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, 1998
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 small business registrant as specified in its charter)
Washington 91-1838969
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
700 N.E. Fourth Avenue, Camas, Washington 98607
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 834-2231
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section
12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. X
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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 May 8, 1998, was approximately $112,686,000 (6,154,326 shares at $18.31 per
share). It is assumed for purposes of this calculation that none of the
Registrant's officers, directors and 5% stockholders (including the Riverview
Savings Bank, FSB Employee Stock Ownership Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (Part III).
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Part I
Item 1. Business
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General
Riverview Bancorp, Inc. ("Company"), a Washington corporation, was
organized on June 23, 1997 for the purpose of becoming the holding company for
Riverview Savings Bank, FSB ("Savings Bank") upon the Savings Bank's
reorganization as a wholly owned subsidiary of the Company resulting from the
conversion of Riverview, M.H.C., Camas, Washington ("MHC"), from a federal
mutual holding company to a stock holding company ("Conversion and
Reorganization"). The Conversion and Reorganization was completed on
September 30, 1997. In connection with the Conversion and Reorganization, the
Company issued 3,570,750 shares of its common stock at $10.00 per share and
each share of common stock of the Savings Bank issued and outstanding at
September 30, 1997 and held by persons other than the MHC ("Savings Bank
Public Stockholders") were exchanged for 2.5359 shares of common stock of the
Company (with cash issued in lieu of fractional shares at the rate of $10.00
per share). The Company has not engaged in any significant activity other
than holding the stock of the Savings Bank. Accordingly, the information set
forth in this report, including financial statement and related data, relates
primarily to the Savings Bank.
The Savings 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 Savings Bank's
deposits are insured by the FDIC up to applicable legal limits under the
Savings Association Insurance Fund ("SAIF"). The Savings Bank has been a
member of the Federal Home Loan Bank ("FHLB") System since 1937.
The Savings Bank is a community oriented financial institution offering
traditional financial services to the residents of its primary market area.
The Savings Bank considers Clark, Cowlitz, Klickitat and Skamania Counties of
Washington as its primary market area. The Savings Bank is engaged primarily
in the business of attracting deposits from the general public and using such
funds to originate fixed-rate mortgage loans and adjustable rate mortgage
("ARM") loans secured by one- to- four family residential real estate located
in its primary market area. The Savings Bank is also an active originator of
residential construction loans and consumer loans.
Market Area
The Savings Bank conducts operations from its home office in Camas and
eight branch offices in Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (two branch offices) and Longview, Washington. The
Savings Bank's market area for lending and deposit taking activities
encompasses Clark, Cowlitz, Skamania and Klickitat Counties, throughout the
Columbia River Gorge area. Camas is located in Clark County which is
approximately 15 miles east of Portland, Oregon.
Several businesses are located in the Camas area because of the favorable
tax structure and relatively lower energy costs as compared to Oregon.
Washington has no state income tax and Clark County operates a public electric
utility which provides relatively lower cost electricity than does Oregon.
Located in the Camas area are Sharp Electronics, Hewlett Packard, James River,
Underwriters Laboratory and Wafer Tech, as well as several support industries.
In addition to this industrial base, the Columbia River Gorge Scenic Area has
been a source of tourism which has transformed the area from its past
dependence on the timber industry. The primary tourist destination of the
Gorge area is the Skamania Lodge, a $25 million resort complex opened in 1993.
In addition, the Hood River, Oregon, area has become internationally renowned
for windsurfing and has attracted young professionals, many of whom have
purchased second residences in the area.
The Savings Bank faces strong competition from many financial
institutions for deposits and loan originations.
Selected Financial Data
See "Item 6. Selected Financial Data," included herein.
1
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Lending Activities
General. At March 31, 1998, the Savings Bank's total net loans
receivable amounted to $162.6 million, or 59.5% of total assets at that date.
The principal lending activity of the Savings Bank is the origination of
residential mortgage loans through its mortgage banking activities, including
residential construction loans, though the Savings Bank has originated loans
collateralized by commercial properties. The Savings Bank, to a lesser
extent, also makes consumer loans and has made commercial business loans. A
substantial portion of the Savings Bank's loan portfolio is secured by real
estate, either as primary or secondary collateral, located in its primary
market area.
2
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Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
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<TABLE>
At March 31,
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1998 1997 1996 1995 1994
------------------ ----------------- ----------------- ---------------- -------------
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Amount Percent Amount Percent Amount Percent Amount Percent Amount
Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -----
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to- four
family(1). $96,225 59.18% $ 94,536 62.29% $ 88,140 68.77% $ 73,047 70.39% $64,068
70.51%
Multi-family 4,790 2.95 5,439 3.58 2,958 2.31 2,048 1.97 1,350
1.49
Construction
one- to-
four family 35,003 21.52 32,529 21.43 22,596 17.63 20,822 20.07 25,280
27.82
Construction
multi-family 5,352 3.29 547 0.36 361 0.28 -- -- --
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Construction
commercial. -- -- 634 0.42 500 0.39 344 0.33 --
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Land . . . . 16,431 10.10 7,900 5.21 7,546 5.89 5,226 5.04 2,870
3.16
Commercial
real estate 9,407 5.78 8,997 5.93 6,518 5.08 5,335 5.14 6,238
6.87
Total real -------- ------ -------- ------ -------- ------ -------- ------ ------- ----
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estate
loans. . . 167,208 102.82 150,582 99.22 128,619 100.35 106,822 102.94 99,806
109.85
Commercial
business . . 1,992 1.22 794 0.53 969 0.76 925 0.89 803
0.88
Consumer loans:
Automobile
loans . . . 2,829 1.74 2,889 1.90 2,384 1.86 1,623 1.56 1,510
1.66
Savings
account
loans . . . 653 0.40 734 0.48 613 0.48 480 0.46 449
0.49
Home equity
loans . . . 9,885 6.08 8,254 5.44 5,107 3.99 1,743 1.68 --
- --
Other consumer
loans . . . 2,741 1.69 2,416 1.59 1,695 1.32 1,448 1.40 1,358
1.50
Total -------- ------ -------- ------ -------- ------ -------- ------ ------- ----
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consumer
loans . . . 16,108 9.91 14,293 9.41 9,799 7.65 5,294 5.10 3,317
3.65
Total loans
and loans held
for sale. . 185,308 165,669 139,387 113,041 103,926
Less:
Undisbursed
loans in
process. . 19,354 11.90 11,087 7.30 8,876 6.93 7,098 6.84 10,917
12.02
Unamortized
loan
origination
fees, net
of direct
costs. . . 2,340 1.44 1,967 1.30 1,678 1.31 1,502 1.45 1,502
1.65
Unearned
discounts . 2 -- 10 0.01 11 0.01 12 0.01 --
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Allowance for
possible
loan
losses . . 984 0.61 831 0.55 653 0.51 657 0.63 647
0.71
-------- ------ -------- ------ -------- ------ -------- ------ ------- ----
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Total loans
receivable,
net(1). . . $162,628 100.00% $151,774 100.00% $128,169 100.00% $103,772 100.00% $90,860
100.00%
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(1) Includes loans held for sale of $1.4 million, $80,000, $1.9 million,
$247,000 and $4.5 million at March 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
One- to- Four Family Real Estate Lending. Historically, the Savings
Bank's primary lending activity has been the origination of mortgage loans to
enable borrowers to purchase one- to- four family properties. At March 31,
1998, approximately $96.2 million, or 59.2% of total net loans receivable,
consisted of loans secured by one- to- four family residential real estate.
One- to- four family mortgage loans accounted for $79.1 million, or 75.1% of
total loan originations, for the year ended March 31, 1998.
In addition to originating one- to- four family loans for its portfolio,
the Savings Bank is an active mortgage broker for several third party mortgage
lenders. In recent periods, such mortgage brokerage activities have reduced
the volume of fixed-rate one- to- four family loans that are originated and
sold by the Savings Bank. See "-- Lending Activities -- Loan Originations,
Sales and Purchases" and "-- Lending Activities -- Mortgage Brokerage."
The Savings Bank originates both fixed-rate mortgage loans and ARM loans
secured by one- to- four family properties.
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Borrower demand for ARM loans versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the interest rates and loan fees
offered for fixed-rate mortgage loans and the first year interest rates and
loan fees for ARM loans. The relative amount of fixed-rate mortgage loans and
ARM loans that can be originated at any time is largely determined by the
demand for each in a competitive environment.
The Savings Bank originates fixed-rate mortgage loans for terms of 15 to
30 years as well as balloon mortgage loans with terms of either five or seven
years. The interest rates on the balloon mortgage loans are adjusted after
the expiration of the initial balloon term. Fixed rate mortgage loans are
generally originated to conform to standards that allow them to be sold in the
secondary mortgage market. The Savings Bank generally sells fixed-rate
mortgage loans with maturities of 15 years or more to the Federal Home Loan
Mortgage Corporation ("FHLMC"), servicing retained. See "-- Lending
Activities -- Loan Originations, Sales and Purchases" and "-- Lending
Activities -- Mortgage Loan Servicing."
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. At March 31, 1998, $57.1 million, or 43.5%, of the Savings
Bank's one- to- four family loan portfolio consisted of ARM loans. ARM loans
are originated with interest rates and payments that adjust annually based on
a rate equal to 2.75% to 3.75% above the prevailing rate on the one-year
constant maturity U.S. Treasury Bill Index.
At March 31, 1998, the Savings Bank charged an origination fee on ARM
loans ranging from 1% to 3% of the loan principal amount and an initial
interest rate that ranged from 6.25% to 7.25% per annum. The annual interest
rate cap (the maximum amount by which the interest rate may be increased per
year) on ARM loans is generally 2% and the lifetime interest rate cap is
generally 5% to 6% over the initial interest rate. The Savings Bank does not
originate negative amortization loans.
As a marketing incentive, the Savings Bank offers ARM loans with a
discounted or "teaser" rate of up to 2% below the normal rate offered. The
borrower, however, is qualified at the fully indexed rate. Annual and
lifetime interest rate caps are based on the initial discounted rate.
"Teaser" rate loans are subject to prepayment penalty during the first three
years of the loan term if the borrower repays more than 20% of the outstanding
principal balance per year. During the first year, the penalty is 3% of the
outstanding principal balance; during year two, it is 2% of the outstanding
principal balance; and during year three, it is 1% of the outstanding
principal balance.
The retention of ARM loans in the portfolio helps reduce the Savings
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
arising from changed rates to be paid by the customer. It is possible that
during periods of rising interest rates the risk of default on ARM loans may
increase as a result of repricing and the increased costs to the borrower.
Furthermore, because "teaser" rate loans originated by the Savings Bank
generally provide for initial rates of interest below the rates which would
apply were the adjustment index used for pricing initially (discounting),
these loans are subject to increased risks of default of delinquency. Another
consideration is that although ARM loans allow the Savings Bank 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 Savings Bank 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 Savings Bank permits its ARM loans to be
assumed by qualified borrowers, such loans generally remain outstanding for
substantially shorter periods because borrowers often prepay their loans in
full upon sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all of the fixed interest rate
loans in the Savings Bank's loan portfolio contain due-on-sale clauses
providing that the Savings Bank may declare the unpaid amount due and payable
upon the sale of the property securing the loan. The Savings Bank enforces
these due-on-sale clauses to the extent permitted by law. Thus, average loan
maturity is a function of, among other factors, the level of purchase and sale
activity in the real estate market, prevailing interest rates and the interest
rates payable on outstanding loans.
The Savings Bank requires title insurance insuring the status of its lien
on all of the real estate secured loans and also requires that the fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance and
the replacement cost of the improvements. Where the value of the unimproved
real estate exceeds the amount of the loan on the real estate, the Savings
Bank may make exceptions to its property insurance requirements.
4
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The Savings Bank generally does not make conventional loans with
loan-to-value ratios exceeding 80% and makes loans with a loan-to-value ratio
in excess of 80% only when secured by first liens on owner-occupied one- to-
four family residences. On loans with loan-to-value ratios in excess of 80%,
the Savings Bank requires private mortgage insurance ("PMI"), with coverage
ranging from 12% to 25% of the appraised value of the property or the amount
required by the FHLMC, depending on the loan-to-value ratio. Loans with
loan-to-value ratios in excess of 80% must have a mortgage escrow account from
which disbursements are made for real estate taxes, hazard and flood insurance
and PMI.
Construction Lending. Prompted by favorable economic conditions,
including a favorable long term interest rate environment, and increased
residential housing demand in its primary market area, the Savings Bank
actively originates three types of residential construction loans: (i)
speculative construction loans, (ii) custom construction loans and (iii)
construction/permanent loans. Subject to market conditions, the Savings Bank
intends to increase its residential construction lending activities. To a
substantially lesser extent, the Savings Bank also originates construction
loans for the development of multi-family and commercial properties.
At March 31, 1998, the composition of the Savings Bank's construction
loan portfolio was as follows:
Outstanding Percent of
Balance(1) Total
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(In thousands)
Speculative construction . . . . . . . . . . . $26,771 54.00%
Custom construction. . . . . . . . . . . . . . 7,200 14.52
Construction/permanent . . . . . . . . . . . . 6,289 12.68
Construction/land. . . . . . . . . . . . . . . 9,321 18.80
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Total. . . . . . . . . . . . . . . . . . . . $49,581 100.00%
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(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Savings Bank 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. The Savings
Bank lends to approximately 50 local builders, many of whom may have only one
or two speculative loans outstanding from the Savings Bank. The Savings Bank
considers approximately 20 builders as core borrowers with several speculative
loans outstanding at any one time. Rather than originating lines of credit to
home builders to construct several homes at once, the Savings Bank originates
and underwrites a separate loan for each home. Speculative construction loans
are originated for a term of 12 months, with interest rates ranging from 1.5%
to 2.0% above the prime lending rate, and with a loan-to-value ratio of no
more than 80% of the appraised estimated value of the completed property. At
March 31, 1998, the Savings Bank had six borrowers each with aggregate
outstanding speculative loan balances of more than $700,000, all of which were
performing according to their respective terms and the largest of which
amounted to $1.1 million.
Unlike speculative construction loans, custom construction loans are made
to home builders who, at the time of construction, have a signed contract with
a home buyer who has a commitment for permanent financing for the finished
home with the Savings Bank or another lender. Custom construction loans are
generally originated for a term of 12 months, with fixed interest rates
ranging from 7.75% to 8.25%, and with loan-to-value ratios of 80% of the
appraised estimated value of the completed property or cost, whichever is
less. At March 31, 1998, the largest outstanding custom construction loan had
an outstanding balance of $375,000 and was performing according to its terms.
Construction/permanent loans are originated to the home owner rather than
the home builder along with a commitment by the Savings Bank to originate a
permanent loan to the home owner to repay the construction loan at the
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completion of construction. The construction phase of a construction/
permanent loan generally lasts six months and the interest rate charged is
generally 6.25% to 8.75%, fixed, and with loan-to-value ratios of 80% (or up
to 95% with PMI) of the appraised estimated value of the completed property or
cost, whichever is less. At the completion of construction, the Savings Bank
may either originate a fixed-rate mortgage loan or an ARM loan for retention
in its portfolio or use its mortgage brokerage capabilities to obtain
permanent financing for the customer with another lender. See "-- Lending
Activities -- Mortgage Brokerage." When the Savings Bank issues a commitment
to provide permanent financing upon completion of construction, the interest
rate charged on the construction loan generally includes an additional 0.375%
to 0.625% as a protection against the risk of an increase in interest rates
before the permanent loan is funded. See "-- Lending Activities -- Loan
Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage Loan
Servicing." At March 31, 1998, the largest outstanding construction/permanent
loan had an outstanding balance of $375,000 and was performing according to
its terms.
To a substantially lesser extent, the Savings Bank also provides
construction financing for non-residential properties (i.e., multi-family and
commercial properties). At March 31, 1998, such construction loans amounted
to $5.4 million.
All construction loans must be approved by the Savings Bank's Loan
Committee. See "-- Lending Activities -- Loan Solicitation and Processing."
Prior to preliminary approval of any construction loan application, an
independent fee appraiser inspects the site and the Savings Bank reviews the
existing or proposed improvements, identifies the market for the proposed
project, analyzes the pro forma data and assumptions on the project. In the
case of a speculative or custom construction loan, the Savings Bank reviews
the experience and expertise of the builder. After preliminary approval has
been given, the application is processed, which includes obtaining credit
reports, financial statements and tax returns on the borrowers and guarantors,
an independent appraisal of the project, and any other expert reports
necessary to evaluate the proposed project. In the event of cost overruns,
the Savings Bank requires that the borrower increase the loan amount by
depositing its own funds into a loans in process account and the Savings Bank
disburses additional loan proceeds consistent with the original loan-to-value
ratio.
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are
based on periodic on-site inspections by independent fee inspectors and
Savings Bank personnel. At inception, the Savings Bank also requires
borrowers to deposit funds to the loans-in-process account covering the
difference between the actual cost of construction and the loan amount. The
Savings Bank regularly monitors the construction loan portfolio and the
economic conditions and housing inventory. Property inspections are performed
by the Savings Bank's property inspector. The Savings Bank believes that the
internal monitoring system helps reduce many of the risks inherent in its
construction lending.
Construction lending affords the Savings Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, the Savings Bank 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 Savings
Bank may be confronted with a project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been
identified carry more risk because the payoff for the loan depends on the
builder's ability to sell the property prior to the time that the construction
loan is due. The Savings Bank has sought to address these risks by adhering
to strict underwriting policies, disbursement procedures, and monitoring
practices. In addition, because the Savings Bank's construction lending is in
its primary market area, changes in the local economy and real estate market
could adversely affect the Savings Bank's construction loan portfolio.
Multi-Family Lending. At March 31, 1998, the Savings Bank had $4.8
million, or 3.0% of the Savings Bank's total net loans receivable, secured by
multi-family dwelling units (more than four units) located primarily in the
Savings Bank's primary market area. Subject to market conditions, the Savings
Bank intends to become a more active originator of multi-family loans within
its primary market area.
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Multi-family loans are generally originated with variable rates of
interest equal to 3.75% over the one-year constant maturity U.S. Treasury Bill
Index, with principal and interest payments fully amortizing over terms of up
to 25 years. Multi-family loans generally range in principal balance from
$200,000 to $400,000. At March 31, 1998, the largest multi-family loan had an
outstanding principal balance of $1.3 million and was secured by an 18-unit
adult assisted living center located in the Savings Bank's primary market
area. At March 31, 1998, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally 75%.
The Savings Bank requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Savings Bank
also inspects the subject property annually.
Multi-family mortgage lending affords the Savings Bank an opportunity to
receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by multi-
family properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Savings Bank
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 Savings Bank also generally obtains personal
guarantees from financially capable parties based on a review of personal
financial statements.
Land Lending. The Savings Bank 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.
At March 31, 1998, subdivision development loans totalled $9.3 million, or
5.7% of total net loans receivable, and building lot loans amounted to $7.1
million, or 4.4% of the total net loans receivable. Land loans are secured by
a lien on the property and made for a period of 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 Savings Bank is repaid
in full upon the sale by the borrower of approximately 90% of the subdivision
lots. All of the Savings Bank's land loans are secured by property located in
its primary market area. In addition, the Savings Bank also generally obtains
personal guarantees from financially capable parties based on a review of
personal financial statements. At March 31, 1998, the Savings Bank had a
$47,000 land loan past due 90 days and not accruing interest.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to- four family residential mortgage loans because such loans are
advanced upon the predicted future value of the developed property. If the
estimate of such future value proves to be inaccurate, in the event of default
and foreclosure the Savings Bank may be confronted with a property the value
of which is insufficient to assure full repayment. The Savings Bank attempts
to minimize this risk by limiting the maximum loan-to-value ratio on land
loans to 60% 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. Commercial real estate loans totalled
$9.4 million, or 5.8% of total net loans receivable at March 31, 1998. The
Savings Bank originates commercial real estate loans generally at variable
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 $300,000 and $500,000. At March 31, 1998, the
largest commercial real estate loan had an outstanding balance of $843,000 and
is secured by a motel located in the Savings Bank's primary market area. Such
loan was performing according to its terms at March 31, 1998.
