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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22957
RIVERVIEW BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1838969
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
900 Washington St., Ste. 900,Vancouver, Washington 98660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 693-6650
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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(Title of Class)
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 if there is no 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based on the closing sales price of the registrant's Common Stock
as quoted on the Nasdaq National Market System under the symbol "RVSB" on
September 30, 2002, was approximately $64,907,872 (4,284,348 shares at $15.15
per share). It is assumed for purposes of this calculation that none of the
Registrant's officers, directors and 5% stockholders (including the Riverview
Bancorp, Inc. Employee Stock Ownership Plan) are affiliates. As of May 15,
2003, there were issued and outstanding 4,358,704 shares of the Registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1.Portions of Registrant's Definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders (Part III).
PART I
Item 1. Business
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General
Riverview Bancorp, Inc. ("Company"), a Washington corporation, was organized
on June 23, 1997 for the purpose of becoming the holding company for Riverview
Savings Bank FSB, upon the its reorganization as a wholly-owned subsidiary of
the Company resulting from the conversion of Riverview, M.H.C., Camas,
Washington, from a federal mutual holding company to a stock holding company
("Conversion and Reorganization"). The Conversion and Reorganization was
completed on September 30, 1997. Riverview Savings Bank, FSB changed its name
to Riverview Community Bank (the "Bank") effective June 29, 1998. At March
31, 2003, the Company had total assets of $419.9 million, total deposits of
$320.7 million and shareholders' equity of $54.5 million. All references to
the Company herein include the Bank where applicable.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), 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 Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") system since
1937.
The Company is a progressive community-oriented, financial institution, which
emphasizes local, personal service to residents of its primary market area.
The Company considers Clark, Cowlitz, Klickitat and Skamania counties of
Washington as its primary market area. The Company is engaged primarily in the
business of attracting deposits from the general public and using such funds
in its primary market area to originate mortgage loans secured by one- to-
four family residential real estate, multi-family, commercial construction,
commercial real estate and non-mortgage loans providing financing for business
commercial ("commercial") and consumer purposes. Commercial real estate loans
and commercial loans have grown from 10.40% and 1.90% of the loan portfolio,
respectively, in fiscal 1999 to 30.02% and 10.11%, respectively, in fiscal
2003. The Company continues to change the composition of its loan portfolio
and the deposit base as part of its migration to commercial banking. The
consolidation among financial institutions in the Company's primary market
area has created a significant gap in the ability of the consolidated
financial institutions to serve customers. The Company's strategic plan
includes targeting this customer base, specifically small and medium size
businesses, professionals and wealth building individuals. In pursuit of
these goals, the Company will emphasize controlled growth and the
diversification of its loan portfolio to include a higher portion of
commercial and commercial real estate loans. A related goal is to increase
the proportion of personal and business checking account deposits used to fund
these new loans. Significant portions of these new loan products carry
adjustable rates, higher yields or shorter terms and higher credit risk than
the traditional fixed-rate mortgages. The strategic plan stresses increased
emphasis on non-interest income, including increased fees for asset management
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.
The Company is well positioned to attract new customers and to increase its
market share given that the administrative headquarters and eight of its
twelve branches are located in Clark County, the fastest growing county in the
state of Washington according to the U.S. Census Bureau.
In order to support its strategy of growth without compromising its local,
personal service to its customers and a commitment to asset quality, the
Company has made significant investments in experienced branch, lending, asset
management and support personnel and has incurred significant costs in
facility expansion. The Company's efficiency ratios reflect this investment
and will remain relatively high by industry standards for the foreseeable
future due to the emphasis on growth and local, personal service. Control of
non-interest expenses remains a high priority for the management of the
Company.
The Company continuously reviews new products and services to give its
customers more financial options. With an emphasis on growth of non-interest
income and control of non-interest expense, all new technology and services
are reviewed for business development and cost saving purposes. The Company
continues to experience growth in the
2
customer usage of the online banking services. Customers are able to conduct
a full range of services on a real-time basis, including balance inquiries,
transfers and electronic bill-paying. This online service has also enhanced
the delivery of cash management services to commercial customers. The
internet banking branch web site is www.riverviewbank.com.
Market Area
The Company conducts operations from its home office in Vancouver and twelve
branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (five branch offices) and Longview, Washington. The
Company's market area for lending and deposit taking activities encompasses
Clark, Cowlitz, Skamania and Klickitat Counties, throughout the Columbia River
Gorge area. The Company operates a trust and financial services company,
Riverview Asset Management Corporation, located in downtown Vancouver,
Washington. Riverview Mortgage, a mortgage broker division of the Company,
originates mortgage loans (including construction loans) for various mortgage
companies predominantly in the Portland, Oregon metropolitan areas, as well as
for the Company. The Business and Professional Banking Division located at
the downtown Vancouver main branch offers commercial and business banking
services. Vancouver is located in Clark County, which is just north of
Portland, Oregon.
Several businesses are located in the Vancouver area because of the favorable
tax structure and lower energy costs in Washington as compared to Oregon.
Washington has no state income tax and Clark County operates a public electric
utility that provides relatively lower cost electricity. Located in the
Vancouver area are Sharp Microelectronics, Hewlett Packard, Georgia Pacific,
Underwriters Laboratory and Wafer Tech, as well as several support industries.
In addition to this industrial base, the Columbia River Gorge Scenic Area has
been a source of tourism, which has transformed the area from its past
dependence on the timber industry.
The Company has strong competition from many financial institutions for
deposits and loan originations.
Lending Activities
General. At March 31, 2003, the Company's total net loans receivable,
including loans held for sale, amounted to $301.8 million, or 71.9% of total
assets at that date. The principal lending activity of the Company is the
origination of residential mortgage loans through its mortgage banking
activities, including residential construction loans and loans collateralized
by commercial properties. While the Company has historically emphasized real
estate mortgage loans secured by one- to- four residential real estate, it has
been diversifying its loan portfolio by focusing on increasing the number of
originations of commercial, commercial real estate and consumer 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.
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
3
At March 31,
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2003 2002 2001 2000 1999
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real estate loans:
One- to- four family(1) $59,999 17.72% $73,536 22.62% $117,152 35.67% $102,542 37.61% $83,275 39.03%
Multi-family 6,313 1.86 9,895 3.04 11,073 3.37 10,921 4.01 7,558 3.54
Construction one- to- four
family 70,397 20.79 71,148 21.89 60,041 18.28 49,338 18.10 45,524 21.34
Construction multi-family 2,100 0.62 4,000 1.23 4,514 1.37 4,669 1.71 4,209 1.97
Construction commercial 4,531 1.34 5,230 1.61 6,806 2.07 3,597 1.32 6,184 2.90
Land 34,630 10.23 27,406 8.43 24,230 7.38 25,475 9.34 24,932 11.68
Commercial real estate 101,672 30.02 84,094 25.87 56,540 17.21 42,871 15.72 22,181 10.40
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total real estate loans 279,642 82.58 275,309 84.69 280,356 85.35 239,413 87.81 193,863 90.86
Commercial 34,239 10.11 23,319 7.17 23,099 7.03 15,976 5.87 4,049 1.90
Consumer loans:
Automobile loans 1,458 0.43 2,132 0.66 3,223 0.98 2,875 1.05 3,146 1.47
Savings account loans 319 0.09 515 0.16 440 0.13 356 0.13 490 0.23
Home equity loans 21,088 6.23 21,598 6.65 18,761 5.71 11,148 4.09 9,096 4.26
Other consumer loans 1,927 0.56 2,134 0.67 2,596 0.80 2,864 1.05 2,728 1.28
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total consumer loans 24,792 7.31 26,379 8.14 25,020 7.62 17,243 6.32 15,460 7.24
Total loans and loans held
for sale 338,673 100.00% 325,007 100.00% 328,475 100.00% 272,632 100.00% 213,372 100.00%
Less: ====== ====== ====== ====== ======
Undisbursed loans in process 31,222 30,970 26,223 18,880 22,278
Unamortized loan origination
fees, net of direct cost 2,901 2,970 3,475 3,355 2,770
Unearned discounts - - - 1 1
Allowance for loan losses 2,739 2,537 1,916 1,362 1,146
Total loans receivable, ------- ------- ------- ------- -------
net(1) $301,811 $288,530 $296,861 $249,034 $187,177
======= ======= ======= ======= =======
(1) Includes loans held for sale of $1.5 million, $1.8 million, $569,000, none, and $341,000 at
March 31, 2003, 2002, 2001, 2000 and 1999 respectively.
4
One- to- Four Family Real Estate Lending. The majority of the residential
loans are secured by one- to four- family residences located in the Company's
primary market area. Underwriting standards require that one- to four- family
portfolio loans generally be owner occupied and that loan amounts not exceed
80% or (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 as well as balloon mortgage loans with terms of either
five or seven years. The Company originates both fixed rate mortgages and
adjustable rate mortgages ("ARMs") with repricing based on Treasury Bill or
other index. The ability to generate volume in ARMs, however, is largely a
function of consumer preference and the interest rate environment.
In addition to originating one- to- four family loans for its portfolio, the
Company is an active mortgage broker for several third party mortgage lenders.
In recent periods, such mortgage brokerage activities have reduced the volume
of fixed rate one- to- four family loans that are originated and sold by the
Company. See "-- Loan Originations, Sales and Purchases" and "-- Mortgage
Brokerage."
The Company generally sells fixed-rate mortgage loans with maturities of 15
years or more and balloon mortgages to the Federal Home Loan Mortgage
Corporation ("FHLMC"), servicing retained. See "-- Loan Originations, Sales
and Purchases" and " -- Mortgage Loan Servicing."
As a marketing incentive, the Company offers ARM loans with a discounted or
"teaser" rate of up to 1.25% below the normal rate offered. The borrower,
however, is qualified at the fully indexed rate. Annual and lifetime interest
rate caps are based on the initial discounted rate. "Teaser" rate loans are
subject to a prepayment penalty during the first three years of the loan term
if the borrower repays more than 20% of the outstanding principal balance per
year. During the first year, the penalty is 3% of the outstanding principal
balance; during year two, the penalty is 2% of the outstanding principal
balance; and during year three, the penalty is 1% of the outstanding principal
balance. The Company does not originate negative amortization loans.
The retention of ARM loans in the portfolio helps reduce the Company's
exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs arising from
changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Furthermore,
because "teaser" rate loans originated by the Company generally provide for
initial rates of interest below the rates which would apply were the
adjustment index used for pricing initially (discounting), these loans are
subject to increased risks of default or delinquency. Another consideration
is that although ARM loans allow the Company to increase the sensitivity of
its asset base to changes in interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. Because of these considerations, the Company has no assurance that
yields on ARM loans will be sufficient to offset increases in its cost of
funds.
While one- to- four family residential real estate loans typically are
originated with 30-year terms and the Company permits its ARM loans to be
assumed by qualified borrowers, such loans generally remain outstanding for
substantially shorter periods because borrowers often prepay their loans in
full upon sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all of the fixed interest rate
loans in the Company's loan portfolio contain due-on-sale clauses providing
that the Company may declare the unpaid amount due and payable upon the sale
of the property securing the loan. The Company enforces these due-on-sale
clauses to the extent permitted by law. Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in
the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Company requires title insurance insuring the status of its lien on all of
the real estate secured loans and also requires that the fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance and
the replacement cost of the improvements. Where the value of the unimproved
real estate exceeds the amount of the loan on the real estate, the Company may
make exceptions to its property insurance requirements.
Construction Lending. The Company actively originates three types of
residential construction loans: (i) speculative construction loans, (ii)
custom/presold construction loans and (iii) construction/permanent loans.
Subject to market
5
conditions, the Company intends to increase its residential construction
lending activities. To a lesser extent, the Company also originates
construction loans for the development of multi-family and commercial
properties.
At March 31, 2003 and 2002, the composition of the Company's construction loan
portfolio was as follows:
At March 31,
------------------------------------
2003 2002
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Amount(1) Percent Amount(1) Percent
-------- ------- -------- -------
(Dollars in thousands)
Speculative construction $ 32,379 33.24% $ 26,791 28.43%
Commercial/multi-family construction 10,750 11.04 13,605 14.44
Custom/presold construction 7,286 7.48 13,094 13.89
Construction/permanent 26,590 27.30 26,078 27.67
Construction/land 20,412 20.94 14,673 15.57
-------- ------- -------- -------
Total $ 97,417 100.00% $ 94,241 100.00%
======== ======= ======== =======
(1)Includes loans in process.
Speculative construction loans are made to home builders and are termed
"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 debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. At March 31,
2003, the Company had one borrower with aggregate outstanding speculative loan
balances of more than $1.0 million, which totaled $2.3 million and were
performing according to original terms. At March 31, 2003, three speculative
construction loans to one borrower that totaled $300,300 were on non-accrual.
Unlike speculative construction loans, presold construction loans are made for
homes that have buyers. Presold construction loans are made to home builders
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 with the
Company or another lender. Custom construction loans are made to the
homeowner. Custom/presold construction loans are generally originated for a
term of 12 months. At March 31, 2003, the largest short-term custom
construction loan and presold construction loan had outstanding balances of
$549,000 and $250,000, respectively, and were performing according to original
terms.
Construction/permanent loans are originated to the homeowner rather than the
home builder 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 ARM loan or use
its mortgage brokerage capabilities to obtain permanent financing for the
customer with another lender. At completion of construction, the Company-
originated fixed interest rate permanent loan's interest rate is set at a
market rate and for adjustable interest rate loans the interest rates adjust
on their first adjustment date. See "-- Mortgage Brokerage." See "-- Loan
Originations, Sales and Purchases" and "-- Mortgage Loan Servicing." At March
31, 2003, the largest outstanding construction/permanent loan had an
outstanding balance of $553,000 and was performing according to its original
terms.
The Company also provides construction financing for non-residential
properties (i.e., multi-family and commercial properties). The Company has
increased its commercial lending resources with the intent of increasing the
amount of commercial real estate loan balances such as construction commercial
and construction multi-family loans. Construction lending affords the Company
the opportunity to achieve higher interest rates and fees with shorter terms
to maturity than does its single-family permanent mortgage lending.
Construction lending, however, generally involves a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they are
generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of
6
value upon completion proves to be inaccurate, the Company may be confronted
with a project whose value is insufficient to assure full repayment. Projects
may also be jeopardized by disagreements between borrowers and builders and by
the failure of builders to pay subcontractors. The Company has sought to
address these risks by adhering to strict underwriting policies, disbursement
procedures and monitoring practices. In addition, because the Company's
construction lending is in its primary market area, changes in the local
economy and real estate market could adversely affect the Company's
construction loan portfolio. Of the $10.8 million commercial construction
loans outstanding at March 31, 2003, the loan commitment amount ranged between
$560,000 and $4.5 million. At March 31, 2003, the largest outstanding
construction commercial loan had an outstanding balance of $2.2 million and
was performing according to its original terms.
Multi-Family Lending. Multi-family mortgage loans generally have terms which
range up to 25 years with maximum loan-to-value ratio up to 75%. Both fixed
and adjustable rate loans are offered with a variety of terms to meet the
multi-family residential financing needs. At March 31, 2003, the largest
multi-family mortgage had an outstanding loan balance of $2.5 million and was
performing according to original terms.
Multi-family mortgage lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by multi-family properties
are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in
the real estate market or the economy. The Company seeks to minimize these
risks by strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the
loan. The Company also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
Land Lending. The Company originates loans to local real estate developers
with whom it has established relationships for the purpose of developing
residential subdivisions (i.e., installing roads, sewers, water and other
utilities), as well as loans to individuals to purchase building lots. Land
development loans are secured by a lien on the property and made for a period
not to exceed five years with an interest rate that adjusts with the prime
rate, and are made with loan-to-value ratios not exceeding 75%. Monthly
interest payments are required during the term of the loan. Subdivision loans
are structured so that the Company is repaid in full upon the sale by the
borrower of approximately 90% of the subdivision lots. All of the Company's
land loans are secured by property located in its primary market area. In
addition, the Company also generally obtains personal guarantees from
financially capable parties based on a review of personal financial
statements. At March 31, 2003, the largest outstanding land loan was $3.4
million and was performing according to original terms.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to- four family residential mortgage loans because such loans are
advanced upon the predicted future value of the developed property. If the
estimate of such future value proves to be inaccurate, in the event of default
and foreclosure, the Company may be confronted with a property the value of
which is insufficient to assure full repayment. The Company attempts to
minimize this risk by limiting the maximum loan-to-value ratio on land loans
to 65% of the estimated developed value of the secured property. Loans on raw
land may run the risk of adverse zoning changes, environmental or other
restrictions on future use.
Commercial Real Estate Lending. The Company originates commercial real estate
loans at both variable and fixed interest rates and secured by properties,
such as office buildings, retail/wholesale facilities and industrial
buildings, located in its primary market area. The principal balance of an
average commercial real estate loan generally ranges between $100,000 and $1.0
million. At March 31, 2003, the largest commercial real estate loan had an
outstanding balance of $5.2 million and is secured by an office building
located in the Company's primary market area. At March 31, 2003, the loan was
performing according to its original terms.
Commercial real estate lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy. The Company seeks to minimize these risks by
limiting the maximum loan-to-value ratio to
7
75% and strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the
loan. At March 31, 2003, the Company had no commercial real estate loans
accounted for on a nonaccrual basis.
Commercial Lending. The Company's commercial loan portfolio has increased to
10.11% of the total loan portfolio at March 31, 2003 from 1.90% at March 31,
1999. The Company was able to increase the balance of outstanding commercial
loans and commitments due to the local economy, the consolidation of some
local competitors offering commercial loans and the hiring of several
experienced commercial bankers from competitors in the local market. The
commercial loan portfolio has grown from 7.17% at March 31, 2002 to 10.11% at
March 31, 2003.
Commercial loans are generally made to customers who are well known to the
Company and are typically secured by business equipment or other property. The
Company's commercial 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 have maturities of five years or less. Commercial lines of credit
are typically made for the purpose of providing working capital and usually
approved with 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 a fixed rate. The Company also generally obtains
personal guarantees from financially capable parties based on a review of
personal financial statements.
Commercial lending involves greater risk than residential mortgage lending and
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
is viewed as the primary source of repayment in the event of borrower default.
Although commercial loans are often collateralized by equipment, inventory,
accounts receivable or other business assets including real estate, the
liquidation of collateral in the event of a borrower default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment. At March 31, 2003, the Company had no commercial loan accounted
for on a nonaccrual basis.
Consumer Lending. The Company originates a variety of consumer loans,
including home equity lines of credit, home equity term loans, home
improvement loans, loans for debt consolidation and other purposes, automobile
loans, boat loans and savings account loans.
Home equity lines of credit and home equity term loans are typically secured
by a second mortgage on the borrower's primary residence. Home equity lines of
credit are made at loan-to-value ratios of 90% or less, taking into
consideration the outstanding balance on the first mortgage on the property.
Home equity lines of credit have a variable interest rate while home equity
term loans have a fixed rate of interest. The Company's procedures for
underwriting consumer loans include an assessment of the applicant's payment
history on other debts and ability to meet existing obligations and payments
on the proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, to the proposed loan amount.
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 such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for
the outstanding loan and the remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by the borrower against
the Company as the holder of the loan, and a borrower may be able to assert
claims and defenses, which it has against the seller of the underlying
collateral. At March 31, 2003, one consumer loan for $22,300 is on
non-accrual.
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Loan Maturity. The following table sets forth certain information at March
31, 2003 regarding the dollar amount of loans maturing in the Company's
portfolio based on their contractual terms to maturity, but does not include
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances do not include unearned discounts, unearned
income and allowance for loan losses.
After
One After 3 After 5
Within Year to Years to Years to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -------
(In thousands)
Residential one-to-four
family:
Adjustable rate $ - $ - $ 76 $ 504 $22,825 $23,405
Fixed rate 731 8,860 10,904 5,107 10,992 36,594
Construction:
Adjustable rate 49,377 23,322 - - - 72,699
Fixed rate 24,718 - - - - 24,718
Other real estate:
Adjustable rate 9,546 4,382 10,217 25,821 11,985 61,951
Fixed rate 5,910 14,641 17,840 18,021 3,863 60,275
Commercial:
Adjustable rate 22,277 429 1,593 519 - 24,818
Fixed rate 2,555 1,971 4,790 105 - 9,421
Consumer:
Adjustable rate 309 55 627 412 19,024 20,427
Fixed rate 446 1,175 1,141 307 1,296 4,365
------- ------ ------ ------ ------ -------
Total gross loans $115,869 $54,835 $47,188 $50,796 $69,985 $338,673
======= ====== ====== ====== ====== =======
The following table sets forth the dollar amount of all loans due one year
after March 31, 2003 which have fixed interest rates or have floating or
adjustable interest rates.
Fixed- Floating or
Rates Adjustable Rates
------ ----------------
(In thousands)
Residential one- to- four family $ 35,863 $ 23,405
Construction loans - 23,322
Other real estate loans 54,365 52,405
Commercial 6,866 2,541
Consumer 3,919 20,118
------- -------
Total $101,013 $121,791
======= =======
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of a loan is substantially less than
its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgage loans are substantially higher than current
mortgage loan market rates. Furthermore, management believes that a
significant number of the Company's residential mortgage loans are outstanding
for a period less than their contractual terms because of the transitory
nature of many of the borrowers who reside in its primary market area.
Loan Solicitation and Processing. The Company's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management.
The
9
customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers. The Company also uses commissioned loan
brokers and print advertising to market its products and services.
The Company's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan, the adequacy of the
value of the property that will secure the loan, and, in the case of
commercial and multi-family real estate loans, the cash flow of the project
and the quality of management involved with the project. The Company's lending
policy requires borrowers to obtain certain types of insurance to protect the
Company's interest in the collateral securing the loan. Loans are approved at
various levels of management, depending upon the amount of the loan.
Loan Commitments. The Company issues commitments to originate residential
mortgage loans, commercial real estate mortgage loans, consumer loans and
commercial 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 extend credit are conditional,
and are honored for up to 45 days subject to the Company's usual terms and
conditions. Collateral is not required to support commitments. At March 31,
2003, the Company had outstanding commitments to originate loans in the amount
of $21.4 million.
Loan Originations, Sales and Purchases. While the Company originates
adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans in its primary market
area. During the years ended March 31, 2003 and 2002, the Company's total
loan originations were $298.4 million and $273.9 million, respectively, of
which 63.2% and 61.8%, respectively, were subject to periodic interest rate
adjustment and 36.8% and 38.2%, respectively, were fixed-rate loans.
The Company customarily sells the fixed-rate residential one- to- four family
mortgage loans that it originates with maturities of 15 years or more to the
FHLMC as part of its asset liability strategy. The sale of such loans allows
the Company to continue to make loans during periods when savings flows
decline or funds are not otherwise available for lending purposes; however,
the Company assumes an increased risk if such loans cannot be sold in a rising
interest rate environment. Changes in the level of interest rates and the
condition of the local and national economies affect the amount of loans
originated by the Company and demanded by investors to whom the loans are
sold. Generally, the Company's residential one- to- four family mortgage loan
origination and sale activity and, therefore, its results of operations, may
be adversely affected by an increasing interest rate environment to the extent
such environment results in decreased loan demand by borrowers and/or
investors. Accordingly, the volume of loan originations and the profitability
of this activity can vary significantly from period to period. Mortgage loans
are sold to the FHLMC on a nonrecourse basis whereby foreclosure losses are
generally the responsibility of the FHLMC and not the Company. Servicing is
retained on loans sold to FHLMC.
