15
<PAGE>
Comparison of Financial Condition at December 31, 2007 and March 31, 2007
At December 31, 2007, the Company had total assets of $844.0 million, compared with $820.3 million at March 31, 2007.
Cash, including interest-earning accounts, totaled $33.0 million at December 31, 2007, compared to $31.4 million at March 31, 2007. The $1.6 million increase was attributable to the maturity of investment securities, an increase in FHLB advances and the issuance of junior subordinated debentures which were partially offset by an increase in loan production and a decrease in deposits.
Loans held for sale totaled $395,000 at December 31, 2007. There were no loans held for sale at March 31, 2007. The balance of loans held for sale can vary significantly from period to period reflecting the interest rate environment, loan demand by borrowers, and loan origination for sale by mortgage brokers versus loan origination for the Company's loan portfolio. The Company originates fixed-rate residential loans for sale in the secondary market and retains the related loan servicing rights. Selling fixed interest rate mortgage loans allows the Company to reduce the interest rate risk associated with long term, fixed interest rate products. The sale of loans also makes additional funds available to make new loans and diversify the loan portfolio. The Company continues to service the loans it sells, maintaining the customer relationship and generating ongoing non-interest income.
Loans receivable, net, totaled $715.8 million at December 31, 2007, compared to $683.0 million at March 31, 2007, an increase of $32.9 million. Loans receivable increased $28.4 million, or 4.1%, at December 31, 2007 compared to the previous linked quarter as a result of continued strong loan growth. A substantial portion of the loan portfolio is secured by real estate, either as primary or secondary collateral, located in the Company's primary market area. Risks associated with loans secured by real estate include decreasing land and property values, material increases in interest rates, deterioration in local economic conditions, tightening credit or refinancing markets, and a concentration of loans within any one area. The Company has no sub-prime residential real estate loans in its portfolio.
Investment securities available for sale totaled $7.8 million at December 31, 2007, compared to $19.3 million at March 31, 2007. The decrease was attributable to maturities and scheduled cash flows.
Mortgage-backed securities available for sale totaled $5.7 million at December 31, 2007, compared to $6.6 million at March 31, 2007. The decrease is attributable to maturities and scheduled cash flows. The Company has no sub-prime mortgage-backed securities.
Goodwill was $25.6 million at December 31, 2007 and March 31, 2007. As of December 31, 2007, the Company has not recognized any impairment loss on the recorded goodwill.
Deposits accounts totaled $622.6 million at December 31, 2007, compared to $665.4 million at March 31, 2007. At December 31, 2007, the balance of interest checking accounts had decreased $32.4 million to $112.1 million from $144.5 million at March 31, 2007. Money market deposit accounts totaled $210.1 million at December 31, 2007, compared to $205.0 million at March 31, 2007.
Junior subordinated debentures totaled $22.7 million at December 31, 2007 and $7.2 million at March 31, 2007. The $15.5 million increase was the result of the issuance of additional trust preferred securities in June 2007.
FHLB advances totaled $94,000 at December 31, 2007, compared to $35,050 at March 31, 2007. The $48,950 increase was attributable to the increase in loan production and the decrease in deposit accounts.
Shareholders' Equity and Capital Resources
Shareholders' equity decreased $7.8 million to $92.4 million at December 31, 2007 from $100.2 million at March 31, 2007. The decrease in equity from cash dividends declared to shareholders of $3.6 million and stock repurchases of $12.6 million were partially offset by earnings of $7.5 million for the nine months ended December 31, 2007. Exercise of stock options, earned ESOP shares, FIN 48 adjustments and the net tax effect of SFAS No. 115 adjustment to securities comprised the remaining $912,000 net increase.
The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated in accordance with regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk, weightings and other factors.
16
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier I capital to risk-weighted assets, Tier I capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below). Management believes the Bank meets all capital adequacy requirements to which it is subject as of December 31, 2007.
As of December 31, 2007, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total capital and Tier I capital to risk-weighted assets, Tier I capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below)
.
