UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended March 31, 20182020 OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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: | | |
| | |
Common Stock, Par Value $.01 per share | | Nasdaq Stock Market LLC |
(Title of Each Class)
| | (Name
|
Title of Each Exchange on Which Registered) |
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 |
Securities registered pursuant to Section 12(g) of the Act: | | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure will not be contained, to the best of the registrant's knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X]
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 definitiondefinitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer”, "smaller“smaller reporting company"company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.Act
Large accelerated filer [ ]
| Accelerated filer [ ]
| Non-accelerated filer [X]
|
Smaller reporting company [X] | Emerging growth company [ ]
| |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [ ]Accelerated filer [X] 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 [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sales price of the registrant's Common Stock as quoted on the Nasdaq Global Select Market System under the symbol "RVSB" on September 30, 20172019 was $189,284,861 (22,533,912$167,883,081 (22,748,385 shares at $8.40$7.38 per share). As of June 13, 2018,17, 2020, there were issued and outstanding 22,570,17922,753,385 and 22,253,385 shares, respectively, of the registrant'sregistrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (Part III).
1
Table of Contents |
PART I | | PAGE |
Item 1. | Business | 4 |
Item 1A. | Risk Factors | 3331 |
Item 1B. | Unresolved Staff Comments | 4645 |
Item 2. | Properties | 4645 |
Item 3. | Legal Proceedings | 4645 |
Item 4. | Mine Safety Disclosures | 4645 |
PART II | | |
Item 5. | Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 4746 |
Item 6. | Selected Financial Data | 4948 |
Item 7. | Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations | 5150 |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 6564 |
Item 8. | Financial Statements and Supplementary Data | 6766 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 109107 |
Item 9A. | Controls and Procedures | 109107 |
Item 9B. | Other Information | 111108 |
PART III | | |
Item 10. | Directors, Executive Officers and Corporate Governance | 111109 |
Item 11. | Executive Compensation | 111109 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 112110 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 112110 |
Item 14. | Principal Accounting Fees and Services | 112110 |
PART IV | | |
Item 15. | Exhibits and Financial Statement Schedules | 113111 |
Item 16. | Form 10-K Summary | 114112 |
| | |
Signatures | | 115 |
Exhibit Index | 116113 |
2
Forward-Looking Statements
As used in this Form 10-K, the terms "we," "our," "us," "Riverview"“we,” “our,” “us,” “Riverview” and "Company"“Company” refer to Riverview Bancorp, Inc. and its consolidated subsidiaries, including its wholly-owned subsidiary, Riverview Community Bank, unless the context indicates otherwise.
"“Safe Harbor"Harbor” statement under the Private Securities Litigation Reform Act of 1995: When used in this Form 10-K, the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook,"“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,"“may,” “will,” “should,” “would,” and "could,"“could,” or similar expressions are intended to identify "forward-looking statements"“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, and statements about future performance.economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the effect of the novel coronavirus of 2019 (“COVID-19”) pandemic, including on Riverview’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in the Company'sCompany’s allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in the Company'sCompany’s market areas; changes in the levels of general interest rates, and the relative differences between short and long-term interest rates, deposit interest rates, the Company'sCompany’s net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in the Company'sCompany’s market areas; secondary market conditions for loans and the Company'sCompany’s ability to originate loans for sale and sell loans in the secondary market; results of examinations of our bank subsidiary, Riverview Community Bank, by the Office of the Comptroller of the Currency and of the Company by the Board of Governors of the Federal Reserve System, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require the Company to increase its allowance for loan losses, write-down assets, reclassify its assets, change Riverview Community Bank'sBank’s regulatory capital position or affect the Company'sCompany’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'sCompany’s business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; the Company'sCompany’s ability to attract and retain deposits; increases in premiums for deposit insurance; the Company'sCompany’s ability to control operating costs and expenses; the use of estimates in determining fair value of certain of the Company'sCompany’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'sCompany’s consolidated balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect the Company'sCompany’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'sCompany’s ability to retain key members of its senior management team; costs and effects of litigation, including settlements and judgments; the Company'sCompany’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 and any goodwill charges related thereto; 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'sCompany’s ability to pay dividends on its common stock and interest or principal payments on its junior subordinated debentures;stock; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting standards; including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act"), other economic, competitive, governmental, regulatory, and technological factors affecting the Company'sCompany’s operations, pricing, products and services; and the other risks described from time to time in our filings with the Securities and Exchange Commission.
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 20192021 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'sCompany’s consolidated financial condition and consolidated results of operations as well as its stock price performance.
3
PART I
Item 1. Business
General
Riverview Bancorp, Inc., a Washington corporation, is the savings and loan holding company of Riverview Community Bank (the "Bank"“Bank”). At March 31, 2018,2020, the Company had total assets of $1.2 billion, total deposits of $995.7$990.4 million and shareholders' equity of $116.9$148.8 million. The Company'sCompany’s executive offices are located in Vancouver, Washington. The Bank's subsidiary, Riverview Trust Company (the “Trust Company”), is a trust and financial services company located in downtown Vancouver, Washington, and provides full-service brokerage activities, trust and asset management services.
The Company is subject to regulation by the Board of Governors of the Federal Reserve Systems ("(“Federal Reserve"Reserve”). Substantially all of the Company'sCompany’s business is conducted through the Bank which is regulated by the Office of the Comptroller of the Currency ("OCC"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are insured by the FDIC up to applicable legal limits under the Deposit Insurance Fund ("DIF"). The Bank is a member of the Federal Home Loan Bank System of Des Moines ("FHLB") which is one of the 11 regional banks in the Federal Home Loan Bank System ("(“FHLB System"System”).
As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington, and Multnomah, 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'sCompany’s loans receivable, net, totaled $800.6$898.9 million at March 31, 20182020 compared to $768.9$864.7 million a year ago.at March 31, 2019.
The Bank's subsidiary, Riverview Trust Company (the "Trust Company"), is a trust and financial services company located in downtown Vancouver, Washington, and provides full-service brokerage activities, trust and asset management services. In April 2017, the Trust Company opened a second office in Lake Oswego, Oregon.
The Company'sCompany’s strategic plan includes targeting the commercial banking customer base in its primary market area for loan originations and deposit growth, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will seek to increase the loan portfolio consistent with its strategic plan and asset/liability and regulatory capital objectives, which includes maintaining a significant amount of commercial business and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations – which are mainly concentrated in commercial business and commercial real estate loans – carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate consumer real estate one-to-four family mortgages.
Our strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through the Trust Company and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. We believe we are well positioned to attract new customers and to increase our market share through our 1918 branches, including, among others, ten in Clark County, four in the Portland metropolitan area and three lending centers.
On February 17, 2017, the Company completed the purchase and assumption transaction in which the Company purchased certain assets and assumed certain liabilities of MBank, the wholly-owned subsidiary of Merchants Bancorp, including $115.3 million in loans and $130.6 million of deposits (the "MBank transaction"). In addition, as part of the MBank transaction, Riverview Bancorp, Inc. assumed the obligations of Merchant Bancorp's trust preferred securities.
Market Area
The Company conducts operations from its home office in Vancouver, Washington and 1918 branch offices located in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, and Vancouver, Washington (seven branch offices) and Longview, Washington and Portland (two branch offices), Gresham, Tualatin and Aumsville, Oregon.We believe we are well positioned to attract new customers and to increase our market share through our branch network. The Trust Company has two locations, one in downtown Vancouver, Washington and one in Lake Oswego, Oregon, and provides full-service brokerage activities, trust and asset management services. Riverview Mortgage, a mortgage broker division of the Bank, originates mortgage loans for various mortgage companies predominantly in the Vancouver/Portland metropolitan areas, as well as for the Bank. The Bank'sBank’s Business and Professional Banking Division, with two lending offices located in Vancouver and one in Portland, offers commercial and business banking services. The Bank also operates a lending office for mortgage banking activities in Vancouver.
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 Fisher Investments and Banfield Pet Hospitals, as well as several support industries. In addition to this industry base, the Columbia River Gorge Scenic Area and the Portland metropolitan area are sources of tourism, which has helped to transform the area from its past dependence on the timber industry.
Economic conditions in the Company'sCompany’s market areas have generally been positive compared tountil the past recessionary downturn.recent COVID-19 pandemic. According to the Washington State Employment Security Department, unemployment in Clark County decreased to 5.4%4.3% at March 31, 20182020 compared to 5.5%5.3% at March 31, 2017.2019. According to the Oregon Employment Department, unemployment in Portland increaseddecreased to 3.7%3.4% at March 31, 20182020 compared to 3.2%3.9% at March 31, 2017.2019. Unemployment levels have increased since March 31, 2020 due to the COVID-19 pandemic, as the governors of both Washington and Oregon have instituted stay-at-home orders and closed non-essential businesses and schools. Once these stay-at-home orders are modified, unemployment levels may begin to reverse the upward trend resulting from COVID-19. According to the Regional Multiple Listing Services ("RMLS"(“RMLS”), residential home inventory levels in Portland, Oregon have increaseddecreased to 1.61.8 months at March 31, 20182020 compared to 1.32.2 months at March 31, 2017.2019. Residential home inventory levels in Clark County were 1.6have decreased to 2.1 months at both March 31, 2018 and 2017.2020 compared to 2.4 months March 31, 2019. According to the RMLS, closed home sales in March 20182020 in Clark County increased 4.5%decreased 3.0% compared to March 2017.2019. Closed home sales during March 20182020 in Portland decreased 4.9%increased 7.9% compared to March 2017.2019.
Lending Activities
General. At March 31, 2018,2020, the Company's net loans receivable totaled $800.6$898.9 million, or 69.5%76.1% of total assets at that date. The principal lending activity of the Company is the origination of loans collateralized by commercial properties and commercial business loans. A substantial portion of the Company's loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area. The Company'sCompany’s lending activities are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Bank'sBank’s Board of Directors ("Board"(“Board”) and management. The customary sources of loan originations are realtors, walk-in customers, referrals and existing customers. The Bank also uses commissioned loan brokers and print advertising to market its products and services. Loans are approved at various levels of management, depending upon the amount of the loan.
5
Loan Portfolio Analysis. The following table sets forth the composition of the Company's loan portfolio, excluding loans held for sale, by type of loan at the dates indicated (dollars in thousands):
| | At March 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | |
Commercial and construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 179,029 | | | | 19.64 | % | | $ | 162,796 | | | | 18.58 | % | | $ | 137,672 | | | | 16.97 | % | | $ | 107,371 | | | | 13.78 | % | | $ | 69,397 | | | | 11.11 | % |
Other real estate mortgage (1) | | | 580,271 | | | | 63.66 | | | | 530,029 | | | | 60.50 | | | | 529,014 | | | | 65.20 | | | | 506,661 | | | | 65.00 | | | | 399,527 | | | | 63.94 | |
Real estate construction | | | 64,843 | | | | 7.12 | | | | 90,882 | | | | 10.37 | | | | 39,584 | | | | 4.88 | | | | 46,157 | | | | 5.92 | | | | 26,731 | | | | 4.28 | |
Total commercial and construction | | | 824,143 | | | | 90.42 | | | | 783,707 | | | | 89.45 | | | | 706,270 | | | | 87.05 | | | | 660,189 | | | | 84.70 | | | | 495,655 | | | | 79.33 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 83,150 | | | | 9.12 | | | | 84,053 | | | | 9.60 | | | | 90,109 | | | | 11.10 | | | | 92,865 | | | | 11.91 | | | | 88,780 | | | | 14.21 | |
Other installment | | | 4,216 | | | | 0.46 | | | | 8,356 | | | | 0.95 | | | | 14,997 | | | | 1.85 | | | | 26,378 | | | | 3.39 | | | | 40,384 | | | | 6.46 | |
Total consumer | | | 87,366 | | | | 9.58 | | | | 92,409 | | | | 10.55 | | | | 105,106 | | | | 12.95 | | | | 119,243 | | | | 15.30 | | | | 129,164 | | | | 20.67 | |
Total loans | | | 911,509 | | | | 100.00 | % | | | 876,116 | | | | 100.00 | % | | | 811,376 | | | | 100.00 | % | | | 779,432 | | | | 100.00 | % | | | 624,819 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 12,624 | | | | | | | | 11,457 | | | | | | | | 10,766 | | | | | | | | 10,528 | | | | | | | | 9,885 | | | | | |
Total loans receivable, net | | $ | 898,885 | | | | | | | $ | 864,659 | | | | | | | $ | 800,610 | | | | | | | $ | 768,904 | | | | | | | $ | 614,934 | | | | | |
| |
(1) Other real estate mortgage consists of commercial real estate, land and multi-family loans. | |
| | At March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | | | Amount | | | Percent | |
| | | |
Commercial and construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 137,672 | | | | 16.97 | % | | $ | 107,371 | | | | 13.78 | % | | $ | 69,397 | | | | 11.11 | % | | $ | 77,186 | | | | 13.31 | % | | $ | 71,632 | | | | 13.43 | % |
Other real estate mortgage (1) | | | 529,014 | | | | 65.20 | | | | 506,661 | | | | 65.00 | | | | 399,527 | | | | 63.94 | | | | 345,506 | | | | 59.60 | | | | 324,881 | | | | 60.90 | |
Real estate construction | | | 39,584 | | | | 4.88 | | | | 46,157 | | | | 5.92 | | | | 26,731 | | | | 4.28 | | | | 30,498 | | | | 5.26 | | | | 19,482 | | | | 3.65 | |
Total commercial and construction | | | 706,270 | | | | 87.05 | | | | 660,189 | | | | 84.70 | | | | 495,655 | | | | 79.33 | | | | 453,190 | | | | 78.17 | | | | 415,995 | | | | 77.98 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 90,109 | | | | 11.10 | | | | 92,865 | | | | 11.91 | | | | 88,780 | | | | 14.21 | | | | 89,801 | | | | 15.49 | | | | 93,007 | | | | 17.43 | |
Other installment | | | 14,997 | | | | 1.85 | | | | 26,378 | | | | 3.39 | | | | 40,384 | | | | 6.46 | | | | 36,781 | | | | 6.34 | | | | 24,486 | | | | 4.59 | |
Total consumer | | | 105,106 | | | | 12.95 | | | | 119,243 | | | | 15.30 | | | | 129,164 | | | | 20.67 | | | | 126,582 | | | | 21.83 | | | | 117,493 | | | | 22.02 | |
Total loans | | | 811,376 | | | | 100.00 | % | | | 779,432 | | | | 100.00 | % | | | 624,819 | | | | 100.00 | % | | | 579,772 | | | | 100.00 | % | | | 533,488 | | | | 100.00 | % |
Less: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 10,766 | | | | | | | | 10,528 | | | | | | | | 9,885 | | | | | | | | 10,762 | | | | | | | | 12,551 | | | | | |
Total loans receivable, net | | $ | 800,610 | | | | | | | $ | 768,904 | | | | | | | $ | 614,934 | | | | | | | $ | 569,010 | | | | | | | $ | 520,937 | | | | | |
| |
(1) Other real estate mortgage consists of commercial real estate, land and multi-family loans. | |
6
Loan Portfolio Composition. The following tables set forth the composition of the Company's commercial and construction loan portfolio based on loan purpose at the dates indicated (in thousands):
| | Commercial Business | | | Other Real Estate Mortgage | | | Real Estate Construction | | | Commercial & Construction Total | |
March 31, 2018 | | | |
| | | | | | | | | | | | |
Commercial business | | $ | 137,672 | | | $ | - | | | $ | - | | | $ | 137,672 | |
Commercial construction | | | - | | | | - | | | | 23,158 | | | | 23,158 | |
Office buildings | | | - | | | | 124,000 | | | | - | | | | 124,000 | |
Warehouse/industrial | | | - | | | | 89,442 | | | | - | | | | 89,442 | |
Retail/shopping centers/strip malls | | | - | | | | 68,932 | | | | - | | | | 68,932 | |
Assisted living facilities | | | - | | | | 2,934 | | | | - | | | | 2,934 | |
Single purpose facilities | | | - | | | | 165,289 | | | | - | | | | 165,289 | |
Land | | | - | | | | 15,337 | | | | - | | | | 15,337 | |
Multi-family | | | - | | | | 63,080 | | | | - | | | | 63,080 | |
One-to-four family construction | | | - | | | | - | | | | 16,426 | | | | 16,426 | |
Total | | $ | 137,672 | | | $ | 529,014 | | | $ | 39,584 | | | $ | 706,270 | |
March 31, 2017 | | | | |
| | | Commercial Business | | | Other Real Estate Mortgage | | | Real Estate Construction | | | Commercial & Construction Total | |
March 31, 2020 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 107,371 | | | $ | - | | | $ | - | | | $ | 107,371 | | | $ | 179,029 | | | $ | - | | | $ | - | | | $ | 179,029 | |
Commercial construction | | | - | | | | - | | | | 27,050 | | | | 27,050 | | | - | | | - | | | 52,608 | | | 52,608 | |
Office buildings | | | - | | | | 121,983 | | | | - | | | | 121,983 | | | - | | | 113,433 | | | - | | | 113,433 | |
Warehouse/industrial | | | - | | | | 74,671 | | | | - | | | | 74,671 | | | - | | | 91,764 | | | - | | | 91,764 | |
Retail/shopping centers/strip malls | | | - | | | | 78,757 | | | | - | | | | 78,757 | | | - | | | 76,802 | | | - | | | 76,802 | |
Assisted living facilities | | | - | | | | 3,686 | | | | - | | | | 3,686 | | | - | | | 1,033 | | | - | | | 1,033 | |
Single purpose facilities | | | - | | | | 167,974 | | | | - | | | | 167,974 | | | - | | | 224,839 | | | - | | | 224,839 | |
Land | | | - | | | | 15,875 | | | | - | | | | 15,875 | | |
Land acquisition and development | | | - | | | 14,026 | | | - | | | 14,026 | |
Multi-family | | | - | | | | 43,715 | | | | - | | | | 43,715 | | | - | | | 58,374 | | | - | | | 58,374 | |
One-to-four family construction | | | - | | | | - | | | | 19,107 | | | | 19,107 | | | | - | | | | - | | | | 12,235 | | | | 12,235 | |
Total | | $ | 107,371 | | | $ | 506,661 | | | $ | 46,157 | | | $ | 660,189 | | | $ | 179,029 | | | $ | 580,271 | | | $ | 64,843 | | | $ | 824,143 | |
March 31, 2019 | | | |
| | | | | | | | | | | | |
Commercial business | | $ | 162,796 | | | $ | - | | | $ | - | | | $ | 162,796 | |
Commercial construction | | | - | | | | - | | | | 70,533 | | | | 70,533 | |
Office buildings | | | - | | | | 118,722 | | | | - | | | | 118,722 | |
Warehouse/industrial | | | - | | | | 91,787 | | | | - | | | | 91,787 | |
Retail/shopping centers/strip malls | | | - | | | | 64,934 | | | | - | | | | 64,934 | |
Assisted living facilities | | | - | | | | 2,740 | | | | - | | | | 2,740 | |
Single purpose facilities | | | - | | | | 183,249 | | | | - | | | | 183,249 | |
Land acquisition and development | | | - | | | | 17,027 | | | | - | | | | 17,027 | |
Multi-family | | | - | | | | 51,570 | | | | - | | | | 51,570 | |
One-to-four family construction | | | - | | | | - | | | | 20,349 | | | | 20,349 | |
Total | | $ | 162,796 | | | $ | 530,029 | | | $ | 90,882 | | | $ | 783,707 | |
Commercial Business Lending. At March 31, 2018,2020, the commercial business loan portfolio totaled $137.7$179.0 million, or 17.0%19.6% of total loans. Commercial business loans are typically secured by business equipment, accounts receivable, inventory or other property. The Company'sCompany’s commercial business loans may be structured as term loans or as lines of credit. Commercial term loans are generally made to finance the purchase of assets and usually have maturities of five years or less. Commercial lines of credit are typically made for the purpose of providing working capital and usually have a term of one year or less. Lines of credit are made at variable rates of interest equal to a negotiated margin above an index rate and term loans are at either a variable or fixed-rate.fixed rate. The Company also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements.
Commercial business lending involves risks that are different from those associated with residential and commercial real estate lending. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit-worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. Additionally, the borrower'sborrower’s cash flow may be unpredictable and collateral securing these loans may fluctuate in value.
Other Real Estate Mortgage Lending. At March 31, 2018,2020, the other real estate mortgage loan portfolio totaled $529.0$580.3 million, or 65.2%63.7% of total loans. The Company originates other real estate mortgage loans includingsecured by office buildings, warehouse/industrial, retail, assisted living facilities and single-purpose facilities (collectively "commercial“commercial real estate loans"loans” or “CRE”); as well as land and multi-family loans primarily located in its market area. At March 31, 2018,2020, owner occupied properties accounted for 36.2%29.9% and non-owner occupied properties accounted for 63.8%70.1% of the Company'sCompany’s commercial real estate loan portfolio.
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Commercial real estate and multi-family loans typically have higher loan balances, are more difficult to evaluate and monitor, and involve a higher degree of risk than one-to-four family residential loans. As a result, commercial real estate and multi-family loans are generally priced at a higher rate of interest than residential one-to-four family loans. Often payments on loans secured by commercial properties are dependent on the successful operation and management of the property
securing the loan or business conducted on the property securing the loan; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The Company seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. Loans are secured by first mortgages and often require specified debt service coverage ("DSC"(“DSC”) ratios depending on the characteristics of the collateral. The Company generally imposes a minimum DSC ratio of 1.20 for loans secured by income producing properties. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower'sborrower’s financial condition and credit history, loan-to-value ratio, DSC ratio and other factors.
The Company actively pursues commercial real estate loans. Loan demand within the Company'sCompany’s market area was competitive in fiscal year 20182020 as economic conditions and competition for strong credit-worthy borrowers remained high. At March 31, 2018,2020 and 2019, the Company had the same two commercial real estate loans totaling $1.2$1.0 million and $1.1 million, respectively, on non-accrual status compared to two commercial real estate loans totaling $1.3 million on non-accrual status at March 31, 2017.status. For more information concerning risks related to commercial real estate loans, see Item 1A. "Risk“Risk Factors – Our emphasis on commercial real estate lending may expose us to increased lending risks."”
Land acquisition and development loans are included in the other real estate mortgage loan portfolio balance and represent loans made to developers for the purpose of acquiring raw land and/or for the subsequent development and sale of residential lots. Such loans typically finance land purchases and infrastructure development of properties (e.g. roads, utilities, etc.) with the aim of making improved lots ready for subsequent sales to consumers or builders for ultimate construction of residential units. The primary source of repayment is generally the cash flow from developer sale of lots or improved parcels of land, secondary sources and personal guarantees, which may provide an additional measure of security for such loans. At March 31, 2018,2020, land acquisition and development loans totaled $15.3$14.0 million, or 1.89%1.54% of total loans compared to $15.9$17.0 million, or 2.04%1.94% of total loans at March 31, 2017.2019. The largest land acquisition and development loan had an outstanding balance at March 31, 20182020 of $3.4$2.0 million and was performing according to its original payment terms. At March 31, 2018,2020, all of the land acquisition and development loans were secured by properties located in Washington and Oregon. At March 31, 20182020 and 2017,2019, the Company had oneno land acquisition and development loan totaling $763,000 and $801,000, respectively,loans on non-accrual status.
Real Estate Construction. The Company originates three types of residential construction loans: (i) speculative construction loans, (ii) custom/presold construction loans and (iii) construction/permanent loans. The Company also originates construction loans for the development of business properties and multi-family dwellings. All of the Company'sCompany’s real estate construction loans were made on properties located in Washington and Oregon.
The composition of the Company'sCompany’s construction loan portfolio, including undisbursed funds, was as follows at the dates indicated (dollars in thousands):
| | At March 31, | | | At March 31, | |
| | 2018 | | | 2017 | | | 2020 | | | 2019 | |
| | Amount (1) | | | Percent | | | Amount (1) | | | Percent | | | Amount (1) | | | Percent | | | Amount (1) | | | Percent | |
| | | | | | |
Speculative construction | | $ | 7,589 | | | | 6.80 | % | | $ | 7,915 | | | | 8.47 | % | | $ | 5,016 | | | 5.65 | % | | $ | 12,315 | | | 8.01 | % |
Commercial/multi-family construction | | | 80,357 | | | | 72.04 | | | | 59,599 | | | | 63.80 | | | 62,929 | | | 70.85 | | | 116,815 | | | 76.01 | |
Custom/presold construction | | | 18,029 | | | | 16.16 | | | | 20,697 | | | | 22.16 | | | 19,117 | | | 21.52 | | | 19,643 | | | 12.78 | |
Construction/permanent | | | 5,573 | | | | 5.00 | | | | 5,202 | | | | 5.57 | | | | 1,759 | | | | 1.98 | | | | 4,923 | | | | 3.20 | |
Total | | $ | 111,548 | | | | 100.00 | % | | $ | 93,413 | | | | 100.00 | % | | $ | 88,821 | | | | 100.00 | % | | $ | 153,696 | | | | 100.00 | % |
(1) Includes undisbursed funds of $72.0$24.0 million and $47.3$62.8 million at March 31, 20182020 and 2017,2019, respectively.