Interest rates on residential one- to -four family mortgage loan applications
are typically locked during the application stage for periods ranging from 30
to 90 days, the most typical period being 45 days. These loans are locked
with FHLMC under a best-efforts delivery program. The Company makes every
effort to deliver these loans before their ratelocks expire. This arrangement
requires the Company to deliver the loans to FHLMC within ten days of funding.
Delays in funding the loans can require a lock extension. The cost of a lock
extension at times is borne by the borrower and at times by the Company.
These lock extension costs paid by the Company are not expected to have a
material impact to operations. This activity is managed daily.
There can be no assurance that the Company will be successful in its efforts
to reduce the risk of interest rate fluctuation between the time of
origination of a mortgage loan and the time of the ultimate sale of the loan.
To the extent that the Company does not adequately manage its interest rate
risk, the Company may incur significant mark-to-market losses or losses
relating to the sale of such loans, adversely affecting financial condition
and results of operations.
The Company is not an active purchaser of loans.
The following table shows total loans originated, sold and repaid during the
periods indicated.
10
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Total net loans receivable and loans held
for sale at beginning of period $288,530 $296,861 $249,034
Loans originated: ------- ------- -------
Mortgage loans:
One- to- four family 45,004 40,398 23,978
Multi-family 6,936 219 1,087
Construction one- to- four family 87,049 81,809 71,602
Construction commercial real estate 3,267 14,585 9,345
Construction multi-family 2,597 - -
Land and commercial real estate 61,671 57,942 31,957
Commercial 68,083 55,213 47,426
Consumer 23,784 23,697 21,062
------- ------- -------
Total loans originated 298,391 273,863 206,457
Residential one- to- four family loans sold (56,097) (35,701) (7,563)
Repayment of principal (227,101) (203,466) (147,415)
Loans securitized - (40,347) -
Decrease in other items, net (1,912) (2,680) (3,652)
------- ------- -------
Net increase (decrease) in loans 13,281 (8,331) 47,827
Total net loans receivable and loans held ------- ------- -------
for sale at end of period $301,811 $288,530 $296,861
======= ======= =======
Mortgage Brokerage. In addition to originating mortgage loans for retention
in its portfolio, the Company employs nine commissioned brokers who originate
mortgage loans (including construction loans) for various mortgage companies
predominately in the Portland metropolitan area, as well as for the Company.
The loans brokered to such 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% to 1.5%
of the loan amount that it shares with the commissioned broker. Loans brokered
to the Company are closed on the Company's books as if the Company had
originated them and the commissioned broker receives a fee of approximately
0.50% of the loan amount. During the year ended March 31, 2003, brokered
loans totaled $200.3 million (including $77.7 million brokered to the
Company). Gross fees of $1.7 million (excluding the portion of fees shared
with the commissioned brokers) were recognized for the year ended March 31,
2003.
Mortgage Loan Servicing. The Company is a qualified servicer for the FHLMC.
The Company's general policy is to close its residential loans on the FHLMC
modified loan documents to facilitate future sales to the FHLMC. Upon sale,
the Company continues to collect payments on the loans, to supervise
foreclosure proceedings, if necessary, and otherwise to service the loans.
The Company generally retains the servicing rights on the fixed-rate mortgage
loans that it sells to the FHLMC. At March 31, 2003, total loans serviced for
others were $128.2 million.
In 1994, the Company purchased the servicing rights to an underlying portfolio
of residential mortgage loans secured by properties predominately located in
the Seattle metropolitan area. At March 31, 2003, the carrying value of these
purchased servicing rights was $30,000 and was being amortized over the life
of the underlying loan servicing.
Loan Origination and Other Fees. The Company generally receives loan
origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the loan that is charged to the borrower
for funding the loan. The Company usually charges origination fees of 1.5% to
2.0% on one- to- four family residential real estate loans, long-term
commercial real estate loans and residential construction loans. Commercial
loan fees are based on terms of the
11
individual loan. Current accounting standards require fees received for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Deferred fees associated with loans that are
sold are recognized as gain on sale of loans. The Company had $2.9 million of
net deferred loan fees at March 31, 2003. The Company also receives loan
servicing fees on the loans it sells and on which it retains the servicing
rights. See Note 8 of Notes to Consolidated Financial Statements.
Delinquencies. The Company's collection procedures for all loans except
consumer loans provide for a series of contacts with delinquent borrowers. A
late charge delinquency notice is first sent to the borrower when the loan
secured by real estate becomes 17 days past due. A follow-up telephone call,
or letter if the borrower cannot be contacted by telephone, is made when the
loan becomes 22 days past due. A delinquency notice is sent to the borrower
when the loan becomes 30 days past due. When payment becomes 60 days past
due, a notice of default letter is sent to the borrower stating that
foreclosure proceedings will commence unless the delinquency is cured. If a
loan continues in a delinquent status for 90 days or more, the Company
generally initiates foreclosure proceedings. In certain instances, however,
the Company may decide to modify the loan or grant a limited moratorium on
loan payments to enable borrowers to reorganize their financial affairs.
A delinquent consumer loan borrower is contacted on the fifteenth day of
delinquency. A letter of intent to repossess collateral is mailed to the
borrower after the loan becomes 45 days past due and repossession proceedings
are initiated after the loan becomes 90 days delinquent.
Delinquencies in commercial loans are handled on a case by case basis.
Generally, notices are sent and personal contact is made with the borrower
when the loan is 15 days past due. Loan officers are responsible for
collecting loans they originate or are assigned to them. Depending on the
nature of the loan or type of collateral securing the loan, negotiations, or
other actions, are undertaken depending upon what the circumstances warrant.
Nonperforming Assets. Loans are reviewed regularly and it is the Company's
general policy that when a loan is 90 days delinquent or when collection of
interest appears doubtful, it is placed on nonaccrual status, at which time
the accrual of interest ceases and the reserve for any unrecoverable accrued
interest is established and charged against operations. Typically, payments
received on a nonaccrual loan are applied to the outstanding principal and
interest as determined at the time of collection of the loan.
Real estate owned is real estate acquired in settlement of loans and consists
of real estate acquired through foreclosure or deeds in lieu of foreclosure.
The acquired real estate is recorded at net realizable value. The Company
periodically reviews the property's net realizable value and a charge to
operations is taken if the property's recorded value exceeds the property's
net realizable value.
The following table sets forth information with respect to the Company's
nonperforming assets. At the dates indicated, the Company had no restructured
loans within the meaning of Statement of Financial Accounting Standards
("SFAS") No. 15.
12
At March 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a nonaccrual
basis:
Residential real estate $ 301 $ 830 $ 153 $ 833 $1,052
Commercial real estate - 297 - - -
Land - 180 - 320 -
Commercial - 54 50 99 208
Consumer 22 39 116 26 33
------ ------ ------ ------ ------
Total 323 1,400 319 1,278 1,293
------ ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more - 122 226 - 5
------ ------ ------ ------ ------
Total of nonaccrual and
90 days past due loans 323 1,522 545 1,278 1,298
------ ------ ------ ------ ------
Real estate owned (net) 425 853 473 65 30
------ ------ ------ ------ ------
Total nonperforming assets $ 748 $2,375 $1,018 $1,343 $1,328
====== ====== ====== ====== ======
Total loans delinquent 90 days
or more to net loans 0.11% 0.53% 0.18% 0.51% 0.69%
Total loans delinquent 90 days or
more to total assets 0.08 0.39 0.13 0.37 0.43
Total nonperforming assets to
total assets 0.18 0.61 0.24 0.39 0.44
The gross amount of interest income on the nonaccrual loans that would have
been recorded during the year ended March 31, 2003 if the nonaccrual loans had
been current in accordance with their original terms was approximately $6,000.
For the year ended March 31, 2003, no interest was earned on the nonaccrual
loans and included in interest and fees on loans receivable interest income.
Loans not included in nonperforming or past due categories, but where
information about possible credit problems causes management to be uncertain
about the borrower's ability to comply with existing repayment terms, totaled
$2.4 million at March 31, 2003 and $2.9 million at March 31, 2002.
Asset Classification. The OTS 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, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. 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. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Company.
13
The aggregate amount of the Company's classified assets, general loss
allowances, specific loss allowances and charge-offs were as follows at the
dates indicated:
At or For the Year
Ended March 31,
2003 2002
------ ------
(In thousands)
Substandard assets $2,740 $3,724
Doubtful assets -
Loss assets - -
General loss allowances 2,739 2,537
Specific loss allowances - -
Charge-offs 428 439
The substandard assets at March 31, 2003 are consisted of three residential
construction loans totaling $316,000, one land loan totaling $100,000, two
commercial real estate loans totaling $212,000, one consumer loan totaling
$22,000 and thirteen commercial borrowers with loans totaling $2.1 million.
Real Estate Owned. Real estate properties acquired through foreclosure or by
deed-in-lieu of foreclosure are recorded at the lower of cost or fair value
less estimated costs of disposal. Management periodically performs valuations
and an allowance for loan losses is established by a charge to operations if
the carrying value exceeds the estimated net realizable value. At March 31,
2003, the Company owned three properties with a recorded value of $425,000
compared to $853,000 at March 31, 2002. The $425,000 recorded value consists
of two land loans totaling $70,000 and one one-to four-family loan of
$355,000.
Allowance for Loan Losses. The Company maintains an allowance for loan losses
to provide for losses inherent in the loan portfolio. The adequacy of the
allowance is evaluated monthly to maintain the allowance at levels sufficient
to provide for inherent losses. A key component to the evaluation is the
Company's internal loan review and loan classification system. The internal
loan review system provides for at least an annual review by the internal
audit department of all loans that meet selected criteria. The Internal Loan
Classification Committee reviews and monitors the risk and quality of the
Company's loan portfolio. The Internal Loan Classification Committee members
include the Credit Administrator, Chairman and Chief Executive Officer, Chief
Financial Officer, Executive Vice President Credit Administration and Senior
Vice President Business & Professional Banking. Credit officers are expected
to monitor their portfolios and make recommendations to change loan grades
whenever changes are warranted. At least annually, loans that are delinquent
60 days or more and with specified outstanding loan balances are subject to
review by the internal audit department. The Internal Loan Classification
Committee meets quarterly to approve any changes to loan grades, monitor loan
grades and to recommend any changes to the loan grades.
The Company uses the OTS loan classifications of special mention, substandard,
doubtful and loss plus the additional loan classifications of pass and watch
in order to assign a loan grade to be used in the determination of the proper
amount of allowance for loan losses. The definition of a pass classification
represents a level of credit quality, which contains no well-defined
deficiency or weakness. The definition of watch classification is used to
identify a loan that currently contains no well-defined deficiency or
weakness, but it is determined to be desirable to closely monitor the loan.
The Company uses the loan classifications from the internal loan review and
Internal Loan Classification Committee in the following manner to determine
the amount of the allowance for loan losses. The calculation of the allowance
for loan losses must consider loan classification in order to determine the
amount of the allowance for loan losses for the required three separate
elements of the allowance for losses: general allowances, allocated allowances
and unallocated allowances.
14
The general allowance element relates to assets with no well-defined
deficiency or weakness (i.e., assets classified pass or watch) and takes into
consideration loss that is imbedded within the portfolio but has not been
realized. Borrowers are impacted by events well in advance of a lender's
knowledge that may ultimately result in a loan default and eventual loss.
Examples of such loss-causing events in the case of consumer or one- to four-
family residential loans would be a borrower job loss, divorce or medical
crisis. Examples in commercial or construction loans may be loss of customers
due to competition or economy changes. General allowances for each major loan
type are determined by applying loss factors that take into consideration past
loss experience, asset duration, economic conditions and overall portfolio
quality to the associated loan balance.
The allocated allowance element relates to assets with well-defined
deficiencies or weaknesses (i.e., assets classified special mention,
substandard, doubtful or loss). The OTS loss factors are applied against
current classified asset balances to determine the amount of allocated
allowances. Included in these allowances are those amounts associated with
loans where it is probable that the value of the loan has been impaired and
the loss can be reasonably estimated.
The unallocated allowance element is more subjective and is reviewed quarterly
to take into consideration estimation errors and economic trends that are not
necessarily captured in determining the general and allocated valuation.
At March 31, 2003, the Company had an allowance for loan losses of $2.7
million, or 0.89% of total outstanding net loans at that date. Based on past
experience and probable losses inherent in the loan portfolio, management
believes that loan loss reserves are adequate.
While the Company believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles" or
"GAAP"), there can be no assurance that regulators, in reviewing the Company's
loan portfolio, will not request the Company to increase significantly its
allowance for loan losses, thereby negatively affecting the Company's
financial condition and results of operations. The following table sets forth
an analysis of the Company's allowance for loan losses for the periods
indicated.
15
Year Ended March 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $2,537 $1,916 $1,362 $1,146 $ 984
------ ------ ------ ------ ------
Provision for loan losses 727 1,116 949 675 240
Recoveries:
Residential real estate 2 - - - -
Land 63 - - - -
Commercial - - - 1 -
Consumer 13 25 18 28 7
------ ------ ------ ------ ------
Total recoveries 78 25 18 29 7
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 140 88 226 48 28
Land 17 - - - -
Commercial 119 185 27 282 -
Consumer 152 166 160 158 57
------ ------ ------ ------ ------
Total charge-offs 428 439 413 488 85
------ ------ ------ ------ ------
Net charge-offs 350 414 395 459 78
------ ------ ------ ------ ------
Dispositions (1) - 81 - - -
Net change in allowance for unfunded
loan commitments and lines of credit (175) - - - -
------ ------ ------ ------ ------
Balance at end of period $2,739 $2,537 $1,916 $1,362 $1,146
====== ====== ====== ====== ======
Ratio of allowance to total net
loans outstanding during period 0.89% 0.86% 0.63% 0.54% 0.60%
Ratio of net charge-offs(recoveries)
to average net loans outstanding
during period 0.12 0.14 0.14 0.21 0.04
Ratio of allowance to total of
nonaccrual and 90 days past due
loans 847.99 166.69 351.56 106.58 88.30
Changes in the allowance for unfunded loan commitments and lines of credit:
Year Ended March 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Beginning Balance $ - $ - $ - $ - $ -
Net change in allowance for unfunded
loan commitments and lines of credit 175 - - - -
------ ------ ------ ------ ------
Ending Balance $ 175 $ - $ - $ - $ -
====== ====== ====== ====== ======
(1) Allowance reclassified with securitization of one-to four-family loans to
mortgage-backed securities.
16
The following table sets forth the breakdown of the allowance for loan losses
by loan category and is based on applying a specific loan loss factor to the
related loan category outstanding loan balances as of the date of the
allocation for the periods indicated.
At March 31,
-------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- --------------- --------------- --------------- ---------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a as a as a as a as a
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Real estate - mortgage
One -to-four family $ 122 19.50% $ 191 24.99% $ 263 38.73% $ 259 40.34% $ 218 43.51%
Multi-family 24 2.05 37 3.36 42 3.66 41 4.30 10 3.95
Construction one-to-four
family 194 14.24 319 14.77 224 13.57 304 13.50 292 16.18
Construction multi-family 5 0.30 20 1.25 21 0.19 10 1.29 10 1.11
Construction commercial 20 1.31 26 1.38 34 1.41 17 1.02 44 1.56
Land 196 10.36 192 8.79 206 7.83 223 9.62 32 11.91
Commercial real estate 1,046 33.05 869 28.58 580 18.69 224 16.86 180 11.59
Commercial loans 796 11.13 668 7.92 354 7.64 160 6.28 198 2.12
Consumer loans:
Secured 141 7.63 180 8.47 154 7.65 90 5.70 89 6.65
Unsecured 33 0.43 27 0.49 34 0.63 29 1.09 37 1.42
Unallocated 162 - 8 - 4 - 5 - 36 -
Total allowance for loan ----- ------ ----- ------ ----- ------ ----- ------ ----- ------
losses $2,739 100.00% $2,537 100.00% $1,916 100.00% $1,362 100.00% $1,146 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
17
Investment Activities
OTS regulated institutions have authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the applicable
FHLB, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, OTS
regulated institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds, the assets of which conform
to the investments that federally chartered savings institutions are otherwise
authorized to make directly.
Federal regulations require the Company to maintain a minimum sufficient
liquidity to ensure its safe and sound operation. Liquid assets include cash,
cash equivalents consisting of short-term interest-earning deposits, certain
other time deposits, and other obligations generally having remaining
maturities of less than five years. See "Regulation." It is the intention of
management to hold securities with short maturities in the Bank's and
Company's investment portfolio in order to match more closely the
interest-rate sensitivities of The Bank's and Company's assets and
liabilities. At March 31, 2003, the Bank's liquidity ratio, the ratio of cash
and eligible investments to the sum of withdrawable savings and borrowings due
within one year, was 12.25%.
The Investment Committee, composed of the Company's Chief Executive Officer
and Chief Financial Officer, makes investment decisions. The Company's
investment objectives are: (i) to provide and maintain liquidity within
regulatory guidelines; (ii) to maintain a balance of high quality, diversified
investments to minimize risk; (iii) to provide collateral for pledging
requirements; (iv) to serve as a balance to earnings; and (v) to optimize
returns. At March 31, 2003, the Company's investment and mortgage-backed
securities portfolio totaled approximately $36.8 million and consisted
primarily of obligations of federal agencies, and Federal National Mortgage
Association ("FNMA") and FHLMC mortgage-backed securities.
At March 31, 2003, the Company's investment securities portfolio did not
contain any tax-exempt securities of any issuer with an aggregate book value
in excess of 10% of the Company's consolidated shareholders' equity, excluding
those securities issued by the U.S. Government or its agencies.
The Board of Directors sets the investment policy of the Company which
dictates that investments be made based on the safety of the principal amount,
liquidity requirements of the Company and the return on the investments. At
March 31, 2003, no investment securities were held for trading. The policy
does not permit investment in non-investment grade bonds and permits
investment in various types of liquid assets permissible under OTS regulation,
which includes U.S. Treasury obligations, securities of various federal
agencies, "bank qualified" municipal bonds, certain certificates of deposits
of insured banks, repurchase agreements and federal funds.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires the classification of securities
at acquisition into one of three categories: held to maturity, available for
sale or trading. See Note 1 of Notes to Consolidated Financial Statements.
18
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated. The fair value of the investment
and mortgage-backed securities portfolio was $36.9 million, $59.8 million and
$76.1 million at March 31, 2003, 2002 and 2001, respectively.
At March 31,
-----------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- --------- -------- --------- -------- ---------
(Dollars in thousands)
Held to maturity (at amortized cost):
Real estate mortgage investment
conduits ("REMICs") $ 1,803 4.90% $ 1,804 3.02% $ 1,805 2.38%
FHLMC mortgage-backed securities 589 1.60 964 1.62 1,680 2.21
FNMA mortgage-backed securities 909 2.47 1,618 2.71 2,920 3.84
Municipal securities - - - - 861 1.13
-------- -------- -------- -------- -------- --------
3,301 8.97 4,386 7.35 7,266 9.56
Available for sale (at fair value): -------- -------- -------- -------- -------- --------
FHLB debentures - - - - 6,937 9.13
REMICs 6,421 17.45 25,114 42.10 40,943 53.90
FHLMC mortgage-backed securities 6,097 16.57 10,972 18.39 451 0.59
FNMA mortgage-backed securities 551 1.50 913 1.53 1,745 2.30
School district bonds 2,751 7.48 2,601 4.36 2,625 3.46
Trust preferred securities 4,975 13.52 - - - -
Equity securities 12,700 34.51 15,674 26.27 15,999 21.06
-------- -------- -------- -------- -------- --------
33,495 91.03 55,274 92.65 68,700 90.44
-------- -------- -------- -------- -------- --------
Total investment securities $36,796 100.00% $59,660 100.00% $75,966 100.00%
======== ======== ======== ======== ======== ========
The following table sets forth the maturities and weighted average yields in
the securities portfolio at March 1, 2003.
Less Than One to More Than Five More Than
One Year Five Years to Ten Years Ten Years
--------------- --------------- --------------- ---------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Municipal securities $ - -% $ 982 4.06% $1,126 4.27% $ 643 4.77%
REMICs - - - - 811 2.38 7,413 2.86
FHLMC mortgage-backed securities - - 6,250 6.24 2 10.50 434 4.23
FNMA mortgage-backed securities 28 5.52 839 6.83 - - 593 4.77
Trust preferred securities - - - - - - 4,975 3.20
Equity securities - - - - - - 12,700 3.81
------ -------- ------ -------- ------ -------- ------ --------
Total $ 28 5.52% $8,071 6.03% $1,939 3.48% $26,758 3.48%
====== ======= ====== ======= ====== ======= ======= =======
(1) For available for sale securities carried at fair value, the weighted
average yield is computed using amortized cost. Average yield
calculations exclude equity securities that have no stated yield or maturity.
19
In addition to U.S. Government treasury obligations, the Company invests in
mortgage-backed securities and real estate mortgage investment conduits
("REMICs"). Mortgage-backed securities ("MBS") (which are also known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages.
Principal and interest payments on mortgage-backed securities are passed from
the mortgage originators, through intermediaries (i.e., FNMA, FHLMC, the
Government National Mortgage Association ("GNMA") or private issues) that pool
and repackage the participation interests in the form of securities, to
investors such as the Company. Mortgage-backed securities generally increase
the quality of the Company's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company. See Note 4 of
Notes to Consolidated Financial Statements for additional information.
REMICs are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes
these securities may represent attractive alternatives relative to other
investments because of the wide variety of maturity, repayment and interest
rate options available. Current investment practices of the Company prohibit
the purchase of high risk REMICs. At March 31, 2003, the Company held REMICs
with a net carrying value of $8.2 million, of which $1.8 million were
classified as held-to-maturity and $6.4 million of which were available-for-
sale. REMICs may be sponsored by private issuers, such as mortgage bankers or
money center banks, or by U.S. Government agencies and government sponsored
entities. At March 31, 2003, the Company owned no privately issued REMICs.
Investments in mortgage-backed securities, including REMICs, involve a risk
that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest
rates.
The investment in school district bonds was $2.8 million at March 31, 2003
compared to $2.6 million at March 31, 2002. Total equity securities investment
was $12.7 million at March 31, 2003, compared to $15.7 million at March 31,
2002.
In the second quarter of fiscal 2003, the Company purchased $5.0 million of
trust preferred securities which are a portion of the mezzanine tranche of a
$500.0 million pooled preferred trust securities indexed to the three month
libor interest rate.