There are no conditions or events since that notification that management believes have changed the Bank's regulatory capital categorization. The Bank's actual and required minimum capital amounts and ratios are presented in the following table (dollars in thousands):
|
Actual
|
For Capital
Adequacy Purposes
|
Categorized as
"Well Capitalized"
Under Prompt
Corrective Action
Provision
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
December 31, 2007
|
|
|
|
|
|
|
Total Capital:
(To Risk-Weighted Assets)
|
$ 86,763
|
11.29%
|
$ 61,460
|
8.0%
|
$ 76,825
|
10.0%
|
Tier I Capital:
(To Risk-Weighted Assets)
|
77,391
|
10.07
|
30,730
|
4.0
|
46,095
|
6.0
|
Tier I Capital:
(To Adjusted Tangible Assets)
|
77,391
|
9.60
|
24,191
|
3.0
|
40,319
|
5.0
|
Tangible Capital:
(To Tangible Assets)
|
77,391
|
9.60
|
12,096
|
1.5
|
N/A
|
N/A
|
|
Actual
|
For Capital
Adequacy Purposes
|
Categorized as
"Well Capitalized"
Under Prompt
Corrective Action
Provision
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
March 31, 2007
|
|
|
|
|
|
|
Total Capital:
(To Risk-Weighted Assets)
|
$ 84,363
|
11.38%
|
$ 59,310
|
8.0%
|
$ 74,137
|
10.0%
|
Tier I Capital:
(To Risk-Weighted Assets)
|
75,740
|
10.22
|
29,655
|
4.0
|
44,482
|
6.0
|
Tier I Capital:
(To Adjusted Tangible Assets)
|
75,740
|
9.60
|
23,662
|
3.0
|
39,436
|
5.0
|
Tangible Capital:
(To Tangible Assets)
|
75,740
|
9.60
|
11,831
|
1.5
|
N/A
|
N/A
|
Liquidity
The Bank's primary source of funds are customer deposits, proceeds from principal and interest payments on loans, proceeds from the sale of loans, maturing securities and FHLB advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At December 31, 2007, cash totaled $33.0 million, or 3.9% of total assets. The Bank has a line of credit with the FHLB of Seattle in the amount of 30% of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At December 31, 2007, the Bank had $94.0 million in outstanding advances from the FHLB of Seattle under an available credit facility of $242.1 million, limited to available collateral. The Bank also had a $10.0 million line of credit available from Pacific Coast Bankers Bank at December 31, 2007. The Bank had no borrowings outstanding under this credit arrangement at December 31, 2007.
Sources of capital and liquidity for the Bancorp 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 restrictions.
17
<PAGE>
Asset Quality
The allowance for loan losses was $9.5 million at December 31, 2007 and $8.7 million at March 31, 2007, respectively. Management believes the allowance for loan losses at December 31, 2007 is adequate to cover probable credit losses existing in the loan portfolio at that date. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. Pertinent factors considered include size and composition of the portfolio, actual loss experience, current economic conditions, industry trends and data, and detailed analysis of individual loans. The appropriate allowance level is estimated based upon factors and trends identified by management at the time the consolidated financial statements are prepared. Commercial loans are considered to involve a higher degree of credit risk than one-to-four family residential loans, and tend to be more vulnerable to adverse conditions in the real estate market and deteriorating economic conditions. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact the Company's financial condition and results of operations. In addition, the determination of the amount of the Bank's allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.
Non-performing assets were $1.1 million or 0.14% of total assets at December 31, 2007, compared with $226,000 or 0.03% of total assets at March 31, 2007. The $1.1 balance of nonaccrual loans is comprised of one commercial loan, two commercial real estate loans, one real estate construction loan, and two residential real estate loans. These loans are to borrowers located in the Company's primary market area. The $74,000 balance of real estate owned is comprised of one land loan. The following table sets forth information regarding the Company's non-performing assets.