At March 31, 2018,2020, the balance of the Company'sCompany’s construction loan portfolio, including undisbursed funds, was $111.5$88.8 million compared to $93.4$153.7 million at March 31, 2017.2019. The $18.1$64.9 million increasedecrease was primarily due to a $20.8$53.9 million increasedecrease in commercial/multi-family construction loans partially offset byalong with a $2.7decrease of $7.3 million decrease in custom/presoldspeculative construction loans. The Company plans to continue to proactively manage and control the growth in its construction loan portfolio in fiscal year 2019 but will continue2021 while continuing to originate new construction loans to selected customers.
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Speculative construction loans are made to home builders and are termed "speculative"“speculative” because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to service the speculative construction loan and finance real estate
taxes and other carrying costs of the completed home for a significant period of time after the completion of construction until a home buyer is identified. The largest speculative construction loan at March 31, 20182020 was a loan to finance the construction of a single family home totaling $425,000.$458,000. This loan is to a single borrower that is secured by a property located in the Company'sCompany’s market area. The average balance of loans in the speculative construction loan portfolio at March 31, 20182020 was $208,000.$260,000. At March 31, 20182020 and 2017,2019, the Company had no speculative construction loans on non-accrual status.
The composition of speculative construction and land acquisition and development and speculative construction loans by geographical area is as follows at the dates indicated (in thousands):
| | Northwest Oregon | | | Other Oregon | | | Southwest Washington | | | Total | |
March 31, 2018 | | | | | | | | | |
| | | | | | | | | | | | |
Land development | | $ | 482 | | | $ | 881 | | | $ | 13,974 | | | $ | 15,337 | |
Speculative construction | | | 400 | | | | 421 | | | | 12,596 | | | | 13,417 | |
Total land development and speculative construction | | $ | 882 | | | $ | 1,302 | | | $ | 26,570 | | | $ | 28,754 | |
| | Northwest Oregon | | | Other Oregon | | | Southwest Washington | | | Total | |
March 31, 2020 | | | | | | | | | |
| | | | | | | | | | | | |
Land acquisition and development | | $ | 2,124 | | | $ | 1,834 | | | $ | 10,068 | | | $ | 14,026 | |
Speculative construction | | | 282 | | | | - | | | | 11,745 | | | | 12,027 | |
Total | | $ | 2,406 | | | $ | 1,834 | | | $ | 21,813 | | | $ | 26,053 | |
March 31, 2017 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Land development | | $ | 223 | | | $ | 2,523 | | | $ | 13,129 | | | $ | 15,875 | |
Speculative construction | | | 945 | | | | 3 | | | | 14,492 | | | | 15,440 | |
Total land development and speculative construction | | $ | 1,168 | | | $ | 2,526 | | | $ | 27,621 | | | $ | 31,315 | |
March 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Land acquisition and development | | $ | 2,184 | | | $ | 1,908 | | | $ | 12,935 | | | $ | 17,027 | |
Speculative construction | | | 1,680 | | | | 104 | | | | 15,284 | | | | 17,068 | |
Total | | $ | 3,864 | | | $ | 2,012 | | | $ | 28,219 | | | $ | 34,095 | |
Unlike speculative construction loans, presold construction loans are made for homes that have buyers. Presold construction loans are made to homebuilders who, at the time of construction, have a signed contract with a home buyer who has a commitment for permanent financing for the finished home from the Company or another lender. Presold construction loans are generally originated for a term of 12 months. At March 31, 20182020 and 2017,2019, presold construction loans totaled $9.0$8.4 million and $11.4$8.5 million, respectively.respectively and are included in the speculative construction loan category.
Unlike speculative and presold construction loans, custom construction loans are made directly to the homeowner. At March 31, 20182020 and 2017,2019, the Company had no custom construction loans. Construction/permanent loans are originated to the homeowner rather than the homebuilder along with a commitment by the Company to originate a permanent loan to the homeowner to repay the construction loan at the completion of construction. The construction phase of a construction/permanent loan generally lasts six to nine months. At the completion of construction, the Company may either originate a fixed-rate mortgage loan or an adjustable rate mortgage ("ARM"(“ARM”) loan or use its mortgage brokerage capabilities to obtain permanent financing for the customer with another lender. At completion of construction, the interest rate of the Company-originated fixed-rate permanent loan is set at a market rate. For adjustable rate loans, the interest rates adjust on their first adjustment date. See "—Mortgage Brokerage"“Mortgage Brokerage” and "—Mortgage“Mortgage Loan Servicing."Servicing” below for more information. At March 31, 2018,2020, construction/permanent loans totaled $3.0 million, the largest of which$207,000, had an outstandinga total commitment balance of $525,000$1.8 million and wasall were performing according to itstheir original repayment terms. The average balance of loans in the construction/permanent loan portfolio excluding undisbursed funds at March 31, 20182020 was $274,000.$69,000.
The Company provides construction financing for non-residential business properties and multi-family dwellings. At March 31, 2018, such2020 commercial construction loans totaled $23.2 $52.6 million, or 58.5%81.1% of total real estate construction loans and 2.85%5.8% of total loans. Borrowers may be the business owner/occupier of the building who intends to operate their business from the property upon construction, or non-owner developers. The expected source of repayment of these loans is typically the sale or refinancing of the project upon completion of the construction phase. In certain circumstances, the Company may provide or commit to take-out financing upon construction. Take-out financing is subject to the project meeting specific underwriting guidelines. No assurance can be given that such take-out financing will be available upon project completion. These loans are secured by office buildings, retail rental space, mini storage facilities, assisted living facilities and multi-family dwellings located in the Company'sCompany’s market area. At March 31, 2018,2020, the largest commercial construction loan had a balance of $7.0$9.5 million and was performing according to its original repayment terms. The average balance of loans in the commercial construction loan portfolio at March 31, 20182020 was $1.7 million.$3.8 million. At March 31, 20182020 and 2017,2019, the Company had no commercial construction loans on non-accrual status.
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The Company has originated construction and land acquisition and development loans where a component of the cost of the project was the interest required to service the debt during the construction period of the loan, sometimes known as interest reserves. The Company allows disbursements of this interest component as long as the project is progressing as originally projected and if there has been no deterioration in the financial standing of the borrower or the underlying project. If the Company makes a determination that there is such deterioration, or if the loan becomes nonperforming, the Company halts
any disbursement of those funds identified for use in paying interest. In some cases, additional interest reserves may be taken by use of deposited funds or through credit lines secured by separate and additional collateral. For additional information concerning the risks related to construction lending, see Item 1A. "Risk Factors – Our real estate construction and land acquisition orand development loans expose us to risk."
Consumer Lending. Consumer loans totaled $105.1$87.4 million at March 31, 2018,2020 and were comprised of $67.2$65.9 million of one-to-four family mortgage loans, $20.5$15.5 million of home equity lines of credit, $2.4$1.8 million of land loans to consumers for the future construction of one-to-four family homes and $15.0$4.2 million of other secured and unsecured consumer loans, which primarily consisted of $12.9included $1.8 million of purchased automobile loans.
One-to-four family residences located in the Company'sCompany’s primary market area secure the majority of the residential loans. Underwriting standards require that one-to-four family portfolio loans generally be owner occupied and that loan amounts not exceed 80% (95% with private mortgage insurance) of the lesser of current appraised value or cost of the underlying collateral. Terms typically range from 15 to 30 years. The Company also offers balloon mortgage loans with terms of either five or seven years and originates both fixed-rate mortgages and ARMs with repricing based on the one-year constant maturity U.S. Treasury index or other index. At March 31, 2018,2020, the Company had fourthree residential real estate loans totaling $206,000$152,000 on non-accrual status compared to three residential real estate loans totaling $170,000$169,000 at March 31, 2017.2019. All of these loans were secured by properties located in Oregon and Washington.
The Company also purchases, from time to time,had previously purchased pools of automobile loans from another financial institution as a way to further diversify its loan portfolio and to earn a higher yield than on its cash or short-term investments. These indirect automobile loans are originated through a single dealership group located outside the Company'sCompany’s primary market area. Unlike a direct loan where the borrower makes an application directly to the lender, in these loans the dealer, who has a direct financial interest in the loan transaction, assists the borrower in preparing the loan application. Indirect automobile loans we purchased are underwritten by us using substantially similar guidelines to our internal guidelines. However, because these loans are originated through a third-party and not directly by us, we do not have direct contact with the borrower and therefore these loans may be more susceptible to a material misstatement on the loan application and present greater risks than other types of lending activities. The collateral for these loans is comprised of a mix of used automobiles. These loans are purchased with servicing retained by the seller. The Company did not purchase any automobile loans during fiscal year 2018years 2020 and 2017.2019 and does not have plans to purchase any additional automobile loan pools. At March 31, 2018, eight2020, six of the purchased automobile loans were on non-accrual status totaling $71,000.$28,000. At March 31, 2017, thirteen2019, twelve of the purchased automobile loans were on non-accrual status totaling $108,000. For more information concerning risks related to automobile loans, see Item 1A. "Risk Factors – Our consumer loan portfolio has increased risk due to the substantial amount of indirect automobile loans."
$41,000. The Company originates a variety of installment loans, including loans for debt consolidation and other purposes, automobile loans, boat loans and savings account loans. TheseAt March 31, 2020 and 2019, excluding the purchased automobile loans noted above, the Company had no installment loans on non-accrual status.
Installment consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as mobile homes, automobiles, boats and recreational vehicles. At March 31, 2018In these cases, we face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and 2017, excludingsale of such property could be insufficient to compensate us for the purchased automobileprincipal outstanding on these loans noted above,as a result of the Company had no installment loansgreater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on non-accrual status.the borrower’s continuing financial stability and are more likely to be adversely affected by job loss (especially now as a result of the COVID-19 pandemic), divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans.
10
Loan Maturity. The following table sets forth certain information at March 31, 20182020 regarding the dollar amount of loans maturing in the Company'sCompany’s total loan portfolio based on their contractual terms to maturity but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments or stated maturity and overdrafts are reported as due in one year or less. Loan balances are reported net of deferred fees (in thousands):
| | Within 1 Year | | | 1 – 3 Years | | | After 3 – 5 Years | | | After 5 – 10 Years | | | Beyond 10 Years | | | Total | | | Within 1 Year | | | 1 – 3 Years | | | After 3 – 5 Years | | | After 5 – 10 Years | | | Beyond 10 Years | | | Total | |
Commercial and construction: | | | | | | |
Commercial business | | $ | 16,939 | | | $ | 15,981 | | | $ | 10,376 | | | $ | 53,110 | | | $ | 41,266 | | | $ | 137,672 | | | $ | 22,035 | | | $ | 11,591 | | | $ | 16,388 | | | $ | 48,733 | | | $ | 80,282 | | | $ | 179,029 | |
Other real estate mortgage | | | 37,563 | | | | 14,544 | | | | 42,486 | | | | 354,433 | | | | 79,988 | | | | 529,014 | | | 19,952 | | | 40,054 | | | 54,559 | | | 397,165 | | | 68,541 | | | 580,271 | |
Real estate construction | | | 12,251 | | | | 987 | | | | - | | | | 21,651 | | | | 4,695 | | | | 39,584 | | | | 11,923 | | | | 1,689 | | | | - | | | | 44,668 | | | | 6,563 | | | | 64,843 | |
Total commercial and construction | | | 66,753 | | | | 31,512 | | | | 52,862 | | | | 429,194 | | | | 125,949 | | | | 706,270 | | | 53,910 | | | 53,334 | | | 70,947 | | | 490,566 | | | 155,386 | | | 824,143 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 292 | | | | 1,562 | | | | 2,003 | | | | 5,158 | | | | 81,094 | | | | 90,109 | | | 127 | | | 365 | | | 594 | | | 4,262 | | | 77,802 | | | 83,150 | |
Other installment | | | 526 | | | | 9,841 | | | | 4,511 | | | | 119 | | | | - | | | | 14,997 | | | | 1,031 | | | | 1,480 | | | | 1,172 | | | | 233 | | | | 300 | | | | 4,216 | |
Total consumer | | | 818 | | | | 11,403 | | | | 6,514 | | | | 5,277 | | | | 81,094 | | | | 105,106 | | | | 1,158 | | | | 1,845 | | | | 1,766 | | | | 4,495 | | | | 78,102 | | | | 87,366 | |
Total loans | | $ | 67,571 | | | $ | 42,915 | | | $ | 59,376 | | | $ | 434,471 | | | $ | 207,043 | | | $ | 811,376 | | | $ | 55,068 | | | $ | 55,179 | | | $ | 72,713 | | | $ | 495,061 | | | $ | 233,488 | | | $ | 911,509 | |
The following table sets forth the dollar amount of loans due after one year from March 31, 2018,2020, which have fixed and adjustable interest rates (in thousands):
| | Fixed Rate | | | Adjustable Rate | | | Total | | | Fixed Rate | | | Adjustable Rate | | | Total | |
| | | | | | |
Commercial and construction: | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 63,022 | | | $ | 57,711 | | | $ | 120,733 | | | $ | 95,081 | | | $ | 61,913 | | | $ | 156,994 | |
Other real estate mortgage | | | 170,899 | | | | 320,552 | | | | 491,451 | | | 224,767 | | | 335,552 | | | 560,319 | |
Real estate construction | | | 8,630 | | | | 18,703 | | | | 27,333 | | | | 16,346 | | | | 36,574 | | | | 52,920 | |
Total commercial and construction | | | 242,551 | | | | 396,966 | | | | 639,517 | | | 336,194 | | | 434,039 | | | 770,233 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 64,510 | | | | 25,307 | | | | 89,817 | | | 64,522 | | | 18,501 | | | 83,023 | |
Other installment | | | 13,967 | | | | 504 | | | | 14,471 | | | | 2,638 | | | | 547 | | | | 3,185 | |
Total consumer | | | 78,477 | | | | 25,811 | | | | 104,288 | | | | 67,160 | | | | 19,048 | | | | 86,208 | |
Total loans | | $ | 321,028 | | | $ | 422,777 | | | $ | 743,805 | | | $ | 403,354 | | | $ | 453,087 | | | $ | 856,441 | |
Loan Commitments. The Company issues commitments to originate commercial loans, other real estate mortgage loans, construction loans, residential mortgage loans and other installment loans conditioned upon the occurrence of certain events. 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'sCompany’s usual terms and conditions. Collateral is not required to support commitments. At March 31, 2018,2020, the Company had outstanding commitments to originate loans of $35.1$35.8 million compared to $45.3$40.7 million at March 31, 2017.2019.
Mortgage Brokerage. In addition to originating mortgage loans for retention in its loan portfolio, theThe Company employs commissioned brokers who originate mortgage loans (including construction loans) for various mortgage companies, as well as for the Company. The loans brokered to mortgage companies are closed in the name of, and funded by, the purchasing mortgage company and are not originated as an asset of the Company. In return, the Company receives a fee ranging from 1.5% to 2.0% of the loan amount that it shares with the commissioned broker. Loans brokered to the Company are closed on the Company's books and the commissioned broker receives a portion of the origination fee. During the year ended March 31, 2018,2020, brokered loans totaled $43.4$45.5 million (including $11.9$11.1 million brokered to the Company) compared to $47.3$35.0 million (including $42.3$10.4 million brokered to the Company) of brokered loans in fiscal year 2017.2019. Beginning in fiscal year 2022, the Company is planning to transition to a model where all future mortgage loan originations will be brokered to various third-party mortgage companies. Gross fees of $746,000$666,000 and $757,000,$504,000, which includes brokered loan fees and fees for loans sold to the Federal Home Loan Mortgage Company ("FHLMC"(“FHLMC”), were earned for the years ended March 31, 20182020 and 2017,2019, respectively. The interest rate environment has a strong influence on the loan volume and amount of fees generated from the mortgage broker activity. In general, during periods of rising interest rates, the volume of loans and the amount of loan fees generally decrease as a result of slower mortgage loan demand. Conversely, during periods of falling interest rates, the volume of loans and the amount of loan fees generally increase as a result of the increased mortgage loan demand.
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Mortgage Loan Servicing. The Company is a qualified servicer for the FHLMC. The Company generally sells fixed-rate residential one-to-four family mortgage loans that it originates with maturities of 15 years or more and balloon mortgages to the FHLMC as part of its asset/liability strategy. Mortgage loans are sold to the FHLMC on a non-recourse basis whereby foreclosure losses are the responsibility of the FHLMC and not the Company. The Company's general policy is to close its residential loans on FHLMC modified loan documents to facilitate future sales to the FHLMC. Upon sale, the Company continues to collect payments on the loans, supervise foreclosure proceedings, and otherwise service the loans. At March 31, 2018,2020, total loans serviced for others were $142.1$146.8 million, of which $117.9$99.5 million were serviced for the FHLMC. Beginning in fiscal year 2021, the Company does not intend to originate and sell mortgages loans to FHLMC; however, the Company will continue to service its existing FHLMC portfolio.
Nonperforming Assets. Nonperforming assets were $2.7$1.4 million or 0.24%0.12% of total assets at March 31, 20182020 compared with $3.0$1.5 million or 0.27%0.13% of total assets at March 31, 2017.2019. The Company also had net loan recoveriescharge-offs totaling $238,000$83,000 during fiscal 20182020 compared to $643,000net recoveries of $641,000 during fiscal 2017.2019. Credit quality challengesmetrics continued to lessenimprove in the past fiscal year and the real estate market in our primary market area has improved steadily. Although it appears the economicEconomic conditions have stabilized,been stable and even continued to improve throughout a prolonged weak economymajority of the fiscal year; however, the current economic downturn in our market area related to the COVID-19 pandemic could result in future increases in nonperforming assets, increases in the provision for loan losses and in loan charge-offs in the future.that may materially adversely affect our results of operations and financial condition.
Loans are reviewed regularly and it is the Company'sCompany’s general policy that 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 any unrecoverable accrued interest is established and charged against operations. In general, payments received on non-accrual loans are applied to reduce the outstanding principal balance on a cash-basis method.
The Company continues to focus on managing theproactively manage its residential construction and land acquisition and development loan portfolios. At March 31, 2018,2020, the Company'sCompany’s residential construction and land acquisition and development loan portfolios were $16.4$12.2 million and $15.3$14.0 million, respectively, as compared to $19.1$20.3 million and $15.9$17.0 million, respectively, at March 31, 2017.2019. At March 31, 20182020 and 2017,2019, there were no nonperforming loans in the residential construction loan portfolio. At March 31, 2018 and 2017, the percentage of nonperforming loans inportfolio or the land acquisition and development loan portfolios was 4.97% and 5.05%, respectively.portfolio. For the yearyears ended March 31, 2018, the charge-off (recovery) ratio for2020 and 2019, there were no charge-offs or recoveries in the residential construction and land acquisition and development loan portfolios was 0.00% and (1.87)%, respectively, compared to 0.00% and (3.29)%, respectively, for the year ended March 31, 2017.portfolios.
The following table sets forth information regarding the Company'sCompany’s nonperforming loans at the dates indicated (dollars in thousands):
| | March 31, 2018 | | | March 31, 2017 | | | March 31, 2020 | | | March 31, 2019 | |
| | Number of Loans | | | Balance | | | Number of Loans | | | Balance | | | Number of Loans | | | Balance | | | Number of Loans | | | Balance | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | 1 | | | $ | 178 | | | | 2 | | | $ | 294 | | | 2 | | | $ | 201 | | | 2 | | | $ | 225 | |
Commercial real estate | | | 2 | | | | 1,200 | | | | 2 | | | | 1,342 | | | 2 | | | 1,014 | | | 2 | | | 1,081 | |
Land | | | 1 | | | | 763 | | | | 1 | | | | 801 | | |
Consumer | | | 12 | | | | 277 | | | | 19 | | | | 312 | | | | 9 | | | | 180 | | | | 16 | | | | 213 | |
Total | | | 16 | | | $ | 2,418 | | | | 24 | | | $ | 2,749 | | | | 13 | | | $ | 1,395 | | | | 20 | | | $ | 1,519 | |
Nonperforming loans decreased compared to the prior year. Thefiscal year as the Company continues its efforts to work out problem loans, seek full repayment or pursue foreclosure proceedings. All of these loans are to borrowers with properties located in Oregon and Washington, with the exception of eightsix automobile loans totaling $71,000 all of which were on non-accrual status.$28,000. At March 31, 2018, 88.54%2020, 82.67% of the Company'sCompany’s nonperforming loans, totaling $2.1$1.2 million, were measured for impairment. These loans have been charged down to the estimated fair market value of the 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 March 31, 2018.2020. At March 31, 2018,2020, the largest single nonperforming loan was a commercial real estate loan totaling $997,000.$851,000. This loan was measured for impairment during fiscal year 20182020 and management determined that a specific reserve was not required.
The balance of nonperforming assets included $298,000 in real estate owned ("REO") at March 31, 2018. The $298,000 balance of REO is comprised of a one-to-four family real estate property located in Washington and the sale of this REO property closed in May 2018. For the fiscal year ended March 31, 2018, the Company sold three land development lots that were carried at a zero cost basis for total gain on sale of $81,000. During fiscal year 2018, there were no write-downs on existing REO properties and maintenance and operating expenses for REO properties totaled $12,000. The orderly resolution of nonperforming loans and REO properties remains a priority for management. Because of the uncertain nature of the real estate market, no assurance can be given as to the timing of ultimate disposition of such assets or that the selling price will be at or above the carrying value. Declines in real estate values in our area could lead to additional valuation adjustments, which would have an adverse effect on our results of operations.