In the fourth quarter of fiscal 2003, the Company recognized a $2.3 million
non-cash pre-tax charge to operations for investments in FHLMC preferred
stock and FNMA preferred stock. The Company accounts for these securities in
accordance with SFAS No. 115. Under SFAS No. 115, if the decline in fair
market value below cost is determined to be other-than-temporary, the
unrealized loss will be realized as expense on the income statement. Based on
a number of factors, including the magnitude of the drop in the market value
below the Company's cost and the length of time the market value had been
below cost, management concluded that the decline in value was
other-than-temporary at the end of the fourth quarter of fiscal year 2003.
Accordingly, the other-than-temporary impairment was realized in the income
statement, in the amount of $700,000 for FNMA preferred stock and $1.6 million
FHLMC preferred stock. A corresponding reduction in unrealized losses in
shareholders' equity was realized in the amount of $462,000 for FNMA preferred
stock and $1.1 million for FHLMC preferred stock.
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.
20
Deposit Accounts. Deposits are attracted from within the Company's primary
market area through the offering of a broad selection of deposit instruments,
including demand deposits, negotiable order of withdrawal ("NOW") accounts,
money market accounts, regular savings accounts, certificates of deposit and
retirement savings plans. Historically the Company has focused on retail
deposits. Expansion in commercial lending has led to growth in business
deposits including demand deposit accounts. Deposit account terms vary
according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. 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 its customer preferences and concerns. The Company generally
reviews its deposit mix and pricing weekly.
21
Deposit Balances
The following table sets forth information concerning the Company's
certificates of deposit, other interest-bearing and non-interest bearing
deposits at March 31, 2003.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ---- --------------------- ------- ------- --------
(In thousands)
0.350% None NOW accounts $ 100 $27,113 8.45%
1.824 None High Yield checking 25,000 35,537 11.08
0.750 None Regular savings 500 24,855 7.75
1.011 None Money market 2,500 53,717 16.75
None None Non-interest checking 100 78,464 24.46
------- -----
Total transaction accounts 219,686 68.49
Certificates of Deposit
-----------------------
1.564 91 Days Fixed-term, Fixed-rate 2,500 9,510 2.96
1.455 182-364 Days Fixed-term, Fixed-rate 2,500 13,592 4.24
2.055 12-17 Months Fixed-term, Fixed-rate 2,500 35,034 10.92
1.380 18 Months Fixed-term, Variable
rate, Individual
Retirement account
("IRA") 100 1,149 0.36
2.314 18-23 Months Fixed-term, Fixed-rate 2,500 2,518 0.79
3.304 24-35 Months Fixed-term, Fixed-rate 2,500 19,834 6.18
4.798 36-59 Months Fixed-term, Fixed-rate 2,500 6,404 2.00
5.353 60-83 Months Fixed-term, Fixed-rate 2,500 10,137 3.16
5.228 84-120 Months Fixed-term, Fixed-rate 2,500 2,878 0.90
------- -----
Total certificates of deposit 101,056 31.51%
------- -----
Total deposits $320,742 100.00%
======= ======
22
Deposit Flow
The following table sets forth the balances of deposit accounts in the
various types offered by the Company at the dates indicated.
At March 31,
----------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ ------------------------
Increase/ Increase/ Increase/
Balance Percent Decrease) Balance Percent Decrease) Balance Percent Decrease)
------- ------- -------- ------- ------- -------- ------- ------- --------
(Dollars in thousands)
Non-interest-bearing demand $78,464 24.46% $ 45,890 $32,574 12.54% $ 4,639 $27,935 9.45% $ 3,194
NOW accounts 27,113 8.45 (5,597) 32,710 12.60 567 32,143 10.88 11,167
High-yield checking 35,537 11.08 30,183 5,354 2.06 5,354 - - -
Regular savings accounts 24,855 7.75 2,916 21,939 8.45 3,112 18,827 6.37 (1,013)
Money market deposit accounts 53,717 16.75 (928) 54,645 21.04 8,921 45,724 15.47 1,104
Certificates of deposits which
mature(1):
Within 12 months 71,155 22.19 (15,784) 86,939 33.48 (55,084) 142,023 48.06 48,149
Within 12-36 months 22,619 7.05 3,249 19,370 7.46 (4,303) 23,673 8.01 897
Beyond 36 months 7,282 2.27 1,123 6,159 2.37 961 5,198 1.76 (330)
------- ------- -------- ------- ------- -------- ------- ------- --------
Total $320,742 100.00% $ 61,052 $259,690 100.00% $(35,833)$295,523 100.00% $ 63,168
======= ====== ======== ======= ====== ======== ======= ====== ========
__________________
(1) IRAs of $12.9 million, $12.8 million and $12.8 million at March 31,
2003, 2002 and 2001, respectively, are included in certificate balances.
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated.
At March 31,
--------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Below 2.00% $43,969 $14,919 $ -
2.00 - 2.99% 17,483 30,028 -
3.00 - 3.99% 18,770 24,390 40
4.00 - 4.99% 7,452 13,014 5,772
5.00 - 5.99% 7,058 10,717 45,544
6.00 - 7.99% 6,324 19,400 119,538
------ ------ ------
Total $101,056 $112,468 $170,894
======= ======= =======
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 2003.
Amount Due
--------------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
-------- ------- --------- ------- -------
(In thousands)
Below 2.00% $ 39,225 $ 4,176 $ 500 $ 68 $ 43,969
2.00 - 2.99% 10,943 4,529 1,998 13 17,483
3.00 - 3.99% 12,755 4,399 391 1,225 18,770
4.00 - 4.99% 3,217 1,161 888 2,186 7,452
5.00 - 5.99% 2,086 790 780 3,402 7,058
6.00 - 7.99% 2,929 1,697 1,310 388 6,324
-------- ------- --------- ------- -------
Total $ 71,155 $16,752 $ 5,867 $ 7,282 $101,056
======== ======= ========= ======= =======
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at March 31, 2003.
Weighted
Maturity Period Amount Average Rate
- --------------- -------- ------------
(Dollars in thousands)
Three months or less $ 12,751 2.46%
Over three through six months 4,675 2.49
Over six through 12 months 4,309 2.69
Over 12 Months 8,552 4.21
-------- ------
Total $ 30,287 2.99%
======== ======
24
Deposit Activities
The following table sets forth the deposit activities of the Company for the
periods indicated.
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
(In thousands)
Beginning balance $259,690 $295,523 $232,355
Net (decrease) increase
before interest credited 55,535 (44,789) 52,002
Interest credited 5,517 8,956 11,166
Net (decrease) increase in ------ ------ ------
savings deposits 61,052 (35,833) 63,168
------ ------ ------
Ending balance $320,742 $259,690 $295,523
======= ======= =======
In the unlikely event the Company is liquidated, depositors are entitled to
full payment of their deposit accounts prior to any payment being made to the
shareholders of the Company. Substantially all of the Bank's depositors are
residents of the States of Washington or Oregon.
Borrowings. Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company relies upon advances from the FHLB-Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB-Seattle are typically secured by the
Company's first mortgage loans and investment securities.
The FHLB functions as a central reserve bank providing credit for savings and
loan associations and certain other 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 (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's assets or on the FHLB's assessment of the institution's
creditworthiness. The FHLB determines specific lines of credit for each member
institution and the Bank has a 35% of total assets line of credit with the
FHLB-Seattle to the extent the Bank provides qualifying collateral and holds
sufficient FHLB stock. At March 31, 2003, the Bank had $40.0 million of
outstanding advances from the FHLB-Seattle under an available credit facility
of $104.9 million.
The following tables set forth certain information concerning the Company's
borrowings at the dates and for the periods indicated.
At March 31,
--------------------------
2003 2002 2001
------ ------ ------
Weighted average rate paid on
FHLB advances 4.90% 6.10% 6.62%
25
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end $74,500 $99,500 $80,000
Average FHLB advances outstanding 53,174 89,499 72,825
Weighted average rate paid on
FHLB advances 5.53% 6.25% 6.79%
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance
Act ("FDIA"), and the regulations issued by the OTS and the FDIC to implement
these statutes. These laws and regulations delineate the nature and extent of
the activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with
its depositors and borrowers is also regulated to a great extent, especially
in such matters as the ownership of deposit accounts and the form and content
of the Bank's mortgage documents.
The Bank is required to file reports with the OTS and the FDIC 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 by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements. 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 OTS, the FDIC or Congress, could have a material
adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS has extensive authority over the operations of savings associations.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to fund
the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2003 was $90,905.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Seattle, is required to acquire and hold
shares of capital stock in the FHLB-Seattle in an amount equal to the greater
of (i) 1.0% of the aggregate outstanding principal amount of residential
26
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from
the FHLB-Seattle. The Bank is in compliance with this requirement with an
investment in FHLB-Seattle stock of $5.6 million at March 31, 2003.
Among other benefits, the FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB-Seattle.
The FHLBs are required to provide funds for the resolution of troubled savings
institutions and to contribute to affordable 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 in the past and could do so in the
future. These contributions also could have an adverse effect on the value of
FHLB stock in the future.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that the institution has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital
and supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1, or
core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. The FDIC makes risk
classification of all insured institutions for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
The premium schedule for BIF and SAIF insured institutions rangesfrom 0 to 27
basis points. However, SAIF insured institutions and BIF insured institutions
are required to pay a Financing Corporation assessment in order to fund the
interest on bonds issued to resolve thrift failures in the 1980s. This amount
is currently equal to about 1.88 basis points for each $100 in domestic
deposits for SAIF and BIF insured institutions. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in 2017 through 2019.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated
27
any applicable law, regulation, rule, order or condition imposed by the FDIC
or the OTS. Management of the Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Liquidity Requirements. Federal regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Liquid assets
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits and other obligations generally having
remaining maturities of less than five years. Liquidity management is both a
daily and long-term responsibility of management. The Company adjusts liquid
assets based upon management's assessment of (i) expected loan demand, (ii)
expected deposit flows, (iii) yields available on interest-bearing deposits,
and (iv) the objectives of its asset/liability management program.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
undercapitalized. An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be significantly undercapitalized and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be critically undercapitalized. Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is critically undercapitalized.
At March 31, 2003, the Bank was categorized as "well capitalized" under the
prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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 OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the OTS may
require the Bank to submit to it an acceptable plan to achieve compliance with
the standard. Management is aware of no conditions relating to these safety
and soundness standards which would require submission of a plan of
compliance.
Qualified Thrift Lender Test. All savings associations, 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 association to
have at least 65% of its portfolio 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 association 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. At March 31,
2003, the Bank met the test and its QTL percentage was 75.65%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Savings and Loan Holding Company
Regulations."
28
Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets, as defined by regulation. At March 31, 2003, the Bank had
tangible capital of $48.2 million, or 11.66% of adjusted total assets, which
is approximately $42.0 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date. At March 31, 2003, the Bank had
$369,000 in core deposit intangible and $629,000 in servicing assets.
The capital standards also require core capital equal to at least 3% to 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2003, the Bank
had core capital equal to $48.2 million, or 11.66% of adjusted total assets,
which is $35.8 million above the minimum leverage ratio requirement of 3% as
in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On March 31, 2003, the Bank had total risk-based capital of approximately
$50.9 million, including $48.2 million in core capital and $2.7 million in
qualifying supplementary capital, and risk-weighted assets of $320.4 million,
or total capital of 15.89% of risk-weighted assets. This amount was $25.3
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association," which is an institution
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio. Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the Bank or
the Company may have a substantial adverse effect on their operations and
profitability.
Limitations on Capital Distributions. The OTS regulations impose various
restrictions on savings associations 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 remain well-capitalized, may make capital distributions
during any calendar year equal to the greater of 100% of net income
29
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 OTS may have its dividend authority restricted by the OTS. The Bank may
pay dividends in accordance with this general authority.
Savings institutions proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "Capital Requirements."
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2003, the Bank's internal limit was 80% of the regulatory limit on loans
to one borrower or $6.1 million. At March 31, 2003, the Bank's largest single
loan to one borrower was $5.8 million, which was performing according to its
original terms.
Activities of Associations and Their Subsidiaries. When a savings association
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings association
must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Bank include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire
the securities of most affiliates. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of their delineated communities. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting the
credit needs of its delineated community and to take this record into account
in evaluating regulatory applications to establish a new branch office that
will accept deposits, relocate an existing office, or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution, among others. The CRA requires public
30
disclosure of an institution's CRA rating. The Bank received a "satisfactory"
rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in 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 amount to $25,000 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
General. The Company is a unitary savings and loan company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
Financial Service Modernization. On November 12, 1999, the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 was signed into law. The purpose
of this legislation was to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act:
(a) repealed the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
(b) provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
(c) broadened the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
(d) provided an enhanced framework for protecting the privacy of consumer
information;
(e) adopted a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the FHLB system;
(f) modified the laws governing the implementation of the CRA; and
(g) addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
Acquisitions. Federal law and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
31
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF insured savings association) would generally
become subject to additional restrictions. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. Federal law
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution; (ii) conducting an insurance agency or escrow
business; (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust; (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies,
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. If the Bank fails the QTL, within one year the
Company must register as, and will become subject to, the significant activity
restrictions applicable to bank holding companies. See "Federal Regulation of
Savings Associations -- Qualified Thrift Lender Test" for information
regarding the Bank's QTL.
The USA Patriot Act
General. In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law
enforcement bodies. Further, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act.
New Legislation. Among other requirements, Title III of the USA PATRIOT Act
imposes the following requirements with respect to financial institutions:
- - Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.
- - Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations by
October 26, 2002 that provide for minimum standards with respect to customer
identification at the time new accounts are opened.
- Section 312 of the Act requires financial institutions that establish,
maintain, administer or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) to
establish appropriate, specific, and where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.
- - Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence in
any
32
country), and will be subject to certain recordkeeping obligations with
respect to correspondent accounts of foreign banks.
- - Bank regulators are directed to consider a holding company's effectiveness
in combating money laundering when ruling on Federal Reserve Act and Bank
Merger Act applications.
During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
Patriot Act.
To date, it has not been possible to predict the impact the USA PATRIOT ACT
and its implementing regulations may have on the Company and the Bank.
Sarbanes-Oxley Act of 2002
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act") was signed into law by President Bush on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the
recent accounting scandals at Enron and WorldCom. 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 is the most far-reaching U.S. securities legislation
enacted in some time. 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 Securities and Exchange Commission ("SEC"), under the
Securities Exchange Act of 1934 ("Exchange Act").
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. 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 Sarbanes-Oxley Act addresses, among other matters:
* audit committees;
* certification of financial statements by the chief executive officer and
the chief financial officer;
* the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
* a prohibition on insider trading during pension plan black out periods;
* disclosure of off-balance sheet transactions;
* a prohibition on personal loans to directors and officers;
* expedited filing requirements for Form 4's;
33
* disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
* "real time" filing of periodic reports;
* the formation of a public accounting oversight board;
* auditor independence; and
* various increased criminal penalties for violations of securities laws.
The Sarbanes-Oxley Act contains provisions which became effective upon
enactment on July 30, 2002 and provisions which will become effective from
within 30 days to one year from enactment. The SEC has been delegated the task
of enacting rules to implement various provisions with respect to, among other
matters, disclosure in periodic filings pursuant to the Exchange Act.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Company or the Bank.
Bad Debt Reserve. Historically, savings institutions, such as the Bank, which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift"), were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
Congress revised the thrift bad debt rules in 1996. The new rules eliminated
the 8% of taxable income method for deducting additions to the tax bad debt
reserves for all thrifts for tax years beginning after December 31, 1995.
These rules also required that all institutions recapture all or a portion of
their bad debt reserves added since the base year (last taxable year beginning
before January 1, 1988). At March 31, 2003, the Bank had a taxable temporary
difference of approximately $1.1 million that arose before 1987 (base-year
amount). For taxable years beginning after December 31, 1995, the Bank's bad
debt deduction will be determined under the experience method using a formula
based on actual bad debt experience over a period of years. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of the
pre-1987 bad debt reserves continues to be subject to provisions of present
law referred to below that require recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend distributions"
to the Company, such distributions will be considered to result in
distributions from the balance of its bad debt reserve as of December 31, 1987
(or a lesser amount if the Bank's loan portfolio decreased since December 31,
1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt
34
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion and Reorganization, the Bank makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See
"Regulation" for limits on the payment of dividends by the Bank. The Bank
does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Company's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Company, whether
or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Bank and the Company will not file a consolidated tax return, except that if
the Bank or the Company owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
Audits. The Company's federal income tax returns have been audited through
the tax year ended March 31, 1999.
State Taxation
General. The Company is subject to a business and occupation tax imposed
under Washington law at the rate of 1.50% of gross receipts; however, interest
received on loans secured by mortgages or deeds of trust on residential
properties is exempt from such tax.
Audits. The Company's business and occupation tax returns have been audited
through the tax year ended March 31, 2001.
Competition
There are several financial institutions in the Company's primary market area
from which the Company faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of
loans. Its most direct competition for savings deposits and loans has
historically come from other thrift institutions, credit unions and commercial
banks located in its market area. Particularly in times of high interest
rates, the Company has faced additional significant competition for investors'
funds from money market mutual funds, other short-term money market
securities, corporate and government securities. The Company's competition
for loans comes principally from other thrift institutions, credit unions,
commercial banks, mortgage banking companies and mortgage brokers.
Subsidiary Activities
Under OTS regulations, the Bank is authorized to invest up to 3% of its assets
in subsidiary corporations, with amounts in excess of 2% only if primarily for
community purposes. At March 31, 2003, the Bank's investments of $725,000 in
Riverview Services, Inc. ("Riverview Services") its wholly owned subsidiary,
and the investment of $545,000 in Riverview Asset Management Corp. ("RAM
Corp"), a 90% owned subsidiary, were within these limitations.
35
Riverview Services, a wholly-owned subsidiary, acts as trustee for deeds of
trust on mortgage loans granted by the Bank, and receives a reconveyance fee
of approximately $70 for each deed of trust. Riverview Services had net
income of $68,000 for the fiscal year ended March 31, 2003 and total assets of
$729,000 at that date. Riverview Services' operations are included in the
Consolidated Financial Statements of the Company.
RAM Corp is an asset management company providing trust, estate planning and
investment management services. RAM Corp commenced business during December
1998 and had a net loss of $58,000 for the fiscal year ended March 31, 2003
and total assets of $695,000 at that date. RAM Corp earns fees on the
management of assets held in fiduciary or agency capacity. At March 31, 2003,
total assets under management approximated $114.8 million. RAM Corp's
operations are included in the Consolidated Financial Statements of the
Company.
Personnel
As of March 31, 2003, the Company had 157 full-time equivalent employees, none
of whom are represented by a collective bargaining unit. The Company believes
its relationship with its employees is good.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age(1) Position
- ----- ------ ---------
Patrick Sheaffer 63 Chairman of the Board. President and Chief
Executive Officer
Ron Wysaske 50 Executive Vice President, Treasurer and Chief
Financial Officer
(1) At March 31, 2003.
Patrick Sheaffer joined the Bank in 1965 and has served as President and Chief
Executive Officer of the Bank since 1976. He became Chairman of the Board of
the Bank in 1993. He has been Chairman of the Board, President and Chief
Executive Officer of the Company since its in inception in 1997. He is
responsible for the daily operations and the management of the Company. Mr.
Sheaffer is active in numerous professional and civic organizations.
Ron Wysaske joined the Bank in 1976. Prior to that, he was an audit and tax
accountant at Price Waterhouse & Co. He became Executive Vice President,
Treasurer and Chief Financial Officer of the Bank in 1981 and of the Company
at inception in 1997. He is responsible for administering all finance,
support and administrative functions at the Company. He is a certified public
accountant in the State of Washington, but is not licensed to practice
publicly and is active in numerous professional and civic organizations.
36
Item 2. Properties
- -------------------
The following table sets forth certain information relating to the Company's
offices as of March 31, 2003.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
Main Office: (In millions)
900 Washington, Suite 900
Vancouver, Washington (1) 2000 16,000 $ 14.7
Branch Offices:
700 N.E. Fourth Avenue
Camas, Washington (3) 1975 25,000 42.2
3307 Evergreen Way
Washougal, Washington (1)(3)(4) 1963 3,200 26.8
225 S.W. 2nd Street
Stevenson, Washington (3) 1971 1,700 24.6
330 E. Jewett Boulevard
White Salmon, Washington (3)(5) 1977 3,200 24.0
15 N.W. 13th Avenue
Battle Ground, Washington (3)(6) 1979 2,900 26.0
412 South Columbus
Goldendale, Washington (3) 1983 2,500 14.2
11505-K N.E. Fourth Plain Boulevard
Vancouver, Washington (3) 1994 3,500 15.6
"Orchards" Office
7735 N.E. Highway 99
Vancouver, Washington (1)(2)(3) 1994 4,800 24.7
"Hazel Dell" Office
1011 Washington Way
Longview, Washington (2)(3) 1994 2,000 13.3
900 Washington St., Suite 100
Vancouver, Washington (1)(3) 1998 5,300 76.3
1901-E N.E. 162nd Avenue
Vancouver, Washington (1)(3) 1999 3,200 9.6
800 N.E. Tenny Road, Suite D
Vancouver, Washington (3) 2000 3,200 10.0
37
(1) Leased.
(2) Former branches of Great American Federal Savings Association, San
Diego, California, that were acquired from the Resolution Trust
Corporation on May 13, 1994. In the acquisition, the Company assumed
all insured deposit liabilities of both branch offices totaling
approximately $42.0 million.
(3) Location of an automated teller machine.
(4) New facility in 2001.
(5) New facility in 2000.
(6) New facility in 1994.
During second quarter of fiscal year 2001, the Company's main office for
administration was relocated from Camas to the downtown Vancouver address of
900 Washington Street. The Washougal branch office was relocated during the
first quarter of the fiscal year 2001.
The Company uses an outside data processing system to process customer records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations. At
March 31, 2003, the net book value of the Company's office properties,
furniture, fixtures and equipment was $9.7 million.
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'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. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2003.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------
At March 31, 2003, there were 4,585,543 shares Company Common Stock issued and
4,358,704 outstanding, 769 stockholders of record and an estimated 1,000
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. OTS regulations require the
Bank to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. The OTS imposes
certain limitations on the payment of dividends from the Bank to the Holding
Company which utilize a three-tiered approach that permits various levels of
distributions based primarily upon a savings association's capital level. See
"REGULATION -- Federal Regulation of Savings Associations -- Limitations on
Capital Distributions." 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 Company below the amount required for the
liquidation account to be established pursuant to the Company's Plan of
Conversion adopted in connection with the Conversion and Reorganization. See
Note 1 of Notes to Consolidated Financial Statements.
38
The common stock of the Company has traded on the Nasdaq National Market
System under the symbol "RVSB" since October 2, 1997. From October 22, 1993
until October 2, 1997, the common stock of the Company traded on The Nasdaq
SmallCap Market under the same symbol. The following table sets forth the
high and low trading prices, as reported by Nasdaq, and cash dividends paid
for each quarter during 2003 and 2002 fiscal years. At March 31, 2003, there
were nine market makers in the Company's common stock as reported by the
Nasdaq Stock Market.
