atDecember 31, 2022 andMarch 31, 2022 . Core branch deposits accounted for 97.7% of total deposits atDecember 31, 2022 compared to 96.8% atMarch 31, 2022 . The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.
FHLB advances increased to
Shareholders' equity decreased$5.2 million to$152.0 million atDecember 31, 2022 from$157.2 million atMarch 31, 2022 . The decrease is mainly attributable to the increase in the accumulated other comprehensive loss related to the change in unrealized holding losses on securities available for sale, net of tax, of$11.6 million , the repurchase of 701,291 shares of common stock totaling$4.9 million , and the payment of cash dividends totaling$3.9 million . These decreases were partially offset by current period net income of$15.1 million .
Capital Resources
The Bank is a state-chartered, federally insured institution subject to various regulatory capital requirements administered by theFDIC and WDFI. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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 ofDecember 31, 2022 . 37 Table of Contents As ofDecember 31, 2022 , the Bank was categorized as "well capitalized" under theFDIC's 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):
"Well Capitalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Action
Amount Ratio Amount Ratio Amount Ratio
December 31, 2022
Total Capital:
(To Risk-Weighted Assets) $ 178,726 16.71 % $ 85,545 8.0 % $ 106,931 10.0 %
Tier 1 Capital:
(To Risk-Weighted Assets) 165,339 15.46 64,159 6.0 85,545 8.0
Common equity tier 1 Capital:
(To Risk-Weighted Assets) 165,339 15.46 48,119 4.5 69,505 6.5
Tier 1 Capital (Leverage):
(To Average Tangible Assets) 165,339 10.10 65,482 4.0 81,853 5.0 March 31, 2022 Total Capital: (To Risk-Weighted Assets)$ 168,486 16.38 %$ 82,305 8.0 %$ 102,881 10.0 % Tier 1 Capital: (To Risk-Weighted Assets) 155,601 15.12 61,728 6.0 82,305 8.0 Common equity tier 1 Capital: (To Risk-Weighted Assets) 155,601 15.12 46,296 4.5 66,872 6.5 Tier 1 Capital (Leverage): (To Average Tangible Assets) 155,601 9.19 67,763
4.0 84,704 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, 2022 , the Bank's CET1
capital exceeded the required capital conservation buffer at an amount greater
than 2.5%.
For a bank 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, 2022 , the Company would have exceeded all regulatory capital
requirements.
At periodic intervals, the Company's banking regulators routinely examine the
Company'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 could include a review of
certain transactions or other amounts reported in the Company's 2023
consolidated financial statements.
Liquidity
Liquidity is essential to our business. The objectives of the Bank's liquidity
management are 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.
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Liquidity management is both a short and long-term responsibility of the
Company's management. The Company adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) projected loan
sales, (iii) expected deposit flows, (iv) yields available on interest-bearing
deposits and (v) its asset/liability management program objectives. Excess
liquidity is invested generally in interest-bearing overnight deposits and other
short-term government and agency obligations. If the Company requires funds
beyond its ability to generate them internally, it has additional diversified
and reliable sources of funds with the FHLB, the FRB and other wholesale
facilities. These sources of funds may be used on a long or short-term basis to
compensate for a reduction in other sources of funds or on a long-term basis to
support lending activities.
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, proceeds from the sale of loans,
maturing securities, FHLB advances and FRB borrowings. While maturities and
scheduled amortization of loans and securities are a predictable source of
funds, deposit flows and prepayment of mortgage loans and mortgage-backed
securities are greatly influenced by general interest rates, economic conditions
and competition. Management believes that its focus on core relationship
deposits coupled with access to borrowing through reliable counterparties
provides reasonable and prudent assurance that ample liquidity is available.