The Savings Bank requires appraisals of all properties securing
commercial real estate loans. Appraisals are performed by an independent
appraiser designated by the Savings Bank, all of which are reviewed by
management. The Savings Bank considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the
quality of management involved with the property. The Savings Bank generally
imposes a debt to income ratio of approximately 33% for originated loans
secured by income producing properties. Loan-to-value ratios on commercial
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real estate loans are generally limited to 75%. The Savings Bank generally
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.
Commercial real estate lending affords the Savings Bank 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 Savings Bank 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,
1998 the Savings Bank had one commercial real estate loan accounted for on a
nonaccrual basis in the amount of $105,000.
Commercial Business Lending. The Savings Bank engages in limited amounts
of commercial business lending. At March 31, 1998, commercial business loans
amounted to $2.0 million, or 1.2% of total net loans receivable. Commercial
business loans are generally made to customers who are well known to the
Savings Bank and are generally secured by business equipment and are made at
variable rates of interest equal to a negotiated margin above the prime rate.
The Savings Bank also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
Commercial business lending generally 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 business
loans are often collateralized by equipment, inventory, accounts receivable or
other business assets, 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 business 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.
Consumer Lending. The Savings Bank originates a variety of consumer
loans, including home equity lines of credit, home improvement loans, loans
for debt consolidation and other purposes, automobile and boat loans and
savings account loans. At March 31, 1998, consumer loans totaled $16.1
million, or 9.9% of total net loans receivable.
Home equity lines of credit, which are secured by a second mortgage on
the borrower's primary residence, are a large and growing portion of the
consumer loan portfolio. The Savings Bank has actively marketed home equity
lines of credit with television advertising and intends to continue to do so
subject to market conditions. At March 31, 1998, approved home equity lines
of credit totalled $13.4 million, of which $9.9 million was outstanding. 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. Lines of credit with a loan to value ratio of 80% or less are made
at variable interest rates equal to 2% above the rate on the three-year U.S.
Treasury Bill with a maximum annual interest rate adjustment of 2% and a
maximum lifetime interest rate adjustment of 8%, with an interest rate not to
exceed 16%. Otherwise, the rate is 3% above the rate on the three-year U.S.
Treasury Bill with an annual interest rate adjustment of 3% and a maximum
lifetime interest rate adjustment of 9%, with an interest rate not to exceed
16%.
The Savings Bank also originates fully amortizing second mortgage loans
for terms up to ten years with generally fixed interest rates, and with
loan-to-value ratios of more than 80% (taking into account any outstanding
first mortgage loan balance). At March 31, 1998, such second mortgage loans
amounted to $3.3 million.
The Savings Bank'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.
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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 Savings Bank 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. The Savings Bank adds a general provision to its consumer loan
loss allowance, based on general economic conditions and prior loss
experience.
Loan Maturity. The following table sets forth certain information at
March 31, 1998 regarding the dollar amount of loans maturing in the Savings
Bank's portfolio based on their contractual terms to maturity, but does not
include potential prepayments. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in
one year or less. Loan balances do not include loans held for sale, unearned
discounts, unearned income and allowance for loan losses.
After
One After 3 After 5
Year Years Years
Within to 3 to 5 to 10 Beyond
One Year Years Years Years 10 Years Total
-------- ----- ----- ----- -------- -----
(In thousands)
Residential one- to-
four family:
Adjustable-rate . . . . $13,133 $ 5,710 $ 1,142 $ 1,713 $35,403 $ 57,101
Fixed-rate. . . . . . . 16,211 3,906 10,340 11,757 30,483 72,697
Other residential and
all non-residential:
Adjustable-rate . . . . 5,881 2,557 511 767 15,852 25,568
Fixed-rate. . . . . . . 281 1,886 4,011 1,864 2,370 10,412
Consumer and commercial:
Adjustable-rate . . . . 721 507 278 136 6,889 8,531
Fixed-rate. . . . . . . 4,080 2,785 2,045 659 -- 9,569
------- ------- ------- ------- ------- --------
Total gross loans. . . $40,307 $17,351 $18,327 $16,896 $90,997 $183,878
======= ======= ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due one
year after March 31, 1998 which have fixed interest rates and have floating or
adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates
----- ----------------
(In thousands)
Real estate mortgage:
One- to- four family. . . . . . . . . . $56,486 $43,968
Other mortgage loans. . . . . . . . . . 10,131 19,687
Consumer and commercial. . . . . . . . . 5,489 7,810
------- -------
Total. . . . . . . . . . . . . . . . . $72,106 $71,465
======= =======
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 Savings Bank 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 Savings Bank'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
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primary market area.
Loan Solicitation and Processing. The Savings Bank'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 Savings Bank also uses
commissioned loan brokers and television and print advertising to market its
products and services.
Upon receipt of a loan application, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. A loan applicant's income is verified through the
applicant's employer or from the applicant's tax returns. In the case of a
real estate loan, an appraisal of the real estate intended to secure the
proposed loan is undertaken, generally by an independent appraiser approved by
the Savings Bank. The Savings Bank's mortgage loan documents conform to FHLMC
standards.
Residential mortgage loans within the FHLMC lending limit (currently
$214,600) may be approved by the Vice President of Lending. Residential
mortgage loans in excess of this limit but not more than $350,000 and all
other loans of $350,000 or less require the approval of the Vice President of
Lending and one other designated senior officer. All loans in excess of
$350,000 must be approved by the Executive Loan Committee consisting of Chief
Executive Officer Sheaffer and two other members of the Board of Directors.
Consumer loans are generally approved by individual loan officers and
authorized branch managers. All loans are subsequently ratified by the full
Board of Directors.
The Savings Bank's policy requires borrowers to obtain certain types of
insurance to protect the Savings Bank's interest in the collateral securing
the loan. The Savings Bank requires either a title insurance policy insuring
that the Savings Bank has a valid first lien on the mortgaged real estate or
an opinion by an attorney regarding the validity of title. Fire and casualty
insurance and, if applicable, flood insurance, is also required on collateral
for loans. The Savings Bank requires escrows for insurance on all loans with
a loan-to-value exceeding 80%.
Loan Commitments. The Savings Bank issues commitments for residential
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to ten days from approval, depending on the type of
transaction. The Savings Bank had outstanding mortgage loan commitments of
approximately $7.1 million at March 31, 1998. See Note 16 of Notes to
Consolidated Financial Statements.
Loan Originations, Sales and Purchases. While the Savings Bank
originates both 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, 1998 and 1997, the
Savings Bank's total loan originations were $105.3 million and $85.7 million,
respectively, of which 64.6% and 53.8%, respectively, were subject to periodic
interest rate adjustment and 35.4% and 46.2% were fixed-rate loans,
respectively.
The Savings Bank customarily sells the fixed-rate loans that it
originates with maturities of 15 years or more to the FHLMC as part of its
asset liability strategy. The sale of such loans allows the Savings Bank to
continue to make loans during periods when savings flows decline or funds are
not otherwise available for lending purposes; however, the Savings Bank
assumes an increased risk if such loans cannot be sold in a rising interest
rate environment. Changes in the level of interest rates and the condition of
the local and national economies affect the amount of loans originated by the
Savings Bank and demanded by investors to whom the loans are sold. Generally,
the Savings Bank's 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 Savings Bank.
Between the time that origination commitments are issued and the time the
loans are sold, the Savings Bank is exposed to movements in the price (due to
changes in interest rates) of such loans (or of securities into which such
loans are sometimes converted). Differences between the volume or timing of
actual loan originations and in management's estimates or in actual sales of
the loans can expose the Savings Bank to significant losses. This activity is
managed daily.
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There can be no assurance that the Savings Bank 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 Savings Bank does not adequately manage its interest
rate risk, the Savings Bank 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 Savings Bank is not an active purchaser of loans.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
For the Years Ended March 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Total net loans receivable at
beginning of period . . . . . . . $151,774 $128,169 $103,772
-------- -------- --------
Loans originated:
Residential one- to- four family. 29,748 24,039 26,397
Multi-family. . . . . . . . . . . 139 479 790
Construction one- to- four family 49,391 43,887 37,165
Construction other. . . . . . . . -- 1,646 861
Land and non-residential. . . . . 20,737 9,983 8,250
Other loans . . . . . . . . . . . 5,312 5,617 4,548
-------- -------- --------
Total loans originated. . . . . 105,327 85,651 78,011
Residential one- to- four family
loans sold. . . . . . . . . . . . (7,006) (6,943) (7,661)
Repayment of principal . . . . . . (78,682) (52,426) (44,004)
(Increase) in loans in process . . (8,267) (2,211) (1,778)
(Increase) in other items, net . . (518) (466) (171)
-------- -------- --------
Net increase in loans. . . . . . . 10,854 23,605 24,397
-------- -------- --------
Total net loans receivable at end
of period . . . . . . . . . . . . $162,628 $151,774 $128,169
======== ======== ========
Mortgage Brokerage. In addition to originating mortgage loans for
retention in its portfolio, the Savings Bank employs five commissioned brokers
who originate mortgage loans (including construction loans) for various
mortgage companies predominately in the Portland and Seattle metropolitan
areas, as well as for the Savings Bank. The loans brokered to such mortgage
companies are closed in the name of and funded by the purchasing mortgage
company and they are not originated as an asset of the Savings Bank. In
return, the Savings Bank receives a fee ranging from 1% to 1.25% of the loan
amount that it shares equally with the commissioned broker. For loans
brokered to the Savings Bank, they are closed on the Savings Bank's books as
if the Savings Bank had originated them and the commissioned broker receives a
fee of approximately 0.50% of the loan amount. During the year ended March
31, 1998, brokered loans totalled $89.2 million (including $26.3 million
brokered to the Savings Bank). Gross fees of $746,000 (excluding the portion
of fees shared with the commissioned brokers) were recognized for the year
ended March 31, 1998.
Mortgage Loan Servicing. The Savings Bank is a qualified servicer for
the FHLMC. The Savings Bank's general policy is to close its residential
loans on the FHLMC modified loan documents to facilitate future sales to the
FHLMC. The Savings Bank continues to collect payments on the loans, to
supervise foreclosure proceedings, if necessary, and otherwise to service the
loans prior to selling the servicing rights. The Savings Bank retains a
portion of the interest paid by the borrower on the loans as consideration for
its servicing activities.
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The Savings Bank generally retains the servicing rights on the fixed-rate
mortgage loans that it sells to the FHLMC. At March 31, 1998, total loans
serviced for others were $87.4 million.
In 1994, the Savings Bank 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, 1998, the value
of these purchased servicing rights was $359,000 and was being amortized over
the life of the underlying loan servicing.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Accounting Pronouncements and
Regulatory Policies" for a discussion of Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities."
Loan Origination and Other Fees. The Savings Bank generally receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan that are charged to
the borrower for funding the loan. The Savings Bank usually charges
origination fees of 2% to 3% on one- to- four family residential real estate
loans, long-term commercial real estate loans and residential construction
loans. 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 income at the time of sale. The Savings Bank had $2.3 million
of net deferred loan fees at March 31, 1998. The Savings Bank also receives
loan servicing fees on the loans it sells and on which it retains the
servicing rights.
Delinquencies. The Savings Bank'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 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 be commenced unless the delinquency is cured. If a loan
continues in a delinquent status for 90 days or more, the Savings Bank
generally initiates foreclosure proceedings. In certain instances, however,
the Savings Bank may decide to modify the loan or grant a limited moratorium
on loan payments to enable the borrower 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.
Nonperforming Assets. Loans are reviewed regularly and when a loan
become 90 days delinquent, 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.
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The following table sets forth information with respect to the Savings
Bank's nonperforming assets at the dates indicated. At the dates indicated,
the Savings Bank had no restructured loans within the meaning of SFAS No. 15.
At March 31,
----------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Residential real estate . . $401 $ 76 $541 $239 $499
Commercial. . . . . . . . . 105 -- -- -- --
Consumer. . . . . . . . . . -- 11 7 1 1
---- ---- ---- ---- ----
Total . . . . . . . . . . 506 87 548 240 500
---- ---- ---- ---- ----
Accruing loans which are
contractually past due 90
days or more. . . . . . . . 11 -- -- -- --
---- ---- ---- ---- ----
Total of nonaccrual and
90 days past due loans . . 517 87 548 240 500
---- ---- ---- ---- ----
Real estate owned (net). . . -- 135 -- -- --
---- ---- ---- ---- ----
Total nonperforming assets. $517 $222 $548 $240 $500
==== ==== ==== ==== ====
Total loans delinquent 90 days
or more to net loans . . . 0.32% 0.06% 0.43% 0.23% 0.55%
Total loans delinquent 90 days
or more to total assets . . 0.19 0.04 0.26 0.13 0.38
Total nonperforming assets
to total assets . . . . . . 0.19 0.10 0.26 0.13 0.38
The Savings Bank does not accrue interest on loans over 90 days past due.
However, if interest on nonaccrual loans had been accrued, interest income of
approximately $22,000 would have been recorded for the year ended March 31,
1998. Income of approximately $3,000 was received and recorded on nonaccrual
loans for the year ended March 31, 1998.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Savings Bank.
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The aggregate amount of the Savings Bank'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,
---------------------
1998 1997
---- ----
(In thousands)
Substandard assets . . . . . . . . . . . . . . $677 $346
Doubtful assets. . . . . . . . . . . . . . . . -- --
Loss assets. . . . . . . . . . . . . . . . . . -- 150
General loss allowances. . . . . . . . . . . . 984 681
Specific loss allowances . . . . . . . . . . . -- 150
Charge-offs. . . . . . . . . . . . . . . . . . 38 11
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. Valuations are periodically performed
by management and an allowance for losses is established by a charge to
operations if the carrying value exceeds the estimated net realizable value.
At March 31, 1998, the Savings Bank had no real estate owned and in judgment.
Allowance for Loan Losses. The Savings Bank's management evaluates the
need to establish reserves against losses on loans and other assets each year
based on estimated losses on specific loans and on any real estate held for
sale or investment when a finding is made that a significant and permanent
decline in value has occurred. Such evaluation includes a review of all loans
for which full collectibility may not be reasonably assured and considers,
among other matters, the estimated market value of the underlying collateral
of problem loans, prior loss experience, economic conditions and overall
portfolio quality. These provisions for losses are charged against earnings
in the year they are established. At March 31, 1998, the Savings Bank had an
allowance for loan losses of $984,000, or 0.53% of total outstanding loans at
that date. Based on past experience and future expectations, management
believes that loan loss reserves are adequate.
While the Savings Bank believes it has established its existing allowance
for loan losses in accordance with generally accepted accounting principles
("GAAP"), there can be no assurance that regulators, in reviewing the Savings
Bank's loan portfolio, will not request the Savings Bank to increase
significantly its allowance for loan losses, therefore negatively affecting
the Savings Bank's financial condition and results of operations.
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The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated.
Year Ended March 31,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period . . $831 $653 $657 $647 $515
Provision for loan losses. . . . . 180 180 -- -- 200
Recoveries:
Residential real estate . . . . . -- 1 8 3 15
Consumer. . . . . . . . . . . . . 11 8 11 26 41
---- ---- ---- ---- ----
Total recoveries. . . . . . . . 11 9 19 29 56
---- ---- ---- ---- ----
Charge-offs:
Residential real estate . . . . . -- -- -- -- 39
Consumer. . . . . . . . . . . . . 38 11 23 19 85
---- ---- ---- ---- ----
Total charge-offs . . . . . . . . 38 11 23 19 124
---- ---- ---- ---- ----
Net charge-offs (recoveries). . 27 2 4 (10) 68
---- ---- ---- ---- ----
Balance at end of period . . . . . $984 $831 $653 $657 $647
==== ==== ==== ==== ====
Ratio of allowance to
total loans outstanding
at end of period. . . . . . . . . 0.53% 0.50% 0.47% 0.58% 0.62%
Ratio of net charge-offs
(recoveries) to average
loans outstanding during
period. . . . . . . . . . . . . . 0.02 0.00 0.00 (0.01) 0.07
Ratio of allowance to
total of nonaccrual and
90 days past due loans. . . . . . 190.32 955.17 119.16 273.75 129.40
15
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<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for
the periods indicated.
At March 31,
----------------------------------------------------------------------------------
- --
1998 1997 1996 1995 1994
----------------- --------------- ---------------- --------------- ---------------
- --
Loan Loan Loan Loan Loan
Category Category Category Category
Category
as a as a as a as a as a
Percent Percent Percent Percent Percent
Total Total Total Total Total
of of of of of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage
Residential . . . . $118 54.52% $124 60.34% $115 65.35% $ 97 66.44% $ 84 62.95%
Nonresidential. . . 136 13.94 224 10.20 225 10.09 170 9.34 146 8.76
Construction. . . . 177 21.78 103 20.35 58 16.83 53 18.72 60 24.33
Consumer. . . . . . . 169 8.69 153 8.63 98 7.03 63 4.68 43 3.19
Commercial. . . . . . 100 1.07 40 0.48 46 0.70 46 0.82 40 0.77
Unallocated . . . . . 284 -- 187 -- 111 -- 228 -- 274 --
Total allowance for ---- ------ ---- ------ ---- ------ ---- ------ ---- ------
loan losses . . . $984 100.00% $831 100.00% $653 100.00% $657 100.00% $647 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
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Investment Activities
Savings 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, such
savings 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. Savings institutions are also required to
maintain minimum levels of liquid assets which vary from time to time. See
"REGULATION -- Federal Regulation of the Savings Bank -- Federal Home Loan
Bank System." The Savings Bank may decide to increase its liquidity above the
required levels depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
Federal regulations require the Savings Bank to maintain a minimum amount
of liquid assets and to make certain other securities investments. See
"REGULATION." The balance of the Savings Bank's investments in short-term
securities in excess of regulatory requirements reflects management's response
to the significantly increasing percentage of deposits with short maturities.
At March 31, 1998, the Savings Bank's regulatory liquidity ratio was 17.9%,
which exceeded regulatory requirements. It is the intention of management to
hold securities with short maturities in the Savings Bank's investment
portfolio in order to enable the Savings Bank to match more closely the
interest-rate sensitivities of its assets and liabilities.
Investment decisions are made by the Investment Committee composed of the
Chief Executive Officer and Chief Financial Officer. The Savings Bank'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, 1998, the Savings Bank's investment and mortgage-backed
securities portfolio totalled approximately $71.3 million and consisted
primarily of obligations of the U.S. Government and agency obligations and
Federal National Mortgage Association ("FNMA") and FHLMC mortgage-backed
securities.
At March 31, 1998, the Savings Bank's investment securities portfolio did
not contain any tax-exempt securities or securities of any issuer with an
aggregate book value in excess of 10% of the Savings Bank'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 Savings Bank
which dictates that investments be made based on the safety of the principal
amount, liquidity requirements of the Savings Bank and the return on the
investments. At March 31, 1998, 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 Savings Bank has adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires the classification
of securities at acquisition into one of three categories: held to maturity,
available for sale, or trading. See Note 1 of Notes to Consolidated Financial
Statements.
17
<PAGE>
<PAGE>
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated. The market value of the investment
and mortgage-backed securities portfolio was $71.8 million, $53.8 million and
$64.6 million at March 31, 1998, 1997 and 1996, respectively.
At March 31,
-----------------------------------------------------
1998 1997 1996
----------------- ---------------- ------------------
Percent Percent Percent
of of of
Carrying Port- Carrying Port- Carrying Port-
Value folio Value folio Value folio
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Held to maturity (at
amortized cost):
U. S. Government treasury
obligations. . . . . . $ 1,000 1.40% $ 7,989 14.86% $11,987 18.72%
FNMA debentures . . . . -- -- 2,000 3.72 4,005 6.25
FHLB debentures . . . . 7,336 10.28 10,467 19.47 10,737 16.77
FHLMC debentures. . . . -- -- -- -- 3,000 4.68
Real estate mortgage
investment conduits
("REMICs") . . . . . 5,627 7.89 6,641 12.36 5,108 7.98
FHLMC mortgage-backed
securities . . . . . . 5,111 7.16 6,800 12.65 9,030 14.10
FNMA mortgage-backed
securities . . . . . . 9,603 13.46 12,961 24.12 14,237 22.23
------- ------ ------- ------ ------- ------
$28,677 40.19 $46,858 87.18 $58,104 90.73
------- ------ ------- ------ ------- ------
Available for sale
(at market value):
U.S. Government treasury
obligations. . . . . . $ 2,974 4.17 2,924 5.44 992 1.55
FNMA debentures . . . . 1,003 1.41 -- -- --
FHLB debentures . . . . 6,000 8.41 975 1.82 2,940 4.59
REMICs. . . . . . . . . 22,059 30.92 1,903 3.54 2,004 3.13
FHLMC mortgage-backed
securities . . . . . . 1,038 1.45 1,087 2.02 -- --
FNMA mortgage-backed
securities . . . . . . 9,593 13.45 -- -- -- --
------- ------ ------- ------ ------- ------
42,667 59.81 6,889 12.82 5,936 9.27
Total investment ------- ------ ------- ------ ------- ------
securities. . . . . . $71,344 100.00% $53,747 100.00% $64,040 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth the maturities and weighted average yields
of the debt securities in the securities portfolio at March 31, 1998.