Cash Dividends
Fiscal Year Ended March 31, 2003 High Low Declared
- -------------------------------- ------ ------- --------
Quarter Ended March 31, 2003 $17.04 $14.64 $0.125
Quarter Ended December 31, 2002 15.24 13.63 0.125
Quarter Ended September 30, 2002 15.71 14.00 0.125
Quarter Ended June 30, 2002 14.75 13.05 0.125
Cash Dividends
Fiscal Year Ended March 31, 2002 High Low Declared
- -------------------------------- ------ ------- --------
Quarter Ended March 31, 2002 $14.00 $11.93 $0.11
Quarter Ended December 31, 2001 12.35 10.90 0.11
Quarter Ended September 30, 2001 12.00 10.00 0.11
Quarter Ended June 30, 2001 10.50 9.25 0.11
39
Item 6. Selected Financial Data
- ---------------------------------
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Company at the dates and
for the periods indicated.
At March 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $419,904 $392,101 $431,996 $344,680 $302,601
Loans receivable, net(1) 301,811 288,530 296,861 249,034 187,177
Mortgage-backed securities held
to maturity, at amortized cost 3,301 4,386 6,405 8,657 12,715
Mortgage-backed securities
available for sale, at fair
value 13,069 36,999 43,139 39,378 53,372
Cash and interest-bearing
deposits 60,858 22,492 38,935 15,786 17,207
Investment securities held to
maturity, at amortized cost - - 861 903 4,943
Investment securities available
for sale, at fair value 20,426 18,275 25,561 12,883 13,280
Deposit accounts 320,742 259,690 295,523 232,355 200,311
FHLB advances 40,000 74,500 79,500 60,550 42,550
Shareholders' equity 54,511 53,677 52,721 48,489 56,867
Year Ended March 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(In thousands)
OPERATING DATA:
Interest income $ 26,461 $ 29,840 $ 31,343 $ 25,438 $ 23,114
Interest expense 8,417 14,318 16,288 11,073 9,925
------ ------ ------ ------ ------
Net interest income 18,044 15,522 15,055 14,365 13,189
Provision for loan losses 727 1,116 949 675 240
Net interest income after ------ ------ ------ ------ ------
provision for loan losses 17,317 14,406 14,106 13,690 12,949
Gains (losses) from sale of
loans, securities and
real estate owned (531) 1,964 129 151 283
Gain on sale of land and
fixed assets - 4 540 - -
Other non-interest income 4,469 4,583 3,293 2,746 2,591
Non-interest expenses 14,908 13,953 12,867 10,832 9,055
Income before federal income ------ ------ ------ ------ ------
tax provision 6,347 7,004 5,201 5,755 6,768
Provision for federal income
taxes 1,988 2,136 1,644 1,878 2,305
------ ------ ------ ------ ------
Net income $ 4,359 $ 4,868 $ 3,557 $ 3,877 $ 4,463
====== ====== ====== ====== ======
40
At March 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
OTHER DATA:
Number of:
Real estate loans outstanding 2,904 2,176 2,510 2,188 1,906
Deposit accounts 25,752 26,625 26,068 23,653 21,639
Full service offices 12 12 12 12 10
At of For the Year Ended March 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.07% 1.16% 0.94% 1.22% 1.55%
Return on average equity 7.99 9.01 7.04 7.15 7.33
Dividend payout ratio (2) 49.97 41.27 52.29 47.13 30.38
Interest rate spread 4.28 3.29 3.37 3.88 3.83
Net interest margin 4.83 4.04 4.27 4.78 4.81
Non-interest expense to
average assets 3.66 3.34 3.41 3.41 3.14
Efficiency ratio (non-interest
expense divided by the sum of
net interest income and non-
interest income) 67.82 63.21 67.66 62.75 56.37
Asset Quality Ratios:
Average interest-earning
assets to interest-
bearing liabilities 124.62 120.49 119.75 124.51 127.02
Allowance for loan losses to
total loans at end of period 0.81 0.78 0.58 0.50 0.54
Net charge-offs to average
outstanding loans during the
period 0.12 0.14 0.14 0.21 0.04
Ratio of nonperforming assets
to total assets 0.18 0.61 0.24 0.39 0.44
Capital Ratios:
Average equity to average
assets 13.39 12.93 13.41 17.05 21.08
Equity to assets at end of
fiscal year 12.98 13.69 12.20 14.07 18.79
(1) Includes loans held for sale.
(2) Dividends paid divided by net income.
41
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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General
Management'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 and the other sections contained in
this Form 10-K.
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis and other portions of this report contain
certain "forward-looking statements" concerning the future operations of the
Company. Management desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing the Company of the protections
of such safe harbor with respect to all "forward-looking statements" contained
in our Annual Report. The Company has used "forward-looking statements" to
describe future plans and strategies, including its expectations of the
Company's future financial results. Management's ability to predict results
or the effect of future plans or strategies is inherently uncertain. Factors
which could affect actual results include interest rate trends, the general
economic climate in the Company's market area and the country as a whole, the
ability of the Company to control costs and expenses, deposit flows, demand
for mortgages and other loans, real estate value and vacancy rates, the
ability of the Company to efficiently incorporate acquisitions into its
operations, competition, loan delinquency rates, and changes in federal and
state regulation. These factors should be considered in evaluating the
"forward-looking statements," and undue reliance should not be placed on such
statements. The Company does not undertake to update any forward-looking
statement that may be made on behalf of the Company.
Proposed Acquisition
On February 6, 2003, the Company announced the signing of a definitive
agreement for the acquisition of Today's Bancorp, Inc. by merger. Upon
completion of the transaction, Today's Bancorp, Inc. shareholders, with a
total of 1.1 million shares of common stock outstanding, may elect to receive
either $13.77 per share in cash or 0.8261 Riverview Bancorp, Inc. shares for
each share of Today's Bancorp, Inc. The exchange ratio is subject to
adjustment under certain conditions. The Company will issue approximately
473,995 shares of its own stock to acquire approximately 45% percent of
Today's Bancorp, Inc. outstanding shares at an exchange ratio of 0.8261
Riverview shares for each share of Today's Bancorp Inc. The remaining 55 % of
outstanding Today's Bancorp, Inc. shares will be acquired for an aggregate of
approximately $9.6 million in cash. If the elections with respect to the form
of consideration filed by Today's shareholders differs from the 45% stock, 55%
cash ratio, the mix of stock and cash to individual shareholders used to
effect the acquisition could change.
The merger, which has been unanimously approved by the directors of both
companies, is subject to certain conditions, including the approval of the
shareholders of Today's Bancorp, the receipt of regulatory approvals, and the
registration of the shares to be issued in the merger with the Securities and
Exchange Commission.
The merger is expected to be completed in the third calendar quarter of 2003.
The combined organization will have assets of approximately $540 million,
deposits of approximately $430 million, and shareholders' equity of
approximately $60 million.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America in the preparation of the Company's Consolidated Financial
Statements. The Company has identified three policies, that due to judgments,
estimates and assumptions inherent in those policies, are critical to an
understanding of the Company's Consolidated Financial Statements. These
42
policies relate to the methodology for the determination of the allowance for
loan losses, the valuation of the mortgage servicing rights ("MSR's") and the
impairment of investments. These policies and the judgments, estimates and
assumptions are described in greater detail in subsequent sections of
Management's Discussions and Analysis and in the notes to the Consolidated
Financial Statements included herein. In particular, Note 1 to the
Consolidated Financial Statements, "Summary of Significant Accounting
Policies," describes generally the Company's accounting policies and Note 8
provides details used in valuing the Company's MSR's and the effect of changes
to certain assumptions. Management believes that the judgments, estimates and
assumptions used in the preparation of the Company's Consolidated Financial
Statements are appropriate given the factual circumstances at the time.
However, given the sensitivity of the Company'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's results of operations or financial condition.
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. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not be
assured. The detailed analysis includes techniques to estimate the fair value
of loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance level is estimated based upon factors and
trends identified by management at the time the consolidated financial
statements are prepared.
The Company stratifies its MSR's based on the predominant characteristics of
the underlying financial assets including coupon interest rate and contractual
maturity of the mortgage. An estimated fair value of MSR's is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected prepayments
speeds, discount rate, loan maturity and interest rate. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSR's portfolio.
The Company's methodology for estimating the fair value of MSR's is highly
sensitive to changes in assumptions. For example, the determination of fair
value uses anticipated prepayment speeds. Actual prepayment experience may
differ and any difference may have a material effect on the fair value. Thus,
any measurement of MSR's fair value is limited by the conditions existing and
assumptions made as of the date made. Those assumptions may not be appropriate
if they are applied to a different time.
Future expected net cash flows from servicing a loan in the servicing
portfolio would not be realized if the loan is paidoff earlier than
anticipated. Moreover, since most loans within the servicing portfolio do not
contain penalty provisions for early payoff, the Company will not receive a
corresponding economic benefit if the loan pays off earlier than expected.
MSR's are the discounted present value of the future net cash flows projected
from the servicing portfolio. Accordingly, prepayment risk subjects the
Company's MSR's to impairment. MSR's impairment is recorded in the amount that
the estimated fair value is less than the MSR's carrying value on a strata by
strata basis.
The Company's determination of impairment for various types of investments
accounted for in accordance with SFAS No. 115 is predicated on the notion of
other-than-temporary. The key indicator that an investment may be impaired is
that the fair value of the investment is less than its carrying value. Each
reporting period the Company reviews those investments that the fair value is
less than their carrying value. The review includes determining whether
certain indicators indicated the fair value of the investment has been
negatively impacted. These indicators include deteriorating financial
condition, regulatory, economic or technological changes, downgrade by a
rating agency and length of time the fair value has been less than carrying
value. If any indicators of impairment are present, management determines the
fair value of the investment and compares to its carrying value. If the fair
value of the investment is less than the carrying value of the investment, the
investment is considered impaired and a determination must be made as to
whether the impairment is other-than-temporary.
43
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. If the cost basis of these securities is
determined to be other-than-temporary impaired, the amount of the impairment
is charged to operations.
Securities available for sale are carried at fair value. Premiums and
discounts are amortized using the interest method over the remaining period to
contractual maturity. Unrealized holding gains and losses, or valuation
allowances established for net unrealized losses, are excluded from earnings
and reported as a separate component of stockholders' equity as accumulated
other comprehensive income, net of income taxes, unless the security is deemed
other-than-temporary impaired. If the security is determined to be
other-than-temporary impaired, the amount of the impairment is charged to
operations.
The Company's underlying principle in determining whether impairment is
other-than temporary is an impairment shall be deemed other-than-temporary
unless positive evidence indicating that an investment's carrying value is
recoverable within a reasonable period of time outweighs negative evidence to
the contrary. Evidence that is objectively determinable and verifiable is
given greater weight than evidence that is subjective and or not verifiable.
Evidence based on future events will generally be less objective as it is
based on future expectations and therefore is generally less verifiable or not
verifiable at all. Factors considered in evaluating whether a decline in
value is other-than-temporary include, (a) the length of time and the extent
to which the fair value has been less than amortized cost, (b) the financial
condition and near-term prospects of the issuer and (c) our intent and ability
to retain the investment for a period of time. In situations in which the
security's fair value is below amortized cost but it continues to be probable
that all contractual terms of the security will be satisfied, and that the
decline is due solely to changes in interest rates (not because of increased
credit risk), and the Company asserts that it has positive intent and ability
to hold that security to maturity, no other-than-temporary impairment is
recognized.
Operating Strategy
In the fiscal year ended March 31, 1998, the Company began to implement a
growth strategy to broaden the products and services from traditional thrift
offerings to those more closely related to commercial banking. The growth
strategy included four elements, geographic and product expansion, loan
portfolio diversification, development of relationship banking and maintenance
of asset quality.
Since the end of fiscal 1998, the Company has added three branches including
the branch at the main office for administration in downtown Vancouver. The
Washougal branch was relocated to a new facility; the Stevenson, White Salmon
and Goldendale branches were remodeled. The number of automated teller
machines more than doubled from six to thirteen so that each branch location
now is serviced by at least one automated teller machine.
The Company's growing commercial customer base has enjoyed new products and
the improvements in existing products. These new products include business
checking, internet banking and new loan products. Retail customers have
benefited from expanded choices ranging from additional automated teller
machines, consumer lending products, checking accounts, debit cards, 24 hour
account information service and internet banking.
Fiscal 2003 marked the 80th anniversary since Riverview Community Bank opened
its doors in 1923. The historical emphasis has been on residential real
estate lending. The Company is focused on diversifying the loan portfolio
through expansion of commercial loans. In fiscal 2000, the Company had four
experienced commercial lenders and currently there are five commercial lenders
who are expanding the commercial lending services available to Riverview's
customers. In the fiscal 1999, commercial loans as a percentage of the loan
portfolio were 1.90%. Commercial loans were 10.11% of total loans at the
end of fiscal year 2003. Commercial lending has higher credit risk, wider
interest margins and shorter loan terms than residential lending which can
increase the loan portfolio profitability.
The Company's relationship banking has been enhanced by the 1998 addition of
RAM Corp, a trust company directed by experienced trust officers, through
expanded loan products serviced by experienced commercial and consumer lending
officers, and an expanded branch network led by experienced branch managers.
Development of relationship banking has been the key to the Company's growth.
Assets under management have increased from
44
approximately $21.0 million at March 31, 1999 to approximately $114.8 at March
31, 2003.
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. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-
earning assets equal or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. The level of non-
interest income and expenses also affects the Company's profitability. Non-
interest income includes deposit service fees, income associated with the
origination and sale of mortgage loans, brokering loans, loan servicing fees,
income from real estate owned, net gains and losses on sales of interest-
earning assets and asset management fee income. Non-interest expenses include
compensation and benefits, occupancy and equipment expenses, deposit insurance
premiums, data servicing expenses and other operating costs. 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.
Comparison of Financial Condition at March 31, 2003 and 2002
At March 31, 2003, the Company had total assets of $419.9 million compared
with $392.1 million at March 31, 2002. The increase in total assets reflects
the increase in loans outstanding and cash. Cash, including interest-earning
accounts, totaled $60.9 million at March 31, 2003, compared to $22.5 million
at March 31, 2002. The $300,000 decrease in loans held for sale to $1.5
million at March 31, 2003 compared to $1.8 million at March 31, 2002, reflects
the variable demand for residential loan refinancing. As interest rates fall
loan volume shifts to fixed rate production. Conversely, in a rising interest
rate environment loan volume will shift to adjustable rate production. Selling
fixed interest rate mortgage loans allows the Company to reduce the interest
rate risk associated with long term fixed interest rate products. It also
frees up funds to make new loans and diversify the loan portfolio. We continue
to service the loans we sell, maintaining the customer relationship and
generating ongoing non-interest income.
Loans receivable, net, were $300.3 million at March 31, 2003, compared to
$286.7 million at March 31, 2002, a 4.7% increase. Increases primarily in
commercial, land and commercial real estate were partially offset by decreases
in one- to- four family residential, residential construction, multi-family,
multi-family construction, commercial construction, and consumer 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 areas.
There were $1.5 million in loans held-for-sale at March 31, 2003, compared to
$1.8 million at March 31, 2002.
Cash and cash equivalents increased to $60.9 million at March 31, 2003, from
$22.5 million at March 31, 2002 as a result of an increase in deposits.
Investment securities available-for-sale was $20.4 million at March 31, 2003,
compared to $18.3 million at March 31, 2002. The $2.1 million increase
reflects the $1.4 million sale of common stock of banks, the purchase of $5.0
million of trust preferred securities and unrealized market gains and loses.
Mortgage-backed securities held-to-maturity was $3.3 million at March 31,
2003, compared to $4.4 million at March 31, 2002. The $1.1 million net
decrease was a result of pay downs.
Mortgage-backed securities available-for-sale was $13.1 million at March 31,
2003, compared to $37.0 million at March 31, 2002. The $23.9 million net
decrease reflects pay downs.
Deposits totaled $320.7 million at March 31, 2003 compared to $259.7 million
at March 31, 2002. The deposit increase is primarily due to the increase in
non-interest bearing account balances. Checking accounts and money market
accounts ("transaction accounts") total average outstanding balance increased
42.2% to $164.5 million at
45
March 31, 2003, compared to $115.7 million at March 31, 2002. Transaction
accounts represented 55.4% and 43.0% of average total outstanding balance of
deposits at March 31, 2003 and March 31, 2002, respectively.
FHLB advances decreased to $40.0 million at March 31, 2003 from $74.5 million
at March 31, 2002 due to the increase in the Company's deposit balances,
prepayments on one- to- four mortgage loans and mortgage-backed securities.
Shareholders' equity increased $834,000 to $54.5 million at March 31, 2003
from $53.7 million at March 31, 2002 primarily as a result of the $4.8 million
of total comprehensive income offset by $2.9 million stock repurchased and
retired and $2.2 million of cash dividends paid to shareholders.
Comparison of Operating Results for the Years Ended March 31, 2003 and 2002
Net Income. Net income was $4.4 million, or $0.99 per diluted share for the
year ended March 31, 2003, compared to $4.9 million, or $1.06 per diluted
share for the year ended March 31, 2002. Earnings were lower for the year
ended March 31, 2003, primarily as a result of the pre-tax other-than-
temporary non-cash charges of $1.6 million for FHLMC preferred stock and
$700,000 for FNMA preferred stock.
Net Interest Income. Net interest income for fiscal year 2003 was $18.0
million, representing a $2.5 million, or a 16.2% increase, from fiscal year
2002. This improvement reflected a 3.4% decrease in average balance of
interest earning assets (primarily decreases in the average balance of
mortgage-backed securities partially offset by an increase in the average
balance of non-mortgage loans) to $379.9 million, which was offset by a 6.6%
decrease in average balance of interest-bearing liabilities (primarily a
decrease in FHLB borrowings and certificates of deposits) to $304.8 million.
The ratio of average interest earning assets to average interest bearing
liabilities increased to 124.6% in 2003 from 120.5% in 2002 which indicates
that the interest earning asset growth is being funded less by interest-
bearing liabilities as compared to capital and non-interest-bearing demand
deposits.
Interest Income. Interest income totaled $26.5 million and $29.8 million, for
fiscal 2003 and 2002, respectively. Average interest-bearing assets decreased
$13.3 million to $379.9 million for fiscal 2003 from $393.2 million for fiscal
2002. The yield on interest-earning assets was 7.04% for fiscal year 2003
compared to 7.68% for fiscal 2002. The decreased yield is the primarily the
result of the lower yields on loans that reflect the Federal Reserve Board
discount rate cuts that occurred during the fiscal 2002 and 2003.
Interest Expense. Interest expense for the year ended March 31, 2003 totaled
$8.4 million, a $5.9 million decrease from $14.3 million for the year ended
March 31, 2002. The decrease in interest expense is the result of lower rates
of interest paid on deposits and FHLB borrowings due to the Federal Reserve
Board discount rate cuts that occurred during the fiscal 2002 and 2003. The
weighted average interest rate of total deposits decreased from 3.69% for the
year ended March 31, 2002 to 2.18% for the year ended March 31, 2003. The
weighted average interest rate of FHLB borrowings decreased from 6.25% for the
year ended March 31, 2002 to 5.53% for the year ended March 31, 2003. The
decrease in certificate of deposits average balance plus the decrease in
average balance of FHLB borrowings was a significant contributor to lower
interest expense in fiscal 2003.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2003 was $727,000 compared to $1.1 million for the year ended March
31, 2002. The fiscal 2003 provision for loan losses exceeded net loan charge-
offs by $377,000, resulting in an increase in the allowance for loan losses to
$2.5 million. Net charge-offs to average net loans for fiscal 2003 declined
to 0.12% from 0.14% for fiscal 2002. The mix of the loan portfolio showed an
increase in the balances of commercial, land and commercial real estate loans
for fiscal 2003 as compared to fiscal 2002. The reduced balances in fiscal
2003 substandard assets and the reallocation of allowance among different
parts of the portfolio offset these increases in loan balances. The
reallocation of the allowance resulted from the annual review of the
allocation of general allowances for each major loan type based on applying
loss factors that take into consideration past loss experience, asset
duration, economic conditions and overall portfolio quality to the associated
loan balance.
46
The Company establishes a general reserve for loan losses through a periodic
provision for loan losses based on management's evaluation of the loan
portfolio and current economic conditions. The provisions for loan losses are
based on management's estimate of net realizable value or fair value of the
collateral, as applicable, and the Company's actual loss experience, and
standards applied by the OTS and the FDIC. The Company regularly reviews its
loan portfolio, including non-performing loans, to determine whether any loans
require classification or the establishment of appropriate reserves. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to provide additions to the
allowance for loan losses based upon judgments different from those of
management. The allowance for loan losses is provided based upon management's
continuing analysis of the pertinent factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of
the loan portfolio, actual loan loss experience, current economic conditions,
and detailed analysis of individual loans for which full collectibility may
not be assured. The detailed analysis includes techniques to estimate the fair
value of the loan collateral and the existence of potential alternative
sources of repayment. Assessment of the adequacy of the allowance for loan
losses involves subjective judgments regarding future events, and thus there
can be no assurance those additional provisions for credit losses will not be
required in future periods. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Company's control. Any increase or decrease in the provision for loan losses
has a corresponding negative or positive effect on net income. The allowance
for loan losses at March 31, 2003 was $2.7 million, or 0.89% of period end net
loans, compared to $2.5 million, or 0.86% of period end net loans, at March
31, 2002. Management considered the allowance for loan losses at March 31,
2003 to be adequate to cover probable losses inherent in the loan portfolio
based on the assessment of various factors affecting the loan portfolio. As a
result of the decrease in nonaccrual loans during the year ended March 31,
2002, the ratio of the allowance for loan losses to nonaccrual loans increased
to 847.99% at March 31, 2003 from 166.69% at March 31, 2002. This ratio is
subject to significant fluctuations from year to year as a result of various
factors such as the mix of loan types in the portfolio, economic prospects of
the borrowers, and in the case of secured loans, the value and marketability
of collateral .
Non-Interest Income. Non-interest income decreased $2.6 million or 66.4% for
the twelve months ended March 31, 2003 to $3.9 million compared $6.6 million
for the same period in 2002. Excluding the fiscal 2003, $2.1 pretax loss on
sale of securities and other-than-temporary impairment on equity investments
and the fiscal 2002 $863,000 pretax gain on sale of securities, non-interest
income increased $388,000 or 6.8% for the year ended March 31, 2003 when
compared to the prior year. The fiscal 2003 $162,000 gain on sale of equity
securities available for sale was more than offset by the $2.3 million for the
write-downs in the amortized cost basis of equity investments where the
decline in value was deemed other-than-temporary. These write-downs are
non-cash charges that are recorded as realized losses in the income statement,
with a corresponding reduction in unrealized losses in shareholders' equity,
even though there were no sales of the securities. As such, the write-downs
do not impact shareholders' equity or the carrying value of the investments
since the investments are marked to market value, in accordance with SFAS No.