However, depositor or counterparty behavior could change in response to
competition, economic or market situations or other unforeseen circumstances,
which could have liquidity implications that may require different strategic or
operational actions.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds for loan originations, deposit withdrawals and
continuing operations, satisfy other financial commitments and take advantage of
investment opportunities. During the nine months ended December 31, 2022 , the
Bank used its sources of funds primarily to fund deposit withdrawals resulting
from increased competition and pricing pressures, loan commitments and to
purchase investment securities. At December 31, 2022 , cash and cash equivalents,
certificates of deposit held for investment and available for sale investment
securities totaled $236.3 million , or 14.8% of total assets. Management believes
that the Company's security portfolio is of high quality and its securities
would therefore be marketable. The levels of these assets are dependent on the
Company's operating, financing, lending, and investing activities during any
given period. 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, consistent with its
asset/liability objectives. In addition to these primary sources of funds, the
Bank has several secondary borrowing sources available to meet potential funding
requirements, including FRB borrowings and FHLB advances. At December 31, 2022 ,
the Bank had no advances from the FRB and maintains a credit facility with the
FRB with an available borrowing capacity of $52.7 million , subject to sufficient
collateral. At December 31, 2022 , the Bank had advances totaling $32.3 million
from the FHLB and had an available borrowing capacity of $299.6 million with the
FHLB, subject to sufficient collateral and stock investment. At December
31, 2022 , the Bank had sufficient unpledged collateral to allow it to utilize
its available borrowing capacity from the FRB and the FHLB. Borrowing capacity
may, however, fluctuate based on acceptability and risk rating of loan
collateral and counterparties could adjust discount rates applied to such
collateral at their discretion.
An additional source of wholesale funding includes brokered certificates of
deposit. While the Company has utilized brokered deposits from time to time, the
Company historically has not extensively relied on brokered deposits to fund its
operations. At December 31, 2022 and March 31, 2022 , the Bank had no wholesale
brokered deposits. The Bank also participates in the Insured Cash Sweep ("ICS")
and Certificate of Deposit Account Registry Services ("CDARS") deposit products,
which allow the Company to accept deposits in excess of the FDIC insurance limit
for depositors while obtaining "pass-through" insurance for total deposits. The
Bank's CDARS and ICS balances were $30.3 million , or 2.2% of total deposits, and
$66.3 million , or 4.3% of total deposits, at December 31, 2022 and March 31,
2022 , respectively. The combination of all the Bank's funding sources gives the
Bank available liquidity of $818.2 million , or 51.2% of total assets at December
31, 2022 .
At December 31, 2022 , the Company had total commitments of $171.6 million , which
includes commitments to extend credit of $24.7 million , unused lines of credit
totaling $101.5 million , undisbursed real estate construction loans totaling
$43.8 million , and standby letters of credit totaling $1.6 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, 2022 totaled $57.0 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 $42.9 million at December 31, 2022 .
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The Company incurs capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on our current capital allocation objectives, during the remainder of fiscal 2023 we expect cash expenditures of approximately$1.8 million for capital investment in premises and equipment.
For further information regarding the Company's off-balance sheet arrangements and other contractual obligations, see Notes 14 and 15 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.
Riverview Bancorp, Inc. , as a separate legal entity from the Bank, must provide for its own liquidity. Sources of capital and liquidity forRiverview 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. Management currently expects to continue the Company's current practice of paying quarterly cash dividends on its common stock subject to the Board of Directors' discretion to modify or terminate this practice at any time and for any reason without prior notice. The current quarterly common stock dividend rate is$0.06 per share, as approved by the Board of Directors, which management believes is a dividend rate per share which enables the Company to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of the Company's cash to its shareholders. Assuming continued payment during 2023 at this rate of$0.06 per share, average total dividend paid each quarter would be approximately$1.3 million based on the number of the Company's current outstanding shares. AtDecember 31, 2022 ,Riverview Bancorp, Inc. had$7.1 million in cash to meet its liquidity needs.
Asset Quality
Nonperforming assets, consisting of nonaccrual loans and accruing loans 90 days or more delinquent, were$12.6 million or 0.79% of total assets atDecember 31, 2022 , of which$12.4 million areSBA and United States Department of Agriculture ("USDA") government guaranteed loans, compared with$22.1 million or 1.27% of total assets atMarch 31, 2022 , of which$21.8 million are SBA andUSDA government guaranteed loans.
