Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-22957
RIVERVIEW BANCORP, INC.
(Exact name of registrant as specified in its charter)
Washington
91-1838969
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer I.D. Number)
900 Washington St., Ste. 900, Vancouver, Washington
98660
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
(360) 693-6650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $0.01 per share
RVSB
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.01 par value per share, 21,496,335 shares outstanding, as of February 7, 2023.
Form 10-Q
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
Page
Part I.
Financial Information
4
Item 1:
Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022
Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2022 and 2021
5
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2022 and 2021
6
Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended December 31, 2022 and 2021
7
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2022 and 2021
8
Notes to Consolidated Financial Statements
9
Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
51
Item 4:
Controls and Procedures
Part II.
Other Information
52
Legal Proceedings
Item 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5:
Item 6:
Exhibits
53
SIGNATURES
54
Certifications
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Forward-Looking Statements
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 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: potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as supply chain disruptions and any governmental or societal responses to new COVID-19 variants; 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 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; the transition away from London Interbank Offered Rate ("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 Bank, by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks (“WDFI”) 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 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 banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes as a result of COVID-19; 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, 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; the quality and composition of our securities portfolio and the impact of and adverse changes in the securities markets, including market liquidity; 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; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services, 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 2023 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.
3
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2022 AND MARCH 31, 2022
December 31,
March 31,
(In thousands, except share and per share data) (Unaudited)
2022
ASSETS
Cash and cash equivalents (including interest-earning accounts of $8,897 and $224,589)
$
24,337
241,424
Certificates of deposit held for investment
249
Investment securities:
Available for sale, at estimated fair value
211,706
165,782
Held to maturity, at amortized cost (estimated fair value of $209,733 and $236,029)
247,147
253,100
Loans receivable (net of allowance for loan losses of $14,558 and $14,523)
1,001,955
975,885
Prepaid expenses and other assets
12,533
12,396
Accrued interest receivable
5,727
4,650
Federal Home Loan Bank (“FHLB”) stock, at cost
3,309
2,019
Premises and equipment, net
20,220
17,166
Financing lease right-of-use ("ROU") assets
1,298
1,355
Deferred income taxes, net
11,166
7,501
Mortgage servicing rights, net
13
34
Goodwill
27,076
Core deposit intangible ("CDI"), net
408
495
Bank owned life insurance ("BOLI")
31,590
30,964
TOTAL ASSETS
1,598,734
1,740,096
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
1,365,997
1,533,878
Accrued expenses and other liabilities
18,966
19,298
Advance payments by borrowers for taxes and insurance
343
555
FHLB advances
32,264
—
Junior subordinated debentures
26,896
26,833
Finance lease liability
2,243
2,283
Total liabilities
1,446,709
1,582,847
COMMITMENTS AND CONTINGENCIES (See Note 14)
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000 shares authorized; issued and outstanding: none
Common stock, $.01 par value; 50,000,000 shares authorized
December 31, 2022 – 21,496,335 shares issued and outstanding
214
221
March 31, 2022 – 22,155,636 shares issued and 22,127,396 outstanding
Additional paid-in capital
57,252
62,048
Retained earnings
116,117
104,931
Accumulated other comprehensive loss
(21,558)
(9,951)
Total shareholders' equity
152,025
157,249
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
Three Months Ended
Nine Months Ended
2021
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans receivable
11,531
11,046
33,496
33,448
Interest on investment securities – taxable
2,397
1,303
6,403
3,438
Interest on investment securities – nontaxable
66
197
171
Other interest and dividends
449
136
1,629
379
Total interest and dividend income
14,443
12,551
41,725
37,436
INTEREST EXPENSE:
Interest on deposits
289
300
897
1,141
Interest on borrowings
454
192
1,036
576
Total interest expense
743
492
1,933
1,717
Net interest income
13,700
12,059
39,792
35,719
Provision for (recapture of) loan losses
(1,275)
(3,975)
Net interest income after provision for (recapture of) loan losses
13,334
39,694
NON-INTEREST INCOME:
Fees and service charges
1,502
1,759
4,903
5,428
Asset management fees
1,137
3,459
3,041
BOLI
194
189
626
613
BOLI death benefit in excess of cash surrender value
500
Other, net
130
31
235
196
Total non-interest income, net
2,963
3,116
9,223
9,778
NON-INTEREST EXPENSE:
Salaries and employee benefits
5,982
5,880
17,819
17,269
Occupancy and depreciation
1,536
1,367
4,600
4,085
Data processing
705
698
2,184
2,187
Amortization of CDI
29
32
87
94
Advertising and marketing
202
155
694
487
FDIC insurance premium
116
113
351
321
State and local taxes
225
195
634
614
Telecommunications
48
153
152
Professional fees
285
924
945
Gain on sale of premises and equipment, net
(993)
Other
662
503
1,975
1,442
Total non-interest expense
9,848
9,279
29,421
26,603
INCOME BEFORE INCOME TAXES
6,815
7,171
19,594
22,869
PROVISION FOR INCOME TAXES
1,575
1,661
4,508
5,174
NET INCOME
5,240
5,510
15,086
17,695
Earnings per common share:
Basic
0.24
0.25
0.69
0.80
Diluted
Weighted average number of common shares outstanding:
21,504,903
22,166,130
21,717,959
22,229,832
21,513,617
22,177,120
21,726,552
22,242,035
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (Unaudited)
Net income
Other comprehensive income (loss):
Net unrealized holding gains (losses) from available for sale investment securities arising during the period, net of tax (expense) benefit of ($283), $324, $3,666 and $372, respectively
894
(1,027)
(11,607)
(1,177)
Total comprehensive income, net
6,134
4,483
3,479
16,518
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
Additional
Paid-In
Retained
Comprehensive
Common Stock
Capital
Earnings
Income (Loss)
Total
Shares
Amount
For the three months ended December 31, 2021
Balance October 1, 2021
22,164,707
62,122
97,727
(310)
159,760
Cash dividends on common stock ($0.055 per share)
(1,214)
Restricted stock grants
11,905
Stock-based compensation expense
112
Other comprehensive loss, net
Balance December 31, 2021
22,176,612
62,234
102,023
(1,337)
163,141
For the nine months ended December 31, 2021
Balance April 1, 2021
22,351,235
223
63,650
87,881
(160)
151,594
Cash dividends on common stock ($0.16 per share)
(3,552)
Exercise of stock options
6,000
17
(1)
16
Stock repurchased
(249,908)
(2)
(1,722)
(1,724)
69,285
For the three months ended December 31, 2022
Balance October 1, 2022
21,507,132
57,233
112,167
(22,452)
147,162
Cash dividends on common stock ($0.06 per share)
(1,290)
(10,797)
(81)
100
Other comprehensive income, net
Balance December 31, 2022
21,496,335
For the nine months ended December 31, 2022
Balance April 1, 2022
22,127,396
Cash dividends on common stock ($0.18 per share)
(3,900)
1,511
(701,291)
(7)
(4,858)
(4,865)
Restricted stock grants and forfeited, net
68,719
292
Purchase of subsidiary shares from noncontrolling interest
(234)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2022 AND 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
2,053
2,661
Purchased loans accretion, net
(43)
(31)
Decrease in deferred loan origination fees, net of amortization
(30)
(2,003)
Net loss (gain) on sales of premises and equipment
Income from BOLI
(626)
(613)
(500)
Changes in certain other assets and liabilities:
(258)
1,611
(1,077)
656
(405)
(4,803)
Net cash provided by operating activities
14,992
9,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments, net
22,333
51,970
Purchases of loans receivable
(48,330)
(68,954)
Principal repayments on investment securities available for sale
11,907
32,166
Purchases of investment securities available for sale
(73,303)
(86,621)
Proceeds from calls of investment securities available for sale
10
Principal repayments on investment securities held to maturity
14,033
4,372
Purchases of investment securities held to maturity
(8,496)
(92,082)
Purchases of premises and equipment and capitalized software
(4,449)
(3,020)
Purchase of FHLB stock, net
Proceeds from death benefit on BOLI
1,305
Proceeds from sales of REO and premises and equipment
63
3,427
Net cash used in investing activities
(87,522)
(157,437)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits
(167,881)
127,394
Dividends paid
(3,827)
(3,450)
Proceeds from borrowings
38,514
2,000
Repayment of borrowings
(6,250)
(2,000)
Net decrease in advance payments by borrowers for taxes and insurance
(212)
Principal payments on finance lease liability
(40)
(34)
Proceeds from exercise of stock options
Repurchase of common stock
Net cash (used in) provided by financing activities
(144,557)
121,892
NET DECREASE IN CASH AND CASH EQUIVALENTS
(217,087)
(25,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
265,408
CASH AND CASH EQUIVALENTS, END OF PERIOD
239,857
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
1,696
1,534
Income taxes
3,993
4,148
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other liabilities
1,290
1,219
Net unrealized holding losses from available for sale investment securities
(15,273)
(1,549)
Income tax effect related to other comprehensive loss
3,666
372
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”). However, all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim unaudited consolidated financial statements have been included. All such adjustments are of a normal recurring nature.