Less Than One to More Than Five More Than
One Year Five Years to Ten Years Ten Years
---------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Yield Yield Yield Yield
Amount (1) Amount (1) Amount (1) Amount (1)
------ --- ------ --- ------ --- ------ ---
(Dollars in thousands)
U.S.
Government
treasury
obligations $2,000 5.02% $ -- --% $ 1,974 5.75% $ -- --%
FNMA
debentures. -- -- 1,003 6.85 -- -- -- --
FHLB
debentures. 2,336 6.54 11,000 6.62 -- -- -- --
REMICs . . . -- -- -- -- 838 6.53 26,848 7.21
FHLMC mortgage-
backed
securities. -- -- 50 8.80 3,679 6.85 2,420 6.89
FNMA mortgage-
backed
securities. -- -- 364 5.66 10,261 6.69 8,571 6.19
------ ------- ------- -------
Total . . $4,336 5.84% $12,417 6.61% $16,752 6.60% $37,839 6.96%
====== ======= ======= =======
- -----------------
(1) For available-for-sale securities carried at fair value, the weighted
average yield is computed using amortized cost.
18
<PAGE>
<PAGE>
In addition to U.S. Government Treasury obligations, the Savings Bank
invests in mortgage-backed securities and REMICs. Mortgage-backed securities
(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, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (i.e., FNMA,
FHLMC and the Government National Mortgage Association ("GNMA") that pool and
repackage the participation interests in the form of securities, to investors
such as the Savings Bank. Mortgage-backed securities generally increase the
quality of the Savings Bank's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings as other obligations of the Savings Bank. See Note 4
of Notes to Consolidated Financial Statements for additional information.
REMICs are generally classified as derivative financial instruments
because they 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 Savings Bank prohibit the purchase of high risk REMICs. At March 31,
1998, the Savings Bank held REMICs with a net carrying value of $27.7 million,
of which $5.6 million were classified as held-to-maturity and $22.1 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, 1998, the Savings Bank did
not own any 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.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and loan sales are the major sources
of the Savings Bank'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.
Deposit Accounts. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, money
market accounts, regular savings accounts, certificates of deposit and
retirement savings plans. 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 Savings Bank considers the rates offered by its competition,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns. The Savings Bank generally reviews its
deposit mix and pricing weekly.
19
<PAGE>
<PAGE>
Deposit Balances
The following table sets forth information concerning the Savings Bank's
certificates of deposit and other interest-bearing deposits at March 31, 1998.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
1.500% None NOW Accounts $ 100 $ 19,296 10.73%
2.750 None Regular Savings 100 19,929 11.08
1.750 None Maxi Checking 2,500 1,299 0.72
3.750 None Money Market 2,500 18,941 10.53
None None Noninterest Checking 100 9,433 5.25
Certificates of Deposit
-----------------------
4.412 28-92 Days Fixed-Term, Fixed-Rate 1,000 1,599 0.89
5.286 4-6 Months Fixed-Term, Fixed-Rate 1,000 8,590 4.78
5.752 12-17 Months Fixed-Term, Fixed-Rate 1,000 58,520 32.55
5.449 18 Months Fixed-Term, Variable
Rate, Individual
Retirement Account
("IRA") 1,000 545 0.30
5.456 18-23 Months Fixed-Term, Fixed-Rate 1,000 2,862 1.59
5.702 24-35 Months Fixed-Term, Fixed-Rate 1,000 23,758 13.21
5.524 36-59 Months Fixed-Term, Fixed-Rate 1,000 2,741 1.52
6.007 60-83 Months Fixed-Term, Fixed-Rate 1,000 10,855 6.04
5.840 84-119 Months Fixed-Term, Fixed-Rate 1,000 1,457 0.81
-------- ------
Total $179,825 100.00%
======== ======
At March 31, 1998, the Savings Bank's jumbo certificates of deposit
totalled $132,000, all of which were due within seven days after March 31,
1998. Jumbo certificates of deposit require minimum deposits of $100,000 and
have negotiable interest rates.
20
<PAGE>
<PAGE>
<TABLE>
Deposit Flow
The following table sets forth the balances of deposit accounts in the various types offered by the
Savings Bank at the dates indicated.
At March 31,
--------------------------------------------------------------------------------
- ---
1998 1997 1996
---------------------------- -------------------------- ------------------------
- ---
Increase/ Increase/
Increase/
Balance Percent (Decrease) Balance Percent (Decrease) Balance Percent
(Decrease)
------- ------- ---------- ------- ------- ---------- ------- ------- -------
- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand . . . . . . . . $ 9,433 5.25% $ 2,348 $ 7,085 4.18% $ 1,738 $ 5,347 3.38% $
709
NOW checking. . . . . . 19,296 10.73 822 18,474 10.91 1,469 17,005 10.75
1,737
Regular savings
accounts . . . . . . . 19,929 11.08 (1,305) 21,234 12.53 (541) 21,775 13.77
(3,555)
Money market deposit
accounts . . . . . . . 20,240 11.26 1,081 19,159 11.31 1,388 17,771 11.24
4,752
Fixed-rate certificates
which mature(1):
Within 12 months. . . 10,189 5.67 (69,520) 79,709 47.05 12,197 67,512 42.68
3,465
Within 12-36 months . 85,685 47.64 67,469 18,216 10.75 (4,230) 22,446 14.19
5,884
Beyond 36 months. . . 15,053 8.37 9,514 5,539 3.27 (764) 6,303 3.99
(282)
-------- ------ ------- -------- ------ ------- -------- ------ -----
- --
Total. . . . . . . . $179,825 100.00% $10,409 $169,416 100.00% $11,257 $158,159 100.00%
$12,710
======== ====== ======= ======== ====== ======= ======== ======
=======
- -------------------
(1) IRAs of $11.0 million, $10.9 million and $11.0 million at March 31, 1998, 1997 and 1996,
respectively,
are included in certificate balances. At March 31, 1998, 1997 and 1996 jumbo certificates amounted
to
$132,000, $513,000 and $302,000, respectively.
21
</TABLE>
<PAGE>
<PAGE>
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit in the Savings
Bank classified by rates as of the dates indicated.
At March 31,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Below 4.00% . . . . . . . . . . . . . . . $ -- $ 212 $ 483
4.00 - 4.99% . . . . . . . . . . . . . . 1,912 4,063 7,084
5.00 - 5.99% . . . . . . . . . . . . . . 86,738 82,336 56,739
6.00 - 7.99% . . . . . . . . . . . . . . 22,255 16,786 31,776
8.00 - 9.99% . . . . . . . . . . . . . . 22 67 179
-------- -------- -------
Total . . . . . . . . . . . . . . . . . $110,927 $103,464 $96,261
======== ======== =======
The following table sets forth the amount and maturities of certificates
of deposit at March 31, 1998.
Amount Due
-------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
-------- ----- --------- ------- -----
(In thousands)
4.00 - 4.99% . . . . . . . . $ 1,906 $ 6 $ -- $ -- $ 1,912
5.00 - 5.99% . . . . . . . . 67,628 13,181 3,380 2,549 86,738
6.00 - 7.99% . . . . . . . . 13,880 4,088 1,638 2,649 22,255
8.00 - 8.99% . . . . . . . . 12 10 -- -- 22
------- ------- ------ ------ --------
Total. . . . . . . . . . . . $83,426 $17,285 $5,018 $5,198 $110,927
======= ======= ====== ====== ========
Deposit Activities
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
Year Ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Beginning balance. . . . . . . . . . $169,416 $158,159 $145,449
Net increase before
interest credited . . . . . . . . . 2,971 4,223 6,127
Interest credited. . . . . . . . . 7,438 7,034 6,583
Net increase in
savings deposits. . . . . . . . . . 10,409 11,257 12,710
-------- -------- --------
Ending balance . . . . . . . . . . . $179,825 $169,416 $158,159
======== ======== ========
In the unlikely event the Savings Bank is liquidated, depositors are
entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Savings Bank. Substantially all of the
Savings Bank's depositors are residents of the States of Washington or Oregon.
Borrowings. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank has at times relied 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 Savings Bank's first mortgage loans.
22
<PAGE>
<PAGE>
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 Savings 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 net worth or on the FHLB's assessment of the institution's
creditworthiness. Under its current credit policies, the FHLB generally
limits advances to 20% of a member's assets, and short-term borrowings of less
than one year may not exceed 10% of the institution's assets. The FHLB
determines specific lines of credit for each member institution and the
Savings Bank has a 35% line of credit with the FHLB-Seattle and authority to
borrow up to 5% of assets under a short-term line of credit.
At March 31, 1998, the Savings Bank had $29.6 million of outstanding
advances from the FHLB-Seattle under a available credit facility of $91.3
million. Approximately $15.0 million of such outstanding advances were used
to purchase mortgage-backed securities, classified as available for sale at
March 31, 1998, with the goal of recognizing income on the difference between
the rate paid on the advances and the rate earned on the mortgage-backed
securities. The success of this activity depends on maintaining over time a
positive differential between the yields earned on the securities and the
rates paid on the advances. Since the yields earned on the securities are
generally capped while the rates paid on the advances generally are not
capped, there is the risk that this differential will narrow or be eliminated
in a rising interest rate environment. See Note 4 of Notes to Consolidated
Financial Statements.
The Savings Bank may occasionally enter into sales of securities under
agreements to repurchase ("repurchase agreements") with nationally recognized
primary securities dealers. The repurchase agreements are generally for terms
up to 30 days. Repurchase agreements are accounted for as borrowings and are
secured by designated investment securities. At March 31, 1998, the Savings
Bank had no reverse repurchase agreements outstanding.
The following tables set forth certain information concerning the Savings
Bank's borrowings at the dates and for the periods indicated.
At March 31,
-------------------------------
1998 1997 1996
---- ---- ----
Weighted average rate paid on
FHLB advances. . . . . . . . . . 5.96% 6.49% 6.66%
Year Ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Maximum amounts of FHLB
advances outstanding
at any month end. . . . . . . . . $33,550 $32,750 $29,850
Approximate average FHLB
advances outstanding. . . . . . . 30,512 29,068 26,404
Approximate weighted
average rate paid on
FHLB advances . . . . . . . . . . 6.47% 6.50% 6.94%
23
<PAGE>
<PAGE>
REGULATION
General
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDIA") and the regulations issued by the
OTS and the FDIC to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. In addition, the
Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent, especially in such matters as the ownership of
deposit accounts and the form and content of the Savings Bank's mortgage
documents. The Savings Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Savings Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company, the Savings Bank and their
operations. The Company, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS and the Securities and Exchange Commission ("SEC").
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Savings Bank,
as a member of the FHLB-Seattle, is required to acquire and hold shares of
capital stock in the FHLB-Seattle in an amount equal to the greater of (i)
1.0% of the aggregate outstanding principal amount of residential mortgage
loans, home purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-Seattle.
The Savings Bank is in compliance with this requirement with an investment in
FHLB-Seattle stock of $2.0 million at March 31, 1998. Among other benefits,
the FHLB-Seattle provides a central credit facility primarily for member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board
of Directors of the FHLB-Seattle.
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. As insurer of the
Savings Bank's deposits, the FDIC has examination, supervisory and enforcement
authority over all savings associations.
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIA as discussed below. The matrix so created results in nine
assessment risk
24
<PAGE>
<PAGE>
classifications, with rates that until September 30, 1996 ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
Savings Bank's assessments expensed for the year ended March 31, 1998 equaled
$114,000.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Savings
Bank, paying 0%. This assessment schedule is the same as that for the BIF,
which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980's to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Savings Bank.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Liquidity and Capital Resources" contained herein.
Prompt Corrective Action. Under the FDIA, as added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal
banking agency is required to implement a system of prompt corrective action
for institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a leverage ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized;" (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage ratio that is less than
3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
25
<PAGE>
<PAGE>
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1998, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, 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; and
(vi) compensation, fees and benefits. The federal banking agencies recently
adopted final regulations and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("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 Savings Bank fails to meet any
standard prescribed by the Guidelines, the agency may require the Savings Bank
to submit to the agency 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.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank and would be required to
repay any outstanding advances to any FHLB. In addition, within one year of
the date on which a savings association controlled by a company ceases to be a
QTL, the company must register as a bank holding company and become subject to
the rules applicable to such companies. A savings institution may requalify
as a QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an
overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer loans; and stock issued by FHLMC or FNMA. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 1998, the qualified thrift investments of the Savings Bank were
approximately 89.0% of its portfolio assets.
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Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common shareholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
An institution that fails to meet the core capital requirement would be
required to file with the OTS a capital plan that details the steps they will
take to reach compliance. In addition, the OTS's prompt corrective action
regulation provides that a savings institution that has a leverage ratio of
less than 4% (3% for institutions receiving the highest CAMEL examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions. See "-- Federal Regulation of Savings Associations -- Prompt
Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
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The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital.
At March 31, 1998, the Savings Bank exceeded all of its regulatory
capital requirements at that date. See Note 13 to Notes to Consolidated
Financial Statements included elsewhere herein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend
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loans to one borrower in additional amounts under circumstances limited
essentially to loans to develop or complete residential housing units. At
March 31, 1998, the Savings Bank's limit on loans to one borrower was $6.8
million. At March 31, 1998, the Savings Bank's largest aggregate amount of
loans to one borrower was $5.3 million, all of which were performing according
to their terms.
Activities of Associations and their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions. Any loan or extension of credit by the Savings
Bank to an affiliate must be secured by collateral in accordance with Section
23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Savings Bank has not been
significantly affected by the rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is governed by Sections 22(g) and 22(h) of the Federal Reserve Act,
and Regulation O thereunder. Among other things, these regulations generally
require that such loans be made on terms and conditions substantially the same
as those offered to unaffiliated individuals and not involve more than the
normal risk of repayment. Generally, Regulation O also places individual and
aggregate limits on the amount of loans the Savings Bank may make to such
persons based, in part, on the Savings Bank's capital position, and requires
certain board approval procedures to be followed. The OTS regulations, with
certain minor variances, apply Regulation O to savings institutions.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
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institution's CRA rating. The Savings Bank received a "satisfactory" rating
as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under
the HOLA. If the Company acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. 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. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
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TAXATION
Federal Taxation
General. The Company and the Savings 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 Savings 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 Savings Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Savings
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 Savings
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 Savings Bank's actual loss experience, or a
percentage equal to 8% of the Savings 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 Savings Bank's loss experience, the
Savings Bank generally recognized a bad debt deduction equal to 8% of taxable
income.
The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate 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 require 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). The Savings Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Savings
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 or, if
the Savings Bank is a "large" association (assets in excess of $500 million)
on the basis of net charge-offs during the taxable year. The new rules allow
an institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only
home purchase or home improvement loans are included and the institution can
elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to
postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year. 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-1988 bad debt
reserves continue 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 Savings 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 Savings 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 Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings 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
Savings 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 Savings 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, the Savings 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
Savings Bank. The Savings 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
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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 Savings
Bank'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
Savings Bank, 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 Savings 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 Company and the Savings Bank will not file a
consolidated tax return, except that if the Company or the Savings Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
Audits. The Savings Bank's federal income tax returns have not been
audited within the past five years.
State Taxation
General. The Savings Bank is subject to a business and occupation tax
imposed under Washington law at the rate of 1.60% 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 Savings Bank's business and occupation tax returns were
audited for the period January 1, 1992 through December 31, 1995 resulting in
an additional tax liability of $48,000, which the Savings Bank has paid.
Competition
There are several financial institutions in the Savings Bank's primary
market area from which the Savings Bank faces strong competition in the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
and loans has historically come from other thrift institutions, credit unions
and commercial banks located in its market area. Particularly in times of
high interest rates, the Savings Bank has faced additional significant
competition for investors' funds from money market mutual funds and other
short-term money market securities and corporate and government securities.
The Savings Bank'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 Savings 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, 1998, the Savings Bank's
investment of $470,000 in Riverview Services, Inc. ("Riverview Services"), its
sole wholly-owned subsidiary, was within these limitations.
Riverview Services acts as trustee for deeds of trust on mortgage loans
granted by the Savings Bank, and receives a reconveyance fee of approximately
$60 for each deed of trust. Riverview Services had net income of $47,000 for
the fiscal year ended March 31, 1998 and total assets of $470,000 at that
date. Riverview Services' operations are included in the consolidated
financial statements of the Company.
Personnel
As of March 31, 1998, the Savings Bank had 87 full-time employees and 13
part-time employees, none of whom are represented by a collective bargaining
unit. The Savings Bank believes its relationship with its employees is good.
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Item 2. Properties
- -------------------
The following table sets forth certain information relating to the
Savings Bank's offices as of March 31, 1998.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In millions)
Main Office:
700 N.E. Fourth Avenue 1975 25,000 $40.0
Camas, Washington(3)
Branch Offices:
1737 B Street 1963 2,200 22.6
Washougal, Washington
225 S.W. 2nd Street 1971 1,700 23.3
Stevenson, Washington(3)
100 North Main 1977 1,800 16.0
White Salmon, Washington(1)
15 N.W. 13th Avenue 1979 2,000 16.6
Battle Ground, Washington(3)
412 South Columbus 1983 2,500 8.9
Goldendale, Washington
11505-K N.E. Fourth Plain Boulevard 1994 3,500 9.3
Vancouver, Washington(3)
"Orchards" Office
7735 N.E. Highway 99 1994 4,800 28.5
Vancouver, Washington(2)(3)
"Hazel Dell" Office
1011 Washington Way 1994 2,000 14.6
Longview, Washington(2)(3)
- ----------------------
(1) Leased.
(2) Former branches of Great American Federal Savings Association, San Diego,
California, that were acquired from the RTC on May 13, 1994. In the
acquisition, the Savings Bank assumed all insured deposit liabilities of
both branch offices totalling approximately $42.0 million.
(3) Location of an automated teller machine.
The Savings Bank 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, 1998, the net book value of the Savings Bank's
office properties, furniture, fixtures and equipment was $4.8 million.
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Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Savings Bank's business. The Savings Bank is not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Savings Bank.
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, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ---------------------------------------------------------------------------
Matters
-------
At March 31, 1998, the Company had 6,154,326 shares of Common Stock
issued and outstanding, 974 stockholders of record and an estimated 1,200
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 are dividend payments from the Savings Bank. OTS regulations
require the Savings Bank to give the OTS 30 days' advance notice of any
proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. The OTS imposes certain limitations on the payment of dividends
from the Savings 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 -- regulation of the
Savings Bank -- Limitations on Capital Distributions." In addition, the
Savings Bank 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 Savings
Bank below the amount required for the liquidation account to be established
pursuant to the Savings Bank's Plan of Conversion adopted in connection with
the Conversion and Reorganization. See Note 13 of Notes to the Consolidated
Financial Statements included elsewhere herein.
The common stock of the Company has traded on the Nasdaq National Market
System under the symbol "RVSB" since October 2, 1997. Prior to that time and
since October 22, 1993, the common stock of the Savings Bank 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 the 1997 and 1998 fiscal years. Stock dividends
of 10% were also declared and paid in fiscal year 1997. At March 31, 1998,
there were 12 market makers in the Company's common stock as reported by the
Nasdaq Stock Market.