The following table sets forth information regarding the Company's nonperforming loans, consisting of nonaccrual loans and accruing loans 90 days or more delinquent, at the dates indicated (dollars in thousands):
December 31, 2022 March 31, 2022
Number of Number of
Loans Balance Loans Balance
Commercial business 1 $ 84 1 $ 100
Commercial real estate 1 106 1 122
Consumer 3 46 2 51
Subtotal 5 236 4 273
Government Guaranteed 42 12,377 66 21,826
Total 47 $ 12,613 70 $ 22,099
The decrease of $9.5 million in nonperforming assets is attributed to a decrease
in nonperforming SBA and USDA government guaranteed loans where payments have
been delayed due to the servicing transfer of these loans between two
third-party servicers. The Bank holds approximately $12.4 million of the
government guaranteed portion of SBA and USDA loans originated by other banks
that, when purchased, were placed into a Direct Registration Certificate ("DRC")
program by the SBA's former fiscal transfer agent, Colson Inc. ("Colson") that
has either yet to be fully reconciled or has been reconciled and awaiting
settlement and conversion to a pass thru certificate. Under the DRC program,
Colson was required to remit monthly payments to the investor holding the
guaranteed balance, whether or not a payment had actually been received from the
borrower. In 2020, Colson did not successfully retain its existing contract as
the SBA's fiscal transfer agent and began transitioning servicing over to a new
company called Guidehouse. In late 2021, Guidehouse,
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under their contract with the SBA, declined to continue the DRC program. After declining to continue the DRC program, all payments under the DRC program began to be held by Guidehouse or Colson until the DRC program could be unwound and the DRC holdings converted into normal pass through certificates. As part of unwinding the DRC program, Colson has requested investors who had received payments in advance of the borrower actually remitting payment return advanced funds before they will process the conversion of certificates. The Bank continues to work with Colson on the reconciliation and transfer of these loans. The Bank expects the reconciliation and unwinding process to continue and until these processes are completed for all loans being transferred, all of these loans will be reflected as past due. These nonperforming government guaranteed loans are not considered to be nonaccrual loans and are still accruing interest because the Company expects to receive all principal and interest since the Company purchased the guaranteed portion of these loans which is backed by government guaranteed interest certificates. The Company continues its efforts to work out problem loans, seek full repayment or pursue foreclosure proceedings and is making progress in regards to the SBA andUSDA government guaranteed loan servicing transfer. AtDecember 31, 2022 , all of the Company's nonperforming loans exclusive of the SBA andUSDA government guaranteed loans and one purchased automobile loan are to borrowers located inSouthwest Washington . AtDecember 31, 2022 , 1.51% of the Company's nonperforming loans, totaling$190,000 were measured for impairment. These nonperforming loans have been charged down to the estimated fair market value of the underlying collateral less selling costs or carry a specific reserve to reduce the net carrying value. There were no reserves associated with these nonperforming loans that were measured for impairment atDecember 31, 2022 . AtDecember 31, 2022 , the largest single nonperforming loan was aUSDA government guaranteed loan for$1.8 million . The largest single non-performing loan exclusive of the SBA andUSDA government guaranteed loans was a commercial real estate loan for$106,000 atDecember 31, 2022 . The allowance for loan losses was$14.6 million or 1.43% of total loans atDecember 31, 2022 compared to$14.5 million or 1.47% of total loans atMarch 31, 2022 . The Company recorded no provision for loan losses for the nine months endedDecember 31, 2022 . For the nine months endedDecember 31, 2021 , the Company recorded a recapture of the provision for loan losses of$4.0 million . The coverage ratio of the allowance for loan losses to nonperforming loans was 115.42% atDecember 31, 2022 compared to 65.72% atMarch 31, 2022 . The Company's general valuation allowance to non-impaired loans was 1.43% and 1.47% atDecember 31, 2022 andMarch 31, 2022 , respectively. Included in both categories are$12.4 million of fully guaranteed SBA orUSDA loans due to a delay in the servicing transfer of these loans between two third-party servicers, as discussed above. These government guaranteed loans are classified as pass rated loans and are not considered to be either nonaccrual, classified or impaired loans because based on the guarantee, the Company expects to receive all principal and interest according to the contractual terms of the loan agreement and there are no well-defined weaknesses or risk of loss. As a result, these loans were omitted from the required calculation of the allowance for loan losses. Management considers the allowance for loan losses to be adequate atDecember 31, 2022 to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio, and the Company believes it has established its existing allowance for loan losses in accordance with GAAP. However, a decline in national and local economic conditions (including declines as a result of inflation, a recession or the COVID-19 pandemic), results of examinations by the Company's banking 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. 41
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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 atDecember 31, 2022 . The Company has determined that, in certain circumstances, it is appropriate to split a loan into multiple notes. This typically includes a nonperforming charged-off loan that is not supported by the cash flow of the relationship and a performing loan that is supported by the cash flow. These may also be split into multiple notes to align portions of the loan balance with the various sources of repayment when more than one exists. Generally, the new loans are restructured based on customary underwriting standards. In situations where they are not, the policy exception qualifies as a concession, and if the borrower is experiencing financial difficulties, the loans are accounted for as TDRs. The accrual status of a loan may change after it has been classified as a TDR.The Company's general policy related to TDRs is to perform a credit evaluation of the borrower's financial condition and prospects for repayment under the revised terms. This evaluation includes consideration of the borrower's sustained historical repayment performance for a reasonable period of time. A sustained period of repayment performance generally would be a minimum of 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, 2022