115. For the twelve months ended March 31, 2003, fees and service charges
increased $556,000 or 15.0% when compared to the twelve months ended March 31,
2002. The $556,000 increase in fees and service charges is primarily due to
the growth in deposit products and mortgage broker fees. Mortgage broker fees
(included in fees and service charges) totaled $1.5 million for the year ended
March 31, 2003 compared to $1.3 million for the previous year. Mortgage
broker commission compensation expense was $1.1 million for the fiscal ended
March 31, 2003 compared to $1.0 million for the fiscal ended March 31, 2002.
Increases in mortgage broker fees and commission compensation expense are a
result of the increase in brokered loan production from $188.4 million in 2002
to $200.3 million in 2003. Asset management services income was $742,000 for
the year 2003 compared to $745,000 for the year 2002. RAM Corp had $114.8
million in total assets under management at March 31, 2003 when compared to
$109.8 million at March 31, 2002.
Non-Interest Expense. Non-interest expense increased $995,000, or 6.8%, to
$14.9 million for fiscal year 2003 compared to $14.0 million for fiscal year
2002. The principal component of the Company's non-interest expense is
salaries and employee benefits. For the year ended March 31, 2003, salaries
and employee benefits, which includes mortgage broker commission compensation,
was $8.4 million, or a 8.1% increase over the prior year total of $7.8
million. Full-time equivalent employees increased to 157 at March 31, 2003
from 147 at March 31, 2002.
47
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation ("RTC") in fiscal 1995 (see Item 2. Properties), and the
related acquisition of $42 million in customer deposits created a $3.2 million
core deposit intangible asset ("CDI"), representing the excess of cost over
fair value of deposits acquired. The CDI ($369,000 at March 31, 2003) is
being amortized over the remaining life of the underlying customer
relationships currently estimated at fourteen months. The amortization expense
of CDI was $327,000 for both fiscal years 2003 and 2002.
Provision for Federal Income Taxes. Provision for federal income taxes was
$2.0 million for the year ended March 31, 2003 compared to $2.1 million for
the year ended March 31, 2002 as a result of lower income before taxes. The
effective tax rate for fiscal year 2003 was 31.3% compared to 30.5% for fiscal
2002. Reference is made to Note 12 of the Notes to Consolidated Financial
Statements, in Item 8, Financial Statements and Supplementary Data, herein for
further discussion of the Company's federal income taxes.
Comparison of Operating Results for the Years Ended March 31, 2002 and 2001
Net Income. Net income was $4.9 million, or $1.06 per diluted share, for the
year ended March 31, 2002, compared to $3.6 million, or $0.77 per diluted
share, for the year ended March 31, 2001. Earnings were higher for the year
ended March 31, 2002 primarily as a result of increased non-interest income.
Net Interest Income. Net interest income for fiscal 2002 was $15.5 million,
representing a $467,000, or a 3.1% increase, from fiscal year 2001. This
improvement reflected a 10.3% increase in average earning assets (primarily
increases in average loan balances due to a 33.1% increase in non-mortgage
loans and a 190.0% increase in daily interest-bearing assets) to $393.2
million, which offset a 23 basis point reduction in the net interest margin to
4.04%. The ratio of average interest earning assets to average interest
bearing liabilities increased to 120.5% in 2002 from 119.8% in 2001, which
indicates that the interest earning asset growth is being funded less by
interest bearing liabilities as compared to capital, which is non-interest
bearing.
Interest Income. Interest income totaled $29.8 million and $31.3 million, for
fiscal years 2002 and 2001, respectively. Average interest-bearing assets
increased $36.7 million to $393.2 million for fiscal year ended 2002 from
$356.5 million for fiscal ended 2001. The yield on interest-earning assets
was 7.68% for fiscal 2002 compared to 8.84% for fiscal ended 2001. The
decreased yield is the result of the lower yields on loans that reflect the
eight Federal Reserve Board discount rate cuts that occurred during the fiscal
2002.
Interest Expense. Interest expense for the year ended March 31, 2002 totaled
$14.3 million, a $2.0 million decrease from $16.3 million for the year ended
March 31, 2001. The decrease in interest expense is the result of lower rates
of interest paid on deposits due to the eight Federal Reserve Board discount
rate cuts that occurred during the fiscal year 2002. The weighted average
interest rate of total deposits decreased from 5.05% for the year ended March
31, 2001 to 3.69% for the year ended March 31, 2002. The decrease in total
deposit average interest rate was partially offset by the $12.0 million
increase in total average deposits to $236.9 million at March 31, 2002.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2002 was $1.1 million compared to $949,000 for the year ended March
31, 2001. The fiscal year 2002 provision for loan losses exceeded net loan
charge-offs by $702,000, resulting in an increase in the allowance for loan
losses to $2.5 million. Net charge-offs to average net loans for fiscal 2002
and 2001 has remained a constant 0.14%.
The allowance for loan losses at March 31, 2002 was $2.5 million, or 0.78% of
period end gross loans, compared to $1.9 million, or 0.58% of period end gross
loans, at March 31, 2001. Management considered the allowance for loan losses
at March 31, 2002 to be adequate to cover foreseeable loan losses based on the
assessment of various factors affecting the loan portfolio.
Non-Interest Income. Non-interest income increased $2.6 million or 65.3% for
the twelve months ended March 31, 2002 compared to the same period in 2001.
Excluding the fiscal 2002, $863,000 pretax gain on sale of securities and
fiscal year 2001, $540,000 pretax gain on sale of land and fixed assets,
non-interest income increased $2.3
48
million or 66.2% for the year ended March 31, 2002 when compared to the prior
year. For the twelve months ended March 31, 2002, fees and service charges
increased $1.1 million when compared to the twelve months ended March 31,
2001. The $1.1 million increase in fees and service charges is primarily due
to the growth in deposit products, mortgage broker fees and asset management
services. Mortgage broker fees (included in fees and service charges) totaled
$1.3 million for the year ended March 31, 2002 compared to $579,000 for the
previous year. Mortgage broker commission compensation expense was $1.0
million for the fiscal ended March 31, 2002 compared to $581,000 for the
fiscal year ended March 31, 2001. Increases in mortgage broker fees and
commission compensation expense are a result of the increase in brokered loan
production from $109.4 million in 2001 to $188.4 million in 2002. Asset
management services income increased $236,000 or 46.4% for fiscal 2002
compared to year 2001. RAM Corp had $109.8 million in total assets under
management at March 31, 2002 compared to $92.2 million at March 31, 2001.
Non-Interest Expense. Non-interest expense increased $1.1 million, or 8.5%, to
$14.0 million for fiscal year 2002 compared to $12.9 million for fiscal year
2001. The principal component of the Company's non-interest expense is
salaries and employee benefits. For the year ended March 31, 2002, salaries
and employee benefits, which includes mortgage broker commission compensation,
was $7.8 million, or an 11.4% increase over the prior year total of $7.0
million. Full-time equivalent employees have held steady at 147 at March 31,
2002 and March 31, 2001. In the second quarter of fiscal year 2001, the
Company's main office for administration was relocated from Camas to the
Vancouver address of 900 Washington, Suite 900, a 16,000 square foot leased
facility.
Provision for Federal Income Taxes. Provision for federal income taxes was
$2.1 million for the year ended March 31, 2002 compared to $1.6 million for
the year ended March 31, 2001 as a result of higher income before taxes. The
effective tax rate for fiscal year 2002 was 30.5% compared to 31.6% for fiscal
2001. Reference is made to Note 12 of the Notes to Consolidated Financial
Statements, in Item 8, Financial Statements and Supplementary Data, herein for
further discussion of the Company's federal income taxes.
Average Balance Sheet
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. Average balances for a period have been
calculated using the monthly average balances during such period. Interest
income on tax exempt securities has been adjusted to a taxable-equivalent
basis using the statutory federal income tax rate of 34%. Non-accruing loans
were included in the average loan amounts outstanding.
49
Year Ended March 31,
-------------------------------------------------------------------------------
2003 2002 2001
------------------------- ------------------------- -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $173,486 $13,854 7.99% $195,419 $16,786 8.59% $205,895 $19,286 9.37%
Non-mortgage loans 129,254 9,816 7.59 95,004 8,086 8.51 71,392 6,985 9.78
------- --------- ------ ------- --------- ------ ------- --------- ------
Total net loans (1) 302,740 23,670 7.82 290,423 24,872 8.56 277,287 26,271 9.47
Mortgage-backed securities 28,615 1,241 4.34 49,575 2,677 5.40 46,151 3,144 6.81
Investment securities 20,914 1,204 5.76 22,567 1,511 6.70 20,200 1,318 6.52
Daily interest-bearing
assets 22,190 319 1.44 25,583 798 3.12 8,827 530 6.00
Other earning assets 5,440 329 6.05 5,078 342 6.73 4,056 262 6.48
Total interest-earning ------- --------- ------ ------- --------- ------ ------- --------- ------
assets 379,899 26,763 7.04 393,226 30,200 7.68 356,521 31,525 8.84
Non-interest-earning assets:
Office properties and
equipment, net 10,060 10,365 10,295
Real estate, net - - 134
Other non-interest-earning
assets 17,809 14,402 10,189
------- ------- -------
Total assets $407,768 $417,993 $377,139
======= ======= =======
Interest-bearing liabilities:
Regular savings accounts $22,861 182 0.80 $19,747 292 1.48 $19,586 536 2.74
NOW accounts 64,916 960 1.48 29,442 215 0.73 21,897 315 1.44
Money market accounts 54,514 692 1.27 53,761 1,307 2.43 44,911 2,182 4.86
Certificates of deposit 109,380 3,642 3.33 133,907 6,915 5.16 138,492 8,314 6.00
------- --------- ------ ------- --------- ------ ------- --------- ------
Total deposits 251,671 5,476 2.18 236,857 8,729 3.69 224,886 11,347 5.05
Other interest-bearing
liabilities 53,174 2,941 5.53 89,499 5,589 6.24 72,825 4,941 6.78
Total interest-bearing ------- --------- ------ ------- --------- ------ ------- --------- ------
liabilities 304,845 8,417 2.76 326,356 14,318 4.39 297,711 16,288 5.47
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 45,109 32,529 26,635
Other liabilities 3,246 5,078 2,232
------- ------- -------
Total liabilities 353,200 363,963 326,578
Shareholders' equity 54,568 54,030 50,561
Total liabilities and ------- ------- -------
shareholders' equity $407,768 $417,993 $377,139
======= ======= =======
Net interest income $18,346 $15,882 $15,237
====== ====== ======
Interest rate spread 4.28% 3.29% 3.37%
==== ==== ====
Net interest margin 4.83% 4.04% 4.27%
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 124.62% 120.49% 119.75%
====== ====== ======
Tax Equivalent Adjustment $ 302 $ 360 $ 182
===== ===== =====
(1) Includes non-accrual loans.
50
Yields Earned and Rates Paid
The following table sets forth for the periods and at the date indicated the
weighted average yields earned on the Company's assets, the weighted average
interest rates paid on the Company's liabilities, together with the net yield
on interest-earning assets on a tax equivalent basis.
At March 31, Year Ended March 31,
------------ ------------------------
2003 2003 2002 2001
------ ------ ------ ------
Weighted average yield earned on:
Total net loans(1) 6.72% 7.13% 7.91% 8.89%
Mortgage-backed securities 4.42 4.34 5.40 6.81
Investment securities 5.47 5.76 6.70 6.52
All interest-earning assets 5.94 6.49 7.19 8.39
Weighted average rate paid on:
Deposits 1.33 2.18 3.69 5.05
FHLB advances and other borrowings 4.90 5.53 6.25 6.78
All interest-bearing liabilities 1.72 2.76 4.39 5.47
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-bearing
liabilities)(1) 4.22 3.73 2.81 2.92
Net interest margin (net interest
income(expense) as a percentage of
average interest-earning assets)(1) 4.48 4.28 3.56 3.82
(1) Weighted average yield on total net loans excludes deferred loan fees.
51
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. 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).
Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total net change.
Year Ended March 31,
--------------------------------------------------
2003 vs 2002 2002 vs 2001
------------------------ ------------------------
Increase(Decrease) Increase(Decrease)
Due to Total Due To Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ -------- ------ ------ --------
(In thousands)
Interest Income:
Mortgage loans $(1,803)$(1,129) $(2,932) $ (951)$(1,547) $(2,498)
Non-mortgage loans 2,468 (738) 1,730 1,814 (714) 1,100
Mortgage-backed securities (980) (456) (1,436) 260 (727) (467)
Investment securities (1) (106) (201) (307) 157 36 193
Daily interest-bearing (95) (384) (479) 359 (91) 268
Other earning assets 28 (41) (13) 69 10 79
------ ------ -------- ------ ------ --------
Total interest income (488) (2,949) (3,437) 1,708 (3,033) (1,325)
------ ------ -------- ------ ------ --------
Interest Expense:
Regular savings accounts 57 (167) (110) 4 (248) (244)
NOW accounts 403 342 745 235 (334) (99)
Money market accounts 18 (634) (616) 570 (1,445) (875)
Certificates of deposit (1,114) (2,159) (3,273) (268) (1,132) (1,400)
Other interest-bearing
liabilities (2,065) (582) (2,647) 995 (346) 649
------ ------ -------- ------ ------ --------
Total interest expense (2,701) (3,200) (5,901) 1,536 (3,505) (1,969)
------ ------ -------- ------ ------ --------
Net interest income (1) $2,213 $ 251 $2,464 $ 172 $ 472 $ 644
===== ====== ======= ====== ====== =======
(1) Taxable equivalent
Asset and Liability Management
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 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. Interest rate sensitivity will increase 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 of more than 15 years. However, the Company may originate fixed
rate loans for investment when funded with long-term funds to mitigate
interest rate risk. 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 or
purchase of adjustable rate mortgage-backed securities for its portfolio;
growing commercial, consumer and residential
52
construction 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 mortgage-backed and other securities; and the origination of
fixed-rate loans for sale in the secondary market and the retention of the
related loan servicing rights. This approach has remained consistent
throughout the past year as the Company has experienced a change in the mix of
loans, deposits, and FHLB advances.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect the Company's
earnings while decreases in interest rates may beneficially affect the
Company's earnings. To reduce the potential volatility of the Company's
earnings, management has sought to improve the match between asset and
liability maturities and rates, while maintaining an acceptable interest rate
spread. Pursuant to this strategy, the Company actively originates ARM loans
for retention in its loan portfolio. Fixed-rate mortgage loans with terms of
more than 15 years generally are originated for the intended purpose of resale
in the secondary mortgage market. The Company has also invested in adjustable
rate mortgage-backed securities to increase the level of short term adjustable
assets. At March 31, 2003, ARM loans and adjustable rate mortgage-backed
securities constituted $195.2 million, or 65.25%, of the Company's total
combined mortgage loan and mortgage-backed securities portfolio. This
compares to ARM loans and adjustable rate mortgage-backed securities at March
31, 2002 that totaled $136.2 million, or 43.1%, of the Company's total
combined mortgage loan and mortgage-backed securities portfolio. Although the
Company has sought to originate ARM 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.
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
portfolio diminish in value. However, the value of the servicing 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. The loan servicing portfolio totaled
$128.2 million at March 31, 2003, including $7.4 million of purchased mortgage
servicing. The purchase of loan servicing replaced loan servicing balances
extinguished through prepayment of the underlying loans. The average balance
of the servicing portfolio was $127.3 million and produced loan servicing
expense of $619,000 for the year ended March 31, 2003. See "Item 1.
Business -- Lending Activities -- Mortgage Loan Servicing."
Consumer 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 consumer, commercial, construction and other loans
totaled $203.3 million or 60.0% of total gross loans at March 31, 2003 as
compared to $156.4 million or 48.1% at March 31, 2002. At March 31, 2003,
the construction, commercial, consumer and other loan portfolios amounted to
$97.4 million, $34.2 million, $24.8 million and $122.2 million, or 28.8%,
10.1%, 7.3% and 36.1% of total gross loans, respectively. See "Item 1.
Business -- Lending Activities -- Construction Lending" and " -- Lending
Activities -- Consumer Lending."
The Company also invests 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, 2003, the combined portfolio of $36.8
million had an average term to repricing or maturity of 9.89 years, excluding
equity securities. See "Item 1. Business -- Investment Activities."
A measure of the Company's exposure to differential changes in interest rates
between assets and liabilities is provided by the test required by OTS Thrift
Bulletin No. 13a, "Interest Rate Risk Management." This test measures the
impact on net interest income and on net portfolio value of an immediate
change in interest rates in 100 basis point increments. Using data compiled by
the OTS, the Company receives a report which measures interest rate risk by
modeling the change in net portfolio value ("NPV") over a variety of interest
rate scenarios. This procedure for measuring interest rate risk was developed
by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period). NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. Following
are the estimated
53
impacts of immediate changes in interest rates at the specified levels based
on the latest OTS report dated December 31, 2002.
At December 31, 2002
Net Portfolio Value Net Portfolio Value as a
--------------------------- Percent of Present Value of Assets
Change Dollar Dollar Percent ----------------------------------
In Rates Amount Change Change NPV Ratio Change
- -------- ------ ------ ------ --------- ------
(Dollars in thousands)
300 bp $73,063 $(1,161) (2)% 16.45% (18) bp
200 bp 74,211 (12) 0 16.66 3 bp
100 bp 74,720 497 1 16.74 11 bp
0 bp 74,223 - - 16.63 -
(100)bp 73,073 (1,150) (2) 16.36 (27) bp
(200)bp(1) - - - - -
(300)bp(1) - - - - -
(1) No minus 200-300 bp because the 3-month treasury bill was 1.155% at
December 31, 2002.
For example, the above table illustrates that an instantaneous 100 basis point
increase in market interest rates at December 31, 2002 would increase the
Company's NPV by approximately $497,000, or 1%, at that date. At December 31,
2001, an instantaneous 100 basis point increase in market interest rates would
have reduced the Company's NPV by approximately $4.5 million, or 7%, at that
date. The $4.0 million decrease in the reduction of NPV to $497,000 at
December 31, 2002 is the result of the impact of more adjustable loan balances
in the loan portfolio at December 31, 2002 as compared to December 31, 2001.
Certain assumptions used by the OTS in assessing the interest rate risk of
savings associations within its region were used in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates and the market values of certain assets under differing
interest rate scenarios, among others.
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 to 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 which 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.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and 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 Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At March 31, 2003,
cash and cash equivalents totaled $60.9 million, or 14.5%, of total assets.
The Bank has a 35% of total assets line of credit with the FHLB-Seattle to the
extent the Bank provides qualifying collateral and holds sufficient FHLB
stock. At March 31, 2003, the Bank had $40.0 million of outstanding advances
from the FHLB-Seattle under an available credit facility of $104.9 million.
54
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) liquidity of its asset/liability management
program. 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 borrowing capacity with the FHLB and collateral for borrowing at
the Federal Reserve Bank discount window. At March 31, 2003, the Bank's ratio
of cash and eligible investments to the sum of withdrawable savings and
borrowings due within one year was 12.25%.
The Company's primary investing activity is the origination of loans. During
the years ended March 31, 2003, 2002 and 2001, the Company originated $298.4
million, $273.9 million and $206.5 million of loans, respectively. At March
31, 2003, the Company had outstanding mortgage loan commitments of $10.2
million and undisbursed balance of mortgage loans closed of $31.2 million.
Consumer loan commitments totaled $2.1 million and unused lines of consumer
credit totaled $16.5 million at March 31, 2003. Commercial real estate loan
commitments totaled $7.8 and undisbursed balance of commercial real estate
loans closed was $8.0 million at March 31, 2003. Commercial loan commitments
totaled $1.3 million and unused commercial lines of credit totaled $19.7
million at March 31, 2003. The Company anticipates that it will have
sufficient funds available to meet current loan commitments. Certificates of
deposit that are scheduled to mature in less than one year from March 31, 2003
totaled $71.2 million. Historically, the Company has been able to retain a
significant amount of its deposits as they mature.
The Bank's primary sources of funds are deposits, FHLB borrowings, proceeds
from the principal and interest payments on loans and securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows, prepayment of mortgage loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions and competition.
The low interest rate environment has created high demand for fixed rate
single family loans and repayment of existing single family mortgage loans and
mortgage-backed securities. The Company's business plan emphasizes the sale of
fixed rate mortgages as part of its interest rate risk strategy. The increase
in the cash flows from operating activities of loans sold of $56.3 million for
the fiscal 2003 compared to $35.7 million for fiscal 2002 reflects this
strategy.
The Bank has experienced growth in deposit accounts that has caused a net
increase in cash flows from deposits of $61.1 million for fiscal 2003 as
compared to a $35.8 million decrease in net cash flows for the same period in
the prior year. The deposit growth experienced during fiscal year 2003 has
been primarily in transaction accounts. This increase in deposit cash flows
has allowed the Bank to repay $39.5 million in FHLB advances.
Should the Bank require funds beyond its ability to generate them internally,
additional funds are available through the use of FHLB borrowings. At March
31, 2003 advances from FHLB totaled $40.0 million and the Bank had additional
borrowing capacity available of $64.9 million from the FHLB.
Sources of capital and liquidity for the Company on a stand-alone basis
include distributions from the Bank and the issuance of debt or equity.
Dividends and other capital distributions from the Bank are subject to
regulatory restrictions.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of March 31, 2003, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 11.66%, 11.66% and 15.89%, respectively. For a detailed discussion of
regulatory capital requirements, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."
Effect of Inflation and Changing Prices
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
55
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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. This statement is
effective for fiscal year ended March 31, 2003. Management does not expect
that the provisions of SFAS No. 148 will impact the Company's results of
operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 is an interpretation
of FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. The disclosure requirements in this
Interpretation are effective for the year ended March 31, 2003. The Company
has adopted the provisions of FIN No. 45.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Quantitative Aspects of Market Risk. 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 -- Lending Activities -- Loan Portfolio
Analysis," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Certificates of Deposit by Rates and Maturities" contained
herein.
Qualitative Aspects of Market Risk. 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 accept 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. Interest rate
sensitivity will increase 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 of more than 15 years. Interest
rates on residential one- to -four family mortgage loan applications are
typically locked during the application stage for periods ranging from 30 to
90 days, the most typical period being 45 days. These loans are locked with
FHLMC under a best-efforts delivery program. The Company makes every effort
to deliver these loans before their ratelocks expire. This arrangement
requires the Company to deliver the loans to FHLMC within ten days of funding.
Delays in funding the loans can require a lock extension. The cost of a lock
extension at times is borne by the borrower and at times by the Company.
These lock extension costs paid by the Company are not expected to have a
material impact to operations. This activity is managed daily.
Consumer and commercial loans are originated and held in portfolio as the
short term nature of these portfolio loans match durations more closely with
the short term nature of retail deposits such as Now accounts, 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 usually be of longer term. For additional information, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein.
56
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, 2003. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives
and other financial instruments.