Cash
Dividend
Fiscal Year Ended March 31, 1998 High Low Declared
- -------------------------------- ---- --- --------
Quarter Ended June 30, 1997. . . . . . . . . . . . $ 9.46 $ 7.10 $0.024
Quarter Ended September 30, 1997 . . . . . . . . . 12.82 8.75 --
Quarter Ended December 31, 1997. . . . . . . . . . 18.00 12.88 0.030
Quarter Ended March 31, 1998 . . . . . . . . . . . 17.88 15.50 0.035
Cash
Dividend
Fiscal Year Ended March 31, 1997 High Low Declared
- -------------------------------- ---- --- --------
Quarter Ended June 30, 1996. . . . . . . . . . . . $6.09 $5.20 $0.020
Quarter Ended Sept. 30, 1996 . . . . . . . . . . . 5.74 5.20 0.020
Quarter Ended Dec. 31, 1996. . . . . . . . . . . . 6.27 5.56 0.020
Quarter Ended March 31, 1997 . . . . . . . . . . . 9.07 6.01 0.021
34
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Item 6. Selected Financial Data
- ---------------------------------
The following tables set forth certain information concerning the
combined financial position and results of operations of the Company at the
dates and for the periods indicated.
At March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets . . . . . . . . . $273,174 $224,385 $209,506 $190,609 $131,511
Loans receivable, net(1) . . . 162,628 151,774 128,169 103,772 90,860
Mortgage-backed certificates held
to maturity, at amortized cost 20,341 26,402 28,375 31,922 17,196
Mortgage-backed certificates
available for sale, at fair
value . . . . . . . . . . . . 32,690 2,990 2,004 -- --
Cash and interest-bearing
deposits. . . . . . . . . . . 27,482 6,951 5,585 6,499 7,363
Investment securities held to
maturity, at amortized cost . 8,336 20,456 29,729 36,767 11,088
Investment securities available
for sale, at fair value . . . 9,977 3,899 3,932 -- --
Deposit accounts . . . . . . . 179,825 169,416 158,159 145,449 106,478
FHLB advances. . . . . . . . . 29,550 27,180 26,050 23,000 5,000
Shareholders' equity . . . . . 61,082 25,022 23,086 20,533 18,359
Year Ended March 31,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income. . . . . . . . $20,302 $17,476 $15,996 $13,232 $10,305
Interest expense . . . . . . . 9,389 8,923 8,416 5,927 3,840
------- ------- ------- ------- -------
Net interest income. . . . . . 10,913 8,553 7,580 7,305 6,465
Provision for loan losses. . . 180 180 -- -- 200
Net interest income after ------- ------- ------- ------- -------
provision for loan losses . . 10,733 8,373 7,580 7,305 6,265
Gains from sale of loans,
securities and real estate
owned . . . . . . . . . . . . 269 106 396 111 342
Noninterest income . . . . . . 2,211 1,768 1,619 1,139 1,064
Noninterest expenses(2). . . . 7,218 7,204 5,607 4,889 3,936
Income before federal income ------- ------- ------- ------- -------
tax provision and extraordinary
item. . . . . . . . . . . . . 5,995 3,043 3,988 3,666 3,735
Provision for federal income
taxes . . . . . . . . . . . . 2,071 1,035 1,375 1,220 1,355
Income before extraordinary ------- ------- ------- ------- -------
items . . . . . . . . . . . . 3,924 2,008 2,613 2,446 2,380
Cumulative effect of accounting
changes . . . . . . . . . . . -- -- -- -- 170
------- ------- ------- ------- -------
Net income . . . . . . . . . . $ 3,924 $ 2,008 $ 2,613 $ 2,446 $ 2,210
======= ======= ======= ======= =======
35
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<PAGE>
At March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ---
OTHER DATA:
Number of:
Real estate loans outstanding 3,155 3,260 2,939 2,894 2,722
Deposit accounts. . . . . . . 20,395 19,300 18,318 16,816 13,877
Full service offices. . . . . 9 9 9 9 6
At or For the Year Ended March 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ---
KEY FINANCIAL RATIOS:
Net income . . . . . . . . . . $ 3,924 $ 2,008 $ 2,613 $ 2,446 $ 2,210
Performance Ratios:
Return on average assets . . . 1.56% 0.92% 1.31% 1.41% 2.06%
Return on average equity . . . 9.15 8.38 12.02 12.59 18.39
Dividend payout ratio(3)(4). . 11.77 10.56 6.62 16.80 N/A
Interest rate spread . . . . . 3.72 3.72 3.62 4.11 5.11
Net interest margin. . . . . . 4.61 4.19 4.05 4.49 5.25
Noninterest expense to
average assets(5) . . . . . . 2.87 3.30 2.80 2.82 3.17
Efficiency ratio (non-
interest expense divided by
the sum of net interest
income and noninterest
income)(6). . . . . . . . . . 53.89 69.09 58.44 57.15 50.00
Asset Quality Ratios:
Average interest-earning
assets to interest-bearing
liabilities . . . . . . . . . 122.21 110.80 109.63 110.39 112.66
Allowance for loan losses to
total loans at end of period. 0.53 0.50 0.47 0.58 0.62
Net charge-offs (recoveries) to
average outstanding loans during
the period. . . . . . . . . . 0.02 0.00 0.00 (0.01) 0.07
Ratio of nonperforming assets
to total assets . . . . . . . 0.19 0.10 0.26 0.13 0.38
Capital Ratios:
Average equity to average assets 17.02 10.98 10.87 11.20 11.18
Equity to assets at end of fiscal
year. . . . . . . . . . . . . 22.36 11.15 11.02 10.77 13.96
- ------------------
(1) Includes loans held for sale.
(2) Includes $947,000 special SAIF assessment in the year ended March 31,
1997.
(3) Prior to the consummation of the Conversion and Reorganization on
September 30, 1997, all cash dividends paid by the Savings Bank had been
waived by the M.H.C.
(4) Excludes cash dividends waived by the M.H.C.
(5) Noninterest expense to average assets was 2.87% at March 31, 1997 without
special SAIF assessment.
(6) Efficiency ratio was 60.0% at March 31, 1997 without special SAIF
assessment.
36
<PAGE>
<PAGE>
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 Savings Bank. 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.
Operating Strategy
The Savings Bank's business consists principally of attracting retail
deposits from the general public and using these funds to originate mortgage
loans secured by one- to- four family residences located in its primary market
area. The Savings Bank also actively originates residential construction
loans secured by properties located in its primary market area. To a lesser
extent, the Savings Bank also originates consumer loans, commercial real
estate loans and land loans. In addition, the Savings Bank invests in U.S.
Government and federal agency obligations, and mortgage-backed securities.
The Savings Bank intends to continue to fund its assets primarily with retail
deposits, although FHLB-Seattle advances may be used as a supplemental source
of funds.
The Savings Bank's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. 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 Savings
Bank's profitability is also affected by the level of other income and
expenses. Other income, net, includes income associated with the origination
and sale of mortgage loans, brokering loans, loan servicing fees, income from
real estate owned and net gains and losses on sales of interest-earning
assets. Other expenses include compensation and benefits, occupancy and
equipment expenses, deposit insurance premiums, data servicing expenses and
other operating costs. The Savings Bank'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.
The Savings Bank's business strategy is to operate as a well-capitalized,
profitable and independent community savings bank, dedicated to home mortgage
lending, consumer installment lending, small business lending and providing
quality financial services to local customers. The Savings Bank has sought to
implement this strategy by: (i) emphasizing the origination of residential
mortgage loans, including one- to- four family residential construction loans;
(ii) providing high quality, personalized financial services to customers and
communities served by its branch network; (iii) operating as a mortgage banker
by selling fixed rate mortgages to the secondary market on a servicing-
retained basis, thereby increasing the loan servicing portfolio and income;
(iv) brokering customer loans to third-party lenders, which generates fee
income; (v) reducing interest rate risk exposure by matching asset and
liability durations and rates; (vi) improving asset quality; (vii) containing
operating expenses; and (viii) maintaining capital in excess of regulatory
requirements combined with prudent growth.
Comparison of Financial Condition at March 31, 1998 and 1997
Total assets were $273.2 million at March 31, 1998, compared to $224.4
million at March 31, 1997. This increase resulted primarily from the increase
in cash and mortgage-backed securities and the growth in the loan portfolio.
These increases were funded primarily by the stock offering proceeds and
deposit growth.
Loans receivable, net, were $161.2 million at March 31, 1998 compared to
$151.7 million at March 31, 1997, a 6.3% increase. Increases primarily in
residential construction loans and consumer loans contributed to the increase
in loans receivable, net. 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.
Loans held-for-sale were $1.4 million at March 31, 1998, compared to
$80,000 at March 31, 1997. The difference resulted primarily from timing
differences in the funding of loans.
37
<PAGE>
<PAGE>
Cash and cash equivalents increased to $27.5 million at March 31, 1998,
from $7.0 million at March 31, 1997 as a result of the stock offering,
maturities of investment securities, and increased deposits.
Investment securities held-to-maturity were $8.3 million at March 31,
1998, compared to $20.4 million at March 31, 1997. The $12.1 million decrease
was a result of investment maturities.
Investment securities available for sale were $10.0 million at March 31,
1998, compared to $3.9 million at March 31, 1997. The $6.1 million increase
reflected the investment of excess liquidity.
Mortgage-backed securities held to maturity were $20.3 million at March
31, 1998, compared to $26.4 million at March 31, 1997. The decrease is a
result of prepayments.
Mortgage-backed securities available for sale were $32.7 million at March
31, 1998, compared to $3.0 million at March 31, 1997. The $29.7 million
increase reflected the investment of excess liquidity.
Total deposits were $179.8 million at March 31, 1998, compared to $169.4
million at March 31, 1997. Management attributes this increase primarily to
the growth in the Savings Bank's market area and to promotions of checking
accounts.
FHLB advances increased to $29.6 million at March 31, 1998 from $27.2
million at March 31, 1997. Approximately $15.0 million of the outstanding
advances at March 31, 1998 and $20.0 million at March 31, 1997 were used to
purchase mortgage-backed securities, classified as available for sale, with
the goal of recognizing income on the difference between the rate paid on the
advances and the rate earned on the mortgage-backed securities.
Shareholders' equity increased $36.1 million to $61.1 million at March
31, 1998 from $25.0 million at March 31, 1997 primarily as a result of the
stock offering which provided proceeds of $34.7 million, and growth in
retained earnings, less cash dividends of $61,000 paid to the Savings Bank
Public Stockholders prior to the consummation of the Conversion and
Reorganization on September 30, 1997.
Comparison of Operating Results for the Years Ended March 31, 1998 and 1997
Net Income. Net income was $3.9 million or $0.66 per share (basic) for
the year ended March 31, 1998, compared to $2.0 million or $0.33 per share
(basic) for the year ended March 31, 1997. Earnings per share information has
been retroactively adjusted for stock dividends paid and the stock offering.
Earnings were higher for the year ended March 31, 1998, primarily as a result
of the stock offering which increased investable assets. Also, the
legislatively-mandated one-time assessment levied by the FDIC on all SAIF-
insured institutions to recapitalize the SAIF amounted to $947,000 ($625,000
after tax) for the year ended March 31, 1997.
Net Interest Income. Net interest income increased $2.3 million to $10.9
million for the year ended March 31, 1998 compared to $8.6 million for the
year ended March 31, 1997. The increased net interest income resulted
primarily from the increase in the average balance of net loans to $159.4 in
1998 compared to $141.4 million in 1997, and the increase in the average
balance of mortgage-backed securities to $43.9 million in 1998 compared to
$30.2 million in 1997. Net interest margin for the year ended March 31, 1998
rose to 4.61% from 4.19% for the 1997 fiscal year primarily as a result of the
loan and investment earnings on the proceeds of the stock offering.
Interest Income. Interest income totalled $20.3 million and $17.5
million, for fiscal years 1998 and 1997, respectively. Average
interest-earning assets increased 16.1% to $236.8 million for the year ended
March 31, 1998, compared to $204.0 million for the year ended March 31, 1997,
and the yield on all interest-earning assets was 8.57% for both fiscal years
1998 and 1997.
Interest Expense. Interest expense for the year ended March 31, 1998
totalled $9.4 million, a $466,000 or 5.2% increase from $8.9 million the prior
year. The increase was primarily a result of an increase in the average
balances of certificate of deposits from $99.7 million to $105.4 million for
the 1997 and 1998 fiscal years, respectively, as a result of deposit growth
unaffected by any special promotions. The average cost on other interest-
bearing liabilities (primarily
38
<PAGE>
<PAGE>
FHLB advances) was 6.29% in fiscal 1998 compared to 6.50% in fiscal 1997 as a
result of the renewal of maturing FHLB advances at lower interest rates. The
average balance of other interest- bearing liabilities for the year ended
March 31, 1998 was $31.0 million compared to $29.1 million for the year ended
March 31, 1997. The effect was to produce interest expense of $2.0 million for
other interest-bearing liabilities for the year ended March 31, 1998, compared
to $1.9 million for the year ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses for the year
ended March 31, 1998 was $180,000 compared to $180,000 for the year ended
March 31, 1997. The Company establishes a general reserve for loan losses
through a periodic provision for loan losses based on management's evaluation
of the loan portfolio and current economic conditions. The provisions for
loan losses are based on management's estimate of net realizable value or fair
value of the collateral, as applicable and the Company's actual loss
experience, and standards applied by the OTS and the FDIC. The Company
regularly reviews its loan portfolio, including non-performing loans, to
determine whether any loans require classification or the establishment of
appropriate reserves. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to provide
additions to the allowance for loan losses based upon judgments different from
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 and anticipated
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 judgements regarding future
events, and thus there can be no assurance that additional provisions for
credit losses will not be required in future periods. Although management
uses the best information available, future adjustments to the allowance may
be necessary due to economic, operating, regulatory and other conditions that
may be beyond the Company's control. Any increase or decrease in the
provision for loan losses has a corresponding negative or positive effect on
net income. The allowance for loan losses at March 31, 1998 was $984,000, or
.53% of total loans receivable compared to $831,000 or .50% at March 31, 1997.
At March 31, 1998, management deemed the allowance for loan losses adequate at
that date. Non-performing assets totalled $517,000 or .19% of total assets at
March 31, 1998 as compared to $222,000 or .10% at March 31, 1997.
Non-Interest Income. The Company's principal sources of non-interest
income include loan fees, deposit service charges, and net gains on the sale
of securities and loans available for sale. Non-interest income including
gains on sales of assets for fiscal years 1998 and 1997 was $2.5 million and
$1.9 million, respectively. Mortgage broker fees (included in fees and
service charges) totalled $746,000 for the year ended March 31, 1998 compared
to $394,000 for the previous year and related commission compensation expense
was $624,000 for the fiscal year ended March 31, 1998 compared to $335,000 for
the fiscal year ended March 31, 1997, both as a result of an increase in
brokered loan production from $60.9 million in 1997 to $89.2 million in 1998.
For the fiscal year ended March 31, 1998, gains on sale of loans and
investments totalled $269,000 compared to $106,000 of gains recorded in 1997.
The increase in gains for 1998 compared to 1997 resulted primarily from the
sale of two securities in March 1998 for a gain of $151,000. The total
loans-serviced-for-others portfolio was $87.4 million at March 31, 1998 and
generated $249,000 of servicing fees for fiscal 1998, versus $279,000 for
fiscal 1997. The purchased and originated mortgage servicing rights assets
were $359,000 and $125,000, respectively at March 31, 1998, and were being
amortized over the life of the underlying loan servicing.
Non-Interest Expense. Non-interest expense was unchanged at $7.2 million
for fiscal 1998 and fiscal 1997. On September 30, 1996, President Clinton
signed into law legislation requiring all SAIF members (like the Savings Bank)
to pay a special one-time premium of 65.7 basis points based on assessable
deposits at March 31, 1995. The special premium of $947,000, was accounted
for as an expense and immediately reduced the capital of the Savings Bank by
the amount of the premium, net of taxes of approximately $322,000, and reduced
net income for the year ended March 31, 1997 by approximately $625,000.
Effective January 1, 1997 the special assessment increased the SAIF reserve
level to the statutory requirement of 1.25%. The legislation also reduced the
Savings Bank's ongoing insurance premiums from an average of 23.0 basis points
to 6.5 basis point. FDIC insurance premiums totalled $114,000 for the year
ended March 31, 1998, compared to $275,000 for the year ended March 31, 1997.
The other principal component of the Bank's non-interest expense has been
and continues to be salaries and employee benefits. For the year ended March
31, 1998, salaries and employee benefits, which includes mortgage broker
39
<PAGE>
<PAGE>
commission compensation, was $4.3 million, or a $918,000 increase over the
prior year total of $3.4 million. As mentioned previously, commission
compensation expense was $624,000 for the fiscal year ended March 31, 1998
compared to $335,000 for the fiscal year ended March 31, 1997. Full-time
equivalent employees have increased to 92 at March 31, 1998 from 82 at March
31, 1997. Other components of non-interest expense include building,
furniture, and equipment depreciation and expense, data processing expense,
and advertising expense.
The acquisition of the Hazel Dell and Longview branches from the
Resolution Trust Corporation ("RTC") in fiscal 1995 (see "BUSINESS OF THE
SAVINGS BANK -- Properties") and the related acquisition of $42 million in
customer deposits gave rise to a $3.2 million core deposit intangible asset
("CDI"), representing the excess of cost over fair value of deposits acquired.
The CDI ($2.0 million at March 31, 1998) is being amortized over the life of
the remaining life of the underlying customer relationships; currently
estimated at six years. The amortization cost of the CDI was $327,000 for
both fiscal years 1998 and 1997.
Provision For Income Taxes. Provision for income taxes was $2.1 million
for the year ended March 31, 1998 compared to $1.0 million for the year ended
March 31, 1997 as a result of higher income before taxes. The effective tax
rate for fiscal year 1998 was 34.5% compared to 34.0% for fiscal 1997.
Comparison of Operating Results for the Years Ended March 31, 1997 and 1996
Net Income. Net income was $2.0 million, or $0.33 per share (basic) for
the year ended March 31, 1997, compared to $2.6 million or $0.44 per share
(basic) for the year ended March 31, 1996. Earnings per share information has
been retroactively adjusted for stock dividends paid and the stock offering.
The decrease in net income was primarily attributable to the
legislatively-mandated, one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF. Without this assessment,
which amounted to $947,000 ($625,000 after tax), net income would have been
$2.6 million, or $0.44 per share, for the year ended March 31, 1997.
Net Interest Income. Net interest income increased $973,000 to $8.6
million for the year ended March 31, 1997 compared to $7.6 million for the
year ended March 31, 1996. The increased net interest income resulted
primarily from the increase in the average balance of net loans to $141.4
million in 1997 compared to $116.4 million in 1996. Net interest margin for
the year ended March 31, 1997 rose to 4.19% from 4.05% for the 1996 fiscal
year primarily because of a lower average rate paid on FHLB advances as a
result of the renewal of maturing advances at lower interest rates.
Interest Income. Interest income totalled $17.5 million and $16.0
million for fiscal years 1997 and 1996, respectively. Average
interest-earning assets increased 9.1% to $204.0 million for the year ended
March 31, 1997, compared to $187.0 million for the year ended March 31, 1996,
and the yield on all interest-earning assets increased to 8.57% from 8.55% for
the fiscal years 1997 and 1996, respectively. The increase in average yield
was primarily a result of a higher proportion of loans in portfolio, which
tend to have higher yields than securities. The proportion of loans-to-assets
at March 31, 1997 was 67.6% compared to 61.2% at March 31, 1996.
Interest Expense. Interest expense for the year ended March 31, 1997
totalled $8.9 million, a $507,000, or 6.0%, increase from $8.4 million the
prior year. The increase was primarily a result of an increase in the average
balances of certificates of deposit from $90.7 million to $99.7 million for
the 1996 and 1997 fiscal years, respectively, as a result of deposit growth
unaffected by any special promotions. The average cost on other interest-
bearing liabilities (primarily FHLB advances) were 6.50% in fiscal 1997
compared 6.94% in fiscal 1996 as a result of the renewal of maturing FHLB
advances at lower interest rates, while average balances increased to $29.1
million in fiscal 1997 from $26.4 million in fiscal 1996 to fund loan growth.
The combined effect was to produce interest expense of $1.9 million for other
interest-bearing liabilities for the year ended March 31, 1997, compared to
$1.8 million for the year ended March 31, 1996.