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The following table sets forth information regarding the Company'sCompany’s nonperforming assets at the dates indicated (in thousands):
| | At March 31, | | | At March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | |
Loans accounted for on a non-accrual basis: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 178 | | | $ | 294 | | | $ | - | | | $ | - | | | $ | 452 | | | $ | 201 | | | $ | 225 | | | $ | 178 | | | $ | 294 | | | $ | - | |
Other real estate mortgage | | | 1,963 | | | | 2,143 | | | | 2,360 | | | | 4,092 | | | | 10,881 | | | 1,014 | | | 1,081 | | | 1,963 | | | 2,143 | | | 2,360 | |
Consumer | | | 277 | | | | 278 | | | | 334 | | | | 1,226 | | | | 2,729 | | | | 180 | | | | 210 | | | | 277 | | | | 278 | | | | 334 | |
Total | | | 2,418 | | | | 2,715 | | | | 2,694 | | | | 5,318 | | | | 14,062 | | | 1,395 | | | 1,516 | | | 2,418 | | | 2,715 | | | 2,694 | |
Accruing loans which are contractually past due 90 days or more | | | - | | | | 34 | | | | 20 | | | | - | | | | - | | | | - | | | | 3 | | | | - | | | | 34 | | | | 20 | |
Total nonperforming loans | | | 2,418 | | | | 2,749 | | | | 2,714 | | | | 5,318 | | | | 14,062 | | | 1,395 | | | 1,519 | | | 2,418 | | | 2,749 | | | 2,714 | |
REO | | | 298 | | | | 298 | | | | 595 | | | | 1,603 | | | | 7,703 | | |
Real estate owned (“REO”) | | | | - | | | | - | | | | 298 | | | | 298 | | | | 595 | |
Total nonperforming assets | | $ | 2,716 | | | $ | 3,047 | | | $ | 3,309 | | | $ | 6,921 | | | $ | 21,765 | | | $ | 1,395 | | | $ | 1,519 | | | $ | 2,716 | | | $ | 3,047 | | | $ | 3,309 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foregone interest on non-accrual loans | | $ | 102 | | | $ | 81 | | | $ | 112 | | | $ | 433 | | | $ | 949 | | | $ | 75 | | | $ | 94 | | | $ | 102 | | | $ | 81 | | | $ | 112 | |
The following tables set forth information regarding the Company'sCompany’s nonperforming assets by loan type and geographical area at the dates indicated (in thousands):
| | Northwest Oregon | | | Other Oregon | | | Southwest Washington | | | Other | | | Total | |
March 31, 2020 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial business | | $ | - | | | $ | - | | | $ | 201 | | | $ | - | | | $ | 201 | |
Commercial real estate | | | - | | | | 851 | | | | 163 | | | | - | | | | 1,014 | |
Consumer | | | - | | | | - | | | | 152 | | | | 28 | | | | 180 | |
Total nonperforming assets | | $ | - | | | $ | 851 | | | $ | 516 | | | $ | 28 | | | $ | 1,395 | |
| | Other Oregon | | | Southwest Washington | | | Other Washington | | | Other | | | Total | |
March 31, 2018 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Commercial business | | $ | - | | | $ | 178 | | | $ | - | | | $ | - | | | $ | 178 | |
Commercial real estate | | | 997 | | | | 203 | | | | - | | | | - | | | | 1,200 | |
Land | | | 763 | | | | - | | | | - | | | | - | | | | 763 | |
Consumer | | | - | | | | 206 | | | | - | | | | 71 | | | | 277 | |
Total nonperforming loans | | | 1,760 | | | | 587 | | | | - | | | | 71 | | | | 2,418 | |
REO | | | - | | | | - | | | | 298 | | | | - | | | | 298 | |
Total nonperforming assets | | $ | 1,760 | | | $ | 587 | | | $ | 298 | | | $ | 71 | | | $ | 2,716 | |
March 31, 2017 | | | | | | | | | | |
March 31, 2019 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | - | | | $ | 294 | | | $ | - | | | $ | - | | | $ | 294 | | | $ | 65 | | | $ | - | | | $ | 160 | | | $ | - | | | $ | 225 | |
Commercial real estate | | | 1,128 | | | | 214 | | | | - | | | | - | | | | 1,342 | | | - | | | 896 | | | 185 | | | - | | | 1,081 | |
Land | | | 801 | | | | - | | | | - | | | | - | | | | 801 | | |
Consumer | | | - | | | | 170 | | | | - | | | | 142 | | | | 312 | | | | - | | | | - | | | | 169 | | | | 44 | | | | 213 | |
Total nonperforming loans | | | 1,929 | | �� | | 678 | | | | - | | | | 142 | | | | 2,749 | | |
REO | | | - | | | | - | | | | 298 | | | | - | | | | 298 | | |
Total nonperforming assets | | $ | 1,929 | | | $ | 678 | | | $ | 298 | | | $ | 142 | | | $ | 3,047 | | | $ | 65 | | | $ | 896 | | | $ | 514 | | | $ | 44 | | | $ | 1,519 | |
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 at March 31, 2020, to cover the probable losses inherent in these and other loans.
The following table sets forth information regarding the Company'sCompany’s other loans of concern at the dates indicated (dollars in thousands):
| | March 31, 2018 | | | March 31, 2017 | | | March 31, 2020 | | | March 31, 2019 | |
| | Number of Loans | | | Balance | | | Number of Loans | | | Balance | | | Number of Loans | | | Balance | | | Number of Loans | | | Balance | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | 11 | | | $ | 3,209 | | | | 6 | | | $ | 2,901 | | | 3 | | | $ | 147 | | | 9 | | | $ | 1,734 | |
Commercial real estate | | | 2 | | | | 1,785 | | | | 3 | | | | 4,380 | | | - | | | - | | | 3 | | | 2,308 | |
Land | | | - | | | - | | | 1 | | | 728 | |
Multi-family | | | 1 | | | | 11 | | | | 1 | | | | 12 | | | | 3 | | | | 34 | | | | 2 | | | | 20 | |
Total | | | 14 | | | $ | 5,005 | | | | 10 | | | $ | 7,293 | | | | 6 | | | $ | 181 | | | | 15 | | | $ | 4,790 | |
At March 31, 2018,2020, loans delinquent 30 – 89 days were 0.06%0.03% of total loans compared to 0.03%0.04% at March 31, 2017.2019 and were comprised of consumer loans. There were no delinquent loans 30 – 8930-89 days past due in our commercial real estate ("CRE"(“CRE”) loanor commercial business portfolio at March 31, 20182020 or 2017. At both March 31, 2018 and 2017, the 30 – 89 days delinquency rate in our commercial business loan portfolio was 0.01% of commercial business loans.2019. CRE loans represent the largest portion of our loan portfolio at 55.54%55.72% of total loans and commercial business loans represent 16.97%19.64% of total loans.
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Troubled debt restructurings ("TDRs"(“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 usingand the original note rate, except when the loan is collateral dependent. In these cases, the estimated fair value of the collateral (less any selling costs, if applicable) is used. Impairment is recognized as a specific component within the allowance for loan losses if the estimated value of the impaired loan is less than the recorded investment in the loan. When the amount of the impairment represents a confirmed loss, it is charged off against the allowance for loan losses. At March 31, 2018,2020, the Company had TDRs totaling $7.7$5.2 million, of which $5.6$4.0 million were on accrual status. The $2.1$1.2 million of TDRs accounted for on a non-accrual basis at March 31, 2018,2020 are included as nonperforming loans in the nonperforming asset table above. However, allAll of the Company'sCompany’s TDRs were paying as agreed at March 31, 20182020 except for one TDR commercial businessreal estate loan totaling $178,000 and two TDR CRE loans totaling $1.2 million that have defaulted since the loans were modified.$851,000. The related amount of interest income recognized on these TDR loans was $294,000$221,000 for the year ended March 31, 2018.2020.
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 CARES Act, signed into law on March 27, 2020, amended accounting principles generally accepted in the United States of America (“GAAP”) with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be 1) related to COVID-19; 2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and 3) executed between March 1, 2020, and the earlier of A) 60 days after the date of termination of the national emergency by the President or B) December 31, 2020. As of March 31, 2020 the Company had approved ten loan modifications related to the COVID-19 pandemic totaling $36.2 million which consisted of deferral of regularly scheduled principal and interest payments for three months. Loan modifications in accordance with the CARES Act are still subject to an evaluation in regards to determining whether or not a loan is deemed to be impaired. For additional information related to loan modifications as a result of the COVID-19 pandemic, see “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments Related to COVID-19.
The accrual status of a loan may change after it has been classified as a TDR. The Company'sCompany’s general policy related to TDRs is to perform a credit evaluation of the borrower'sborrower’s financial condition and prospects for repayment under the revised terms. This evaluation includes consideration of the borrower'sborrower’s sustained historical repayment performance for a reasonable period of time. A sustained period of repayment performance generally would be a minimum of six months and may include repayments made prior to the restructuring date. If repayment of principal and interest appears doubtful, it is placed on non-accrual status.
In accordance with the Company'sCompany’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 six 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.
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Asset Classification. The OCC has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OCC examiners have authority to identify problem assets and, if appropriate, require them to be classified as such. There are three classifications for problem assets: substandard, doubtful and loss (collectively "classified loans"“classified loans”). Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility
of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.
When the Company classifies problem assets as either substandard or doubtful, we may determine that the loan is impaired and establish a specific allowance in an amount we deem prudent to address the risk specifically or we may allow the loss to be addressed in the general allowance. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been specifically allocated to particular problem assets. When a problem asset is classified by us as a loss, we are required to charge off the asset in the period in which it is deemed uncollectible.
The aggregate amount of the Company's classified loans (comprised entirely of substandard loans), general loss allowances, specific loss allowances and net recoveries were as follows at the dates indicated (in thousands):
| | At or For the Year | | | At or For the Year | |
| | Ended March 31, | | | Ended March 31, | |
| | 2018 | | | 2017 | | | 2020 | | | 2019 | |
| | | | | | |
Classified loans | | $ | 7,423 | | | $ | 10,008 | | | $ | 1,576 | | | $ | 6,306 | |
| | | | | | | | | |
General loss allowances | | | 10,697 | | | | 10,440 | | | 12,612 | | | 11,435 | |
Specific loss allowances | | | 69 | | | | 88 | | | 12 | | | 22 | |
Net recoveries | | | (238 | ) | | | (643 | ) | |
Net charge-offs (recoveries) | | | 83 | | | (641 | ) |
All of the loans on non-accrual status as of March 31, 20182020 were categorized as classified loans. Classified loans at March 31, 20182020 were comprised of twelvefive commercial business loans totaling $3.4 million, four$348,000, two commercial real estate loans totaling $3.0$1.0 million (the largest of which was $1.6 million)$851,000), onethree multi-family loanloans totaling $11,000, one land development loan totaling $763,000, four$34,000, three one-to-four family real estate loans totaling $206,000$152,000 and eightsix purchased automobile loans totaling $71,000.$28,000.
Allowance for Loan Losses. The Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio consistent with U.S. generally accepted accounting principles ("GAAP")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'sCompany’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'sCompany’s external loan reviews and its loan classification systems. Credit officers are expected to monitor their loan portfolios and make recommendations to change loan grades whenever changes are warranted. Credit administration approves any changes to loan grades and monitors loan grades. For additional discussion of the Company'sCompany’s methodology for assessing the appropriate level of the allowance for loan losses see Item 7 "Management's7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies."
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'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 $2.2$1.1 million and $3.0$1.5 million at March 31, 20182020 and 2017,2019, respectively.
The Company did not recordrecorded a provision for loan losses of $1.3 million and $50,000 for the years ended March 31, 20182020 and 2017.2019, respectively. At March 31, 2018,2020, the Company had an allowance for loan losses of $10.8$12.6 million, or 1.33%1.38% of total loans, compared to $10.5$11.5 million, or 1.35%1.31% at March 31, 2017.2019. The increase in the balance of the allowance for loan losses at March 31, 20182020 reflects the $31.9consideration of the weakening economic conditions as a result of the COVID-19 pandemic and to a lesser extent, the $35.4 million increase in loan balances from March 31, 20172019 compared to March 31, 2018. The2020. During fiscal year 2020, the Company is continuing to experience stabilizing real estate valuesexperienced improvement in our market areas as reflected by net recoveriesthe level of $238,000delinquent, nonperforming and classified loans. Net
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charge-offs totaled $83,000 for the fiscal year ended March 31, 2018.2020 compared to net recoveries of $641,000 in the prior fiscal year. Nonperforming loans decreased $331,000$124,000 and 30-89 day delinquent loans increased $279,000decreased $74,000 during the fiscal year ended March 31, 2018.2020. Classified loans were $7.4$1.6 million at March 31, 20182020 compared to $10.0$6.3 million at March 31, 2017.2019. The $2.6$4.7 million decrease is primarily attributed to onethe payoff of six commercial real estate loanbusiness loans with an unpaid principal balance of $3.2$1.1 million andduring fiscal year 2020 along with risk rating upgrades totaling $3.3 million, as of March 31, 2018 and 2017, respectively, which improved from a substandard to a special mention credit quality indicator during the fiscal year ended March 31, 2018.including two commercial real estate loans totaling $2.2 million. The coverage ratio of allowance for loan losses to nonperforming loans was 445.24%904.95% at March 31, 20182020 compared to 382.98%754.25% at March 31, 2017.2019. The
Company's Company’s general valuation allowance to non-impaired loans was 1.33%1.39% and 1.36%1.31% at March 31, 20182020 and 2017,2019, respectively.
Management considers the allowance for loan losses to be adequate at March 31, 20182020 to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio, and the Company believes it has established its existing allowance for loan losses in accordance with GAAP. However, a further decline in national and local economic conditions (including declines as a result of the COVID-19 pandemic), results of examinations by the Company'sCompany’s banking regulators, or other factors could result in a material increase in the allowance for loan losses and may adversely affect the Company'sCompany’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.
The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated (dollars in thousands):
| | Year Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | |
Balance at beginning of year | | $ | 10,528 | | | $ | 9,885 | | | $ | 10,762 | | | $ | 12,551 | | | $ | 15,643 | |
Provision for (recapture of) loan losses | | | - | | | | - | | | | (1,150 | ) | | | (1,800 | ) | | | (3,700 | ) |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Commercial and construction | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | 240 | | | | 492 | | | | 30 | | | | 34 | | | | 526 | |
Other real estate mortgage | | | 347 | | | | 463 | | | | 331 | | | | 271 | | | | 873 | |
Real estate construction | | | - | | | | - | | | | 6 | | | | - | | | | 4 | |
Total commercial and construction | | | 587 | | | | 955 | | | | 367 | | | | 305 | | | | 1,403 | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 11 | | | | 89 | | | | 153 | | | | 158 | | | | 304 | |
Other installment | | | 48 | | | | 57 | | | | 27 | | | | 12 | | | | 7 | |
Total consumer | | | 59 | | | | 146 | | | | 180 | | | | 170 | | | | 311 | |
Total recoveries | | | 646 | | | | 1,101 | | | | 547 | | | | 475 | | | | 1,714 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Commercial and construction | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | - | | | | 1 | | | | - | | | | 120 | | | | 340 | |
Other real estate mortgage | | | 68 | | | | 117 | | | | - | | | | 233 | | | | 406 | |
Real estate construction | | | - | | | | - | | | | - | | | | - | | | | 11 | |
Total commercial and construction | | | 68 | | | | 118 | | | | - | | | | 353 | | | | 757 | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 12 | | | | - | | | | 8 | | | | 53 | | | | 346 | |
Other installment | | | 328 | | | | 340 | | | | 266 | | | | 58 | | | | 3 | |
Total consumer | | | 340 | | | | 340 | | | | 274 | | | | 111 | | | | 349 | |
| | | | | | | | | | | | | | | | | | | | |
Total charge-offs | | | 408 | | | | 458 | | | | 274 | | | | 464 | | | | 1,106 | |
| | | | | | | | | | | | | | | | | | | | |
Net recoveries | | | (238 | ) | | | (643 | ) | | | (273 | ) | | | (11 | ) | | | (608 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance at end of year | | $ | 10,766 | | | $ | 10,528 | | | $ | 9,885 | | | $ | 10,762 | | | $ | 12,551 | |
| | | | | | | | | | | | | | | | | | | | |
Ratio of allowance to total loans outstanding at end of year | | | 1.33 | % | | | 1.35 | % | | | 1.58 | % | | | 1.86 | % | | | 2.35 | % |
Ratio of net (recoveries) charge-offs to average net loans outstanding during year | | | (0.03 | ) | | | (0.10 | ) | | | (0.05 | ) | | | 0.00 | | | | (0.12 | ) |
Ratio of allowance to total nonperforming loans | | | 445.24 | | | | 382.98 | | | | 364.22 | | | | 202.37 | | | | 89.25 | |
| | Year Ended March 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | | |
Balance at beginning of year | | $ | 11,457 | | | $ | 10,766 | | | $ | 10,528 | | | $ | 9,885 | | | $ | 10,762 | |
Provision for (recapture of) loan losses | | | 1,250 | | | | 50 | | | | - | | | | - | | | | (1,150 | ) |
Recoveries: | | | | | | | | | | | | | | | | | | | | |
Commercial and construction | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | - | | | | 1 | | | | 240 | | | | 492 | | | | 30 | |
Other real estate mortgage | | | - | | | | 824 | | | | 347 | | | | 463 | | | | 331 | |
Real estate construction | | | - | | | | - | | | | - | | | | - | | | | 6 | |
Total commercial and construction | | | - | | | | 825 | | | | 587 | | | | 955 | | | | 367 | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 30 | | | | 80 | | | | 11 | | | | 89 | | | | 153 | |
Other installment | | | 33 | | | | 27 | | | | 48 | | | | 57 | | | | 27 | |
Total consumer | | | 63 | | | | 107 | | | | 59 | | | | 146 | | | | 180 | |
Total recoveries | | | 63 | | | | 932 | | | | 646 | | | | 1,101 | | | | 547 | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | |
Commercial and construction | | | | | | | | | | | | | | | | | | | | |
Commercial business | | | 64 | | | | - | | | | - | | | | 1 | | | | - | |
Other real estate mortgage | | | - | | | | - | | | | 68 | | | | 117 | | | | - | |
Real estate construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Total commercial and construction | | | 64 | | | | - | | | | 68 | | | | 118 | | | | - | |
Consumer | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | - | | | | 30 | | | | 12 | | | | - | | | | 8 | |
Other installment | | | 82 | | | | 261 | | | | 328 | | | | 340 | | | | 266 | |
Total consumer | | | 82 | | | | 291 | | | | 340 | | | | 340 | | | | 274 | |
Total charge-offs | | | 146 | | | | 291 | | | | 408 | | | | 458 | | | | 274 | |
Net charge-offs (recoveries) | | | 83 | | | | (641 | ) | | | (238 | ) | | | (643 | ) | | | (273 | ) |
Balance at end of year | | $ | 12,624 | | | $ | 11,457 | | | $ | 10,766 | | | $ | 10,528 | | | $ | 9,885 | |
Ratio of allowance to total loans outstanding at end of year | | | 1.38 | % | | | 1.31 | % | | | 1.33 | % | | | 1.35 | % | | | 1.58 | % |
Ratio of net (recoveries) charge-offs to average net loans outstanding during year | | | 0.01 | | | | (0.08 | ) | | | (0.03 | ) | | | (0.10 | ) | | | (0.05 | ) |
Ratio of allowance to total nonperforming loans | | | 904.95 | | | | 754.25 | | | | 445.24 | | | | 382.98 | | | | 364.22 | |
16
The following table sets forth the breakdown of the allowance for loan losses by loan category as of the dates indicated (dollars in thousands):
| | At March 31, | | | At March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | | | Amount | | | Loan Category as a Percent of Total Loans | |
| | | | | | |
Commercial and construction: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial business | | $ | 1,668 | | | | 16.97 | % | | $ | 1,418 | | | | 13.78 | % | | $ | 1,048 | | | | 11.11 | % | | $ | 1,263 | | | | 13.31 | % | | $ | 2,409 | | | | 13.43 | % | | $ | 2,008 | | | 19.64 | % | | $ | 1,808 | | | 18.58 | % | | $ | 1,668 | | | 16.97 | % | | $ | 1,418 | | | 13.78 | % | | $ | 1,048 | | | 11.11 | % |
Other real estate mortgage | | | 5,956 | | | | 65.20 | | | | 5,609 | | | | 65.00 | | | | 5,310 | | | | 63.94 | | | | 5,155 | | | | 59.60 | | | | 5,812 | | | | 60.90 | | | 7,505 | | | 63.66 | | | 6,035 | | | 60.50 | | | 5,956 | | | 65.20 | | | 5,609 | | | 65.00 | | | 5,310 | | | 63.94 | |
Real estate construction | | | 618 | | | | 4.88 | | | | 714 | | | | 5.92 | | | | 416 | | | | 4.28 | | | | 769 | | | | 5.26 | | | | 387 | | | | 3.65 | | | 1,149 | | | 7.12 | | | 1,457 | | | 10.37 | | | 618 | | | 4.88 | | | 714 | | | 5.92 | | | 416 | | | 4.28 | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate one-to-four family | | | 1,400 | | | | 11.10 | | | | 1,525 | | | | 11.91 | | | | 1,652 | | | | 14.21 | | | | 1,881 | | | | 15.49 | | | | 2,190 | | | | 17.43 | | | 1,237 | | | 9.12 | | | 1,208 | | | 9.60 | | | 1,400 | | | 11.10 | | | 1,525 | | | 11.91 | | | 1,652 | | | 14.21 | |
Other installment | | | 409 | | | | 1.85 | | | | 574 | | | | 3.39 | | | | 751 | | | | 6.46 | | | | 667 | | | | 6.34 | | | | 463 | | | | 4.59 | | | 126 | | | 0.46 | | | 239 | | | 0.95 | | | 409 | | | 1.85 | | | 574 | | | 3.39 | | | 751 | | | 6.46 | |
Unallocated | | | 715 | | | | - | | | | 688 | | | | - | | | | 708 | | | | - | | | | 1,027 | | | | - | | | | 1,290 | | | | - | | | | 599 | | | | - | | | | 710 | | | | - | | | | 715 | | | | - | | | | 688 | | | | - | | | | 708 | | | | - | |
Total allowance for loan losses | | $ | 10,766 | | | | 100.00 | % | | $ | 10,528 | | | | 100.00 | % | | $ | 9,885 | | | | 100.00 | % | | $ | 10,762 | | | | 100.00 | % | | $ | 12,551 | | | | 100.00 | % | | $ | 12,624 | | | | 100.00 | % | | $ | 11,457 | | | | 100.00 | % | | $ | 10,766 | | | | 100.00 | % | | $ | 10,528 | | | | 100.00 | % | | $ | 9,885 | | | | 100.00 | % |
Investment Activities
The Board sets the investment policy of the Company. The Company's investment objectives are: to provide and maintain liquidity within regulatory guidelines; to maintain a balance of high quality, diversified investments to minimize risk; to provide collateral for pledging requirements; to serve as a balance to earnings; and to optimize returns. The policy permits investment in various types of liquid assets (generally debt and asset-backed securities) permissible under OCC regulation, which includes U.S. Treasury obligations, securities of various federal agencies, "bank qualified" municipal bonds, certain certificates of deposit of insured banks, repurchase agreements, federal funds, real estate mortgage investment conduits ("REMICS"(“REMICS”) and mortgage-backed securities ("MBS"(“MBS”), but does not permit investment in non-investment grade bonds. The policy also dictates the criteria for classifying investment securities into one of three categories: held to maturity, available for sale or trading. At March 31, 2018,2020, no investment securities were held for trading purposes. At March 31, 2020, the Company’s investment portfolio consists of debt securities and does not include any equity securities. See Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies."
The Company primarily purchases agency securities with maturities of five years or less and purchases a combination of MBS backed by government agencies (FHLMC, Fannie Mae ("FNMA"(“FNMA”), U.S. Small Business Administration ("SBA"(“SBA”) or Ginnie Mae ("GNMA"(“GNMA”)). FHLMC and FNMA securities are not backed by the full faith and credit of the U.S. government, while SBA and GNMA securities are backed by the full faith and credit of the U.S. government. At March 31, 2018,2020, the Company owned no privately issued MBS. Our REMICS are MBS issued by FHLMC, FNMA and consist of FHLMC and FNMA securitiesGNMA and our CRE MBS consist of FNMA securities.are issued by FNMA. The Company does not believe that it has any exposure to sub-prime lending in its investment securities portfolio. See Note 43 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K for additional information.
The following table sets forth the investment securities portfolio and carrying values at the dates indicated (dollars in thousands):
| | At March 31, | | | At March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | |
| | Carrying Value | | | Percent of Portfolio | | | Carrying Value | | | Percent of Portfolio | | | Carrying Value | | | Percent of Portfolio | | | Carrying Value | | | Percent of Portfolio | | | Carrying Value | | | Percent of Portfolio | | | Carrying Value | | | Percent of Portfolio | |
| | | | | | |
Available for sale (at estimated fair value): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal securities | | $ | 8,732 | | | | 4.09 | % | | $ | 2,819 | | | | 1.41 | % | | $ | - | | | | - | % | | $ | 4,877 | | | 3.29 | % | | $ | 8,881 | | | 4.98 | % | | $ | 8,732 | | | 4.09 | % |
Trust preferred securities | | | - | | | | - | | | | - | | | | - | | | | 1,808 | | | | 1.20 | | |
Agency securities | | | 22,102 | | | | 10.36 | | | | 16,808 | | | | 8.39 | | | | 19,569 | | | | 12.98 | | | 6,016 | | | 4.06 | | | 12,341 | | | 6.92 | | | 22,102 | | | 10.36 | |
REMICs | | | 46,955 | | | | 22.02 | | | | 43,160 | | | | 21.55 | | | | 43,924 | | | | 29.14 | | | 43,791 | | | 29.52 | | | 40,162 | | | 22.53 | | | 46,955 | | | 22.02 | |
Residential MBS | | | 89,074 | | | | 41.77 | | | | 96,611 | | | | 48.24 | | | | 76,353 | | | | 50.64 | | | 60,085 | | | 40.51 | | | 75,821 | | | 42.54 | | | 89,074 | | | 41.77 | |
Other MBS | | | 46,358 | | | | 21.74 | | | | 40,816 | | | | 20.38 | | | | 9,036 | | | | 5.99 | | | | 33,522 | | | | 22.60 | | | | 41,021 | | | | 23.01 | | | | 46,358 | | | | 21.74 | |
| | | 213,221 | | | | 99.98 | | | | 200,214 | | | | 99.97 | | | | 150,690 | | | | 99.95 | | | 148,291 | | | 99.98 | | | 178,226 | | | 99.98 | | | 213,221 | | | 99.98 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held to maturity (at amortized cost): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential MBS | | | 42 | | | | 0.02 | | | | 64 | | | | 0.03 | | | | 75 | | | | 0.05 | | | 28 | | | 0.02 | | | 35 | | | 0.02 | | | 42 | | | 0.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investment securities | | $ | 213,263 | | | | 100.00 | % | | $ | 200,278 | | | | 100.00 | % | | $ | 150,765 | | | | 100.00 | % | | $ | 148,319 | | | | 100.00 | % | | $ | 178,261 | | | | 100.00 | % | | $ | 213,263 | | | | 100.00 | % |
The following table sets forth the maturities and weighted average yields in the securities portfolio at March 31, 20182020 (dollars in thousands):
| | Less Than One Year | | | One to Five Years | | | More Than Five to Ten Years | | | More Than Ten Years | | | Less Than One Year | | | One to Five Years | | | More Than Five to Ten Years | | | More Than Ten Years | |
| | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | | | Amount | | | Weighted Average Yield (1) | |
| | | | | | |
Municipal securities | | $ | - | | | | - | % | | $ | - | | | | - | % | | $ | 2,155 | | | | 1.72 | % | | $ | 6,577 | | | | 2.67 | % | | $ | - | | | - | % | | $ | 51 | | | 2.66 | % | | $ | 2,333 | | | 5.03 | % | | $ | 2,493 | | | 3.00 | % |
Agency securities | | | 9,964 | | | | 1.04 | | | | 5,976 | | | | 1.69 | | | | 6,162 | | | | 2.22 | | | | - | | | | - | | | 1,015 | | | 2.47 | | | 1,998 | | | 1.95 | | | 3,003 | | | 1.75 | | | - | | | - | |
REMICS | | | - | | | | - | | | | 2,390 | | | | 2.14 | | | | 4,316 | | | | 2.33 | | | | 40,249 | | | | 2.32 | | | - | | | - | | | 748 | | | 1.52 | | | 12,492 | | | 1.44 | | | 30,551 | | | 1.82 | |
Residential MBS | | | - | | | | - | | | | 6 | | | | 6.16 | | | | 16,435 | | | | 1.93 | | | | 72,675 | | | | 2.41 | | | - | | | - | | | 25 | | | 3.58 | | | 8,462 | | | 2.08 | | | 51,626 | | | 1.95 | |
Other MBS | | | - | | | | - | | | | - | | | | - | | | | 13,489 | | | | 2.19 | | | | 32,869 | | | | 2.16 | | | | - | | | - | | | | 1,523 | | | 1.76 | | | | 7,696 | | | 2.33 | | | | 24,303 | | | 2.23 | |
Total | | $ | 9,964 | | | | 1.04 | % | | $ | 8,372 | | | | 1.82 | % | | $ | 42,557 | | | | 2.09 | % | | $ | 152,370 | | | | 2.34 | % | | $ | 1,015 | | | 2.47 | % | | $ | 4,345 | | | 1.82 | % | | $ | 33,986 | | | 2.08 | % | | $ | 108,973 | | | 2.00 | % |
(1) For available for sale securities carried at estimated fair value, the weighted average yield is computed using amortized cost without a tax equivalent
adjustment for tax-exempt obligations.
18
Management reviews investment securities quarterly for the presence of other than temporary impairment ("OTTI"(“OTTI”), taking into consideration current market conditions, the extent and nature of changes in estimated fair value, issuer rating changes and trends, financial condition of the underlying issuers, current analysts'analysts’ evaluations, the Company'sCompany’s ability and intent to hold investments until a recovery of estimated fair value, which may be maturity, as well as other factors. The Company's trust preferred securities investment consisted of a single collateralized debt obligation ("CDO") secured by a pool of trust preferred securities issued by other bank holding companies which was liquidated during the year ended March 31, 2017, and the Company received $1.8 million in proceeds from the liquidation. During the year ended March 31, 2017, the Company recognized a $240,000 OTTI charge related to this CDO. For additional information related to this security, see Note 4 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K. There was no OTTI charge for investment securities for the years ended March 31, 20182020, 2019 or 2016.2018. However, additional deterioration in market and economic conditions related to the COVID-19 pandemic may have an adverse impact on credit quality in the future and result in OTTI charges.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and loan sales are the major sources of the Company's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.
Deposit Accounts. The Company attracts deposits from within its primary market area by offering a broad selection of deposit instruments, including demand deposits, negotiable order of withdrawal ("NOW") accounts, money market accounts, savings accounts, certificates of deposit and retirement savings plans. The Company has focused on building customer relationship deposits which include both business and consumer depositors. Deposit account terms vary according to, among other factors, the minimum balance required, the time periods the funds must remain on deposit and the interest rate. In determining the terms of its deposit accounts, the Company considers the rates offered by its competition, profitability to the Company, matching deposit and loan products and customer preferences and concerns.
The following table sets forth the average balances of deposit accounts held by the Company at the dates indicated (dollars in thousands):
| | Year Ended March 31, | | | Year Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2020 | | | 2019 | | | 2018 | |
| | Average Balance | | | Average Rate | | | Average Balance | | | Average Rate | | | Average Balance | | | Average Rate | | | Average Balance | | | Average Rate | | | Average Balance | | | Average Rate | | | Average Balance | | | Average Rate | |
| | | | | | |
Non-interest-bearing demand | | $ | 264,128 | | | | 0.00 | % | | $ | 202,376 | | | | 0.00 | % | | $ | 170,612 | | | | 0.00 | % | | $ | 284,748 | | | 0.00 | % | | $ | 289,707 | | | 0.00 | % | | $ | 264,128 | | | 0.00 | % |
Interest-bearing checking | | | 170,124 | | | | 0.06 | | | | 151,801 | | | | 0.06 | | | | 127,161 | | | | 0.08 | | | 180,969 | | | 0.06 | | | 180,256 | | | 0.06 | | | 170,124 | | | 0.06 | |
Savings accounts | | | 132,376 | | | | 0.10 | | | | 106,324 | | | | 0.10 | | | | 84,485 | | | | 0.10 | | | 189,207 | | | 0.56 | | | 136,720 | | | 0.11 | | | 132,376 | | | 0.10 | |
Money market accounts | | | 275,092 | | | | 0.12 | | | | 252,040 | | | | 0.12 | | | | 231,873 | | | | 0.12 | | | 194,061 | | | 0.12 | | | 252,202 | | | 0.12 | | | 275,092 | | | 0.12 | |
Certificates of deposit | | | 136,370 | | | | 0.47 | | | | 118,769 | | | | 0.53 | | | | 129,427 | | | | 0.55 | | | | 112,282 | | | 1.34 | | | | 105,049 | | | 0.43 | | | | 136,370 | | | 0.47 | |
Total | | $ | 978,090 | | | | 0.12 | % | | $ | 831,310 | | | | 0.14 | % | | $ | 743,558 | | | | 0.16 | % | | $ | 961,267 | | | 0.30 | % | | $ | 963,934 | | | 0.10 | % | | $ | 978,090 | | | 0.12 | % |
Deposit accounts totaled $995.7$990.4 million at March 31, 20182020 compared to $980.1$925.1 million at March 31, 2017.2019. The Company did not have any wholesale-brokered deposits at March 31, 20182020 and 2017.2019. The Company continues to focus on core deposits and growth generated by customer relationships as opposed to obtaining deposits through the wholesale markets. Themarkets, although the Company has continued to experience increased competition for customer deposits within its market area.area during fiscal year 2020. Core branch deposits (comprised of all demand, savings, interest checking accounts and all time deposits excluding wholesale-brokered deposits, trust account deposits, Interest on Lawyer Trust Accounts ("IOLTA"(“IOLTA”), public funds, and Internetinternet based deposits) increased $22.7$58.7 million since March 31, 2017.2019. At March 31, 2018,2020, the Company had $23.6$5.3 million, or 2.4%0.01% of total deposits, in Certificate of Deposit Account Registry Service ("CDARS"(“CDARS”) and Insured Cash Sweep ("ICS"(“ICS”) deposits, which were gathered from customers within the Company'sCompany’s primary market-area. CDARS and ICS deposits allow customers access to FDIC insurance on deposits exceeding the $250,000 FDIC insurance limit.
At March 31, 20182020 and 2017,2019, the Company also had $3.1$12.2 million and $3.5$3.2 million, respectively, in deposits from public entities located in the States of Washington and Oregon, all of which were fully covered by FDIC insurance or secured by pledged collateral.
19
The Company is enrolled in an internet deposit listing service. Under this listing service, the Company may post certificates of deposit rates on an internet site where institutional investors have the ability to deposit funds with the Company. At March 31, 2018,2020 and 2019, the Company did not have any deposits through this listing service as the Company chose not to utilize these internet based deposits. At March 31, 2017, the Company had $7.0 million of deposits through this listing service which were assumed in the MBank transaction. Although the Company did not originate any internet based deposits during the year ended March 31, 2018,2020, the Company may do so in the future consistent with its asset/liability objectives.
Deposit growth remains a key strategic focus for the Company and our ability to achieve deposit growth, particularly growth in core deposits, is subject to many risk factors including the effects of competitive pricing pressures, changing customer deposit behavior, and increasing or decreasing interest rate environments. Adverse developments with respect to any of these risk factors could limit the Company'sCompany’s ability to attract and retain deposits and could have a material negative impact on the Company'sCompany’s future financial condition, results of operations and cash flows.
The following table presents the maturity period, amount and weighted average rate of certificates of deposit equal to or greater than $100,000 at March 31, 20182020 (dollars in thousands):
Maturity Period | | Amount | | | Weighted Average Rate | | | Amount | | | Weighted Average Rate | |
| | | | | | |
Three months or less | | $ | 14,879 | | | | 0.44 | % | | $ | 7,959 | | | 1.07 | % |
Over three through six months | | | 10,821 | | | | 0.55 | | | 14,065 | | | 1.76 | |
Over six through 12 months | | | 23,139 | | | | 0.54 | | | 24,365 | | | 1.71 | |
Over 12 months | | | 16,399 | | | | 0.90 | | | | 45,345 | | | 2.32 | |
Total | | $ | 65,238 | | | | 0.61 | % | | $ | 91,734 | | | 1.96 | % |
Borrowings. The Company relies upon advances from the FHLB and borrowings from the Federal Reserve Bank of San Francisco ("FRB"(“FRB”) to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB and borrowings from the FRB are typically secured by the Bank's commercial business loans, commercial real estate loans and first mortgage loans and investment securities.residential loans. At March 31, 2018, 2017 and 2016,2020, the Bank did not have any FHLB advances or FRB borrowings. At March 31, 2019, the Bank had FHLB advances totaling $56.6 million and no FRB borrowings.
The FHLB functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (primarily securities which are obligations of, or guaranteed by, the U.S.) provided certain standards related to credit-worthiness have been met. The FHLB determines specific lines of credit for each member institution and the Bank has a line of credit with the FHLB equal to 35%45% of its total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At March 31, 2018,2020, the Bank had an available credit capacity of $394.6$532.5 million, subject to sufficient collateral and stock investment.
The Bank also has a borrowing arrangement with the FRB with an available credit facility of $57.4$67.3 million, subject to pledged collateral, as of March 31, 2018.2020. The following table sets forth certain information concerning the Company's borrowings for the periods indicated (dollars in thousands):
| | Year Ended March 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | | |
Maximum amounts of FHLB advances outstanding at any month end | | $ | 77,241 | | | $ | 62,638 | | | $ | 14,050 | |
Average FHLB advances outstanding | | | 20,532 | | | | 15,400 | | | | 787 | |
Weighted average rate on FHLB advances | | | 2.54 | % | | | 2.58 | % | | | 1.60 | % |
Maximum amounts of FRB borrowings outstanding at any month end | | $ | - | | | $ | - | | | $ | - | |
Average FRB borrowings outstanding | | | 33 | | | | 3 | | | | 1 | |
Weighted average rate on FRB borrowings | | | 1.92 | % | | | 3.00 | % | | | 1.50 | % |
| | Year Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | |
Maximum amounts of FHLB advances outstanding at any month end | | $ | 14,050 | | | $ | - | | | $ | - | |
Average FHLB advances outstanding | | | 787 | | | | 239 | | | | 5 | |
Weighted average rate on FHLB advances | | | 1.60 | % | | | 0.80 | % | | | 0.31 | % |
Maximum amounts of FRB borrowings outstanding at any month end | | $ | - | | | $ | - | | | $ | - | |
Average FRB borrowings outstanding | | | 1 | | | | - | | | | 5 | |
Weighted average rate on FRB borrowings | | | 1.50 | % | | | - | % | | | 0.88 | % |
The CARES Act authorized the SBA to temporarily guarantee loans under a new federal loan program called the Paycheck Protection Program (“PPP”) pursuant to which we have originated COVID-19 related loans. We may utilize the FRB's Paycheck Protection Program Liquidity Facility pursuant to which the Company will pledge its PPP loans as collateral at face value to obtain FRB non-recourse borrowings. For additional information, see “Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments Related to COVID-19.”
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At March 31, 2018,2020, the Company had three wholly-owned subsidiary grantor trusts totaling $26.5$26.7 million that were established for the purpose of issuing trust preferred securities and common securities including a $5.2 million trust acquired in the MBank transaction.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"“Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company'sCompany’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'sCompany’s common stock. The common securities issued by the grantor trusts are held by the Company, and the Company'sCompany’s investment in the common securities of $836,000 at both March 31, 20182020 and 2017,2019 is included in prepaid expenses and other assets in the Consolidated Balance Sheets included in the Consolidated Financial Statements contained in Item 8 of this Form 10-K. For more information, see also Note 1110 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Taxation
For details regarding the Company'sCompany’s taxes, see Note 1211 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Personnel
As of March 31, 2018,2020, the Company had 258252 full‑time equivalent employees, none of whom are represented by a collective bargaining unit. The Company believes its relationship with its employees is good.
Corporate Information
The Company'sCompany’s principal executive offices are located at 900 Washington Street, Vancouver, Washington 98660. Its telephone number is (360) 693-6650. The Company maintains a website with the address www.riverviewbank.com.www.riverviewbank.com. The information contained on the Company'sCompany’s website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor'sinvestor’s own internet access charges, the Company makes available free of charge through its website the Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after it has electronically filed such material with, or furnished such material to, the Securities and Exchange Commission ("SEC"(“SEC”).
Subsidiary Activities
Under OCC regulations, the Bank is authorized to invest up to 3% of its assets in subsidiary corporations classified as service corporations, with amounts in excess of 2% only if primarily for community purposes, and unlimited amounts in operating subsidiaries. At March 31, 2018,2020, the Bank'sBank’s investments in its wholly-owned subsidiariessubsidiary of $1.2$1.3 million in Riverview Services, Inc. ("(“Riverview Services"Services”) and $4.8majority-owned subsidiary of $6.4 million in the Trust Company were within these limitations.
Riverview Services acts as a trustee for deeds of trust on mortgage loans granted by the Bank and receives a reconveyance fee for each deed of trust. Riverview Services had net income of $26,000$23,000 for the fiscal year ended March 31, 20182020 and total assets of $1.2$1.3 million at March 31, 2018.2020. Riverview Services'Services’ operations are included in the Consolidated Financial Statements of the Company contained in Item 8 of this Form 10-K.
The Trust Company is an asset management company providing trust, estate planning and investment management services. The Trust Company had net income of $314,000$991,000 for the fiscal year ended March 31, 20182020 and total assets of $5.1$6.9 million at that date. The Trust Company earns fees on the management of assets held in fiduciary or agency capacity. At March 31, 2018,2020, total assets under management were $484.3 million.$1.2 billion. The Trust Company'sCompany’s operations are included in the Consolidated Financial Statements of the Company contained in Item 8 of this Form 10-K.
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Information about our Executive Officers. The following table sets forth certain information regarding the executive officers of the Company and its subsidiaries:
Name | Age(1) | Position |
Patrick Sheaffer | 78 | Chairman of the Board |
Kevin J. Lycklama | 4042 | President and Chief Executive Officer |
David Lam | 4143 | Executive Vice President and Chief Financial Officer |
Daniel D. Cox | 4042 | Executive Vice President and Chief Credit Officer |
Kim J. Capeloto | 5658 | Executive Vice President and Chief Banking Officer |
Steven P. Plambeck | 5860 | Executive Vice President and Chief Lending Officer |
Christopher P. Cline | 5759 | President and Chief Executive Officer of Riverview Trust Company |
(1) At March 31, 20182020
Patrick SheafferKevin J. Lycklama currently serves as Chairman of the Board of the Company and also serves in an advisory role to theis President and Chief Executive Officer. Prior to April 2, 2018, Mr. Sheaffer served as Chairman of the Board and Chief Executive Officer of the Company, positions he hadhas held since February 2004 and had also been the President of the Company since July 2017. Prior to February 2004, Mr. Sheaffer served as Chairman of the Board, and President and Chief Executive Officer of the Company since its inception in 1997. He became Chairman of the Board of the Bank in 1993. Mr. Sheaffer joined the Bank in 1963. Mr. Sheaffer is active in numerous professional and civic organizations.
Kevin J. Lycklama was appointed President and Chief Executive Officer of the Company effective April 2, 2018. Prior to assuming the role of President and Chief Executive Officer, Mr. Lycklama served as Executive Vice President and Chief Operating Officer of the Company, positions he had held since July 2017. Prior to July 2017, Mr. Lycklama served as Executive Vice President and Chief Financial Officer of the Company since 2008 and Vice President and Controller of the Bank since 2006. Prior to joining Riverview, Mr. Lycklama spent five years with a local public accounting firm advancing to the level of audit manager. He holds a Bachelor of Arts degree from Washington State University, is a graduate of the Pacific Coast Banking School and is a certified public accountant (CPA). Mr. Lycklama is a member of the Washington State University Vancouver Advisory Council.
David Lam is Executive Vice President and Chief Financial Officer of the Company, positions he has held since July 2017. Prior to July 2017, Mr. Lam served as Senior Vice President and Controller of the Bank since 2008. He is responsible for accounting, SEC reporting and treasury functions for the Bank and the Company. Prior to joining Riverview, Mr. Lam spent ten years working in the public accounting sector advancing to the level of audit manager. Mr. Lam holds a Bachelor of Arts degree in business administration with an emphasis in accounting from Oregon State University. Mr. Lam is a CPA, holds a chartered global management accountant designation and is a member of both the American Institute of CPA'sCPAs and Oregon Society of CPAs.
Daniel D. Cox is Executive Vice President and Chief Credit Officer and is responsible for credit administration related to the Bank'sBank’s commercial, mortgage and consumer loan activities. Mr. Cox joined Riverview in August 2002 and spent five years as a commercial lender and progressed through the credit administration function, most recently serving as Senior Vice President of Credit Administration. He holds a Bachelor of Arts degree from Washington State University and was an Honor Roll graduate of the Pacific Coast Banking School. Mr. Cox is an active mentor in the local schools and was the Past Treasurer and Endowment Chair for the Washougal Schools Foundation and Past Board Member of Camas-Washougal Chamber of Commerce.
Kim J. Capeloto is Executive Vice President and Chief Banking Officer. Mr. Capeloto has been employed by the Bank since September 2010. Mr. Capeloto has over 30 years of banking experience serving as regional manager for Union Bank of California and Wells Fargo Bank directing small business and personal banking activities. Prior to joining the Bank, Mr. Capeloto held the position of President and Chief Executive Officer of the Greater Vancouver Chamber of Commerce. Mr. Capeloto is active in numerous professional and civic organizations.
Steven P. Plambeck is Executive Vice President and Chief Lending Officer, a position he has held since March 1, 2018. Mr. Plambeck is responsible for all loan production including commercial, consumer, mortgage and builder/developer construction loans. Mr. Plambeck joined Riverview in January 2011 as Director of Medical Banking. For the past two years Mr. Plambeck served as Senior Vice President and Team Leader for the Portland Commercial Team. Mr. Plambeck holds a Bachelor of Science degree in Accounting from the University of Wyoming and is also a graduate of the Pacific Coast Banking School. Mr. Plambeck is a board member for the Providence St. Vincent Council of Trustees, Providence Heart and Vascular Institute and the Providence Brain and Spine Institute. Mr. Plambeck is also a member of the Medical and Dental Advisory Team.
Christopher P. Cline is President and Chief Executive Officer of the Trust Company, a wholly-owned subsidiary of the Bank. Mr. Cline joined the Trust Company in 2016, after having spent eight years managing the trust department of Wells Fargo'sFargo’s Private Bank in Oregon and Southwest Washington. Prior to that, Mr. Cline was an estate planning attorney for 17 years, most recently as a partner at Holland & Knight. Mr. Cline manages all aspects of the trust business, is a Fellow of the American College of Trust and Estate Counsel and is a nationally recognized speaker and author, having written books on estate planning and trust administration. Mr. Cline holds a Bachelor of Arts degree from San Francisco State University and a Juris Doctor degree from Hastings College of the Law in San Francisco.
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REGULATION
The following is a brief description of certain laws and regulations which are applicable to the Company and the Bank. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress ("Congress"(“Congress”) that may affect the Company'sCompany’s and Bank'sBank’s operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the OCC, the FDIC, the Federal Reserve Board or the SEC, as appropriate. Any such legislation or regulatory changes in the future could have an adverse effect on our operations and financial condition. We cannot predict whether any such changes may occur.
General
As a federally chartered savings bank, the Bank is subject to extensive regulation, examination and supervision by the OCC, as its primary federal regulator, and the FDIC, as the insurer of its deposits. As used herein, the terms “savings institution” and “savings association” refer to federally chartered savings banks. Additionally, the Company is subject to extensive regulation, examination and supervision by the Federal Reserve as its primary federal regulator. The Bank is a member of the FHLB System and its deposits are insured up to applicable limits by the DIF, which is administered by the FDIC. The Bank must file reports with the OCC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations of the Bank by the OCC and of the Company by the Federal Reserve to evaluate safety and soundness and compliance with various regulatory requirements. This regulatory structure establishes a comprehensive framework of activities in which the Bank may engage and is intended primarily for the protection of the DIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OCC, the Federal Reserve, the FDIC or Congress, could have a material adverse impact on the Company and the Bank and their operations.
In connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"“Dodd-Frank Act”), the laws and regulations affecting depository institutions and their holding companies have changed particularly affecting the bank regulatory structure and are affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. Among other changes, the Dodd-Frank Act established the Consumer Financial Protection Bureau ("CFPB"(“CFPB”) as an independent bureau of the Federal Reserve Board. The CFPB assumed responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations and has authority to impose new requirements. The Bank is subject to consumer protection regulations issued by the CFPB, but as a smaller financial institution, the Bank is generally subject to supervision and enforcement by the FDICOCC with respect to its compliance with consumer financial protection laws and CFPB regulations.
Many aspects of the Dodd-Frank Act are subject to delayed effective dates and/or rulemaking by the federal banking agencies. Their impact on operations cannot yet fully be assessed. The Dodd-Frank Act has resulted in, and may continue to result in, increased regulatory burden and increased compliance costs and interest expense for the Bank, the Company and the financial services industry in general. However, in February 2017, the President issued an executive order that a policy of his administration would be to make regulation efficient, effective, and appropriately tailored, and directed certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a manner consistent with the policies stated in the executive order. Any changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed implementation of the Dodd-Frank Act.
On May 23, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act passed by Congress (the "Act"“Act”). The Act contains a number of provisions extending regulatory relief to banks and savings institutions and their holding companies. Some of these provisions may benefit the Company and the Bank, such as (1) a simplified capital ratio, called the Community Bank CapitalLeverage Ratio, computed as the ratio of tangible equity capital to average consolidated total assets to be set by the federal banking regulators at not less than 8% and not more than 10%, which for most institutions with less than $10 billion in consolidated assets will replace the leverage and risk-based capital ratios under current regulations; (2) an option for federal savings institutions to operate as national banks with respect to limits on lending, investments, and subsidiaries, without changing their charters to national bank charters; and (3) a lower risk weight on certain loans currently classified as high volatility commercial real estate exposures. A number ofEffective January 1, 2020, the provisions in the Act require rulemaking or other action by the federal banking regulators and so may not have an immediate impact on the Company and the Bank.Community Bank Leverage Ratio is 9.0%.
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Federal Regulation of Savings Institutions
Office of the Comptroller of the Currency. The OCC has extensive authority over the operations of federal savings institutions. As part of this authority, the Bank is required to file periodic reports with the OCC and is subject to periodic examinations by the OCC. The OCC also has extensive enforcement authority over allfederal savings institutions, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders and initiate prompt corrective action orders. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the OCC. Except under certain circumstances, public disclosure of final enforcement actions by the OCC is required by law.
All federal savings institutions are required to pay assessments to the OCC to fund the agency's operations. The general assessments, paid on a semi-annual basis, are determined based on the savings institution's total assets, including consolidated subsidiaries. The Bank's OCC assessment for the fiscal year ended March 31, 20182020 was $264,000.$244,000.
The Bank's general permissible lending limit for loans to one borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At March 31, 2018,2020, the Bank's lending limit under this restriction was $18.6$22.2 million and, at that date, the Bank'sBank’s largest lending relationship with one borrower was $14.9$16.9 million, which consisted of one commercial real estate loan which wasof $14.4 million and one commercial construction loan with a contractual amount of $2.5 million. The commercial construction loan has an outstanding balance of $1.6 million and undisbursed funds of $900,000 at March 31, 2020. Both loans are performing accordingin accordance to itstheir original payment terms.
The OCC'sOCC’s oversight of the Bank includes reviewing its compliance with the customer privacy requirements imposed by the Gramm-Leach-Bliley Act of 1999 ("GLBA"(“GLBA”) and the anti-money laundering provisions of the USA Patriot Act. The GLBA privacy requirements place limitations on the sharing of consumer financial information with unaffiliated third parties. They also require each financial institution offering financial products or services to retail customers to provide such customers with its privacy policy and with the opportunity to "opt out"opt out of the sharing of their personal information with unaffiliated third parties. The USA Patriot Act significantly expands theimposes significant responsibilities ofon financial institutions in preventingto prevent the use of the U.S. financial system to fund terrorist activities. Its anti-money laundering provisions require financial institutions operating in the U.S. to develop anti-money laundering compliance programs and due diligence policies and controls to ensure the detection and reporting of money laundering. These compliance programs are intended to supplement requirements under the Bank Secrecy Act and the regulations of the Office of Foreign Assets Control.
The OCC, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan.
Capital Requirements. Federally insured savings institutions, such as the Bank, are required by the OCC to maintain minimum levels of regulatory capital, including a common equity Tier 1 ("CET1"(“CET1”) capital to risk-based assets ratio, a Tier 1 capital to risk-based assets ratio, a total capital to risk-based assets ratio and a Tier 1 capital to total assets leverage ratio. The capital standards require the maintenance of the following minimum capital ratios: (i) a CET1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%.
Certain changes in what constitutes regulatory capital, are subject to transition periods, including the phasing-out of certain instruments as qualifying capital.capital, are subject to transition periods, most of which have expired. The Bank does not have any of thesesuch instruments. Mortgage servicing rights and certain deferred tax assets over designated percentages of CET1 are deducted from capital subject to a transition period which ended December 31, 2017. In addition, Tier 1 capital includes accumulated other comprehensive income (loss), which includes all unrealized gains and losses on available for sale debt and equity securities, subject to a transition period which ended December 31, 2017. Because of the Bank'sBank’s asset size, the Bank elected to take a one-time option to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in its capital calculations.
The Bank also must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The capital conservation buffer requirement is subject to a phase in period beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.
In order to be considered well-capitalized under the prompt corrective action regulations, the Bank must maintain a CET1 risk-based ratio of 6.5%, a Tier 1 risk-based ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%, and the Bank must not be subject to any of certain mandates by the OCC requiring it as an individual institution to meet any specified capital level. Effective January 1, 2020, a bank or savings institution that elects to use the Community Bank Leverage Ratio will generally be considered well-capitalized and to have met the risk-based and leverage capital requirements of the capital regulations if it has a leverage ratio greater than 9.0%. In order to qualify for the Community
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Bank Leverage Ratio framework, in addition to maintaining a leverage ratio greater than 9%, the bank or institution also must have total consolidated assets of less than $10 billion, off-balance sheet exposures of 25% or less of its total consolidated assets, and trading assets and trading liabilities of 5.0% or less of its total consolidated assets, all as of the end of the most recent quarter.
As of March 31, 2018,2020, the most recent notification from the OCC categorized the Bank as "well capitalized"“well capitalized” under the regulatory framework for prompt corrective action. For additional information, see Note 1513 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Prompt Corrective Action. An institution is considered adequately capitalized if it meets the minimum capital ratios described above. The OCC is required to take certain supervisory actions against undercapitalized savings institutions, the severity of which depends upon the institution's degree of undercapitalization. Subject to a narrow exception, the OCC is required to appoint a receiver or conservator for a savings institution that is critically undercapitalized. OCC regulations also require that a capital restoration plan be filed with the OCC within 45 days of the date a savings institution receives notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. Significantly undercapitalized and critically undercapitalized institutions are subject to more extensive mandatory regulatory actions. The OCC also can take a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. An institution that is not well-capitalized is subject to certain restrictions on deposit rates and brokered deposits. At March 31, 2018, the Bank has met the regulatory requirements described above under "Capital Requirements" to be considered well-capitalized.
Federal Home Loan Bank System. The Bank is a member of the FHLB, of Des Moines, which is one of 11 regional Federal Home Loan Banks that administer the home financing credit function of savings institutions, each of which serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans or advances to members in accordance with policies and procedures established by the Board of Directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. See Business – "Deposit“Deposit Activities and Other Sources of Funds – Borrowings."” As a member, the Bank is required to purchase and maintain stock in the FHLB. At March 31, 2018,2020, the Bank held $1.4 million in FHLB stock, which was in compliance with this requirement. During the year ended March 31, 2018,2020, the Bank purchased $172,000$40,000 of FHLB membership stock at par.par and redeemed $2.3 million of FHLB activity stock at par with the payoff of borrowed funds.
The FHLB continues to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a decrease in net income and possibly capital.
Federal Deposit Insurance Corporation. The DIF of the FDIC insures deposits in the Bank up to $250,000 per separately insured depositor.depositor ownership rights or category. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. The Bank'sBank’s deposit insurance premiums for the fiscal year ended March 31, 20182020 were $476,000.$81,000. The Bank received full credit for the premiums for the first three quarters of fiscal year 2020 from the FDIC since the DIF reserve ratio exceeded 1.35% for these quarters. The Bank has $44,000 of remaining small bank assessment credits as of March 31, 2020.
Under its regulations, the FDIC sets assessment rates for established small institutions (generally, those with total assets of less than $10 billion) based on an institution'sinstitution’s weighted average CAMELS component ratings and certain financial ratios. Total base assessment rates currently range from 1.5 to 16 basis points for institutions with CAMELS composite ratings of 1 or 2, 3 to 30 basis points for those with a CAMELS composite score of 3, and 11 to 30 basis points for those with CAMELS composite scores of 4 or 5, all subject to certain adjustments. Assessment rates are expected to decrease in the future as the reserve ratio increases in specified incrementsincrements. The FDIC may increase or decrease its rates up to the 1.35% ratio required by the Dodd-Frank Act. An institution that has reported on its Call Reports total assets of $10 billion or more for at least four consecutive quarters is considered a large institution and is assessed under a complex scorecard method employing many factors.
An institution that has reported on its Call Reports total assets of $10 billion or more for at least four consecutive quarters is considered a large institution and is assessed under a complex scorecard method employing many factors, including weighted average CAMELS ratings; a performance score; leverage ratio; ability to withstand asset-related stress; certain measures of concentration, core earnings, core deposits, credit quality, and liquidity; and a loss severity score and loss severity measure. Total base assessment rates for these institutions currently range from 1.5 to 40two basis points subject to certain adjustments, and are expected to decrease inwithout further rule-making. In an emergency, the future as the reserve ratio increases in specified increments.FDIC may also impose a special assessment.
The Dodd-Frank Act directsincreased the minimum FDIC deposit insurance reserve ratio from 1.15 percent to 1.35 percent. The FDIC surpassed the 1.35% as of September 30, 2018. The Dodd-Frank Act directed the FDIC to offset the effects of higher assessments due to the increase in the reserve ratio on established small institutions by charging higher assessments to large institutions. To implement this mandate, large and highly complex institutions must pay an annualpaid a surcharge of 4.5 basis points on their assessment base beginning July 1, 2016. If the DIF reserve ratio has not reached 1.35% by December 31, 2018, the FDIC plans to impose a shortfall assessment on large institutions on March 31, 2019. The FDIC may increase or decrease its rates by 2 basis points without further rule-making. In an emergency, the FDIC may also impose a special assessment.since
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established small institutions contribute toautomatically receive credits from the DIF while the reserve ratio remains below 1.35% and large institutions are paying a surcharge, the FDIC will provide assessment credits to established small institutions for the portion of their assessments that contribute to the increase. When the reserve ratio reaches 1.35%, the FDIC will automatically apply an established small institution's assessment credits to reduce its regular deposit insurance assessments.
In addition to the FDIC assessments, the Financing Corporation is authorized to impose and collect, through the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are maturing in 2017 through 2019.
The FDIC also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the deposit insurance of the Bank.
Qualified Thrift Lender Test. All federal savings institutions, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its total assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a) (19) of the Internal Revenue Code ("Code"). Under either test, such assets primarily consist of residential housing related loans and investments.
Any institution that fails to meet the QTL test is subject to certain operating restrictions and may be required to convert to a national bank charter, and a savings and loan holding company of such an institution may become regulated as a bank holding company. As of March 31, 2018,2020, the Bank maintained 89.50%89.83% of its portfolio assets in qualified thrift investments and therefore met the QTL test.
Limitations on Capital Distributions. OCC regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. Generally, savings institutions, such as the Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OCC may have its dividend authority restricted by the OCC. If the Bank, however, proposes to make a capital distribution when it does not meet its capital requirements (or will not following the proposed capital distribution) or that will exceed these net income-based limitations, it must obtain the OCC's approval prior to making such distribution. In addition, the Bank must file a prior written notice of a dividend with the Federal Reserve. The Federal Reserve or the OCC may object to a capital distribution based on safety and soundness concerns. Additional restrictions on Bank dividends may apply if the Bank fails the QTL test. In addition, as noted above, if the Bank does not have the required capital conservation buffer, its ability to pay dividends to the Company wouldwill be limited, which may limit the ability of the Company to pay dividends to its stockholders.
Activities of Savings Associations and their Subsidiaries. When a savings institution establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the savings institution controls, the savings institution must file a notice or application with the OCC and, in certain circumstances with the FDIC, and receive regulatory approval or non-objection. Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders.
With respect to subsidiaries generally, the OCC may determine that investment by a savings institution in, or the activities of, a subsidiary must be restricted or eliminated based on safety and soundness or legal reasons.
Transactions with Affiliates. The Bank'sBank’s authority to engage in transactions with affiliates is limited by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve'sReserve’s Regulation W. The term affiliates for these purposes generally mean any company that controls or is under common control with an institution except subsidiaries of the institution. The Company and its non-savings institution subsidiaries are affiliates of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution'sinstitution’s capital. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. FDIC-insured institutions are subject, with certain exceptions, to certain restrictions on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. Collateral in specified amounts must be provided by affiliates in order to receive loans from an institution. In addition, these institutions are prohibited from engaging in certain tying arrangements in connection with any extension of credit or the providing of any property or service.
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The Sarbanes-Oxley Act of 2002 ("(“Sarbanes-Oxley Act"Act”) generally prohibits a company that makes filings with the SEC from making loans to its executive officers and directors. That act, however, contains a specific exception for loans by a depository institution to its executive officers and directors, if the lending is in compliance with federal banking laws. Under such laws, the Bank'sBank’s authority to extend credit to executive officers, directors and 10% stockholders ("insiders"(“insiders”), as well as entities which such persons control, is limited. The law restricts both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank'sBank’s capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. There are additional restrictions applicable to loans to executive officers.
Community Reinvestment Act and Consumer Protection Laws. Under the Community Reinvestment Act of 1977 ("CRA"(“CRA”), every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with the examination of the Bank, to assess the institution'sinstitution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. The OCC may use an unsatisfactory rating as the basis for the denial of an application. Similarly, the Federal Reserve is required to take into account the performance of an insured institution under the CRA when considering whether to approve an acquisition by the institution'sinstitution’s holding company. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community.
In connection with its deposit-taking, lending and other activities, the Bank is subject to a number of federal laws designed to protect consumers and promote lending to various sectors of the economy and population. Some state laws can apply to these activities as well. The CFPB issues regulations and standards under these federal consumer protection laws, which include, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. Through its rulemaking authority, the CFPB has promulgated several proposed and finala number of regulations under these laws that will affect our consumer businesses. Among these regulatory initiatives are final regulations setting "ability���ability to repay"repay” and "qualified mortgage"“qualified mortgage” standards for residential mortgage loans and establishing new mortgage loan servicing and loan originator compensation standards. The Bank devotes substantial compliance, legal and operational business resources to ensure compliance with theseapplicable consumer protection standards. In addition, the OCC has enacted customer privacy regulations that limit the ability of the Bank to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated parties.
Enforcement. The OCC has primary enforcement responsibility over federally-chartered savings institutions and has the authority to bring action against all "institution-affiliated parties," including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in a wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can range up to $2.0 million per day.violations. The FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted interagency guidelines prescribing standards for safety and soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OCC determines that a savings institution fails to meet any standard prescribed by the guidelines, the OCC may require the institution to submit an acceptable plan to achieve compliance with the standard.
Federal Reserve System. The Federal Reserve requires that all depository institutions maintain reserves on transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Interest-bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. At March 31, 2018,2020, the Bank was in compliance with these
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reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy any liquidity requirements that may be imposed by the OCC.
Commercial Real Estate Lending Concentrations. The federal banking agencies have issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank'sbank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance directs the FDICOCC and other federal bank regulatory agencies to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A federal savings bank that has experienced rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
Total reported loans for construction, land development and other land represent 100% or more of the bank'sbank’s capital; or
Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank'sbank’s total capital or the outstanding balance of the bank'sbank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution'sinstitution’s lending and risk management practices with respect to such concentrations will be taken into account in supervisory guidance on evaluation of capital adequacy.
Environmental Issues Associated with Real Estate Lending. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"(“CERCLA”), is a federal statute that generally imposes strict liability on all prior and present "owners and operators" of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term "owner“owner and operator"operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this "secured“secured creditor exemption"exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which could substantially exceed the value of the collateral property.
Bank Secrecy Act/Anti-Money Laundering Laws. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing and to verify the identity of their customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing mergers and acquisitions.
Other Consumer Protection Laws and Regulations. The Dodd-Frank Act established the CFPB and empowered it to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally subject to supervision and enforcement by the OCC with respect to compliance with consumer financial protection laws and CFPB regulations.
The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While the following list is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages, and the loss of certain contractual rights.
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Savings and Loan Holding Company RegulationsRegulation
General. The Company is a unitary savings and loan holding company subject to regulatory oversight of the Federal Reserve. Accordingly, the Company is required to register and file reports with the Federal Reserve and is subject to regulation and examination by the Federal Reserve. In addition, the Federal Reserve has enforcement authority over the Company and its non-savings institution subsidiaries, which also permits the Federal Reserve to restrict or prohibit activities that are determined to present a serious risk to the subsidiary savings institution. In accordance with the Dodd-Frank Act, the federal banking regulatorsFederal Reserve must require any company that controls an FDIC-insured depository institution to serve as a source of financial strength for the institution, with the ability to provide financial assistance if the institution suffers financial distress.institution. These and other Federal Reserve policies, as well as the capital conservatism buffer requirement, may restrict the Company'sCompany’s ability to pay dividends.
Capital Requirements. For a savings and loan holding company that qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, such as the Company, the capital regulations apply on a consolidated basis.to its savings institution subsidiaries, but not the Company. The Federal Reserve expects the holding company's subsidiary bankscompany’s savings institution subsidiaries to be well capitalized under the prompt corrective action regulations. At March 31, 2018,2020, the Company exceeded all regulatory capital requirements. See "Federal“Federal Regulation of Savings Institutions--Institutions- Capital Requirements"Requirements” above.
Activities Restrictions. The GLBA provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies. Further, the GLBA specifies that, subject to a grandfather provision, existing savings and loan holding companies may only engage in such activities. The Company qualifies for grandfathering and is therefore not restricted in terms of its activities. Upon any non-supervisory acquisition by the Company of another savings association as a separate subsidiary, the Company would become a multiple savings and loan holding company and would be limited to activities permitted by Federal Reserve regulation.
Mergers and Acquisitions. The Company must obtain approval from the Federal Reserve before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation or purchase of its assets. In evaluating an application for the Company to acquire control of a savings institution, the Federal Reserve would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the DIF, the convenience and the needs of the community, including performance under the CRA and competitive factors.
The Federal Reserve may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions; (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Acquisition of the Company. Any company, except a bank holding company, that acquires control of a savings association or savings and loan holding company becomes a "savings“savings and loan holding company"company” subject to registration, examination and regulation by the Federal Reserve and must obtain the prior approval of the Federal Reserve under the Savings and Loan Holding Company Act before obtaining control of a savings association or savings and loan holding company. A bank holding company must obtain the prior approval of the Federal Reserve under the Bank Holding Company Act before obtaining control of, or more than 5% of a class of voting stock of, a savings association or savings and loan holding company and remains subject to regulation under the Bank Holding Company Act. The term "company"“company” includes corporations, partnerships, associations, and certain trusts and other entities. "Control"“Control” of a savings association or savings and loan holding company is deemed to exist if a company has voting control, directly or indirectly, of more than 25% of any class of the savings association'sassociation’s voting stock or controls in any manner the election of a majority of the directors of the savings association or savings and loan holding company, and may be presumed under other circumstances, including, but not limited to, holding in certain cases 10% or more of a class of voting securities. In addition, a savings and loan holding company must obtain Federal Reserve approval prior to acquiring voting control of more than 5% of any class of voting stock of another savings association or another savings association holding company. A similar provision limiting the acquisition by a bank holding company of 5% or more of a class of voting stock of any company is included in the Bank Holding Company Act.
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Accordingly, the prior approval of the Federal Reserve would be required:
before any savings and loan holding company or bank holding company could acquire 5% or more of the common stock of the Company; and
before any other company could acquire 25% or more of the common stock of the Company and may be required for an acquisition of as little as 10% of such stock.
In addition, persons that are not companies are subject to the same or similar definitions of control with respect to savings and loan holding companies and savings associations and requirements for prior regulatory approval by the Federal Reserve in the case of control of a savings and loan holding company or by the OCC in the case of control of a savings association not obtained through control of a holding company of such savings association.
Dividends and Stock Repurchases. The Federal Reserve'sReserve’s policy statement on the payment of cash dividends applicable to savings and loan holding companies expresses its view that a savings and loan holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company'scompany’s net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the company'scompany’s capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. In addition, a savings and loan holding company is required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. The capital conservation buffer requirement may also limit or preclude dividends payable by the Company.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was enacted in 2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, and requires the SEC and securities exchanges to adopt extensive additional disclosure,disclosures, corporate governance and related rules. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank-Act imposesimposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including capital regulations of depository institutions and implements new capital regulations discussed above under "-“- Regulation and Supervision of the Bank - Capital Requirements."” In addition, among other changes,requirements, the Dodd-Frank Act requires public companies, such as the Company, to (i) provide their shareholders with a non-binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether they should have a "say“say on pay"pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive compensation paid and the financial performance of the issuer; and (iv) amend Item 402 of Regulation S-K to require companies to disclose the ratio of the Chief Executive Officer's annual total compensation to the median annual total compensation of all other employees. For certain provisions of the Dodd-Frank Act, the implementing regulations have not been promulgated, so the full impact of the Dodd-Frank Act on public companies cannot be determined at this time.
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Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment. The risks below also include forward-looking statements. This report is qualified in its entirety by these risk factors.
The COVID-19 pandemic has adversely affected our ability to conduct business and is expected to adversely impact our future financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the COVID-19 pandemic.
The COVID-19 pandemic has significantly adversely affected our operations and the way we provide banking and financial services to businesses and individuals, most of whom are currently under varying levels of government issued stay-at-home orders. As an essential business, we continue to provide banking and financial services to our customers with drive-thru access available at the majority of our branch locations and in-person services available by appointment. In addition, we continue to provide access to banking and financial services through online banking, ATMs and by telephone. If the COVID-19 pandemic worsens, it could limit or disrupt our ability to provide banking and financial services to our customers.
In response to the stay-at-home orders, approximately forty percent of our employees are currently working remotely to enable us to continue to provide banking services to our customers. Heightened cybersecurity, information security and operational risks may result from these remote work-from-home arrangements. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic. We also rely upon our third-party vendors to conduct business and to process, record and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. We have business continuity plans and other safeguards in place; however, there is no assurance that such plans and safeguards will be effective.
There is uncertainty surrounding the future economic conditions that will emerge in the months and years following the start of the COVID-19 pandemic. As a result, management is confronted with a significant and unfamiliar degree of uncertainty in estimating the impact of the COVID-19 pandemic on credit quality, revenues and asset values. To date, the COVID-19 pandemic has resulted in declines in loan demand and loan originations (other than through government sponsored programs such as the PPP), deposit availability, and market interest rates and has negatively impacted many of our business and consumer borrowers’ ability to make their loan payments. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences (including recent reductions in the targeted federal funds rate) are unknown, until the COVID-19 pandemic subsides, we expect our net interest income and net interest margin will be adversely affected. Many of our borrowers have become unemployed or may face unemployment, and certain businesses are at risk of insolvency as their revenues decline precipitously, especially in businesses related to travel, hospitality, leisure and physical personal services. Businesses may ultimately not reopen as there is a significant level of uncertainty regarding the level of economic activity that will return to our markets over time, the impact of governmental assistance, the speed of economic recovery, the resurgence of COVID-19 in subsequent seasons and changes to demographic and social norms that will take place.
The impact of the COVID-19 pandemic is expected to continue to adversely affect us during 2020 and possibly longer as the ability of many of our customers to make loan payments has been significantly affected. Although the Company makes estimates of loan losses related to the COVID-19 pandemic as part of its evaluation of the allowance for loan losses, such estimates involve significant judgment and are made in the context of significant uncertainty as to the impact the COVID-19 pandemic will have on the credit quality of our loan portfolio. It is likely that loan delinquencies, adversely classified loans and loan charge-offs will increase in the future as a result of the COVID-19 pandemic. Consistent with guidance provided by banking regulators through an interagency statement and guidance under the CARES Act, we have modified loans by providing various loan payment deferral options to our borrowers affected by the COVID-19 pandemic. Notwithstanding these modifications, these borrowers may not be able to resume making full payments on their loans once the COVID-19 pandemic subsides. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
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The PPP loans made by the Bank are guaranteed by the SBA and, if the loan funds are used by the borrower for specific purposes as provided under the PPP, may be fully or partially forgiven by the SBA at which time, the Bank will receive funds related to the PPP loan forgiveness directly from the SBA. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from the Bank. In addition, since the commencement of the PPP, several banks have been subject to litigation regarding their processing of PPP loan applications. The Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank seeking PPP loans. PPP lenders, including the Bank, may also be subject to the risk of litigation in connection with other aspects of the PPP, including but not limited to borrowers seeking forgiveness of their loans. If any such litigation is filed against the Bank, it may result in significant financial or reputational harm to us.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require some time to recover from its effects, the length of which is unknown and during which time the U.S. may experience a recession. As a result, we anticipate our business may be materially and adversely affected during this recovery. To the extent the effects of the COVID-19 pandemic adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described below and in any subsequently filed Quarterly Reports on Form 10-Q.
Our business may be adversely affected by downturns in the national and the regional economies on which we depend.
Substantially all of our loans are to businesses and individuals in the states of Washington and Oregon. A decline in the economies of the seven counties in which we operate, including the Portland, Oregon metropolitan area, which we consider to be our primary market area, could have a material adverse effect on our business, financial condition, results of operations and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are dependent upon international trade.trade and it is not known how changes in tariffs being imposed on international trade may also affect these businesses. Changes in agreements or relationships between the U.S. and other countries may also affect these businesses. The COVID-19 pandemic has adversely impacted most of the Company's customers directly or indirectly. Their businesses have been adversely affected by quarantines and travel restrictions due to the COVID-19 pandemic. See “-The COVID-19 pandemic has adversely impacted our ability to conduct business and is expected to adversely impact our financial results and those of our customers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the COVID-19 pandemic.”
While real estate values and unemployment rates have recently improved, a deteriorationDeterioration in economic conditions in the market areas we serve as a result of COVID-19 or other factors could result in the following consequences, any of which could have a materially adverse impact on our business, financial condition and results of operations:
· | loan delinquencies, problem assets and foreclosures may increase; |
loan delinquencies, problem assets and foreclosures may increase;
· | we may increase our allowance for loan losses; |
we may increase our allowance for loan losses;
· | the slowing of sales of foreclosed assets; |
the slowing of sales of foreclosed assets;
· | demand for our products and services may decline possibly resulting in a decrease in our total loans or assets; |
demand for our products and services may decline possibly resulting in a decrease in our total loans or assets;
· | collateral for loans made may decline further in value, exposing us to increased risk loans, reducing customers' borrowing power, and reducing the value of assets and collateral associated with existing loans; |
collateral for loans made may decline further in value, exposing us to increased risk loans, reducing customers’ borrowing power, and reducing the value of assets and collateral associated with existing loans;
· | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and |
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
· | the amount of our low-cost or non-interest bearing deposits may decrease. |
the amount of our low-cost or non-interest bearing deposits may decrease.
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower'sborrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes and tornadoes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
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Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a negative effect on our financial condition and results of operations.
Our real estate construction and land acquisition orand development loans expose us to risk.
We originate real estatemake construction and land acquisition and development loans primarily to individuals and builders primarily forto finance the construction of residentialsingle and multifamily homes, subdivisions, as well as commercial properties. We originate these loans whether or not the collateral property underlying the loan is under contract for sale. At March 31, 2018,2020, construction loans totaled $39.6$64.8 million, or 4.88%7.1% of our total loan portfolio, of which $16.4$12.2 million were for residential real estate projects. Undisbursed funds for construction projects totaled $72.0$24.0 million at March 31, 2018.2020. Land acquisition and development loans, which are loans made with land as security, totaled $15.3$14.0 million, or 1.89%1.5% of our total loan portfolio at March 31, 2018. Land loans include raw land and land acquisition and development loans.2020.
In general, construction and land lending involves additional risks because of the inherent difficulty in estimating a property's value both before and at completion of the project, as well as the estimated cost of the project and the time needed to sell the property at completion. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value ratio. Changes in the demand, such as for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of our builders have more than one loan outstanding with us and also have residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.
In addition, during the term of most of our construction loans, no payment from the borrower is required since the accumulated interest is added to the principal of the loan through an interest reserve. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor.
Increases in market rates of interest may have a more pronounced effect on construction loans by rapidly increasing the end-purchasers' borrowing costs, thereby reducing the overall demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. This may require us to advance additional funds and/or contract with another builder to complete construction. Further, in the case of speculative construction loans, there is the added risk associated with identifying an end-purchaser for the finished project, and thus pose a greater potential risk than construction loans to individuals on their personal residences. Loans on land under development or raw land held for future construction, as well asincluding lot loans made to individuals for the future construction of a residence also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions.
At March 31, 2018, total committed2020, real estate construction and land acquisition and development loans totaled $54.9$78.9 million comprised mainly of $13.4$12.0 million of speculative construction loans, $15.3$14.0 million of land acquisition and development loans, $23.2$52.6 million of commercial/multi-family construction loans and $3.0 million$207,000 of custom/presold construction loans.
Our emphasis on commercial real estate lending may expose us to increased lending risks.
Our current business strategy is focused on the expansion of commercial real estate lending. This type of lending activity, while potentially more profitable than single-family residential lending, is generally more sensitive to regional and local economic conditions, making loss levels more difficult to predict. Collateral evaluation and financial statement analysis in these types of loans requires a more detailed analysis at the time of loan underwriting and on an ongoing basis. Many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss.
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At March 31, 2018,2020, we had $513.7$566.2 million of commercial and multi-family real estate mortgage loans, representing 63.31%61.12% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential loan. Repayment on these loans is dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be adversely affected by changes in the economy or local market conditions. For example, if the cash flow from the borrower'sborrower’s project is reduced as a result of leases not being obtained or renewed, the borrower'sborrower’s ability to repay the loan may be impaired. Commercial and multi-family mortgage loans also expose a lender to greater credit risk than loans secured by one-to-four family residential real estate because the collateral securing these loans typically cannot be sold as easily as residential real estate. In addition, many of our commercial and multi-family real estate loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment.
A secondary market for most types of commercial real estate and multi-family loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial or multi-family real estate loan, our holding period for the collateral typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial and multi-family real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under this guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors (i) total reported loans for construction, land development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these criteria, the Bank has a concentration in commercial real estate lending as total loans for multifamily, non-farm/non-residential, construction, land development and other land represented 337%358% of total risk-based capital at March 31, 2018.2020. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing.
Our business may be adversely affected by credit risk associated with residential property.
At March 31, 2018, $90.12020, $83.2 million, or 11.10%9.1% of our total loan portfolio, was secured by one-to-four family mortgage loans and home equity loans. This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the Washington and Oregon housing markets in which we operate may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations. Further, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") enacted in the fourth quarter of 2017 could negatively impact our customers because it lowers the existing caps on mortgage interest deductions and limits the state and local tax deductions. These changes could make it more difficult for borrowers to make their loan payments, and could also negatively impact the housing market, which could adversely affect our business and loan growth.
Many of our one-to-four family loans and home equity lines of credit are secured by liens on mortgage properties. Residential loans with high combined loan-to-value ratios will be more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale. Further, the majority of our home equity lines of credit consist of second mortgage loans. For those home equity lines secured by a second
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mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property.
Repayment of our commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.
At March 31, 2018,2020, we had $137.7$179.0 million, or 16.97%19.6% of total loans, in commercial business loans. Commercial lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers' cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. This collateral may consist of equipment, inventory, accounts receivable, or other business assets. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Other collateral securing loans may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the specific type of business and equipment. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself which, in turn, is often dependent in part upon general economic conditions and secondarily on the underlying collateral provided by the borrower.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
· | the cash flow of the borrower and/or the project being financed; |
the cash flow of the borrower and/or the project being financed;
· | in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; |
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
· | the duration of the loan; |
the duration of the loan;
· | the credit history of a particular borrower; and |
the credit history of a particular borrower; and
· | changes in economic and industry conditions. |
changes in economic and industry conditions.
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio. The amount of this allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to:
· | our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management's expectations of future events; |
our general reserve, based on our historical default and loss experience and certain macroeconomic factors based on management’s expectations of future events;
· | our specific reserve, based on our evaluation of impaired loans and their underlying collateral; and |
our specific reserve, based on our evaluation of impaired loans and their underlying collateral or discounted cash flow; and
· | an unallocated reserve to provide for other credit losses inherent in our loan portfolio that may not have been contemplated in the other loss factors. |
an unallocated reserve to provide for other credit losses inherent in our loan portfolio that may not have been contemplated in the other loss factors.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is charged against income. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may also require an increase in the allowance for loan losses. Additionally, pursuant to our growth strategy, management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.
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The Financial Accounting Standards Board has adopted a new accounting standard update ("ASU"(“ASU”) that will be effective for our first fiscal year beginning after December 15, 2019.2022. This standard, referred to as "Current“Current Expected Credit Loss"Loss”, or "CECL"“CECL”, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses at inception of the loan. This will change the current method of providing allowances for credit losses that are probable of having been incurred, which may require us to increase our allowance for loan losses, and may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. For more on this ASU, see Note 1 of the Notes to Consolidated Financial Statements - Recently Issued Accounting Pronouncements contained in Item 8 of this report. In addition, a further decline in national and local economic conditions, including as a result of the COVID-19 pandemic, results of the bank regulatory agencies periodicallyagencies’ periodic review of our allowance for loan losses andor other factors may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs based on judgments different than those of management.charge-offs. If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.
Our consumer loan portfolio has increased risk dueUncertainty relating to the substantial amountLondon Interbank Offered Rate ("LIBOR") calculation process and potential phasing out of indirect automobile loans.
Our consumer loan portfolio includes a substantial number of indirect loans which are automobile loans purchased by us from another financial institution as well as other installment consumer loans. These indirect automobile loans were originated through a single dealership group located outside the Company's primary market area. Unlike a direct loan where the borrower makes an application directly to the lender, in these loans the dealer, who has a direct financial interest in the loan transaction, assists the borrower in preparing the loan application. Indirect automobile loans we purchased are underwritten by us using substantially similar guidelines to our internal guidelines. However, because these loans are originated through a third party and not directly by us, we do not have direct contact with the borrower and therefore these loansLIBOR may be more susceptible to a material misstatement on the loan application and present greater risks than other types of lending activities. The collateral for these loans is comprised of a mix of used automobiles. These loans are purchased with servicing retained by the seller. At March 31, 2018, our other installment consumer loans totaled $15.0 million, or 1.85% of our total loan portfolio, of which indirect automobile loans totaled $12.9 million, representing 86.26% of total consumer loans. At March 31, 2018, eight of the purchased automobile loans were on non-accrual status totaling $71,000.
The Company also originates a variety of installment loans, including loans for debt consolidation and other purposes, automobile loans, boat loans and savings account loans. At March 31, 2018 and 2017, excluding the purchased automobile loans noted above, the Company had no installment loans on non-accrual status.
Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as mobile homes, automobiles, boats and recreational vehicles. In these cases, we face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. Finally, because indirect automobile loan applications are originated by automobile dealerships, we underwrite the loans and we assume the risks associated with unsatisfactory origination procedures, including compliance with federal, state and local laws. In addition, since a third party services these loans for us, any failure of our third party servicer to timely pursue repossession action may adversely affect our ability to limit our credit losses. As a result of these factors, it may become necessary to increase our provision for loan losses in the event our losses on these loans increase, which could negatively affect our results of operations.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. The Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, selected a new index (the Secured Overnight Financing Rate or "SOFR") to replace LIBOR. SOFR is calculated as a volume-weighted median of transaction level data from the Bank of New York Mellon, Global Collateral Finance Repo and bilateral Treasury repo transactions cleared through the Fixed Income Clearing Corporation. SOFR is observed and backward looking, which stands in contrast with LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting panel members. Given that SOFR is a secured rate backed by government securities, it will be a rate that does not take into account bank credit risk (as is the case with LIBOR). SOFR is therefore likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether or not SOFR attains market traction as a LIBOR replacement tool remains in question, although some transactions using SOFR have been completed including by Fannie Mae. Both Fannie Mae and Freddie Mac have recently announced that they will cease accepting adjustable rate mortgages tied to LIBOR by the end of 2020 and will soon begin accepting mortgages based on SOFR. Continued uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.
If our investments in real estate are not properly valued or sufficiently reserved to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property is taken in as REO and at certain other times during the assets'assets’ holding periods. Our net book value ("NBV"(“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset'sasset’s NBV over its fair value. If our valuation process is incorrect, or if property values decline, the fair value of the investments in real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. Significant write-downs to our investments in real estate could have a material adverse effect on our financial condition, liquidity and results of operations.
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In addition, bank regulators periodically review our REO and may require us to recognize further write-downs. Any increase in our write-downs, as required by the bank regulators, may have a material adverse effect on our financial condition, liquidity and results of operations.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income (loss) and/or earnings. Fluctuations in market value may be caused by changes in market interest rates, lower market prices for securities and limited investor demand. Our securities portfolio is evaluated for OTTI. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. Changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value and therefore are impacted by fluctuations in interest rates. We increase or decrease our shareholders' equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value, including as a result of the COVID-19 pandemic, will not result in OTTI of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.
Changes in interest rates may reduce our net interest income and may result in higher defaults in a rising rate environment.
Our earnings and cash flows are largely dependent upon our net interest income, which is the difference, or spread, between the interest earned on loans, securities and other interest-earning assets and the interest paid on deposits, borrowings, and other interest-bearing liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including domestic and international economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. In an attempt to helpAfter steadily increasing the overall economy,target federal funds rate in 2018 and 2017, the Federal Reserve has kept interest rates low through its targeted Fed Funds rate. The Federal Reserve increasedin 2019 decreased the target Fed Fundsfederal funds rate by 75 basis points, and 25in response to the COVID-19 pandemic in March 2020, decreased the target federal funds rate by an additional 150 basis points in 2017 and 2016, respectively. Into a range of 0.0% to 0.25% as of March 2018, the31, 2020. The Federal Reserve increased the target Fed Funds rate by another 25 basis points and intends further increasescould make additional changes in interest rates during 20182020 subject to economic conditions. AsIf the Federal Reserve increases the target Fed Fundsfederal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of collateral securing loans, which could negatively affect our financial performance.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but also can affect: (1) our ability to originate and/or sell loans; (2) the fair value of our financial assets and liabilities, which could negatively impact shareholders'shareholders’ equity, and our ability to realize gains from the sale of such assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; (4) the ability of our borrowers to repay adjustable or variable rate loans; and (5) the average duration of our investment securities portfolio and other interest-earning assets.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yieldyields we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the "yield curve"“yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our
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assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.
A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings. As a resultis the case with many financial institutions, our emphasis on increasing the development of the relatively low interest rate environment, an increasing percentage of ourcore deposits, have been comprised of certificates of deposit and otherthose deposits yieldingbearing no or a relatively low rate of interest with no stated maturity date, has resulting in our having a significant amount of these deposits which have a shorter duration than our assets. At March 31, 2018,2020, we had $88.9$271.0 million in non-interest bearing demand deposits and $74.1 million in certificates of deposit that mature within one year and $279.0 million in non-interest bearing demand deposits.year. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans. In addition, a substantial amount of our home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders'stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our consolidated balance sheet or projected operating results. In this regard, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reductions in the targeted federal funds rate, until the COVID-19 pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in fiscal 2021 and possibly longer. See Item 7A., "Quantitative“Quantitative and Qualitative Disclosures About Market Risk,"” of this Form 10-K.
Liquidity riskIneffective liquidity management could impair our ability to fund operations and jeopardizeadversely affect our financial condition, growthresults and prospects.condition.
LiquidityEffective liquidity management is essential to our business; therefore, the inabilitybusiness. We require sufficient liquidity to obtain adequate funding may negatively affect growthmeet customer loan requests, customer deposit maturities and consequently,withdrawals, payments on our earnings capabilitydebt obligations as they come due and capital levels.other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, or other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the Washington or Oregon markets in which our loans are concentrated, negative operating results, or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and the continued uncertainty in credit markets. In particular, our liquidity position could be significantly constrained if we are unable to access funds from the FHLB, the Federal Reserve Bank of San Francisco or other wholesale funding sources, or if adequate financing is not available at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources, our revenues may not increase proportionately to cover our costs. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality's fiscal policies and cash flow needs.
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An increaseRevenue from mortgage banking operations is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market, higher interest rates change in the programs offered by governmental sponsored entities ("GSE") or our ability to qualify for such programsnew legislation which may reduce our mortgage revenues, which would negativelyadversely impact our non-interest income.financial condition and results of operations
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage revenues primarily from gains on the salesales of single-family mortgage loans pursuant to programs currently offered by FNMA, FHLMC, GNMA and non-GSE entities.non-government sponsored entities. These entities account for a substantial portion of the secondary market in residential mortgage loans. Any future changes in these programs, our eligibility to participate in such programs, the criteria for loans to be accepted or laws that significantly affect the activity of such entities could, in turn, materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans and we may incur a loss on the repurchase.
We may be adversely affected by risks associated with completed and potential acquisitions.
As part of our general growth strategy, in February 2017 we expanded our business through the purchase and assumption transaction in which the Company purchased certain assets and assumed certain liabilities of MBank, the wholly-owned subsidiary of Merchants Bancorp. Although our business strategy emphasizes organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of profitability comparable to those achieved by our existing operations, or otherwise perform as expected. Further, transaction-related expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on the value of our common stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
· | We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be materially negatively affected; |
· | Higher than expected deposit attrition; |
· | Our strategic efforts may divert resources or management's attention from ongoing business operations and may subject us to additional regulatory scrutiny; |
· | Prices at which acquisitions can be made may not be acceptable to us; |
· | The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our company to make the transaction economically successful. This integration process is complicated and time consuming and can also be disruptive to the customers of the acquired business. If the integration process is not conducted successfully and with minimal adverse effect on the acquired business and its customers, we may not realize the anticipated economic benefits of particular acquisitions within the expected time frame, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful; |
· | To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. As discussed below, we are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material adverse effect on our results of operations and financial condition; |
· | To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional capital, which could dilute the interests of our existing shareholders; and |
· | We expect our net income will increase following our acquisitions; however, we also expect our general and administrative expenses and consequently our efficiency rates will also increase. Ultimately, we would expect our efficiency ratio to improve; however, if we are not successful in our integration process, this may not occur, and our acquisitions or branching activities may not be accretive to earnings in the short or long-term. |
The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.
Under GAAP, we are required to record loans acquired through acquisitions, including purchase credit-impaired loans, at fair value. Estimating the fair value of such loans requires management to make estimates based on available information and facts and circumstances on the acquisition date. Actual performance could differ from management'smanagement’s initial estimates. If these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the "discount"“discount”) is accreted into net interest income. Thus, our net interest margins may initially increase due to the discount accretion. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and the discount decreases, and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.
A general decline in economic conditions may adversely affect the fees generated by our asset management company.
To the extent our asset management clients and their assets become adversely affected by weak economic and stock market conditions, they may choose to withdraw the amount of assets managed by us and the value of their assets may decline. Our asset management revenues are based on the value of the assets we manage. If our clients withdraw assets or the value of their assets decline, the revenues generated by the Trust Company will be adversely affected.
Our branching strategy may cause our expenses to increase faster than revenues.
The Company previously announced plans for three new branches located in Clark County, Washington, to complement its existing branch network. A new branch in downtown Camas is scheduled to open this summer while our new location in the Cascade Park neighborhood of Vancouver is scheduled to open later this fall. A construction delay due to COVID-19 pandemic has pushed the opening of the new branch location in Ridgefield to early 2021. The success of our expansion strategy is contingent upon numerous factors, such as our ability to secure managerial resources, hire and retain qualified personnel and implement effective marketing strategies. The opening of new branches may not increase the volume of our loans and deposits as quickly or to the degree that we hope and opening new branches will increase our operating expenses. On average, de novo branches do not become profitable until three to four years after opening. Further, the projected timeline and the estimated dollar amounts involved in opening de novo branches could differ significantly from actual results. We may not successfully manage the costs and implementation risks associated with our branching strategy. Accordingly, any new branch may negatively impact our earnings for some period of time until the branch reaches certain economies of scale. Finally, there is a risk that our new branches will not be successful even after they have been established.
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Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, any additional capital we obtain may result in the dilution of the interests of existing holders of our common stock. Further, if we are unable to raise additional capital when required by our bank regulators, we may be subject to adverse regulatory action.
We may experience future goodwill impairment, which could reduce our earnings.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair values with the excess of the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, business combinations typically result in recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. We performed our annual goodwill impairment test during the quarter-ended Decemberas of October 31, 2017, but2019, and no impairment was identified. Our assessment of the fair value of goodwill is based on an evaluation of current purchase transactions, discounted cash flows from forecasted earnings, our current market capitalization, and a valuation of our assets. Our evaluation of the fair value of goodwill involves a substantial amount of judgment. If our judgment was incorrect and an impairment of goodwill was deemed to exist, we would be required to write down our goodwill resulting in a charge to earnings, which could adversely affect our results of operations, perhaps materially; however, it would have no impact on our liquidity, operations or regulatory capital. TheAs a result of the effects of the COVID-19 pandemic and its impacts on the financial markets and economy, the Company completed a qualitative assessment of goodwill as of March 31, 2020 and concluded that it is more likely than not that the fair value of the Bank (the reporting unit), exceeds its carrying value at March 31, 2020. If adverse economic conditions or the recent MBank transaction has increaseddecrease in the Company’s common stock price and market capitalization as a result of the COVID-19 pandemic were sustained in the future rather than temporary, it may significantly affect the fair value of the reporting unit and may trigger future goodwill impairment charges. Any such impairment charge could have a material adverse effect on our goodwill.
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operating results and financial condition.We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company'scompany’s shareholders. These regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions. The significant federal and state banking regulations that affect us are described under the heading "Item“Item 1. Business-Regulation"Business-Regulation” in Item I of this Form 10-K. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. New proposals for legislation continue to be introduced in the U.S. Congress that could further alter the regulation of the bankThese laws, regulations, rules, standards, policies, and non-bank financial services industriesinterpretations are constantly evolving and the manner in which firms within the industry conduct business. In this regard, in May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Act"), was enacted to reduce the application of certain financial reform regulations, including the Dodd-Frank Act, on community banks such as us. The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the "Small Bank Holding Company and Savings and Loan Holding Company Policy Statement" by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. It is difficult at this time to predict when or how anychange significantly over time. Any new standards under the Act will ultimately be applied to us or what specific impact the Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that they may impact the profitability of our business activities and enhance our ability to originate residential loans while reducing our operating and compliance costs. In addition to this new legislation, federal and state regulatory agencies also frequently adopt changes to their regulations or legislation, change the manner in which existing regulations are applied. Future changesor oversight, whether a change in federalregulatory policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the levelor a change in a regulator’s interpretation of oversight and focus on the financial services industry. These changesa law or regulation, may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations. Additionally, actions by regulatory agencies or significant litigation against us may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These accounting changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes.
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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury'sTreasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions and limit our ability to get regulatory approval of acquisitions. Recently, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Competition with other financial institutions could adversely affect our profitability.
Although we consider ourselves competitive in our market areas, we face intense competition in both making loans and attracting deposits. Price competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability will depend upon our continued ability to compete successfully in our market areas.
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Further, our cardholders use their debit and credit cards to make purchases from third parties or through third partythird-party processing services. As such, we are subject to risk from data breaches of such third party'sthird-party’s information systems or their payment processors. Such a data security breach could compromise our account information. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for losses associated with reimbursing our clients for such fraudulent transactions on clients'clients’ card accounts, as well as costs incurred by payment card issuing banks and other third parties or may be subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. We may also incur other costs related to data security breaches, such as replacing cards associated with compromised card accounts. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs.
Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our clients'clients’ or counterparties'counterparties’ confidential information, including employees. The Company is continuously working to install new and upgrade its existing information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to further protect the Company against cyber risks and security breaches.
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There continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. We are regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for companies, including ours. We are not aware that we have experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber-security breach or other act, however, some of our clients may have been affected by third-party breaches, which could increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third partythird-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise of our security could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While the Company selects third-party vendors carefully, it does not control their actions. If our third-party providers encounter difficulties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct our business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. We may not be insured against all types of losses as a result of third partythird-party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.
The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.
We are dependent on
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Our ability to retain and recruit key management personnel and bankers is critical to the losssuccess of one or more of those key personnel may materiallyour business strategy and any failure to do so could impair our customer relationships and adversely affect our prospects.business and results of operations.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our President and Chief Executive Officer, and certain other employees. Our ability to retain and grow our loans, deposits, and fee income depends upon the business generation capabilities, reputation, and relationship management skills of our lenders. If we were to lose the services of any of our bankers, including successful bankers employed by banks that we may acquire, to a new or existing competitor, or otherwise, we may not be able to retain valuable relationships and some of our customers could choose to use the services of a competitor instead of our services. In addition, our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors.
Our operationsWe rely on numerous external vendors.other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements because of changes in the vendor'svendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by a third partythe third-party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be responsible for all aspects of our vendors'vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.
OurIf our enterprise risk management framework for managing risks mayis not be effective inat mitigating risk and loss to us.us, we could suffer unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing shareholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include, among others, liquidity, risk, credit, risk, market, risk, interest rate, risk, operational, risk, legal and compliance, risk, and reputational risk, among others.risk. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. We also maintain a compliance program to identify, measure, assess, and report on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate risk under all circumstances, or that it will adequately mitigate any risk and limit losses in our business. Asor loss to us. However, as with any risk management framework, there are inherent limitations to our risk management strategies as therethey may exist, or develop in the future, including risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses which could have a material adverse effect onand our business, financial condition, and results of operations.operations or growth prospects could be materially adversely affected. We may also be subject to potentially adverse regulatory consequences.
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Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.
Managing reputational risk is important to attracting and maintaining customers, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. The Bank's ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable to pay dividends to us, we may not be able to pay dividends on our common stock. Also, our right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The executive offices of the Company are located in downtown Vancouver, Washington at 900 Washington Street. The Company'sCompany’s operational center is also located in Vancouver, Washington (both offices are leased). At March 31, 2018,2020, the Bank had 10 offices located in Clark County, Washington (five of which are leased), one office in Cowlitz County, Washington, two offices in Klickitat County, Washington and one office in Skamania County, Washington. The Bank also has three offices in Multnomah County, Oregon, one leased office in Washington County, Oregon and one office in Marion County, Oregon. In addition, at March 31, 2018,2020, the Trust Company had one office as part of the executive offices leased and one leased office in Clackamas County, Oregon. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are appropriately designed for their present and future use.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company'sCompany’s business. The Company is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is traded on the Nasdaq Global Market under the symbol “RVSB.” At March 31, 2018, there were 22,570,1792020, the number of shares of Company common stock issued and outstanding 627were 22,748,385 and 22,544,285, respectively, 565 stockholders of record and an estimated 2,9562,913 holders in nominee or "street name." Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets. The principal source of funds for the Company is dividend payments from the Bank. OCC regulations require the Bank to give the OCC 30 days advance notice of any proposed declaration of dividends to the Company, and the OCC has the authority under its supervisory powers to prohibit the payment of dividends to the Company. The OCC imposes certain limitations on the payment of dividends from the Bank to the Company, which utilize a three-tiered approach that permits various levels of distributions based primarily upon a savings association's capital level. In addition, the Company may not declare or pay a cash dividend on its capital stock if the effect thereof would be to reduce the regulatory capital of the Bank below the amount required for the liquidation account established pursuant to the Bank's conversion from the mutual stock form of organization. See Item 1. "Business-Regulation-Federal Regulation of Savings Institutions-Limitations on Capital Distributions." and Note 1 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
The common stock of the Company is traded on the Nasdaq Global Select Market under the symbol "RVSB"“street name”. The following table sets forth the high and low trading prices, as reported by Nasdaq, and cash dividends for each quarter during the 2018 and 2017 fiscal years:
Fiscal Year Ended March 31, 2018 | | High | | | Low | | | Cash Dividends Declared | |
| | | | | | | | | |
Quarter ended March 31, 2018 | | $ | 9.68 | | | $ | 8.45 | | | $ | 0.0300 | |
Quarter ended December 31, 2017 | | | 9.45 | | | | 8.44 | | | | 0.0300 | |
Quarter ended September 30, 2017 | | | 8.48 | | | | 6.64 | | | | 0.0225 | |
Quarter ended June 30, 2017 | | | 7.47 | | | | 6.51 | | | | 0.0225 | |
Fiscal Year Ended March 31, 2017 | | High | | | Low | | | Cash Dividends Declared | |
| | | | | | | | | |
Quarter ended March 31, 2017 | | $ | 7.90 | | | $ | 6.87 | | | $ | 0.0200 | |
Quarter ended December 31, 2016 | | | 7.61 | | | | 5.23 | | | | 0.0200 | |
Quarter ended September 30, 2016 | | | 5.41 | | | | 4.69 | | | | 0.0200 | |
Quarter ended June 30, 2016 | | | 4.89 | | | | 4.30 | | | | 0.0200 | |
Stock Repurchase
The Company may repurchase shares of its common stock from time-to-time in open market transactions. The timing, volume and price of purchases are made at our discretion and are also contingent upon our overall financial condition, as well as general market conditions.
On February 27, 2020, the Company announced that its Board of Directors adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 500,000 shares of the Company’s outstanding shares of common stock, in the open market, based on prevailing market prices, or in private negotiated transactions, over a period beginning March 12, 2020 continuing until the earlier of the completion of the repurchase or the next six months, depending on market conditions. As of March 31, 2020, the Company had repurchased 204,100 shares under the stock repurchase program at an average price of $4.94 per share. As of April 17, 2020, the Company had repurchased the remaining 295,900 shares at an average price of $4.85 per share. The Company did not repurchase any shares of its common stock during the years ended March 31, 2018, 20172019 or 2016.2018.
The following table sets forth the Company’s repurchases of its outstanding common stock during the fourth quarter of the year ended March 31, 2020:
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Stock Repurchase Program | | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Stock Repurchase Program |
March 12, 2020 | | | | | | | | | | | | 500,000 | |
March 12, 2020 – March 31, 2020 | | | 204,100 | | | $ | 4.94 | | | | 204,100 | | | | 295,900 | |
Total | | | 204,100 | | | | 4.94 | | | | 204,100 | | | | | |
Securities for Equity Compensation Plans
Please refer to Item 12 in this Form 10-K for a listing of securities authorized for issuance under equity compensation plans.
Five-Year Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock with the cumulative total return on the Standard & Poor's 500 Stock Index and The NASDAQ Bank Index. The graph assumes that total return includes the reinvestment of all dividends and that the value of the investment in Riverview’s common stock and each index was $100 on March 31, 2015, and is the base amount used in the graph. The closing price of Riverview’s common stock on March 31, 2020 was $5.01.
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| | 3/31/13* | 3/31/14 | 3/31/15 | 3/31/16 | 3/31/17 | 3/31/18 |
| | | | | | | |
Riverview Bancorp, Inc. | | 100.00 | 129.75 | 170.45 | 161.02 | 278.27 | 367.82 |
S & P 500 | | 100.00 | 121.86 | 137.37 | 139.82 | 163.83 | 186.75 |
NASDAQ Bank | | 100.00 | 132.67 | 134.75 | 135.98 | 193.45 | 214.70 |
| | 3/31/15* | 3/31/16 | 3/31/17 | 3/31/18 | 3/31/19 | 3/31/20 |
| | | | | | | |
Riverview Bancorp, Inc. | | 100.00 | 94.47 | 163.25 | 215.79 | 171.74 | 120.47 |
S & P 500 | | 100.00 | 101.78 | 119.26 | 135.95 | 148.86 | 138.47 |
NASDAQ Bank | | 100.00 | 100.81 | 143.18 | 159.22 | 140.44 | 99.82 |
*$100 invested on 3/31/1315 in stock or index-including reinvestment of dividends.
Copyright © 2018,2020, Standard & Poor's, a division of S&P Global. All rights reserved.
www.researchdatagroup.com/S&P.htm
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Item 6. Selected Financial Data
The following condensed consolidated statements of operations and financial condition and selected performance ratios as of March 31, 2020, 2019, 2018, 2017 2016, 2015 and 20142016 and for the years then ended have been derived from the Company'sCompany’s audited Consolidated Financial Statements. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read along with Item 7. "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations"Operations” and Item 8. "Financial“Financial Statements and Supplementary Data"Data” included in this Form 10-K.
| | At March 31, | | At March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2020
| | | 2019
| | | 2018
| | | 2017
| | | 2016
| |
| | (In thousands) | | | (In thousands) | |
FINANCIAL CONDITION DATA: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total assets | | $ | 1,151,535 | | | $ | 1,133,939 | | | $ | 921,229 | | | $ | 858,750 | | | $ | 824,521 | | $ | 1,180,808 | | $ | 1,156,921 | | $ | 1,151,535 | | $ | 1,133,939 | | $ | 921,229 | |
Loans receivable, net | | | 800,610 | | | | 768,904 | | | | 614,934 | | | | 569,010 | | | | 520,937 | | | 898,885 | | | 864,659 | | | 800,610 | | | 768,904 | | 614,934 | |
Loans held for sale | | | 210 | | | | 478 | | | | 503 | | | | 778 | | | | 1,024 | | | 275 | | | 909 | | | 210 | | | 478 | | 503 | |
Investment securities available for sale | | | 213,221 | | | | 200,214 | | | | 150,690 | | | | 112,463 | | | | 101,969 | | | 148,291 | | | 178,226 | | | 213,221 | | | 200,214 | | 150,690 | |
Investment securities held to maturity | | | 42 | | | | 64 | | | | 75 | | | | 86 | | | | 101 | | | 28 | | | 35 | | | 42 | | | 64 | | 75 | |
Cash and cash equivalents | | | 44,767 | | | | 64,613 | | | | 55,400 | | | | 58,659 | | | | 68,577 | | | 41,968 | | | 22,950 | | | 44,767 | | | 64,613 | | 55,400 | |
Deposits | | | 995,691 | | | | 980,058 | | | | 779,803 | | | | 720,850 | | | | 690,066 | | | 990,448 | | | 925,068 | | | 995,691 | | | 980,058 | | 779,803 | |
Shareholders' equity | | | 116,901 | | | | 111,264 | | | | 108,273 | | | | 103,801 | | | | 97,978 | | |
Shareholders’ equity | | | 148,843 | | | 133,122 | | | 116,901 | | | 111,264 | | 108,273 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2020
| | | 2019
| | | 2018
| | | 2017
| | | 2016
| |
| | (Dollars in thousands, except per share data) | | | (Dollars in thousands, except per share data) | |
OPERATING DATA: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Interest and dividend income | | $ | 44,960 | | | $ | 35,627 | | | $ | 30,948 | | | $ | 28,626 | | | $ | 26,804 | | $ | 50,495 | | $ | 49,869 | | $ | 45,314 | | $ | 36,054 | | $ | 31,374 | |
Interest expense | | | 2,349 | | | | 1,869 | | | | 1,742 | | | | 1,916 | | | | 2,568 | | | 4,764 | | | 2,815 | | | 2,349 | | | 1,869 | | | 1,742 | |
Net interest income | | | 42,611 | | | | 33,758 | | | | 29,206 | | | | 26,710 | | | | 24,236 | | | 45,731 | | | 47,054 | | | 42,965 | | | 34,185 | | 29,632 | |
Recapture of loan losses | | | - | | | | - | | | | (1,150 | ) | | | (1,800 | ) | | | (3,700 | ) | |
Net interest income after recapture of loan losses | | | 42,611 | | | | 33,758 | | | | 30,356 | | | | 28,510 | | | | 27,936 | | |
Provision for (recapture of) loan losses | | | 1,250 | | | 50 | | | - | | | - | | | (1,150 | ) |
Net interest income after provision for (recapture of) loan losses | | | 44,481 | | | 47,004 | | | 42,965 | | | 34,185 | | 30,782 | |
Gains from sales of loans, securities and real estate owned | | | 722 | | | | 493 | | | | 338 | | | | 674 | | | | 422 | | | 282 | | | 326 | | | 722 | | | 493 | | | 338 | |
Other non-interest income | | | 10,282 | | | | 9,521 | | | | 9,037 | | | | 8,201 | | | | 7,945 | | | 12,078 | | | 10,781 | | | 9,928 | | | 9,094 | | 8,611 | |
Non-interest expense | | | 35,618 | | | | 32,981 | | | | 29,947 | | | | 30,744 | | | | 31,961 | | | 36,263 | | | 35,699 | | | 35,618 | | | 32,981 | | | 29,947 | |
Income before income taxes | | | 17,997 | | | | 10,791 | | | | 9,784 | | | | 6,641 | | | | 4,342 | | | 20,578 | | | 22,412 | | | 17,997 | | | 10,791 | | 9,784 | |
Provision (benefit) for income taxes | | | 7,755 | | | | 3,387 | | | | 3,426 | | | | 2,150 | | | | (15,081 | ) | |
Provision for income taxes | | | 4,830 | | | 5,146 | | | 7,755 | | | 3,387 | | | 3,426 | |
Net income | | $ | 10,242 | | | $ | 7,404 | | | $ | 6,358 | | | $ | 4,491 | | | $ | 19,423 | | $ | 15,748 | | $ | 17,266 | | $ | 10,242 | | $ | 7,404 | | $ | 6,358 | |
| | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.70 | | $ | 0.76 | | $ | 0.45 | | $ | 0.33 | | $ | 0.28 | |
Diluted | | | 0.69 | | | 0.76 | | | 0.45 | | | 0.33 | | 0.28 | |
Dividends per share | | | 0.19000 | | | 0.15000 | | | 0.10500 | | | 0.08000 | | 0.06500 | |
Earnings per share:
Basic | | $ | 0.45 | | | $ | 0.33 | | | $ | 0.28 | | | $ | 0.20 | | | $ | 0.87 | |
Diluted | | | 0.45 | | | | 0.33 | | | | 0.28 | | | | 0.20 | | | | 0.87 | |
Dividends per share | | | 0.10500 | | | | 0.08000 | | | | 0.06500 | | | | 0.01125 | | | | - | |
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| | | | | | | | | | | | | | | |
| At or For the Years Ended March 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | |
KEY FINANCIAL RATIOS: | | | | | | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | | | | | | |
Return on average assets | | 0.90 | % | | 0.76 | % | | 0.72 | % | | 0.54 | % | | 2.46 | % |
Return on average equity | | 8.78 | | | 6.66 | | | 5.93 | | | 4.42 | | | 23.73 | |
Dividend payout ratio (1) | | 23.33 | | | 24.24 | | | 23.21 | | | 5.63 | | | - | |
Interest rate spread | | 3.99 | | | 3.72 | | | 3.60 | | | 3.52 | | | 3.29 | |
Net interest margin | | 4.08 | | | 3.79 | | | 3.67 | | | 3.59 | | | 3.37 | |
Non-interest expense to average assets | | 3.15 | | | 3.38 | | | 3.39 | | | 3.70 | | | 4.05 | |
Efficiency ratio (2) | | 66.43 | | | 75.35 | | | 77.62 | | | 86.40 | | | 98.03 | |
Average equity to average assets | | 10.30 | | | 11.39 | | | 12.14 | | | 12.23 | | | 10.37 | |
Asset Quality Ratios: | | | | | | | | | | | | | | | |
Allowance for loan losses to total net loans at end of period | | 1.33 | | | 1.35 | | | 1.58 | | | 1.86 | | | 2.35 | |
Allowance for loan losses to nonperforming loans | | 445.24 | | | 382.98 | | | 364.22 | | | 202.37 | | | 89.25 | |
Net (recoveries) charge-offs to average outstanding loans during the period | | (0.03 | ) | | (0.10 | ) | | (0.05 | ) | | - | | | (0.12 | ) |
Ratio of nonperforming assets to total assets | | 0.24 | | | 0.27 | | | 0.36 | | | 0.81 | | | 2.64 | |
Ratio of nonperforming loans to total loans | | 0.30 | | | 0.35 | | | 0.43 | | | 0.92 | | | 2.64 | |
Capital Ratios: | | | | | | | | | | | | | | | |
Total capital to risk-weighted assets | | 15.41 | | | 14.06 | | | 16.07 | | | 15.89 | | | 16.66 | |
Tier 1 capital to risk-weighted assets | | 14.16 | | | 12.81 | | | 14.81 | | | 14.63 | | | 15.40 | |
Common equity tier 1 capital to risk-weighted assets | | 14.16 | | | 12.81 | | | 14.81 | | | 14.63 | | | N/A | |
Leverage ratio | | 10.26 | | | 10.21 | | | 11.18 | | | 10.89 | | | 10.71 | |
| | At or For the Years Ended March 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
| | | |
KEY FINANCIAL RATIOS: | | | | | | | | | | | | | | | |
Performance Ratios: | | | | | | | | | | | | | | | |
Return on average assets | | | 1.35 | % | | | 1.51 | % | | | 0.90 | % | | | 0.76 | % | | | 0.72 | % |
Return on average equity | | | 10.96 | | | | 13.86 | | | | 8.78 | | | | 6.66 | | | | 5.93 | |
Dividend payout ratio (1) | | | 27.54 | | | | 19.74 | | | | 23.33 | | | | 24.24 | | | | 23.21 | |
Interest rate spread | | | 4.04 | | | | 4.32 | | | | 4.02 | | | | 3.76 | | | | 3.65 | |
Net interest margin | | | 4.26 | | | | 4.45 | | | | 4.12 | | | | 3.83 | | | | 3.72 | |
Non-interest expense to average assets | | | 3.11 | | | | 3.13 | | | | 3.15 | | | | 3.38 | | | | 3.39 | |
Efficiency ratio (2) | | | 62.42 | | | | 61.38 | | | | 66.43 | | | | 75.35 | | | | 77.62 | |
Average equity to average assets | | | 12.32 | | | | 10.92 | | | | 10.30 | | | | 11.39 | | | | 12.14 | |
Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses to total loans at end of period | | | 1.38 | | | | 1.31 | | | | 1.33 | | | | 1.35 | | | | 1.58 | |
Allowance for loan losses to nonperforming loans | | | 904.95 | | | | 754.25 | | | | 445.24 | | | | 382.98 | | | | 364.22 | |
Net charge-offs (recoveries) to average outstanding loans during the period | | | 0.01 | | | | (0.08 | ) | | | (0.03 | ) | | | (0.10 | ) | | | (0.05 | ) |
| | | | | | | | | | | | | | | | | | | | |
Ratio of nonperforming assets to total assets | | | 0.12 | | | | 0.13 | | | | 0.24 | | | | 0.27 | | | | 0.36 | |
Ratio of nonperforming loans to total loans | | | 0.15 | | | | 0.17 | | | | 0.30 | | | | 0.35 | | | | 0.43 | |
Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
Total capital to risk-weighted assets | | | 17.01 | | | | 16.88 | | | | 15.41 | | | | 14.06 | | | | 16.07 | |
Tier 1 capital to risk-weighted assets | | | 15.76 | | | | 15.63 | | | | 14.16 | | | | 12.81 | | | | 14.81 | |
Common equity tier 1 capital to risk-weighted assets | | | 15.76 | | | | 15.63 | | | | 14.16 | | | | 12.81 | | | | 14.81 | |
Leverage ratio | | | 11.79 | | | | 11.56 | | | | 10.26 | | | | 10.21 | | | | 11.18 | |
(1) | Dividends per share divided by diluted earnings per shareshare. |
(2) | Non-interest expense divided by the sum of net interest income and non-interest incomeincome. |
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49
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
General
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto contained in Item 8 of this Form 10-K and the other sections contained in this Form 10-K. This section contains certain financial information determined by methods other than in accordance with GAAP. These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company'sCompany’s performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets. As a result of the enactment on December 21, 2017 of the Tax Act, which reduced the federal income tax rate for corporations from a maximum of 35% to 21%, the Company utilized a blended tax rate of 30.8% to calculate the tax equivalent adjustment for the fiscal year ended March 31, 2018. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Recent Developments Related to COVID-19
In response to the current global situation surrounding the novel coronavirus of 2019 (“COVID-19”) pandemic, the Company is offering a variety of relief options designed to support our customers and the communities we serve.
Paycheck Protection Program ("PPP") Participation – The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under the PPP, a new loan program. The goal of the PPP is to avoid as many layoffs as possible and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. Under terms of the PPP, all PPP loans have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of loan funding. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA so long as employee and compensation levels of the borrower’s business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses. The Company has accepted more than 700 applications for PPP loans, consisting primarily of existing customers who are small to midsize businesses as well as independent contractors, sole proprietors and partnerships and non-for-profits as allowed under the PPP guidance.
As of May 31, 2020, we have funded 781 PPP loans for a total of $116.2 million, with an average loan amount of $150,000. Another $12,000 in PPP loans have been approved and are in the application pipeline process as of May 31, 2020. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five percent for loans of not more than $350,000; (ii) three percent for loans of more than $350,000 and less than $2,000,000; and one percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants.
We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company will pledge its PPP loans at face value as collateral to obtain FRB non-recourse borrowings. The Company will also assist our customers with accessing other borrowing options as they become available such as other government sponsored lending programs, as appropriate.
Allowance for Loan Losses and Loan Modifications – The Company recorded a provision for loan losses of $1.3 million for the fiscal year 2020, compared to $50,000 in fiscal 2019 due primarily to deterioration in economic conditions related to COVID-19.
As of May 31, 2020, the Bank’s loan portfolio exposures to industries most affected by the COVID-19 pandemic were as follows (dollars in thousands):
| | Balance | | | Percent to total loans | | | Weighted Average Loan-To-Value Percentage | | | Weighted Average Debt-Service- Coverage Ratio | |
| | | | | | | | | | | | |
Hotel/Motel | | $ | 108,055 | | | | 10.7 | % | | | 53.2 | % | | | 1.94 | |
Retail strip centers | | | 79,925 | | | | 7.9 | | | | 51.5 | | | | 1.66 | |
Gas station/auto repair | | | 41,712 | | | | 4.1 | | | | 51.8 | | | | 2.70 | |
Restaurant/fast food | | | 14,867 | | | | 1.5 | | | | 57.3 | | | | 1.45 | |
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We have received, and continue to receive, inquiries and requests from borrowers for some type of payment relief due to the COVID-19 pandemic although the number of new requests have recently slowed. These modifications were not classified as TDRs in accordance with the guidance of the CARES Act and subsequent bank regulatory guidance. The Company has made available the following short-term relief option to all borrowers affected by COVID-19:
Interest only payments for up to 90 days;
Full payment deferrals for up to 90 days upon request with an extension for another 90 days upon submission of specified documentation and recovery plans;
Loan re-amortization, especially in cases where significant prepayments of principal have occurred and to provide for continuing payment reduction at the end of the 180-day deferment period;
Covenant waivers and resets; and
Extension of up to six months on loans maturing prior to December 31, 2020.
All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate.
As of March 31, 2020, the Company had approved payment deferrals for ten commercial loans that were impacted by the COVID-19 pandemic totaling $36.2 million which consisted of deferral of regularly scheduled principal and interest payments. As of March 31, 2020, the Bank had not received any requests for payment deferrals for consumer loans. As of May 31, 2020, the Bank had approved payment deferrals for 91 commercial loans that were impacted by the COVID-19 pandemic totaling $145.8 million. In general, the payment deferral period for these loans was 90 days. Depending on economic conditions, extensions to the initial payment deferral periods may be necessary. The Bank has received an additional 13 commercial loan modification requests totaling $25.3 million that are in the process of being completed. In addition, as of May 31, 2020, 42 consumer and mortgage loans totaling $10.1 million were approved for payment deferrals. Furthermore, 20 mortgage loans serviced for FHLMC totaling $3.4 million were approved for payment deferrals.
The primary method of relief granted by the Company has been to allow the borrower to defer their loan payments for up to 90 days. After the deferral period, normal loan payments will continue, however, payments will be applied first to interest until the deferred interest is repaid and thereafter applied to both principal and interest with any deficiency in amortized principal payments added to the balloon payment due at maturity. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our customers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.
Branch Operations and Additional Customer Support – We have taken various steps to ensure the safety of our customers and our personnel. Many of our employees are working remotely or have flexible work schedules, and we have established measures within our offices to help ensure the safety of those employees who must work on-site. The Family First Coronavirus Response Act also provides additional flexibility to our employees to help navigate their individual challenges.
The COVID-19 pandemic has caused significant disruptions to our branch operations resulting in the implementation of various social distancing measures at the Company to address client and community needs, including branch lobby closures. To ensure the safety of our customers and employees, services are offered through drive up facilities, ATMs, online banking, our call center operations and/or by appointment.
Critical Accounting Policies
The Company has established various accounting policies that govern the application of GAAP in the preparation of the Company'sCompany’s Consolidated Financial Statements. The Company has identified policies that due to judgments, estimates and assumptions inherent in those policies are critical to an understanding of the Company'sCompany’s Consolidated Financial Statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of investment securities, the valuation of REO and foreclosed assets, goodwill valuation and the calculation of income taxes. These policies and the judgments, estimates and assumptions are described in greater detail in the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K. In particular, Note 1 of the Notes to Consolidated Financial Statements, "Summary“Summary of Significant Accounting Policies,"” describes generally the Company'sCompany’s accounting policies. Management believes that the judgments, estimates and assumptions used in the preparation of the Company'sCompany’s Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company'sCompany’s Consolidated Financial Statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company'sCompany’s results of operations or financial condition.
51
Operating Strategy
Fiscal year 20182020 marked the 9597th 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 previously been on residential real estate lending. Since 1998, however, the Company has been diversifying its loan portfolio through the expansion of its commercial and construction loan portfolios. At March 31, 2018,2020, commercial and construction loans represented 87.1%90.42% of total loans. 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'sportfolio’s profitability.