One After After
Within Year 3 Years 5 Years Beyond
Average One To 3 To 5 To 10 10 Fair
Rate Year Years Years Years Years Total Value
------- ------ ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-Sensitive Assets:
Loans receivable 6.72% $189,649 $55,731 $53,337 $23,805 $16,151 $338,673 $346,567
Mortgage-backed securities 4.42 12,872 2,750 740 8 - 16,370 16,472
Investments and other
interest-earning assets 2.55 55,839 4,300 982 1,769 - 62,890 62,890
FHLB stock 6.04 1,130 2,258 2,258 - - 5,646 5,646
Interest-Sensitive Liabilities:
NOW accounts 0.35 5,423 10,845 10,845 - - 27,113 27,113
High-yield checking 1.82 7,107 14,215 14,215 - - 35,537 35,537
Non-interest checking accounts - 15,692 31,386 31,386 - - 78,464 78,464
Savings accounts 0.75 4,971 9,942 9,942 - - 24,855 24,855
Money market 1.01 10,743 21,487 21,487 - - 53,717 53,717
Certificate accounts 2.77 71,155 22,619 5,001 2,281 - 101,056 102,322
FHLB advances 4.90 35,000 - 5,000 - - 40,000 42,267
Off-Balance Sheet Items:
Commitments to extend credit - 21,366 - - - - 21,366 21,366
Unused lines of credit - 75,502 - - - - 75,502 75,502
57
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for Years Ended March 31, 2003, 2002 and
2001
Independent Auditors' Report
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
Page
Independent Auditors' Report 59
Consolidated Balance Sheets as of March 31, 2003 and 2002 60
Consolidated Statements of Income for the Years Ended March 31, 2003,
2002 and 2001 61
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 2003, 2002 and 2001 62
Consolidated Statements of Cash Flows for the Years Ended March 31,
2003, 2002 and 2001 63
Notes to Consolidated Financial Statements 64
58
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Riverview
Bancorp, Inc. and Subsidiary as of March 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Riverview Bancorp, Inc. and
Subsidiary as of March 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2003, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 2, 2003
59
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(In thousands, except share data) 2003 2002
- -----------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $42,464
and $14,369) $ 60,858 $ 22,492
Loans held for sale 1,501 1,826
Investment securities available for sale, at fair value
(amortized cost of $20,265 and $18,925) 20,426 18,275
Mortgage-backed securities held to maturity, at amortized
cost (fair value of $3,403 and $4,485) 3,301 4,386
Mortgage-backed securities available for sale, at fair
value(amortized cost of $12,669 and $36,462) 13,069 36,999
Loans receivable (net of allowance for loan losses of
$2,739 and $2,537) 300,310 286,704
Real estate owned 425 853
Prepaid expenses and other assets 854 525
Accrued interest receivable 1,492 1,902
Federal Home Loan Bank stock, at cost 5,646 5,317
Premises and equipment, net 9,703 10,607
Deferred income taxes, net 1,321 607
Mortgage servicing rights, net 629 912
Core deposit intangible, net 369 696
------- -------
TOTAL ASSETS $419,904 $392,101
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $320,742 $259,690
Accrued expenses and other liabilities 4,364 4,001
Advance payments by borrowers for taxes and insurance 287 233
Federal Home Loan Bank advances 40,000 74,500
------- -------
Total liabilities 365,393 338,424
COMMITMENTS AND CONTINGENCIES (NOTE 18)
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000 authorized,
issued and outstanding:
2003 - 4,585,543 issued, 4,358,704 outstanding 46 47
2002 - 4,735,066 issued, 4,458,456 outstanding
Additional paid-in capital 33,525 35,725
Retained earnings 22,389 20,208
Unearned shares issued to employee stock ownership trust (1,804) (2,010)
Unearned shares held by the management recognition
and development plan (15) (218)
Accumulated other comprehensive income (loss) 370 (75)
------- -------
Total shareholders' equity 54,511 53,677
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $419,904 $392,101
======= =======
See notes to consolidated financial statements.
60
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In thousands, except share data) 2003 2002 2001
- -----------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 23,670 $ 24,872 $ 26,271
Interest on investment securities 200 327 820
Interest on mortgage-backed securities 1,241 2,677 3,144
Other interest and dividends 1,350 1,964 1,108
------- ------- -------
Total interest income 26,461 29,840 31,343
------- ------- -------
INTEREST EXPENSE:
Interest on deposits 5,475 8,729 11,347
Interest on borrowings 2,942 5,589 4,941
------- ------- -------
Total interest expense 8,417 14,318 16,288
------- ------- -------
Net interest income 18,044 15,522 15,055
Less provision for loan losses 727 1,116 949
Net interest income after provision for ------- ------- -------
loan losses 17,317 14,406 14,106
------- ------- -------
NON-INTEREST INCOME:
Fees and service charges 4,263 3,707 2,631
Asset management fees 742 745 509
Gain on sale of loans held for sale 1,552 1,067 94
(Loss) gain on sale of securities and impairment (2,138) 863 -
Gain on sale of other real estate owned 55 34 35
Loan servicing income (expense) (619) 57 67
Gain on sale of land and fixed assets - 4 540
Other 83 74 86
------- ------- -------
Total non-interest income 3,938 6,551 3,962
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 8,395 7,763 6,989
Occupancy and depreciation 2,481 2,199 1,947
Data processing 834 776 926
Amortization of core deposit intangible 327 327 327
Advertising and marketing expense 605 540 601
FDIC insurance premium 47 51 46
State and local taxes 383 402 319
Telecommunications 225 259 256
Professional fees 399 346 247
Other 1,212 1,290 1,209
------- ------- -------
Total non-interest expense 14,908 13,953 12,867
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 6,347 7,004 5,201
PROVISION FOR FEDERAL INCOME TAXES 1,988 2,136 1,644
------- ------- -------
NET INCOME $ 4,359 $ 4,868 $ 3,557
======= ======= =======
Earnings per common share:
Basic $ 1.00 $ 1.06 $ 0.78
Diluted 0.99 1.06 0.77
Weighted average number of shares outstanding:
Basic 4,365,855 4,572,253 4,579,091
Diluted 4,424,733 4,612,468 4,640,249
See notes to consolidated financial statements.
61
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
Unearned
Shares
Issued to
Employee Unearned Accumulated
Common Stock Additional Stock Shares Other
(In thousands, --------------- Paid-In Retained Ownership Issued to Comprehensive
except share data) Shares Amount Capital Earnings Trust MRDP Income(Loss) Total
- -----------------------------------------------------------------------------------------------------------
Balance April 1, 2000 4,521,209 $ 49 $38,457 $15,652 $(2,422) $(1,178) $(2,069) $48,489
Cash Dividends - - - (1,860) - - - (1,860)
Exercise of stock options 78,918 1 221 - - - - 222
Earned ESOP shares 24,633 - 9 - 205 - - 214
Earned MRDP shares 30,280 - - - - 416 - 416
--------- ------ ------ ------ ------ ------ ------ ------
4,655,040 50 38,687 13,792 (2,217) (762) (2,069) 47,481
Comprehensive income:
Net income - - - 3,557 - - - 3,557
Other comprehensive income:
Unrealized holding gain on
securities of $1,683 (net
of $867 tax effect) - - - - - - 1,683 1,683
------
Total comprehensive income - - - - - - - 5,240
--------- ------ ------ ------ ------ ------ ------ ------
Balance March 31, 2001 4,655,040 50 38,687 17,349 (2,217) (762) (386) 52,721
Cash Dividends - - - (2,009) - - - (2,009)
Exercise of stock options 22,345 - 91 - - - - 91
Stock repurchased and
retired (268,700) (3) (3,120) - - - - (3,123)
Earned ESOP shares 24,633 - 77 - 207 - - 284
Earned MRDP shares 25,138 - (10) - - 544 - 534
--------- ------ ------ ------ ------ ------ ------ ------
4,458,456 47 35,725 15,340 (2,010) (218) (386) 48,498
Comprehensive income:
Net income - - - 4,868 - - - 4,868
Other comprehensive income:
Unrealized holding gain on
securities of $881 (net of
$454 tax effect) less
reclassification adjustment
for net gains included in
net income of $570 (net of
$293 tax effect) - - - - - - 311 311
------
Total comprehensive income - - - - - - - 5,179
--------- ------ ------ ------ ------ ------ ------ ------
Balance March 31, 2002 4,458,456 47 35,725 20,208 (2,010) (218) (75) 53,677
Cash dividends - - - (2,178) - - - (2,178)
Exercise of stock options 46,577 - 417 - - - - 417
Stock repurchased and
retired (196,100) (1) (2,881) - - - - (2,882)
Earned ESOP shares 24,633 - 166 - 206 - - 372
Tax benefit associated
with MRDP - - 98 - - - - 98
Earned MRDP shares 25,138 - - - - 203 - 203
--------- ------ ------ ------ ------ ------ ------ ------
4,358,704 46 33,525 18,030 (1,804) (15) (75) 49,707
Comprehensive income:
Net income - - - 4,359 - - - 4,359
Other comprehensive income:
Unrealized holding loss on
securities of $966 (net of
$498 tax effect) less
reclassification adjustment
for net losses included in
net income of $1,411 (net of
$727 tax effect) - - - - - - 445 445
------
Total comprehensive income - - - - - - - 4,804
--------- ------ ------ ------ ------ ------ ------ ------
Balance March 31, 2003 4,358,704 $ 46 $33,525 $22,389 $(1,804) $ (15) $ 370 $54,511
========= ====== ====== ====== ====== ====== ====== ======
See notes to consolidated financial statements.
62
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In thousands) 2003 2002 2001
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,359 $ 4,868 $ 3,557
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,108 1,623 1,452
Mortgage servicing rights impairment 320 44 49
Provision for losses on loans 727 1,116 949
Provision (credit) for deferred income taxes (942) 89 (487)
Noncash expense related to ESOP 372 284 214
Noncash expense related to MRDP 203 544 416
Increase (decrease) in deferred loan
origination fees, net of amortization 728 (79) 120
Federal Home Loan Bank stock dividend (329) (342) (263)
Origination of loans held for sale (55,771) (36,959) (8,132)
Proceeds from sales of loans held for sale 56,311 35,686 7,563
Net loss (gain) on sale of real estate owned,
mortgage-backed securities, investment
securities and premises and equipment 582 (1,941) (456)
Changes in assets and liabilities:
(Increase) decrease in other assets (240) 1,094 104
Increase (decrease) in accrued interest receivable 280 417 (513)
Increase in accrued expenses and other liabilities 173 2 722
------ ------ ------
Net cash provided by operating activities 8,881 6,446 5,295
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (242,620)(236,904)(198,327)
Principal repayments on loans 227,101 203,466 147,415
Proceeds from call, maturity, or sale of
investment securities available for sale 1,518 2,500 3,000
Purchase of investment securities available
for sale (5,000) - -
Purchase of equity securities - - (15,000)
Purchase of mortgage-backed securities available
for sale - (4,967) (8,055)
Proceeds from sale of mortgage-backed securities
available for sale - 25,944 -
Principal repayments on mortgage-backed securities
held to maturity 1,084 2,017 2,255
Principal repayments on mortgage-backed securities
available for sale 23,728 25,754 5,745
Principal repayments on investment securities held
to maturity - 861 42
Principal repayments on investment securities
available for sale - 4,641 359
Purchase of premises and equipment (256) (2,063) (2,507)
Purchase of Federal Home Loan Bank stock - (543) (1,095)
Proceeds from sale of real estate owned,
premises and equipment 1,915 2,264 3,463
------ ------ ------
Net cash provided (used) by investing activities 7,470 22,970 (62,705)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 61,052 (35,833) 63,168
Dividends paid (2,126) (2,009) (1,860)
Repurchase of common stock (2,882) (3,123) -
Proceeds from Federal Home Loan Bank advances 5,000 23,300 164,686
Repayment of Federal Home Loan Bank advances (39,500) (28,300)(145,736)
Net increase in advance payments by borrowers 54 15 79
Proceeds from exercise of stock options 417 91 222
------ ------ ------
Net cash provided (used) by financing activities 22,015 (45,859) 80,559
------ ------ ------
NET INCREASE (DECREASE) IN CASH 38,366 (16,443) 23,149
CASH, BEGINNING OF YEAR 22,492 38,935 15,786
------ ------ ------
CASH, END OF YEAR $60,858 $22,492 $38,935
====== ====== ======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 8,666 $14,610 $15,906
Income taxes 2,912 2,025 2,222
NONCASH INVESTING AND FINANCING ACTIVITIES:
Mortgage loans securitized and classified as
mortgage-backed securities available for sale $ - $40,347 $ -
Transfer of loans to real estate owned 1,527 2,373 2,585
Dividends declared and accrued in other liabilities 545 494 471
Fair value adjustment to securities available
for sale 674 472 2,550
Income tax effect related to fair value adjustment (229) (161) (867)
See notes to consolidated financial statements.
63
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of
Riverview Bancorp, Inc. and Subsidiary (the "Company") include all the
accounts of Riverview Bancorp, Inc. and the consolidated accounts of its
wholly-owned subsidiary, Riverview Community Bank (the "Bank"), the Bank's
wholly-owned subsidiary, Riverview Services, Inc. and the Bank's majority
owned subsidiary, Riverview Asset Management Corp. All significant
inter-company transactions and balances have been eliminated in consolidation.
Nature of Operations - The Bank is a twelve branch community-oriented
financial institution operating in rural and suburban communities in southwest
Washington State. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such funds, together with other
borrowings, to invest in various consumer-based real estate loans, other
consumer and commercial loans, investment securities and mortgage-backed
securities.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America ("generally accepted accounting
principles" or "GAAP"), requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of related revenue and expense during the
reporting period. Actual results could differ from those estimates.
Conversion and Reorganization - Riverview Bancorp, Inc. ("Bancorp") is a
Washington corporation which is the holding company for the Bank. Bancorp was
organized by the Bank for the purpose of acquiring all of the capital stock of
the Bank in connection with the conversion of Riverview M.H.C. ("MHC"), the
former parent mutual holding company of the Bank, to stock form, and the
reorganization of the Bank as a wholly-owned subsidiary of Bancorp, which was
completed on September 30, 1997 ("Conversion and Reorganization").
In the Conversion and Reorganization, 3,570,270 shares previously held by MHC
were retired and simultaneously 3,570,750 shares of common stock were sold at
a subscription price of $10.00 per share resulting in net proceeds of
approximately $31.8 million after taking into consideration $2.9 million for
the establishment of an Employee Stock Ownership Plan (ESOP) and $1.1 million
in expenses. In addition to the shares sold in the offering, 2,562,576 shares
of the Company's stock were issued in exchange for shares of the Bank's stock
previously held by public shareholders at an exchange ratio of 2.5359 shares
for each share of the Bank's common stock, resulting in 6,133,326 total shares
of the Company's stock issued as of September 30, 1997.
Interest Income on Loans - Interest on loans is credited to income as earned.
When the collectibility of the interest is in doubt, the accrual of interest
ceases and a reserve for any nonrecoverable accrued interest is established
and charged against operations and the loan is placed on nonaccrual status. If
ultimate collection of principal is in doubt, all cash receipts on nonaccrual
loans are applied to reduce the principal balance.
Loan Fees - Loan fee income, net of the direct origination costs, is deferred
and accreted to interest income by the level yield method over the contractual
life of the loan.
Securities - In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, investment securities are classified as held to maturity
where the Company has the ability and positive intent to hold them to
maturity. Investment securities held to maturity are carried at cost, adjusted
for amortization of premiums and accretion of discounts to maturity.
Unrealized losses on securities held to maturity or available for sale due to
fluctuations in fair value are recognized when it is determined that an other
than temporary decline in value has occurred. Investment securities bought and
held principally for the purpose of sale in the near term are classified as
trading securities. Investment securities not classified as trading
securities, or as held to maturity securities, are classified as securities
available for sale. For purposes of computing gains and losses, cost of
securities sold is determined using the specific identification method.
Unrealized holding gains and losses on securities available for sale are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until realized.
Real Estate Owned ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken
64
based upon detailed analysis of the fair value of collateral underlying loans
on which the Company is in the process of foreclosing. Such collateral is
transferred into REO at the lower of recorded cost or fair value less
estimated costs of disposal. Subsequently, properties are evaluated and for
any additional declines in value the Company writes down the REO directly and
charges operations for the diminution in value. The amounts the Company will
ultimately recover from REO may differ from the amounts used in arriving at
the net carrying value of these assets because of future market factors beyond
the Company's control or because of changes in the Company's strategy for the
sale of the property.
Allowance for Loan Losses - 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. The allowance is provided
based upon management's continuing analysis of the pertinent factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current economic conditions, and detailed analysis of individual loans for
which full collectibility may not be assured. The detailed analysis includes
techniques to estimate the fair value of loan collateral and the existence of
potential alternative sources of repayment. The appropriate allowance level is
estimated based upon factors and trends identified by management at the time
the consolidated financial statements are prepared.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, an amendment of SFAS No. 114, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts (principal and interest) due according to the contractual terms of the
loan agreement. Large groups of smaller balance homogenous loans such as
consumer secured loans, residential mortgage loans and consumer unsecured
loans are collectively evaluated for potential loss. When a loan has been
identified as being impaired, the amount of the impairment is measured by
using discounted cash flows, except when, as a practical expedient, the
current fair value of the collateral, reduced by costs to sell, is used. When
the measurement of the impaired loan is less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs, and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an allocation of the allowance for loan losses. Uncollected accrued
interest is reversed against interest income. If ultimate collection of
principal is in doubt, all cash receipts on impaired loans are applied to
reduce the principal balance.
Allowance for Unfunded Loan Commitments - The allowance for unfunded loan
commitments is maintained at a level believed by management to be sufficient
to absorb estimated probable losses related to these unfunded credit
facilities. The determination of the adequacy of the allowance is based on
periodic evaluations of the unfunded credit facilities including an assessment
of the probability of commitment usage, credit risk factors for loans
outstanding to these same customers, and the terms and expiration dates of the
unfunded credit facilities
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is generally computed on the
straight-line method over the estimated useful lives as follows:
Buildings and improvements 3 to 40 years
Furniture and equipment 3 to 20 years
Leasehold improvements 15 to 25 years
Loans Held for Sale - The Company identifies loans held for sale at the time
of origination and they are carried at the lower of aggregate cost or net
realizable value. Market values are derived from available market quotations
for comparable pools of mortgage loans. Adjustments for unrealized losses, if
any, are charged to income.
Gains or losses on sales of loans held for sale are recognized at the time of
the sale and are determined by the difference between the net sales proceeds
and the allocated basis of the loans sold. The Company capitalizes mortgage
servicing rights ("MSR's") acquired through either the purchase of MSR's, the
sale of originated mortgage loans or the securitization of mortgage loans with
servicing rights retained. Upon sale of mortgage loans held for sale the total
cost of the mortgage loans designated for sale is allocated to mortgage loans
with and without MSR's based on their relative fair values. The MSR's are
included as a component of gain on sale of loans. The MSR's are amortized in
proportion to and over the estimated period of the net servicing life. Such
amortization is reflected as a component of loan servicing income (expense).
Mortgage Servicing - Fees earned for servicing loans for the Federal Home Loan
Mortgage Corporation ("FHLMC") are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
MSR's are the rights to service loans. Loan servicing includes collecting
payments, remitting funds to investors, insurance companies and tax
authorities, collecting delinquent payments, and foreclosing on properties
when necessary.
The Company records its originated mortgage servicing rights at fair values in
accordance with SFAS No. 140, Accounting
65
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, which requires the Company to allocate the total cost of all
mortgage loans sold to the MSR's and the loans (without the MSR's) based on
their relative fair values if it is practicable to estimate those fair values.
The Company stratifies its MSR's based on the predominant characteristics of
the underlying financial assets including coupon interest rate and contractual
maturity of the mortgage. An estimated fair value of MSR's is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected prepayments
speeds, discount rate, loan maturity and interest rate. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSR's portfolio. The Company
is amortizing the MSR's assets, which totaled $629,000 and $912,000 at March
31, 2003 and 2002, respectively, over the period of estimated net servicing
income.
The MSR's are periodically reviewed for impairment based on their fair value.
The fair value of the MSR's, for the purposes of impairment, is measured using
a discounted cash flow analysis based on market adjusted discount rates,
anticipated prepayment speeds, mortgage loan term and coupon rate. Market
sources are used to determine prepayment speeds and the Office of Thrift
Supervision ("OTS") is the source for ancillary income, servicing cost and
pre-tax required yield. Impairment losses are recognized through a valuation
allowance for each impaired stratum, with any associated provision recorded as
a component of loan servicing income (expense).
Core Deposit Intangible - The deposit base premium of $369,000 at March 31,
2003 is reflected on the consolidated balance sheets as core deposit
intangible and is being amortized to non-interest expense on a straight-line
basis over ten years.
Advertising and Marketing Expense - Cost incurred for advertising,
merchandising, market research, community investment, travel and business
development are classified as marketing expense and are expensed as incurred.
Income Taxes - Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in the Company's income tax
returns. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation allowances
are established to reduce the net carrying amount of deferred tax assets if it
is determined to be more likely than not, that all or some portion of the
potential deferred tax asset will not be realized. The Company files a
consolidated federal income tax return.
Earnings Per Share - The Company accounts for earnings per share in accordance
with SFAS No. 128, Earnings Per Share, which requires all companies whose
capital structure include dilutive potential common shares to make a dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period, excluding restricted stock. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and has been computed after
giving consideration to the weighted average diluted effect of the Company's
stock options and the shares issued under the Company's Management Retention
and Development Plan ("MRDP").
Cash - Includes amounts on hand, due from banks and interest-earning deposits
in other banks.
Stock-Based Compensation - The Company adopted SFAS No. 123, Accounting for
Stock Based Compensation, which permits entities to recognize as expense over
the expected life the fair value of all stock-based awards on the date of
grant, or alternatively, entities may continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The Company elected to
continue the accounting methods prescribed by APB Opinion No. 25 and related
interpretations which measure compensation cost using the intrinsic value
method. Under the intrinsic value method, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the stock at
grant date over the amount an employee must pay to acquire the stock.
SFAS No. 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of
fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The dividend
yield represents average yields over the previous six-year period. Volatility
is measured using the fluctuation in month-end closing stock prices over a
seven-year period. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
66
assumptions:
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- --------- ---------- ---------
Fiscal 2003 4.01% 5.42 31.59% 3.23%
Fiscal 2002 5.14% 6.15 33.67% 2.92%
Fiscal 2001 5.33% 6.90 35.85% 2.65%
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. The weighted average grant-date
fair value of 2003, 2002 and 2001 awards was $3.54, $2.87 and $3.09,
respectively. Only stock options are considered in this calculation and not
MRDP shares. If the accounting provisions of the SFAS No. 123 had been
adopted, the effect on 2003, 2002 and 2001 net income would have been reduced
to the following pro forma amounts:
Year ended March 31,
----------------------------
2003 2002 2001
Net income: ------ ------ ------
As reported $4,359,000 $4,868,000 $3,557,000
Deduct: Total stock based compensation
expense determined under fair value
based method for all options, net of
related tax benefit 180,000 228,000 226,000
Pro forma 4,179,000 4,640,000 3,331,000
Earnings per common share - basic:
As reported $1.00 $1.06 $0.78
Pro forma 0.96 1.01 0.73
Earnings per common share - fully diluted:
As reported $0.99 $1.06 $0.77
Pro forma 0.94 1.01 0.72
Employee Stock Ownership Plan - The Company sponsors a leveraged ESOP. The
ESOP is accounted for in accordance with the American Institute of Certified
Public Accountants Statement of Position ("SOP") 93-6, Employer's Accounting
for Employee Stock Ownership Plans. Stock and cash dividends on allocated
shares are recorded as a reduction of additional paid in capital and paid
directly to plan participants or distributed directly to participants'
accounts. As shares are released, compensation expense is recorded equal to
the then current market price of the shares and the shares become available
for earnings per share calculations. The Company records cash dividends on
unallocated shares as a reduction of debt and accrued interest.