|
December 31, 2007
|
March 31, 2007
|
|
(Dollars in thousands)
|
Loans accounted for on a nonaccrual basis:
|
|
|
Commercial
|
$ 269
|
$ -
|
Other real estate mortgage
|
454
|
226
|
Real estate construction
|
201
|
-
|
Consumer
|
144
|
-
|
Total
|
1,068
|
226
|
Accruing loans which are contractually
past due 90 days or more
|
-
|
-
|
Total of nonaccrual and
90 days past due loans
|
1,068
|
226
|
Real estate owned (net)
|
74
|
-
|
Total non-performing assets
|
$ 1,142
|
$ 226
|
Total loans delinquent 90 days
or more to net loans
|
0.15%
|
0.03%
|
Total loans delinquent 90 days or
more to total assets
|
0.13%
|
0.03%
|
Total non-performing assets to total assets
|
0.14%
|
0.03%
|
As of December 31, 2007 and March 31, 2007, other loans of concern totaled $9.3 million and $3.9 million, respectively. This increase is attributable to one land development loan located in southern California and one multi-family mortgage loan located in the Portland, Oregon market. These two loans totaled $4.8 million and were to a related borrower. Neither of these loans were on nonaccrual status at December 31, 2007. Other loans of concern consist of loans which known information concerning possible credit problems with the borrowers or the cash flows of the collateral securing the respective loans has caused management to be concerned about these isolated instances of the ability of the borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the nonaccrual category. Management considers the allowance for loan losses to be adequate to cover the probable losses inherent in these loans.
18
<PAGE>
Off-Balance Sheet Arrangements and Other Contractual Obligations
Through the normal course of operations, the Company enters into certain contractual obligations and other commitments. Obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Commitments generally relate to lending operations.
The Company has obligations under long-term operating leases, principally for building space and land. Lease terms generally cover a five-year period, with options to extend, and are not subject to cancellation.
The Company has commitments to originate fixed and variable rate mortgage loans to customers. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed, but committed to construction projects and home equity and commercial lines of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
For further information regarding the Company's off-balance sheet arrangements and other contractual obligations, see Note 14 of the Notes to Consolidated Financial Statements contained herein.
Comparison of Operating Results for the Three Months Ended December 31, 2007 and 2006
Net Interest Income.
The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and its cost of funds, which consists of interest paid on deposits and borrowings. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies.
Net interest income for the three months ended December 31, 2007 was $8.9 million, representing a decrease of $460,000, or 4.9%, from $9.3 million during the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 116.59% for the three months ended December 31, 2007, compared to 118.04% in the same prior year period which indicates that the interest-earning asset growth is being funded more by interest-bearing liabilities as compared to capital and non-interest-bearing demand deposits. The net interest margin for the quarter ended December 31, 2007 was 4.71%, compared to 4.89% for the quarter ended December 31, 2006. The growth in the higher yielding money market deposit accounts reflects the impact that the inverted/flat yield curve has had on the customers' choice of deposit accounts. An inverted or flat yield curve means that short-term interest rates are equal to or higher than long-term interest rates. The Company's balance sheet interest rate sensitivity achieves better net interest rate margins in a stable or increasing interest rate environment due to the balance sheet being slightly asset interest rate sensitive. In a decreasing interest rate environment the Company requires time to recover the decline in the net interest rate margin. Interest rates on the Company's interest-earning asset reprice down faster than interest rates on the Company's interest-bearing liabilities. As a result of the Federal Reserve's 50 basis point reduction in the short-term federal funds rate during the quarter ended December 31, 2007, approximately 40% of the Company's loans immediately repriced down 50 basis points. The Company immediately reduced the interest rate paid on certain interest-bearing deposits. Further reductions will be reflected in future deposit offering rates. The amount and timing of these reductions is dependent on competitive pricing pressures, yield curve shape and changes in spreads. In January 2008, the Federal Reserve reduced the short-term federal funds rate by an additional 125 basis points, which resulted in a further reduction in both the yields on loans and the cost of deposits.
Interest Income.
Interest income decreased to $15.3 million for the quarter ended December 31, 2007, compared to $16.1 million for the quarter ended December 31, 2006. Interest income on loans receivable decreased for the three months ended December 31, 2007, compared to the same prior year period due to the Federal Reserve rate cuts described above. The yield on interest-earning assets was 8.14% for the three months ended December 31, 2007, compared to 8.43% for the same three months ended December 31, 2006.