Provision for Loan Losses. The provision for loan losses for the year
ended March 31, 1997 was $180,000 compared to no provision for loan losses for
the years ended March 31, 1996. The increase in the provision for loan losses
resulted primarily from the increased size of the loan portfolio, particularly
with respect to construction and consumer loans which involve greater risk
than residential mortgage loans, and management's desire to increase its
allowance for loan losses as a percentage of loans receivable to levels
comparable with its peers in the Pacific Northwest.
40
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<PAGE>
The allowance for loan losses at March 31, 1997 was $831,000, or 0.50% of
total loans receivable, compared to $653,000, or 0.47%, at March 31, 1996. At
March 31, 1997, management deemed the allowance for loan losses adequate at
that date. Non-performing assets totalled $222,000, or 0.10%, of total
assets, at March 31, 1997 as compared to $548,000 or 0.26% at March 31, 1996.
Non-Interest Income. Non-interest income including gains on sales of
assets for fiscal years 1997 and 1996 was $1.9 million and $2.0 million
respectively. Mortgage broker fees (included in fees and service charges)
totalled $394,000 for the year ended March 31, 1997 compared to $283,000 for
the previous year and related commission compensation expense was $335,000 for
the fiscal year ended March 31, 1997 compared to $243,000 for the fiscal year
ended March 31, 1996. For the fiscal year ended March 31, 1997, gains on sale
of loans and investments totalled $106,000 compared to $391,000 of gains
recorded in 1996. The total loans-serviced-for-others portfolio was $98.8
million at March 31, 1997 and generated $279,000 of servicing fees for fiscal
1997, versus $342,000 for fiscal 1996. The purchased and originated mortgage
servicing rights assets were $402,000 and $67,000, respectively, at March 31,
1997.
Non-Interest Expense. Non-interest expense increased by $1.6 million in
fiscal 1997 compared to fiscal 1996, as total non-interest expense was $7.2
million and $5.6 million for fiscal 1997 and 1996, respectively. The primary
cause for the $1.6 million increase was the FDIC insurance premium surcharge
of $947,000 levied November 1996. Salaries and employee benefits totalled
$3.4 million for fiscal 1997 and $2.9 million for fiscal 1996, including the
mortgage broker commissions, as a result of full-time equivalent employees
increasing to 82 at March 31, 1997 from 73 at March 31, 1996. The
amortization of the CDI related to the acquisition from the RTC in May 1994
was $327,000 for both fiscal years. Other components of non-interest expense
include building, furniture, and equipment depreciation and expense, deposit
insurance premiums, data processing expense, and advertising expense.
Provision For Income Taxes. Provision for income taxes was $1.0 million
for the year ended March 31, 1997 compared to $1.4 million for the year March
31, 1996 as a result of lower income before income taxes. The effective tax
rate for fiscal year 1997 was 34.0% compared to 34.5% for fiscal 1996.
41
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<PAGE>
Average Balance Sheet
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin. Average balances for a period have been
calculated using the monthly average balances during such period.
42
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<PAGE>
<TABLE>
Year Ended March 31,
----------------------------------------------------------------------------
- ---
1998 1997 1996
------------------------- -------------------------- -----------------------
- ---
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and
Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends
Cost
------- --------- ----- ------- --------- ---- ------- --------- ---
- -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans. . . . . . . $142,463 $13,596 9.54% $128,552 $12,087 9.40% $107,902 $10,413
9.65%
Non-mortgage loans. . . . . 16,909 1,642 9.71 12,835 1,252 9.75 8,474 839
9.90
-------- ------- ---- -------- ------- ---- -------- ------- --
- --
Total net loans . . . . . 159,372 15,238 9.56 141,387 13,339 9.43 116,376 11,252
9.67
Mortgage-backed securities . 43,880 3,010 6.86 30,212 2,135 7.07 29,779 2,020
6.78
Investment securities. . . . 19,077 1,221 6.40 29,048 1,832 6.31 36,729 2,528
6.88
Daily interest-bearing . . . 12,622 687 5.44 708 40 5.65 1,626 91
5.60
Other earning assets . . . . 1,865 146 7.83 2,619 130 4.96 2,491 105
4.22
Total interest-earning -------- ------- ---- -------- ------- ---- -------- ------- --
- --
assets . . . . . . . . . . 236,816 20,302 8.57 203,974 17,476 8.57 187,001 15,996
8.55
Noninterest-earning assets:
Office properties and
equipment, net . . . . . . 4,748 4,516 4,342
Real estate, net. . . . . . 471 471 --
Other noninterest-earning
assets . . . . . . . . . . 9,872 9,375 8,634
-------- -------- --------
Total assets. . . . . . . . $251,907 $218,336 $199,977
======== ======== ========
Interest-earning liabilities:
Regular savings accounts. . $ 20,097 553 2.75 21,408 588 2.75 22,259 617
2.77
NOW accounts. . . . . . . . 19,480 287 1.47 15,915 234 1.47 15,322 247
1.61
Money market accounts . . . 17,784 649 3.65 18,046 617 3.42 15,879 599
3.77
Certificates of deposit . . 105,382 5,949 5.65 99,657 5,595 5.61 90,710 5,120
5.64
-------- ------- ---- -------- ------- ---- -------- ------- --
- --
Total deposits . . . . . . 162,743 7,438 4.57 155,026 7,034 4.54 144,170 6,583
4.57
Other interest-bearing
liabilities. . . . . . . . 31,039 1,951 6.29 29,068 1,889 6.50 26,404 1,833
6.94
Total interest-bearing -------- ------- ---- -------- ------- ---- -------- ------- --
- --
liabilities . . . . . . . 193,782 9,389 4.85 184,094 8,923 4.85 170,574 8,416
4.93
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits . . . . . . . . . 12,466 7,047 5,095
Other liabilities . . . . . 2,776 3,229 2,570
-------- -------- --------
Total liabilities. . . . . 209,024 194,370 178,239
Shareholders' equity. . . . 42,883 23,966 21,738
-------- -------- --------
Total liabilities and
shareholders' equity. . . . $251,907 $218,336 $199,977
======== ======== ========
Net interest income. . . . . $10,913 $8,553 $7,580
======= ====== ======
Interest rate spread . . . . 3.72% 3.72%
3.62%
==== ====
====
Net interest margin. . . . . 4.61% 4.19%
4.05%
==== ====
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 122.21% 110.80%
109.63%
====== ======
======
43
</TABLE>
<PAGE>
<PAGE>
Yields Earned and Rates Paid
The following table sets forth for the periods and at the date indicated
and the weighted average yields earned on the Savings Bank's assets, the
weighted average interest rates paid on the Savings Bank's liabilities,
together with the net yield on interest-earning assets.
Year Ended March 31,
At March 31, ------------------------
1998 1998 1997 1996
---- ---- ---- ----
Weighted average yield earned on:
Total net loans(1). . . . . . . 8.67% 9.56% 9.43% 9.67%
Mortgage-backed securities. . . 6.85 6.86 7.07 6.78
Investment securities . . . . . 6.13 6.40 6.31 6.88
All interest-earning assets . . 7.91 8.57 8.57 8.55
Weighted average rate paid on:
Deposits. . . . . . . . . . . . 4.38 4.57 4.54 4.57
FHLB advances and other
borrowings . . . . . . . . . . 5.97 6.29 6.50 6.94
All interest-bearing
liabilities. . . . . . . . . . 4.61 4.85 4.85 4.93
Interest rate spread (spread
between weighted average rate
on all interest-earning assets
and all interest-bearing
liabilities). . . . . . . . . . 3.31 3.72 3.72 3.62
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning
assets) . . . . . . . . . . . . N/A 4.61 4.19 4.05
- -----------------
(1) Weighted average yield on total net loans at March 31, 1998 excludes
deferred loan fees.
44
<PAGE>
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes
on net interest income of the Savings Bank. 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).
Year Ended March 31,
-----------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
-------------------- Increase -------------------- Increase
Rate/ (De- Rate/ (De-
Volume Rate Volume crease) Volume Rate Volume crease)
------ ---- ------ ------- ------ ---- ------ -------
(In Thousands)
Interest Income:
Mortgage loans . . $1,308 $181 $ 20 $1,509 $1,993 $(268) $(51) $1,674
Non-mortgage
loans . . . . . . 397 (6) (2) 389 432 (13) (6) 413
Mortgage-backed
securities. . . . 966 (63) (28) 875 29 85 1 115
Investment
securities. . . . (629) 27 (9) (611) (528) (212) 44 (696)
Daily interest-
bearing . . . . . 673 (1) (25) 647 (51) -- -- (51)
Other earning
assets. . . . . . (37) 75 (22) 16 5 19 1 25
Total interest- ------ ---- ---- ------ ------ ----- ---- ------
earning assets. 2,678 213 (66) 2,825 1,880 (389) (11) 1,480
------ ---- ---- ------ ------ ----- ---- ------
Interest Expense:
Regular savings
accounts. . . . . (36) -- -- (36) (24) (4) (1) (29)
NOW accounts . . . 52 -- -- 52 10 (23) -- (13)
Money market
accounts. . . . . (9) 42 -- 33 82 (56) (8) 18
Certificates of
deposit . . . . . 321 31 2 354 505 (27) (3) 475
Other interest-
bearing
liabilities . . . 128 (62) (4) 62 185 (118) (11) 56
Total interest- ------ ---- ---- ------ ------ ----- ---- ------
bearing
liabilities. . . 456 11 (2) 465 758 (228) (23) 507
------ ---- ---- ------ ------ ----- ---- ------
Net increase
(decrease) in
interest income. . $2,222 $202 $(64) $2,360 $1,122 $(161) $ 12 $ 973
====== ==== ==== ====== ====== ===== ==== ======
Asset and Liability Management
The Savings Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Savings Bank 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
Savings Bank's interest-earning assets by retaining for its 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. The Savings Bank relies on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered 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 Savings Bank promotes transaction accounts and
certificates of deposit with terms up to ten years.
The Savings Bank 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 ARM loans or
purchase of adjustable rate mortgage-backed securities for its portfolio;
maintaining 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 Savings Bank
has experienced growth in assets, deposits, and FHLB advances.
45
<PAGE>
<PAGE>
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 Savings Bank's earnings while decreases in interest rates may beneficially
affect the Savings Bank's earnings. To reduce the potential volatility of the
Savings Bank'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 Savings Bank 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 Savings Bank
has also invested in adjustable rate mortgage-backed securities to increase
the level of short term adjustable assets. At March 31, 1998, ARM loans and
adjustable rate mortgage-backed securities constituted $99.6 million, or
53.0%, of the Savings Bank's total combined mortgage loan and mortgage-backed
securities portfolio. Although the Savings Bank 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 Savings Bank's mortgage servicing activities provide additional
protection from interest rate risk. The Savings Bank 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 totalled $87.4 million at March 31, 1998, including $33.7
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 $93.5
million and produced service fees of $249,000 for the year ended March 31,
1998. See "Item 1. Business -- Lending Activities -- Mortgage Loan
Servicing."
Consumer loans and construction loans typically have shorter terms and
higher yields than permanent residential mortgage loans, and accordingly
reduce the Savings Bank's exposure to fluctuations in interest rates. At
March 31, 1998, the construction and consumer loan portfolios amounted to
$49.6 million and $16.1 million, or 30.5% and 9.9% of total net loans
receivable, respectively. See "Item 1. Business -- Lending Activities --
Construction Lending" and "-- Lending Activities -- Consumer Lending."
The Savings Bank 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, 1998, the combined
portfolio of $71.3 million had an average term to repricing or maturity of
three years. See "Item 1. Business -- Investment Activities."
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the FHLB-Seattle, the
Savings Bank 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. The calculation is
intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps that management might take to counter the effect of that
interest rate movement. Under proposed OTS regulations, an institution with a
greater than "normal" level of interest rate risk will be subject to a
deduction from total capital for purposes of calculating its risk-based
capital. An institution with a "normal" level of interest rate risk is
defined as one whose "measured interest rate risk" is less than 2.0%.
Institutions with assets of less than $300 million and a risk-based capital
ratio of more than 12.0% are exempt. The Savings Bank is exempt because its
assets are less than $300 million. Based on the Savings Bank's regulatory
capital levels at December 31, 1997 (the latest date available), the Savings
Bank believes that, if the proposed regulation was implemented at that date,
the regulation would not have had a material adverse effect on the Savings
Bank's regulatory capital compliance.
46
<PAGE>
<PAGE>
At December 31, 1997
---------------------------------------------------------------
Net Portfolio Value Net Portfolio Value as a Per-
---------------------------- cent of Present Value of Assets
Change Dollar Dollar Percent -------------------------------
In Rates Amount Change Change NPV Ratio Change
- -------- ------ ------ ------ --------- ------
(Dollars in thousands)
400bp $42,566 $(10,647) (20)% 17.36% (307)bp
300bp 45,866 (7,347) (14) 18.38 (205)bp
200bp 48,933 (4,280) (8) 19.29 (115)bp
100bp 51,525 (1,688) (3) 20.01 (2)bp
--bp 53,213 -- -- 20.43 --bp
(100)bp 53,232 19 -- 20.34 (10)bp
(200)bp 52,479 (734) (1) 20.00 (44)bp
(300)bp 52,096 (1,117) (2) 19.77 (66)bp
(400)bp 52,570 (643) (1) 19.80 (64)bp
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1997 would reduce the
Savings Bank's NPV by approximately $4.3 million, or 8%, at that date.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, 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 Savings Bank's primary sources of funds are customer deposits,
proceeds from principal and interest payments on 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 Savings Bank must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Savings Bank generally maintains sufficient
cash and short-term investments to meet short-term liquidity needs. At March
31, 1998, cash and cash equivalents totalled $19.1 million, or 7.3% of total
assets. At March 31, 1998, the Savings Bank also maintained an uncommitted
credit facility with the FHLB-Seattle that provided for immediately available
advances up to an aggregate amount of $91.3 million, under which $29.6 million
was outstanding.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
4.0% of the average daily balance of its net withdrawable deposits and short-
term borrowings. The Savings Bank's liquidity ratio at March 31, 1998 was
17.9%.
Liquidity management is both a short- and long-term responsibility of the
Savings Bank's management. The Savings Bank 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
47
<PAGE>
<PAGE>
other short-term government and agency obligations. If the Savings Bank
requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for repurchase
agreements.
The Savings Bank's primary investing activity is the origination of one-
to- four family mortgage loans. During the years ended March 31, 1998, 1997
and 1996, the Savings Bank originated $79.1 million, $67.9 million and $63.6
million of such loans, respectively. At March 31, 1998, the Savings Bank had
mortgage loan commitments totalling $7.1 million, consumer loan commitments
totalling $6.0 million, and undisbursed loans in process totalling $19.4
million. The Savings Bank 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, 1998 totalled $83.4
million. Historically, the Savings Bank has been able to retain a significant
amount of its deposits as they mature.
OTS regulations require the Savings Bank to maintain specific amounts of
regulatory capital. As of March 31, 1998, the Savings Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 17.0%, 17.0% and 32.7%, respectively. For a
detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of the Savings Bank -- Capital Requirements."
Impact of Accounting Pronouncements and Regulatory Policies
Accounting for Employee Stock Ownership Plans. In November 1993 the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 93-6, which requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be
released to employees from an employee stock ownership plan and to exclude
unallocated shares from earnings per share computations. The effect of SOP
93-6 on net income and book value per share in future periods cannot be
predicted due to the uncertainty of the fair value of the shares at the time
they will be committed to be released.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. See Note 1 of Notes to the Consolidated
Financial Statements for a discussion of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," and of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125. SFAS No. 127 defers the effective date of the
application of certain portions of SFAS No. 125 until January 1, 1998. The
adoption of the provisions of SFAS No. 125 did not have a material impact on
the Savings Bank's financial condition or results of operations.
Earnings Per Share. SFAS No. 128, "Earnings Per Share," issued in
February 1997, establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly-held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basis EPS and requires the dual presentation of basic and
diluted EPS on the face of the income statement. SFAS No. 128 is effective
for the financial statements for the periods ending after December 15, 1997.
SFAS No. 128 requires restatement of all prior period EPS data presented. The
impact of its adoption is not expected to be material to the Savings Bank.
Disclosure of Information About Capital Structure. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose
certain information about an entity's capital structure found in Accounting
Principles Board ("APB") Opinions No. 10, "Omnibus Opinion - 1966," and No.
15, "Earnings Per Share," and SFAS No. 47, "Disclosure of Long-Term
Obligations," for entities that were subject to those standards. SFAS No. 129
is effective for financial statements for periods ending after December 15,
1997. SFAS No. 129 contains no change in disclosure requirements for entities
that were previously subject to the requirements of APB Opinions Nos. 10 and
15 and SFAS No. 47. The adoption of the provisions of SFAS No. 129 is not
expected to have a material impact on the Savings Bank.
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presenting of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
SFAS No. 130 requires that companies (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of
48
<PAGE>
<PAGE>
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
Disclosure About Segments. SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," issued in June 1997, establishes
standards for disclosure about operating segments in annual financial
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
becomes effective for the Savings Bank's fiscal year ending March 31, 1999,
and requires that comparative information from earlier years be restated to
conform to its requirements. The adoption of the provisions of SFAS No. 131
is not expected to have a material impact on the Savings Bank.
Year 2000 Considerations
Many existing computer programs use only two digits to identify a year in
the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Savings Bank uses the services of an outside service bureau for its
significant data processing applications. Based on discussions with its
service bureau, the Savings Bank does not expect that the cost of addressing
any Year 2000 issue will be a material event or uncertainty that would cause
its reported financial information not to be necessarily indicative of future
operating results or future financial condition, or that the costs or
consequences of incomplete or untimely resolution of any Year 2000 issue
represent a known material event or uncertainty that is reasonably likely to
affect the its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition. Every financial institution will be posed with
the Year 2000 challenge. It is the Savings Bank's desire to make the
transition to the Year 2000 as effortless as possible. The Savings Bank has
developed an intensive Action Plan for addressing the concerns and risks
associated with the coming millennium. The comprehensive plan was written
based on guidelines established by the Federal Financial Institutions
Examination Council's Interagency Statement entitled "Year 2000 Project
Management Awareness." The year 2000 Action Plan includes defined phases for
Awareness, Assessment, Renovation, Validation and Implementation. As part of
the awareness phase, a Special Projects Team composed of individuals from
every operational sector of the Savings Bank was utilized to assess all
vendors, customers, and correspondents. All computer hardware was upgraded in
the last quarter of fiscal 1996 and the first quarter of fiscal 1997. All
vendors and applications have been identified and the Savings Bank has set
December 31, 1998 as the target date for full compliance to Year 2000.
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 Savings Bank'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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Quantitative Aspects of Market Risk. The Savings Bank 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 Savings Bank is not subject to foreign currency exchange rate risk or
commodity price risk. For information regarding the sensitivity to interest
rate risk of the Savings Bank's interest-earning assets and interest- bearing
liabilities, see the tables under "Item 1. Business -- Lending Activities --
Maturity of Loan Portfolio," "-- Investment Activities" and "-- Deposit
Activities and Other Sources of Funds -- Time Deposits by Maturities"
contained herein.
49
<PAGE>
<PAGE>
Qualitative Aspects of Market Risk. The Savings Bank's principal
financial objective is to achieve long-term profitability while reducing its
exposure to fluctuating market interest rates. The Savings Bank 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 Bank's interest-earning assets
by retaining for its portfolio loans with interest rates subject to periodic
adjustment to market conditions and the selling of fixed-rate one- to- four
family mortgage loans. In addition, the Savings Bank maintains an investment
portfolio of U.S. Government and agency securities with contractual maturities
of between zero and two years. The Savings Bank relies on retail deposits as
its primary source of funds. Management believes retail deposits, compared to
brokered 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 Savings Bank promotes transaction
accounts and certificates of deposit with terms up to four years. 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 Savings Bank's financial instruments that
are sensitive to changes in interest rates, categorized by expected maturity,
and the instruments' fair values at March 31, 1998. Market risk sensitive
instruments are generally defined as on- and off- balance sheet derivatives
and other financial instruments.