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Riverview Bancorp, Inc. Annual Report on Form 10-K for the year ended March 31, 2022 (“2022 Form 10-K”). The unaudited consolidated results of operations for the nine months ended December 31, 2022 are not necessarily indicative of the results which may be expected for the entire fiscal year ending March 31, 2023.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the current period presentation; such reclassifications had no effect on previously reported net income or total shareholders’ equity.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Riverview Bancorp, Inc., and its wholly-owned subsidiary, which changed its name on August 9, 2022 from Riverview Community Bank to Riverview Bank (the “Bank”), and the Bank’s wholly-owned subsidiaries, Riverview Services, Inc., and Riverview Trust Company (the “Trust Company”) (collectively referred to as the “Company”). All intercompany transactions and balances have been eliminated in consolidation.
For the period from April 1, 2017 through December 2019, the Trust Company was a wholly-owned subsidiary of the Bank. In December 2019, the Trust Company issued 1,500 shares of Trust Company stock in conjunction with the exercise of 1,500 Trust Company stock options by the Trust Company’s President and Chief Executive Officer. In both October 2020 and May 2021, the Trust Company issued an additional 500 shares of Trust Company stock upon the exercise of options for 500 shares of Trust Company common stock by the Trust Company's President and Chief Executive Officer. In August 2022, the Trust Company repurchased all the outstanding shares held by its noncontrolling interest owner. Upon repurchase, these shares were retired. This transaction resulted in the Bank’s ownership increasing from 97.3% to 100%. The book value of the noncontrolling interest was $234,000 prior to the share repurchase. These amounts are not presented separately in the accompanying consolidated financial statements due to their insignificance.
3. STOCK PLANS AND STOCK-BASED COMPENSATION
Stock Option Plans - In July 2003, shareholders of the Company approved the adoption of the 2003 Stock Option Plan (“2003 Plan”). The 2003 Plan was effective in July 2003 and expired in July 2013. Accordingly, no further option awards may be granted under the 2003 Plan; however, any awards granted prior to their respective expiration dates remain outstanding subject to their terms. Each option granted under the 2003 Plan has an exercise price equal to the fair value of the Company’s common stock on the date of the grant, a maximum term of ten years and a vesting period from zero to five years.
In July 2017, the shareholders of the Company approved the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (“2017 Plan”). The 2017 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock and restricted stock units. The Company reserved 1,800,000 shares of its common stock for issuance under the 2017 Plan. At December 31, 2022, there were 1,517,449 shares available for grant under the 2017 Plan. The 2003 Plan and the 2017 Plan are collectively referred to as “the Stock Option Plans”.
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes stock option valuation model. The fair value of all awards is amortized on a straight-line basis over the requisite service periods, which are generally the vesting periods. The expected life of options granted represents the period of time that they are expected to be outstanding. The expected life is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules. Expected volatility is estimated at the date of grant based on the historical volatility of the Company's common stock. Expected dividends are based on dividend trends and the market value of the Company's common stock at the time of grant. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. There were no stock options granted under the 2017 Stock Option Plan during the nine months ended December 31, 2022 and 2021.
As of December 31, 2022, all outstanding stock options were fully vested and there was no remaining unrecognized compensation expense related to stock options granted under the Stock Option Plans. There was no stock-based compensation expense related to stock options for the nine months ended December 31, 2022 and 2021 under the Stock Option Plans.
The following table presents the activity related to stock options under the Stock Option Plans for the periods shown:
Nine Months Ended December 31,
Weighted
Average
Number of
Exercise
Price
Balance, beginning of period
17,332
2.78
23,332
Options exercised
(1,511)
(6,000)
Options forfeited
Balance, end of period
14,310
The following table presents information on stock options outstanding, less estimated forfeitures, as of December 31, 2022 and 2021:
Stock options fully vested and expected to vest:
Number
Weighted average exercise price
Aggregate intrinsic value (1)
70,000
85,000
Weighted average contractual term of options (years)
0.54
1.54
Stock options fully vested and currently exercisable:
The total intrinsic value of stock options exercised was $7,000 and $25,000 for the nine months ended December 31, 2022 and 2021, respectively, under the Stock Option Plans.
The Company may grant restricted stock pursuant to the 2017 Plan of which vesting can either be time based or performance based. Performance based awards are subject to attaining certain performance metrics and all, or a portion of, the performance based awards can subsequently be cancelled for not attaining the predetermined performance metrics.
The fair value of restricted stock awards is equal to the fair value of the Company’s stock on the date of grant. The related stock-based compensation expense is recorded over the requisite service period. Stock-based compensation related to restricted stock grants was $100,000 and $112,000 for the three months ended December 31, 2022 and 2021, respectively. Stock-based compensation related to restricted stock grants was $292,000 and $289,000 for the nine months ended December 31, 2022 and 2021, respectively. The unrecognized stock-based compensation related to restricted stock was $539,000 and $549,000 at December 31, 2022 and 2021, respectively. The weighted average vesting period for the restricted stock was 1.33 years and 1.78 years at December 31, 2022 and 2021, respectively.
A summary of changes in nonvested restricted stock awards for the periods shown:
Time Based
Performance Based
of
Unvested
Grant Date
Nine Months Ended December 31, 2022
Fair Value
26,855
6.02
121,492
5.70
148,347
5.76
Granted
15,571
6.30
56,125
71,696
Forfeited
(2,977)
7.56
Vested
(12,449)
6.07
(41,995)
5.26
(54,444)
5.45
29,977
6.14
132,645
6.05
162,622
Nine Months Ended December 31, 2021
45,616
6.57
96,772
5.27
142,388
5.69
15,274
7.08
54,011
7.06
(29,618)
7.43
(12,732)
8.35
(42,350)
7.71
31,272
6.00
138,051
169,323
5.75
Trust Company Stock Options – At both December 31, 2022 and 2021, there were no Trust Company stock options outstanding. There were no Trust Company stock options exercised during the nine months ended December 31, 2022. During the nine months ended December 31, 2021, 500 Trust Company stock options were exercised. There were no Trust Company stock options granted during the nine months ended December 31, 2022 and 2021.
4. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income or loss applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Nonvested shares of restricted stock are included in the computation of basic EPS because the holder has voting rights and shares in non-forfeitable dividends during the vesting period. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company’s common stock during the period. Common stock equivalents arise from the assumed exercise of outstanding stock options. For the nine months ended December 31, 2022 and 2021, there were no stock options excluded in computing diluted EPS.
In November 2022, the Company’s Board of Directors adopted a stock repurchase program (the “November 2022 repurchase program”). Under the November 2022 repurchase program, the Company was authorized to repurchase up to $2.5 million of the Company’s outstanding shares of common stock, in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on November 28, 2022 and continuing until the earlier of the completion of the authorized level of repurchases or May 28, 2023, depending upon market conditions. As of December 31, 2022, the Company had repurchased 10,797 shares at a total cost of $81,000 under the November 2022 repurchase program at an average price of $7.51 per share.