Interest Expense.
Interest expense decreased $282,000 to $6.5 million for the three months ended December 31, 2007, or 4.2%, compared to $6.8 million for the same prior year period. The decrease in interest expense was attributable to a decrease in rates of interest paid on deposits and other interest-bearing liabilities due to the Federal Reserve's reduction in the short-term federal funds rate. The weighted average interest rate on total deposits decreased to 3.79% for the three months ended December 31, 2007 from 3.97% for the same period in the prior year. The weighted average cost of FHLB borrowings, junior subordinated debenture and capital lease obligations decreased to 5.47% for the three months ended December 31, 2007 from 5.51% for the same period in the prior year.
19
<PAGE>
The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities and net interest margin.
|
Three Months Ended December 31,
|
|
2007
|
2006
|
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
Mortgage loans
|
$ 604,305
|
$ 12,817
|
8.41%
|
$ 609,503
|
$ 13,427
|
8.74%
|
Non-mortgage loans
|
107,047
|
2,133
|
7.91
|
102,120
|
2,190
|
8.51
|
Total net loans (1)
|
711,352
|
14,950
|
8.34
|
711,623
|
15,617
|
8.71
|
|
|
|
|
|
|
|
Mortgage-backed securities (2)
|
6,868
|
78
|
4.51
|
8,761
|
102
|
4.62
|
Investment securities (2)(3)
|
8,324
|
144
|
6.86
|
22,524
|
280
|
4.93
|
Daily interest-bearing assets
|
13,530
|
153
|
4.49
|
6,829
|
89
|
5.17
|
Other earning assets (4)
|
8,031
|
29
|
1.43
|
7,567
|
12
|
0.63
|
Total interest-earning assets
|
748,105
|
15,354
|
8.14
|
757,304
|
16,100
|
8.43
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
Office properties and equipment, net
|
22,321
|
|
|
21,452
|
|
|
Other non-interest-earning assets
|
59,859
|
|
|
61,634
|
|
|
Total assets
|
$ 830,285
|
|
|
$ 840,390
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
Regular savings accounts
|
$ 26,874
|
37
|
0.55
|
$ 30,615
|
42
|
0.54
|
Interest checking accounts
|
127,671
|
988
|
3.07
|
144,190
|
1,180
|
3.25
|
Money market deposit accounts
|
220,639
|
2,141
|
3.85
|
172,492
|
1,937
|
4.46
|
Certificates of deposit
|
183,973
|
2,174
|
4.69
|
207,028
|
2,389
|
4.58
|
Total interest-bearing deposits
|
559,157
|
5,340
|
3.79
|
554,325
|
5,548
|
3.97
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
82,498
|
1,138
|
5.47
|
87,249
|
1,212
|
5.51
|
Total interest-bearing liabilities
|
641,655
|
6,478
|
4.01
|
641,574
|
6,760
|
4.18
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
84,951
|
|
|
91,140
|
|
|
Other liabilities
|
9,319
|
|
|
8,848
|
|
|
Total liabilities
|
735,925
|
|
|
741,562
|
|
|
Shareholders' equity
|
94,360
|
|
|
98,828
|
|
|
Total liabilities and shareholders' equity
|
$ 830,285
|
|
|
$ 840,390
|
|
|
Net interest income (5)
|
|
$ 8,876
|
|
|
$ 9,340
|
|
Interest rate spread
|
|
|
4.13%
|
|
|
4.25%
|
Net interest margin
|
|
|
4.71%
|
|
|
4.89%
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
116.59%
|
|
|
118.04%
|
Tax equivalent adjustment (3)
|
|
$ 18
|
|
|
$ 22
|
|
|
|
(1)
|
Includes non-accrual loans.
|
(2)
|
For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized; therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders' equity.
|
(3)
|
Tax-equivalent adjustment relates to non-taxable investment interest income. Interest and rates are presented on a fully tax-equivalent basis under a tax rate of 34%.