Loans accounted for on a non-accrual basis:
Commercial business (1) $ 102 $ 118
Commercial real estate 106 122
Consumer 46 51
Total 254 291
Accruing loans which are contractually past
due 90 days or more (2) 12,359 21,808
Total nonperforming loans 12,613 22,099
Real estate owned ("REO") - -
Total nonperforming assets $ 12,613 $ 22,099
Foregone interest on non-accrual loans (3) $ 10 $
24
(1) Includes
2022 and
(2) Consists entirely of SBA and
(3) Nine months ended
42
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The following tables set forth information regarding the Company's nonperforming
assets by loan type and geographical area at the dates indicated (in thousands):
Southwest
Washington Other Total
December 31, 2022
Commercial business $ 84 $ - $ 84
Commercial real estate 106 - 106
Consumer 45 1 46
Subtotal 235 1 236
Government Guaranteed - 12,377 12,377
Total nonperforming assets $ 235 $ 12,378 $ 12,613
March 31, 2022
Commercial business $ 100 $ - $ 100
Commercial real estate 122 - 122
Consumer 51 - 51
Subtotal 273 - 273
Government Guaranteed - 21,826 21,826
Total nonperforming assets $ 273 $ 21,826 $ 22,099 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 Southwest Other
Oregon Washington Washington Total
December 31, 2022 Land acquisition and development$ 1,912 $ 4,569 $ -$ 6,481 Speculative and presold construction - 17,833
1,510 19,343 Total$ 1,912 $ 22,402 $ 1,510 $ 25,824 March 31, 2022
Land acquisition and development
- 10,989 430 11,419
Total $ 2,111 $ 20,434 $ 430 $ 22,975
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.
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The following table sets forth information regarding the Company's other loans of concern at the dates indicated (dollars in thousands):
December 31, 2022 March 31, 2022
Number of Number of
Loans Balance Loans Balance
Commercial business 1 $ 40 1 $ 45
Commercial real estate 3 5,968 3 6,087
Total 4 $ 6,008 4 $ 6,132
At December 31, 2022 , loans delinquent 30 - 89 days were 0.36% of total loans
compared to 0.81% at March 31, 2022 and were comprised mainly of the previously
discussed government guaranteed loans (which are included in commercial
business) and consumer loans. There were no loans 30 - 89 days delinquent in the
commercial real estate ("CRE") portfolio at both December 31, 2022 and March 31,
2022 . At December 31, 2022 , CRE loans represented the largest portion of the
loan portfolio at 55.30% of total loans and commercial business represented
23.49% of total loans.
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 theTrust Company , for purposes of evaluating goodwill for impairment. All of the Company's goodwill has been allocated to the Bank reporting unit. The Company performs an annual review in the third quarter of each fiscal year, or more frequently if indications of potential impairment exist, to determine if the recorded goodwill is impaired. If the fair value exceeds the carrying value, goodwill at the reporting unit level is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit is greater than its fair value, there is an indication that impairment may exist and additional analysis must be performed to measure the amount of impairment loss, if any. The amount of impairment is determined by comparing the implied fair value of the reporting unit's goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company's consolidated financial statements. The Company performed its annual goodwill impairment test as ofOctober 31, 2022 . 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 30%, which was based on comparable transactional history. The income approach uses a reporting unit's projection of estimated operating results and cash flows that are discounted using a rate that reflects current market conditions. The projection uses management's best estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 2.0%, a net interest margin that approximated 3.7% and a return on assets that 44 Table of Contents
ranged from 1.22% to 1.30% (average of 1.26%). 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 18.33% 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. The market approach estimates fair value by applying tangible book value multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting unit. In applying the market approach method, the Company selected four publicly traded comparable institutions. After selecting comparable institutions, the Company derived the fair value of the reporting unit by completing a comparative analysis of the relationship between their financial metrics listed above and their market values utilizing a market multiple of 1.0 times book value, a market multiple of 1.1 times tangible book value and an earnings multiple of 10 times. The Company calculated a fair value of its reporting unit of$192.0 million using the corporate value approach,$169.2 million using the income approach and$230.0 million using the market approach, with a final concluded value of$197.0 million , with equal weight given to the income approach, the market approach and 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. The Company also completed a qualitative assessment of goodwill as ofDecember 31, 2022 and concluded that it is more likely than not that the fair value of the Bank (the reporting unit), exceeds its carrying value at that date. 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 also possible that changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management's judgments, assumptions and estimates made in assessing the fair value of our goodwill, could result in an impairment charge of a portion or all of our goodwill. If the Company recorded an impairment charge, its financial position and results of operations would be adversely affected; however, such an impairment charge would have no impact on our liquidity, operations or regulatory capital.