Reclassification - Certain 2002 and 2001 amounts have been reclassified in
order to conform to the 2003 presentation.
Business segments - The Company operates a single business segment. The
financial information that is used by the chief operating decision maker in
allocating resources and assessing performance is only provided for one
reportable segment as of March 31, 2003, 2002 and 2001.
Recently Issued Accounting Pronouncements - In December 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. This
statement is effective for fiscal year ended March 31, 2003. Management does
not expect that the provisions of SFAS No. 148 will impact the Company's
results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 is an interpretation
of
67
FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that it has issued. The disclosure requirements in this Interpretation are
effective for the year ended March 31, 2003. The Company has adopted the
provisions of FIN No. 45.
2. INTEREST RATE RISK MANAGEMENT
The Company is engaged principally in gathering deposits supplemented with
Federal Home Loan Bank ("FHLB") advances and providing first mortgage loans to
individuals and commercial enterprises, commercial loans to businesses, and
consumer loans to individuals. At March 31, 2003 and 2002, the asset portfolio
consisted of fixed and variable rate interest-earning assets. Those assets
were funded primarily with short-term deposits and advances from the FHLB that
have market interest rates that vary over time. The shorter maturity of the
interest-sensitive liabilities indicates that the Company could be exposed to
interest rate risk because, generally in an increasing rate environment,
interest-bearing liabilities will be repricing faster at higher interest rates
than interest-earning assets, thereby reducing net interest income, as well as
the market value of long-term assets. Management is aware of this interest
rate risk and actively monitors such risk and manages it to the extent
practicable.
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2003
- --------------
Trust Preferred $ 5,000 $ - $ (25) $ 4,975
Equity securities 12,700 - - 12,700
School district bonds 2,565 186 - 2,751
--------- ---------- ---------- ---------
Total $ 20,265 $ 186 $ (25) $ 20,426
========= ========== ========== =========
March 31, 2002
- --------------
Equity securities $ 16,356 $ 27 $ (709) $ 15,674
School district bonds 2,569 34 (2) 2,601
--------- ---------- ---------- ---------
Total $ 18,925 $ 61 $ (711) $ 18,275
========= ========== ========== =========
The contractual maturities of securities available for sale are as follows (in
thousands):
Amortized Estimated
Cost Fair Value
--------- ----------
March 31, 2003
- --------------
Due after one year through five years $ 908 $ 982
Due after five years through ten years 1,040 1,125
Due after ten years 18,317 18,319
--------- ----------
Total $ 20,265 $ 20,426
========= ==========
Investment securities with an amortized cost of $12.7 million and $15.0
million and a fair value of $12.7 million and $14.4 million at March 31, 2003
and March 31, 2002, respectively, were pledged as collateral for advances at
the FHLB.
In the fourth quarter of fiscal 2003, the Company recognized a pre-tax
other-than-temporary impairment for investments in
68
FHLMC preferred stock and FNMA preferred stock that totaled $2.3 million. The
Company accounts for these securities in accordance with SFAS No. 115. Under
SFAS No. 115, if the decline in fair market value below cost is determined to
be other than temporary, the unrealized loss will be realized as expense on
the income statement. Based on a number of factors, including the magnitude
of the drop in the market value below the Company's cost and the length of
time the market value had been below cost, management concluded that the
decline in value was other than temporary at the end of the fourth quarter of
fiscal 2003. Accordingly, the pre-tax other-than-temporary impairment was
realized in the income statement, in the amount of $700,000 for Federal
National Mortgage Association ("FNMA") preferred stock and $1.6 million
Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock. A
corresponding reduction in unrealized losses in shareholders' equity was
realized in the amount of $462,000 for FNMA preferred stock and $1.1 million
for FHLMC preferred stock.
The Company realized gains on sale on investment securities available for sale
of $162,000 in fiscal 2003 and none in fiscal 2002 or 2001. The Company had no
realized losses on sale of investment securities available for sale in fiscal
2003, 2002 and 2001.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2003
- --------------
Real estate mortgage investment
conduits $ 1,803 $ 57 $ - $ 1,860
FHLMC mortgage-backed securities 589 13 - 602
FNMA mortgage-backed securities 909 32 - 941
--------- ---------- ---------- ---------
Total $ 3,301 $ 102 $ - $ 3,403
========= ========== ========== =========
March 31, 2002
- --------------
Real estate mortgage investment
conduits $ 1,804 $ 40 $ - $ 1,844
FHLMC mortgage-backed securities 964 12 - 976
FNMA mortgage-backed securities 1,618 47 - 1,665
--------- ---------- ---------- ---------
Total $ 4,386 $ 99 $ - $ 4,485
========= ========== ========== =========
Mortgage-backed securities held to maturity with an amortized cost of $2.2
million and $2.8 million and a fair value of $2.3 million and $2.9 million at
March 31, 2003 and 2002, respectively, were pledged as collateral for
governmental public funds held by the Bank. Mortgage-backed securities with an
amortized cost of $385,000 and a fair value of $399,000 at March 31, 2003 were
pledged as collateral for treasury tax and loan funds held by the Bank. The
real estate mortgage investment conduits consist of FHLMC and FNMA securities.
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------- ----------
March 31, 2003
- --------------
Due in one year or less $ 28 $ 28
Due after one year through five years 558 575
Due after five years through ten years 2 2
Due after ten years 2,713 2,798
--------- ----------
Total $ 3,301 $ 3,403
========= ==========
69
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2003
- --------------
Real estate mortgage investment
conduits $ 6,327 $ 100 $ (6) $ 6,421
FHLMC mortgage-backed securities 5,811 286 - 6,097
FNMA mortgage-backed securities 531 20 - 551
--------- ---------- ---------- ---------
Total $ 12,669 $ 406 $ (6) $ 13,069
========= ========== ========== =========
March 31, 2002
- --------------
Real estate mortgage investment
conduits $ 25,053 $ 144 $ (83) $ 25,114
FHLMC mortgage-backed securities 10,519 453 - 10,972
FNMA mortgage-backed securities 890 23 - 913
--------- ---------- ---------- ---------
Total $ 36,462 $ 620 $ (83) $ 36,999
========= ========== ========== =========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
Cost Fair Value
--------- ----------
March 31, 2003
- --------------
Due after one year through five years $ 6,230 $ 6,531
Due after five years through ten years 801 811
Due after ten years 5,638 5,727
--------- ----------
Total $ 12,669 $ 13,069
========= ==========
Expected maturities of mortgage-backed securities held to maturity will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
Mortgage-backed securities available for sale with an amortized cost of none
and $6.3 million and a fair value of none and $6.3 million at March 31, 2003
and 2002, respectively, were pledged as collateral for the discount window at
the Federal Reserve Bank. Mortgage-backed securities with an amortized cost of
$11.9 million and $23.3 million and a fair value of $12.2 million and $23.8
million at March 31, 2003 and March 31, 2002, respectively, were pledged as
collateral for advances at the Federal Home Loan Bank. Mortgage-backed
securities with an amortized cost of $316,000 and $4.9 million and a fair
value of $327,000 and $4.8 million at March 31, 2003 and March 31, 2002,
respectively, were pledged as collateral for treasury tax and loan funds held
by the Bank.
The Company realized gains on sale of mortgage-backed securities available
for sale of $863,000 in fiscal 2002 and none in fiscal year 2003 or 2001. The
Company realized no losses on sale of mortgage-backed securities available
for sale in fiscal 2003, 2002 and 2001.
70
5. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
March 31,
------------------
2003 2002
Residential: ------ ------
One- to- four family $ 58,498 $ 71,710
Multi-family 6,313 9,895
Construction:
One- to- four family 70,397 71,148
Multi-family 2,100 4,000
Commercial real estate 4,531 5,230
Commercial 34,239 23,319
Consumer
Secured 23,458 24,932
Unsecured 1,334 1,447
Land 34,630 27,406
Commercial real estate 101,672 84,094
------- -------
337,172 323,181
Less:
Undisbursed portion of loans 31,222 30,970
Deferred loan fees 2,901 2,970
Allowance for loan losses 2,739 2,537
------- -------
Loans receivable, net $300,310 $286,704
======= =======
The Company originates residential real estate loans, commercial real estate,
multi-family real estate, commercial and consumer loans. Substantially all of
the mortgage loans in the Company's portfolio are secured by properties
located in Washington and Oregon. A further economic downturn in these areas
would likely have a negative impact on the Company's results of operations
depending on the severity of such downturn.
Loans receivable including loans held for sale, by maturity or repricing date,
were as follows (in thousands):
March 31,
------------------
2003 2002
Adjustable rate loans: ------ ------
Within one year $155,289 $139,649
After one but within three years 29,084 10,044
After three but within five years 18,662 6,559
After five but within ten years 265 117
------- -------
203,300 156,369
Fixed rate loans:
Within one year 34,360 34,387
After one but within three 26,647 24,778
After three but within five years 34,675 45,558
After five but within ten years 23,540 31,160
After ten years 16,151 32,755
------- -------
135,373 168,638
------- -------
$338,673 $325,007
======= =======
Mortgage loans receivable with adjustable rates primarily reprice based on the
one year U.S. Treasury index and reprice a maximum of 2% per year and up to 6%
over the life of the loan. The remaining adjustable rate loans reprice based
on the prime lending rate or the FHLB cost of funds index. Commercial loans
with adjustable rates primarily reprice based on the prime rate.
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
71
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
Beginning balance $ 539 $ 813 $ 442
Originations 368 184 486
Principal repayments (592) (458) (115)
------ ------ ------
Ending balance $ 315 $ 539 $ 813
====== ====== ======
6. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowances for loan losses is as follows (in
thousands):
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
Beginning balance $ 2,537 $ 1,916 $ 1,362
Provision for losses 727 1,116 949
Charge-offs (428) (439) (413)
Recoveries 78 25 18
Allowance reclassified with loan securitization - (81) -
Net change in allowance for unfunded loan
commitments and lines of credit (175) - -
------ ------ ------
Ending balance $ 2,739 $ 2,537 $ 1,916
====== ====== ======
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
Beginning balance $ - $ - $ -
Net change in allowance for unfunded loan
commitments and lines of credit 175 - -
------ ------ ------
Ending balance $ 175 $ - $ -
====== ====== ======
The allowance for unfunded loan commitments was $175,000 at March 31, 2003.
The allowance for unfunded loan commitments for prior years was not material.
At March 31, 2003, 2002 and 2001, the Company's recorded investment in
impaired loans was $323,000, $1.4 million and $319,000, respectively. The
allowance for loan losses in excess of specific reserves is available to
absorb losses from all loans, although allocations have been made for certain
loans and loan categories as part of management's analysis of the allowance.
The average investment in impaired loans was approximately $1.1 million, $1.1
million and $836,000 during the years ended March 31, 2003, 2002 and 2001,
respectively.
7. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following (in thousands):
March 31,
-----------------
2003 2002
------ ------
Land $ 2,026 $ 2,026
Buildings and improvements 7,008 7,002
Leasehold improvements 927 927
Furniture and equipment 6,076 5,965
------ ------
Subtotal 16,037 15,920
Less accumulated depreciation (6,334) (5,313)
------ ------
Total $ 9,703 $ 10,607
====== ======
72
Depreciation expense was $1.1 million, $1.0 million and $970,000 for years
ended March 31, 2003, 2002, and 2001, respectively. The Company is obligated
under various noncancellable lease agreements for land and buildings that
require future minimum rental payments, exclusive of taxes and other charges,
as follows (in thousands):
Year ending March 31,
---------------------
2004 $ 657
2005 607
2006 631
2007 643
2008 657
Thereafter 3,062
-----
Total $6,257
=====
Rent expense was $634,000, $619,000 and $375,000 for the years ended March 31,
2003, 2002 and 2001, respectively.
8. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in MSR's and the related
allowance for the periods indicated and other related financial data (in
thousands):
March 31,
--------------------------
2003 2002 2001
------ ------ ------
Balance at beginning of period $ 912 $ 447 $ 537
Additions 671 704 57
Amortization (634) (195) (98)
Impairment write down (320) (44) (49)
------ ------ ------
Balance end of period $ 629 $ 912 $ 447
====== ====== ======
Allowance at beginning of period $ 93 $ 49 $ -
Provision for impairment 320 44 49
------ ------ ------
Allowance balance at end of period $ 413 $ 93 $ 49
====== ====== ======
The Company evaluates MSR's for impairment by stratifying MSR's based on the
predominant risk characteristics of the underlying financial assets. At March
31, 2003, the MSR's fair value totaled $629,000, which was estimated using
discount rate and a range of PSA (The Bond Market Association's standard
prepayment) values that ranged from 289 to 1,193.
Mortgage loans serviced for others (in millions):
March 31,
--------------------------
2003 2002 2001
------ ------ ------
Total $ 128.2 $ 123.6 $ 78.6
====== ====== ======
The sensitivity analysis in the table below is hypothetical and should be used
with caution. As the figures indicate changes in fair value based on a 25% or
50%, decrease or increase in assumptions generally cannot be easily
extrapolated because the relationship of the change in the assumptions to the
change in fair value may not be linear. Also, in this table, the effect that
a change in a particular assumption may have on the fair value is calculated
without changing any other assumption. In reality, changes in one factor may
result in changes in another, which might magnify or counteract the
sensitivities (in thousands):
73
5 Year 7 Year 15 Year 30 Year
Mortgages Mortgages Mortgages Mortgages Total
--------- --------- --------- --------- -----
Fair Value of MSR's $ 10 $ 25 $ 245 $ 349 $ 629
Impact of changes in PSA
Impact on fair value of
25% decrease 2 6 48 79 135
Impact on fair value of
50% decrease 5 15 130 210 360
Impact on fair value of
25% increase (1) (4) (32) (53) (90)
Impact on fair value of
50% increase (2) (7) (54) (91) (154)
Impact of changes in discount
Future cash flows discounted at 8.75% 8.75% 8.75% 8.75%
Impact on fair value of
25% decrease $ - $ 1 $ 7 $ 10 $ 18
Impact on fair value of
50% decrease 1 2 15 19 37
Impact on fair value of
25% increase - (1) (7) (11) (19)
Impact on fair value of
50% increase (1) (1) (15) (22) (39)
9. INTANGIBLE ASSETS, NET
Intangible assets consisted of the following at March 31, 2003 and 2002 (in
thousands):
March 31,
-----------------
2003 2002
------ ------
Mortgage servicing rights $ 629 $ 912
Core deposit intangible 369 696
------ ------
Total $ 998 $1,608
====== ======
At March 31, 2003 and 2002 the Company had $2,900 and $2,573 accumulated
amortization related to core deposits intangibles.
Amortization and write-downs of intangible assets for 2003 and 2002 were as
follows (in thousands):
Year Ended March 31,
--------------------
2003 2002
------ ------
Mortgage servicing rights $ 954 $ 239
Core deposit intangible 327 327
------ ------
Total $1,281 $ 566
====== ======
Amortization expense for the net carrying amount of intangible assets at March
31, 2003 is estimated to be as follows (in thousands):
Fiscal year
-------------------
2004 $ 843
2005 141
2006 10
2007 4
-----
Total $ 998
=====
74
10. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands):
Weighted Weighted
Average March 31, Average March 31,
Account Type Rate 2003 Rate 2002
- ------------ -------- -------- -------- --------
NOW Accounts:
Non-interest-bearing 0.00% $ 78,464 0.00% $ 32,574
Regular 0.35 27,113 0.44 32,710
High yield checking 1.82 35,537 3.47 5,354
Money market 1.01 53,717 1.73 54,645
Savings accounts 0.75 24,855 0.95 21,939
Certificates of deposit 2.77 101,056 3.79 112,468
----- -------- ----- --------
Total 1.33% $320,742 2.21% $259,690
===== ======== ===== ========
The weighted average rate is based on interest rates at the end of the period.
Certificates of deposit as of March 31, 2003, mature as follows (in
thousands):
Amount
------
Less than one year $ 71,155
One year to two years 16,752
Two years to three years 5,867
Three years to four years 2,342
Four years to five years 2,659
After five years 2,281
-------
Total $ 101,056
=======
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation ("FDIC").
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
NOW Accounts:
Regular $ 138 $ 211 $ 315
High yield checking 821 4 -
Money market 692 1,307 2,182
Savings accounts 182 292 536
Certificates of deposit 3,642 6,915 8,314
------ ------ ------
Total $ 5,475 $ 8,729 $11,347
====== ====== ======
11. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2003 advances from FHLB totaled $40.0 million, of which $35.0
million had fixed interest rates ranging from 4.650% to 6.380% with a weighted
average interest rate of 4.904%. The remaining $5.0 million adjustable rate
advance had a weighted average interest rate of 1.490%, which is based on 3
month LIBOR plus 11 basis points as quoted by the FHLB-Seattle. The weighted
average interest rate for fixed and adjustable rate advances was 5.53%, 6.25%
and 6.79% for the years ended March 31, 2003, 2002 and 2001, respectively.
At March 31, 2003, the Bank had additional borrowing commitments available of
$104.9 million from the FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB by certain investment and mortgage-backed
securities, stock owned by the Company, deposits with the FHLB, and certain
mortgages on
75
deeds of trust securing such properties as provided in the agreements with the
FHLB. At March 31, 2003, the Bank had a collateral balance of approximately
$90.2 million with the FHLB.
Payments required to service the Bank's FHLB advances during the next five
years ended March 31 are as follows:
2006 - $15.0 million; 2007 - $20.0 million; and 2008 - $5.0 million.
12. FEDERAL INCOME TAXES
Federal income tax provision (benefit) for the years ended March 31 consisted
of the following (in thousands):
2003 2002 2001
------ ------ ------
Current $ 2,930 $ 2,047 $ 2,131
Deferred (942) 89 (487)
------ ------ ------
Total $ 1,988 $ 2,136 $ 1,644
====== ====== ======
A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the years ended March 31 is as follows:
2003 2002 2001
------ ------ ------
Statutory federal income tax rate 34.0% 34.0% 34.0%
ESOP market value adjustment 0.9 0.4 0.1
Interest income on municipal securities (0.6) (0.7) (1.1)
Dividend received deduction (2.6) (2.8) (1.4)
Other, net (0.4) (0.4) -
------ ------ ------
Effective federal income tax rate 31.3% 30.5% 31.6%
====== ====== ======
Taxes related to gains on sales of securities were $55,000, $276,000 and none
for the years ended March 31, 2003, 2002 and 2001, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 2003 and 2002
are as follows (in thousands):
2003 2002
------ ------
Deferred tax assets:
Deferred compensation $ 436 $ 385
Loan loss reserve 907 805
Core deposit intangible 328 291
Accrued expenses 137 142
Accumulated depreciation 129 81
Net realized loss on securities available
for sale 782 -
Net unrealized loss on securities available
for sale - 38
Other 58 97
------ ------
Total deferred tax asset 2,777 1,839
------ ------
Deferred tax liabilities:
FHLB stock dividend (851) (740)
Tax qualified loan loss reserve (47) (94)
Net unrealized gain on securities available
for sale (190) -
Other (368) (398)
------ ------
Total deferred tax liability (1,456) (1,232)
------ ------
Deferred tax asset, net $1,321 $ 607
====== ======
For the fiscal year ended March 31, 1996 and years prior, the Company
determined bad debt expense to be deducted from taxable income based on 8% of
taxable income before such deduction as provided by a provision in the
Internal Revenue
76
Code ("IRC"). In August 1996, the provision in the IRC allowing the 8% of
taxable income deduction was repealed. Accordingly, the Company is required to
use the write-off method to record bad debt in the current period and must
recapture the excess reserve accumulated from April 1, 1987 to March 31, 1996
from use of the 8% method ratably over a six-taxable year period. The income
tax provision from 1987 to 1996 included an amount of $282,000 for the tax
effect on such excess reserves. The IRC regulation allowed the Company the
opportunity to defer the recapture of the excess reserve for a period of up to
two years if the Company meets a residential loan requirement. The Company met
the requirement to delay recapture for the 1998 and 1997 taxable years and
recaptured $47,000 in each of the 2003 and 2002 taxable years.
The Company has qualified under provisions of the IRC to compute federal
income taxes after deductions of additions to the bad debt reserves. At March
31, 2003, the Company had a taxable temporary difference of approximately $1.1
million that arose before 1987 (base-year amount). In accordance with SFAS
No. 109, a deferred tax liability has not been recognized for the temporary
difference. Management does not expect this temporary difference to reverse
in the foreseeable future. No valuation allowance for deferred tax assets was
deemed necessary at March 31, 2003 or 2002 based on the Company's anticipated
future ability to generate taxable income from operations.
13. EMPLOYEE BENEFITS PLANS
Retirement Plan - The Riverview Bancorp, Inc. Employees' Savings and Profit
Sharing Plan (the "Plan") is a defined contribution profit-sharing plan
incorporating the provisions of Section 401(k) of the Internal Revenue Code
("IRC"). The plan covers all employees with at least six months and 500 hours
of service who are over the age of 18. The Company matches 50% of the
employee's elective contribution up to 3% of the employee's compensation.
Company expenses related to the Plan for the years ended March 31, 2003, 2002
and 2001 were $88,000, $76,000 and $66,000, respectively.
Directors Deferred Compensation Plan - Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. This alternative is made
available to them through a nonqualified deferred compensation plan. The
Company accrues annual interest on the unfunded liability under the Directors
Deferred Compensation Plan based upon a formula relating to gross revenues,
which amounted to 7.82%, 8.32% and 8.06% for the years ended March 31, 2003,
2002 and 2001, respectively. The estimated liability under the plan is accrued
as earned by the participant. At March 31, 2003 and 2002, the Company's
aggregate liability under the plan was $1.1 million.
Bonus Programs - The Company maintains a bonus program for senior management.
The senior management bonus represents approximately 5% of fiscal year
profits, assuming profit goals are attained, and is divided among senior
management members in proportion to their salaries. The Company has an
incentive program for branch managers that is paid to the managers based on
the attainment of certain goals. Under these programs, the Company paid
$414,000, $360,000 and $262,000 in bonuses during the years ended March 31,
2003, 2002 and 2001, respectively. Accrued bonuses were $345,000 and $381,000
at March 31, 2003 and 2002, respectively.
Management Recognition and Development Plan - On July 23, 1998, shareholders
of the Company approved the adoption of the MRDP for the benefit of officers,
employees and non-employee directors of the Company.
The objective of the MRDP is to retain personnel of experience and ability in
key positions by providing them with a proprietary interest in the Company.