11
In March 2022, the Company’s Board of Directors adopted a stock repurchase program (the “March 2022 repurchase program”). Under the March 2022 repurchase program, the Company was authorized to repurchase up to $5.0 million of the Company’s outstanding shares of common stock, in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on March 21, 2022 and continuing until the earlier of the completion of the authorized level of repurchases or September 9, 2022, depending upon market conditions. As of September 30, 2022, the Company had completed the March 2022 repurchase program as 718,734 shares were repurchased at an average price of $6.96 per share and at a total cost of $5.0 million. At September 30, 2022, all 718,734 shares repurchased under the March 2022 repurchase program have been retired.
In June 2021, the Company’s Board of Directors adopted a stock repurchase program (the “June 2021 repurchase program”) authorizing the repurchase of up to $5.0 million of the Company’s outstanding shares of common stock, during the period from June 21, 2021 until the earlier of the completion of the repurchase of $5.0 million of the Company’s common stock or the next nine months. As of December 31, 2021, the Company had repurchased 249,908 shares totaling $1.7 million at an average price of $6.89 per share under the June 2021 repurchase program.
The following table presents a reconciliation of the components used to compute basic and diluted EPS for the periods indicated:
Three Months Ended December 31,
Basic EPS computation:
Numerator-net income
5,240,000
5,510,000
15,086,000
17,695,000
Denominator-weighted average common shares outstanding
Basic EPS
Diluted EPS computation:
Effect of dilutive stock options
8,714
10,990
8,593
12,203
Weighted average common shares and common stock equivalents
Diluted EPS
5. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities consisted of the following at the dates indicated (in thousands):
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
December 31, 2022
Available for sale:
Municipal securities
47,904
15
(9,396)
38,523
Agency securities
93,745
(7,084)
86,661
Real estate mortgage investment conduits (1)
34,952
(6,041)
28,911
Residential mortgage-backed securities (1)
17,272
(1,216)
16,056
Other mortgage-backed securities (2)
46,198
(4,656)
41,555
Total available for sale
240,071
28
(28,393)
Held to maturity:
10,350
(3,244)
7,106
53,896
(5,887)
48,009
36,008
(5,346)
30,662
126,271
(19,254)
107,017
Other mortgage-backed securities (3)
20,622
(3,683)
16,939
Total held to maturity
(37,414)
209,733
12
March 31, 2022
44,104
14
(4,514)
39,604
43,848
1
(3,144)
40,705
35,563
(2,847)
32,717
17,368
(436)
16,945
37,991
(2,208)
35,811
178,874
57
(13,149)
10,368
(1,422)
8,946
45,277
(2,450)
42,827
39,394
(2,457)
36,937
137,343
(8,883)
128,460
20,718
(1,859)
18,859
(17,071)
236,029
The contractual maturities of investment securities as of December 31, 2022 are as follows (in thousands):
Available for Sale
Held to Maturity
Due in one year or less
5,618
5,576
Due after one year through five years
84,927
80,879
42,168
38,799
Due after five years through ten years
57,980
49,934
29,798
24,514
Due after ten years
91,546
75,317
175,176
146,415
Expected maturities of investment securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
The fair value of temporarily impaired investment securities, the amount of unrealized losses and the length of time these unrealized losses existed are as follows at the dates indicated (in thousands):
Less than 12 months
12 months or longer
14,341
(2,024)
22,996
(7,372)
37,337
50,832
(1,047)
35,829
(6,037)
5,903
(462)
23,005
(5,579)
28,908
13,985
(968)
2,071
(248)
25,409
(1,540)
14,384
(3,116)
39,793
110,470
98,285
(22,352)
208,755
1,649
(777)
5,457
(2,467)
20,800
(1,473)
27,209
(4,414)
12,891
(1,517)
17,771
(3,829)
28,800
(3,641)
78,217
(15,613)
(760)
11,482
(2,923)
69,597
(8,168)
140,136
(29,246)
32,767
(4,293)
3,282
(221)
36,049
22,288
(1,565)
16,414
(1,579)
38,702
17,334
(1,310)
15,275
(1,537)
32,609
15,702
32,408
(2,194)
769
(14)
33,177
120,499
(9,798)
35,740
(3,351)
156,239
5,911
(816)
3,036
(606)
8,947
35,930
(1,708)
6,897
(742)
26,233
(1,715)
7,735
33,968
111,096
(7,160)
17,363
(1,723)
128,459
13,472
(1,153)
5,386
(706)
18,858
192,642
(12,552)
40,417
(4,519)
233,059
The unrealized losses on the Company’s investment securities were primarily attributable to increases in market interest rates subsequent to their purchase by the Company. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that these securities are other than temporarily impaired because of their credit quality or related to any issuer or industry specific event. The Company has the ability and intent to hold the investments until the fair value recovers. Based on management’s evaluation and intent, the unrealized losses related to the investment securities in the above tables are considered temporary.
The Company had no sales and realized no gains or losses on sales of investment securities for the three and nine months ended December 31, 2022 and 2021. Investment securities available for sale with an amortized cost of $3.4 million and $1.3 million and an estimated fair value of $3.1 million and $1.2 million at December 31, 2022 and March 31, 2022, respectively, were pledged as collateral for government public funds held by the Bank. Investment securities held to maturity with an amortized cost of $12.6 million and $13.7 million and a fair value of $10.5 million and $12.6 million at December 31, 2022 and March 31, 2022, respectively, were pledged as collateral for government public funds held by the Bank.
6. LOANS RECEIVABLE
Loans receivable are reported net of deferred loan fees and discounts, and inclusive of premiums. At December 31, 2022, deferred loan fees totaled $4.4 million compared to $4.5 million at March 31, 2022. Loans receivable discounts and premiums totaled $1.5 million and $2.3 million, respectively, as of December 31, 2022, compared to $371,000 and $2.4 million, respectively, as of March 31, 2022. Loans receivable, excluding loans held for sale, consisted of the following at the dates indicated (in thousands):
Commercial and construction
Commercial business
238,740
228,091
Commercial real estate
562,180
582,837
Land
6,481
11,556
Multi-family
55,157
60,211
Real estate construction
51,153
24,160
Total commercial and construction
913,711
906,855
Consumer
Real estate one-to-four family
101,122
82,006
Other installment
1,680
1,547
Total consumer
102,802
83,553
Total loans
1,016,513
990,408
Less: Allowance for loan losses
14,558
14,523
Loans receivable, net
The Company considers its loan portfolio to have very little exposure to sub-prime mortgage loans since the Company has not historically engaged in this type of lending. At December 31, 2022, loans carried at $602.2 million were pledged as collateral to the Federal Home Loan Bank of Des Moines (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) pursuant to borrowing agreements.
Substantially all of the Bank’s business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulation to 15% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive income (loss). As of December 31, 2022 and March 31, 2022, the Bank had no loans to any one borrower in excess of the regulatory limit.
7. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level sufficient to provide for estimated probable loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s ongoing quarterly assessment of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, current economic conditions and a detailed analysis of individual loans for which full collectability may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are considered impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value (less estimated selling costs, if applicable) of the impaired loan is lower than the carrying value of that loan.
The general component covers non-impaired loans based on the Company’s risk rating system and historical loss experience adjusted for qualitative factors. The Company calculates its historical loss rates using the average of the last four quarterly 24-month periods. The Company calculates and applies its historical loss rates by individual loan types in its loan portfolio. These historical loss rates are adjusted for qualitative and environmental factors.
