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, 2002 | |
| 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.
| Washington (State or other jurisdiction of incorporation or organization) |
91-1838969 (I.R.S. Employer I.D. Number) |
|
| 900 Washington St., Ste. 900,Vancouver, Washington (Address of principal executive offices) |
98660 (Zip Code) |
|
| Registrant's telephone number, including area code: | (360) 693-6650 |
|
| Securities registered pursuant to Section 12(b) of the Act: | None |
|
| Securities registered pursuant to Section 12(g) of the Act: | Common Stock, par value $.01 per share (Title of Class) |
Check 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 past 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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained herein, and no disclosure will 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
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 May 17, 2002, was approximately $62,908,814 (4,458,456 shares at $14.11 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 Employee Stock Ownership Plan) are affiliates. As of May 17, 2002, there were issued and outstanding 4,458,456 shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
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Part I
Item 1. Business
General
Riverview Bancorp, Inc. ("Company"), a Washington corporation, was organized on June 23, 1997 for the purpose of becoming the holding company for Riverview Community Bank (the "Bank"), upon the Bank's 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 effective June 29, 1998. At March 31, 2002, the Company had total assets of $392.1 million, total deposits of $259.7 million and shareholders' equity of $53.7 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 5.22% and 0.93% of the loan portfolio, respectively, in fiscal year 1998 to 27.48% and 7.17% respectively, in fiscal 2002. The Company continues to change the composition of its loan portfolio and the deposit base as part of its migration to commer cial 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
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reviewed for business development and cost saving purposes. The Company continues to experience growth in the 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 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 Portla nd, Oregon.
Several businesses are located in the Vancouver area because of the favorable tax structure and relatively 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 Electronics, 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 faces strong competition from many financial institutions for deposits and loan originations.
Lending Activities
General. At March 31, 2002, the Company's total net loans receivable, including loans held for sale, amounted to $288.5 million, or 73.6% 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.
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| At March 31, |
||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
||||||
| Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
Amount |
Percent |
|
| (Dollars in thousands) | ||||||||||
| Real estate loans: | ||||||||||
| One- to- four family(1) | $ 73,536 | 22.62% | $117,152 | 35.67% | $102,542 | 37.61% | $ 83,275 | 39.03% | $ 96,225 | 51.93% |
| Multi-family | 9,895 | 3.04 | 11,073 | 3.37 | 10,921 | 4.01 | 7,558 | 3.54 | 4,790 | 2.58 |
| Construction one-to-four family |
71,148 | 21.89 | 60,041 | 18.28 | 49,338 | 18.10 | 45,524 | 21.34 | 35,003 | 18.89 |
| Construction multi-family | 4,000 | 1.23 | 4,514 | 1.37 | 4,669 | 1.71 | 4,209 | 1.97 | 5,352 | 2.89 |
| Construction commercial | 5,230 | 1.61 | 6,806 | 2.07 | 3,597 | 1.32 | 6,184 | 2.90 | -- | -- |
| Land | 27,406 | 8.43 | 24,230 | 7.38 | 25,475 | 9.34 | 24,932 | 11.68 | 16,431 | 8.87 |
| Commercial real estate | 84,094 |
25.87 |
56,540 |
17.21 |
42,871 |
15.72 |
22,181 |
10.40 |
9,667 |
5.22 |
| Total real estate loans | 275,309 | 84.69 | 280,356 | 85.35 | 239,413 | 87.81 | 193,863 | 90.86 | 167,468 | 90.38 |
| Commercial | 23,319 | 7.17 | 23,099 | 7.03 | 15,976 | 5.87 | 4,049 | 1.90 | 1,732 | 0.93 |
| Consumer loans: | ||||||||||
| Automobile loans | 2,132 | 0.66 | 3,223 | 0.98 | 2,875 | 1.05 | 3,146 | 1.47 | 2,829 | 1.53 |
| Savings account loans | 515 | 0.16 | 440 | 0.13 | 356 | 0.13 | 490 | 0.23 | 653 | 0.35 |