The Company reserved 142,830 shares of common stock to be issued under the
MRDP which are authorized but unissued shares. Awards under the MDRP were
made in the form of restricted shares of common stock that are subject to
restrictions on transfer of ownership. Compensation expense in the amount of
the fair value of the common stock at the date of the grant to the plan
participant will be recognized over a five year vesting period, with 20%
vesting immediately upon grant. On October 1, 1998, the number of restricted
shares granted under the MRDP were 99,980 shares to executive officers and
42,850 shares to non-employee directors. Compensation expense of $201,000,
$361,000 and $393,000 was recognized for the years ended March 31, 2003, 2002
and 2001, respectively.
Stock Option Plans - In October 1993, the Board of Directors approved a Stock
Option and Incentive Plan ("1993 Plan") for officers, directors, and key
employees, which authorizes the grant of stock options. In July 1994,
shareholders of the Company approved the adoption of the 1993 Plan. The
maximum number of shares of common stock of the Company, which may be issued
under the 1993 Plan, is 244,539 shares. All options granted under this plan
are immediately exercisable and expire October 22, 2003.
In July 1998, shareholders of the Company approved the adoption of the 1998
Stock Option Plan ("1998 Plan") that authorizes the grant of stock options.
The 1998 Plan was effective October 1, 1998 and will expire on the tenth
anniversary of the effective date, unless terminated sooner by the Board. The
maximum number of shares of common stock of the Company that may be issued
under the 1998 plan is 357,075 shares. Options granted under the 1998 plan
vest
77
in five years. On October 1, 1998, under the 1998 Plan, 257,962 shares were
granted to executive officers, non-employee directors and employees.
Stock option activity is summarized in the following table:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding March 31, 2000 425,756 $ 10.40
Grants 15,000 8.83
Options exercised (78,918) 2.82
--------- --------
Outstanding March 31, 2001 361,838 11.99
Grants 5,000 9.30
Options exercised (22,345) 4.09
--------- --------
Outstanding March 31, 2002 344,493 12.46
Grants 15,000 14.00
Forfeited (50,366) 13.75
Options exercised (46,577) 8.96
--------- --------
Outstanding March 31, 2003 262,550 $ 12.92
========= ========
Additional information regarding options outstanding as of March 31, 2003 is
as follows:
Options Outstanding Options Exercisable
--------------------- ---------------------
Weighted Avg Weighted Weighted
Remaining Average Average
Contractual Number Exercise Number Exercise
Exercise Price Life(years) Outstanding Price Exercisable Price
- -------------- ----------- ----------- -------- ----------- --------
$ 6.32 - 9.30 4.71 29,781 $ 8.73 19,782 $ 8.61
10.13 - 14.97 5.51 232,769 13.46 217,369 13.46
----- ------- ----- ------- -----
5.42 262,550 $ 12.92 237,151 $ 13.05
===== ======= ===== ======= =====
14. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP") that covers all
employees with at least one year and 1000 hours of service who are over the
age of 21. Shares are released for allocation and allocated to participant
accounts on December 31 of each year until 2011. ESOP compensation expense
included in salaries and benefits was $372,000, $284,000 and $214,000 for
years ended March 31, 2003, 2002 and 2001, respectively.
In conjunction with the Conversion and Reorganization, the Company purchased
an additional 285,660 shares equal to eight percent of the total number of
shares issued in the offering, for future allocation to eligible participants.
ESOP share activity is summarized in the following table:
Unreleased Allocated
ESOP and Released
Shares Shares Total
------ ------ -------
Balance, April 1, 2000 295,596 185,696 481,292
Allocation December 31, 2000 (24,633) 24,633 -
------ ------ -------
Balance, March 31, 2000 270,963 210,329 481,292
Allocation December 31, 2001 (24,633) 24,633 -
------ ------ -------
Balance, March 31, 2001 246,330 234,962 481,292
Allocation December 31, 2002 (24,633) 24,633 -
------ ------ -------
Balance, March 31, 2003 221,697 259,595 481,292
======= ======= =======
78
15. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Company's Board of Directors authorized 250,000 shares of serial preferred
stock as part of the Conversion and Reorganization completed on September 30,
1997. No preferred shares were issued or outstanding at March 31, 2003 or
2002.
The Bank's Board of Directors authorized 1,000,000 shares of serial preferred
stock as part of the stock offering and reorganization completed on October
22, 1993. No preferred shares were issued or outstanding at March 31, 2003 or
2002.
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 under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk, weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, of core capital to total 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
March 31, 2003.
As of March 31, 2003, 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 Company must
maintain minimum total capital and Tier I capital to risk weighted assets,
core capital to total assets and tangible capital to tangible assets (set
forth in the table below). There are no conditions or events since that
notification that management believes have changed the Company's category.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
79
For Categorized as "Well
Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2003
Total Capital:
(To Risk Weighted Assets) $50,893 15.89% $25,629 8.0% $32,037 10.0%
Tier I Capital:
(To Risk Weighted Assets) 48,154 15.03 N/A N/A 19,222 6.0
Tier I Capital:
(To Adjusted Total Assets) 48,154 11.66 12,389 3.0 20,649 5.0
Tangible Capital:
(To Tangible Assets) 48,154 11.66 6,195 1.5 N/A N/A
For Categorized as "Well
Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2002
Total Capital:
(To Risk Weighted Assets) $51,077 17.04% $23,987 8.0% $29,984 10.0%
Tier I Capital:
(To Risk Weighted Assets) 48,549 16.19 N/A N/A 17,990 6.0
Tier I Capital:
(To Adjusted Total Assets) 48,549 12.52 11,637 3.0 19,395 5.0
Tangible Capital:
(To Tangible Assets) 48,549 12.52 5,819 1.5 N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at March 31, 2003 (in thousands):
Equity $ 48,956
Net unrealized securities loss (370)
Core deposit intangible (369)
Servicing asset (63)
---------
Tangible capital 48,154
General valuation allowance 2,739
---------
Total capital $ 50,893
=========
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation
("FDIC") routinely examine the Company's financial statements as part of their
legally prescribed oversight of the savings and loan industry. Based on their
examinations, these regulators can direct that the Company's financial
statements be adjusted in accordance with their findings. A future examination
by the OTS or the FDIC could include a review of certain transactions or other
amounts reported in the Company's 2003 financial statements. In view of the
uncertain regulatory environment in which the Company operates, the extent, if
any, to which a forthcoming regulatory examination may ultimately result in
adjustments to the 2003 financial statements cannot presently be determined.
16. EARNINGS PER SHARE
Basic earning per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that
are dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed
80
conversion of outstanding stock options. ESOP shares are not considered
outstanding for earnings per share purposes until they are committed to be
released.
Year Ended March 31,
----------------------------
2003 2002 2001
------ ------ ------
Basic EPS computation:
Numerator-Net income $4,359,000 $4,868,000 $3,557,000
Denominator-Weighted average common
shares outstanding 4,365,855 4,572,253 4,579,091
Basic EPS $ 1.00 $ 1.06 $ 0.78
Diluted EPS computation: ========= ========= =========
Numerator-Net Income $4,359,000 $4,868,000 $3,557,000
Denominator-Weighted average
common shares outstanding 4,365,855 4,572,253 4,579,091
Effect of dilutive stock options 50,437 32,940 61,158
Effect of dilutive MRDP 8,441 7,275 -
Weighted average common shares ------ ------ ------
and common stock equivalents 4,424,733 4,612,468 4,640,249
Diluted EPS $ 0.99 $ 1.06 $ 0.77
========= ========= =========
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The Company using available market
information and appropriate valuation methodologies has determined the
estimated fair value amounts. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows (in
thousands):
March 31,
-------------------------------------
2003 2002
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- ------
Assets:
Cash and cash equivalents $ 60,858 $ 60,858 $ 22,492 $ 22,492
Investment securities available for sale 20,426 20,426 18,275 18,275
Mortgage-backed securities held
to maturity 3,301 3,403 4,386 4,485
Mortgage-backed securities available
for sale 13,069 13,069 36,999 36,999
Loans receivable, net 300,310 308,204 286,704 292,685
Loans held for sale 1,501 1,501 1,826 1,826
Mortgage servicing rights 629 629 912 919
FHLB stock 5,646 5,646 5,317 5,317
Liabilities:
Demand - Savings deposits 219,686 219,753 147,222 147,222
Time deposits 101,056 102,322 112,468 112,964
FHLB advances - short-term - - 39,500 39,983
FHLB advances - long-term 40,000 42,267 35,000 35,456
Fair value estimates, methods and assumptions are set forth below.
Investments and Mortgage-Backed Securities - Fair values were based on quoted
market rates and dealer quotes.
81
Loans Receivable - Loans were priced using a discounted cash flow method. The
discount rate used was the rate currently offered on similar products, risk
adjusted for credit concerns or dissimilar characteristics.
No adjustment was made to the entry-value interest rates for changes in credit
of performing loans for which there are no known credit concerns. Management
believes that the risk factor embedded in the entry-value interest rates,
along with the general reserves applicable to the loan portfolio for which
there are no known credit concerns, result in a fair valuation of such loans
on an entry-value basis.
Mortgage Servicing Rights - The fair value of mortgage servicing rights was
determined using the Company's model, which incorporates the expected life of
the loans, estimated cost to service the loans, servicing fees received and
other factors. The Company calculates MSR's fair value by stratifying MSR's
based on the predominant risk characteristics that include the underlying
loan's interest rate, cash flows of the loan, origination date and term. Key
economic assumptions that vary due to changes in market interest rates are
used to determine the fair value of the MSR's and include expected prepayment
speeds, which impact the average life of the portfolio, annual service cost,
annual ancillary income and the discount rate used in valuing the cash flows.
At March 31, 2003, the MSR's fair value totaled $629,000, which was estimated
using a range of PSA (The Bond Market Association's standard prepayment)
values that ranged from 289 to 1,193.
Deposits - The fair value of time deposits with no stated maturity such as
non-interest-bearing demand deposits, savings, NOW accounts, and money market
and checking accounts was equal to the amount payable on demand. The fair
value of time deposits with stated maturity was based on the discounted value
of contractual cash flows. The discount rate was estimated using rates
currently available in the local market.
Federal Home Loan Bank Advances - The fair value for FHLB advances was based
on the discounted cash flow method. The discount rate was estimated using
rates currently available from the FHLB.
Off-Balance Sheet Financial Instruments - The estimated fair value of loan
commitments approximates fees recorded associated with such commitments as of
March 31, 2003 and 2002.
Other - The carrying value of other financial instruments was determined to be
a reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 2003 and 2002.
Although management was not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements on those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments.
18. COMMITMENTS AND CONTINGENCIES
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 balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are conditional, and are honored for up to 45
days subject to the Company's usual terms and conditions. Collateral is not
required to support commitments.
At March 31, 2003, the Company had commitments to originate fixed rate
mortgage loans of $4.4 million at interest rates ranging from 4.0% to 7.25%.
At March 31, 2003, commitments to originate adjustable rate mortgage loans
were $5.8 million at an average interest rate of 5.91%. Undisbursed balance
of mortgage loans closed was $31.2 million at March 31, 2003. Commitments to
originate consumer loans totaled $2.1 million and unused lines of consumer
credit totaled $16.5 million at March 31, 2003. Commercial real estate loan
commitments to originate loans totaled $7.8 million. Undisbursed balance of
commercial real estate mortgage loans closed was $8.0 million at March 31,
2003. Commercial loan commitments totaled $1.3 million and unused commercial
lines of credit totaled $19.7 million.
The allowance for unfunded loan commitments was $175,000 at March 31, 2003.
82
At March 31, 2003, the Company had firm commitments to sell $1.5 million of
residential loans to FHLMC. These agreements are short term fixed rate
commitments and no material gain or loss is likely.
In connection with certain asset sales, the Bank typically makes
representation and warranties about the underlying assets conforming to
specified guidelines. If the underlying assets do not conform to the
specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss. As of March 31, 2003, loans under
warranty totaled $120.8 million, which substantially represents the unpaid
principal balance of the Company's loans serviced for other portfolio. The
Bank believes that the potential for loss under these arrangements is remote.
Accordingly, no contingent liability is recorded in the financial statements.
The Company is 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's financial position, results of operations, or
liquidity.
19. PROPOSED ACQUISITION
On February 6, 2003 the Company announced the signing of a definitive
agreement for the acquisition of Today's Bancorp, Inc. by merger. Upon
completion of the transaction, Today's Bancorp, Inc. shareholders, with a
total of 1.1 million shares of common stock outstanding, may elect to receive
either $13.77 per share in cash or 0.8261 Riverview Bancorp, Inc. shares for
each share of Today's Bancorp, Inc. The exchange ratio is subject to
adjustment under certain conditions. The Company will issue approximately
473,995 shares of its own stock to acquire approximately 45% percent of
Today's Bancorp Inc. outstanding shares at an exchange ratio of 0.8261
Riverview shares for each share of Today's Bancorp Inc. The remaining 55% of
outstanding Today's Bancorp, Inc. shares will be acquired for an aggregate of
approximately $9.6 million in cash. If the elections with respect to the form
of consideration filed by Today's shareholders differs from the 45% stock, 55%
cash ratio, the mix of stock and cash to individual shareholders used to
effect the acquisition could change.
The merger, which has been unanimously approved by the directors of both
companies, is subject to certain conditions, including the approval of the
shareholders of Today's Bancorp, Inc., the receipt of regulatory approvals,
and the registration of the shares to be issued in the merger with the
Securities and Exchange Commission.
The merger is expected to be completed in the third calendar quarter of 2003.
The combined organization will have assets of approximately $540 million,
deposits of approximately $430 million and shareholders' equity of
approximately $60 million.
83
20. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
MARCH 31, 2003 AND 2002
(In thousands) 2003 2002
- -----------------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of $5,663
and $2,145) $ 5,717 $ 2,226
Investment securities available for sale, at fair
value (amortized cost of none and $1,356) - 1,323
Investment in the Bank 48,956 49,283
Other assets 505 1,367
Deferred income taxes (4) 7
--------- ---------
TOTAL ASSETS $ 55,174 $ 54,206
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 118 $ 35
Dividend payable 545 494
Shareholders' equity 54,511 53,677
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,174 $ 54,206
========= =========
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In thousands) 2003 2002 2001
- -----------------------------------------------------------------------------
INCOME:
Interest on investment securities and other
short-term investments $ 48 $ 93 $ 202
Interest on loan receivable from the Bank 193 206 217
Gain on sale of securities 162 - -
-------- -------- --------
Total income 403 299 419
-------- -------- --------
EXPENSE:
Management service fees paid to the Bank 107 28 28
Other expenses 165 159 113
-------- -------- --------
Total expense 272 187 141
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK 131 112 278
PROVISION FOR FEDERAL INCOME TAXES 1 31 87
-------- -------- --------
INCOME OF PARENT COMPANY 130 81 191
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 4,229 4,787 3,366
-------- -------- --------
NET INCOME $ 4,359 $ 4,868 $ 3,557
======== ======== ========
84
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(In thousands) 2003 2002 2001
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,359 $ 4,868 $ 3,557
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of the Bank (4,229) (4,787) (3,366)
Earned ESOP shares 372 284 214
Earned MRDP shares 203 544 416
Net gain on sale of investment securities (162) - -
Changes in assets and liabilities:
(Increase) decrease in other assets 126 (269) 116
Decrease in accrued expenses and other
liabilities 84 54 (1)
-------- -------- --------
Net cash provided by operating activities 753 694 936
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Dividend received from the Bank 6,094 4,000 -
Proceeds from call, maturity, or sale of
investment securities available for sale 1,518 - 2,000
-------- -------- --------
Net cash provided by investing activities 7,612 4,000 2,000
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,127) (2,009) (1,860)
Repurchase of common stock (2,882) (3,123) -
Investment in majority owned subsidiary (282) (191) (122)
Proceeds from exercise of stock options 417 91 222
-------- -------- --------
Net cash used by financing activities (4,874) (5,232) (1,760)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH 3,491 (538) 1,176
CASH, BEGINNING OF YEAR 2,226 2,764 1,588
-------- -------- --------
CASH, END OF YEAR $ 5,717 $ 2,226 $ 2,764
======== ======== ========
85
RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except share data) Three Months Ended
- -----------------------------------------------------------------------------
March 31 December 31 September 30 June 30
-------- ----------- ------------ -------
Fiscal 2003:
Interest income $ 6,377 $ 6,494 $ 6,810 $ 6,780
Interest expense 1,651 1,935 2,107 2,724
Net interest income 4,726 4,559 4,703 4,056
Provision for loan losses 210 190 82 245
Non-interest income (730) 1,994 1,264 1,410
Non-interest expense 3,804 3,695 3,717 3,692
Income before income taxes (18) 2,668 2,168 1,529
Provision for income taxes (39) 896 674 457
-------- ----------- ------------ -------
Net income $ 21 $ 1,772 $ 1,494 $ 1,072
======== =========== ============= =======
Basic earnings per share(1) $ 0.00 $ 0.41 $ 0.34 $ 0.24
======== =========== ============= =======
Diluted earnings per share(1) $ 0.00 $ 0.40 $ 0.34 $ 0.24
======== =========== ============= =======
Fiscal 2002:
Interest income $ 6,641 $ 7,246 $ 7,623 $ 8,330
Interest expense 2,572 3,246 3,950 4,550
Net interest income 4,069 4,000 3,673 3,780
Provision for loan losses 396 210 - 510
Non-interest income 1,461 1,637 2,150 1,303
Non-interest expense 3,614 3,469 3,350 3,520
Income before income taxes 1,520 1,958 2,473 1,053
Provision for income taxes 464 599 777 296
-------- ----------- ------------ -------
Net income $ 1,056 $ 1,359 $ 1,696 $ 757
======== =========== ============= =======
Basic earnings per share(1) $ 0.24 $ 0.30 $ 0.37 $ 0.16
======== =========== ============= =======
Diluted earnings per share(1) $ 0.23 $ 0.30 $ 0.36 $ 0.16
======== =========== ============= =======
(1) Quarterly earnings per share varies from annual earnings per share
due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I - Election
of Directors" contained in the Company's Proxy Statement for the 2003 Annual
Meeting of Stockholders, and "Part I -- Business -- Personnel -- Executive
Officers" of this report, is incorporated herein by reference. Reference is
made to the cover page of this report for information regarding compliance
with Section 16(a) of the Exchange Act.
Item 11. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" under "Proposal I - Election of
Directors" in the Proxy Statement for the 2003 Annual Meeting of Stockholders
is incorporated herein by reference.
86
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Executive Compensation" in the Proxy Statement for the 2003
Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Proposal I - Election
of Directors - Transactions with Management" in the Proxy Statement for the
2003 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Controls and Procedures
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
------------------------------------------------
Company's disclosure controls and procedures (as defined in Section
13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried
out under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management within the 90-day period preceding the filing date
of this annual report. The Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as currently in effect are effective in ensuing that the
information required to be disclosed by the Company in the reports it files or
submits under the Act 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 rules and forms of the Securities and
Exchange Commission.
(b) Changes in Internal Controls: In the fiscal year ended March 31, 2003, the
----------------------------
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
87
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements
See "Part II -Item 8. Financial Statements and Supplementary Data."
2. Financial Statement Schedules
All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4 Form of Certificate of Common Stock of the Registrant*
10.1 Employment Agreement with Patrick Sheaffer**
10.2 Employment Agreement with Ronald A. Wysaske**
10.3 Severance Agreement with Michael C. Yount**
10.4 Severance Agreement with Karen Nelson**
10.5 Severance Agreement with John A. Karas
10.6 Employee Severance Compensation Plan**
10.7 Employee Stock Ownership Plan***
10.8 Management Recognition and Development Plan****
10.9 1998 Stock Option Plan****
10.10 1993 Stock Option and Incentive Plan****
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
99 Certificates Pursuant to Section 906 of the Sabanes-Oxley Act
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-30203), and incorporated herein by reference.
** Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference.
*** Filed as an exhibit to the Registrant's Form 10-K for the year ended
March 31, 1998, and incorporated herein by reference.
**** Filed on October 23, 1998, as an exhibit to the Registrant's Registration
Statement on Form S-8, and incorporated herein by reference.
(b) Reports on Form 8-K
One Current Report on Form 8-K was filed during the quarter ended
March 31, 2003. The Form 8-K was filed on February 6, 2003, which
announced that the Company and the Bank had entered into a
definitive merger agreement with Today's Bancorp, Inc. and its
wholly-owned subsidiary, Today's Bank, Vancouver, Washington.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RIVERVIEW BANCORP, INC.
Date: May 30, 2003
By: /s/ Patrick Sheaffer
--------------------
Patrick Sheaffer
Chairman of the Board
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Patrick Sheaffer By: /s/ Ronald A. Wysaske
-------------------- ---------------------
Patrick Sheaffer Ronald A. Wysaske
Chairman of the Board Executive Vice President, Treasurer
President and Chief Executive Officer and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: May 30, 2003 Date: May 30, 2003
By: /s/ Robert K. Leick By: /s/ Paul L. Runyan
-------------------- -------------------
Robert K. Leick Paul L. Runyan
Director Director
Date: May 30, 2003 Date: May 30, 2003
By: /s/ Edward R. Geiger By: /s/ Gary R. Douglass
-------------------- -------------------
Edward R. Geiger Gary R. Douglass
Director Director
Date: May 30, 2003 Date: May 30, 2003
By: /s/ Michael D. Allen
--------------------
Michael D. Allen
Director
Date: May 30, 2003
89
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Patrick Sheaffer, certify that:
1. I have reviewed this annual report on Form 10-K of Riverview Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 30, 2003
/S/ Patrick Sheaffer
Patrick Sheaffer
President and Chief Executive Officer
90
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Ronald Wysaske, certify that:
1. I have reviewed this annual report on Form 10-K of Riverview Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 30, 2003
/S/ Ronald Wysaske
Ronald Wysaske
Chief Financial Officer
91
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Riverview Bancorp, Inc.
Subsidiaries (a) Percentage State of Incorporation
- ---------------- ---------- ----------------------
Owned
-----
Riverview Community Bank 100% Federal
Riverview Services, Inc. (b) 100% Washington
Riverview Asset Management Corp. (b) 90% Washington
(a) The operation of the Registrant's wholly and majority owned subsidiaries
are included in the Registrant's Financial Statements contained in Item
8 of this Form 10-K.
(b) This corporation is a subsidiary of Riverview Community Bank.
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Exhibit 23
Consent of Independent Auditors
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-66049 and 333-38887 on Form S-8 and 333-104538 on Form S-4 of Riverview
Bancorp, Inc., of our report dated May 2, 2003, appearing in the Annual
Report on Form 10-K of Riverview Bancorp, Inc. for the year ended March 31,
2003.
/s/DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 4, 2003
93
EXHIBIT 99
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley
act of 2002 and in connection with this annual report on Form 10-K that:
1. the report fully complies with the requirements of sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all material
respects, the company's financial condition and results of operations.
/S/ Patrick Sheaffer /S/ Ronald Wysaske
Patrick Sheaffer Ronald Wysaske
Chief Executive Officer Chief Financial Officer
Dated: May 30, 2003
94