Comparison of Operating Results for the Three and Nine Months Ended
Net Income. Net income was$5.2 million , or$0.24 per diluted share for the three months endedDecember 31, 2022 , compared to$5.5 million , or$0.25 per diluted share for the same prior year period. Net income for the nine months endedDecember 31, 2022 and 2021 was$15.1 million , or$0.69 per diluted share, and$17.7 million , or$0.80 per diluted share, respectively. The Company's net income decreased primarily due to no recapture of the provision for loan losses for the three and nine months endedDecember 31, 2022 , respectively, compared to a recapture of the provision for loan losses of$1.3 million and$4.0 million for the three and nine months endedDecember 31, 2021 , respectively. The Company also recognized in non-interest income, a$500,000 BOLI death benefit during the nine months endedDecember 31, 2021 that was not present during the nine months endedDecember 31, 2022 . In addition, the Company recognized in other non-interest expense, a gain on sale of premises and equipment, net, of$1.0 million during the nine months endedDecember 31, 2021 , that was not present during the same period this year. Net Interest Income. The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and the interest paid on deposits and borrowings. When the rate earned on interest-earning assets equals or exceeds the rate paid on interest-bearing liabilities, this positive interest rate spread will generate net interest income. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies. Net interest income for the three and nine months endedDecember 31, 2022 was$13.7 million and$39.8 million , representing an increase of$1.6 million and$4.1 million , respectively, compared to the three and nine months ended 45
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December 31, 2021 . The net interest margin for the three and nine months endedDecember 31, 2022 was 3.48% and 3.30%, compared to 2.96% and 3.05% for the three and nine months endedDecember 31, 2021 . These increases in the net interest margin were primarily attributable to both the higher average balance and yield on investment securities compared to the legacy investment securities portfolios and an increase in the average yield on interest-bearing deposits in other banks balances between the periods reflecting the lagging benefit of variable rate interest-earning assets beginning to reprice higher following recent increases in market interest rates. Additionally, the cost of interest-bearing deposits remained unchanged for the three months endedDecember 31, 2022 and decreased for the nine months endedDecember 31, 2022 , as compared to the same periods in the prior year which also contributed to the net interest margin expansion. Interest and Dividend Income. Interest and dividend income for the three and nine months endedDecember 31, 2022 was$14.4 million and$41.7 million , respectively, compared to$12.6 million and$37.4 million , respectively, for the same period in the prior year. The increase for the three and nine months endedDecember 31, 2022 was primarily due to the increase in interest income on investment securities of$1.1 million and$3.0 million , respectively, when compared to the three and nine months endedDecember 31, 2021 due primarily to the overall increase in the average balance of investment securities. In addition, the increase for the three and nine months endedDecember 31, 2022 reflects a 3.01% and 1.47% increase in the average yield on interest-bearing deposits in other banks, respectively, partially offset by a decline in average balances to$52.8 million and$128.4 million , respectively. Interest and fees earned on net loans increased by$485,000 and$48,000 for the three and nine months endedDecember 31, 2022 due to the increase in the average balance of net loans. The increase in the average balance of net loans was able to offset the decrease in the average yield on net loans which decreased to 4.50% and 4.42%, respectively, for the three and nine months endedDecember 31, 2022 compared to 4.67% and 4.81% for the same periods in the prior year due primarily to a decrease in deferred SBA PPP loan fees recognized related to the forgiveness of SBA PPP loans. The average balance of net loans increased$79.1 million and$83.0 million to$1.02 billion and$1.01 billion for the three and nine months endedDecember 31, 2022 , respectively, from$938.1 million and$922.1 million for the same periods in the prior year. The average yield on non-mortgage related loans decreased 67 basis points to 4.22% and 56 basis points to 4.05% for the three and nine months endedDecember 31, 2022 , respectively, predominantly from lower deferred SBA PPP loan fees recognized from SBA PPP loans that were forgiven. For the three