<PAGE>
<TABLE>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Loans receivable . . . . . . . 8.67% $92,208 $8,245 $14,684 $12,789 $30,702 $162,628 $164,561
Mortgage-backed
securities . . . . . . . . . 6.85 364 -- 50 14,778 37,839 53,031 53,448
Investments and other
interest-earning assets . . . 6.13 24,840 5,000 7,003 1,974 -- 38,817 38,875
FHLB stock . . . . . . . . . . 7.75 393 786 787 -- -- 1,966 1,966
Interest-Sensitive
Liabilities:
NOW accounts . . . . . . . . . 1.50 4,119 8,238 8,238 -- -- 20,595 20,595
Non-interest checking
accounts. . . . . . . . . . . -- 1,887 3,773 3,773 -- -- 9,433 9,433
Savings accounts . . . . . . . 2.75 3,986 7,972 7,973 -- -- 19,929 19,929
Money market . . . . . . . . . 3.75 3,788 7,576 7,577 -- -- 18,941 18,941
Certificate accounts . . . . . 5.70 83,426 22,303 4,782 416 -- 110,927 111,004
FHLB advances. . . . . . . . . 5.97 17,000 12,550 -- -- -- 29,550 29,689
Off-Balance Sheet Items:
Commitments to extend
credit. . . . . . . . . . . . 8.57 7,106 -- -- -- -- 7,106 7,106
Unused lines of credit . . . . 9.86 5,972 -- -- -- -- 5,972 5,972
50
</TABLE>
<PAGE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 52
FINANCIAL STATEMENTS AS OF AND FOR THE THREE YEARS
ENDED MARCH 31, 1998:
Consolidated Balance Sheets 53
Consolidated Statements of Income 54-55
Consolidated Statements of Shareholders' Equity 56
Consolidated Statements of Cash Flows 57-58
Notes to Consolidated Financial Statements 59-75
51
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Riverview
Bancorp, Inc. and Subsidiary (the "Company", formerly known as Riverview
Savings Bank, FSB and Subsidiary prior to the Conversion and Reorganization on
September 30, 1997, as discussed in Note 1) as of March 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 15, 1998
52
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<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(In thousands, except share data) 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of
$20,504 and $1,450) $ 27,482 $ 6,951
Loans held for sale 1,430 80
Investment securities held to maturity, at
amortized cost (fair value of $8,394 and $20,438) 8,336 20,456
Investment securities available for sale, at fair
value (amortized cost of $9,961 and $3,993) 9,977 3,899
Mortgage-backed securities held to maturity, at amortized
cost (fair value of $20,758 and $26,488) 20,341 26,402
Mortgage-backed securities available for sale, at fair
value (amortized cost of $32,526 and $3,022) 32,690 2,990
Loans receivable (net of allowance for loan losses of
$984 and $831) 161,198 151,694
Real estate owned - 135
Prepaid expenses and other assets 882 1,141
Accrued interest receivable 1,597 1,449
Federal Home Loan Bank stock 1,966 1,756
Premises and equipment 4,802 4,632
Land held for development 471 471
Core deposit intangible 2,002 2,329
---------- ----------
TOTAL ASSETS $ 273,174 $ 224,385
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 179,825 $ 169,416
Accrued expenses and other liabilities 2,490 2,264
Advance payments by borrowers for taxes and insurance 84 123
Deferred income taxes, net 143 143
Other borrowed funds - 237
Federal Home Loan Bank advances 29,550 27,180
---------- ----------
Total liabilities 212,092 199,363
========== ==========
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000
authorized, 1998 - 6,154,326 issued, 5,809,456
outstanding; 1997 - $1.00 par value 10,143,600
authorized, 6,127,498 issued, 6,043,656 outstanding 62 2,416
Additional paid-in capital 53,399 16,043
Unearned shares issued to employee stock ownership trust (2,993) (386)
Retained earnings 10,495 7,033
Net unrealized gain (loss) on securities available
for sale, net of tax 119 (84)
---------- ----------
Total shareholders' equity 61,082 25,022
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 273,174 $ 224,385
========== ==========
See notes to consolidated financial statements.
53
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<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED MARCH 31, 1998
(In thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 15,238 $ 13,339 $ 11,252
Interest on investment securities 1,221 1,832 2,528
Interest on mortgage-backed securities 3,010 2,135 2,020
Other interest and dividends 833 170 196
---------- ---------- ----------
Total interest income 20,302 17,476 15,996
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 7,438 7,034 6,583
Interest on borrowings 1,951 1,889 1,833
---------- ---------- ----------
Total interest expense 9,389 8,923 8,416
---------- ---------- ----------
Net interest income 10,913 8,553 7,580
Less provision for loan losses 180 180 -
---------- ---------- ----------
Net interest income
after provision for
loan losses 10,733 8,373 7,580
---------- ---------- ----------
NONINTEREST INCOME:
Fees and service charges 1,845 1,368 1,182
Loan servicing income 249 279 342
Gain on sale of mortgage-backed and other
securities available for sale 189 37 216
Gain on sale of loans held for sale 80 69 180
Trading activity (losses) - - (5)
Other 117 121 100
---------- ---------- ----------
Total noninterest income 2,480 1,874 2,015
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 4,304 3,386 2,851
Occupancy and depreciation 1,339 1,174 1,090
Special SAIF assessment - 947 -
Amortization of core deposit intangible 327 327 327
Marketing expense 248 257 263
FDIC insurance premium 114 275 336
Other 886 838 740
---------- ---------- ----------
Total noninterest expense 7,218 7,204 5,607
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES $ 5,995 $ 3,043 $ 3,988
(Continued)
See notes to consolidated financial statements.
54
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<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED MARCH 31, 1998
(In thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------
INCOME BEFORE FEDERAL INCOME TAXES $ 5,995 $ 3,043 $ 3,988
PROVISION FOR FEDERAL INCOME TAXES 2,071 1,035 1,375
---------- ---------- ----------
NET INCOME $ 3,924 $ 2,008 $ 2,613
========== ========== ==========
Earnings per common share, basic $0.66 $0.33 $0.44
Earnings per common share, diluted 0.65 0.33 0.43
Weighted average number of shares
outstanding
Basic 5,913,792 6,020,418 5,990,937
Diluted 6,055,134 6,104,130 6,039,206
See notes to consolidated financial statements.
55
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<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED MARCH 31, 1998
Net
Unrealized
Unearned Gain
Shares (Loss) on
Issued to Securities
Addi- Employee Avail-
Common Stock tional Owner- able
----------------- Paid-In ship Retained Sale
Shares Amount Capital Trust Earnings for Total
(In thousands, except share data)
- -----------------------------------------------------------------------------
BALANCE,
APRIL 1,
1995 4,944,592 $ 1,995 $ 9,155 $ (473) $ 9,856 $ - $ 20,533
Net income - - - - 2,613 - 2,613
Cash dividends - - - - (173) - (173)
Exercise of
stock
options 1,268 1 4 - - - 5
Earned ESOP
shares 23,097 - 55 93 - - 148
10% stock
dividend 496,430 199 3,019 (59) (3,159) - -
Change in
unrealized
loss on
securities
available
for sale,
net of tax - - - - - (40) (40)
--------- ------- ------- -------- -------- ---- --------
BALANCE,
MARCH 31,
1996 5,465,387 2,195 12,233 (439) 9,137 (40) 23,086
Net income - - - - 2,008 - 2,008
Cash
dividends - - - - (212) - (212)
Exercise of
stock
options 3,804 2 10 - - - 12
Earned ESOP
shares 25,407 - 65 107 - - 172
10% stock
dividend 549,058 219 3,735 (54) (3,900) - -
Change in
unrealized
loss on
securities
available
for sale,
net of tax - - - - - (44) (44)
--------- ------- ------- -------- -------- ---- --------
BALANCE,
MARCH 31,
1997 6,043,656 2,416 16,043 (386) 7,033 (84) 25,022
Net income - - - - 3,924 - 3,924
Retirement
of Mutual
Holding
Company
stock (3,570,270) (1,408) 1,494 - - - 86
Issuance
and
exchange
of common
stock as
a result
of con-
version/
reorgani-
zation 3,570,750 (948) 35,586 - - - 34,638
Retirement
of frac-
tional
shares (230) - - - - - -
Cash
dividends - - - - (462) - (462)
Exercise
of stock
options 26,578 2 88 - - - 90
Shares
acquired
by ESOP (285,660) - - (2,856) - - (2,856)
Earned ESOP
shares 24,632 - 188 249 - - 437
Change in
unrealized
gain on
securities
available
for sale,
net of tax - - - - - 203 203
--------- ------- ------- -------- -------- ---- --------
BALANCE,
MARCH 31,
1998 5,809,456 $ 62 $53,399 $ (2,993) $ 10,495 $119 $ 61,082
========= ======= ======= ======== ======== ==== ========
See notes to consolidated financial statements.
56
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RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED MARCH 31, 1998
(In thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,924 $ 2,008 $ 2,613
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 310 794 579
Provision for loan losses 180 180 -
Noncash compensation expense related
to ESOP benefit 437 172 148
Increase in deferred loan origination
fees, net of amortization 372 289 176
Federal Home Loan Bank stock dividend (146) (130) (105)
Net gain on sale of real estate owned,
mortgage-backed securities, investment
securities and premises and equipment (189) (37) (301)
Changes in assets and liabilities:
Decrease (increase) in loans held for sale (1,350) 1,861 (1,694)
Decrease (increase) in prepaid expenses
and other assets 259 (93) (98)
Decrease (increase) in accrued interest
receivable (148) 62 (113)
Increase in accrued expenses and other
liabilities 69 562 510
Provision for deferred income taxes (103) - 493
---------- ---------- ----------
Net cash provided by
operating activities 3,615 5,668 2,208
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (105,327) (85,651) (78,011)
Principal repayments on loans 95,270 59,369 55,176
Proceeds from call, maturity or sale of
investment securities available for sale 10,003 3,535 6,047
Purchase of investment securities
available for sale (15,974) (3,502) (4,996)
Purchase of equity securities (1,014) - -
Proceeds from sale of equity securities 1,165 - -
Purchase of mortgage-backed securities
available for sale (33,632) (1,100) (2,002)
Proceeds from sale of mortgage-backed
securities available for sale 2,280 - -
Principal repayments on mortgage-backed
securities held to maturity 6,218 5,104 5,656
Principal repayments on mortgage-backed
securities available for sale 2,421 80 -
Purchase of mortgage-backed securities
held to maturity - (3,035) (2,017)
Purchase of investment securities held
to maturity - - (4,006)
Proceeds from call or maturity of
investment securities held to maturity 12,033 9,265 6,271
Purchase of premises and equipment (755) (699) (749)
Purchase of Federal Home Loan Bank stock (64) - (240)
Proceeds from sale of real estate 135 140 225
---------- ---------- ----------
Net cash used in
investing activities (27,241) (16,494) (18,646)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 10,409 11,257 12,710
Dividends paid (304) (200) (164)
Stock acquired for ESOP (2,856) - -
Proceeds from Federal Home Loan Bank
advances 35,800 68,880 40,050
Repayment of Federal Home Loan Bank
advances (33,430) (67,750) (37,000)
Net increase (decrease) in advance
payments by borrowers (39) 72 2
Repayment of other borrowed funds (237) (79) (79)
Proceeds from issuance of common stock,
net of related costs 34,724 - -
Proceeds from exercise of stock options 90 12 5
---------- ---------- ----------
Net cash provided by
financing activities 44,157 12,192 15,524
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH $ 20,531 $ 1,366 $ (914)
(Continued)
See notes to consolidated financial statements.
57
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RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED MARCH 31, 1998
(In thousands, except share data) 1998 1997 1996
- ------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH $ 20,531 $ 1,366 $ (914)
CASH, BEGINNING OF YEAR 6,951 5,585 6,499
---------- ---------- ----------
CASH, END OF YEAR $ 27,482 $ 6,951 $ 5,585
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 9,424 $ 8,921 $ 8,405
Income taxes 2,003 951 870
NONCASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned $ 10 $ 269 $ -
Loans arising from sale of real estate
owned and land held for investment - - 225
Compensation expense recognized for
shares released for allocation to
participants of the ESOP 437 172 148
December 29, 1995 transfer of securities
from held to maturity to available for
sale at estimated fair value - - 5,061
Dividends declared and accrued in other
liabilities 215 58 46
Fair value adjustment to securities
available for sale 306 (65) (62)
Income tax effect related to fair
value adjustment (103) 21 22
See notes to consolidated financial statements. (Concluded)
58
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<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of
Riverview Bancorp, Inc. and Subsidiary (the "Company") include all the
accounts of Riverview Bancorp, Inc. and the consolidated accounts of its
wholly-owned subsidiary, Riverview Savings Bank , FSB (the "Bank") and the
Bank's wholly-owned subsidiary, Riverview Services, Inc. All significant
intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations - The Bank is a nine 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, investment
securities, and mortgage-backed securities.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of related revenue and expense during the reporting
period. Actual results could differ from those estimates.
Conversion and Reorganization - Riverview Bancorp, Inc. ("Bancorp") is a
Washington corporation which is the holding company for the Bank. Bancorp was
recently organized by the Bank for the purpose of acquiring all of the capital
stock of the Bank in connection with the conversion of Riverview M.H.C.
("MHC"), the former parent mutual holding company of the Bank, to stock form,
and the reorganization of the Bank as a wholly-owned subsidiary of Bancorp,
which was completed on September 30, 1997 ("Conversion and Reorganization").
In the Conversion and Reorganization, 3,570,270 shares previously held by MHC
were retired and simultaneously 3,570,750 shares of common stock were sold at
a subscription price of $10.00 per share resulting in net proceeds of
approximately $31.8 million after taking into consideration $2.9 million for
the establishment of an Employee Stock Ownership Plan (ESOP) and $1.1 million
in expenses. In addition to the shares sold in the offering, 2,562,576 shares
of Bancorp's stock were issued in exchange for shares of the Bank's stock
previously held by public shareholders at an exchange ratio of 2.5359 shares
for each share of the Bank's common stock, resulting in 6,133,326 total shares
of Bancorp's stock issued as of September 30, 1997. Share data and earnings
per common share prior to September 30, 1997 have been restated to reflect the
Conversion and Reorganization.
Interest Income - Interest on loans is credited to income as earned, unless
the collectibility of the interest is in doubt, at which time the accrual of
interest ceases and a reserve for any nonrecoverable accrued interest is
established and charged against operations and the loan is placed on
nonaccrual status. If ultimate collection of principal is in doubt, all cash
receipts on nonaccrual loans are applied to reduce the principal balance.
Premiums or discounts on loans purchased and sold are amortized or accreted
using the level yield method over a period approximating the average life of
the loans.
Loan Fees - Loan fee income, net of the direct origination costs, is deferred
and accreted to interest income by the level yield method over the contractual
life of the loan.
Securities - In accordance with SFAS No. 115, investment securities are
classified as held to maturity where the Bank 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 due to
fluctuations in fair value are recognized when it is determined that an other
than temporary decline in value has occurred. Investment securities bought and
held principally for the purpose of sale in the near term are classified as
trading securities. Investment securities not classified as trading
securities, or as held to maturity securities, are classified as securities
available for sale. For purposes of computing gains and losses, cost of
securities sold is determined using the specific identification method.
Unrealized holding gains and losses on securities available for sale are
excluded from earnings and reported net of tax as a separate component of
shareholders' equity until realized.
Trading Account Securities Activity - Under the terms of the Bank's investment
policy, the Bank is authorized to purchase and sell U.S. Treasury and
government agency securities with maturity dates not to exceed ten years. The
policy limits such investments to 5% of total Bank assets. Securities in the
Bank's trading portfolio are carried at fair value. There was no trading
activity during the year ended March 31, 1998 and 1997. During the year ended
March 31, 1996, the Bank purchased and sold $2.0 million of U.S. Treasury and
government agency securities and realized gross trading gains of $1,000 and
gross trading losses of $6,000.
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 Bank 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 any additional declines in value are provided for
in the REO reserve for losses. The amounts the
59
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<PAGE>
Bank 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 Bank's control or because of changes in the Bank's strategy
for the sale of the property.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level sufficient to provide for estimated loan losses based on evaluating
known and inherent risks in the loan portfolio. The allowance is provided
based upon management's continuing analysis of the pertinent factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, actual loan loss experience,
current and anticipated economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
detailed analysis includes techniques to estimate the fair value of loan
collateral and the existence of potential alternative sources of repayment.
The appropriate allowance level is estimated based upon factors and trends
identified by management at the time the consolidated financial statements are
prepared.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, an amendment of SFAS No. 114, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts (principal and interest) due according to the contractual terms of the
loan agreement. Large groups of smaller balance homogenous loans such as
consumer secured loans, residential mortgage loans, and consumer unsecured
loans are collectively evaluated for potential loss. When a loan has been
identified as being impaired, the amount of the impairment is measured by
using discounted cash flows, except when, as a practical expedient, the
current fair value of the collateral, reduced by costs to sell, is used. When
the measurement of the impaired loan is less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs, and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an allocation of the allowance for loan losses. Uncollected accrued
interest is reversed against interest income. If ultimate collection of
principal is in doubt, all cash receipts on impaired loans are applied to
reduce the principal balance.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is generally computed on the
straight-line method over the estimated useful lives as follows:
Buildings and improvements 3 to 60 years
Furniture and equipment 3 to 20 years
Loans Held for Sale - Under the terms of the Bank's investment policy, the
Bank is authorized to sell certain loans when such sales result in higher net
yields. Accordingly, such loans are classified as held for sale in the
accompanying consolidated financial statements and are carried at the lower of
aggregate cost or net realizable value.
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.
The Company records its mortgage servicing rights at fair values in accordance
with SFAS No. 125, 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, whether originated or purchased, to the
mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values if it is practicable to estimate
those fair values. The Company is amortizing the mortgage servicing assets,
which totaled $125,000 and $67,000 at March 31, 1998 and 1997, respectively,
over the period of estimated net servicing income.
Core Deposit Intangible - The deposit base premium of $3.2 million is
reflected on the consolidated balance sheets as core deposit intangible and is
being amortized to noninterest expense on a straight-line basis over ten
years.
Income Taxes - The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, Accounting for Income Taxes, which requires the
use of the asset and liability method of accounting for income taxes and
eliminates, on a prospective basis, the exemption from deferred income taxes
of thrift bad debt reserves. (See Note 10.)
Land Held for Development - Land held for development, which is carried at the
lower of cost or net realizable value, consists of a parcel of land which the
Bank intends to develop either for Bank operation or for ultimate sale.
Employee Stock Ownership Plan - The Bank sponsors a leveraged Employee Stock
Ownership Plan ("ESOP"). The ESOP is accounted for in accordance with the
American Institute of Certified Public Accountants Statement of Position 93-6,
Employer's Accounting for Employee Stock Ownership Plan. Accordingly, the debt
of the ESOP is recorded as other borrowed funds of the Bank and the shares
pledged as collateral are reported as unearned shares issued to the employee
stock ownership trust in the balance sheet. As shares are released from
collateral, compensation expense is recorded equal to the then current market
price of the shares, and the shares become outstanding for earnings per share
calculations. Stock and cash dividends on allocated shares are recorded as a
reduction of retained earnings and paid directly to plan participants or
distributed directly to participants' accounts. Cash dividends on unallocated
shares are recorded as a reduction of debt and accrued interest. Stock
dividends on unallocated shares are recorded as an increase to the unearned
shares issued to the employee stock ownership trust contra-equity account and
distributed to participants over the remaining debt service period.
Earnings Per Share - The Company adopted SFAS No. 128, Earnings Per Share,
which requires all companies whose capital structure includes convertible
securities and options to make a dual presentation of basic and diluted
earnings per share for all periods presented. (See Note 14.)
Cash - includes amounts on hand, due from banks, and interest-earning deposits
in other banks with original maturities of 90 days or less.
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Stock-Based Compensation - Effective April 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock Based Compensation (SFAS 123), which permits
entities to recognize as expense over the vesting period fair value of all
stock-based awards on the date of grant. Alternatively, the Company may
continue to apply the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
The Company elected to continue the accounting methods prescribed by APB
Opinion No. 25 and related interpretations which measure compensation cost
using the intrinsic value method. Under the intrinsic value method,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the stock at grant date over the amount an employee
must pay to acquire the stock. Pro forma disclosure provisions of SFAS No.