An unallocated component is maintained to cover uncertainties that the Company believes have resulted in incurred losses that have not yet been allocated to specific elements of the general and specific components of the allowance for loan losses. Such factors include uncertainties in economic conditions, uncertainties in identifying triggering events that directly correlate to subsequent loss rates, changes in appraised value of underlying collateral, risk factors that have not yet manifested themselves in loss allocation factors and historical loss experience data that may not precisely correspond to the current loan portfolio or economic conditions. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio. The appropriate allowance level is estimated based upon factors and trends identified by the Company as of the date of the filing of the consolidated financial statements.
When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; and/or the estimated fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement.
Management’s evaluation of the allowance for loan losses is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company’s historical loss experience with additional consideration and adjustments made for changes in economic conditions, changes in the amount and composition of the loan portfolio, delinquency rates, changes in collateral values, seasoning of the loan portfolio, duration of the current business cycle, a detailed analysis of impaired loans and other factors as deemed appropriate. These factors are evaluated on a quarterly basis. Loss rates used by the Company are affected as changes in these factors increase or decrease from quarter to quarter. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
The following tables present a reconciliation of the allowance for loan losses for the periods indicated (in thousands):
Three months ended
Commercial
Multi-
Real Estate
Business
Family
Construction
Unallocated
Beginning balance
2,789
8,230
124
856
638
1,225
690
14,552
101
(254)
(26)
(41)
206
(42)
56
Charge-offs
Recoveries
Ending balance
2,890
7,976
98
815
844
1,189
746
Nine months ended
2,422
9,037
168
845
393
943
715
468
(1,061)
(70)
451
211
(16)
December 31, 2021
2,261
11,795
232
530
231
841
610
16,500
381
(2,178)
(66)
207
71
148
162
(62)
(63)
2,580
9,617
166
737
302
999
772
15,173
2,416
14,089
233
294
852
19,178
226
(4,472)
(67)
99
115
(76)
46
The following tables present an analysis of loans receivable and the allowance for loan losses, based on impairment methodology, at the dates indicated (in thousands):
Allowance for Loan Losses
Recorded Investment in Loans
Individually
Collectively
Evaluated
for
Impairment
84
238,656
106
562,074
1,181
102,334
14,550
658
1,015,855
227,991
122
582,715
935
83,058
14,515
717
989,691
Non-accrual loans: Loans are reviewed regularly and it is the Company’s general policy that a loan is past due when it is 30 to 89 days delinquent. In general, when a loan is 90 days delinquent or when collection of principal or interest appears doubtful, it is placed on non-accrual status, at which time the accrual of interest ceases and a reserve for unrecoverable accrued interest is established and charged against operations. As a general practice, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cost recovery method. Also, as a general practice, a loan is not removed from non-accrual status until all delinquent principal, interest and late fees have been brought current and the borrower has demonstrated a history of performance based upon the contractual terms of the note. A history of repayment performance generally would be a minimum of nine months. Interest income foregone on non-accrual loans was $10,000 and $21,000 for the nine months ended December 31, 2022 and 2021, respectively.
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The following tables present an analysis of loans by aging category at the dates indicated (in thousands):
90 Days
Past
and
Due and
30-89 Days
Greater
Non-
Loans
Past Due
Non-accrual
accrual
Current
Receivable
872
12,359
102
13,333
225,407
2,738
2,784
100,018
3,610
254
16,223
1,000,290
7,753
21,808
118
29,679
198,412
291
23,869
60
83,493
8,053
30,152
960,256
Included in the 30-89 days past due and 90 days and greater past due loans at December 31, 2022 are $13.2 million of fully guaranteed SBA or United States Department of Agriculture (“USDA”) loans. 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. For additional information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Financial Condition at December 31, 2022 and March 31, 2022 – Asset Quality, discussed below. As a result, these loans were omitted from the required calculation of the allowance for loan losses. Interest income foregone on non-accrual loans was $10,000 and $24,000 for the nine months ended December 31, 2022 and the year ended March 31, 2022, respectively.
Credit quality indicators: The Company monitors credit risk in its loan portfolio using a risk rating system (on a scale of one to nine) for all commercial (non-consumer) loans. The risk rating system is a measure of the credit risk of the borrower based on their historical, current and anticipated future financial characteristics. The Company assigns a risk rating to each commercial loan at origination and subsequently updates these ratings, as necessary, so that the risk rating continues to reflect the appropriate risk characteristics of the loan. Application of appropriate risk ratings is key to management of loan portfolio risk. In determining the appropriate risk rating, the Company considers the following factors: delinquency, payment history, quality of management, liquidity, leverage, earnings trends, alternative funding sources, geographic risk, industry risk, cash flow adequacy, account practices, asset protection and extraordinary risks. Consumer loans, including custom construction loans, are not assigned a risk rating but rather are grouped into homogeneous pools with similar risk characteristics. When a consumer loan is delinquent 90 days, it is placed on non-accrual status and assigned a substandard risk rating. Loss factors are assigned to each risk rating and homogeneous pool based on historical loss experience for similar loans. This historical loss experience is adjusted for qualitative factors that are likely to cause the estimated credit losses to differ from the Company’s historical loss experience. The Company uses these loss factors to estimate the general component of its allowance for loan losses.
Pass – These loans have a risk rating between 1 and 4 and are to borrowers that meet normal credit standards. Any deficiencies in satisfactory asset quality, liquidity, debt servicing capacity and coverage are offset by strengths in other areas. The borrower currently has the capacity to perform according to the loan terms. Any concerns about risk factors such as stability of margins, stability of cash flows, liquidity, dependence on a single product/supplier/customer, depth of management, etc. are offset by strengths in other areas. Typically, these loans are secured by the operating assets of the borrower and/or real estate. The borrower’s management is considered competent. The borrower has the ability to repay the debt in the normal course of business.
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Watch – These loans have a risk rating of 5 and are included in the “pass” rating. However, there would typically be some reason for additional management oversight, such as the borrower’s recent financial setbacks and/or deteriorating financial position, industry concerns and failure to perform on other borrowing obligations. Loans with this rating are monitored closely in an effort to correct deficiencies.
Special mention – These loans have a risk rating of 6 and are rated in accordance with regulatory guidelines. These loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the credit position at some future date. These loans pose elevated risk but their weakness does not yet justify a “substandard” classification.
Substandard – These loans have a risk rating of 7 and are rated in accordance with regulatory guidelines, for which the accrual of interest may or may not be discontinued. By definition under regulatory guidelines, a “substandard” loan has defined weaknesses which make payment default or principal exposure likely but not yet certain. Repayment of such loans is likely to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business.
Doubtful – These loans have a risk rating of 8 and are rated in accordance with regulatory guidelines. Such loans are placed on non-accrual status and repayment may be dependent upon collateral which has value that is difficult to determine or upon some near-term event which lacks certainty.
Loss – These loans have a risk rating of 9 and are rated in accordance with regulatory guidelines. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.
The following tables present an analysis of loans by credit quality indicators at the dates indicated (in thousands):
Special
Pass
Mention
Substandard
Doubtful
Loss
236,420
2,196
554,942
1,164
6,074
55,012
145
102,756
1,006,764
3,505
6,244
227,435
511
569,417
7,211
6,209
60,138
73
83,502
976,208
7,795
6,405
Impaired loans and troubled debt restructurings (“TDRs”): A loan is considered impaired when it is probable that the Company will be unable to collect all amounts when due (principal and interest) according to the contractual terms of the loan agreement. Typically, factors used in determining if a loan is impaired include, but are not limited to, whether the loan is 90 days or more delinquent, internally designated as substandard or worse, on non-accrual status or represents a TDR. The majority of the Company’s impaired loans are considered collateral dependent. When a loan is considered collateral dependent, impairment is measured using the estimated value of the underlying collateral, less any prior liens, and when applicable, less estimated selling costs. For impaired loans that are not collateral dependent, impairment is
20
measured using the present value of expected future cash flows, discounted at the loan’s original effective interest rate. When the estimated net realizable value of the impaired loan is less than the recorded investment in the loan (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized by adjusting an allocation of the allowance for loan losses. Subsequent to the initial allocation of allowance to the individual loan, the Company may conclude that it is appropriate to record a charge-off of the impaired portion of the loan. When a charge-off is recorded, the loan balance is reduced and the specific allowance is eliminated. Generally, when a collateral dependent loan is initially measured for impairment and has not had an appraisal of the collateral in the last nine months, the Company obtains an updated market valuation. Subsequently, the Company generally obtains an updated market valuation of the collateral on an annual basis. The collateral valuation may occur more frequently if the Company determines that there is an indication that the market value may have declined.
