MANAGEMENT'S DISCUSSION AND ANALYSIS
In reviewing the results of operations for
March 31, 1995 as compared to March 31, 1994, changes are
visible through the balance sheet. Total assets have grown
over 13.0% over he past twelve months with the major changes
visible in the investment and loan portfolios. The Bank's
investment portfolio grew by approximately $9,700,000 for
the twelve month period with growth predominantly in U.S.
Government agency securities. The Bank extended loans
secured by real estate to its customers totaling over
$18,000,000 more than one year ago with consumer mortgages
being the major category. The Bank's loan portfolio has
shown consistent growth during the past three years.
Funding for the asset growth has come from
increases in deposits totaling $26,600,000 and predominantly
from interest bearing liabilities, which increased 14%. The
Bank reduced its advances from the Federal Home Loan Bank by
$12,000,000 as deposits and opportunities for repurchase
agreements became less costly than advances. Short term
borrowings are expected to continue dropping for the next
six months through seasonal deposit growth, investment
maturities and principal pay downs from the Bank's mortgage
backed securities portfolio. During this period of rising
rates, the Bank has not extended its long erm borrowings
through the Federal Home Loan Bank.
Liquidity is measured by the Bank's ability
to meet cash needs at a reasonable cost or minimum loss to
the Bank. Liquidity management involves the ability to meet
cash flow requirements of its customers, which may come from
depositors withdrawing funds or borrowers requiring funds to
meet credit needs. Without adequate liquidity management,
the Bank would not be able to meet the needs of the
individuals and communities it serves. The Bank's policy is
to maintain its liquidity position at a minimum of 5% of
total assets. The Bank has maintained liquidity in its
balance sheet in excess of its 5% minimum for the past
twelve months.
How changes in the balance sheet have
affected the Bank may be viewed through the earnings
statement for the periods ending March 31, 1993, 1994, and
1995. The Bank has experienced a very strong first quarter
which compares favorably to the first quarter of 1994 and
which has produced a 9.8% increase over 1994 in net earnings
for the Bank. Interest income is affected by rates, volumes
and the mix of earning assets and interest bearing
liabilities. For the first three months of 1995, increases
in the loan portfolio have afforded the Bank additional
interest income of $724,000 due to increases in both volumes
($532,000) and $192,000 due to changes in rates. Loan
yields have increased (69 basis points) over the past twelve
months. This represents the first increase in loan yields
for the past several years with decreases of 64 and 103
basis points experienced in 1994 and 1993 respectively.
Additionally, interest on investments has increased by more
than $300,000 with increases both from volumes and yields.
This too is a change from the past two years, when in 1994
earnings from the Bank's investment portfolio decreased
by $244,000 due to decreases in yields. Yields on
investments have increased by 61 basis points during the
past year and represent a positive trend when compared to
the 72 basis points drop experienced in 1994.
Increased rates on the liability side were
contained with the Bank not increasing its rates on savings,
NOW and money market funds. Instead the Bank chose to offer
CDS at current market rates, thereby increasing its cost of
funds on those accounts only. The Bank's cost of funds rose
by $690,000 which is both from increased volumes ($209,000)
as well as higher CD rates. The cost of purchased funds
has increased by 92 basis points in the past year.
Comparing this to 1994 and 1993, both years showed
reductions in funding costs (23 basis points in 1994 and 106
basis points in 1993). In 1993, liability costs were
decreasing at a more rapid pace than asset yields, which
impacted the Bank in a very positive manner. 1994 began
with a downward trend for interest rates, but the Bank like
other financial institutions was impacted by each of the
federal funds increases instituted by the Federal Reserve.
It has been the Bank's approach to lag increases on both
sides of the balance sheet throughout the year.
The Bank is well-positioned with regard to
interest rate sensitivity with assets and liabilities
matched for repricing within a year. The Bank has maintained
its reserve for possible loan losses over the past several
years, reflecting the recessionary nature of the economy in
the early 1990's. The ratio for the reserve for possible
loan losses has been over 2% for the past three years, with
a ratio of 2.13% as of March 31, 1995. The Bank reviews
its allocation to the reserve on a monthly basis and funds
the reserve as deemed necessary. Losses for 1995 are
estimated at $1,000,000. Included in loans on a non-accrual
basis as of March 31, 1995 were several large credits
relating to the fishing industry. After quarter end, loans
totaling $1,350,000 were resolved and have been taken off
non-accrual status. The amounts represented below are the
total dollars outstanding for the first three months of each
year listed.
CATEGORY 1995 1994 1993
90-Day past
due and
still
accruing $189,904 $486,959 $1,070,264
Non-accruing $4,184,679 $2,596,655 $3,036,538
$4,374,583 $3,083,614 $4,106,802
Gross loans $190,459,413 $165,649,797 $144,701,914
Percentage
of gross
loans 2.30% 1.86% 2.84%
In reviewing non-interest income, 1995 showed a
decline of $29,000 when compared to 1994. The decline has
come from two specific areas, one being securities gains
taken in the first quarter of 1994 of $18,500 for which
there were no comparable gains taken in 1995. Additionally,
the secondary market for residential mortgages, which has
generated substantial income for the Bank in the past
several years, dropped to $11,000 in the first quarter of
1995. In comparison, both 1994 and 1993 showed increases
as compared to their respective previous years.
Non-interest income for 1994 increased by $92,000
whereas 1993 experienced a $96,000 increase over 1992.
During the first three months of 1993 the Bank earned almost
$63,000 from fees generated by the secondary mortgage
program. Although this trend was not expected to continue
into 1994 as rates began to rise, these fees totaled $75,000
for the first three quarters of 1994. Following the first
quarter of 1995, interest rates, specifically in the
secondary market for residential mortgages, have dropped and
the Bank has once again begun to experience additional loan
demand in this area.
In 1994 salary and employee benefit s were
$63,000 (or 5.5%) over 1993 which is comparable to the
increase experienced in 1993 as compared to 1992. Salary
and benefits remained stable for the first quarter of 1995,
increasing by $14,000 over 1994.
Other expense for the first quarter of 1995
is greater than 1994 and includes increases in postage costs
due to the increase by the US Postal Service; increases in
media coverage for Bank promotions offered during the first
quarter; increased legal expense incurred with loan
resolutions; and increased FDIC insurance based on increased
deposits. Likewise, other expense was greater in 1994 when
compared to 1993's expense with no single account showing a
large increase over last year. This category encompasses
the majority of accounts that are not interest or human
resource related.
The Bank's capital to asset ratio is 9.98%
and the Bank far exceeds the required risk based capital
ratio of 8% with its Tier I ratio of 14.9% and total capital
ratio of 16.1% or additional capital of $16,000,000.