123 are provided in Note 11.
Recently Issued Accounting Pronouncements - In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes requirements
for disclosure of comprehensive income and becomes effective for the Company's
fiscal year ending March 31, 1999. Reclassification of earlier financial
statements for comparative purposes is required. The impact of its adoption is
not expected to be material to the financial statements of the Company.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. This statement supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. The new standard becomes
effective for the Company's fiscal year ending March 31, 1999, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard. The adoption of provisions of SFAS No. 131 is
not expected to have a material impact on the financial statements of the
Company.
2. INTEREST RATE RISK MANAGEMENT
The Bank is engaged principally in gathering deposits and providing first
mortgage loans to individuals and commercial enterprises. At March 31, 1998
and 1997, the asset portfolio consisted of fixed and variable rate interest-
earning assets. Those assets were funded primarily with short-term deposits
that have market interest rates that vary over time. The shorter maturity of
the interest-sensitive liabilities indicates that the Bank 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 in its opinion actively monitors such risk and manages it to the
extent practicable.
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities held to
maturity consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
---------- ------- ------- ----------
Agency securities $ 7,336 $ 64 $ (6) $ 7,394
U.S. Treasury securities 1,000 - - 1,000
---------- ------- ------- ----------
$ 8,336 $ 64 $ (6) $ 8,394
========== ======= ======= ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
---------- ------- ------- ----------
Agency securities $ 12,467 $ 60 $ (79) $ 12,448
U.S. Treasury securities 7,989 12 (11) 7,990
---------- ------- ------- ----------
$ 20,456 $ 72 $ (90) $ 20,438
========== ======= ======= ==========
61
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The contractual maturities of investment securities held to maturity are as
follows (in thousands):
Amortized Estimated
March 31, 1998 Cost Fair Value
--------- ----------
Due in one year or less $ 3,336 $ 3,344
Due after one year through five years 5,000 5,050
--------- ----------
$ 8,336 $ 8,394
========= ==========
There were no sales of investment securities held to maturity during the years
ended March 31, 1998 and 1997.
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
March 31, 1998 Cost Gains Losses Value
---------- ------- ------- ----------
Agency securities $ 7,000 $ 13 $ (9) $ 7,004
U.S. Treasury securities 2,961 12 - 2,973
--------- ------ ------- ---------
$ 9,961 $ 25 $ (9) $ 9,977
========= ====== ======= =========
March 31, 1997
Agency securities $ 1,000 $ - $ (25) $ 975
U.S. Treasury securities 2,993 - (69) 2,924
--------- ------ ------- ---------
$ 3,993 $ - $ (94) $ 3,899
========= ====== ======= =========
The contractual maturities of securities available for sale are as follows (in
thousands):
Amortized Estimated
March 31, 1998 Cost Fair Value
--------- ----------
Due in one year or less $ 998 $ 1,000
Due after one year through five years 7,000 7,003
Due after five years through ten years 1,963 1,974
--------- ----------
$ 9,961 $ 9,977
========= ==========
Investment securities with an amortized cost of $1,000,000 and a fair value of
$995,000 and $967,000 at March 31, 1998 and 1997, respectively, were pledged
as collateral for treasury tax and loan funds held by the Bank.
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
---------- ------- ------- ----------
Real estate mortgage
investment conduits $ 5,627 $ 195 $ - $ 5,822
FHLMC mortgage-backed
securities 5,111 82 (5) 5,188
FNMA mortgage-backed
securities 9,603 155 (10) 9,748
--------- ------ ------- ---------
$ 20,341 $ 432 $ (15) $ 20,758
========= ====== ======= =========
March 31, 1997
Real estate mortgage
investment conduits $ 6,641 $ 139 $ (4) $ 6,776
FHLMC mortgage-backed
securities 6,800 89 (94) 6,795
FNMA mortgage-backed
securities 12,961 125 (169) 12,917
--------- ------ ------- ---------
$ 26,402 $ 353 $ (267) $ 26,488
========= ====== ======= =========
The real estate mortgage investment conduits consist of FHLMC and Federal
National Mortgage Association (FNMA) securities.
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<PAGE>
The contractual maturities of mortgage-backed securities held to maturity are
as follows (in thousands):
Amortized Estimated
March 31, 1998 Cost Fair Value
--------- ----------
Due after one year through five years $ 414 $ 415
Due after five years through ten years 8,300 8,377
Due after ten years 11,627 11,966
--------- ----------
$ 20,341 $ 20,758
========= ==========
There were no sales of mortgage-backed securities held to maturity during the
years ended March 31, 1998 and 1997.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
---------- ------- ------- ----------
Real estate mortgage
investment conduits $ 21,914 $ 148 $ (2) $ 22,060
FHLMC mortgage-backed
securities 1,021 17 - 1,038
FNMA mortgage-backed
securities 9,591 16 (15) 9,592
---------- -------- ------- ---------
$ 32,526 $ 181 $ (17) $ 32,690
========== ======== ======= =========
March 31, 1997
Real estate mortgage
investment conduits $ 1,922 $ - $ (19) $ 1,903
FHLMC mortgage-backed
securities 1,100 - (13) 1,087
---------- -------- ------- ---------
$ 3,022 $ - $ (32) $ 2,990
========== ======== ======= =========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 1998 Cost Fair Value
--------- ----------
Due after five years through ten years $ 6,458 $ 6,478
Due after ten years 26,068 26,212
--------- ---------
$ 32,526 $ 32,690
========= =========
Expected maturities of mortgage-backed securities held to maturity will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
Mortgage-backed securities held to maturity with an amortized cost of $522,000
and $82,000 and a fair value of $523,000 and $82,000 at March 31, 1998 and
1997, respectively, were pledged as collateral for public funds held by the
Bank.
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<PAGE>
5. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
March 31,
------------------------------
1998 1997
---------- ----------
Residential:
One to four family $ 94,795 $ 94,456
Multi-family 4,790 5,439
Construction:
One to four family 35,003 32,529
Multi-family 5,352 547
Commercial real estate - 634
Commercial 1,992 794
Consumer:
Secured 13,638 12,797
Unsecured 2,470 1,496
Land 16,431 7,900
Non-residential 9,407 8,997
---------- ----------
183,878 165,589
Less:
Undisbursed portion of loans 19,354 11,087
Deferred loan fees 2,340 1,967
Allowance for loan losses 984 831
Unearned discounts 2 10
---------- ----------
Loans receivable, net $ 161,198 $ 151,694
========== ==========
Loans, by maturity or repricing date, were as follows (in thousands):
March 31,
------------------------------
1998 1997
---------- ----------
Adjustable rate loans:
Within one year $ 90,571 $ 73,628
After one but within five years 629 1,884
After five but within ten years - 281
After ten years - 2,381
---------- ----------
91,200 78,174
========== ==========
Fixed rate loans:
Within one year 20,572 11,203
After one but within five years 24,973 18,086
After five but within ten years 14,280 16,555
After ten years 32,853 41,571
---------- ----------
92,678 87,415
---------- ----------
$ 183,878 $ 165,589
========== ==========
Loans receivable with adjustable rates primarily reprice based on the one year
U.S. Treasury index. The remaining adjustable rate loans reprice based on the
prime lending rate or the Federal Home Loan Bank cost of funds index.
Adjustable rate loans generally reprice a maximum of 2% per year and up to 6%
over the life of the loan.
The Bank services loans for others totaling $87,410,000, $98,751,000 and
$106,167,000 as of March 31, 1998, 1997 and 1996. These loan balances are not
included in the consolidated balance sheet as they are not assets of the Bank.
64
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<PAGE>
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
Year Ended March 31,
-------------------------
1998 1997
---------- ----------
Beginning balance $ 521 $ 631
Originations 137 -
Principal repayments (120) (110)
---------- ----------
Ending balance $ 538 $ 521
========== ==========
6. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Year Ended March 31,
-------------------------
1998 1997
---------- ----------
Beginning balance $ 831 $ 653
Provision for losses 180 180
Write-offs (38) (11)
Recoveries 11 9
---------- ----------
Ending balance $ 984 $ 831
========== ==========
At March 31, 1998 and 1997, the Bank's recorded investment in loans for which
an impairment has been recognized under the guidance of SFAS No. 114 and SFAS
No. 118 was $506,000 and $87,000, respectively. The allowance for loan losses
in excess of specific reserves is available to absorb losses from all loans,
although allocations have been made for certain loans and loan categories as
part of management's analysis of the allowance. The average investment in
impaired loans was approximately $343,000 and $326,000 during the years ended
March 31, 1998 and 1997.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
Year Ended March 31,
-------------------------
1998 1997
---------- ----------
Land $ 1,399 $ 1,399
Buildings and improvements 3,751 3,679
Furniture and equipment 2,811 2,424
---------- ----------
Subtotal 7,961 7,502
Less accumulated depreciation (3,159) (2,870)
---------- ----------
Total $ 4,802 $ 4,632
========== ==========
Depreciation expense was $583,000, $464,000 and $419,000 for years ended March
31, 1998, 1997 and 1996, respectively.
65
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<PAGE>
8. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (in thousands):
Average Average
Interest March 31, Interest March 31,
Account Type Rate 1998 Rate 1997
-------- ---------- -------- ---------
NOW Accounts:
Noninterest-bearing 0.00% $ 9,433 0.00% $ 7,085
Regular 1.50 19,296 1.50 18,474
Maxi 1.75 1,299 1.75 1,606
Money market 3.75 18,941 3.75 17,553
Savings accounts 2.75 19,929 2.75 21,234
Certificates of deposit 5.70 110,927 5.62 103,464
---------- ----------
Total $ 179,825 $ 169,416
========== ==========
Weighted average interest rate 4.39% 4.35%
========== ==========
Certificates of deposit as of March 31, 1998, mature as follows (in
thousands):
Amount
----------
Less than one year $ 83,426
One year to two years 17,285
Two years to three years 5,018
Three years to four years 1,860
Four years to five years 2,922
After five years 416
----------
Total $ 110,927
==========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation.
Interest expense by deposit type was as follow (in thousands):
Year Ended March 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
NOW Accounts:
Regular $ 261 $ 234 $ 247
Maxi 26 29 37
Money market accounts 649 588 562
Savings accounts 553 588 617
Certificates of deposit 5,949 5,595 5,120
---------- ---------- ----------
Total $ 7,438 $ 7,034 $ 6,583
========== ========== ==========
9. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 1998, advances from the FHLB totaled $29,550,000, of which
$14,550,000 had fixed interest rates ranging from 5.55% to 8.15% with a
weighted average interest rate of 6.294%. The remaining $15,000,000 adjustable
rate advances had a weighted average interest rate of 5.654%, which is the
"Cash Management Advance Rate" quoted by the FHLB from time to time, each
change in interest rate to take effect simultaneously with the corresponding
change in the Cash Management Rate.
At March 31, 1998, the Bank had additional borrowing commitments available of
$61.7 million from the FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB by certain investment and mortgage-backed
securities, stock owned by the Bank, deposits with the FHLB, and certain
mortgages on deeds of trust securing such properties as provided in the
agreements with the FHLB.
Payments required to service the Bank's FHLB advances during the next five
years ended March 31 are as follows: 1999 - $17,000,000; 2000 - $7,000,000;
and 2001 - $5,550,000.
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<PAGE>
<PAGE>
10. FEDERAL INCOME TAXES
Income tax expense for the three years ended March 31 consisted of the
following (in thousands):
1998 1997 1996
---------- ---------- ----------
Current $ 2,071 $ 1,035 $ 882
Deferred - - 493
---------- ---------- ----------
Total $ 2,071 $ 1,035 $ 1,375
========== ========== ==========
A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the year ended March 31 is as follows:
1998 1997 1996
---------- ---------- ----------
Federal statutory rate 34.0% 34.0% 34.0%
Unqualified disposition of
incentive stock options (4.7) - -
ESOP market value adjustment 3.1 (2.1) 1.4
Other, net 2.1 (2.1) (0.9)
--------- --------- ---------
Total 34.5% 34.0% 34.5%
========= ========= =========
Taxes related to gains on sales of securities were $65,000, $13,000 and
$72,000 for the years ended March 31, 1998, 1997, and 1996, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 1998 and 1997
are as follows (in thousands):
1998 1997
---------- ----------
Deferred tax assets:
Deferred compensation $ 262 $ 225
Loan loss reserve 335 195
Core deposit intangible 144 106
Accrued expenses 53 72
Accumulated depreciation 48 56
Deferred loan fees - 16
Unrealized loss on securities
available for sale - 43
---------- ----------
Total deferred tax asset 842 713
========== ==========
Deferred tax liabilities:
FHLB stock dividend (400) (350)
Tax qualified loan loss reserve (282) (282)
Unrealized loss on securities
available for sale (62) -
Other (241) (224)
---------- ----------
Total deferred tax liability (985) (856)
---------- ----------
Deferred tax liability, net $ (143) $ (143)
========== ==========
For the fiscal year ended March 31, 1996 and years prior, the Company
determined bad debt expense to be deducted from taxable income based on 8% of
taxable income before such deduction as provided by a provision in the
Internal Revenue Code ("IRC"). In August 1996, the provision in the IRC
allowing the 8% of taxable income deduction was repealed. Accordingly, the
Company is required to use the write-off method to record bad debt in the
current period and must recapture the excess reserve accumulated from April 1,
1987 to March 31, 1996 from use of the 8% method ratably over a six-taxable
year period. The income tax provision from 1987 to 1996 included an amount of
$282,000 for the tax effect on such excess reserves. The IRC regulation allows
the Bank the opportunity to defer the recapture of the excess reserve for a
period of up to two years if the Bank meets a residential loan requirement.
The Bank met the requirement to delay recapture for the current taxable year.
SFAS No. 109 eliminates, on a prospective basis, the exemption from deferred
income taxes of thrift bad debt reserves. These thrift bad debt reserves are
included in taxable income of later years only if the allowance for losses is
used subsequently for purposes other than to absorb bad debt losses. Because
the Company does not intend to use the allowance for purposes other than to
absorb loan losses, no deferred taxes have been provided for the thrift bad
debt reserves. Bad debt deductions on which federal income taxes have not been
provided approximate $1.1 million at March 31, 1998. The Company files a
consolidated federal income tax return.
67
<PAGE>
<PAGE>
No valuation allowance for deferred tax assets was deemed necessary at March
31, 1998 or 1997, based on the Company's anticipated future ability to
generate taxable income from operations.
11. EMPLOYEE BENEFIT PLANS
Retirement Plan - The Riverview Retirement and Savings 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 one year of service who are over the age of 21. The Bank 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, 1998, 1997 and 1996 were $36,000, $52,000 and $66,000, respectively.
Director Deferred Compensation Plan - Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. This alternative is made
available to them through a nonqualified deferred compensation plan. The
Company accrues annual interest on assets under the plan based upon a formula
relating to gross revenues, which amounted to 7.63%, 7.90%, and 7.65% for the
years ended March 31, 1998, 1997 and 1996, respectively. The estimated
liability under the plan is accrued as earned by the participant. At March 31,
1998 and 1997, the Company's aggregate liability under the plan was $772,000
and $663,000, respectively.
Bonus Programs - The Company maintains a bonus program for senior management.
The senior management bonus represents approximately 5% of fiscal year
profits, assuming profit goals are attained, and is divided among senior
management members in proportion to their salaries. Under these programs, the
Company paid $145,000, $140,000 and $87,000 in bonuses during the years ended
March 31, 1998, 1997 and 1996, respectively. Accrued bonuses were $145,000 and
$201,000 at March 31, 1998 and 1997.
Stock Option Plans - The Board of Directors approved a Stock Option and
Incentive Plan for officers, directors and key employees, which authorizes the
granting of stock options. The maximum number of shares of common stock of the
Company which may be issued under the Stock Plan is 244,539 shares. All
options granted under this plan are immediately exercisable and expire October
22, 2003.
Stock option activity, which includes the impact of stock dividends, is
summarized in the following table:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding and exercisable April 1, 1995 188,420 $ 2.84
Grants 15,342 4.48
Options exercised (1,534) 2.82
------- -------
Outstanding and exercisable March 31, 1996 202,228 $ 2.96
Grants 13,947 6.02
Options exercised (4,184) 2.82
------- -------
Outstanding and exercisable March 31, 1997 211,991 3.16
Grants 17,044 8.43
Forfeited (2,788) 5.83
Options exercised (26,578) 3.45
------- -------
Outstanding and exercisable March 31, 1998 199,669 $ 3.54
======= =======
Additional information regarding options outstanding as of March 31, 1998 is
as follows:
Weighted Avg. Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yrs) Price Exercisable Price
- -------------- ----------- ------------ --------- ----------- ---------
$2.82 to $4.48 177,048 5.58 $ 2.98 177,048 $ 2.98
5.83 to 8.43 22,621 5.58 7.91 22,621 7.91
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25 and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
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:
68
<PAGE>
<PAGE>
Risk Free Expected Expected Expected
Interest Rate Life (Yrs) Volatility Dividends
------------- ---------- ---------- ---------
Fiscal 1998 6.85% 5.58 34.24% 1.45%
Fiscal 1997 6.85% 6.58 25.03% 2.46%
Fiscal 1996 6.33% 7.58 28.78% 3.16%
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 1998, 1997 and 1996 awards was $3.25, $2.05 and $1.67,
respectively. If the accounting provisions of SFAS No. 123 had been adopted as
of the beginning of fiscal 1996, the effect on 1998, 1997 and 1996 net income
would not have been material and earnings per share would not have changed.
12. EMPLOYEE STOCK OWNERSHIP PLAN
In 1993, the Company established an ESOP that covers all employees with at
least one year of service who are over the age of 21. Shares are released for
allocation and allocated to participant accounts on December 31 of each year
until 2011. Dividends on allocated ESOP shares may either be paid directly to
plan participants or retained in the participants' accounts. Cash dividends on
unallocated shares are recorded as a reduction to ESOP debt and accrued
interest. ESOP compensation expense included in salaries and benefits was
$437,000, $173,000 and $148,000 for years ended March 31, 1998, 1997 and 1996,
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:
Allocated
Unreleased and
ESOP Released
Shares Shares Total
------- ------- --------
Balance, April 1, 1995 115,485 46,194 161,679
Allocation December 31, 1995 (23,097) 23,097 -
Adjusted for stock dividend 9,241 6,928 16,169
------- ------- --------
Balance, March 31, 1996 101,629 76,219 177,848
Allocation December 31, 1996 (25,407) 25,407 -
Adjusted for stock dividend 7,620 10,166 17,786
------- ------- --------
Balance, March 31, 1997 83,842 111,792 195,634
Issuance September 30, 1997 285,660 - 285,660
Allocation December 31, 1997 (24,632) 24,632 -
------- ------- --------
Balance, March 31, 1998 344,870 136,424 481,294
======= ======= ========
13. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Bancorp'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, 1998.
The Bank's Board of Directors authorized 1,000,000 shares of serial preferred
stock as part of the stock offering and reorganization completed on October
22, 1993. No preferred shares were issued or outstanding at March 31, 1998 or
1997.
The Bank is subject to various regulatory capital requirements administered by
the 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, 1998.
As of March 31, 1998, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain minimum Total capital and Tier I capital to risk weighted assets,
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 Bank's category.