| Home equity loans | 21,598 | 6.65 | 18,761 | 5.71 | 11,148 | 4.09 | 9,096 | 4.26 | 9,885 | 5.33 |
| Other consumer loans | 2,134 |
0.67 |
2,596 |
0.80 |
2,864 |
1.05 |
2,728 |
1.28 |
2,741 |
1.48 |
| Total consumer loans | 26,379 | 8.14 | 25,020 | 7.62 | 17,243 | 6.32 | 15,460 | 7.24 | 16,108 | 8.69 |
| Total loans and loans held for sale |
325,007 | 100.00% | 328,475 | 100.00% | 272,632 | 100.00% | 213,372 | 100.00% | 185,308 | 100.00% |
| Less: | ||||||||||
| Undisbursed loans in process |
30,970 | 26,223 | 18,880 | 22,278 | 19,354 | |||||
| Unamortized loan origination fees, net of direct costs |
2,970 | 3,475 | 3,355 | 2,770 | 2,340 | |||||
| Unearned discounts | -- | -- | 1 | 1 | 2 | |||||
| Allowance for loan losses | 2,537 |
1,916 |
1,362 |
1,146 |
984 |
|||||
| Total loans receivable, net(1) | $288,530 | $296,861 | $249,034 | $187,177 | $162,628 | |||||
(1) Includes loans held for sale of $1.8 million, $569,000, zero, $341,000 and $1.4 million at March 31, 2002, 2001, 2000,
1999 and 1998, respectively.
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 current appraised value or cost, whichever is lower, 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."
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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 construction loans and (iii) construction/permanent loans. Subject to market 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.
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The composition of the Company's construction loan portfolio was as follows:
| At March 31, |
||||
| 2002 |
2001 |
|||
| Amount(1) |
Percent |
Amount(1) |
Percent |
|
| (Dollars in thousands) | ||||
| Speculative construction | $ 26,791 | 28.43% | $ 27,925 | 33.26% |
| Commercial/multi-family construction | 13,605 | 14.44 | 9,131 | 10.88 |
| Custom/presold construction | 13,094 | 13.89 | 10,064 | 11.99 |
| Construction/permanent | 26,078 | 27.67 | 22,754 | 27.11 |
| Construction/land | 14,673 |
15.57 |
14,068 |
16.76 |
| Total | $ 94,241 | 100.00% | $ 83,942 | 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, 2002, the Company had one borrower with aggregate outstanding speculative loan balances of more than $1.0 million, which totaled $1.7 million and was performing according to original terms.
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, 2002, the largest short-term custom construction loan and presold construction loan had outstanding balances of $439,000 and $229,000, 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 permanent loan's interest rate is set at a market rate. See "-- Mortgage Brokerage." See "-- Loan Originations, Sales and Purchases" and "-- Mortgage Loan Servicing." At March 31, 2002, the largest outstanding construction/permanent loan had an outstanding balance of $543,000 and was performing according to its original terms.
The Company also provides construction financing for non-residential properties (i.e., construction multi-family and construction 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, is generally considered to involve 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 i naccurate, the Company may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, the
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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 $13.6 million commercial construction loans outstanding at March 31, 2002, the loan commitment amount ranges between $499,000 and $4.5 million. At March 31, 2002, the largest outstanding construction commercial loan had an outstanding balance of $3.7 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, 2002, the largest multi-family mortgage had an outstanding loan balance of $1.2 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 st atements. At March 31, 2002, the largest outstanding land loan was $1.7 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 $40,000 and $500,000. At March 31, 2002, the largest commercial real estate loan had an outstanding balance of $5.3 million and is secured by an office building located in the Company's primary market area. At March 31, 2002, 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-
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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 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, 2002, the Company had three commercial real estate loans accounted for on a nonaccrual basis in the amount of $297,000.