The following tables present the total and average recorded investment in impaired loans at the dates and for the periods indicated (in thousands):
Recorded
Investment
with
Related
No Specific
Specific
Unpaid
Valuation
Principal
Allowance
Balance
131
167
246
222
436
874
143
178
259
236
603
481
Recognized
on
Impaired
107
109
471
667
748
21
92
114
795
519
687
1,426
The cash basis interest income on impaired loans was not materially different than the interest recognized on impaired loans as shown in the above tables.
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, impairment is measured as described for impaired loans above.
The following table presents TDRs by interest accrual status at the dates indicated (in thousands):
Accrual
Nonaccrual
190
At December 31, 2022, the Company had no commitments to lend additional funds on TDR loans. At December 31, 2022, all of the Company’s TDRs were paying as agreed. There were no new TDRs during both the nine months ended December 31, 2022 and 2021.
In accordance with the Company’s policy guidelines, unsecured loans are generally charged-off when no payments have been received for three consecutive months unless an alternative action plan is in effect. Consumer installment loans delinquent nine months or more that have not received at least 75% of their required monthly payment in the last 90 days are charged-off. In addition, loans discharged in bankruptcy proceedings are charged-off. Loans under bankruptcy protection with no payments received for four consecutive months are charged-off. The outstanding balance of a secured loan that is in excess of the net realizable value is generally charged-off if no payments are received for four to five consecutive months. However, charge-offs are postponed if alternative proposals to restructure, obtain additional guarantors, obtain additional assets as collateral or a potential sale of the underlying collateral would result in full repayment of the outstanding loan balance. Once any other potential sources of repayment are exhausted, the impaired portion of the loan is charged-off. Regardless of whether a loan is unsecured or collateralized, once an amount is determined to be a confirmed loan loss it is promptly charged off.
8. GOODWILL
Goodwill and certain other intangibles generally arise from business combinations accounted for under the purchase method of accounting. Goodwill and other intangibles deemed to have indefinite lives generated from business combinations are not subject to amortization and are instead tested for impairment not less than annually. 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.
22
The Company performed an impairment assessment as of October 31, 2022 and determined that no impairment of goodwill exists. The goodwill impairment test involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to progress to the second step. In the second step, the Company calculates the implied fair value of goodwill and compares the implied fair value of goodwill to the carrying amount of goodwill in the Company’s consolidated balance sheet. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. 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, a step two analysis was not required; however, no assurance can be given that the Company’s goodwill will not be written down in future periods. The Company completed a qualitative assessment of goodwill as of December 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. If adverse economic conditions or decreases in the Company’s common stock price and market capitalization as a result of the ongoing 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.
9. FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are summarized at the dates indicated (dollars in thousands):
Weighted average interest rate on FHLB advances (1)
4.64
%
0.31
(1) Computed based on the borrowing activity for the nine months ended December 31, 2022 and the fiscal year ended March 31, 2022, respectively.
The Bank has a credit line with the FHLB equal to 45% of total assets, limited by available collateral. At December 31, 2022, based on collateral values, the Bank had additional borrowing capacity of $299.6 million from the FHLB. FHLB advances are collateralized with loans secured by real estate. At December 31, 2022, loans carried at $516.5 million were pledged as collateral to the FHLB.
10. JUNIOR SUBORDINATED DEBENTURES
The Company has wholly-owned subsidiary grantor trusts that were established for the purpose of issuing trust preferred securities and common securities. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement. The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon maturity of the Debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole or in part on or after specific dates, at a redemption price specified in the indentures governing the Debentures plus any accrued but unpaid interest to the redemption date. The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company’s common stock.
The Debentures issued by the Company to the grantor trusts, totaling $26.9 million and $26.8 million at December 31, 2022 and March 31, 2022, respectively, are reported as “junior subordinated debentures” in the consolidated balance sheets. The common securities issued by the grantor trusts were purchased by the Company, and the Company’s investment in the common securities of $836,000 at both December 31, 2022 and March 31, 2022, is included in prepaid expenses and other assets in the consolidated balance sheets. The Company records interest expense on the Debentures in the consolidated statements of income.
23
The following table is a summary of the terms and the amounts outstanding of the Debentures at December 31, 2022 (dollars in thousands):
Issuance Trust
Issuance Date
Amount Outstanding
Rate Type
Initial Rate
Current Rate
Maturity Date
Riverview Bancorp Statutory Trust I
12/2005
7,217
Variable
5.88
6.13
3/2036
Riverview Bancorp Statutory Trust II
06/2007
15,464
7.03
6.12
9/2037
Merchants Bancorp Statutory Trust I (4)
06/2003
5,155
(3)
4.16
7.82
6/2033
27,836
Fair value adjustment (4)
(940)
Total Debentures
11. FAIR VALUE MEASUREMENTS
Fair value is defined under GAAP as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of three levels. These levels are:
Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means.
Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
Financial instruments are presented in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the consolidated financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the consolidated financial statements at some time during the reporting period.
24
The following tables present assets that are measured at estimated fair value on a recurring basis at the dates indicated (in thousands):
Total Estimated
Estimated Fair Value Measurements Using
Level 1
Level 2
Level 3
Investment securities available for sale:
Real estate mortgage investment conduits
Residential mortgage-backed securities
Other mortgage-backed securities
Total assets measured at fair value on a recurring basis
There were no transfers of assets into or out of Levels 1, 2 or 3 for both the nine months ended December 31, 2022 and the year ended March 31, 2022.
The following methods were used to estimate the fair value of financial instruments above:
Investment securities are included within Level 1 of the hierarchy when quoted prices in an active market for identical assets are available. The Company uses a third-party pricing service to assist the Company in determining the fair value of its Level 2 securities, which incorporates pricing models and/or quoted prices of investment securities with similar characteristics. Investment securities are included within Level 3 of the hierarchy when there are significant unobservable inputs.
For Level 2 securities, the independent pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data from market research publications. The Company’s third-party pricing service has established processes for the Company to submit inquiries regarding the estimated fair value. In such cases, the Company’s third-party pricing service will review the inputs to the evaluation in light of any new market data presented by the Company. The Company’s third-party pricing service may then affirm the original estimated fair value or may update the evaluation on a go-forward basis.
Management reviews the pricing information received from the third-party pricing service through a combination of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analysis of the prices against statistics and trends. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. As necessary, management compares prices received from the pricing service to discounted cash flow models or by performing independent valuations of inputs and assumptions similar to those used by the pricing service in order to help ensure prices represent a reasonable estimate of fair value.
25
The following tables present assets that are measured at estimated fair value on a nonrecurring basis at the dates indicated (in thousands):
Estimated Fair Value
Measurements Using
Impaired loans
228
The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a nonrecurring basis at December 31, 2022 and March 31, 2022:
Significant Unobservable
Technique
Inputs
Range
Appraised value
Adjustment for market conditions
N/A (1)
Discounted cash flows
Discount rate
5.375% - 8.000%
For information regarding the Company’s method for estimating the fair value of impaired loans, see Note 7 – Allowance for Loan Losses.
In determining the estimated net realizable value of the underlying collateral, the Company primarily uses third-party appraisals which may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available and include consideration of variations in location, size, and income production capacity of the property. Additionally, the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions.
Impaired loans are reviewed and evaluated quarterly for additional impairment and adjusted accordingly based on the same factors identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, the Company considers the fair value of impaired loans to be highly sensitive to changes in market conditions.