|
(4)
|
In December 2006, FHLB of Seattle announced that quarterly cash dividends would resume after having operated under a regulatory directive since May 2005. During the quarter ended December 31, 2007, FHLB paid cash dividends of $0.20 per share.
|
|
|
|
|
(5)
|
Three Months Ended
December 31,
|
|
|
2007
|
2006
|
|
Net interest income as reported
|
$ 8,858
|
$ 9,318
|
|
Tax equivalent effect
|
18
|
22
|
|
Net interest income on a fully
tax equivalent basis
|
$ 8,876
|
$ 9,340
|
|
20
<PAGE>
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006. Variances that were immaterial have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change.
|
Three Months Ended December 31,
|
|
2007 vs. 2006
|
|
Increase (Decrease)
Due to
|
Total
|
|
Volume
|
Rate
|
Increase
(Decrease)
|
|
(In thousands)
|
Interest Income:
|
|
|
|
Mortgage Loans
|
$ (112)
|
$ (498)
|
$ (610)
|
Non-mortgage loans
|
102
|
(159)
|
(57)
|
Mortgage-backed securities
|
(22)
|
(2)
|
(24)
|
Investment securities (1)
|
(219)
|
83
|
(136)
|
Daily interest-bearing
|
77
|
(13)
|
64
|
Other earning assets
|
1
|
16
|
17
|
Total interest income
|
(173)
|
(573)
|
(746)
|
|
|
|
|
Interest Expense:
|
|
|
|
Regular savings accounts
|
(5)
|
-
|
(5)
|
Interest checking accounts
|
(130)
|
(62)
|
(192)
|
Money market deposit accounts
|
493
|
(289)
|
204
|
Certificates of deposit
|
(272)
|
57
|
(215)
|
Other interest-bearing liabilities
|
(66)
|
(8)
|
(74)
|
Total interest expense
|
20
|
(302)
|
(282)
|
Net interest income (1)
|
|
$ (193)
|
|
$ (271)
|
|
$ (464)
|
(1) Interest is presented on a fully tax-equivalent basis under a tax rate of 34%
|
Provision for Loan Losses.
The provision for loan losses for the three months ended December 31, 2007 was $650,000, compared to $375,000 for the same period in the prior year. The increase in the provision for loan losses for quarter ended December 31, 2007 compared to the same period in the prior year is the result of increased loan growth, changes in the loan portfolio mix, and a negative trend in the risk rating of certain loans. Net charge-offs for the current period were $207,000, compared to $10,000 for the same period last year. The increase in net charge-offs is attributable to a $200,000 charge-off of one commercial loan in the quarter ended December 31, 2007. The ratio of allowance for loan losses and unfunded loan commitments to total net loans was 1.37% at December 31, 2007, compared to 1.27% at December 31, 2006. Annualized net charge-offs to average net loans for the three-month period ended December 31, 2007 was 0.12%, compared to 0.01% for the same period in the prior year. Management's evaluation of the allowance for loan losses is based on ongoing, quarterly assessments of the known and inherent risks in the loan portfolio. Loss factors are based on the Company's historical loss experience with additional consideration and adjustments made for other economic conditions. Management considers the allowance for loan losses at December 31, 2007 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio as described above under "Asset Quality."
Non-Interest Income.
Non-interest income decreased $260,000 to $2.2 million for the quarter ended December 31, 2007 compared to $2.4 million for the quarter ended December 31, 2006. Decreases in mortgage broker loan fees that are reported in fees and service charges and gain on sale of loans held for sale were partially offset by an increase in asset management fees. For the three months ended December 31, 2007, broker loan fees decreased by $294,000 compared to the same prior year period.
Non-Interest Expense.
Non-interest expense increased to $7.0 million for the quarter ended December 31, 2007 compared to $6.5 million for the same prior year period. The principal component of the Company's non-interest expense is salaries and employee benefits. Salaries and employee benefits increased $557,000 to $4.2 million for the three months ended December 31, 2007 compared to $3.7 million for the three months ended December 31, 2006. The majority of the increase is a result of the continued expansion of the Company's lending team, the opening of a new branch and a separate lending office and the increasing costs of employee benefits. Full-time equivalent employees increased to 265 at December 31, 2007 from 254 at December 31, 2006.