months endedDecember 31, 2022 , interest and fee income related to SBA PPP loans was insignificant compared to$781,000 for the same period in the prior year. For the nine months endedDecember 31, 2022 and 2021, interest and fee income related to SBA PPP loans was$101,000 and$2.6 million , respectively. The average yield on mortgage related loans decreased one basis point and 35 basis points to 4.59% and 4.54% for the three and nine months endedDecember 31, 2022 , respectively, as the current interest rate environment resulted in lower yields on new loan originations compared to the yields on the legacy loan portfolio which included the impact of SBA PPP loans. Interest Expense. Interest expense totaled$743,000 and$1.9 million for the three and nine months endedDecember 31, 2022 , respectively, compared to$492,000 and$1.7 million for the three and nine months endedDecember 31, 2021 , respectively. Interest expense on deposits decreased$11,000 and$244,000 for the three and nine months endedDecember 31, 2022 , respectively, primarily due to the decrease in the average rate and average balance of certificates of deposits, partially offset by an increase in the average rate on money market accounts. The average rate paid on certificates of deposits decreased 13 basis points and 36 basis points and the average balance decreased$19.8 million and$15.7 million for the three and nine months endedDecember 31, 2022 , respectively, compared to the same periods in the prior year. The average rate paid on money market accounts increased nine basis points and seven basis points for the three and nine months endedDecember 31, 2022 , respectively, compared to the same periods in the prior year. The average balance of interest-bearing deposits decreased$47.4 million for the three months endedDecember 31, 2022 and increased$18.4 million for the nine months endedDecember 31, 2022 , compared to the same periods in the prior year. Interest expense on borrowings increased$262,000 and$460,000 for the three and nine months endedDecember 31, 2022 , compared to the same periods in the prior year due to the higher rates paid on the outstanding floating rate junior subordinated debentures. The average balance of junior subordinated debentures was$26.9 million for both the three and nine months endedDecember 31, 2022 compared to$26.8 million for the same periods in the prior year. Overall, total interest expense is higher due to the increase in the average rate on total interest-bearing liabilities for the three and nine months endedDecember 31, 2022 compared to the same periods in the prior year reflecting the rising interest rate environment. 46 Table of Contents The following tables set forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income earned on average interest-earning assets and interest expense paid on average interest-bearing liabilities, resultant yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities and net interest margin (dollars in thousands): Three
Months Ended
2022 2021
Interest Interest
Average and Average and
Balance Dividends Yield/Cost Balance Dividends Yield/Cost
Interest-earning assets: Mortgage loans$ 765,730 $ 8,855 4.59 %$ 708,329 $ 8,212 4.60 % Non-mortgage loans 251,484 2,676 4.22 229,784 2,834 4.89 Total net loans (1) 1,017,214 11,531 4.50 938,113 11,046 4.67
Investment securities (2) 491,207 2,484 2.01 368,628 1,390 1.50 Interest-bearing deposits in other banks 52,809 421 3.16 310,476 116 0.15 Other earning assets 2,913 28 3.81 2,558 20 3.10 Total interest-earning assets 1,564,143 14,464
3.67 1,619,775 12,572 3.08
Non-interest-earning assets: Office properties and equipment, net 19,897 18,305 Other non-interest-earning assets 58,932
74,727
Total assets $ 1,642,972 $ 1,712,807
Interest-bearing liabilities:
Savings accounts $ 305,577 54 0.07 $ 327,228 64 0.08
Interest checking accounts 290,349 23 0.03 282,916 22 0.03
Money market accounts 266,554 96 0.14 279,958 37 0.05
Certificates of deposit 93,111 116 0.49 112,885 177 0.62Total interest-bearing deposits 955,591 289 0.12 1,002,987 300 0.12 Junior subordinated debentures 26,884 396 5.84 26,800 150 2.22 Other interest-bearing liabilities 3,723 58 6.18 2,302 42 7.24 Total interest-bearing liabilities 986,198 743 0.30 1,032,089 492 0.19
Non-interest-bearing liabilities:
Non-interest-bearing deposits 489,458
500,749
Other liabilities 17,210 17,687
Total liabilities 1,492,866 1,550,525
Shareholders' equity 150,106 162,282
Total liabilities and shareholders'
equity $ 1,642,972 $ 1,712,807
Net interest income $ 13,721 $ 12,080
Interest rate spread 3.37 % 2.89 %
Net interest margin 3.48 % 2.96 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities 158.60 % 156.94 %
Tax equivalent adjustment (3) $ 21 $ 21 (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.