The following disclosure of the estimated fair value of financial instruments is made in accordance with GAAP. The Company, using available market information and appropriate valuation methodologies, has determined the estimated fair value amounts. However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in the future. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
26
The carrying amount and estimated fair value of financial instruments is as follows at the dates indicated (in thousands):
Carrying
Assets:
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity
988,629
FHLB stock
Liabilities:
Certificates of deposit
86,134
82,921
18,170
253
962,893
111,372
109,860
16,046
Fair value estimates were based on existing financial instruments without attempting to estimate the value of anticipated future business. The fair value was not estimated for assets and liabilities that were not considered financial instruments.
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”) as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11. ASU 2016-13 replaces the existing incurred losses methodology for estimating allowances with a current expected credit losses methodology (CECL) with respect to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held to maturity investment securities and off-balance sheet commitments. In addition, ASU 2016-13 requires credit losses relating to available for sale debt securities to be recorded through an allowance for credit losses rather than as a reduction of carrying amount. ASU 2016-13 also changes the accounting for purchased credit impaired debt securities and loans. ASU 2016-13 retains many of the current disclosure requirements in GAAP and expands certain disclosure requirements. As a “smaller reporting company” filer with the U.S. Securities and Exchange Commission, ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. In addition, the current accounting policy and procedures for other-than-temporary impairment of investment securities available for sale will be replaced with an allowance approach. The Company is reviewing the requirements of ASU 2016-13 and has begun developing and implementing processes and procedures to ensure it is fully compliant with the amendments at the adoption date. At this time, management anticipates the allowance for loan losses will change as a result of the implementation of ASU 2016-13; however, until management's evaluation is complete, the magnitude of the change will not be known.
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In March 2022, the FASB issued ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures" ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance for TDRs in Accounting Standards Codification (“ASC”) 310-40, "Receivables - Troubled Debt Restructurings by Creditors" for entities that have adopted the CECL model introduced by ASU 2016-13. ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20, "Financial Instruments—Credit Losses—Measured at Amortized Cost". This ASU is effective upon adoption of ASU 2016-13.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2022. Early application of ASU 2017-04 is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on the Company's future consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. ASU 2020-04 permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. The Company's current interest rates on its junior subordinated debentures are based upon the three-month LIBOR plus a spread.
In January 2021, ASU 2021-01 updated amendments in ASU 2020-04 to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification. The amendments in ASU 2021-01 have differing effective dates, beginning with interim periods including and subsequent to March 12, 2020 through December 31, 2022.
In December 2022, ASU 2022-06 extended the period of time financial statement preparers can utilize the reference rate reform relief guidance. In March 2021, the Financial Conduct Authority (FCA) announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of ASU 2021-01. The amendments in ASU 2022-06 defer the sunset date of ASU 2021-01 from December 31, 2022 to December 31, 2024. The Company has not adopted ASU 2020-04 as of December 31, 2022. The adoption of ASU 2020-04, as amended, is not expected to have a material impact on the Company's future consolidated financial statements.
13. REVENUE FROM CONTRACTS WITH CUSTOMERS
In accordance with ASC Topic 606 “Revenues from Contracts with Customers” (“ASC 606”), revenues are recognized when goods or services are transferred to the customer in exchange for the consideration the Company expects to be entitled to receive. The largest portion of the Company’s revenue is from interest income, which is not within the scope of ASC 606. All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income with the exception of gains on sales of REO and premises and equipment, which are included in non-interest expense.
If a contract is determined to be within the scope of ASC 606, the Company recognizes revenue as it satisfies a performance obligation. Payments from customers are generally collected at the time services are rendered, monthly, or quarterly. For contracts with customers within the scope of ASC 606, revenue is either earned at a point in time or revenue is earned over time. Examples of revenue earned at a point in time are automated teller machine (“ATM”) transaction fees, wire transfer fees, overdraft fees and interchange fees. Revenue earned at a point in time is primarily based on the number and type of transactions that are generally derived from transactional information accumulated by the Company’s systems and is recognized immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is generally the principal in these contracts, with the exception of interchange fees, in which case the Company is acting as the agent and records revenue net of expenses paid to the principal. Examples of revenue earned over time, which generally occur on a monthly basis, are deposit account maintenance fees, investment advisory fees, merchant revenue, trust and investment management fees and safe deposit box fees. Revenue is generally derived from transactional information accumulated by the Company’s systems or those of third-parties and is recognized as the related transactions occur or services are rendered to the customer. For the nine months ended December 31, 2022 and 2021, substantially all of the Company’s revenues within the scope of ASC 606 are for performance obligations satisfied at a point in time.
Disaggregation of Revenue
The following table includes the Company’s non-interest income, net disaggregated by type of service for the periods shown (in thousands):
Debit card and ATM fees
803
843
2,598
2,638
Deposit related fees
427
405
1,304
1,221
Loan related fees
349
422
1,033
BOLI (1)
FHLMC loan servicing fees (1)
55
BOLI death benefit in excess of cash surrender value (1)
290
173
759
669
Revenues recognized within scope of ASC 606
Asset management fees: Asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by clients through the Trust Company. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each quarter.
Debit card and ATM fees: Debit and ATM interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the MasterCard® payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card. Certain expenses directly associated with the debit cards are recorded on a net basis with the interchange income.
Deposit related fees: Fees are earned on the Bank’s deposit accounts for various products offered to or services performed for the Bank’s customers. Fees include business account fees, non-sufficient fund fees, stop payment fees, wire services, safe deposit box and others. These fees are recognized on a daily, monthly or quarterly basis, depending on the type of service.
Loan related fees: Non-interest loan fee income is earned on loans that the Bank services, excluding loans serviced for the FHLMC which are not within the scope of ASC 606. Loan related fees include prepayment fees, late charges, brokered loan fees, maintenance fees and others. These fees are recognized on a daily, monthly, quarterly or annual basis, depending on the type of service.
Other: Fees earned on other services, such as merchant services or occasional non-recurring type services, are recognized at the time of the event or the applicable billing cycle.
Contract Balances
As of December 31, 2022, the Company had no significant contract liabilities where the Company had an obligation to transfer goods or services for which the Company had already received consideration. In addition, the Company had no material unsatisfied performance obligations as of December 31, 2022 and 2021.
14. COMMITMENTS AND CONTINGENCIES
Off-balance sheet arrangements – In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk in order to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to originate loans are conditional and are honored for up to 45 days subject to the Company’s usual terms and conditions. Collateral is not required to support commitments.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. These guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies and is required in instances where the Company deems it necessary.
Significant off-balance sheet commitments at December 31, 2022 are listed below (in thousands):
Contract or Notional
Commitments to extend credit:
Adjustable-rate
13,967
Fixed-rate
10,769
Standby letters of credit
1,600
Undisbursed loan funds and unused lines of credit
145,243
171,579
Other Contractual Obligations - In connection with certain asset sales, the Company typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Company may have an obligation to repurchase the assets or indemnify the purchaser against loss. At December 31, 2022, loans under warranty totaled $38.2 million, which substantially represents the unpaid principal balance of the Company’s loans serviced for the FHLMC. The Company believes that the potential for loss under these arrangements is remote. At December 31, 2022, the Company had an allowance for FHLMC loans of $12,000.
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The Bank is a public depository and, accordingly, accepts deposit and other public funds belonging to, or held for the benefit of, Washington and Oregon states, political subdivisions thereof, and municipal corporations. In accordance with applicable state law, in the event of default of a participating bank, all other participating banks in the state collectively assure that no loss of funds are suffered by any public depositor. Generally, in the event of default by a public depository, the assessment attributable to all public depositories is allocated on a pro rata basis in proportion to the maximum liability of each depository as it existed on the date of loss. The Company did not incur any losses related to public depository funds for the nine months ended December 31, 2022 and 2021.
The Bank has entered into employment contracts with certain key employees, which provide for contingent payments subject to future events.