21
<PAGE>
Provision for Income Taxes.
Provision for income taxes was $1.1 million for the three months ended December 31, 2007, compared to $1.7 million for the three months ended December 31, 2006 as a result of the decrease in income before taxes. The effective tax rate for the three months ended December 31, 2007 was 33.9% compared to 33.8% for the three months ended December 31, 2006. The Company's overall effective tax rate at December 31, 2007 and 2006 takes into account the estimated Oregon apportionment factors for property, payroll and sales.
Comparison of Operating Results for the Nine Months Ended December 31, 2007 and 2006
Net Interest Income.
Net interest income for the nine months ended December 31, 2007 was $26.4 million, representing a decrease of $1.1 million, or 3.9%, compared to $27.5 million for the same prior year period. This decline reflected a 3.1% increase in the average balance of interest-bearing liabilities to $628.1 million. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 117.50% in the nine-month period ended December 31, 2007 from 119.35% in the same prior year period.
Interest Income
. Interest income totaled $46.1 million and $45.6 million, for the nine months ended December 31, 2007 and 2006, respectively. The increased interest income of $496,000 reflects the 1.5% increase in the average balance of interest earning assets for the current nine month period compared to the same period in the prior year, which was attributable to increased loan originations and interest-earning cash accounts. The yield on interest-earning assets was 8.30% for the nine months ended December 31, 2007 compared to 8.33% for the nine months ended December 31, 2006.
Interest Expense
. Interest expense was $19.7 million for the nine months ended December 31, 2007, an increase of 8.7%, from $18.1 million for the same period in the prior year. The increase in interest expense reflects the higher market rates of interest paid on deposits and FHLB borrowings and the increased balance of interest-bearing liabilities when comparing average balances at December 31, 2007 and December 31, 2006. Average interest-bearing liabilities increased $19.1 million to $628.1 million for the nine months ended December 31, 2007 from $609.0 million for the same prior year period. The growth in the higher yielding money market deposit accounts reflects the impact that the inverted/flat yield curve has had on the customers' choice of deposit accounts. The weighted average interest rate on total deposits increased to 4.02% for the nine months ended December 31, 2007 from 3.72% for the same period in the prior year. The weighted average interest rate of FHLB borrowings, junior subordinated debenture and capital lease obligations increased to 5.86% for the nine months ended December 31, 2007 from 5.39% for same period in the prior year. The increase in interest rates on interest-bearing liabilities is a result of the higher rates paid on such items during the first six months of fiscal year 2008, which were only partially offset by the Federal Reserve rate cuts which began in September 2007.
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|
Nine Months Ended December 31,
|
|
2007
|
2006
|
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
|
(Dollars in thousands)
|
Interest-earning assets:
|
|
|
|
|
|
|
Mortgage loans
|
$ 586,335
|
$ 37,975
|
8.60%
|
$ 582,192
|
$ 37,931
|
8.65%
|
Non-mortgage loans
|
103,253
|
6,486
|
8.34
|
98,728
|
6,289
|
8.45
|
Total net loans (1)
|
689,588
|
44,461
|
8.56
|
680,920
|
44,220
|
8.62
|
|
|
|
|
|
|
|
Mortgage-backed securities(2)
|
7,320
|
254
|
4.61
|
9,346
|
325
|
4.62
|
Investment securities(2)(3)
|
12,689
|
571
|
5.97
|
23,116
|
848
|
4.87
|
Daily interest-bearing assets
|
20,560
|
778
|
5.02
|
5,960
|
229
|
5.10
|
Other earning assets (4)
|
7,896
|
67
|
1.13
|
7,567
|
20
|
0.35
|
Total interest-earning assets
|
738,053
|
46,131
|
8.30
|
726,909
|
45,642
|
8.33
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
Office properties and equipment, net
|
21,524
|
|
|
20,039
|
|
|
Other non-interest-earning assets
|
59,857
|
|
|
61,728
|
|
|
Total assets
|
$ 819,434
|
|
|
$ 808,676