Commercial Lending. The Company's commercial loan portfolio has increased to 7.17% of the total loan portfolio at March 31, 2002 from 0.93% at March 31, 1998. The Company was able to increase the balance of outstanding commercial loans and commitments due to the strong local economy, and the consolidation of some local competitors offering commercial loans. The Company also hired several experienced commercial bankers from competitors in the local market. The growth in the commercial loan portfolio from 7.03% at March 31, 2001 to 7.17% at March 31, 2002 reflects the slow down experienced in the economy.
Commercial loans are generally made to customers who are well known to the Company and are generally secured by business equipment or other property. 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.
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.
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 guarant ors), while liquidation of collateral is a secondary and often insufficient source of repayment. At March 31, 2002, the Company had one commercial loan accounted for on a nonaccrual basis in the amount of $54,000.
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, 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 the 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
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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.
Loan Maturity. The following table sets forth certain information at March 31, 2002 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.
Within One Year |
After One Year to 3 Years |
After 3 Years to 5 Years |
After 5 Years to 10 Years |
Beyond 10 Years |
Total |
|
| (In thousands) | ||||||
| Residential one- to- four family: | ||||||
| Adjustable rate | $ 141 | $ - | $ 36 | $ 838 | $ 18,706 | $ 19,721 |
| Fixed rate | 260 | 7,400 | 15,402 | 10,147 | 20,606 | 53,815 |
| Construction: | ||||||
| Adjustable rate | 40,204 | 21,689 | -- | -- | -- | 61,893 |
| Fixed rate | 29,254 | 1,419 | 1,675 | -- | -- | 32,348 |
| Other real estate: | ||||||
| Adjustable rate | 12,428 | 4,153 | 5,115 | 9,665 | 6,582 | 37,943 |
| Fixed rate | 3,579 | 13,126 | 22,182 | 20,317 | 10,385 | 69,589 |
| Commercial: | ||||||
| Adjustable rate | 15,058 | 892 | 628 | 580 | -- | 17,158 |
| Fixed rate | 49 | 1,286 | 4,590 | 236 | -- | 6,161 |
| Consumer: | ||||||
| Adjustable rate | 398 | 40 | 725 | 450 | 18,041 | 19,654 |
| Fixed rate | 1,245 |
1,547 |
1,709 |
460 |
1,764 |
6,725 |
| Total gross loans | $102,616 | $ 51,552 | $ 52,062 | $ 42,693 | $ 76,084 | $325,007 |
The following table sets forth the dollar amount of all loans due one year after March 31, 2002, which, have fixed interest rates and have floating or adjustable interest rates.
| Fixed- Rates |
Floating- or Adjustable-Rates |
|||
| (In thousands) | ||||
| Residential one- to- four family | $ 53,555 | $ 19,580 | ||
| Construction loans | 3,094 | 21,689 | ||
| Other real estate loans | 66,010 | 25,515 | ||
| Commercial | 6,112 | 2,100 | ||
| Consumer | 5,480 |
19,256 |
||
| Total | $134,251 | $ 88,140 | ||
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
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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 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, 2002, the Company had outstanding commitments to originate loans in the amount of $7.6 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, 2002 and 2001, the Company's total loan originations were $273.9 million and $206.5 million, respectively, of which 61.8% and 56.4%, respectively, were subject to periodic interest rate adjustment and 38.2% and 43.6% were fixed-rate loans, respectively.
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. Also during the year ended March 31, 2002, the Company securitized $40.3 million of fixed rate single family mortgages through FHLMC. The Company may originate fixed rate loans for investment when funded with long-term funds to mitigate interest rate risk.
Between the time that residential one- to- four family mortgage loan origination commitments are issued and the time the loans are sold, the Company is exposed to movements in the price (due to changes in interest rates) of such loans (or of securities into which such loans are sometimes converted). Differences between the volume or timing of actual loan originations and in management's estimates or in actual sales of the loans can expose the Company to significant losses. When the Company has issued a commitment to fund a fix rate one- to- four family mortgage the loan is generally sold to FHLMC under a forward commitment with delivery to FHLMC within ten days of funding. 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
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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.
| For the Years Ended March 31, |
||||
| 2002 |
2001 |
2000 |
||
| (In thousands) | ||||
| Total net loans receivable and loans held for sale at beginning of period |
$296,861 |
$249,034 |
$187,177 |
|
| Loans originated: | ||||
| Mortgage loans: | ||||
| Residential one- to- four family | 40,398 | 23,978 | 20,609 | |
| Multi-family | 219 | 1,087 | 490 | |
| Construction one- to- four family | 81,809 | 71,602 | 67,955 | |
| Land and commercial real estate | 14,585 | 31,957 | 48,057 | |
| Construction Non-residential | 57,942 | 9,345 | -- | |
| Commercial | 55,213 | 47,426 | 14,717 | |
| Consumer | 23,697 |
21,062 |
5,004 |
|
| Total loans originated | 273,863 | 206,457 | 156,832 | |
| Residential one- to- four family loans sold | (35,701) | (7,563) | (4,224) | |
| Repayment of principal | (203,466) | (147,415) | (88,179) | |
| Loans securitized | (40,347) | -- | -- | |
| Decrease in other items, net | (2,680) |
(3,652) |
(2,572) |
|
| Net increase in loans | (8,331) |
47,827 |
61,857 |
|
| Total net loans receivable and loans held for sale at end of period |
$288,530 | $296,861 | $249,034 | |
Mortgage Brokerage. In addition to originating mortgage loans for retention in its portfolio, the Company employs seven commissioned brokers who originate mortgage loans (including construction loans) for various mortgage companies predominately in the Portland metropolitan areas, 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, 2002, brokered loans totaled $188.4 million (including $88.4 million brokered to the Company). Gross fees of $1.8 million (excluding the por tion of fees shared with the commissioned brokers) were recognized for the year ended March 31, 2002.
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, 2002, total loans serviced for others were $123.6 million.
In 1994, the Company purchased the servicing rights to an underlying portfolio of residential mortgage loans secured by
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properties predominately located in the Seattle Metropolitan Area. At March 31, 2002, the carrying value of these purchased servicing rights was $79,000 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 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 $3.0 million of net deferred loan fees at March 31, 2002. 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 Consoli dated 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 affai rs.
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.
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| At March 31, |
|||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
|
| (Dollars in thousands) | |||||
| Loans accounted for on a nonaccrual basis: | |||||
| Residential real estate | $ 830 | $ 153 | $ 833 | $1,052 | $ 401 |
| Commercial real estate | 297 | -- | -- | -- | -- |
| Land | 180 | -- | 320 | -- | -- |
| Commercial | 54 | 50 | 99 | 208 | 105 |
| Consumer | 39 |
116 |
26 |
33 |
-- |
| Total | 1,400 |
319 |
1,278 |
1,293 |
506 |
| Accruing loans which are contractually past due 90 days or more |
122 |
226 |
-- |
5 |
11 |
| Total of nonaccrual and 90 days past due loans |
1,522 |
545 |
1,278 |
1,298 |
517 |
| Real estate owned (net) | 853 |
473 |
65 |
30 |
-- |
| Total nonperforming assets | $ 2,375 | $ 1,018 | $ 1,343 | $ 1,328 | $ 517 |
| Total loans delinquent 90 days or more to net loans |
0.53% | 0.18% | 0.51% | 0.69% | 0.32% |
| Total loans delinquent 90 days or more to total assets |
0.39 | 0.13 | 0.37 | 0.43 | 0.19 |
| Total nonperforming assets to total assets | 0.61 | 0.24 | 0.39 | 0.44 | 0.19 |
The gross amount of interest income on the nonaccrual loans that would have been recorded during the year ended March 31, 2002 if the nonaccrual loans had been current in accordance with their original terms was approximately $53,000. For the year ended March 31, 2002, no interest was earned on the nonaccrual loans and included in interest and fees on loans receivable interest income.
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.
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:
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| At or For the Year Ended March 31, |
|||
| 2002 |
2001 |
||
| (In thousands) | |||
| Substandard assets | $3,724 | $ 863 | |
| Doubtful assets | -- | 5 | |
| Loss assets | -- | -- | |
| General loss allowances | 2,537 | 1,916 | |
| Specific loss allowances | -- | -- | |
| Charge-offs | 439 | 413 | |
The substandard assets at March 31, 2002 are made up of two residential construction loans totaling $648,000, two one- to- four residential loans totaling $285,000 and eleven commercial borrowers with loans totaling $2.8 million being classified as substandard.
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, 2002, the Company owned six properties with a recorded value of $853,000 compared to $473,000 at March 31, 2001. The $853,000 recorded value is made up of two land loans totaling $67,000 and four single family loans of $786,000.
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 CEO, Chief Financial Officer, Executive VP Sales & Production, Senior VP Lending and Senior VP Business & Professional Banking. Credit officers are expected to monitor their portfolios and make recommendations to change loan grades whenev er those 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 utilizes 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.
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
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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.
The year ended March 31, 2002 included a transaction that affected the allowance for loan losses. The sale of $40.3 million in fixed rate single family residential loans to FHLMC reduced the required allowance on mortgage loans. In conjunction with the sale, $81,000 of allowance was reclassified as part of the basis of the resulting mortgage-backed securities.
At March 31, 2002, the Company had an allowance for loan losses of $2.5 million, or 0.78% of total outstanding loans at that date. Based on past experience and future expectations, 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.
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The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated.
| Year Ended March 31, |
|||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
|
| (Dollars in thousands) | |||||
| Balance at beginning of period | $ 1,916 |
$ 1,362 |
$ 1,146 |
$ 984 |
$ 831 |
| Provision for loan losses | 1,116 | 949 | 675 | 240 | 180 |
| Recoveries: | |||||
| Commercial | -- | -- | 1 | -- | -- |
| Consumer | 25 |
18 |
28 |
7 |
11 |
| Total recoveries | 25 |
18 |
29 |
7 |
11 |
| Charge-offs: | |||||
| Residential real estate | 88 | 226 | 48 | 28 | -- |
| Commercial | 185 | 27 | 282 | -- | -- |
| Consumer | 166 |
160 |
158 |
57 |
38 |
| Total charge-offs | 439 |
413 |
488 |
85 |
38 |
| Net charge-offs | 414 | 395 | 459 | 78 | 27 |
| Dispositions (1) | 81 |
-- |
-- |
-- |
-- |
| Balance at end of period | $ 2,537 | $ 1,916 | $ 1,362 | $ 1,146 | $ 984 |
| Ratio of allowance to total loans outstanding at end of period |
0.78% | 0.58% | 0.50% | 0.54% | 0.53% |
| Ratio of net charge-offs to average net loans outstanding during period |
0.14 | 0.14 | 0.21 | 0.04 | 0.02 |
| Ratio of allowance to total of nonaccrual and 90 days past due loans |
166.69 | 351.56 | 106.58 | 88.30 | 190.32 |
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The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated.
| At March 31, |
||||||||||
| 2002 |
2001 |
2000 |
1999 |
1998 |
||||||
Amount |
Loan Category as a Percent of Total Loans |
Amount |
Loan Category as a Percent of Total Loans |
Amount |
Loan Category as a Percent of Total Loans |
Amount |
Loan Category as a Percent of Total Loans |
Amount |
Loan Category as a Percent of Total Loans |
|
| (Dollars in thousands) | ||||||||||
| Real estate- | ||||||||||