Litigation – The Company is periodically a party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect, if any, on the Company’s future consolidated financial position, results of operations and cash flows.
15. LEASES
The Company has a finance lease for the shell of the building constructed as the Company's operations center which expires in November 2039. The Company is also obligated under various noncancelable operating lease agreements for land, buildings and equipment that require future minimum rental payments. For operating each lease, the Company records an operating lease right-of-use asset (representing the right to use the underlying asset for the lease term) and an operating lease liability (representing the obligation to make lease payments required under the terms of the lease). Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate – derived from information available at the lease commencement date – as the discount rate when determining the present value of lease payments. The Company does not have any operating leases with an initial term of 12 months or less. Certain operating leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Certain operating leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. Lease extensions are not reasonably certain and the Company generally does not include payments occurring during option periods in the calculation of its operating lease right-of-use assets and operating lease liabilities. In accordance with ASC 842, the Company records in the consolidated balance sheet operating lease right-of-use (“ROU”) assets and operating lease liabilities for leases with an initial term of more than 12 months.
The table below presents the ROU assets and lease liabilities recorded in the consolidated balance sheets at the dates indicated (in thousands):
Classification in the
Leases
consolidated balance sheets
Finance lease ROU assets
Financing lease ROU assets
Finance lease remaining lease term
16.93
years
17.68
Finance lease discount rate
7.16
Operating lease ROU assets
7,008
7,907
Operating lease liabilities
7,379
8,306
Operating lease weighted-average remaining lease term
6.36
7.02
Operating lease weighted-average discount rate
1.79
1.81
The table below presents certain information related to the lease costs for operating leases, which are recorded in occupancy and depreciation in the accompanying consolidated statements of income at the dates indicated (in thousands):
Lease Costs
Finance lease amortization of right-of-use asset
Finance lease interest on lease liability
41
Operating lease costs
283
316
Variable lease costs
Total lease cost (1)
396
430
58
849
946
157
158
1,186
1,286
Supplemental cash flow information - Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities was $338,000 and $1.0 million for the three and nine months ended December 31, 2022, respectively, compared to $365,000 and $1.1 million for the three and nine months ended December 31, 2021, respectively. During the three and nine months ended December 31, 2022 and 2021, the Company did not record any ROU assets that were exchanged for operating lease liabilities.
The following table reconciles the undiscounted cash flows for the periods presented related to the Company’s lease liabilities as of December 31, 2022 (in thousands):
Year Ending March 31:
Operating
Finance
Lease
Remaining of 2023
340
2024
1,370
219
2025
1,375
2026
1,125
2027
1,116
230
Thereafter
2,530
2,944
Total minimum lease payments
7,856
3,895
Less: amount of lease payment representing interest
(477)
(1,652)
Lease liabilities
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.
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 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 $1.0 billion at December 31, 2022 compared to $975.9 million at March 31, 2022.
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. 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 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 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 the Trust Company and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. We believe we are well positioned to attract new customers and to increase our market share through our 17 branches, including, among others, ten in Clark County, three 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.
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. At December 31, 2022, commercial and real estate construction loans represented 89.9% of total loans compared to 91.6% at March 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 the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $855.9 million and $1.3 billion at December 31, 2022 and March 31, 2022, 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.
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 of December 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.
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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 and
Mortgage
238,730
SBA Paycheck Protection Program ("PPP")
Commercial construction
31,810
Office buildings
116,980
Warehouse/industrial
99,075
Retail/shopping centers/strip malls
83,265
Assisted living facilities
Single purpose facilities
262,349
One-to-four family construction
19,343
623,818
225,006
SBA PPP
3,085
12,741
124,690
100,184
97,192
663
260,108
11,419
654,604
Comparison of Financial Condition at December 31, 2022 and March 31, 2022
Cash and cash equivalents, including interest-earning accounts, totaled $24.3 million at December 31, 2022 compared to $241.4 million at March 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 the Federal Deposit Insurance Corporation (“FDIC”). Certificates of deposits held for investment totaled $249,000 at both December 31, 2022 and March 31, 2022.
Investment securities totaled $458.9 million and $418.9 million at December 31, 2022 and March 31, 2022, respectively. The increase is due to investment purchases partially offset by normal pay downs, calls and maturities. During the nine months ended December 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). At December 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.
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Loans receivable, net, totaled $1.0 billion at December 31, 2022 compared to $975.9 million at March 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, since March 31, 2022. In addition, the increases were offset by a decrease in SBA PPP loans related to forgiveness repayments. At December 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 at March 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 at December 31, 2022 totaled $24.4 million compared to $14.7 million at March 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. At December 31, 2022, the Company’s purchased SBA loan portfolio was $57.1 million compared to $59.4 million at March 31, 2022.
Deposits decreased $167.9 million to $1.37 billion at December 31, 2022 from $1.53 billion at March 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 at December 31, 2022 and March 31, 2022. Core branch deposits accounted for 97.7% of total deposits at December 31, 2022 compared to 96.8% at March 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 $32.3 million at December 31, 2022 and were comprised of overnight advances. There were no outstanding FHLB advances at March 31, 2022. These FHLB advances were utilized to partially offset the decrease in deposit balances.
Shareholders' equity decreased $5.2 million to $152.0 million at December 31, 2022 from $157.2 million at March 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 the FDIC 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 of December 31, 2022.
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As of December 31, 2022, the Bank was categorized as “well capitalized” under the FDIC’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
Ratio
Total Capital:
(To Risk-Weighted Assets)
178,726
16.71
85,545
8.0
106,931
10.0
Tier 1 Capital:
165,339
15.46
64,159
6.0
Common equity tier 1 Capital:
48,119
4.5
69,505
6.5
Tier 1 Capital (Leverage):
(To Average Tangible Assets)
10.10
65,482
4.0
81,853
5.0
168,486
16.38
82,305
102,881
155,601
15.12
61,728
46,296
66,872
9.19
67,763
84,704
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 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. 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. At December 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 at December 31, 2022, of which $12.4 million are SBA and United States Department of Agriculture (“USDA”) government guaranteed loans, compared with $22.1 million or 1.27% of total assets at March 31, 2022, of which $21.8 million are SBA and USDA 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):
2
Subtotal
273
Government Guaranteed
42
12,377
21,826
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 and USDA government guaranteed loan servicing transfer. At December 31, 2022, all of the Company’s nonperforming loans exclusive of the SBA and USDA government guaranteed loans and one purchased automobile loan are to borrowers located in Southwest Washington. At December 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 at December 31, 2022. At December 31, 2022, the largest single nonperforming loan was a USDA government guaranteed loan for $1.8 million. The largest single non-performing loan exclusive of the SBA and USDA government guaranteed loans was a commercial real estate loan for $106,000 at December 31, 2022.
The allowance for loan losses was $14.6 million or 1.43% of total loans at December 31, 2022 compared to $14.5 million or 1.47% of total loans at March 31, 2022. The Company recorded no provision for loan losses for the nine months ended December 31, 2022. For the nine months ended December 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% at December 31, 2022 compared to 65.72% at March 31, 2022. The Company’s general valuation allowance to non-impaired loans was 1.43% and 1.47% at December 31, 2022 and March 31, 2022, respectively. Included in both categories are $12.4 million of fully guaranteed SBA or USDA 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 at December 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.
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, 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):
Loans accounted for on a non-accrual basis:
Commercial business (1)
Accruing loans which are contractually past due 90 days or more (2)
Total nonperforming loans
Real estate owned (“REO”)
Total nonperforming assets
Foregone interest on non-accrual loans (3)
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
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12,378
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
Land acquisition and development
1,912
4,569
Speculative and presold construction
17,833
1,510
22,402
25,824
2,111
9,445
10,989
20,434
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):
5,968
6,087
6,008
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 the Trust Company, for purposes of evaluating goodwill for impairment. All of the Company’s goodwill has been allocated to the Bank reporting unit. The Company performs an annual review in the third quarter of each fiscal year, or more frequently if indications of potential impairment exist, to determine if the recorded goodwill is impaired. If the fair value exceeds the carrying value, goodwill at the reporting unit level is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit is greater than its fair value, there is an indication that impairment may exist and additional analysis must be performed to measure the amount of impairment loss, if any. The amount of impairment is determined by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, the Company would allocate the fair value to all of the assets and liabilities of the reporting unit, including unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, the Company would record an impairment charge for the difference.