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Nine Months Ended December 31,
2022 2021
Interest Interest
Average and Average and
Balance Dividend Yield/Cost Balance Dividends Yield/Cost
Interest-earning assets: Mortgage loans$ 759,746 $ 26,008 4.54 %$ 683,719 $ 25,174 4.89 % Non-mortgage loans 245,358 7,488 4.05 238,352 8,274 4.61 Total net loans (1) 1,005,104 33,496 4.42 922,071 33,448 4.81
Investment securities (2) 468,815 6,662 1.89 324,755 3,663 1.50 Interest-bearing deposits in other banks 128,373 1,557 1.61 309,781 327 0.14 Other earning assets 2,874 72 3.33 2,558 52 2.70 Total interest-earning assets 1,605,166 41,787
3.46 1,559,165 37,490 3.19
Non-interest-earning assets: Office properties and equipment, net 18,974 19,005 Other non-interest-earning assets 64,807 77,385 Total assets$ 1,688,947
Interest-bearing liabilities: Regular savings accounts$ 318,995 174 0.07$ 314,338 184 0.08 Interest checking accounts 293,233 69 0.03 276,699 66 0.03 Money market accounts 278,800 255 0.12 265,850 108 0.05 Certificates of deposit 103,295 399 0.51 119,017 783 0.87
Total interest-bearing deposits 994,323 897
0.12 975,904 1,141 0.16
Junior subordinated debentures 26,864 897 4.43 26,779 451 2.24 Other interest-bearing liabilities 2,757 139 6.69 2,320 125 7.15
Total interest-bearing liabilities 1,023,944 1,933 0.25 1,005,003 1,717 0.23
Non-interest-bearing liabilities:
Non-interest-bearing deposits 494,081
473,082
Other liabilities 16,977 18,436
Total liabilities 1,535,002 1,496,521
Shareholders' equity 153,945 159,034
Total liabilities and shareholders'
equity $ 1,688,947 $ 1,655,555
Net interest income $ 39,854 $ 35,773
Interest rate spread 3.21 % 2.96 %
Net interest margin 3.30 % 3.05 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities 156.76 % 155.14 %
Tax equivalent adjustment (3) $ 62 $ 54 (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.
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The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the periods endedDecember 31, 2022 compared to the periods endedDecember 31, 2021 . 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, 2022 vs 2021 2022 vs 2021 Increase (Decrease) Due to Increase (Decrease) Due to Total Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) Interest Income: Mortgage loans $ 661$ (18) $ 643 $ 2,701 $ (1,867) $ 834 Non-mortgage loans 252 (410) (158) 239 (1,025) (786) Investment securities (1) 541 553 1,094 1,891 1,108 2,999 Interest-bearing deposits in other banks (174) 479 305 (297) 1,527 1,230 Other earning assets 3 5 8 7 13 20 Total interest income 1,283 609 1,892 4,541 (244) 4,297 Interest Expense: Savings accounts (3) (7) (10) 4 (14) (10) Interest checking accounts 1 - 1 3 - 3 Money market accounts (2) 61 59 5 142 147 Certificates of deposit (28) (33) (61) (93) (291) (384)
Junior subordinated debentures - 246
246 1 445 446 Other interest-bearing liabilities 23 (7) 16 22 (8) 14 Total interest expense (9) 260 251 (58) 274 216 Net interest income$ 1,292 $ 349 $ 1,641 $ 4,599 $ (518) $ 4,081
(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 endedMarch 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$255,000 and$371,000 atDecember 31, 2022 andMarch 31, 2022 , respectively. There was no provision for loan losses for the three and nine months endedDecember 31, 2022 , compared to a recapture of the provision for loan losses of$1.3 million and$4.0 million for the three and nine months endedDecember 31, 2021 . The recapture of the provision for loan losses for the three and nine months endedDecember 31, 2021 was based primarily upon the improving local and national economic conditions associated with the COVID-19 pandemic during those periods. Any future decline in national and local economic conditions could result in a material increase in the allowance for loan losses and may adversely affect the Company's financial condition and results of operations.