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
Regular savings accounts
|
$ 27,614
|
114
|
0.55
|
$ 33,721
|
139
|
0.55
|
Interest checking accounts
|
137,146
|
3,368
|
3.26
|
139,944
|
3,285
|
3.12
|
Money market deposit accounts
|
228,034
|
7,425
|
4.32
|
149,505
|
4,719
|
4.19
|
Certificates of deposit
|
187,045
|
6,656
|
4.72
|
201,048
|
6,535
|
4.31
|
Total deposits
|
579,839
|
17,563
|
4.02
|
524,218
|
14,678
|
3.72
|
|
|
|
|
|
|
|
Other interest-bearing liabilities
|
48,265
|
2,131
|
5.86
|
84,819
|
3,442
|
5.39
|
Total interest-bearing liabilities
|
628,104
|
19,694
|
4.16
|
609,037
|
18,120
|
3.95
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
84,659
|
|
|
94,082
|
|
|
Other liabilities
|
9,025
|
|
|
8,947
|
|
|
Total liabilities
|
721,788
|
|
|
712,066
|
|
|
Shareholders' equity
|
97,646
|
|
|
96,610
|
|
|
Total liabilities and shareholders' equity
|
$ 819,434
|
|
|
$ 808,676
|
|
|
Net interest income (5)
|
|
$ 26,437
|
|
|
$ 27,522
|
|
Interest rate spread
|
|
|
4.14%
|
|
|
4.38%
|
Net interest margin
|
|
|
4.75%
|
|
|
5.03%
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
117.50%
|
|
|
119.35%
|
Tax Equivalent Adjustment (3)
|
|
$ 57
|
|
|
$ 64
|
|
|
|
(1)
|
Includes non-accrual loans.
|
(2)
|
For purposes of the computation of average yield on investments available for sale, historical cost balances were utilized; therefore, the yield information does not give effect to changes in fair value that are reflected as a component of shareholders' equity.
|
(3)
|
Tax-equivalent adjustment relates to non-taxable investment interest income. Interest and rates are presented on a fully tax-equivalent basis under a tax rate of 34%.
|
(4)
|
In December 2006, FHLB of Seattle announced that quarterly cash dividends would resume after having operated under a regulatory directive since May 2005. During the quarter ended December 31, 2007, FHLB paid cash dividends of $0.20 per share.
|
|
|
|
|
(5)
|
Nine Months Ended
December 31,
|
|
|
2007
|
2006
|
|
Net interest income as reported
|
$ 26,380
|
$ 27,458
|
|
Tax equivalent effect
|
57
|
64
|
|
Net interest income on a fully
tax equivalent basis
|
$ 26,437
|
$ 27,522
|
|
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<PAGE>
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006. Variances that were immaterial have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change
|
Nine Months Ended December 31,
|
|
2007 vs. 2006
|
|
Increase (Decrease)
Due to
|
Total
|
|
Volume
|
Rate
|
Increase
(Decrease)
|
|
(In thousands)
|
Interest Income:
|
|
|
|
Mortgage loans
|
$ 266
|
$ (222)
|
$ 44
|
Non-mortgage loans
|
281
|
(84)
|
197
|
Mortgage-backed securities
|
(70)
|
(1)
|
(71)
|
Investment securities (1)
|
(440)
|
163
|
(277)
|
Daily interest-bearing
|
553
|
(4)
|
549
|
Other earning assets
|
1
|
46
|
47
|
Total interest income
|
591
|
(102)
|
489
|
|
|
|
|
Interest Expense:
|
|
|
|
Regular savings accounts
|
(25)
|
-
|
(25)
|
Interest checking accounts
|
(66)
|
149
|
83
|
Money market deposit accounts
|
2,555
|
151
|
2,706
|
Certificates of deposit
|
(474)
|
595
|
121
|
Other interest-bearing liabilities
|
(1,590)
|
279
|
(1,311)
|
Total interest expense
|
400
|
1,174
|
1,574
|
Net interest income (1)
|
|
$ 191
|
|
$ (1,276)
|
|
$ (1,085)
|
(1) Interest is presented on a fully tax-equivalent basis under a tax rate of 34%
|
Provision for Loan Losses
. The provision for loan losses for the nine months ended December 31, 2007 was $1.1 million, compared to $1.3 million for the same period in the prior year. Net charge-offs for the nine months ended December 31, 2007 were $248,000, compared to $82,000 net recoveries for the same period of last year. Annualized net charge-offs to average net loans for the nine-month period ended December 31, 2007 was 0.05%, compared to annualized net recoveries of 0.02% for the same period in the prior year. The ratio of allowance for loan losses to total net loans increased to 1.31% at December 31, 2007, compared to 1.22% at December 31, 2006. Management considers the allowance for loan losses at December 31, 2007 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio as described above under "Asset Quality."