The Company'sCompany’s goal is to deliver returns to shareholders by increasing higher-yielding assets (in particular, commercial real estate and commercial business loans), increasing core deposit balances, managing problem assets, reducing expenses, hiring experienced employees with a commercial lending focus and exploring expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:
Execution of our Business Plan. The Company is focused on increasing its loan portfolio, especially higher yielding commercial and construction loans, and its core deposits by expanding its customer base throughout its primary market areas. By emphasizing total relationship banking, the Company intends to deepen the relationships with its customers and increase individual customer profitability through cross-marketing programs, which allows the Company to better identify lending opportunities and services for customers. To build its core deposit base, the Company will continue to utilize additional product offerings, technology and a focus on customer service in working toward this goal. The Company will also continue to seek to expand its franchise through de novo branches, the selective acquisition of individual branches, loan purchases and whole bank transactions that meet its investment and market objectives, such asobjectives. In this regard, the February 2017 MBank transaction.Company previously announced plans for three new branches located in Clark County, Washington, to complement its existing branch network. A new branch in downtown Camas is scheduled to open this summer while our new location in the Cascade Park neighborhood of Vancouver is scheduled to open later this fall. A construction delay due to COVID-19 has pushed the opening of the new branch location in Ridgefield to early 2021.
Maintaining Strong Asset Quality. The Company believes that strong asset quality is a key to long-term financial success. The Company has actively managed the 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. In the past several years, the Company has applied more conservativeThe Company’s approach to credit management uses well defined policies and stringentprocedures and disciplined underwriting practices to new loans, including, among other things, increasing the amount of required collateral or equity requirements, reducing loan-to-value ratios and increasing debt service coverage ratioscriteria resulting in improvedour strong asset quality and credit metrics/asset quality.metrics in fiscal year 2020. Although the Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate, real estate construction and commercial business loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, the Company intends to manage credit exposure through the use of experienced bankers in these areas and a conservative approach to its lending.
Implementation of a Profit Improvement Plan ("PIP"(“PIP”). The Company has formed aCompany’s PIP committee is comprised of several members of management and the Board of Directors to undertake several initiatives to reduce non-interest expense and continue its on-going efforts to identify cost saving opportunities throughout all aspects of the Company'sCompany’s operations. The PIP committee'scommittee’s mission is not only to find additional cost saving opportunities but also to search for and implement revenue enhancements and additional areas for improvement. The Company has instituted expense control measures such as cancelling certain projects and capital purchases, and reducing travel and entertainment and other noninterest expenditures. As a result, the Company has improved its efficiency ratio over the last several years from 98.0% at March 31, 2014 to 66.4%62.42% at March 31, 2018.2020.
Introduction of New Products and Services. The Company continuously reviews new products and services to provide its customers more financial options. All new technology and services are generally reviewed for business development and cost saving purposes. The Company continues to experience growth in customer use of its online banking services, where the Bank provides a full array of traditional cash management products as well as online banking products including mobile banking, mobile deposit, bill pay, e-statements, and text banking. The products are tailored to meet the needs of small to medium size businesses and households in the markets we serve. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank.Company launched a new online mortgage origination platform in June 2019. The Company also intends to selectively add other products to further diversify revenue sources and to capture more of each customer'scustomer’s banking relationship by cross selling loan and deposit products and additional services, to Bank customers, including services provided through the Trust Company to increase its fee income. Assets under management by the Trust Company totaled $484.3 million$1.2 billion and $425.9$646.0 million at March 31, 20182020 and March 31, 2017,2019, respectively. Beginning in November 2017, theThe Company began offeringalso offers a third-party identity theft product to its customers. The identity theft product assists our customers in monitoring their credit and includes an identity theft restoration service. In December 2016, the Company switched its existing debit card holders from Visa® to MasterCard®. The change in debit card service providers increased interchange revenue and has provided cost savings to the Company.
52
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'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'customers’ cash management needs and compete effectively with banks of all sizes. Core branch deposits increased $22.7$58.7 million at March 31, 20182020 compared to March 31, 2017,2019 reflecting organic deposit growth.the Company’s commitment to increasing core deposits versus relying on wholesale funding. However, the Company continues to experience increased competition and pricing pressure for deposits.
Recruiting and Retaining Highly Competent Personnel with a Focus on Commercial Lending. The Company'sCompany’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'sCompany’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'sCompany’s employee stock ownership ("ESOP"(“ESOP”) and 401(k) plans.
53
Comparison of Financial Condition at March 31, 20182020 and 20172019
Cash and cash equivalents, including interest-earning accounts, totaled $44.8$42.0 million at March 31, 20182020 compared to $64.6$23.0 million at March 31, 2017.2019. The decreaseincrease in cash balances was primarily the result of funding the increase in loans receivabledeposits. The Company’s cash balances fluctuate based upon funding needs, and investment securities. Thethe Company has deployedwill deploy a portion of its excess cash balances intoto purchase investment securities to earn higher yields than the nominal yield earned on cash held in interest-earning accounts, based on itsthe Company’s asset/liability management program and liquidity objectives in order to maximize earnings. As a part of this strategy, the Company also investshas the ability to invest a portion of its excess cash in short-term certificates of deposit held for investment. All of the certificates of deposit held for investment are fully insured by the FDIC. At March 31, 2018,2020, certificates of deposits held for investment totaled $6.0 million$249,000 compared to $11.0 million$747,000 at March 31, 2017.2019.
Investment securities totaled $213.3$148.3 million and $200.3$178.3 million at March 31, 20182020 and 2017,2019, respectively. The increasedecrease was due to a decision by the Companyutilization of the cash proceeds from regular scheduled investment securities repayments, pay downs, calls and maturities which were used to invest additional excess cash into higher yielding investment securities.fund loan growth. During the fiscal year ended March 31, 2018, the Company purchased $47.5 million2020, purchases of investment securities.securities totaled $18.1 million which was partially offset by investment sales totaling $17.8 million. The Company primarily purchases a combination of securities backed by government agencies (FHLMC, FNMA, SBA or GNMA). At March 31, 2018,2020, the Company determined that none of its investment securities required an OTTI charge. For additional information on the Company'sCompany’s investment securities, see Note 43 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Loans receivable, net, totaled $800.6$898.9 million at March 31, 2018,2020, compared to $768.9$864.7 million at March 31, 2017,2019, an increase of $31.7$34.2 million. The Company has had steady loan demand in its market areas and anticipates continuingcontinued organic loan growth. A substantial portion ofgrowth, in particular through government sponsored lending programs initiated in response to the loan portfolio is secured by real estate, either as primary or secondary collateral, locatedCOVID-19 pandemic. The increase was mainly concentrated in the Company's primary market areas. Risks associated with loans secured by real estate include decreases in land and property values, increases in interest rates, deterioration in local economic conditions, tightening credit or refinancing markets, and a geographic concentration of loans. The Company has no option adjustable-rate mortgage (ARM) or teaser residentialcommercial real estate loans which increased $46.4 million or 10.1%. In addition, commercial business loans increased $16.2 million, or 10.0%, and multi-family loans increased $6.8 million, or 13.2%. Partially offsetting these increases were decreases in its loan portfolio.
Beginningreal estate construction loans of $26.0 million, or 28.7%, consumer loans of $5.0 million, or 5.5%, and land loans of $3.0 million, or 17.6%. Due to the timing of the completion of these real estate construction projects, balances may fluctuate in March 2017, thethese categories. Once these projects are completed, these loans will roll to permanent financing and be classified within a category under other real estate mortgage. The Company periodically began purchasingalso purchases the guaranteed portion of SBA loans as a way to supplement loan originations, further diversify its loan portfolio and earn a higher yield than earned on its cash or short-term investments. These SBA loans are originated through another financial institution located outside the Company'sCompany’s primary market area. These loans are purchased with servicing retained by the seller. At March 31, 2018,2020, the Company'sCompany’s purchased SBA loan portfolio was $47.0$74.8 million compared to $5.6$67.9 million at March 31, 2017.2019. During the year ended March 31, 2018,2020, the Bank purchased $42.8$17.3 million of SBA loans, including premiums.
Goodwill was $27.1 million at March 31, 20182020 and 2017. For the year ended March 31, 2018, the Company performed its annual goodwill impairment test during the third quarter ended December 31, 2017 and determined that no impairment of goodwill existed.2019. For additional information on our goodwill impairment testing, see "Goodwill Valuation" included in this Item 7.
Deposits increased $15.6$65.4 million to $995.7$990.4 million at March 31, 20182020 compared to $980.1$925.1 million at March 31, 2017.2019. The increase iswas due a concentrated effort by the result of continued organicCompany to increase deposits. The Company increased interest rates on certain deposit growth.products to be more competitive in its market area. The Company had no wholesale-brokered deposits at March 31, 20182020 and 2017.2019. Core branch deposits accounted for 98.3%97.6% of total deposits at March 31, 20182020 compared to 97.6%98.2% at March 31, 2017.2019. The Company plans to continue its focus on core deposits and on building customer relationships as opposed to obtaining deposits through the wholesale markets.
Shareholders' equity increased $5.6 millionThe Bank had no FHLB advances at March 31, 2020 compared to $116.9$56.6 million at March 31, 2018 from $111.32019. Based upon the increase in deposit balances, the Company was able to pay off its outstanding FHLB balances during the second fiscal quarter of 2020. In the prior fiscal year, the outstanding advances were deployed to supplement the funding of loan originations and offset the decrease in deposit balances.
Shareholders' equity increased $15.7 million to $148.8 million at March 31, 2017.2020 from $133.1 million at March 31, 2019. The increase was mainly attributable to net income of $10.2 million.$15.7 million and an increase in accumulated other comprehensive income related to unrealized holding loss on securities available for sale, net of tax, of $4.7 million for the fiscal year ended March 31, 2020. The increase was partially offset by cash dividends declared of $2.4 million and an increase in other comprehensive loss related to unrealized holding loss on securities available for sale, of $3.1$4.3 million for the fiscal year ended March 31, 2018.2020.
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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'sCompany’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'sunit’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'sCompany’s consolidated financial statements.
The Company performed its annual goodwill impairment test as of October 31, 2017.2019. The goodwill impairment test involves a two-step process. Step one of the goodwill impairment test estimates the fair value of the reporting unit utilizing the allocation of corporate value approach, the income approach and the market approach in order to derive an enterprise value of the Company. The allocation of corporate value approach applies the aggregate market value of the Company and divides it among the reporting units. A key assumption in this approach is the control premium applied to the aggregate market value. A control premium is utilized as the value of a company from the perspective of a controlling interest is generally higher than the widely quoted market price per share. The Company used an expected control premium of 30%, which was based on comparable transactional history. The income approach uses a reporting unit'sunit’s projection of estimated operating results and cash flows that are discounted using a rate that reflects current market conditions. The projection uses management'smanagement’s best estimates of economic and market conditions over the projected period including growth rates in loans and deposits, estimates of future expected changes in net interest margins and cash expenditures. Assumptions used by the Company in its discounted cash flow model (income approach) included an annual revenue growth rate that approximated 6.9%5.3%, a net interest margin that approximated 4.3%4.0% and a return on assets that ranged from 1.17%1.24% to 1.38%1.34% (average of 1.27%1.29%). In addition to utilizing the above projections of estimated operating results, key assumptions used to determine the fair value estimate under the income approach were the discount rate of 14.26%15.54% utilized for our cash flow estimates and a terminal value estimated at 1.81.43 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 market approach estimates fair value by applying tangible book value multiples to the reporting unit'sunit’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 1.51.1 times tangible book value. The Company calculated a fair value of its reporting unit of $265.0$217.0 million using the corporate value approach, $196.5$170.0 million using the income approach and $275.0$253.0 million using the market approach, with a final concluded value of $250.0$216.0 million, with primaryequal weight given to the corporate value approach and market approach and slightly less weight given to the income approach. The results of the Company'sCompany’s step one test indicated that the reporting unit'sunit’s fair value was greater than its carrying value and therefore no impairment of goodwill exists.
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Even though the Company determined that there was no goodwill impairment, a sustained decline in the value of its stock price as well as values of other financial institutions, declines in revenue for the Company beyond our current forecasts, significant adverse changes in the operating environment for the financial industry or an increase in the value of our assets without an increase in the value of the reporting unit may result in a future impairment charge.
It is possible that changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management'smanagement’s judgments, assumptions and estimates made in assessing the fair value of our goodwill, could result in an impairment charge of a portion or all of our goodwill. If the Company recorded an impairment charge, its financial position and results of operations would be adversely affected; however, such an impairment charge would have no impact on our liquidity, operations or regulatory capital.
As a result of the effects of the COVID-19 pandemic and its impacts on the financial markets and economy, the Company completed a qualitative assessment of goodwill and concluded that it is more likely than not that the fair value of the Bank (the reporting unit), exceeds its carrying value at March 31, 2020. If adverse economic conditions or the recent decrease in the Company’s common stock price and market capitalization as a result of the COVID-19 pandemic were sustained in the future rather than temporary, it may significantly affect the fair value of the reporting unit and may trigger future goodwill impairment charges. Any impairment charge could have a material adverse effect on our results of operations and financial condition. However, such an impairment would not impact the Company’s liquidity, operations or regulatory capital.
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The Company determines the estimated fair value of certain assets that are classified as Level 3 under the fair value hierarchy established under GAAP. These Level 3 assets are valued using significant unobservable inputs that are supported by little or no market activity and that are significant to the estimated fair value of the assets. These Level 3 assets includeare certain loans measured for impairment and REO for which there is neither an active market for identical assets from which to determine fair value, nor is there sufficient, current market information about similar assets to use as observable, corroborated data for all significant inputs in a valuation model. Under these circumstances, the estimated fair values of these assets are determined using pricing models, discounted cash flow methodologies, appraisals, and other valuation methods in accordance with accounting standards, for which the determination of fair value requires significant management judgment or estimation.
Valuations using models or other techniques are dependent upon assumptions used for the significant inputs. Where market data is available, the inputs used for valuation reflect that information as of the valuation date. In periods of extreme volatility, lessened liquidity or in illiquid markets, there may be more variability in market pricing or a lack of market data to use in the valuation process. Judgment is then applied in formulating those inputs.
For additional information on our Level 1, 2 and 3 fair value measurements see Note 1715 of the Notes to the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Impaired loans are subjected to an impairment analysis to determine an appropriate reserve amount to be held against each loan. As of March 31, 2018,2020, the Company had identified $7.7$5.2 million of impaired loans. Because the significant majority of the impaired loans are collateral dependent, nearly all of the specific allowances are calculated based on the estimated fair value of the collateral. Of those impaired loans, $6.6$5.1 million have no specific valuation allowance as their estimated net collateral value is equal to or exceeds the carrying amount of the loan, which in some cases is the result of previous loan charge-offs. The remaining $1.1 million$137,000 have specific valuation allowances totaling $69,000.$12,000. Charge-offs on these impaired loans totaled $83,000 from their original loan balances. Based on a comprehensive analysis, management deemed the allowance for loan losses of $10.8 million at March 31, 2018 adequate to cover probable losses inherent in the loan portfolio.portfolio at March 31, 2020. See Note 65 of the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding the allowance for loan losses.
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the fiscal year ended March 31, 20182020 compared to the fiscal year ended March 31, 2017,2019, and the fiscal year ended March 31, 20172019 compared to the fiscal year ended March 31, 2016.2018. Information is provided with respect to: (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume). 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). The changes noted in the table below include tax equivalent adjustments, and as a result, will not agree to the amounts reflected on the Company'sCompany’s consolidated statements of income for the categories that have been adjusted to reflect tax equivalent income.
The Company's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the difference between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities. Interest rate sensitivity increases by retaining portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one-to-four family mortgage loans with terms to maturity of more than 15 years. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with terms up to ten years.
The Company has adopted a strategy that is designed to maintain or improve the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve: the origination of adjustable rate loans; increasing commercial loans, consumer loans that are adjustable rate and other short-term loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one-to-four family residential mortgage loans; matching asset and liability maturities; investing in short-term securities; and selling most long term, fixed-rate, one-to-four family mortgage loan originations. The strategy for liabilities has been to shorten the maturities for both deposits and borrowings. The longer-term objective is to increase the proportion of noninterest bearing demand deposits, low interest bearing demand deposits, money market accounts, and savings deposits relative to certificates of deposit to reduce our overall cost of funds.
The Company's mortgage servicing activities provide additional protection from interest rate risk. The Company retains servicing rights on all mortgage loans sold. As market interest rates rise, the fixed-rate loans held in the loan portfolio diminish in value. However, the value of the servicing loan portfolio tends to rise as market interest rates increase because borrowers tend not to prepay the underlying mortgages, thus providing an interest rate risk hedge versus the fixed-rate loan portfolio. See "Item 1. Business – Lending Activities – Mortgage Loan Servicing."
Consumer loans, such as home equity lines of credit and installment loans, commercial loans and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Company's exposure to fluctuations in interest rates. Adjustable interest rate loans totaled $477.1$491.7 million or 58.80%53.95% of total loans at March 31, 20182020 as compared to $490.6$499.6 million or 62.95%57.02% at March 31, 2017.2019. Although the Company has sought to originate adjustable rate loans, the ability to originate and purchase such loans depends to a great extent on market interest rates and borrowers' preferences. Particularly in lower interest rate environments, borrowers often prefer to obtain fixed-rate loans. See Item 1. "Business“Business - Lending Activities – Real Estate Construction " and "-“- Lending Activities - Consumer Lending."
The Company may also invest in short-term to medium-term U.S. Government securities as well as mortgage-backed securities issued or guaranteed by U.S. Government agencies. At March 31, 2018,2020, the combined investment portfolio carried at $213.3$148.3 million had an average life of 4.93.2 years. Adjustable rate mortgage-backed securities totaled $17.8$11.6 million at March 31, 20182020 compared to $10.2$14.7 million at March 31, 2017.2019. See Item 1. "Business“Business – Investment Activities."Activities" for additional information.
Liquidity is essential to our business. The objective of the Bank'sBank’s liquidity management is to maintain ample cash flows to meet obligations for depositor withdrawals, to fund the borrowing needs of loan customers, and to fund ongoing operations. Core relationship deposits are the primary source of the Bank'sBank’s liquidity. As such, the Bank focuses on deposit relationships with local consumer and business clients who maintain multiple accounts and services at the Bank.
Liquidity management is both a short and long-term responsibility of the Company's management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) its asset/liability management program objectives. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Company requires funds beyond its ability to generate them internally, it has additional diversified and reliable sources of funds with the FHLB, the FRB and other wholesale facilities. These sources of funds may be used on a long or short-term basis to compensate for a reduction in other sources of funds or on a long-term basis to support lending activities.
The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans, proceeds from the sale of loans, maturing securities, FHLB advances and FRB borrowings. While maturities and scheduled amortization of loans and securities are a predictable source of funds, deposit flows and prepayment of mortgage loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions and competition. Management believes that its focus on core relationship deposits coupled with access to borrowing through reliable counterparties provides reasonable and prudent assurance that ample liquidity is available. However, depositor or counterparty behavior could change in response to competition, economic or market situations or other unforeseen circumstances, which could have liquidity implications that may require different strategic or operational actions.
The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds for loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. During the year ended March 31, 2018,2020, the Bank used its sources of funds primarily to fund loan commitments and purchase additional investment securities.commitments. At March 31, 2018,2020, cash and cash equivalents, certificates of deposit held for investment and available for sale investmentsinvestment securities totaled $264.0$190.5 million, or 22.9%16.1% of total assets. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs; however, its primary liquidity management practice is to increase or decreasemanage short-term borrowings, including FRB borrowings and FHLB advances.advances consistent with its asset/liability objectives. At March 31, 2018,2020, the Bank had no advances from the FRB and had a borrowing capacity of $57.4$67.3 million from the FRB, subject to sufficient collateral. At March 31, 2018, there were2020, the Bank had no advances from the FHLB and the Bank had an available borrowing capacity of $279.0$235.9 million, subject to sufficient collateral and stock investment. At March 31, 2018,2020, the Bank had sufficient unpledged collateral to allow it to utilize its available borrowing capacity from the FRB and the FHLB. Borrowing capacity may, however, fluctuate based on acceptability and risk rating of loan collateral and counterparties could adjust discount rates applied to such collateral at their discretion.
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 March 31, 20182020 and 2017,2019, the Bank had no wholesale brokered deposits. The Bank also participates in the CDARS and ICS deposit products, which allow the Company to accept deposits in excess of the FDIC insurance limit for thata depositor and obtain "pass-through"“pass-through” insurance for the total deposit. The Bank'sBank’s CDARS and ICS balances were $23.6$5.3 million, or 2.4%0.54% of total deposits, and $24.3$14.5 million, or 2.5%1.6% of total deposits, at March 31, 20182020 and 2017,2019, respectively. In addition, the Bank is enrolled in an internet deposit listing service. Under this listing service, the Bank may post time deposit rates on an internet site where institutional investors have the ability to deposit funds with the Bank. At March 31, 2018,2020 and 2019, the Company had no deposits through this listing service. At March 31, 2017, the Company had $7.0 million of deposits through this listing service which were assumed in the MBank transaction. Although the Company did not originate any internet based deposits during the year ended March 31, 2018,2020, the Company may do so in the future consistent with its asset/liability objectives. The combination of all the Bank'sBank’s funding sources gives the Bank available liquidity of $767.4$676.0 million, or 66.6%57.2% of total assets at March 31, 2018.2020.
Riverview Bancorp, Inc., as a separate legal entity from the Bank, must provide for its own liquidity. Sources of capital and liquidity for Riverview Bancorp, Inc. include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory notice. At March 31, 2018,2020, Riverview Bancorp, Inc. had $6.5$10.3 million in cash to meet its liquidity needs.
The Consolidated Financial Statements and related financial data presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
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 adverse effect, if any, on the Company'sCompany’s future financial position, results of operations, or liquidity. The Bank has entered into employment contracts with certain key employees, which provide for contingent payment subject to future events.
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.sheets. The Company'sCompany’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'sCompany’s usual terms and conditions. Collateral is not required to support commitments.
Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our interest-bearing liabilities. Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in market interest rates will have an adverse impact on the institution'sinstitution’s earnings and underlying economic value. Interest rate risk is determined by the maturity and repricing characteristics of an institution'sinstitution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary market risk affecting our financial performance.
The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of the Company's interest-earning assets and interest-bearing liabilities, see the tables under Item 1. "Business“Business – Lending Activities," "–” “– Investment Activities"Activities” and "–“– Deposit Activities and Other Sources of Funds"Funds”.
The Company's principal financial objective is to achieve long-term profitability while limiting its exposure to fluctuating market interest rates. The Company intends to reduce risk where appropriate but accepts a degree of risk when warranted by economic circumstances. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets by retaining in its loan portfolio, short–term loans and loans with interest rates subject to periodic adjustments.
Consumer and commercial loans are originated and held in the loan portfolio as the short-term nature of these portfolio loans match durations more closely with the short-term nature of retail deposits such as interest checking, money market accounts and savings accounts. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with longer terms to maturity. Except for immediate short-term cash needs, and depending on the current interest rate environment, FHLB advances will have short or long-term maturities. FRB borrowings have short-term maturities. For additional information, see Item 7. "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein.
A number of measures are utilized to monitor and manage interest rate risk, including simulation modeling and traditional interest rate gap analysis. While both methods provide an indication of risk for a given change in interest rates, the simulation model is primarily used to assess the impact on earnings that changes in interest rates may produce. Key assumptions in the model include cash flows and maturities of financial instruments, changes in market conditions, loan volumes and pricing, deposit sensitivity, consumer preferences and management'smanagement’s capital leverage plans. These assumptions are inherently uncertain; therefore, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results may significantly differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and specific strategies among other factors.
The following table shows the approximate percentage change in net interest income as of March 31, 20182020 over a 12 and 24-month period under several rate scenarios:
Our consolidated balance sheet continues to be slightly asset sensitive, meaning that interest-earning assets reprice faster than interest-bearing liabilities in a given period. However, due to a number of loans in our loan portfolio with interest rate floors, our net interest income will be negatively impacted in a rising interest rate environment until such time as the current rate exceeds these interest rate floors. Net interest income will increase in year two as our interest-earning assets are expected to continue to reprice faster than interest-bearing liabilities. In a falling interest rate environment over a shorter duration, these interest rate floors coupled with the ability to be able to decrease deposit costs will assist in maintaining our net interest income. However, in a falling interest rate environment over a longer duration, our net interest income will be negatively impacted as our deposit costs are currently relatively low and interest rates paid cannot decrease significantly. We attempt to limit our interest rate risk through managing the repricing characteristics of our assets and liabilities.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Furthermore, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table.
The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at March 31, 2018.2020. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments (dollars in thousands).
RIVERVIEW BANCORP, INC. AND SUBSIDIARY