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company’s consolidated financial statements.
The Company performed its annual goodwill impairment test as of October 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
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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 of December 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 December 31, 2022 and 2021
Net Income. Net income was $5.2 million, or $0.24 per diluted share for the three months ended December 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 ended December 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 ended December 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 ended December 31, 2021, respectively. The Company also recognized in non-interest income, a $500,000 BOLI death benefit during the nine months ended December 31, 2021 that was not present during the nine months ended December 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 ended December 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 ended December 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
December 31, 2021. The net interest margin for the three and nine months ended December 31, 2022 was 3.48% and 3.30%, compared to 2.96% and 3.05% for the three and nine months ended December 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 ended December 31, 2022 and decreased for the nine months ended December 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 ended December 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 ended December 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 ended December 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 ended December 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 ended December 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 ended December 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 ended December 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 ended December 31, 2022, respectively, predominantly from lower deferred SBA PPP loan fees recognized from SBA PPP loans that were forgiven. For the three months ended December 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 ended December 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 ended December 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 ended December 31, 2022, respectively, compared to $492,000 and $1.7 million for the three and nine months ended December 31, 2021, respectively. Interest expense on deposits decreased $11,000 and $244,000 for the three and nine months ended December 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 ended December 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 ended December 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 ended December 31, 2022 and increased $18.4 million for the nine months ended December 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 ended December 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 ended December 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 ended December 31, 2022 compared to the same periods in the prior year reflecting the rising interest rate environment.
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):
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
4.50
938,113
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
0.15
Other earning assets
2,913
3.81
2,558
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
0.07
327,228
64
0.08
Interest checking accounts
290,349
0.03
282,916
Money market accounts
266,554
96
0.14
279,958
0.05
93,111
0.49
112,885
177
0.62
Total interest-bearing deposits
955,591
0.12
1,002,987
26,884
5.84
26,800
150
2.22
Other interest-bearing liabilities
3,723
6.18
2,302
7.24
Total interest-bearing liabilities
986,198
0.30
1,032,089
0.19
Non-interest-bearing liabilities:
Non-interest-bearing deposits
489,458
500,749
Other liabilities
17,210
17,687
1,492,866
1,550,525
Shareholders’ equity
150,106
162,282
Total liabilities and shareholders’ equity
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)
Dividend
759,746
26,008
4.54
683,719
25,174
245,358
7,488
4.05
238,352
8,274
4.61
1,005,104
4.42
922,071
4.81
468,815
6,662
1.89
324,755
3,663
128,373
1,557
1.61
309,781
327
2,874
72
3.33
2.70
1,605,166
41,787
3.46
1,559,165
37,490
3.19
18,974
19,005
64,807
77,385
1,688,947
1,655,555
Regular savings accounts
318,995
174
314,338
184
293,233
69
276,699
278,800
255
265,850
108
103,295
399
0.51
119,017
783
0.87
994,323
975,904
0.16
26,864
4.43
26,779
2.24
2,757
139
6.69
2,320
125
7.15
1,023,944
1,005,003
0.23
494,081
473,082
16,977
18,436
1,535,002
1,496,521
153,945
159,034
39,854
35,773
3.21
3.30
3.05
156.76
155.14
62
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, 2022 compared to the periods ended December 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).
2022 vs 2021
Increase (Decrease) Due to
Increase
Volume
Rate
(Decrease)
Interest Income:
661
(18)
643
2,701
(1,867)
834
252
(410)
(158)
239
(1,025)
(786)
Investment securities (1)
541
553
1,094
1,891
1,108
2,999
(174)
479
305
(297)
1,527
1,230
Total interest income
1,283
609
1,892
4,541
(244)
4,297
Interest Expense:
(10)
61
59
142
147
(28)
(33)
(61)
(93)
(291)
(384)
445
446
(8)
(9)
260
251
(58)
274
216
1,292
1,641
4,599
(518)
4,081
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 $255,000 and $371,000 at December 31, 2022 and March 31, 2022, respectively.
There was no provision for loan losses for the three and nine months ended December 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 ended December 31, 2021. The recapture of the provision for loan losses for the three and nine months ended December 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 $6,000 for the three months ended December 31, 2022 compared to net charge-offs totaling $52,000 for the same period in the prior year. Net recoveries totaled $35,000 for the nine months ended December 31, 2022
49
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.
50
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has not been any material change in the market risk disclosures contained in the 2022 Form 10-K.
Item 4. Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) as of December 31, 2022 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as in effect on December 31, 2022 were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In the quarter ended December 31, 2022, the Company did not make any changes in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, these controls.
While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns in controls or procedures can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements attributable to errors or fraud may occur and not be detected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect on the Company’s financial position, results of operations, or liquidity.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s 2022 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2022:
Total Dollar
Maximum Dollar Value
Value Purchased
of Shares that
as Part of Publicly
May Yet Be Purchased
Paid per
Announced Stock
Under the Stock
Period
Purchased
Share
Repurchase Program
October 1, 2022
October 1, 2022 - October 31, 2022
November 1, 2022 - November 30, 2022
1,200
7.50
9,004
2,490,996
December 1, 2022 - December 31, 2022
9,597
7.51
72,057
2,418,939
10,797
81,061
On November 17, 2022, the Company announced that its Board of Directors authorized a stock repurchase program. Under the November 2022 repurchase program, the Company was authorized to repurchase up to $2.5 million of the Company’s outstanding shares of common stock, in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on November 28, 2022 and continuing until the earlier of the completion of the authorized level of repurchases or May 28, 2023, depending upon market conditions. As of December 31, 2022, the Company had repurchased $81,000 of the Company’s outstanding shares at an average price of $7.51 per share. Shares repurchased under the November 2022 repurchase program are retired as settled.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
(a) Exhibits:
3.1
Articles of Incorporation of the Registrant (1)
3.2
Amended and Restate Bylaws of the Registrant (2)
4.1
Form of Certificate of Common Stock of the Registrant (1)
10.1
Form of Employment Agreement between the Company and the Bank and each of Kevin J. Lycklama, David Lam, Daniel D. Cox and Steven P. Plambeck (3)
10.2
Form of Change in Control Agreement between the Company and the Bank and each of Kevin J. Lycklama, David Lam, Daniel D. Cox and Steven P. Plambeck (3)
10.3
Employee Stock Ownership Plan (4)
10.4
2003 Stock Option Plan (5)
10.5
Form of Incentive Stock Option Award Pursuant to 2003 Stock Option Plan (6)
10.6
Form of Non-qualified Stock Option Award Pursuant to 2003 Stock Option Plan (6)
10.7
Deferred Compensation Plan (7)
10.8
2017 Equity Incentive Plan (8)
10.9
Form of Incentive Stock Option Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (9)
Form of Non-Qualified Stock Option Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (9)
10.11
Form of Restricted Stock Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (9)
10.12
Form of Restricted Stock Unit Award Agreement under the Riverview Bancorp, Inc. 2017 Equity Incentive Plan (9)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act *
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
The following materials from Riverview Bancorp Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, formatted in Inline Extensible Business Reporting Language (XBRL) (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Shareholders’ Equity (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements *
104
The cover page from Riverview Bancorp Inc’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, formatted in Inline XBRL and contained in Exhibit 101
*
Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/S/ Kevin J. Lycklama
/S/ David Lam
Kevin J. Lycklama
David Lam
President and Chief Executive Officer
Executive Vice President and
Director
Chief Financial Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
Date:
February 7, 2023