Net recoveries totaled
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compared to net charge-offs totaling $30,000 for the same period in the prior
year. Annualized net recoveries were insignificant for the three and nine months
ended December 31, 2022 , respectively. Annualized net charge-offs were
insignificant for the three and nine months ended December 31, 2021 ,
respectively. Nonperforming loans were $12.6 million at December 31, 2022 ,
compared to $22.1 million at March 31, 2022 . The ratio of allowance for loan
losses to nonperforming loans was 115.42% at December 31, 2022 compared to
65.72% at March 31, 2022 . See "Asset Quality" above for additional information
related to asset quality that management considers in determining the provision
for loan losses.
Impaired loans are subjected to an impairment analysis to determine an
appropriate reserve amount to be held against each loan. As of December 31,
2022 , the Company had identified $658,000 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, $436,000 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, 2022 , charge-offs on these impaired loans totaled $85,000 from
their original loan balances. The remaining $222,000 of impaired loans has
specific valuation allowances totaling $8,000 at December 31, 2022 .
Non-Interest Income. Non-interest income decreased $153,000 to $3.0 million for
the three months ended December 31, 2022 compared to the same period in the
prior year. The decrease is primarily due to a decrease in fees and service
charges related to a decrease in brokered loan fees of $248,000 . Non-interest
income decreased $555,000 to $9.2 million for the nine months ended December 31,
2022 compared to $9.8 million in the same period in the prior year. The decrease
is primarily due to a BOLI death benefit on a former employee of $500,000
recognized during the nine months ended December 31, 2021 that was not present
during the nine months ended December 31, 2022 . Further, fees and service
charges decreased to $4.9 million for the nine months ended December 31, 2022
compared to $5.4 million in the same period in the prior year primarily due to a
decrease in brokered loan fees of $602,000 . These decreases are partially offset
by an increase in asset management fees of $418,000 due to an increase in
custody fees of $587,000 and trust tax preparation fees of $51,000 during the
nine months ended December 31, 2022 compared to the same prior year period.
Non-Interest Expense. Non-interest expense increased $569,000 and $2.8 million
to $9.8 million and $29.4 million for the three and nine months ended December
31, 2022 , respectively, compared to $9.3 million and $26.6 million for the same
periods in the prior year. These increases for both periods was primarily due to
an increase in salaries and employee benefits related to wage pressures and the
competitive landscape for attracting and retaining employees in the Company's
primary markets. Additionally, occupancy and depreciation expense for the three
and nine months ended December 31, 2022 increased mainly due to an increase in
rent expense and depreciation expense. Furthermore, the increase for the nine
months ended December 31, 2022 was primarily due to the gain on sale of premise
and equipment, net of $993,000 during the nine months ended December 31, 2021 ,
respectively, that was not present during the same current year period.
Additionally, other non-interest expense increased $533,000 for the nine months
ended December 31, 2022 primarily due to the change in the provision for
off-balance sheet commitments which fluctuates monthly based upon unfunded
commitments.
Income Taxes. The provision for income taxes was $1.6 million and $4.5 million
for the three and nine months ended December 31, 2022 , respectively, compared to
$1.7 million and $5.2 million for the same periods in the prior year. The
decrease in the provision for income taxes was due to lower pre-tax income for
the three and nine months ended December 31, 2022 compared to the same periods
in the prior year. The decrease was mainly due to the recapture of the provision
for loan losses for the three and nine months ended December 31, 2021 that was
not present for the three and nine months ended December 31, 2022 . Income before
income taxes was $6.8 million and $19.6 million for the three and nine months
ended December 31, 2022 , compared to $7.2 million and $22.9 million for the same
periods in the prior year. The Company's effective tax rate for the three and
nine months ended December 31, 2022 was 23.1% and 23.0%, respectively, compared
to 23.2% and 22.6% for the three and nine months ended December 31, 2021 . The
Company's effective tax rate for the nine months ended December 31, 2021 was
lower than its historical effective tax rate due to a non-taxable BOLI death
benefit of $500,000 recognized during the nine months ended December 31, 2021 .
At December 31, 2022 , management deemed that a valuation allowance related to
the Company's deferred tax asset was not necessary. At December 31, 2022 , the
Company had a net deferred tax asset of $11.2 million compared to $7.5 million
at March 31, 2022 .
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