Non-Interest Income
. Non-interest income decreased $148,000, or 2.2%, to $6.7 million for the nine months ended December 31, 2007 from $6.8 million for the nine months ended December 31, 2006. Decreases in fees and service charges, gain on sale of loans held for sale and gain on the sale of credit card portfolio were partially offset by increases in asset management fees. For the nine months ended December 31, 2007 asset management fees increased by $211,000 to $1.6 million, compared to $1.4 million for the same period in the prior year. RAM Corp. had $318.6 million in assets under management at December 31, 2007 compared to $288.2 million at December 31, 2006.
Non-Interest Expense
. Non-interest expense increased $1.1 million to $20.6 million for the nine months ended December 31, 2007, compared to $19.5 million the same period last year. The principal component of non-interest expense is salaries and employee benefits, which increased $1.1 million as a result of the continued expansion of the Company's lending team, the opening of a new branch and a separate lending office and the increasing costs of employee benefits.
Occupancy and depreciation expense totaled $3.9 million for the nine months ended December 31, 2007, compared to $3.4 million for the same period in prior year. This increase is the result of increases in rent and related costs at several banking facilities, increased software depreciation expense and the opening of the Gateway branch in November 2006 and the Clackamas lending office in November 2007.
Data processing expense was $600,000 for the nine months ended December 31, 2007 compared to the $777,000 for the nine months ended December 31, 2006. The $177,000 decrease reflects the savings attributable to the April 2006 change in the service bureau that performs the Bank's core computer system processing.
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<PAGE>
Provision for Income Taxes
. Provision for income taxes was $3.8 million for the nine months ended December 31, 2007, compared to $4.6 million for the nine months ended December 31, 2006 as a result of the decrease in income before taxes. The effective tax rate for the nine months ended December 31, 2007 was 33.9% compared to 34.2% for the nine months ended December 31, 2006. The Company's overall effective tax rate at December 31, 2007 and 2006 takes into account Oregon apportionment factors for property, payroll and sales.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's Asset Liability Committee is responsible for implementing the interest rate risk policy which sets forth limits established by the Board of acceptable changes in net interest income and the portfolio value from specified changes in interest rates. The OTS defines net portfolio value as the present value of expected cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present value of expected cash flows from existing off-balance sheet contracts. The Asset Liability Committee reviews, among other items, economic conditions, the interest rate outlook, the demand for loans, the availability of deposits and borrowings, and the Company's current operating results, liquidity, capital and interest rate exposure. In addition, the Asset Liability Committee monitors asset and liability characteristics on a regular basis and performs analyses to determine the potential impact of various business strategies in controlling interest rate risk and other potential impact of these strategies upon future earnings under various interest rate scenarios. Based on these reviews, the Asset Liability Committee formulates a strategy that is intended to implement the objectives contained in its business plan without exceeding limits set forth in the Company's interest rate risk policy for losses in net interest income and net portfolio value.
There has not been any material change in the market risk disclosures contained in the 2007 Form 10-K.
Item 4. Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) was carried out as of December 31, 2007 under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
In the quarter ended December 31, 2007, the Company did not make any changes in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect these controls. The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and correct any deficiencies that it may discover in the future. The goal is to ensure that management has timely access to all material financial and non-financial information concerning the Company's business.
While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
25
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY