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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, 2004
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
- ------------------------------------------------- -----------------------
(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
-----------------------
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
-----------------------
(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 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 X No
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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, 2003 was approximately $89,352,396 (4,727,640 shares at
$18.90 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 11, 2004, there were issued and outstanding 4,777,911 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 2004
Annual Meeting of Shareholders (Part III).
PART I
Item 1. Business
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General
Riverview Bancorp, Inc. ("the Company"), a Washington corporation, was
organized on June 23, 1997 for the purpose of becoming the holding company for
Riverview Savings Bank FSB, upon 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. On July
18, 2003, the Company completed the acquisition of Today's Bancorp, Inc.
("Today's Bancorp"). The acquisition of Today's Bancorp's $122.3 million of
assets and $105.1 million of deposits were accounted for using the purchase
method of accounting. At March 31, 2004, the Company had total assets of
$520.5 million, total deposits of $409.1 million and shareholders' equity of
$65.2 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 15.72% and 5.87% of the loan portfolio,
respectively, in fiscal 2000 to 42.29% and 13.73%, respectively, in fiscal
2004. The Company continues to change the composition of its loan portfolio
and the deposit base as part of its transition to commercial banking. The
Company's strategic plan includes targeting the commercial banking customer
base in our primary market area, 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
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 nine of its
thirteen branches are located in Clark County, for most of the 1990s was 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 Company's management.
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 in house
processing of checks and production of images has supported the Bank's
increased service to customers and at the same time has increased efficiency.
The Company continues to experience growth in customer use 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 thirteen
branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (six 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 and the Cascade Park lending office 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.
Lending Activities
General. At March 31, 2004, the Company's total net loans receivable,
including loans held for sale, amounted to $381.5 million, or 73.3% of total
assets at that date. The principal lending activity of the Company is the
origination of mortgage loans through its mortgage banking activities,
including residential, 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,
-----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------- --------------- --------------- -------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)
Real estate loans:
One- to four-
family (1) $ 44,601 10.61% $ 59,999 17.72% $ 73,536 22.62% $117,152 35.67% $102,542 37.61%
Multi-family 5,074 1.21 6,313 1.86 9,895 3.04 11,073 3.37 10,921 4.01
Construction one- to
four- family 78,094 18.58 70,397 20.79 71,148 21.89 60,041 18.28 49,338 18.10
Construction multi-
family - - 2,100 0.62 4,000 1.23 4,514 1.37 4,669 1.71
Construction commercial 1,453 0.35 4,531 1.34 5,230 1.61 6,806 2.07 3,597 1.32
Land 27,020 6.43 34,630 10.23 27,406 8.43 24,230 7.38 25,475 9.34
Commercial real estate 177,785 42.29 101,672 30.02 84,094 25.87 56,540 17.21 42,871 15.72
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Total real estate
loans 334,027 79.47 279,642 82.58 275,309 84.69 280,356 85.35 239,413 87.81
Commercial 57,702 13.73 34,239 10.11 23,319 7.17 23,099 7.03 15,976 5.87
Consumer loans:
Automobile loans 1,622 0.39 1,458 0.43 2,132 0.66 3,223 0.98 2,875 1.05
Savings account loans 333 0.08 319 0.09 515 0.16 440 0.13 356 0.13
Home equity loans 23,778 5.66 21,088 6.23 21,598 6.65 18,761 5.71 11,148 4.09
Other consumer loans 2,864 0.67 1,927 0.56 2,134 0.67 2,596 0.80 2,864 1.05
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Total consumer loans 28,597 6.80 24,792 7.31 26,379 8.14 25,020 7.62 17,243 6.32
Total loans and loans
held for sale 420,326 100.00% 338,673 100.00% 325,007 100.00% 328,475 100.00% 272,632 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loans in
process 31,204 31,222 30,970 26,223 18,880
Unamortized loan
origination fees, net
of direct cost 3,107 2,901 2,970 3,475 3,355
Unearned discounts - - - - 1
Allowance for loan
losses 4,481 2,739 2,537 1,916 1,362
-------- -------- -------- -------- --------
Total loans receivable,
net (1) $381,534 $301,811 $288,530 $296,861 $249,034
======== ======== ======== ======== ========
- --------------
(1) Includes loans held for sale of $407,000, $1.5 million, $1.8 million, $569,000 and none at March 31,
2004, 2003, 2002, 2001 and 2000, 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, and the Company also offers 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, these 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."
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. 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, these 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. 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 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 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.
5
At March 31, 2004 and 2003, the composition of the Company's construction loan
portfolio was as follows:
At March 31,
--------------------------------------
2004 2003
------------------ ------------------
Amount(1) Percent Amount(1) Percent
-------- ------- -------- -------
(Dollars in thousands)
Speculative construction $37,017 39.80% $32,379 33.24%
Commercial/multi-family construction 1,453 1.56 10,750 11.04
Custom/presold construction 15,949 17.15 7,286 7.48
Construction/permanent 25,128 27.02 26,590 27.30
Construction/land 13,461 14.47 20,412 20.94
------- ------ ------- ------
Total $93,008 100.00% $97,417 100.00%
======= ====== ======= ======
(1) Includes loans in progress.
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,
2004, the Company had seven borrowers with aggregate outstanding speculative
loan balances of more than $1.0 million, which totaled $10.9 million and were
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 from 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, 2004, the largest custom construction loan
and presold construction loan had outstanding balances of $1,920,000 and
$297,000, 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 rate permanent loan's interest rate is set at a
market rate and for adjustable rate loans, the interest rates adjust on their
first adjustment date. See " Mortgage Brokerage," " Loan Originations, Sales
and Purchases" and " Mortgage Loan Servicing." At March 31, 2004, the largest
outstanding construction/permanent loan had an outstanding balance of $1.2
million 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 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
6
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 $1.5 million commercial construction loans
outstanding at March 31, 2004, the loan commitment amount was $2.1 million. At
March 31, 2004, the outstanding construction commercial loan had an
outstanding balance of $1.5 million and was performing according to its
original terms.
Multi-Family Lending. Multi-family mortgage loans generally have terms up to
25 years with 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, 2004, the largest multi-family mortgage loan
had an outstanding loan balance of $2.5 million and was performing according
to it's 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, are 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, 2004, the largest outstanding land loan was $2.9
million and was performing according to it's original terms.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to four- family residential mortgage loans because these loans are
advanced upon the predicted future value of the developed property. If the
estimate of these 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, 2004, the largest commercial real estate loan had an
outstanding balance of $7.7 million and is secured by an office building
located in the Company's primary market area. At March 31, 2004, 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 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, 2004, the Company
had no commercial real estate loans accounted for on a
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nonaccrual basis.
Commercial Lending. The Company's commercial loan portfolio has increased to
13.73% of the total loan portfolio at March 31, 2004 from 5.87% at March 31,
2000 and 10.11% at March 31, 2003. The Company has been 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.
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
have a term of one year or less. Lines of credit are made at variable rates
of interest equal to a negotiated margin above an index rate and term loans
are at 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, 2004, the Company had twelve commercial loans on
nonaccrual status totaling $851,000.
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
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, 2004, one consumer loan for $65,100 was on
nonaccrual status.
Loan Maturity. The following table sets forth certain information at March
31, 2004 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
8
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 $ - $ - $ 539 $ 693 $22,072 $ 23,304
Fixed rate 1,249 7,389 4,086 2,624 5,948 21,296
Construction:
Adjustable rate 48,553 16,602 - - - 65,155
Fixed rate 27,709 144 - - - 27,853
Other real estate:
Adjustable rate 23,198 12,590 9,928 66,686 13,768 126,170
Fixed rate 12,744 21,121 22,729 11,740 1,913 70,247
Commercial:
Adjustable rate 31,034 2,083 3,888 2,884 - 39,889
Fixed rate 6,073 7,036 4,450 348 - 17,907
Consumer:
Adjustable rate 562 293 24 2,573 18,715 22,167
Fixed rate 324 1,516 2,076 1,159 1,263 6,338
-------- ------- ------- ------- ------- --------
Total gross loans $151,446 $68,774 $47,720 $88,707 $63,679 $420,326
======== ======= ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due within one
year of March 31, 2004, 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 $ 20,047 $ 23,304
Construction loans 144 16,602
Other real estate loans 57,503 102,972
Commercial 11,834 8,855
Consumer 6,014 21,605
--------- --------
Total $ 95,542 $173,338
========= ========
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 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,
9
the adequacy of the value of the property that will secure the loan, if any
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 any 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,
2004, the Company had outstanding commitments to originate loans in the amount
of $9.0 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, 2004 and 2003, the Company's total
loan originations were $375.8 million and $298.4 million, respectively, of
which 70.4% and 63.2%, respectively, were subject to periodic interest rate
adjustment and 29.6% and 36.8%, 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 these 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 these 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 with customers and FHLMC 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 rate locks
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.
10
The following table shows total loans originated, sold and repaid during the
periods indicated.
For the Years Ended March 31,
------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Total net loans receivable and loans
held for sale at beginning of period $301,811 $288,530 $296,861
-------- -------- --------
Loans originated:
Mortgage loans:
One- to four- family 35,963 45,004 40,398
Multi-family 2,065 6,936 219
Construction one- to four- family 104,913 87,049 81,809
Construction commercial real estate 482 3,267 14,585
Construction multi-family 341 2,597 -
Land and commercial real estate 99,508 61,671 57,942
Commercial 101,432 68,083 55,213
Consumer 31,135 23,784 23,697
-------- -------- --------
Total loans originated 375,839 298,391 273,863
Residential one- to four- family
loans sold (51,567) (56,097) (35,701)
Repayment of principal (329,443) (227,101) (203,466)
Loans securitized - - (40,347)
Today's Bank acquisition 85,610 - -
Decrease in other items, net (716) (1,912) (2,680)
-------- -------- --------
Net increase (decrease) in loans 79,723 13,281 (8,331)
-------- -------- --------
Total net loans receivable and loans held
for sale at end of period $381,534 $301,811 $288,530
======== ======== ========
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 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, 2004, brokered loans totaled
$183.0 million (including $67.6 million brokered to the Company). Gross fees
of $1.5 million (excluding the portion of fees shared with the commissioned
brokers) were recognized for the year ended March 31, 2004. The interest rate
environment has a strong influence on the loan volume and amount of fees
generated from the mortgage broker activity. In general, during periods of
rising interest rates such as we are currently experiencing, the volume of
loans and amount of loan fees generally decreases as a result of slower
mortgage loan demand. Conversely, during periods of falling interest rates,
the volume of loans and amount of loan fees generally increase as a result of
the increased mortgage loan demand.
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, 2004, total loans serviced for
others were $133.5 million.
11
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, 2004, the carrying value of these
purchased servicing rights was $20,000 and was being amortized over the life
of the underlying loan servicing.
The value of loans serviced for others is significantly affected by interest
rates. In general, during periods of falling interest rates, mortgage loans
repay at faster rates and the value of the mortgage servicing declines.
Conversely, during periods of rising interest rates, the value of the mortgage
servicing rights generally increases as a result of slower rates of
repayments. The Company may be required to recognize this decrease in value
by taking a charge against its earnings, which would cause its profits to
decrease. The Company has experienced a decrease and an increase in
prepayments of mortgages as interest rates have dramatically changed during
the past two years, which has impacted the value of the servicing asset.
Accordingly, the Company recognized an $307,000 increase in its servicing
portfolio for fiscal year 2004 reflecting the increase in interest rates and
slowing of prepayments and a $320,000 impairment charges for fiscal 2003
reflecting the decrease in mortgage interest rates and the increase in
prepayments. We believe, based on historical experience, that the amount of
prepayments and the related impairment charges should decrease as interest
rates increase.
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 $3.1 million of net deferred loan fees at March 31,
2004. The Company also receives loan servicing fees on the loans it sells and
on which it retains the servicing rights. See Note 10 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 that 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 the circumstances.
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.
12
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, Accounting for Certain Investments in Debt and Equity
Securities.
At March 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Residential real estate $ 24 $301 $ 830 $ 153 $ 833
Commercial real estate 309 - 297 - -
Land 31 - 180 - 320
Commercial 872 - 54 50 99
Consumer 65 22 39 116 26
------ ---- ------ ------- ------
Total 1,301 323 1,400 319 1,278
------ ---- ------ ------- ------
Accruing loans which are
contractually past due 90
days or more - - 122 226 -
------ ---- ------ ------- ------
Total of nonaccrual and
90 days past due loans 1,301 323 1,522 545 1,278
------ ---- ------ ------- ------
Real estate owned (net) 742 425 853 473 65
------ ---- ------ ------- ------
Total nonperforming
assets $2,043 $748 $2,375 $1,018 $1,343
====== ==== ====== ====== ======
Total loans delinquent
90 days or more to net
loans 0.34% 0.11% 0.53% 0.18% 0.51%
Total loans delinquent
90 days or more to
total assets 0.25 0.08 0.39 0.13 0.37
Total nonperforming assets
to total assets 0.39 0.18 0.61 0.24 0.39
The gross amount of interest income on the nonaccrual loans that would have
been recorded during the year ended March 31, 2004 if the nonaccrual loans had
been current in accordance with their original terms was approximately
$66,000. For the year ended March 31, 2004, 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
$4.9 million at March 31, 2004 and $2.4 million at March 31, 2003.
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
13
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:
At or For the Year
Ended March 31,
------------------
2004 2003
------ ------
(In thousands)
Substandard assets $4,932 $2,740
Doubtful assets 803 -
Loss assets - -
General loss allowances 4,481 2,739
Specific loss allowances - -
Charge-offs 1,182 428
The loans classified as substandard assets at March 31, 2004 comprise one land
development loan totaling $97,000, one home equity line of credit totaling
$65,000, 11 real estate secured commercial loans totaling $1.3 million and 49
commercial loans totaling $3.5 million. The acquisition of Today's Bancorp
significantly increased the amount and number of loans classified substandard.
Loans classified as doubtful assets at March 31, 2004 consisted of one real
estate secured loan totaling $475,000, and eight commercial loans totaling
$328,000.
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,
2004, the Company owned three properties with a recorded value of $742,000
compared to $425,000 at March 31, 2003. The $742,000 recorded value consists
of two land loans totaling $325,000 and one single family loan of $417,000.
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,
President and Chief Operating 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 management has deemed it desirable to closely monitor the loan.
14
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.
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 that may ultimately result in a
loan default and eventual loss well in advance of a lender's knowledge.
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 changes in the economy. 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 allowance.
The increase in the balance of the allowance for loan losses at March 31, 2004
reflects the acquisition of Today's Bancorp, Inc., the proportionate increase
in loan balances, the change in mix of loan balances, the increase in
substandard assets and a change in loss rate when compared to March 31, 2003.
The acquisition of Today's Bancorp, Inc. added $2.6 million to the allowance
for loan losses and approximately $900,000 of the charge-offs was related to
loans acquired in the acquisition. The mix of the loan portfolio showed an
increase in the balances of commercial, commercial real estate loans, and
construction, and consumer loans at March 31, 2004 as compared to balances at
March 31, 2003. Substandard assets increased by $3.0 million to $5.7 million
at March 31, 2004 compared to $2.7 million at March 31, 2003. Substandard
asset balance of $5.7 million at March 31, 2004 is a decrease of $5.2 million
from the $10.9 million balance of substandard assets after the acquisition of
Today's Bancorp, Inc. The loss rate for other mention loans was increased
from 1.5% at March 31, 2003 to 4.0% at March 31, 2004 in order to reflect the
risk of loss.
At March 31, 2004, the Company had an allowance for loan losses of $4.5
million, or 1.16% 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.
15
The following table sets forth an analysis of the Company's allowance for loan
losses for the periods indicated.
Year Ended March 31,
---------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $2,739 $2,537 $1,916 $1,362 $1,146
------ ------ ------ ------ ------
Provision for loan losses 210 727 1,116 949 675
Recoveries:
Residential real estate - 2 - - -
Land - 63 - - -
Commercial 74 - - - 1
Consumer 17 13 25 18 28
------ ------ ------ ------ ------
Total recoveries 91 78 25 18 29
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 21 140 88 226 48
Land 15 17 - - -
Commercial 882 119 185 27 282
------ ------ ------ ------ ------
Consumer 264 152 166 160 158
------ ------ ------ ------ ------
Total charge-offs 1,182 428 439 413 488
------ ------ ------ ------ ------
Net charge-offs 1,091 350 414 395 459
------ ------ ------ ------ ------
Dispositions (1) - - 81 - -
Allowance acquired from
Today's Bank 2,639
Net change in allowance for
unfunded loan commitments
and lines of credit (16) (175) - - -
------ ------ ------ ------ ------
Balance at end of period $4,481 $2,739 $2,537 $1,916 $1,362
====== ====== ====== ====== ======
Ratio of allowance to total
net loans outstanding
during period 1.16% 0.90% 0.87% 0.64% 0.54%
Ratio of net charge-offs to
average net loans
outstanding during period 0.31 0.12 0.14 0.14 0.21
Ratio of allowance to total
of nonaccrual and 90 days
past due loans 344.43 847.99 166.69 351.56 106.58
16
(1) Allowance reclassified with securitization of one-to four-family loans
to mortgage-backed securities.
Changes in the allowance for unfunded loan commitments and lines of credit:
Year Ended March 31,
---------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Beginning Balance $ 175 $ - $ - $ - $ -
Net change in allowance for
unfunded loan commitments and
lines of credit 16 175 - - -
------ ------ ------ ------ ------
Ending Balance $ 191 $ 175 $ - $ - $ -
====== ====== ====== ====== ======
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,
---------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------- ----------------- ----------------- ----------------- -----------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a Percent as a Percent as a Percent as a Percent as a 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
loans
One- to
four-family $ 89 11.46% $ 122 19.50% $ 191 24.99% $ 263 38.73% $ 259 40.34%
Multi-family 19 1.30 24 2.05 37 3.36 42 3.66 41 4.30
Construction
one-to four-
family 148 12.39 194 14.24 319 14.77 224 13.57 304 13.50
Construction
multi-family - - 5 0.30 20 1.25 21 0.19 10 1.29
Construction
commercial 7 0.37 20 1.31 26 1.38 34 1.41 17 1.02
Land 148 6.63 196 10.36 192 8.79 206 7.83 223 9.62
Commercial real
estate 2,259 45.68 1,046 33.05 869 28.58 580 18.69 224 16.86
Commercial
loans 1,589 14.82 796 11.13 668 7.92 354 7.64 160 6.28
Consumer loans:
Secured 175 6.92 141 7.63 180 8.47 154 7.65 90 5.70
Unsecured 37 0.43 33 0.43 27 0.49 34 0.63 29 1.09
Unallocated 10 - 162 - 8 - 4 - 5 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses $4,481 100.00% $2,739 100.00% $2,537 100.00% $1,916 100.00% $1,362 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 management's
intention of 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, 2004, 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 15.97%.
The Investment Committee, composed of the Company's Chief Executive Officer,
President 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, 2004, the Company's investment and
mortgage-backed securities portfolio totaled $46.0 million and consisted
primarily of obligations of federal agencies, and Federal National Mortgage
Association ("FNMA") and FHLMC mortgage-backed securities.
At March 31, 2004, 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, 2004, 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 Statement of Financial Accounting Standards ("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 $46.1 million,
$36.9 million and $59.8 million at March 31, 2004, 2003 and 2002, respectively.
At March 31,
-------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
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") $ 1,802 3.92% $ 1,803 4.90% $ 1,804 3.02%
FHLMC mortgage-backed
securities 332 0.72 589 1.60 964 1.62
FNMA mortgage-backed
securities 383 0.83 909 2.47 1,618 2.71
------- ------ ------- ------ ------- ------
2,517 5.47 3,301 8.97 4,386 7.35
------- ------ ------- ------ ------- ------
Available for sale (at fair
value):
Agency securities 11,194 24.33 - - - -
REMICs 3,015 6.55 6,421 17.45 25,114 42.10
FHLMC mortgage-backed
securities 7,190 15.63 6,097 16.57 10,972 18.39
FNMA mortgage-backed
securities 402 0.88 551 1.50 913 1.53
Municipal securities 4,270 9.28 2,751 7.48 2,601 4.36
Trust preferred securities 5,019 10.91 4,975 13.52 - -
Equity securities 12,400 26.95 12,700 34.51 15,674 26.27
------- ------ ------- ------ ------- ------
43,490 94.53 33,495 91.03 55,274 92.65
------- ------ ------- ------ ------- ------
Total investment securities $46,007 100.00% $36,796 100.00% $59,660 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth the maturities and weighted average yields in the securities portfolio at
March 31, 2004.
Less Than One to More Than Five to More Than
One Year Five Years 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 $ - -% $ 1,537 4.12% $ 587 4.30% $ 2,146 4.50%
Agency securities - - 11,194 3.17 - - - -
REMICs - - 271 2.17 - - 4,546 2.97
FHLMC mortgage-
backed securities 1 6.00 2,409 6.15 4,782 4.07 330 3.57
FNMA mortgage-
backed securities 23 7.13 144 6.88 7 11.95 611 4.22
Trust preferred
securities - - - - - - 5,019 2.97
Equity securities - - - - - - 12,400 1.72
---- ---- ------- ---- ------ ----- ------- ----
Total $ 24 7.09% $15,555 3.74% $5,376 4.11% $25,052 2.52%
==== ==== ======= ==== ====== ===== ======= ====
(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 issuers) 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 6 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, 2004, the Company held REMICs
with a net carrying value of $4.8 million, of which $1.8 million were
classified as held-to-maturity and $3.0 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, 2004, 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 municipal securities was $4.3 million at March 31, 2004
compared to $2.8 million at March 31, 2003. Total equity securities
investment was $12.4 million at March 31, 2004, compared to $12.7 million at
March 31, 2003.
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
$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. 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. The Company's attracts deposits from within it's primary
market area by offering 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. At the July 18, 2003 acquisition date of
Today's Bancorp, $105.1 million of deposits were acquired. The Bank continues
to see a shift in the customer demand in deposit products from certificates of
deposit to transaction 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, 2004.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- -------- ---- ---------- -------- ------- --------
(In thousands)
0.200% None NOW accounts $ 100 $ 65,718 16.06%
1.300 None High yield checking 25,000 49,668 12.14
0.550 None Regular savings 500 29,334 7.17
0.948 None Money market 2,500 69,984 17.11
None None Non-interest checking 100 61,902 15.13
-------- ------
Total transaction accounts 276,606 67.61
Certificates of Deposit
-----------------------
1.201 91 Days Fixed-term, Fixed-rate 2,500 8,412 2.06
0.819 182-364
Days Fixed-term, Fixed-rate 2,500 14,934 3.65
1.053 12-17
Months Fixed-term, Fixed-rate 2,500 29,987 7.33
1.030 18
Months Fixed-term, Variable rate,
Individual Retirement
account("IRA") 100 1,391 0.34
2.120 18-23
Months Fixed-term, Fixed-rate 2,500 6,923 1.69
2.694 24-35
Months Fixed-term, Fixed-rate 2,500 28,768 7.03
3.786 36-59
Months Fixed-term, Fixed-rate 2,500 21,279 5.20
4.901 60-83
Months Fixed-term, Fixed-rate 2,500 15,526 3.80
4.814 84-120
Months Fixed-term, Fixed-rate 2,500 5,289 1.29
-------- ------
Total certificates of deposit 132,509 32.39%
-------- ------
Total deposits $409,115 100.00%
======== ======
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,
------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
Increase/ Increase/ Increase/
Balance Percent Decrease) Balance Percent Decrease) Balance Percent Decrease)
------- ------- -------- ------- ------- -------- ------- ------- --------
(Dollars in thousands)
Non-interest-bearing
demand $ 61,902 15.13% $(16,562) $ 78,464 24.46% $ 45,890 $ 32,574 12.54% $ 4,639
NOW accounts 65,718 16.06 38,605 27,113 8.45 (5,597) 32,710 12.60 567
High-yield checking 49,668 12.14 14,131 35,537 11.08 30,183 5,354 2.06 5,354
Regular savings
accounts 29,334 7.17 4,479 24,855 7.75 2,916 21,939 8.45 3,112
Money market deposit
accounts 69,984 17.11 16,267 53,717 16.75 (928) 54,645 21.04 8,921
Certificates of
deposits which
mature (1):
Within 12 months 86,272 21.09 15,117 71,155 22.19 (15,784) 86,939 33.48 (55,084)
Within 12-36 months 32,422 7.92 9,803 22,619 7.05 3,249 19,370 7.46 (4,303)
Beyond 36 months 13,815 3.38 6,533 7,282 2.27 1,123 6,159 2.37 961
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total $409,115 100.00% $ 88,373 $320,742 100.00% $ 61,052 $259,690 100.00% $(35,833)
======== ====== ======== ======== ====== ======== ======== ====== ========
(1) IRAs of $13.9 million, $12.9 million and $12.8 million at March 31, 2004, 2003 and 2002,
respectively, are included in certificate balances.
23
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,
---------------------------------
2004 2003 2002
--------- --------- ---------
(In thousands)
Below 2.00% $ 63,241 $ 43,969 $ 14,919
2.00 - 2.99% 23,307 17,483 30,028
3.00 - 3.99% 14,221 18,770 24,390
4.00 - 4.99% 17,224 7,452 13,014
5.00 - 5.99% 10,230 7,058 10,717
6.00 - 7.99% 4,286 6,324 19,400
--------- --------- ---------
Total $ 132,509 $ 101,056 $ 112,468
========= ========= =========
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 2004.
Amount Due
-----------------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
--------- ------- --------- -------- --------
(In thousands)
Below 2.00% $ 55,806 $ 7,117 $ 247 $ 71 $ 63,241
2.00 - 2.99% 11,602 8,818 2,645 242 23,307
3.00 - 3.99% 6,625 3,363 185 4,048 14,221
4.00 - 4.99% 8,945 1,029 1,604 5,646 17,224
5.00 - 5.99% 842 3,831 1,884 3,673 10,230
6.00 - 7.99% 2,452 1,568 131 135 4,286
-------- -------- ------- -------- ---------
Total $ 86,272 $ 25,726 $ 6,696 $ 13,815 $ 132,509
======== ======== ======= ======== =========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at March 31, 2004.
Weighted
Maturity Period Amount Average Rate
- --------------- -------- ------------
(Dollars in thousands)
Three months or less $ 14,332 1.76%
Over three through six months 7,859 2.51
Over six through 12 months 10,564 2.69
Over 12 Months 23,105 3.83
--------- ----
Total $ 55,860 2.90%
========= ====
24
Deposit Activities
The following table sets forth the deposit activities of the Company for the
periods indicated.
Year Ended March 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Beginning balance $320,742 $259,690 $295,523
Net (decrease) increase
before interest credited 83,618 55,535 (44,789)
Interest credited 4,755 5,517 8,956
-------- -------- --------
Net increase (decrease) in
savings deposits 88,373 61,052 (35,833)
-------- -------- --------
Ending balance $409,115 $320,742 $259,690
======== ======== ========
In the unlikely event the Bank 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
Bank'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, 2004, the Bank had $40.0 million of
outstanding advances from the FHLB-Seattle under an available credit facility
of $180.3 million, limited to available collateral.
The following tables set forth certain information concerning the Company's
borrowings at the dates and for the periods indicated.
At March 31,
---------------------------
2004 2003 2002
------ ------ ------
Weighted average rate on
FHLB advances 4.88% 4.90% 6.10%
25
Year Ended March 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Maximum amounts of FHLB
advances outstanding
at any month end $40,000 $74,500 $99,500
Average FHLB
advances outstanding 40,000 53,174 89,499
Weighted average rate on
FHLB advances 4.96% 5.53% 6.25%
REGULATION
General
The Bank, as a federally-chartered savings institution, is subject to federal
regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the
FDIC, which insures the deposits of the Bank to the maximum extent permitted
by law, and requirements established by the Federal Reserve Board.
Federally-chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and the FDIC.
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and these institutions are prohibited from
engaging in any activities not permitted by the laws and regulations. This
regulation and supervision primarily is intended for the protection of
depositors and not for the purpose of protecting shareholders.
The OTS regularly examines the Bank and prepares reports for the consideration
of the Bank's Board of Directors on any deficiencies that it may find in the
Bank's operations. The FDIC also has the authority to examine the Bank in its
roles as the administrator of the SAIF. The Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in matters such as the ownership of savings
accounts and the form and content of the Bank's mortgage requirements. Any
change in these regulations, whether by the FDIC, the OTS or Congress, could
have a material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Institutions
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. When these examinations are conducted
by the OTS and the FDIC, the examiners may require the Bank to provide for
higher general or specific loan loss reserves. All savings institutions are
subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OTS. The OTS also has extensive
enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
issue cease-and-desist or removal orders and initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For example, no savings institution
may invest in non-investment grade corporate debt securities. In addition,
the permissible level of investment by federal institutions in loans secured
by non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
All savings institutions 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 institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2004 was $98,160.
26
Federal Home Loan Bank System. The Bank is a member of the FHLB of Seattle,
which is one of 12 regional FHLBs that administer the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans or advances to members in accordance with policies and
procedures, established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Seattle. At March 31, 2004, the Bank had $6.0 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Over the past two fiscal years such
dividends have averaged 3.93% and 6.05% for the fiscal years ended March 31,
2004 and 2003, respectively.
Under federal law, the FHLBs are required to provide funds for the resolution
of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
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 is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to the
applicable limits by the FDIC and this insurance is backed by the full faith
and credit of the United States government.
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.
Since January 1, 1997, the premium schedule for BIF and SAIF insured
institutions has ranged from 0 to 27 basis points. However, SAIF- and
BIF-insured institutions are required to pay a Financing Corporation
assessment in
27
order to fund the interest on bonds issued to resolve thrift failures in the
1980s equal to approximately 1.50 points for each $100 in domestic deposits
annually. These assessments, which may be revised based upon the level of BIF
and SAIF deposits, will continue until the bonds mature.
Under the Federal Deposit Insurance Act ("FDIA"), the FDIC may terminate
deposit insurance 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 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.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, 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." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company in an amount of up to the lesser of 5% of the institution's
assets or the amount which would bring the institution into compliance with
all capital standards. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors. At March 31, 2004, 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 an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review
of such safety and soundness compliance plans. Management of the Bank is not
aware of any conditions relating to these safety and soundness standards which
would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings institutions, including the Bank,
are required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings institution to
have at least 65% of its total assets less (i) specified liquid assets up to
20% of total assets, (ii) intangibles, including goodwill and (iii) the value
of property used to conduct business in certain "qualified thrift investments"
in at least nine out of each 12 month period on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code ("Code").
Under either test, such assets primarily consist of residential housing
related loans and investments. At March 31, 2004, the Bank met the test and
its QTL percentage was 75.50%.
Any savings institution 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
28
both a savings institution and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association 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 to meet the QTL test, 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."
Capital Requirements. Federally-insured savings institutions, 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 institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). At March 31, 2004, the Bank had
tangible capital of $49.4 million, or 9.81% of adjusted tangible assets, which
is approximately $41.9 million above the minimum requirement of 1.5% of
adjusted tangible assets in effect on that date. At March 31, 2004, the Bank
had $758,000 in core deposit intangible, $624,000 in servicing assets and $9.2
million in goodwill. 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, 2004, the Bank had core capital equal to $49.4 million, or 9.81% of
adjusted tangible assets, which is $34.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS also requires savings institutions to have core capital equal to 4% of
risk-weighted assets ("Tier 1 risk-based"). At March 31, 2004, the Bank had
Tier 1 risk-based capital of $49.4 million or 11.72% of risk-weighted assets,
which is approximately $32.6 million above the minimum on that date. The OTS
risk-based requirement requires savings institutions 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. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. 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 Fannie Mae or Freddie Mac.
On March 31, 2004, the Bank had total risk-based capital of approximately
$54.0 million, including $49.4 million in core capital and $4.6 million in
qualifying supplementary capital, and risk-weighted assets of $422.0 million,
or total capital of 12.78% of risk-weighted assets. This amount was $20.2
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 institutions that fail to meet their
capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution," which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risked-based capital ratio or an 8.0% risk-based capital ratio. Any such
institution must submit a capital restoration plan and until the 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
institutions. As a condition to the approval of the capital restoration plan,
any company controlling
29
an undercapitalized institution must agree that it will enter into a limited
capital maintenance guarantee with respect to the institution's achievement of
its capital requirements.
Any savings institution that fails to comply with its capital plan or has Tier
1 risk-based or core capital ratios of less than 3.0% or a risk-based capital
ratio of less than 6.0% and is considered "significantly undercapitalized"
will be made subject to one or more additional specified actions and operating
restrictions which may cover all aspects of its operations and may include a
forced merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" because it has a tangible capital ratio of 2.0%
or less is subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized institutions.
In addition, the OTS must appoint a receiver, or conservator with the
concurrence of the FDIC, for a savings institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator
or a receiver.
The OTS is also generally authorized to reclassify an institution 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 may have a substantial adverse effect on its operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. The OTS also
prohibits a savings institution from declaring or paying any dividends or from
repurchasing any of its stock if, as a result of such action, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with the
association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided that
the Bank notify the OTS 30 days before it declares the capital distribution
and that the following requirements are met: (i) the Bank has a regulatory
rating in one of the two top examination categories; (ii) the Bank is not of
supervisory concern, and will remain adequately or well capitalized, as
defined in the OTS prompt corrective action regulations, following the
proposed distribution; and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does not meet these stated requirements, it must obtain the prior approval of
the OTS before declaring any proposed distributions.
If the Bank's capital falls below its regulatory requirements or the OTS
notifies it that it is in need of more than normal supervision, the Bank's
ability to make capital distributions will be restricted. In addition, no
distribution will be made if OTS notifies the Bank that a proposed capital
distribution would constitute an unsafe and unsound practice, which would
otherwise be permitted by the regulation.
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, 2004, the Bank's regulatory limit on loans to one borrower is $8.1
million. At March 31, 2004, the Bank's largest single loan to one borrower
was $8.1 million, which was performing according to its original terms.
Activities of Associations and their Subsidiaries. When a savings institution
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings institution
must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings institutions
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
30
The OTS may determine that the continuation by a savings institution 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 institution 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. Savings institutions must comply with Sections
23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
institution were a Federal Reserve member bank. Generally, transactions
between a savings institution 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 institution's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings institution 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 institutions as affiliates on a
case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which comprehensively
amends sections 23A and 23B of the Federal Reserve Act, became effective. The
Federal Reserve Act and Regulation W are applicable to savings institutions
such as the Bank. The Regulation unifies and updates staff interpretations
issued over the years, incorporates several new interpretative proposals (such
as to clarify when transactions with an unrelated third party will be
attributed to an affiliate) and addresses new issues arising as a result of
the expanded scope of nonbanking activities engaged in by banks and bank
holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Financial Services Modernization Act of
1999.
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 Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with the examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its
latest examination.
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
shareholders, 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. 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
31
circumstances. Federal law also establishes criminal penalties for certain
violations.
Environmental Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), a federal
statute, generally imposes strict liability on all prior and present "owners
and operators" of sites containing hazardous waste. However, Congress asked
to protect secured creditors by providing that the term "owner and operator"
excludes a person whose ownership is limited to protecting its security
interest in the site. Since the enactment of the CERCLA, this "secured
creditor exemption" has been the subject of judicial interpretations which
have left open the possibility that lenders could be liable for cleanup costs
on contaminated property that they hold as collateral for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Savings and Loan Holding Company Regulations
General. The Company is a unitary savings and loan holding 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 institution subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to present a
serious risk to the subsidiary savings institution.
Financial Services Modernization. On November 12, 1999, the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") was
signed into law. The purpose of this legislation is 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 GLBA:
* 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;
* provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
* broadened the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
* provided an enhanced framework for protecting the privacy of consumer
information; and
* addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial institutions.
The GLBA also imposes certain obligations on financial institutions to develop
privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions were
implemented by regulations that were effective on November 12, 2000.
Compliance with the privacy provisions was required by July 1, 2001.
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 institution 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
institution not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity
32
restrictions. If the Company acquires control of another savings institution
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
Bank and any other subsidiaries (other than the Bank or any other SAIF-insured
savings institution) 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.
The USA Patriot Act. In response to the terrorist events of September 11,
2001, the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot
Act") was signed into law 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. 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.
Among other requirements, Title III of the USA Patriot Act imposes the
following requirements:
Financial institutions must establish anti-money laundering programs that
include (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.
Financial institutions must implement a risk-based customer identification
program in connection with opening new accounts. The program must contain
requirements for identity verification, record-keeping, comparison of
information to government-maintained lists and notice to customers.
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 must establish appropriate, specific
and, where necessary, enhanced due diligence policies, procedures and controls
designed to detect and report money laundering.
Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks that
do not have a physical presence in any 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. Our policies and procedures have been updated to reflect the
requirements of the USA Patriot Act. The impact on business and customers was
minimal.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act") was signed into law 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 generally
applies to all companies, both U.S. and non-U.S., that file or are
33
required to file periodic reports with the Securities and Exchange Commission
("SEC") under the Securities Exchange Act of 1934.
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 related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate
law, such as the relationship between a board of directors and management and
between a board of directors and its committees.
The 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 fund black out periods;
* disclosure of off-balance sheet transactions;
* a prohibition on personal loans to directors and officers;
* expedited filing requirements for Form 4s;
* 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 company accounting oversight board;
* auditor independence; and
* various increased criminal penalties for violations of securities laws.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift lender
test, 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 Institutions - Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift
lender test.
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, 2004, the Bank had a taxable temporary
difference of approximately $760,000 that arose before 1987 (base-year
amount). For taxable years beginning after
34
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 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. The audit determined there was an
additional $5,500 owing in tax.
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,
35
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, 2004, the Bank's investments of $790,000 in
Riverview Services, Inc. ("Riverview Services"), its wholly owned subsidiary,
and $556,000 in Riverview Asset Management Corp. ("RAM Corp"), a 85% owned
subsidiary, were within these limitations.
Riverview Services 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 $65,000 for the
fiscal year ended March 31, 2004 and total assets of $793,000 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 in December 1998
and had net income of $13,100 for the fiscal year ended March 31, 2004 and
total assets of $758,000 at that date. RAM Corp earns fees on the management
of assets held in fiduciary or agency capacity. At March 31, 2004, the fair
market value of total assets under management approximated $134.6 million.
RAM Corp's operations are included in the Consolidated Financial Statements of
the Company.
Personnel
As of March 31, 2004, the Company had 186 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 64 Chairman of the Board and Chief Executive Officer
Ron Wysaske 51 President and Chief Operating Officer
Ron Dobyns 55 Senior Vice President and Chief Financial Officer
(1) At March 31, 2004.
Patrick Sheaffer is Chairman of the Board and Chief Executive Officer of the
Company and Chief Executive Officer of the Bank. Prior to February 2004, Mr.
Sheaffer served as Chairman of the Board, President and Chief Executive
Officer of the Company since inception in 1997. He became Chairman of the
Board of the Bank in 1993. Mr. Sheaffer joined the Bank in 1965. He is
responsible for leadership and management of the Company. Mr. Sheaffer is
active in numerous professional and civic organizations.
Ron Wysaske is President and Chief Operating Officer of the Bank. Prior to
February 2004, Mr. Wysaske served as Executive Vice President, Treasurer and
Chief Financial Officer of the Bank from 1981 to 2004 and of the Company at
inception in 1997. He joined the Bank in 1976. Mr. Wysaske is responsible for
daily operations and management of the Bank. He holds a M.B.A. from Washington
State University and is active in numerous professional and civic
organizations.
Ron Dobyns is Senior Vice President and Chief Financial Officer of the
Company. Prior to February 2004, Mr. Dobyns served as Controller since 1996.
He is responsible for accounting, SEC reporting as well as treasury
36
functions for the Bank and the Company. He is a State of Oregon certified
public accountant, holds an M.B.A. from the University of Minnesota and is a
graduate of Pacific Coast Banking School.
Item 2. Properties
- -------------------
The following table sets forth certain information relating to the Company's
offices as of March 31, 2004.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
Main Office: (In millions)
900 Washington, Suite 900
Vancouver, Washington (1) 2000 16,000 $ 28.2
Branch Offices:
700 N.E. Fourth Avenue
Camas, Washington (2) 1975 25,000 44.1
3307 Evergreen Way
Washougal, Washington (1)(2)(3) 1963 3,200 28.5
225 S.W. 2nd Street
Stevenson, Washington (2) 1971 1,700 26.6
330 E. Jewett Boulevard
White Salmon, Washington (2)(4) 1977 3,200 25.4
15 N.W. 13th Avenue
Battle Ground, Washington (2)(5) 1979 2,900 28.8
412 South Columbus
Goldendale, Washington (2) 1983 2,500 14.7
11505-K N.E. Fourth Plain Boulevard
Vancouver, Washington (2) 1994 3,500 19.2
7735 N.E. Highway 99
Vancouver, Washington (1)(6)(3) 1994 4,800 23.3
1011 Washington Way
Longview, Washington (6)(2) 1994 2,000 15.7
900 Washington St., Suite 100
Vancouver, Washington (1)(2) 1998 5,300 79.1
1901-E N.E. 162nd Avenue
Vancouver, Washington (1)(2) 1999 3,200 10.1
800 N.E. Tenny Road, Suite D
Vancouver, Washington (2) 2000 3,200 15.6
915 MacArthur Blvd.
Vancouver, Washington (1)(2)(7) 2003 3,000 50.0
37
204 S.E. Park Plaza Dr., #109
Vancouver, Washington (1)(2)(7)
Cascade Park Mortgage Center 2003 2565 -
(1) Leased.
(2) Location of an automated teller machine.
(3) New facility in 2001.
(4) New facility in 2000.
(5) New facility in 1994.
(6) 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.
(7) Former location of Today's Bank, Vancouver, Washington, acquired on July
18, 2003.
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, 2004, the net book value of the Company's office properties,
furniture, fixtures and equipment was $9.7 million.
Management believes that the facilities are of sound construction and good
operating condition, and are appropriately insured and adequately equipped for
carrying on the business of the Company.
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, 2004.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
- ------------------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities
- -------------------------------------------------
At March 31, 2004, there were 4,974,979 shares Company Common Stock issued and
4,777,911 outstanding, 850 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
38
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 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.
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 2004 and 2003 fiscal years. At March 31, 2004, 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, 2004 High Low Declared
- -------------------------------- ------ ----- --------------
Quarter Ended March 31, 2004 $21.43 $19.35 $0.140
Quarter Ended December 31, 2003 21.74 19.09 0.140
Quarter Ended September 30, 2003 20.50 18.08 0.140
Quarter Ended June 30, 2003 18.30 16.30 0.140
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
Equity Compensation Plan Information. The following table summarizes share
and exercise price information about the Company's equity compensation plan as
of March 31, 2004.
Number of securities
remaining available
for future issuance
Number of securities Weighted- under equity
to be issued upon average price compensation plans
exercise of of outstanding excluding securities
Plan category outstanding options options reflected in column (A)
- -------------- -------------------- -------------- ----------------------
Equity compensation
plans approved by
security holders: (A) (B) (C)
2003 Stock Option
Plan(1) 229,227 - 229,227
1998 Stock Option
Plan 245,269 $13.57 38,483
Equity compensation
plans not approved
by security holders: - - -
------- -------
Total 474,496 267,710
======= =======
39
(1) At March 31, 2004, no options had been granted under the 2003 Plan.
Stock Repurchase
The shares are being repurchased from time-to-time in open market
transactions. The timing, volume and price of purchases will be made at our
discretion, and will also be contingent upon our overall financial condition,
as well, as market conditions in general. The following table reflects
activity for the three months ended March 31, 2004.
Common Stock Repurchased
---------------------------------
Total Number of Average Price Maximum Number of shares
Shares Purchased Paid per that May Yet Be Purchased
(1) Share Under the Program (2)
- - -
------- ------- -------
Balance at
March 31, 2004 - - 133,204
======= ======= =======
(1) Of these shares, no shares were purchased other than through a publicly
announced program.
(2) In September 2002, the Company announced a stock repurchase of up to 5%,
or 214,000 shares, of its outstanding common stock. This program expires
when all shares under the plan have been repurchased.
40
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,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $520,487 $419,904 $392,101 $431,996 $344,680
Loans receivable, net (1) 381,534 301,811 288,530 296,861 249,034
Mortgage-backed securities
held to maturity, at
amortized cost 2,517 3,301 4,386 6,405 8,657
Mortgage-backed securities
available for sale, at
fair value 10,607 13,069 36,999 43,139 39,378
Cash and interest-bearing
deposits 47,907 60,858 22,492 38,935 15,786
Investment securities held
to maturity, at amortized
cost - - - 861 903
Investment securities
available for sale, at
fair value 32,883 20,426 18,275 25,561 12,883
Deposit accounts 409,115 320,742 259,690 295,523 232,355
FHLB advances 40,000 40,000 74,500 79,500 60,550
Year Ended March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
OPERATING DATA:
Interest income $ 27,584 $ 26,461 $ 29,840 $ 31,343 $ 25,438
Interest expense 6,627 8,417 14,318 16,288 11,073
-------- -------- -------- -------- --------
Net interest income 20,957 18,044 15,522 15,055 14,365
Provision for loan losses 210 727 1,116 949 675
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 20,747 17,317 14,406 14,106 13,690
Gains (losses) from sale of
loans, securities and real
estate owned 1,003 (531) 1,964 129 151
Gain on sale of land and
fixed assets 3 - 4 540 -
Other non-interest income 5,583 4,469 4,583 3,293 2,746
Non-interest expenses 17,572 14,908 13,953 12,867 10,832
-------- -------- -------- -------- --------
Income before federal
income tax provision 9,764 6,347 7,004 5,201 5,755
Provision for federal
income taxes 3,210 1,988 2,136 1,644 1,878
-------- -------- -------- -------- --------
Net income $ 6,554 $ 4,359 $ 4,868 $ 3,557 $ 3,877
======== ======== ======== ======== ========
(1) Includes loans held for sale
41
At March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
OTHER DATA:
Number of:
Real estate loans
outstanding 3,141 2,904 2,176 2,510 2,188
Deposit accounts 27,209 25,752 26,625 26,068 23,653
Full service offices 13 12 12 12 12
At or For the Year Ended March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.35% 1.07% 1.16% 0.94% 1.22%
Return on average equity 10.60 7.99 9.01 7.04 7.15
Dividend payout ratio (1) 39.72 50.00 41.51 51.94 48.65
Interest rate spread 4.42 4.28 3.29 3.37 3.88
Net interest margin 4.76 4.83 4.04 4.27 4.78
Non-interest expense to
average assets 3.61 3.66 3.34 3.41 3.41
Efficiency ratio (2) 63.79 67.82 63.21 67.66 62.75
Asset Quality Ratios:
Average interest-earning
assets to interest-bearing
liabilities 122.53 124.62 120.49 119.75 124.51
Allowance for loan losses
to total net loans at end
of period 1.16 0.90 0.87 0.64 0.54
Net charge-offs to average
outstanding loans during
the period 0.31 0.12 0.14 0.14 0.21
Ratio of nonperforming
assets to total assets 0.39 0.18 0.61 0.24 0.39
Capital Ratios:
Average equity to average
assets 12.72 13.39 12.93 13.41 17.05
Equity to assets at end of
fiscal year 12.52 12.98 13.69 12.20 14.07
(1) Dividends per share divided by net income per share
(2) Non-interest expense divided by the sum of net interest income and
non-interest income
42
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------------------------------------------------------------------------
Results of Operations
- ---------------------
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.
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 ("GAAP") 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
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 10
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.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is maintained at a level sufficient to provide
for probable 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.
43
Mortgage Servicing Rights
- -------------------------
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 paid off 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.
Investment Valuation
- --------------------
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 the fair value is less
than 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 this 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.
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 shareholders' 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
44
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. In
addition, the July 2003 acquisition of Today's Bancorp, Inc. added one branch
and a commercial lending center. The Washougal branch was relocated to a new
facility, and the Stevenson, White Salmon and Goldendale branches were
remodeled. The number of automated teller machines increased from six to
seventeen 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 2004 marked the 81st 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 seven commercial
lenders who are expanding the commercial lending services available to
Riverview's customers. In the fiscal 2000, commercial loans as a percentage
of the loan portfolio were 5.87%. Commercial loans were 13.73% of total loans
at the end of fiscal year 2004. 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.
The fair market value of assets under management has increased from $114.8
million at March 31, 2003, to $134.6 million at March 31, 2004.
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, bank-owned life insurance income 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.
45
Comparison of Financial Condition at March 31, 2004 and 2003
At March 31, 2004, the Company had total assets of $520.5 million compared
with $419.9 million at March 31, 2003. The increase in total assets reflects
the July 2003 acquisition of Today's Bancorp. The increase in total assets
was primarily an increase in loans outstanding, goodwill and bank-owned life
insurance. Cash, including interest-earning accounts, totaled $47.9 million at
March 31, 2004, compared to $60.9 million at March 31, 2003. The $1.1 million
decrease in loans held for sale to $407,000 at March 31, 2004 compared to $1.5
million at March 31, 2003, 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 $381.1 million at March 31, 2004, compared to
$300.3 million at March 31, 2003, a 26.9% increase. The acquisition of Today's
Bancorp in July 2003 increased gross loans $85.4 million. The increases were
primarily in commercial, land, commercial real estate and residential
construction, consumer loans were partially offset by decreases in one- to
four- family residential, multi-family, multi-family construction and
commercial construction 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.
Cash decreased to $47.9 million at March 31, 2004, from $60.9 million at March
31, 2003 as a result of investment in securities and bank owned life
insurance.
Investment securities available-for-sale was $32.9 million at March 31, 2004,
compared to $20.4 million at March 31, 2003. The $12.5 million increase
reflects the $6.9 million of securities acquired in the Today's Bancorp
acquisition, and purchase of $12.1 million of securities, called and paydowns
of $6.3 million and unrealized market gains and losses.
Mortgage-backed securities held-to-maturity was $2.5 million at March 31,
2004, compared to $3.3 million at March 31, 2003. The $800,000 decrease was a
result of pay downs.
Mortgage-backed securities available-for-sale was $10.6 million at March 31,
2004, compared to $13.1 million at March 31, 2003. The $2.5 million net
decrease reflects $5.2 million in purchases and $7.7 million in paydowns and
unrealized market gains and losses.
Deposits totaled $409.1 million at March 31, 2004 compared to $320.7 million
at March 31, 2003. 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
33.8% to $220.1 million at March 31, 2004, compared to $164.5 million at March
31, 2003. Transaction accounts represented 57.9% and 55.4% of average total
outstanding balance of deposits at March 31, 2004 and March 31, 2003,
respectively.
FHLB advances were $40.0 million at March 31, 2004 and 2003. There were no
new borrowings in fiscal year 2004.
Shareholders' equity increased $10.7 million to $65.2 million at March 31,
2004 from $54.5 million at March 31, 2003. The increase was primarily as a
result of the $7.3 million of stock issued in the acquisition of Today's
Bancorp and $6.4 million of total comprehensive income, offset by $1.5
million stock repurchased and retired and $2.6 million of cash dividends paid
to shareholders.
46
Comparison of Operating Results for the Years Ended March 31, 2004 and 2003
Net Income. Net income was $6.6 million, or $1.39 per diluted share for the
year ended March 31, 2004, compared to $4.4 million, or $0.99 per diluted
share for the year ended March 31, 2003. 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 2004 was $21.0
million, representing a $3.0 million, or a 16.7% increase, from fiscal year
2003. This improvement reflected a 16.7% increase in average balance of
interest earning assets (primarily increases in the average balance of non
mortgage loans, investment securities and daily interest bearing assets,
partially offset by a decrease in the average balance of mortgage loans and
mortgage-backed securities) to $443.5 million, which was offset by a 18.7%
increase in average balance of interest-bearing liabilities (a increase in all
deposit categories and a decrease in FHLB borrowings) to $362.0 million. The
ratio of average interest earning assets to average interest bearing
liabilities decreased to 122.5% in fiscal 2004 from 124.6% in fiscal 2003
which indicates that the interest-earning asset growth is being funded more by
interest-bearing liabilities as compared to capital and non-interest-bearing
demand deposits.
Interest Income. Interest income totaled $27.6 million and $26.5 million, for
fiscal 2004 and 2003, respectively. Average interest-bearing assets increased
$63.6 million to $443.5 million for fiscal 2004 from $379.9 million for fiscal
2003. The yield on interest-earning assets was 6.25% for fiscal year 2004
compared to 7.04% for fiscal 2003. 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 fiscal years 2003 and 2004.
Interest Expense. Interest expense for the year ended March 31, 2004 totaled
$6.6 million, a $1.8 million decrease from $8.4 million for the year ended
March 31, 2003. 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 fiscal years 2003 and 2004. The
weighted average interest rate of total deposits decreased from 2.18% for the
year ended March 31, 2003 to 1.44% for the year ended March 31, 2004. The
weighted average interest rate of FHLB borrowings decreased from 5.53% for the
year ended March 31, 2003 to 4.96% for the year ended March 31, 2004. The
level of liquidity in fiscal year 2004 allowed the runoff of high interest
rate deposits acquired in the acquisition of Today's Bancorp and held the FHLB
borrowings stable at $40.0 million.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2004 was $210,000 compared to $727,000 for the year ended March 31,
2003. The fiscal 2004 provision for loan losses was less than the $1.1
million net charge-offs for the year. The allowance for loan losses increased
$1.7 million to $4.5 million at March 31, 2004 from $2.7 million at March 31,
2003. The ratio of allowance for loan losses to total net loans increased to
1.16% compared to 0.90% at March 31, 2003. Net charge-offs to average net
loans for fiscal 2004 increased to 0.31% from 0.12% for fiscal 2003. The
increase in the balance of the allowance for loan losses at March 31, 2004
reflects the acquisition of Today's Bancorp, the proportionate increase in
loan balances, the change in mix of loan balances, the increase in substandard
assets and a change in loss rate when compared to March 31, 2003. The
acquisition of Today's Bancorp added $2.6 million to the allowance for loan
losses and approximately $900,000 of the charge-offs was related to loans
acquired in the acquisition. The mix of the loan portfolio showed an increase
in the balances of commercial, commercial real estate loans, and construction,
and consumer loans at March 31, 2004 as compared to balances at March 31,
2003. Substandard assets increased by $3.0 million to $5.7 million at March
31, 2004 compared to $2.7 million at March 31, 2003. The balance of
substandard asset of $5.7 million at March 31, 2004 is a decrease of $5.2
million from the $10.9 million balance of substandard assets after the
acquisition of Today's Bancorp. The loss rate for other mention loans was
increased from 1.5% at March 31, 2003 to 4.0% at March 31, 2004 in order to
reflect the risk of loss. Management considered the allowance for loan losses
at March 31, 2004 to be adequate to cover probable losses inherent in the loan
portfolio based on the assessment of various factors affecting the loan
portfolio
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
47
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.
Non-Interest Income. Non-interest income increased $2.7 million or 67.3% for
the twelve months ended March 31, 2004 to $6.6 million compared to $3.9
million for the same period in 2003. Excluding the fiscal 2003 $2.1 million
pretax loss on sale of securities and other-than-temporary impairment on
equity investments, non-interest income increased $513,000 or 8.4% for the
year ended March 31, 2004 when compared to the prior year. The increase was
due primarily to the loan servicing income of $158,000 for fiscal year 2004
compared to a loss of $619,000 for fiscal year 2003. The increase in loan
servicing income for fiscal year 2004 reflects the $307,000 increase in market
valuation of mortgage servicing rights in fiscal 2004 as compared to the
$320,000 write-down of mortgage servicing rights in fiscal 2003. For the year
ended March 31, 2004, fees and service charges increased $61,000 or 1.4% when
compared to the year ended March 31, 2003. The $61,000 increase in fees and
service charges is primarily due to the $275,000, or 10.1%, growth in fee
income from deposit services that was offset by the $214,000 decrease in
mortgage broker fees in fiscal year 2004 as compared to fiscal year 2003. The
rise in mortgage rates experienced in fiscal 2004 reduced the volume of
mortgage refinance activity as compared to the mortgage finance activity in
fiscal 2003. The reduced mortgage refinance activity resulted in reduced
mortgage broker activity and reduced gains on sale of loans held for sale.
Mortgage brokered loan production decreased from $200.3 million in 2003 to
$183.0 million in 2004. Mortgage broker fees (included in fees and service
charges) totaled $1.3 million for the year ended March 31, 2004 compared to
$1.5 million for the previous year. Mortgage broker commission compensation
expense was $976,000 for the fiscal ended March 31, 2004 compared to $1.1
million for the fiscal ended March 31, 2003. Asset management services income
was $906,000 for the fiscal year 2004 compared to $742,000 for the fiscal year
2003. RAMCorp. had $134.6 million in total assets under management at March
31, 2004 compared to $114.8 million at March 31, 2003. In fiscal year 2004,
the Bank purchased $12.0 million of bank-owned life insurance that increased
non-interest income by $121,000.
Non-Interest Expense. Non-interest expense increased $2.7 million, or 17.9%,
to $17.6 million for fiscal year 2004 compared to $14.9 million for fiscal
year 2003. One measure of a bank's ability to contain non-interest expense is
the efficiency ratio. It is calculated by dividing total non-interest expense
(less intangible asset amortization) by the sum of net interest income plus
non-interest income (less intangible asset amortization and lower of cost or
market adjustments). The Company's efficiency ratio excluding intangible asset
amortization and lower cost or market adjustments was 61.84% in fiscal 2004
compared to 63.57% in fiscal 2003.
Merger related expenses that were non-capitalizable were not material to the
Company in fiscal year 2004. The principal component of the Company's
non-interest expense is salaries and employee benefits. For the year ended
March 31, 2004, salaries and employee benefits, which includes mortgage broker
commission compensation, was $9.9 million, or a 18.0% increase over the prior
year total of $8.4 million. Full-time equivalent employees increased to 186 at
March 31, 2004 from 157 at March 31, 2003. The primary reason for the
increase was the expansion of lending and branch locations and the related
staffing resulting from the acquisition of Today's Bancorp. This expansion
also contributed to increase expense in occupancy, depreciation, data
processing, telecommunication and other expense.
48
The acquisition of Today's Bancorp and the related acquisition of $105.1
million in deposits accounts created an $820,000 core deposit intangibles
("CDI"), representing the excess of cost over fair market of acquired
deposits. The CDI is being amortized over a ten-year life using an
accelerated amortization method. The amortization expense was $103,000 for
fiscal 2004.
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation in fiscal 1995 (see Item 2. Properties), and the related
acquisition of $42.0 million in customer deposits created a $3.2 million core
deposit intangible asset, representing the excess of fair value of deposits
over the acquired cost. The CDI ($42,000 at March 31, 2004) is being
amortized over the remaining life of the underlying customer relationships
currently estimated at two months. The amortization expense of CDI was
$327,000 for both fiscal years 2004 and 2003.
Provision for Federal Income Taxes. Provision for federal income taxes was
$3.2 million for the year ended March 31, 2004 compared to $2.0 million for
the year ended March 31, 2003 as a result of higher income before taxes in
2004. The effective tax rate for fiscal year 2004 was 32.8% compared to 31.3%
for fiscal 2003. Reference is made to Note 14 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, 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 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 years 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, combined with 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
$2.7 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
49
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.
The allowance for loan losses at March 31, 2003 was $2.7 million, or 0.90% 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 40.0% 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 year ended March 31, 2003, fees and service charges increased
$556,000 or 15.0% when compared to the year ended March 31, 2002. The
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 year ended March 31, 2003
compared to $1.0 million for the fiscal year 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 compared to $109.8 million at
March 31, 2002.
Non-Interest Expense. Non-interest expense increased $955,000, 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.
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 14 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
50
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. Loan fees of $2.2 million, $2.1 million and
$1.9 million are included in interest income for the twelve months ended March
31, 2004, 2003 and 2002, respectively.
51
Year Ended March 31,
-------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ---------------------------
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 $145,537 $11,153 7.66% $173,486 $13,854 7.99% $195,419 $16,786 8.59%
Non-mortgage loans 211,352 14,481 6.85 129,254 9,816 7.59 95,004 8,086 8.51
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total net loans (1) 356,889 25,634 7.18 302,740 23,670 7.82 290,423 24,872 8.56
Mortgage-backed
securities(2) 13,170 613 4.65 28,615 1,241 4.34 49,575 2,677 5.40
Investment
securities(2) 28,283 889 3.14 20,914 1,204 5.76 22,567 1,511 6.70
Daily interest-
bearing assets 39,334 372 0.95 22,190 319 1.44 25,583 798 3.12
Other earning assets 5,849 231 3.93 5,440 329 6.05 5,078 342 6.73
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
earning assets 443,525 27,739 6.25 379,899 26,763 7.04 393,226 30,200 7.68
Non-interest-earning
assets:
Office properties and
equipment, net 10,165 10,060 10,365
Other non-interest-
earning assets 32,400 17,809 14,402
-------- -------- --------
Total assets $486,090 $407,768 $417,993
======== ======== ========
Interest-bearing
liabilities:
Regular savings
accounts $ 27,534 163 0.59 $ 22,861 182 0.80 $ 19,747 292 1.48
NOW accounts 97,017 836 0.86 64,916 960 1.48 29,442 215 0.73
Money market
accounts 65,176 582 0.89 54,514 692 1.27 53,761 1,307 2.43
Certificates of
deposit 132,257 3,062 2.32 109,380 3,642 3.33 133,907 6,915 5.16
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits 321,984 4,643 1.44 251,671 5,476 2.18 236,857 8,729 3.69
Other interest-
bearing liabilities 40,000 1,984 4.96 53,174 2,941 5.53 89,499 5,589 6.25
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing
liabilities 361,984 6,627 1.83 304,845 8,417 2.76 326,356 14,318 4.39
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 57,899 45,109 32,529
Other liabilities 4,390 3,246 5,078
-------- -------- --------
Total liabilities 424,273 353,200 363,963
Shareholders' equity 61,817 54,568 54,030
-------- -------- --------
Total liabilities
and shareholders'
equity $486,090 $407,768 $417,993
======== ======== ========
Net interest income $21,112 $18,346 $15,882
======= ======= =======
Interest rate spread 4.42% 4.28% 3.29%
====== ====== ======
Net interest margin 4.76% 4.83% 4.04%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 122.53% 124.62% 120.49%
====== ====== ======
Tax Equivalent
Adjustment $ 155 $ 302 $ 360
======= ======= =======
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available for sale, historical cost
balances were utilized, therefore, the yield information does not give effect to change in fair value
that are reflected as a component of shareholders' equity.
52
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,
------------ ----------------------------
2004 2004 2003 2002
------ ------ ------ ------
Weighted average yield earned on:
Total net loans (1) 6.39% 6.53% 7.13% 7.91%
Mortgage-backed securities 4.06 4.65 4.34 5.40
Investment securities 3.40 3.14 5.76 6.70
All interest-earning assets (1) 5.70 5.73 6.49 7.19
Weighted average rate paid on:
Deposits 1.20 1.44 2.18 3.69
FHLB advances and other
borrowings 4.88 4.96 5.53 6.25
All interest-bearing liabilities 1.52 1.83 2.76 4.39
Interest rate spread (spread
between weighted average rate
on all interest-earning assets
and all interest-bearing
liabilities)(1) 4.18 3.90 3.73 2.81
Net interest margin (net
interest income(expense) as a
percentage of average interest-
earning assets)(1) 4.53 4.23 4.28 3.56
(1) Weighted average yield on total net loans excludes deferred loan fees.
53
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,
---------------------------------------------------------------------
2004 vs 2003 2003 vs 2002
------------------------------ -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due To Total
---------------- Increase ---------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- -------- ------ ---- --------
(In thousands)
Interest Income:
Mortgage loans $ (2,160) $ (541) $ (2,701) $ (1,803) $ (1,129) $ (2,932)
Non-mortgage loans 5,706 (1,040) 4,666 2,468 (738) 1,730
Mortgage-backed securities (713) 85 (628) (980) (456) (1,436)
Investment securities (1) 340 (655) (315) (106) (201) (307)
Daily interest-bearing 188 (135) 53 (95) (384) (479)
Other earning assets 23 (122) (99) 28 (41) (13)
-------- ------- -------- -------- -------- --------
Total interest income 3,384 (2,408) 976 (488) (2,949) (3,437)
-------- ------- -------- -------- -------- --------
Interest Expense:
Regular savings accounts 33 (52) (19) 57 (167) (110)
NOW accounts 368 (492) (124) 403 342 745
Money market accounts 119 (229) (110) 18 (634) (616)
Certificates of deposit 668 (1,248) (580) (1,114) (2,159) (3,273)
Other interest-bearing liabilities (675) (282) (957) (2,065) (582) (2,647)
-------- ------- -------- -------- -------- --------
Total interest expense 513 (2,303) (1,790) (2,701) (3,200) (5,901)
-------- ------- -------- -------- -------- --------
Net interest income (1) $ 2,871 $ (105) $ 2,766 $ 2,213 $ 251 $ 2,464
======== ======= ======== ======== ======== ========
(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 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.
54
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, 2004, ARM loans and adjustable rate mortgage-backed
securities constituted $217.9 million, or 62.8%, 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, 2003 that totaled $195.2 million, or 65.3%, 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
$133.5 million at March 31, 2004, including $3.4 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 $130.3 million and produced loan servicing
income of $158,000 for the year ended March 31, 2004. 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 $276.7 million or 65.8% of total gross loans at March 31, 2004 as
compared to $203.3 million or 60.0% at March 31, 2003. At March 31, 2004,
the construction, commercial, consumer and other loan portfolios amounted to
$93.0 million, $57.8 million, $28.5 million and $196.4 million, or 22.1%,
13.8%, 6.8% and 46.7% 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, 2004, the combined portfolio carried at
$33.6 million had an average term to repricing or maturity of 10.56 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 impacts of immediate changes in interest rates at the
specified levels based on the latest OTS report dated December 31, 2003.
55
At December 31, 2003
-------------------------------------------------------------------
Net Portfolio Value Net Portfolio Value as a
----------------------------- ----------------------------------
Change Dollar Dollar Percent Percent of Present Value of Assets
In Rates Amount Change Change NPV Ratio Change
- -------- ------- ------ ------- --------- --------
(Dollars in thousands)
300 bp $77,263 $295 0% 14.59% 8 bp
200 bp 77,666 698 +1 14.64 +14 bp
100 bp 77,717 749 +1 14.64 +13 bp
0 bp 76,968 - - 14.51 -
(100) bp 75,552 (1,417) (2) 14.25 (26) bp
(200) bp(1) - - - - -
(300) bp(1) - - - - -
(1) No minus 200-300 bp because the 3-month treasury bill was 0.95% at
December 31, 2003.
For example, the above table illustrates that an instantaneous 100 basis point
increase in market interest rates at December 31, 2003 would increase the
Company's NPV by approximately $749,000, or 1%, at that date. At December 31,
2002, an instantaneous 100 basis point increase in market interest rates would
have increased the Company's NPV by approximately $497,000, or 1%, at that
date. The $497,000 increase in the reduction of NPV to $749,000 at December
31, 2003 is the result of the impact of more adjustable loan balances in the
loan portfolio at December 31, 2003 as compared to December 31, 2002.
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 of repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features 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, 2004,
cash totaled $47.9 million, or 9.2%, 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,
2004, the Bank had $40.0 million of outstanding advances from the FHLB-Seattle
under an available credit facility of $180.3 million, limited to available
collateral.
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, 2004, the Bank's ratio
of cash and eligible investments to the sum of withdrawable savings and
borrowings due within one year was 17.89%.
56
The Company's primary investing activity is the origination of loans. During
the years ended March 31, 2004, 2003 and 2002, the Company originated $375.8
million, $298.4 million and $273.9 million of loans, respectively. At March
31, 2004, the Company had outstanding mortgage loan commitments of $3.6
million and undisbursed balance of mortgage loans closed of $31.2 million.
Consumer loan commitments totaled $1.4 million and unused lines of consumer
credit totaled $18.6 million at March 31, 2004. Commercial real estate loan
commitments totaled $3.4 and undisbursed balance of commercial real estate
loans closed was $13.9 million at March 31, 2004. Commercial loan commitments
totaled $600,000 and unused commercial lines of credit totaled $29.4 million
at March 31, 2004. 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, 2004 totaled $86.3
million. Historically, the Company has been able to retain a significant
amount of its deposits as they mature.
At March 31, 2004, scheduled maturities of certificates of deposit, FHLB
advances, commitments to originate loans, undisbursed loan funds, unused lines
of credit, standby letters of credit and future operating minimum lease
commitments were as follows:
Within 1-3 4-5 Over Total
(In thousands) 1 year Years Years 5 Years Balance
------ ----- ----- ------- -------
Certificates of deposit $ 86,272 $32,422 $10,241 $ 3,574 $132,509
FHLB advances - 35,000 5,000 - 40,000
Commitments to originate
loans
Adjustable 7,886 - - - 7,886
Fixed 1,090 - - - 1,090
Undisbursed loan funds,
unused lines of credit
and standby letters of
credit 85,649 7,647 - - 93,296
Operating leases 891 1,629 1,531 2,393 6,444
-------- ------- ------- ------- --------
Total other contractual
obligations $181,788 $76,698 $16,772 $ 5,967 $281,225
======== ======= ======= ======= ========
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 increase in interest rates during the fiscal year 2004 has created an
interest rate environment that caused the demand for fixed rate single family
loans and repayment of existing single family mortgage loans and
mortgage-backed securities to be less than in prior year. The Company's
business plan emphasizes the sale of fixed rate mortgages as part of its
interest rate risk strategy. The decrease in the cash flows from operating
activities of loans sold to $50.4 million for the fiscal 2004 compared to
$55.8 million for fiscal 2003 reflects this strategy under the changing
interest rate environment.
The Bank has experienced growth in deposit accounts due to organic growth and
the $105.1 million of deposits acquired in the acquisition of Today's Bancorp.
The schedule Deposit Flows on page 23 reflects this net increase in cash flows
from deposits of $88.4 million for fiscal 2004 as compared to a $61.1 million
increase in net cash flows for the same period in the prior year. The higher
interest rate certificates of deposit have been allowed to runoff.
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, 2004 advances from FHLB totaled $40.0 million and the Bank had additional
borrowing capacity available of $140.3 million from the FHLB, subject to
collateral limitations. At March 31, 2004 the Bank's available borrowing
line subject to collateral limitations was $40.6 million.
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, 2004, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 9.81%, 9.81% and 12.78%, respectively. For a detailed discussion of
regulatory capital requirements, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."
57
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 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 April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, Amendments of Statement No. 133 on Derivative Instruments and
Hedging. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
The Statement was effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
Implementation of the Statement on July 1, 2003 did not have a significant
impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This SFAS
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the SFAS was effective July
1, 2003, and implementation had no significant impact on the consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46 Consolidation
of Variable Interest Entities, and Interpretation of Accounting Research
Bulletin No. 51. FIN No. 46 establishes accounting guidance for consolidation
of variable interest entities ("VIE") that function to support the activities
of the primary beneficiary. For the Company, the provisions of FIN No. 46 are
effective for the year ending March 31, 2005 and implementation is not
expected to have a significant impact on the consolidated financial
statements.
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 rate locks 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.
58
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.
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, 2004. 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 6.39% $229,888 $105,958 $59,485 $15,871 $9,124 $420,326 $429,905
Mortgage-backed securities 4.06 6,255 2,087 4,782 - - 13,124 13,198
Investments and other
interest-earning assets 2.15 52,647 8,664 1,173 1,243 1,490 65,217 65,217
FHLB stock 3.93 1,207 2,414 2,414 - - 6,035 6,035
Interest-Sensitive
Liabilities:
NOW accounts 0.20 13,144 26,287 26,287 - - 65,718 65,718
High-yield checking 1.30 9,934 19,867 19,867 - - 49,668 49,668
Non-interest checking
accounts - 12,380 24,761 24,761 - - 61,902 61,902
Savings accounts 0.55 5,867 11,734 11,734 - - 29,335 29,335
Money market accounts 0.95 13,997 27,994 27,994 - - 69,985 69,985
Certificate accounts 2.49 86,272 32,422 10,241 3,518 56 132,509 131,890
FHLB advances 4.88 35,000 - 5,000 - - 40,000 42,011
Off-Balance Sheet Items:
Commitments to extend
credit - 8,963 - - - - 8,963 8,963
Unused lines of credit - 93,123 - - - - 93,123 93,123
59
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for Years Ended March 31, 2004, 2003 and
2002 Independent Auditor's Reports
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
Independent Auditor's Reports 61
Consolidated Balance Sheets as of March 31, 2004 and 2003 63
Consolidated Statements of Income for the Years Ended March 31,
2004, 2003 and 2002 64
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 2004, 2003 and 2002 65
Consolidated Statements of Cash Flows for the Years Ended March 31,
2004, 2003 and 2002 66
Notes to Consolidated Financial Statements 67
60
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Riverview
Bancorp, Inc. and Subsidiary as of March 31, 2004 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit 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
audit provides 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, 2004, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/S/ McGladrey & Pullen LLP
Tacoma, Washington
April 23, 2004
61
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Riverview
Bancorp, Inc. and Subsidiary as of March 31, 2003, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years ended March 31, 2003 and 2002. 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 the results of their operations and their
cash flows the years ended March 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
/S/ Deloitte & Touche LLP
Portland, Oregon
May 2, 2003
62
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
(In thousands, except share data) 2004 2003
- ----------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $32,334
and $42,464) $ 47,907 $ 60,858
Loans held for sale 407 1,501
Investment securities available for sale, at fair
value (amortized cost of $32,751 and $20,265) 32,883 20,426
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $2,591 and $3,403) 2,517 3,301
Mortgage-backed securities available for sale, at
fair value (amortized cost of $10,417 and $12,669) 10,607 13,069
Loans receivable (net of allowance for loan losses
of $4,481 and $2,739) 381,127 300,310
Real estate owned 742 425
Prepaid expenses and other assets 1,289 1,052
Accrued interest receivable 1,786 1,492
Federal Home Loan Bank stock, at cost 6,034 5,646
Premises and equipment, net 9,735 9,505
Deferred income taxes, net 2,736 1,321
Mortgage servicing rights, net 624 629
Goodwill 9,214 -
Core deposit intangible, net 758 369
Bank owned life insurance 12,121 -
--------- ---------
TOTAL ASSETS $ 520,487 $ 419,904
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 409,115 $ 320,742
Accrued expenses and other liabilities 5,862 4,364
Advance payments by borrowers for taxes and insurance 328 287
Federal Home Loan Bank advances 40,000 40,000
--------- ---------
Total liabilities 455,305 365,393
COMMITMENTS AND CONTINGENCIES - -
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:
2004 - 4,974,979 issued, 4,777,911 outstanding 50 46
2003 - 4,585,543 issued, 4,358,704 outstanding
Additional paid-in capital 40,187 33,525
Retained earnings 26,330 22,389
Unearned shares issued to employee stock ownership trust (1,598) (1,804)
Unearned shares held by the management recognition
and development plan - (15)
Accumulated other comprehensive income 213 370
--------- ---------
Total shareholders' equity 65,182 54,511
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 520,487 $ 419,904
========= =========
See notes to consolidated financial statements.
63
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands, except share data) 2004 2003 2002
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 25,634 $ 23,670 $ 24,872
Interest on investment securities 478 200 327
Interest on mortgage-backed securities 613 1,241 2,677
Other interest and dividends 859 1,350 1,964
-------- -------- --------
Total interest income 27,584 26,461 29,840
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits 4,643 5,475 8,729
Interest on borrowings 1,984 2,942 5,589
-------- -------- --------
Total interest expense 6,627 8,417 14,318
-------- -------- --------
Net interest income 20,957 18,044 15,522
Less provision for loan losses 210 727 1,116
-------- -------- --------
Net interest income after provision for
loan losses 20,747 17,317 14,406
-------- -------- --------
NON-INTEREST INCOME:
Fees and service charges 4,324 4,263 3,707
Asset management fees 906 742 745
Gain on sale of loans held for sale 954 1,552 1,067
(Loss) gain on sale/impairment of securities - (2,138) 863
Gain on sale of other real estate owned 49 55 34
Loan servicing income (expense) 158 (619) 57
Gain on sale of land and fixed assets 3 - 4
Bank owned life insurance 121 - -
Other 74 83 74
-------- -------- --------
Total non-interest income 6,589 3,938 6,551
-------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 9,910 8,395 7,763
Occupancy and depreciation 2,900 2,481 2,199
Data processing 917 834 776
Amortization of core deposit intangible 430 327 327
Advertising and marketing expense 772 605 540
FDIC insurance premium 64 47 51
State and local taxes 426 383 402
Telecommunications 269 225 259
Professional fees 501 399 346
Other 1,383 1,212 1,290
-------- -------- --------
Total non-interest expense 17,572 14,908 13,953
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 9,764 6,347 7,004
PROVISION FOR FEDERAL INCOME TAXES 3,210 1,988 2,136
-------- -------- --------
NET INCOME $ 6,554 $ 4,359 $ 4,868
======== ======== ========
Earnings per common share:
Basic $ 1.41 $ 1.00 $ 1.06
Diluted 1.39 0.99 1.06
Weighted average number of shares outstanding:
Basic 4,640,485 4,365,855 4,572,253
Diluted 4,714,329 4,424,733 4,612,468
See notes to consolidated financial statements.
64
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands, except share data)
Unearned
Shares
Issued to
Employee Unearned Accumulated
Common Stock Additional Stock Shares Other
----------------- Paid-In Retained Ownership Issued to Comprehensive
Shares Amount Capital Earnings Trust MRDP Income (Loss) Total
-------- ------ --------- -------- -------- -------- ------------ -------
Balance March 31,
2001 4,655,040 $ 50 $38,687 $17,349 $ (2,217) $ (762) $ (386) $ 52,721
Cash Dividends
($0.44 per
share) - - - (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
($0.50 per
share) - - - (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, stock
option and MDRP - - 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
Cash dividends
($0.56 per
share) - - - (2,613) - - - (2,613)
Exercise of
stock options 40,281 1 484 - - - - 485
Stock repurchased
and retired (81,500) (1) (1,509) - - - - (1,510)
Stock issued in
connection with
acquisition
(Note 2) 430,655 4 7,343 7,347
Earned ESOP
shares 24,633 - 271 - 206 - - 477
Tax benefit,
stock option
and MDRP - - 73 - - - - 73
Earned MRDP
shares 5,138 - - - - 15 - 15
--------- ------ ------- ------- -------- ----- ------ -------
4,777,911 50 40,187 19,776 (1,598) - 370 58,785
Comprehensive
income:
Net income - - - 6,554 - - - 6,554
Other comprehensive
income:
Unrealized holding
loss on
securities of
$157 (net of $81
tax effect) - - - - - - (157) (157)
-------
Total comprehensive
income - - - - - - - 6,397
--------- ------ ------- ------- -------- ----- ------ -------
Balance March 31,
2004 4,777,911 $ 50 $40,187 $26,330 $ (1,598) $ - $ 213 $65,182
========= ====== ======= ======= ======== ===== ====== =======
See notes to consolidated financial statements.
66
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,554 $ 4,359 $ 4,868
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,157 2,108 1,623
Mortgage servicing rights valuation adjustment (307) 320 44
Provision for loan losses 210 727 1,116
Provision (benefit) for deferred income taxes 421 (942) 89
Noncash expense related to ESOP 477 372 284
Noncash expense related to MRDP 15 203 544
Noncash expense related to REO donation 61 - -
Increase (decrease) in deferred loan
origination fees, net of amortization 759 728 (79)
Federal Home Loan Bank stock dividend (229) (329) (342)
Origination of loans held for sale (50,472) (55,771) (36,959)
Proceeds from sales of loans held for sale 51,700 56,311 35,686
Net (gain) loss on loans held for sale, sale
of real estate owned, mortgage-backed
securities, investment securities and premises
and equipment (852) 582 (1,941)
Changes in assets and liabilities:
Increase (decrease) in prepaid expenses and
other assets, net of acquisition 69 (463) 866
Increase (decrease) in accrued interest
receivable (294) 280 417
Increase in accrued expenses and other
liabilities, net of acquisition 521 173 2
--------- --------- ---------
Net cash provided by operating activities 10,790 8,658 6,218
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (325,366) (242,620) (236,904)
Principal repayments/refinance on loans 329,443 227,101 203,466
Proceeds from call, maturity, or sale of
investment securities available for sale 6,250 1,518 2,500
Principal repayments on investment securities
available for sale - - 4,641
Purchase of investment securities available
for sale (12,490) (5,000) -
Purchase of mortgage-backed securities
available for sale (4,937) - (4,967)
Proceeds from sale of mortgage-backed
securities available for sale - - 25,944
Principal repayments on mortgage-backed
securities available for sale 7,690 23,728 25,754
Principal repayments on mortgage-backed
securities held to maturity 782 1,084 2,017
Principal repayments on investment securities
held to maturity - - 861
Purchase of premises and equipment (307) (33) (1,835)
Purchase of Federal Home Loan Bank stock - - (543)
Acquisition, net of cash received 7,206 - -
Additions to real estate owned (546) - -
Purchase of bank-owned life insurance (12,000) - -
Proceeds from sale of real estate owned and
premises and equipment 749 1,915 2,264
--------- --------- ---------
Net cash (used in) provided by
investing activities (3,526) 7,693 23,198
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts (16,740) 61,052 (35,833)
Dividends paid (2,490) (2,126) (2,009)
Repurchase of common stock (1,510) (2,882) (3,123)
Proceeds from Federal Home Loan Bank advances - 5,000 23,300
Repayment of Federal Home Loan Bank advances - (39,500) (28,300)
Net increase in advance payments by borrowers 40 54 15
Proceeds from exercise of stock options 485 417 91
--------- --------- ---------
Net cash (used in) provided by financing
activities (20,215) 22,015 (45,859)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (12,951) 38,366 (16,443)
CASH, BEGINNING OF YEAR 60,858 22,492 38,935
--------- --------- ---------
CASH, END OF YEAR $ 47,907 $ 60,858 $ 22,492
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 6,741 $ 8,666 $ 14,610
Income taxes 3,070 2,912 2,025
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 340 1,527 2,373
Dividends declared and accrued in other
liabilities 668 545 494
Fair value adjustment to securities
available for sale (238) 674 472
Income tax effect related to fair value
adjustment 81 (229) (161)
Common stock issued upon business combination 7,347 - -
See notes to consolidated financial statements.
66
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 he
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 inter-company
transactions and balances have been eliminated in consolidation.
Nature of Operations - The Bank is a thirteen 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. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of mortgage servicing rights, goodwill, core deposit intangibles and
deferred tax assets.
Loans - Loans are stated at the amount of unpaid principal, reduced by
deferred loan origination fees and an allowance for loan losses. Interest on
loans is accrued daily based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when they are past due 90 days as to either principal or
interest, unless they are well secured and in the process of collection. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal balance on a cash-basis method, until the
loans qualify for return to accrual status. Loans are returned to accrual
status when all principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the yield of the related loan.
Securities - In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, 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. Securities that the Company intends to hold for an
indefinite period, but not necessarily to maturity are classified as available
for sale. Such securities may be sold to implement the Bank's asset/liability
management strategies and in response to changes in interest rates and similar
factors, and certain equity. Securities available for sale are reported at
fair value. Unrealized gains and losses, net of related deferred tax effect,
are reported as net amount in a separate component of shareholders' equity
entitled "accumulated other comprehensive income (loss)." Realized gains and
losses on securities available for sale, determined using the specific
identification method, are included in earnings. Amortization of premiums and
accretion of discounts are recognized in interest income over the period to
maturity.
Real Estate Owned ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken 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 probable loan
67
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, delinquency
levels, 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 allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio. The appropriate
allowance level is estimated based upon factors and trends identified by
management at the time the consolidated financial statements are prepared.
When available information confirms that specific loans or portions thereof
are uncollectible, identified amounts are charged against the allowance for
loan losses. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not demonstrated the ability or intent to
bring the loan current; the Bank has no recourse to the borrower, or if it
does, the borrower has insufficient assets to pay the debt; the estimated fair
value of the loan collateral is significantly below the current loan balance,
and there is little or no near-term prospect for improvement.
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.
A provision for loan losses is charged against income and is added to the
allowance for loan losses based on regular assessments of the loan portfolio.
The allowance for loan losses is allocated to certain loan categories based on
the relative risk characteristics, asset classifications and actual loss
experience of the loan portfolio. While management has allocated the allowance
for loan losses to various loan portfolio segments, the allowance is general
in nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Bank's control. These factors may result in losses or recoveries
differing significantly from those provided in the consolidated financial
statements. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan loses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
Federal Home Bank Loan Bank Stock The Bank, as a member of Federal Home Loan
Bank (FHLB), is required to maintain an investment in capital stock of the
FHLB in an amount equal to or greater of 1% of its outstanding home loans or
5% of advances from the FHLB. The recorded amount of FHLB stock equals its
fair value because the shares can only be redeemed by the FHLB at the $100
per share value.
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. The allowance for unfunded loan commitments is
included in other liabilities on the consolidated balance sheets, with changes
to the balance charged against the allowance for loan losses.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Leasehold improvements are amortized over the term
of the lease or the estimated useful life of the improvements, whichever is
less. Gains or losses on dispositions are reflected in earnings. 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
68
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. This
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 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 $624,000 and $629,000 at March 31, 2004 and 2003,
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).
Goodwill - Goodwill represents costs in excess of net assets acquired, and
will be evaluated annually for impairment, in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
Core Deposit Intangible - The core deposit intangible is being amortized to
non-interest expense using a straight line method and an accelerated method,
(based on expected attrition and cash flows of core deposit accounts
purchased) 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. The Bank provides for income
taxes separately and remits to the Company amounts currently due.
Trust Assets - Assets held by Riverview Asset Management Corporation in a
fiduciary or agency capacity for Trust customers are not included in the
consolidated financial statements because such items are not assets of the
Company. Assets totaling $134.7 million and $114.8 million were held in trust
as of March 31, 2004 and 2003, respectively.
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
69
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
Recognition and Development Plan ("MRDP").
Cash and Cash Flows - Cash includes amounts on hand, due from banks and
interest-earning deposits in other banks. Cash flows from interest-earning
deposits in other banks and deposits are reported net.
Stock-Based Compensation - At March 31, 2004, the Company had two stock option
plans, which are described further in Note 15. The Company accounts for these
plans under the recognition and measurement principles of Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no stock-based compensation cost is reflected
in net income as all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
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 Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions:
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- --------- ---------- ---------
Fiscal 2004 4.00% 10.00 31.02% 3.07%
Fiscal 2003 4.01% 5.42 31.59% 3.23%
Fiscal 2002 5.14% 6.15 33.67% 2.92%
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 2004, 2003 and 2002 awards was $5.47, $3.54 and $2.87,
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 2004, 2003 and 2002 net income would have been reduced
to the following pro forma amounts (dollars in thousands, except per share
amounts):
Year ended March 31,
--------------------------------
2004 2003 2002
------ ------ ------
Net income:
As reported $6,554 $4,359 $4,868
Deduct: Total stock based
compensation expense determined
under fair value based method for
all options, net of related tax
benefit 109 180 228
Pro forma 6,445 4,179 4,640
Earnings per common share - basic:
As reported $1.41 $1.00 $1.06
Pro forma 1.39 0.96 1.01
Earnings per common share -
fully diluted:
As reported $1.39 $0.99 $1.06
Pro forma 1.37 0.94 1.01
Employee Stock Ownership Plan ("ESOP") - 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 2003 and 2002 amounts have been reclassified in
order to conform to the 2004 presentation, with no impact on net income or
shareholders' equity as previously reported.
70
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, 2004, 2003 and 2002.
Acquisitions - Acquisitions are accounted for under the purchase method of
accounting, which allocates costs to assets purchased and liabilities assumed
at their estimated fair market values. The results of operations subsequent
to the date of acquisition are included in the consolidated financial
statements of the Company.
Recently Issued Accounting Pronouncements - In April 2003, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 149, Amendments of
Statement No. 133 on Derivative Instruments and Hedging. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The Statement was
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. Implementation of the
Statement on July 1, 2003 did not have any impact on the consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This SFAS
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the SFAS was effective July
1, 2003, and implementation had no significant impact on the consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation
of Variable Interest Entities, and Interpretation of Accounting Research
Bulletin No. 51. FIN No. 46 establishes accounting guidance for consolidation
of variable interest entities ("VIE") that function to support the activities
of the primary beneficiary. For the Company, the provisions of FIN No. 46 are
effective for the year ending March 31, 2005 and implementation is not
expected to have a significant impact on the consolidated financial
statements.
2. ACQUISITION
On July 18, 2003, the Company completed the acquisition of Today's Bancorp,
Inc. ("Today's Bancorp"). Each share of Today's Bancorp was exchanged for
0.826 shares of the Company's common stock, or $13.64 in cash, or a
combination thereof, resulting in the issuance of 430,655 new shares. Total
stock and cash consideration for Today's Bancorp's was $17.2 million. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of Today's Bancorp were recorded at
their respective fair values. Core deposit intangible is being amortized using
an accelerated method over ten years. Goodwill, the excess of the purchase
price over net fair value of the assets and liabilities acquired was recorded
at $9.2 million. The goodwill is not tax deductible because this was a
nontaxable transaction. The purchased assets and assumed liabilities were
recorded as follows: (dollars in thousands):
Assets
------
Cash $ 17,054
Investments 6,895
Building and equipment 1,130
Loans 85,427
Core deposit intangible 820
Goodwill 9,214
Other, net 1,768
---------
Total Assets 122,308
Liabilities
-----------
Deposits $(105,113)
---------
Net Acquisition costs $ 17,195
Less:
Stock issued in acquisition (7,347)
Cash Acquired (17,054)
---------
Cash used in acquisition, net
of cash acquired $ 7,206
=========
The following unaudited pro forma financials for the twelve months ended March
31, 2004 and 2003 assumes that the Today's Bancorp acquisition occurred as of
April 1, 2002, after giving effect to certain adjustments. The pro forma
results have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which occur in the future
or that would have occurred had the Today's Bancorp acquisition been
consummated on the date indicated.
71
Pro Forma Financial Information for
the Twelve Months Ended March 31,
2004 2003
-----------------------------------
(in thousands)
Net Interest Income $ 22,037 $ 23,276
Non-interest Income 6,687 4,270
Non-interest Expense 18,945 18,447
Net Income $ 6,698 $ 3,546
Earnings per common share:
Basic $ 1.41 $ 1.00
Diluted 1.39 0.99
3. RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain minimum
reserve balances either on hand or on deposit with the Federal Reserve Bank,
based on a percentage of deposits. The amounts of such balances for the years
ended March 31, 2004 and 2003 were approximately $832,000 and $9.1 million,
respectively.
4. 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, 2004 and 2003, 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.
5. 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, 2004
- --------------
Trust Preferred $ 5,000 $ 19 $ - $ 5,019
Agency securities 11,000 194 - 11,194
Equity securities 12,700 - (300) 12,400
Municipal bonds 4,051 219 - 4,270
--------- --------- -------- ---------
Total $ 32,751 $ 432 $ (300) $ 32,883
========= ========= ======== =========
March 31, 2003
- --------------
Trust Preferred $ 5,000 $ - $ (25) $ 4,975
Equity securities 12,700 - - 12,700
Municipal bonds 2,565 186 - 2,751
--------- --------- -------- ---------
Total $ 20,265 $ 186 $ (25) $ 20,426
========= ========= ======== =========
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of March 31,
2004 are as follows (in thousands):
12 months
Less than 12 months or longer Total
---------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
------ ----------- ----- ---------- ----- ----------
Equity
securities $12,400 $(300) $ - $ - $12,400 $(300)
------- ----- ----- ------- ------- -----
Total
temporarily
impaired
securities $12,400 $(300) $ - $ - $12,400 $(300)
======= ===== ===== ======= ======= =====
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in
72
value is not related to any company or industry specific event. The Company
anticipates full recovery of amortized cost with respect to these securities
at maturity or sooner in the event of a more favorable market interest rate
environment. The contractual maturities of investment securities available
for sale are as follows (in thousands):
Amortized Estimated
Cost Fair Value
---------- ------------
March 31, 2004
Due after one year through five years $ 12,414 $ 12,731
Due after five years through ten years 530 587
Due after ten years (1) 19,807 19,565
---------- ----------
Total $ 32,751 $ 32,883
========== ==========
(1) Includes equity securities amortized cost of $12,700 and estimated fair
value of $12,400.
Investment securities with an amortized cost of $16.5 million and $12.7
million and a fair value of $16.3 million and $12.7 million at March 31, 2004
and March 31, 2003, respectively, were pledged as collateral for advances at
the FHLB. Investment securities with an amortized cost of $753,000, and a fair
value of $760,000 at March 31, 2003 were pledged as collateral for government
public funds held by the Bank. The Bank pledged investment securities with an
amortized cost of $500,000 and a fair value of $504,000 at March 31, 2004, as
collateral for treasury tax and loan funds.
In the fourth quarter of fiscal 2003, the Company recognized a pre-tax
other-than-temporary impairment for investments in Federal Home Loan Mortgage
Corporation ("FHLMC") preferred stock and Federal National Mortgage
Association ("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
consolidated 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 FNMA preferred
stock and $1.6 million FHLMC preferred stock. A corresponding reduction in
unrealized losses in shareholders' equity was realized in fiscal 2003 in the
amount of $462,000 for FNMA preferred stock and $1.1 million for FHLMC
preferred stock.
The Company realized no gains or losses on sales of investment securities
available for sale in fiscal 2004 or fiscal 2002. The Company realized
$162,000 in gains on sales of investment securities available for sale in
fiscal 2003.
6. 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, 2004
- --------------
Real estate mortgage
investment conduits $ 1,802 $ 55 $ - $ 1,857
FHLMC mortgage-backed
securities 332 8 - 340
FNMA mortgage-backed
securities 383 11 - 394
------- ----- ----- -------
Total $ 2,517 $ 74 $ - $ 2,591
======= ===== ===== =======
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
======= ===== ===== =======
Mortgage-backed securities held to maturity with an amortized cost of $1.8
million and $2.2 million and a fair value of $1.9 million and $2.3 million at
March 31, 2004 and 2003, respectively, were pledged as collateral for
governmental public funds held by the Bank. Mortgage-backed securities held to
maturity with an amortized cost of $332,000 and $385,000 and a fair value of
$341,000 and $399,000 at March 31, 2004 and March 31, 2003, respectively, 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.
73
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
March 31, 2004 Cost Fair Value
- -------------- --------- ----------
Due in one year or less $ 8 $ 8
Due after one year through five years 34 36
Due after five years through ten years 7 8
Due after ten years 2,468 2,539
-------- -------
Total $ 2,517 $ 2,591
======== =======
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, 2004
- --------------
Real estate mortgage
investment conduits $ 2,943 $ 72 $ - $ 3,015
FHLMC mortgage-backed
securities 7,086 104 - 7,190
FNMA mortgage-backed
securities 388 14 - 402
-------- ----- ------ --------
Total $ 10,417 $ 190 $ - $ 10,607
======== ===== ====== ========
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
======== ===== ====== ========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 2004 Cost Fair Value
- -------------- --------- ----------
Due in one year or less $ 16 $ 16
Due after one year through five years 2,722 2,789
Due after five years through ten years 4,736 4,782
Due after ten years 2,943 3,020
-------- --------
Total $ 10,417 $ 10,607
======== ========
Expected maturities of mortgage-backed securities held to maturity and
available for sale 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 $9.9
million and $11.9 million and a fair value of $10.1 million and $12.2 million
at March 31, 2004 and March 31, 2003, respectively, were pledged as collateral
for advances at the Federal Home Loan Bank, Seattle ("FHLB"). Mortgage-backed
securities with an amortized cost of $274,000 and a fair value of $283,000 at
March 31, 2003 were pledged as collateral for governmental public funds by the
Bank. Mortgage-backed securities available for sale with an amortized cost of
$105,000 and $316,000 and a fair value of $111,000 and $327,000 at March 31,
2004 and March 31, 2003, 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 2004 or 2003. The
Company realized no losses on sale of mortgage- backed securities available
for sale in fiscal 2004, 2003 and 2002.
74
7. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
March 31,
---------------------
2004 2003
-------- --------
Residential:
One- to- four family $ 44,194 $ 58,498
Multi-family 5,074 6,313
Construction:
One- to- four family 78,094 70,397
Multi-family - 2,100
Commercial real estate 1,453 4,531
Commercial 57,702 34,239
Consumer
Secured 26,908 23,458
Unsecured 1,689 1,334
Land 27,020 34,630
Commercial real estate 177,785 101,672
-------- --------
419,919 337,172
Less:
Undisbursed portion of loans 31,204 31,222
Deferred loan fees 3,107 2,901
Allowance for loan losses 4,481 2,739
-------- --------
Loans receivable, net $381,127 $300,310
======== ========
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,
---------------------
2004 2003
-------- --------
Adjustable rate loans:
Within one year $181,790 $155,289
After one but within three years 68,752 29,084
After three but within five years 26,145 18,662
After five but within ten years - 265
-------- --------
276,687 203,300
Fixed rate loans:
Within one year 48,098 34,360
After one but within three 37,206 26,647
After three but within five years 33,340 34,675
After five but within ten years 15,871 23,540
After ten years 9,124 16,151
-------- --------
143,639 135,373
-------- --------
$420,326 $338,673
======== ========
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.
75
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 315 $ 539 $ 813
Originations 753 368 184
Principal repayments (336) (592) (458)
------- ------- -------
Ending balance $ 732 $ 315 $ 539
======= ======= =======
8. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 2,739 $ 2,537 $ 1,916
Provision for losses 210 727 1,116
Charge-offs (1,182) (428) (439)
Recoveries 91 78 25
Allowance reclassified with
loan securitization - - (81)
Allowance transferred from
Today's Bancorp acquisition 2,639 - -
Net change in allowance for
unfunded loan commitments and
lines of credit (16) (175) -
------- ------- -------
Ending balance $ 4,481 $ 2,739 $ 2,537
======= ======= =======
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 175 $ - $ -
Net change in allowance for
unfunded loan commitments and
lines of credit 16 175 -
------- ------- -------
Ending balance $ 191 $ 175 $ -
======= ======= =======
The allowance for unfunded loan commitments is included in other liabilities
on the consolidated balance sheets.
At March 31, 2004, 2003 and 2002, the Company's recorded investment in
impaired loans was $1.3 million, $323,000 and $1.4 million respectively. None
of the impaired loans for March 31, 2004, 2003 or 2002 had specific valuation
allowance. 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 $1.2
million, $1.1 million, and $1.1 million during the years ended March 31, 2004,
2003 and 2002, respectively. Interest income recognized on impaired loans was
$44,000, $56,000 and $20,000 during the years ended March 31, 2004, 2003 and
2002, respectively. There were no loans past due 90 days or more and still
accruing interest at March 31, 2004 and 2003. At March 31, 2002, loans past
due 90 days or more and still accruing interest totaled $122,000.
9. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following (in thousands):
March 31,
-------------------------
2004 2003
-------- --------
Land $ 2,026 $ 2,026
Buildings and improvements 7,128 7,008
Leasehold improvements 1,396 927
Furniture and equipment 6,599 5,266
Subtotal 17,149 15,227
Less accumulated depreciation
and amortization (7,414) (5,722)
-------- --------
Total $ 9,735 $ 9,505
======== ========
76
Depreciation expense was $1.1 million, $1.0 million and $1.0 million for years
ended March 31, 2004, 2003 and 2002, respectively. The Company is obligated
under various noncancelable 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,
---------------------
2005 $ 891
2006 843
2007 786
2008 784
2009 747
After 2009 2,393
------
Total $6,444
======
Rent expense was $857,000, $634,000 and $619,000 for the years ended March 31,
2004, 2003 and 2002, respectively.
10. 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,
-------------------------
2004 2003 2002
------ ------ ------
Balance at beginning of year, net $ 629 $ 912 $ 447
Additions 167 671 704
Amortization (479) (634) (195)
Change in valuation allowance 307 (320) (44)
------- ------- -------
Balance end of year, net $ 624 $ 629 $ 912
======= ======= =======
Valuation allowance at beginning
of year $ 413 $ 93 $ 49
Change in valuation allowance (307) 320 44
------- ------- -------
Valuation allowance balance at
end of year $ 106 $ 413 $ 93
======= ======= =======
The Company evaluates MSR's for impairment by stratifying MSR's based on he
predominant risk characteristics of the underlying financial assets. At March
31, 2004 and 2003, the MSR's fair value totaled $669,000 and $629,000,
respectively. The 2004 fair value was estimated using discount rate and a
range of PSA values (The Bond Market Association's standard prepayment values)
that ranged from 205 to 1,399.
Amortization expense for the net carrying amount of MSR's at March 31, 2004 is
estimated as follows (in thousands):
Year ending March 31,
---------------------
2005 $207
2006 136
2007 98
2008 91
2009 72
After 2009 20
----
Total $624
====
Mortgage loans serviced for others (in millions):
March 31,
-------------------------
2004 2003 2002
------ ------ ------
Total $ 133.5 $ 128.2 $ 123.6
======= ======= =======
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):
77
March 31, 2004
5 Year 7 Year 15 Year 30 Year
Mortgages Mortgages Mortgages Mortgages Total
--------- --------- --------- --------- ------
Fair Value of MSR's $ 34 $ 108 $ 199 $ 328 $ 669
Impact of changes in PSA
Impact on fair value of
25% decrease 6 23 42 80 151
Impact on fair value of
50% decrease 15 49 106 203 373
Impact on fair value of
25% increase (3) (11) (16) (39) (69)
Impact on fair value of
50% increase (6) (22) (29) (72) (129)
Impact of changes in discount
Future cash flows
discounted at 9.00% 9.00% 8.25% 8.25%
Impact on fair value of
25% decrease $ 3 $ 9 $ 14 $ 23 $ 49
Impact on fair value of
50% decrease 4 15 23 39 81
Impact on fair value of
25% increase - (1) (1) (7) (9)
Impact on fair value of
50% increase (1) (6) (8) (20) (35)
11. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $758,000 and $369,000 at March
31, 2004 and 2003, respectively. Amortization expense related to the core
deposit intangible during the year ended March 31, 2004, 2003 and 2002 totaled
$430,000, $327,000 and $327,000, respectively. During the year ended March 31,
2004, the Company had additions to core deposit intangibles totaling $820,000
in connection with the acquisition of Today's Bancorp (See Note 2).
Amortization expense for the net core deposit intangible at March 31, 2004 is
estimated to be as follows (in thousands):
Year Ending
March 31,
----------------
2005 $ 180
2006 116
2007 98
2008 83
2009 71
After 2009 210
-----
Total $ 758
=====
12. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands):
Weighted Weighted
Average March 31, Average March 31,
Account Type Rate 2004 Rate 2003
- ------------ -------- --------- -------- --------
NOW Accounts:
Non-interest-bearing 0.00% $ 61,902 0.00% $ 78,464
Regular 0.20 65,718 0.35 27,113
High yield checking 1.30 49,668 1.82 35,537
Money market 0.95 69,984 1.01 53,717
Savings accounts 0.55 29,334 0.75 24,855
Certificates of deposit 2.49 132,509 2.77 101,056
---- --------- ---- ---------
Total 1.20% $ 409,115 1.33% $ 320,742
==== ========= ==== =========
The weighted average rate is based on interest rates at the end of the period.
78
Certificates of deposit as of March 31, 2004, mature as follows (in
thousands):
Amount
--------
Less than one year $ 86,272
One year to two years 25,726
Two years to three years 6,696
Three years to four years 4,699
Four years to five years 5,542
After five years 3,574
--------
Total $132,509
========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation ("FDIC"). Deposits with balances in excess of $100,000
totaled $186.2 million and $138.1 million at March 31, 2004 and 2003,
respectively.
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
------------------------------
2004 2003 2002
------- ------- -------
NOW Accounts:
Regular $ 122 $ 138 $ 211
High yield checking 713 821 4
Money market 583 692 1,307
Savings accounts 163 182 292
Certificates of deposit 3,062 3,642 6,915
------- ------- -------
Total $ 4,643 $ 5,475 $ 8,729
======= ======= =======
13. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2004, advances from FHLB, totaled $40.0 million with a weighted
average interest rate of 4.875%. The fixed rate borrowings of $35.0 million
had fixed interest rates ranging from 4.65% to 6.38%. The remaining $5.0
million adjustable rate advance had a weighted average interest rate of 1.26%,
which is based on 3 month London Interbank Offered Rate Index ('LIBOR") plus
11 basis points as quoted by the FHLB. The weighted average interest rate for
fixed and adjustable rate advances was 4.96%, 5.53% and 6.25% for the years
ended March 31, 2004, 2003 and 2002, respectively.
The Bank has a credit line with the FHLB equal to 35% of total assets, limited
by available collateral. At March 31, 2004, based on collateral values, the
Bank had additional borrowing commitments available of $40.6 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, FHLB stock owned by the Company, deposits with the FHLB, and
certain mortgages on deeds of trust securing such properties as provided in
the agreements with the FHLB. At March 31, 2004, loans carried at $69.1
million and investments and mortgage-backed securities carried at $16.3
million were pledged as collateral to 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.
14. FEDERAL INCOME TAXES
Federal income tax provision for the years ended March 31 consisted of the
following (in thousands):
2004 2003 2002
------- ------- -------
Current $ 2,789 $ 2,930 $ 2,047
Deferred 421 (942) 89
------- ------- -------
Total $ 3,210 $ 1,988 $ 2,136
======= ======= =======
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:
79
2004 2003 2002
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
ESOP market value adjustment 0.9 0.9 0.4
Interest income on municipal securities (0.4) (0.6) (0.7)
Dividend received deduction (0.6) (2.6) (2.8)
Other, net (1.1) (0.4) (0.4)
---- ---- ----
Effective federal income tax rate 32.8% 31.3% 30.5%
==== ==== ====
Taxes related to gains on sales of securities were none, $55,000 and $276,000
for the years ended March 31, 2004, 2003 and 2002, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 2004 and 2003
are as follows (in thousands):
2004 2003
------- -------
Deferred tax assets:
Deferred compensation $ 491 $ 436
Loan loss reserve 1,589 907
Core deposit intangible 365 328
Accrued expenses 208 137
Accumulated depreciation 54 129
Net operating loss carryforward 1,171 -
Net realized loss on securities available
for sale 782 782
Other 83 58
------- -------
Total deferred tax asset 4,743 2,777
------- -------
Deferred tax liabilities:
FHLB stock dividend (934) (851)
Tax qualified loan loss reserve (360) (47)
Purchase accounting (247) -
Net unrealized gain on securities available
for sale (109) (190)
Other (357) (368)
------- -------
Total deferred tax liability (2,007) (1,456)
------- -------
Deferred tax asset, net $ 2,736 $ 1,321
======= =======
At March 31, 2004, the Company had a taxable temporary difference of
approximately $760,000 that arose before 1987 (base-year tax reserve). 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.
As a result of the acquisition of Today's Bancorp, Inc. net deferred tax
assets increased $1.8 million. The Company also has net operating loss
carryforwards of approximately $3.4 million for federal tax purposes due to
the acquisition of Today's Bancorp, Inc. Utilization of net operating losses,
which begin to expire at various times starting in 2019, may be subject to
certain limitations under Section 382 of the Internal Revenue Code.
The tax effects of certain tax benefits related to stock options are recorded
directly to shareholder's equity.
No valuation allowance for deferred tax assets was deemed necessary at March
31, 2004 or 2003 based upon the Company's anticipated future ability to
generate taxable income from operations.
15. 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.
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, 2004, 2003 and 2002
were $93,000, $88,000 and $76,000, 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. Executive and Senior Vice
Presidents of the Company may also defer salary into this plan. 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
80
Compensation Plan based upon a formula relating to gross revenues, which
amounted to 7.12%, 7.82%, and 8.32% for the years ended March 31, 2004, 2003
and 2002, respectively. The estimated liability under the plan is accrued as
earned by the participant. At March 31, 2004 and 2003, the Company's aggregate
liability under the plan was $1.4 million and $1.1 million, respectively.
Bonus Programs - The Company maintains a bonus program for senior management
and certain key individuals. 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. The Company
expensed $482,000, $414,000, $360,000 in bonuses during the years ended March
31, 2004, 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 was recognized over a five-year vesting period, with 20% vesting
immediately upon grant. At March 31, 2004, all shares has been issued and
full vested. Compensation expense of $15,000, $203,000 and $534,000 was
recognized for the years ended March 31, 2004, 2003 and 2002, respectively.
Stock Option Plans - In July 1998, shareholders of the Company approved the
adoption of the 1998 Stock Option Plan ("1998 Plan"). 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. Under the 1998 Plan,
the Company may grant both incentive and non-qualified stock options up to
357,075 shares of its common stock to officers, directors and employees. The
exercise price of each option granted under the 1998 Plan equals the fair
market value of the Company's stock on the date of grant with a maximum term
of ten years and options vest over five years. At March 31, 2004, there were
options for 38,483 shares available for grant under the 1998 plan.
In July 2003, shareholders of the Company approved the adoption of the 2003
Stock Option Plan ("2003 Plan"). The 2003 Plan was effective July 2003 and
will expire on the tenth anniversary of the effective date, unless terminated
sooner by the Board. Under the 2003 Plan, the Company may grant both
incentive and non-qualified stock options up to 229,227 shares of its common
stock to officers, directors and employees. The exercise price of each option
granted under the 2003 Plan equals the fair market value of the Company's
stock on the date of grant with a maximum term of ten years from date of grant
and options vest over five years. At March 31, 2004, no options had been
granted under the 2003 plan.
81
Stock option activity is summarized in the following table:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
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
Grants 23,000 18.30
Options exercised (40,281) 12.02
------- -------
Outstanding March 31, 2004 245,269 $ 13.57
======= =======
Additional information regarding options outstanding as of March 31, 2004 is
as follows:
Options Outstanding Options Exercisable
---------------------- ----------------------
Weighted Avg Weighted Weighted
Remaining Average Average
Range of Contractual Number Exercise Number Exercise
Exercise Price Life (years) Outstanding Price Exercisable Price
- -------------- ----------- ----------- -------- ----------- --------
$8.06 - $12.31 5.74 49,498 $ 10.68 45,298 $ 10.81
13.51 - 13.75 4.72 167,771 13.74 161,771 13.74
14.97 - 19.02 9.16 28,000 17.71 6,600 17.29
---- ------- ------- ------- -------
5.43 245,269 $ 13.57 213,699 $ 13.23
==== ======= ======= ======= =======
16. EMPLOYEE STOCK OWNERSHIP PLAN
The Company ESOP 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 at the
discretion of the Board of Directors and allocated to participant accounts on
December 31 of each year until 2011. ESOP compensation expense included in
salaries and benefits was $477,000, $372,000 and $284,000 for years ended
March 31, 2004, 2003 and 2002, 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:
Fair Value Allocated
of Unreleased and
Unreleased ESOP Released
Shares Shares Shares Total
---------- ---------- --------- -------
Balance, March 31, 2001 270,963 210,329 481,292
Allocation December 31, 2001 (24,633) 24,633 -
------- -------
Balance, March 31, 2002 $3,077,000 246,330 234,962 481,292
-------
Allocation December 31, 2002 (24,633) 24,633 -
------- -------
Balance, March 31, 2003 $3,490,000 221,697 259,595 481,292
-------
Allocation December 31, 2003 (24,633) 24,633 -
------- -------
Balance, March 31, 2004 $4,083,000 197,064 284,228 481,292
======= ======= -------
17. 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, 2004 or
2003.
82
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, 2004.
As of March 31, 2004, 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):
For Categorized as "Well
Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2004
Total Capital:
(To Risk Weighted Assets) $53,952 12.78% $33,760 8.0% $42,200 10.0%
Tier I Capital:
(To Risk Weighted Assets) 49,471 11.72 16,880 4.0 25,320 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 49,471 9.81 15,125 3.0 25,209 5.0
Tangible Capital:
(To Tangible Assets) 49,471 9.81 7,563 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, 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 12,815 4.0 19,222 6.0
Tier I Capital:
(To Adjusted Tangible
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
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, 2004 (in thousands):
Equity $ 59,960
Net unrealized securities loss (213)
Core deposit intangible (10,215)
Servicing asset (61)
---------
Tangible capital 49,471
General valuation allowance 4,481
---------
Total capital $ 53,952
=========
83
At periodic intervals, the OTS and the 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 2004
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 2004 financial
statements cannot presently be determined.
The following table summarizes the Company's common stock repurchased in each
of the last three fiscal years (dollars in thousands):
Shares Value
------- ------
2004 81,500 $1,510
2003 196,100 $2,882
2002 268,700 $3,123
18. 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 conversion of outstanding
stock options and from assumed vesting of shares awarded but not released
under the Company's MRDP plan. ESOP shares are not considered outstanding for
earnings per share purposes until they are committed to be released.
Years Ended March 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Basic EPS computation:
Numerator-Net income $6,554,000 $4,359,000 $4,868,000
Denominator-Weighted average
common shares outstanding 4,640,485 4,365,855 4,572,253
Basic EPS $ 1.41 $ 1.00 $ 1.06
========== ========== ==========
Diluted EPS computation:
Numerator-Net Income $6,554,000 $4,359,000 $4,868,000
Denominator-Weighted average
common shares outstanding 4,640,485 4,365,855 4,572,253
Effect of dilutive stock
options 72,149 50,437 32,940
Effect of dilutive MRDP 1,695 8,441 7,275
---------- ---------- ----------
Weighted average common
shares and common stock
equivalents 4,714,329 4,424,733 4,612,468
Diluted EPS $ 1.39 $ 0.99 $ 1.06
========== ========== ==========
19. 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.
84
The estimated fair value of financial instruments is as follows (in
thousands):
March 31,
----------------------------------------------
2004 2003
-------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- -------- --------- ---------
Assets:
Cash $ 47,907 $ 47,907 $ 60,858 $ 60,858
Investment securities
available for sale 32,833 32,883 20,426 20,426
Mortgage-backed securities
held to maturity 2,517 2,591 3,301 3,403
Mortgage-backed securities
available for sale 10,417 10,607 13,069 13,069
Loans receivable, net 381,127 390,750 300,310 308,204
Loans held for sale 407 407 1,501 1,501
Mortgage servicing rights 624 669 629 629
FHLB stock 6,034 6,034 5,646 5,646
BOLI 12,121 12,121 - -
Liabilities:
Demand - Savings deposits 276,606 276,881 219,686 219,753
Time deposits 132,509 134,926 101,056 102,322
FHLB advances - long-term 40,000 42,011 40,000 42,267
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.
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. For variable rate
loans that reprice frequently and have no significant change in credit, fair
values are based on carrying values.
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, 2004, the MSR's fair value totaled $669,000, which was estimated
using a range of PSA (The Bond Market Association's standard prepayment)
values that ranged from 205 to 1,399.
Bank owned life insurance - The carrying amount is the cash surrender value of
all policies.
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, 2004 and 2003. Since the majority of the Bank's off-balance-sheet
instruments consist of non-fee producing, variable rate commitments, the Bank
has determined they do not have a distinguishable fair value.
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, 2004 and 2003.
Although management was not aware of any factors that would significantly
affect the estimated
85
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.
20. 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, 2004, the Company had commitments to originate fixed rate
mortgage loans of $886,000 at interest rates ranging from 4.5% to 5.5%. At
March 31, 2004, commitments to originate adjustable rate mortgage loans were
$2.7 million at an average interest rate of 5.82%. Undisbursed balance of
mortgage loans closed was $31.2 million at March 31, 2004. Commitments to
originate consumer loans totaled $1.4 million and unused lines of consumer
credit totaled $18.6 million at March 31, 2004. Commercial real estate loan
commitments to originate loans totaled $3.4 million. Undisbursed balance of
commercial real estate mortgage loans closed was $13.9 million at March 31,
2004. Commercial loan commitments totaled $600,000 and unused commercial lines
of credit totaled $29.4 million.
The allowance for unfunded loan commitments was $191,000 at March 31, 2004.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary. At March 31, 2004 and 2003, standby letters of credit totaled
$173,000 and $136,000, respectively.
Most of the Bank's business activity is with customers located in the states
of Washington and Oregon. Investments in state and municipal securities
involve government entities primarily within the state of Washington. Loans
are generally limited, by federal and state banking regulation, to 10% of the
Bank's shareholder's equity, excluding accumulated other comprehensive income.
As of March 31, 2004 and 2003, the Bank had no individual industry
concentrations.
At March 31, 2004, the Company had firm commitments to sell $407,000 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, 2004, loans under
warranty totaled $125.0 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.
At March 31, 2004, scheduled maturities of certificates of deposit, FHLB
advances and future operating minimum lease commitments were as follows:
Within 1-3 4-5 Over Total
(In thousands) 1 year Years Years 5 Years Balance
------- ----- ----- ------- -------
Certificates of deposit $86,272 $32,422 $10,241 $ 3,574 $132,509
FHLB advances - 35,000 5,000 - 40,000
Operating leases 891 1,629 1,531 2,393 6,444
------- ------- ------- ------- --------
Total other contractual
obligations $87,163 $69,051 $16,772 $ 5,967 $178,953
======= ======= ======= ======= ========
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.
The Bank has entered into employment contracts with certain key employees
which provide for contingent payment subject to future events.
86
21. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
March 31, 2004 AND 2003
(In thousands) 2004 2003
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of
$5,268 and $5,663) $ 5,400 $ 5,717
Investment in the Bank 59,960 48,956
Other assets 423 505
Deferred income taxes 109 (4)
-------- --------
TOTAL ASSETS $ 65,892 $ 55,174
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 41 $ 118
Dividend payable 669 545
Shareholders' equity 65,182 54,511
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,892 $ 55,174
======== ========
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
- ------------------------------------------------------------------------------
INCOME:
Dividend income from bank $ 12,952 $ 6,094 $ 4,000
Interest on investment securities and other
short-term investments 28 48 93
Interest on loan receivable from the Bank 180 193 206
Gain on sale of securities - 162 -
Other income 2 - -
-------- -------- --------
Total income 13,162 6,497 4,299
-------- -------- --------
EXPENSE:
Management service fees paid to the Bank 122 107 28
Other expenses 189 165 159
-------- -------- --------
Total expense 311 272 187
-------- -------- --------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES AND
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 12,851 6,225 4,112
(BENEFIT) PROVISION FOR FEDERAL INCOME TAXES (117) 1 31
-------- -------- --------
INCOME OF PARENT COMPANY 12,968 6,224 4,081
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF THE BANK (6,414) (1,865) 787
-------- -------- --------
NET INCOME $ 6,554 $ 4,359 $ 4,868
======== ======== ========
87
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,554 $ 4,359 $ 4,868
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of the Bank 6,414 1,865 (787)
Provision for deferred income taxes 2 - -
Earned ESOP shares 477 372 284
Earned MRDP shares 15 203 544
Net gain on sale of investment securities - (162) -
Changes in assets and liabilities:
(Increase) in other assets, net of acquisition (536) (156) (460)
(Decrease) increase accrued expenses and other
liabilities (245) 84 54
-------- -------- --------
Net cash provided by operating activities 12,681 6,565 4,503
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from call, maturity, or sale of
investment securities available for sale - 1,518 -
Acquisition (9,482) - -
-------- -------- --------
Net cash (used) provided by investing
activities (9,482) 1,518 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,490) (2,127) (2,009)
Repurchase of common stock (1,510) (2,882) (3,123)
Proceeds from exercise of stock options 484 417 91
-------- -------- --------
Net cash used by financing activities (3,516) (4,592) (5,041)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (317) 3,491 (538)
CASH, BEGINNING OF YEAR 5,717 2,226 2,764
-------- -------- --------
CASH, END OF YEAR $ 5,400 $ 5,717 $ 2,226
======== ======== ========
88
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 2004:
Interest income $ 7,035 $ 7,191 $ 7,227 $ 6,131
Interest expense 1,572 1,729 1,822 1,504
Net interest income 5,463 5,462 5,405 4,627
Provision for loan losses 140 - - 70
Non-interest income 1,505 1,419 2,049 1,616
Non-interest expense 4,489 4,570 4,578 3,935
Income before income taxes 2,339 2,311 2,876 2,238
Provision for income taxes 742 772 958 738
------- ------- ------- -------
Net income $ 1,597 $ 1,539 $ 1,918 $ 1,500
======= ======= ======= =======
Basic earnings per share (1) $ 0.33 $ 0.32 $ 0.41 $ 0.34
======= ======= ======= =======
Diluted earnings per
share (1) $ 0.33 $ 0.32 $ 0.41 $ 0.34
======= ======= ======= =======
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
======= ======= ======= =======
(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
- --------------------
Information concerning a change in accountants included in the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission
on October 6, 2003 and the Company's Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on November 7, 2003.
Item 9A. 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)-
15(e) and 15d 15(e) of the Securities Exchange Act of 1934 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 as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the
Securities and Exchange Act of 1934 is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
(b) Changes in Internal Controls: There was no change in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
89
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 2004 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.
In December 2003, the Board of Directors adopted the Officer and Director Code
of Ethics. The code is applicable to each of the Company's officers,
including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional
conduct. A copy of the Code of Ethics is available on the Company's website
at www.riverviewbank.com.
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 2004 Annual Meeting of Stockholders
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ----------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
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 2004
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
2004 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
This information set forth under the section captioned "Independent Auditors"
in the Proxy statement for the 2004 Annual Meeting of Stockholders is
incorporated herein by reference.
90
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 Karen Nelson**
10.4 Severance Agreement with John A. Karas*****
10.5 Employee Severance Compensation Plan**
10.6 Employee Stock Ownership Plan***
10.7 Management Recognition and Development Plan****
10.8 1998 Stock Option Plan****
10.9 1993 Stock Option and Incentive Plan****
10.10 Form of Severance Agreement Entered into by Officers
10.11 2003 Stock Option Plan******
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
23.1 Consent of Independent Auditors
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification Pursuant to Section 906 of the Sarbanes-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.
***** Filed as an exhibit to the Registrant's Form 10-K for the year ended
March 31, 2002, and incorporated herein by reference.
****** Filed as an exhibit to the Registrant's Annual Meeting Proxy Statement
dated June 5, 2003, and incorporated herein by reference.
(b) Reports on Form 8-K
Form 8-K was filed February 12, 2004 announcing change in
Riverview Bancorp, Inc. executive officers.
91
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 28, 2004 By: /s/ Patrick Sheaffer
-----------------------------
Patrick Sheaffer
Chairman of the Board 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 and President and Chief
Chief Executive Officer Operating Officer
(Principal Executive Officer) Director
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Ron Dobyns By: /s/ Paul L. Runyan
-------------------------- --------------------------
Ron Dobyns Paul L. Runyan
Senior Vice President and Director
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Robert K. Leick By: /s/ Gary R. Douglass
-------------------------- --------------------------
Robert K. Leick Gary R. Douglass
Director Director
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Edward R. Geiger By: /s/ Michael D. Allen
-------------------------- --------------------------
Edward R. Geiger Michael D. Allen
Director Vice Chairman of the Board and
Director
Date: May 28, 2004 Date: May 28, 2004
92
Exhibit 10.10
Form of Severance Agreement Entered Into
By Dave Dalhstrom, Chief Credit Officer and Executive Vice President
Jim Baldovin Senior Vice President Retail Banking
Jeff Donaldson Senior Vice President
AGREEMENT
This AGREEMENT is made effective as of ___________, by and between
RIVERVIEW COMMUNITY BANK (the "BANK"), RIVERVIEW BANCORP, INC. (the
"COMPANY"), and _______________ ("EXECUTIVE").
WHEREAS, the BANK recognizes the substantial contribution EXECUTIVE will
be making to the BANK and wishes to protect his position therewith for the
period provided in this Agreement in the event of a Change in Control (as
defined herein): and
WHEREAS, EXECUTIVE serves in the position of Executive Vice President of
the BANK, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date of this Agreement and continuing at each anniversary date thereafter,
the Board of Directors of the BANK ("Board") may extend the Agreement for
an additional year. The Board will conduct a performance evaluation of
EXECUTIVE for purposes of determining whether to extend the Agreement, and
the results thereof shall be included in the minutes of the Board's
meeting.
2. Payments to EXECUTIVE Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of the
Change in Control by the voluntary or involuntary termination of
EXECUTIVE's employment, other than for Cause, as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. For purposes
of this Agreement, "voluntary termination" shall be limited to the
circumstances in which EXECUTIVE elected to voluntarily terminate his
employment within twelve (12) months of the effective date of a
Change in Control following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or
benefits (other than a reduction affecting the Bank's personnel
generally), or relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change
of Control.
(b) A "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) an offeror or other than the Corporation
purchases shares of the stock of the Corporation or the Bank pursuant
to a tender or exchange offer for such shares, (b) any person (as
such term is used in Section 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of
securities of the Corporation or the Bank representing twenty-five
percent (25%) or more of the combined voting power of the
Corporation's or the Bank's then outstanding securities, (c) the
membership of the board of directors of the Corporation or the
Bank changes as the result of a contested election, such that
individuals who were directors at
1
the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Agreement) do
not constitute a majority of the Board at the end of such period, or
(d) shareholders of the Corporation or the Bank approve a merger,
consolidation, sale or disposition of all or substantially all of the
Corporation's or the Bank's assets, or a plan of partial or complete
liquidation.
(c) EXECUTIVE shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of EXECUTIVE's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, willful violation of any law, rule,
regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material
provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing
in the savings institution industry. Notwithstanding the foregoing,
EXECUTIVE shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a
resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to
EXECUTIVE and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of
the Board, EXECUTIVE was guilty of conduct justifying Termination for
Cause and specifying the particulars thereof in detail. EXECUTIVE
shall not have the right to receive compensation or other benefit for
any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve
(12) months of the effective date of a Change in Control by the
voluntary or involuntary termination of EXECUTIVE's employment other
than Termination for Cause, the BANK shall be obligated to pay
EXECUTIVE, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance
pay, a sum equal to 2.99 times EXECUTIVE's "base amount," within the
meaning of 280G(b)(3) of the Internal Revenue Code of 1986 ("Code"),
as amended. Such payment shall be made in a lump sum paid within ten
(10) days of EXECUTIVE's date of termination.
(b) Upon the occurrence of a Change in Control of the Bank followed
within twelve (12) months of the effective date of a Change in
Control by EXECUTIVE's voluntary or involuntary termination of
employment, other than Termination for Cause, the BANK shall cause to
be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the BANK for
EXECUTIVE prior to his severance. Such coverage and payments shall
cease upon expiration of thirty-six (36) months from the date of
EXECUTIVE's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded
to EXECUTIVE under this Section, together with any other payments or
benefits received or to be received by EXECUTIVE in connection with a
Change of Control, would be deemed to include an "excess parachute
payment" under 280G of the Code, then, at the election of EXECUTIVE,
(i) such payments or benefits shall be payable or provided to
EXECUTIVE over the minimum period necessary to reduce the present
value of
2
such payments or benefits to an amount which is one dollar ($1.00)
less than three (3) times EXECUTIVE's "base amount" under 280G(b)(3)
of the Code or (ii) the payments or benefits to be provided under
this Section 3 shall be reduced to the extent necessary to avoid
treatment as an excess parachute payment with the allocation of the
reduction among such payments and benefits to be determined by
EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the BANK and EXECUTIVE,
except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to EXECUTIVE of a kind elsewhere
provided. No provision of this Agreement shall be interpreted to mean
that EXECUTIVE is subject to receiving fewer benefits than those available
to him without reference to this Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or
to execution, attachment, levy, or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to
affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the COMPANY, the BANK and their respective successors and
assigns.
6. Modification and Waiver
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the
party charged with such waiver or estoppel. No such written waiver
shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific
term or condition waived and shall not constitute a waiver of such
term or condition for the future or as to any act other than that
specifically waived.
7. Required Provisions
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not
prejudice EXECUTIVE's right to compensation or other benefits under
this Agreement. EXECUTIVE shall not have the right to receive
compensation or other benefits for any period after Termination for
Cause as defined in Section 2(c) herein.
3
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1), the BANK's obligations
under the Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the BANK may, in its discretion, (i) pay
EXECUTIVE all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part)
any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued
under Section 8(e)(4) and (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or
(g)(1), all obligations of the BANK under the Agreement shall
terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this paragraph shall not affect any vested
rights of the parties.
All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the BANK under
the authority contained in Section 13(c) of the FDIA and (ii) by the
Director, or his or her designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to
operation of the BANK or when the BANK is determined by the Director to be
in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Washington, unless
preempted by Federal law as now or hereafter in effect. In the event that
any provision of this Agreement conflicts with 12 C.F.R. Section
563.39(b), the latter provision shall prevail.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the BANK, in accordance with
the rules of the American Arbitration Association then in effect.
4
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to EXECUTIVE and, if such payments are not timely paid or
provided by the BANK, such amounts and benefits shall be paid or provided
by the COMPANY.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the BANK if EXECUTIVE is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
13. Successor to the BANK or the COMPANY
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the BANK or the
COMPANY, expressly and unconditionally to assume and agree to perform the
BANK's or the COMPANY's obligations under this Agreement, in the same
manner and to the same extent that the BANK or the COMPANY would be
required to perform if no such succession or assignment had taken place.
14. Signatures
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized
officer, and EXECUTIVE has signed this Agreement, with an effective date
of the 6th day of May, 2002.
ATTEST: RIVERVIEW COMMUNITY BANK
- --------------------------- BY: ------------------------------
ATTEST: RIVERVIEW BANCORP, INC.
- --------------------------- BY: ------------------------------
- ---------------------------
- ---------------------------
WITNESS
5
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) 85% 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.
Exhibit 23
Consent of Independent Auditors
Consent of Independent Auditors
We consent to the incorporation by reference in Registrations Statements Nos.
333-66049, 333-38887 and 333-109894 on Form S-8 of Riverview Bancorp, Inc., of
our report dated April 23, 2004 appearing in the Annual Report on Form 10K of
Riverview Bancorp, Inc. for the year ended March 31, 2004.
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
May 28, 2004
Exhibit 23.1
Consent of Independent Auditors
Exhibit 23.1
Independent Auditors Consent
We consent to the incorporation by reference in Registration Statements Nos.
333-66049, 333-38887, and 333-109894 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, 2004.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
May 28, 2004
Exhibit 31.1
- ------------
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
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 and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 28, 2004 /S/ Patrick Sheaffer
--------------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
Exhibit 31.2
- ------------
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Ron Dobyns, certify that:
1. I have reviewed this annual report on Form 10-K of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
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 and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 28, 2004 /S/ Ron Dobyns
-----------------------------
Ron Dobyns
Chief Financial Officer
EXHIBIT 32
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 Shaeffer /S/ Ron Dobyns
- --------------------------- ---------------------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: May 28, 2004