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<PAGE>
<PAGE>
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (in thousands):
Categorized
as "Well
Capitalized"
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purpose Provision
---------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of March 31, 1998
Total Capital:
(To Risk Weighted Assets) $44,584 32.7% $10,922 8.0% $13,653 10.0%
Tier I Capital:
(To Risk Weighted Assets) 44,071 32.3% N/A N/A 8,192 6.0%
Core Capital:
(To Total Assets) 44,071 17.0% 7,765 3.0% 12,942 5.0%
Tangible Capital:
(To Tangible Assets) 44,071 17.0% 3,883 1.5% N/A N/A
As of March 31, 1997
Total Capital:
(To Risk Weighted Assets) 22,986 20.9% 8,804 8.0% 11,005 10.0%
Tier I Capital:
(To Risk Weighted Assets) 22,777 20.7% N/A N/A 6,603 6.0%
Core Capital:
(To Total Assets) 22,777 10.3% 6,660 3.0% 11,101 5.0%
Tangible Capital:
(To Tangible Assets) 22,777 10.3% 3,330 1.5% N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles (GAAP), to regulatory
tangible and risk-based capital at March 31, 1998 (in thousands):
Equity $ 46,197
Net unrealized gain on securities
available for sale (124)
Core deposit intangible asset (2,002)
----------
Tangible capital 44,071
Land held for development (471)
General valuation allowance 984
----------
Total capital $ 44,584
==========
At periodic intervals, the OTS and the Federal Deposit Insurance Corporation
("FDIC") routinely examine the Bank'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 Bank'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 Bank's 1998 financial statements. In view of the uncertain
regulatory environment in which the Bank operates, the extent, if any, to
which a forthcoming regulatory examination may ultimately result in
adjustments to the 1998 financial statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package (C.R.), including the Bank
Insurance Fund/Savings Association Insurance Fund ("BIF/SAIF") and Regulatory
Burden Relief packages. Included in this legislation was a requirement for
SAIF-insured institutions to recapitalize the SAIF insurance fund through a
one-time special assessment to be paid within 60 days of the first of the
month following the enactment. The FDIC is charged with the ultimate
responsibility of determining the specific assessment, which was determined to
be 65.7 basis points of the March 31, 1995 SAIF deposit assessment base. As
the Bank is insured by the SAIF, the assessment resulted in a pre-tax charge
to other expenses of $947,000 in the third quarter of the year ended March 31,
1997, based on the SAIF assessment base of $144.2 million.
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14. EARNINGS PER SHARE
Basic 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. ESOP
shares are not considered outstanding for earnings per share purposes until
they are allocated.
Years Ended March 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Basic EPS computation:
Numerator-Net Income $ 3,924,000 $ 2,008,000 $ 2,613,000
Denominator-Weighted average
common shares outstanding 5,913,792 6,020,418 5,990,937
Basic EPS $0.66 $0.33 $0.44
=========== =========== ===========
Diluted EPS computation:
Numerator-Net Income $ 3,924,000 $ 2,008,000 $ 2,613,000
Denominator-Weighted average
common shares outstanding 5,913,792 6,020,418 5,990,937
Effect of dilutive stock options 141,342 83,712 48,269
----------- ----------- -----------
Weighted average common shares
and common stock equivalents $ 6,055,134 $ 6,104,130 $ 6,039,206
Diluted EPS $0.65 $0.33 $0.43
=========== =========== ===========
Weighted average common shares outstanding for purposes of calculating
earnings per share have been retroactively restated to reflect all stock
dividends declared.
15. 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 estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March 31,
1998 and 1997 (in thousands):
1998 1997
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Assets:
Cash $ 27,482 $ 27,482 $ 6,951 $ 6,951
Investment securities held to
maturity 8,336 8,394 20,456 20,438
Investment securities available
for sale 9,977 9,977 3,899 3,899
Mortgage-backed securities held
to maturity 20,341 20,758 26,402 26,488
Mortgage-backed securities available
for sale 32,690 32,690 2,990 2,990
Loans receivable, net 161,198 163,131 151,694 150,436
Loans held for sale 1,430 1,430 80 82
FHLB stock 1,966 1,966 1,756 1,756
Liabilities:
Demand deposits 68,89 68,898 65,952 65,952
Time deposits 110,927 111,004 103,464 103,401
FHLB advances - short-term 17,000 17,062 12,630 12,678
FHLB advances - long-term 12,550 12,627 14,550 14,401
Other borrowed funds - - 237 237
71
<PAGE>
<PAGE>
Fair value estimates, methods and assumptions are set forth below.
Investment 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.
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.
Deposits - The fair value of deposits with no stated maturity such as
noninterest-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
available in the local market.
Federal Home Loan Bank (FHLB) 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, 1998 and 1997.
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, 1998 and 1997.
Although management was not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements on those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments. Significant assets and liabilities that are
not financial instruments include the mortgage banking operations, deferred
tax liabilities and premises and equipment.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
AND CONCENTRATIONS OF CREDIT RISK
The Bank 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 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 Bank's maximum exposure to credit loss in the event
of nonperformance by the borrower is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments.Commitments to extend
credit are conditional 14-day agreements to lend to a customer subject to the
Bank's usual terms and conditions.
At March 31, 1998, the Bank had commitments to originate fixed rate mortgage
loans of $4,109,000 at interest rates ranging from 6.625% to 10.00%. At March
31, 1998, adjustable rate mortgage loan commitments were $2,997,000 at
interest rates ranging from 8.00% to 10.50%. Collateral is not required to
support commitments.
Consumer loan commitments totaled $5,972,000 at March 31, 1998.
The Bank originates residential real estate loans and, to a lesser extent,
commercial and multi-family real estate and consumer loans. Approximately 99%
of the mortgage loans in the bank's portfolio are secured by properties
located in Washington and Oregon. An economic downturn in these areas would
likely have a negative impact on the Bank's results of operations depending on
the severity of such downturn.
72
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<PAGE>
17. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEET
March 31, 1998
(In thousands) 1998
- ------------------------------------------------------------------------------
ASSETS
Interest-earning deposits at Federal Home Loan Bank $ 8,374
Investment securities available for sale, at fair value (amortized
cost of $4,000) 3,991
Loan receivable from the Bank 2,822
Investment in the Bank 46,197
Other assets 146
---------
TOTAL ASSETS $ 61,530
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 448
Shareholders' equity 61,082
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 61,530
=========
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENT OF INCOME
YEAR ENDED MARCH 31, 1998
(In thousands) 1998
- ------------------------------------------------------------------------------
INCOME:
Interest on investment securities and other short-term investments
$ 332
Interest on loan receivable from the Bank 127
Gain on sale of investment securities available for sale 151
---------
Total income 610
---------
EXPENSE:
Operating expenses paid to the Bank 40
---------
Total expense 40
---------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK 570
PROVISION FOR INCOME TAXES 197
---------
INCOME OF PARENT COMPANY 373
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 3,551
---------
NET INCOME $ 3,924
=========
73
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<PAGE>
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENT OF CASH FLOWS
YEAR ENDED MARCH 31, 1998
(In thousands) 1998
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,924
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed earnings of the Bank (3,551)
Net gain on investment securities available for sale (151)
Changes in assets and liabilities:
Increase in other assets (146)
Increase in accrued expenses and other liabilities 448
---------
Net cash provided by operating activities 524
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to the Bank (17,222)
Proceeds from call, maturity, or sale of investment securities
available for sale 6,165
Purchase of investment securities available for sale (10,014)
Funding provided to the Bank for purchase of common stock for ESOP (3,108)
Principal repayments on loan receivable from the Bank 286
---------
Net cash used in investing activities (23,893)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (184)
Proceeds from issuance of common stock, net of related costs 34,724
Stock acquired for ESOP (2,856)
Proceeds from exercise of stock options 59
---------
Net cash provided by financing activities 31,743
---------
NET INCREASE IN CASH 8,374
CASH, BEGINNING OF YEAR -
---------
CASH, END OF YEAR $ 8,374
=========
74
<PAGE>
<PAGE>
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except share date) Three Months Ended
- ------------------------------------------------------------------------------
December September
March 31 31 30 June 30
-------- -------- --------- --------
1998:
Interest income $ 5,522 $ 5,288 $ 4,869 $ 4,623
Interest expense 2,332 2,384 2,423 2,250
Net interest income 3,190 2,904 2,446 2,373
Provision for loan losses 45 45 45 45
Noninterest income 841 579 591 469
Noninterest expense 1,922 1,806 1,828 1,662
Income before income taxes 2,064 1,632 1,164 1,135
Provision for income taxes 714 559 408 390
-------- -------- -------- --------
Net income $ 1,350 $ 1,073 $ 756 $ 745
======== ======== ======== ========
Basic earnings per share (1) $ 0.23 $ 0.19 $ 0.13 $ 0.12
======== ======== ======== ========
Diluted earnings per share $ 0.23 $ 0.18 $ 0.12 $ 0.12
======== ======== ======== ========
1997:
Interest income $ 4,524 $ 4,361 $ 4,379 $ 4,212
Interest expense 2,241 2,290 2,226 2,166
Net interest income 2,283 2,071 2,153 2,046
Provision for loan losses 45 45 45 45
Noninterest income 532 419 486 437
Noninterest expense 1,662 1,523 1,599 1,473
Special SAIF assessment - - 947 -
Income before income taxes 1,108 922 48 965
Provision for income taxes 369 312 24 330
-------- -------- -------- --------
Net income $ 739 $ 610 $ 24 $ 635
======== ======== ======== ========
Basic earnings per share $ 0.12 $ 0.10 $ - $ 0.11
======== ======== ======== ========
Diluted earnings per share (1) $ 0.12 $ 0.10 $ - $ 0.10
======== ======== ======== ========
(1) Quarterly earnings per share varies from annual earnings per share due to
rounding.
75
<PAGE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure Act
------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference. Information on the Company's executive
officers is included in "Part I - Item 1. - Business" in this Form 10-K.
The information contained under the section captioned "Proposal I --
Executive Compensation -- Compliance with Section 16(a) of the Exchange Act"
in the Company's Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I -
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the sections captioned "Voting Securities and Security Ownership of
Certain Beneficial Owners and Management" and "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Security Ownership of Certain
Beneficial Owners and Management" and "Proposal I -- Election of Directors" of
the Proxy Statement.
76
<PAGE>
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Exhibits
--------
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement with Patrick Sheaffer**
10.2 Employment Agreement with Ron Wysaske**
10.3 Employment Agreement with Michael C. Yount**
10.4 Employment Agreement with Karen Nelson**
10.5 Riverview Savings Bank, FBS Severance Compensation Agreement**
10.6 Riverview Savings Bank, FSB Employee Stock Ownership Plan
21 Subsidiaries of Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K: No Forms 8-K were filed during the quarter
ended March 31, 1998.
- ------------------
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1, as amended (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.
77
<PAGE>
<PAGE>
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 29, 1998 By: /s/ Patrick Sheaffer
-------------------------------------
Patrick Sheaffer
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Patrick Sheaffer By: /s/ Ron Wysaske
----------------------------- ------------------------------------
Patrick Sheaffer Ron Wysaske
President and Chief Executive Executive Vice President and Chief
Officer Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: May 29, 1998 Date: May 29, 1998
By:/s/ Robert K. Leick By: /s/ Paul L. Runyan
----------------------------- ------------------------------------
Robert K. Leick Paul L. Runyan
Director Director
Date: May 29, 1998 Date: May 29, 1998
By:/s/ Roger Malfait By: /s/ Dale E. Scarbrough
----------------------------- ------------------------------------
Roger Malfait Dale E. Scarbrough
Director Director
Date: May 29, 1998 Date: May 29, 1998
By: /s/ Gary R. Douglass
Gary R. Douglass
Director
Date: May 29, 1998
78
<PAGE>
<PAGE>
Exhibit 10.6
RIVERVIEW SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
1997 Restatement
Effective January 1, 1997
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
INDEX OF TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
ARTICLE I Background; Relevant Dates; Qualification
1.01 Effective Date; Plan Year;
Limitation Year; Valuation Dates. . . . . . . . . . 2
1.02 Qualification . . . . . . . . . . . . . . . . . . . 2
ARTICLE II Application to the Company and Affiliates
2.01 Eligible Employers. . . . . . . . . . . . . . . . . 3
2.02 Service for Affiliates. . . . . . . . . . . . . . . 3
2.03 Adoption Procedure. . . . . . . . . . . . . . . . . 4
ARTICLE III Eligibility and Service
3.01 Conditions of Eligibility . . . . . . . . . . . . . 5
3.02 Service . . . . . . . . . . . . . . . . . . . . . . 5
3.03 Leaves of Absence . . . . . . . . . . . . . . . . . 7
3.04 Break in Service. . . . . . . . . . . . . . . . . . 8
ARTICLE IV Compensation; General Contribution Rules
4.01 Application of Provisions . . . . . . . . . . . . . 10
4.02 Compensation. . . . . . . . . . . . . . . . . . . . 10
4.03 Deductibility . . . . . . . . . . . . . . . . . . . 12
4.04 Limit on Annual Additions . . . . . . . . . . . . . 12
4.05 Adjustments to Satisfy Limits . . . . . . . . . . . 14
ARTICLE V ESOP Contributions, Allocations, etc.
5.01 ESOP Contributions. . . . . . . . . . . . . . . . . 16
5.02 Time of Payment . . . . . . . . . . . . . . . . . . 17
5.03 Leveraged ESOP Suspense Accounts. . . . . . . . . . 17
5.04 Allocations From Leveraged ESOP Suspense Account. . 18
5.05 Treatment of Dividends. . . . . . . . . . . . . . . 19
5.06 Limitations on Allocations of Special Assets. . . . 20
5.07 Limitation on Allocations to Highly
Compensated Participants. . . . . . . . . . . . . . 21
-i-
<PAGE>
<PAGE>
ARTICLE VI Participants' Accounts
6.01 Participants' Accounts. . . . . . . . . . . . . . . 22
6.02 Valuations and Adjustments. . . . . . . . . . . . . 22
6.03 Rollovers . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE VII Retirements Benefits
7.01 Entitlement; Retirement Dates; Participation
After Mandatory Benefit Starting Date . . . . . . . 23
7.02 Amount and Form of Benefit. . . . . . . . . . . . . 23
7.03 Application for Benefits; Time of Payment . . . . . 24
7.04 Distribution Rules. . . . . . . . . . . . . . . . . 26
7.05 Distribution and Transfer of Company Stock. . . . . 26
7.06 Right to Sell Distributed Shares. . . . . . . . . . 26
7.07 Right of First Refusal. . . . . . . . . . . . . . . 28
ARTICLE VIII Benefits on Death or Disability
8.01 Benefits on Death . . . . . . . . . . . . . . . . . 30
8.02 Benefits on Disability. . . . . . . . . . . . . . . 30
8.03 Designation of Beneficiary. . . . . . . . . . . . . 30
ARTICLE IX Benefits After Termination of Employment
9.01 Vesting . . . . . . . . . . . . . . . . . . . . . . 33
9.02 Distributable Amount. . . . . . . . . . . . . . . . 33
9.03 Payment of Benefits . . . . . . . . . . . . . . . . 33
9.04 Forfeiture of Unvested Amounts. . . . . . . . . . . 35
9.05 Restoration of Forfeited Amounts. . . . . . . . . . 35
9.06 Vesting After Rehire. . . . . . . . . . . . . . . . 36
ARTICLE X Plan Administration
10.01 Administrative Committee. . . . . . . . . . . . . . 38
10.02 Company and Employer Functions. . . . . . . . . . . 39
10.03 Claims Procedure. . . . . . . . . . . . . . . . . . 39
10.04 Expenses. . . . . . . . . . . . . . . . . . . . . . 40
10.05 Indemnity and Bonding . . . . . . . . . . . . . . . 40
ARTICLE XI Investment of Trust Funds
11.01 Trust Funds . . . . . . . . . . . . . . . . . . . . 41
11.02 ESOP Trust. . . . . . . . . . . . . . . . . . . . . 41
-ii-
<PAGE>
<PAGE>
11.03 Voting Company Stock. . . . . . . . . . . . . . . . 42
11.04 ESOP Loans. . . . . . . . . . . . . . . . . . . . . 42
ARTICLE XII Amendment; Termination; Merger
12.01 Amendment . . . . . . . . . . . . . . . . . . . . . 44
12.02 Termination . . . . . . . . . . . . . . . . . . . . 44
12.03 Treatment of Employers. . . . . . . . . . . . . . . 45
12.04 Merger. . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE XIII Miscellaneous Provisions
13.01 Information Furnished . . . . . . . . . . . . . . . 46
13.02 Applicable Law. . . . . . . . . . . . . . . . . . . 46
13.03 Plan Binding on All Parties . . . . . . . . . . . . 46
13.04 Not A Contract of Employment. . . . . . . . . . . . 46
13.05 Notices . . . . . . . . . . . . . . . . . . . . . . 46
13.06 Benefits Not Assignable; Qualified Domestic
Relations Orders. . . . . . . . . . . . . . . . . . 46
13.07 Nondiscrimination . . . . . . . . . . . . . . . . . 47
13.08 Nonreversion of Assets. . . . . . . . . . . . . . . 47
ARTICLE XIV Special Top-Heavy Plan Rules
14.01 General . . . . . . . . . . . . . . . . . . . . . . 48
14.02 Vesting . . . . . . . . . . . . . . . . . . . . . . 48
14.03 Minimum Contribution. . . . . . . . . . . . . . . . 48
14.04 Definitions . . . . . . . . . . . . . . . . . . . . 50
14.05 Special Rules . . . . . . . . . . . . . . . . . . . 50
-iii-
<PAGE>
<PAGE>
INDEX OF TERMS
Term Page
Absence because of Maternity or Paternity . . . . . . . . . . . . . . . 8
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Annual Addition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Break in Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Break-in-Service Year . . . . . . . . . . . . . . . . . . . . . . . . . 8
Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Deferred Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . 23
Disabled Participant. . . . . . . . . . . . . . . . . . . . . . . . . . 30
ESOP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ESOP Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ESOP Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Eligible Rollover Distribution. . . . . . . . . . . . . . . . . . . . . 25
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Employer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Employment Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Entry Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Highly Compensated Employee . . . . . . . . . . . . . . . . . . . . . . 11
Hours of Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Key Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Leave of Absence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Leveraged Company Stock . . . . . . . . . . . . . . . . . . . . . . . . 42
Leveraged ESOP Suspense Account . . . . . . . . . . . . . . . . . . . . 17
Limitation Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Non-Key Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Normal Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . 23
-iv-
<PAGE>
<PAGE>
Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Publicly Traded . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Qualified Domestic Relations Order. . . . . . . . . . . . . . . . . . . 46
Qualified Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Service Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top-Heavy Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Valuation Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Year of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-v-
<PAGE>
<PAGE>
RIVERVIEW SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
1997 Restatement
Effective January 1, 1997
Riverview Savings Bank
700 N.E. Fourth Avenue
Camas, Washington 98607
Company
ARTICLE I
Background; Relevant Dates; Qualification
In order to provide eligible employees with the benefits of having
Company stock held for them through a tax-qualified retirement plan, the
Company has adopted this amended and restated employee stock ownership plan
("ESOP" or "Plan") effective January 1, 1997 to invest primarily in stock of
the Company or any Affiliate of the Company. The assets of the Plan will be
held in the Company Employee Stock Ownership Trust ("Trust"), which is
intended to form a part of the ESOP.
The Company previously maintained the Riverview Savings Bank Retirement,
Savings and Employee Stock Ownership Plan (the "Former Plan"), which consisted
of two separate plans (i) a 401(k) profit sharing plan and (ii) this employee
stock ownership plan. The Former Plan's 401(k) profit sharing plan and its
related trust were amended and restated effective April 1, 1997 and are now
contained in a separate plan document. This amended and restated plan relates
to the separate plan within the Former Plan which consisted of an employee
stock ownership plan. The Former Plan's employee stock ownership trust
remains in effect with respect to this Plan.
-1-
<PAGE>
<PAGE>
1.01 Effective Date; Plan Year; Limitation Year; Valuation Dates
1.01-1 The Plan, as amended and restated, shall be effective
January 1, 1997.
1.01-2 The Plan Year and Limitation Year shall be a calendar
year beginning January 1 and ending December 31 of each year.
1.01-3 The last day of each Plan Year shall be the regular
valuation date. Each other date on which the trust assets are valued at the
request of the Committee shall be a special valuation date.
1.02 Qualification
1.02-1 The Plan and the related Trust are maintained for the
exclusive benefit of eligible employees and are intended to comply with
sections 401(a), 409, 4975 and 501 of the Internal Revenue Code and applicable
regulations. The Plan and the related Trust are intended to qualify as an
employee stock ownership plan and are designed to invest primarily in shares
of Company Stock.
1.02-2 If the Commissioner of Internal Revenue rules that this
amended restated ESOP and the related Trust do not qualify under sections
401(a), 409, 4975 and 501 of the Internal Revenue Code, the Company may,
within the time permitted by applicable law and regulations, amend them
retroactively to qualify or may rescind them.
-2-
<PAGE>
<PAGE>
ARTICLE II
Application to the Company and Affiliates
2.01 Eligible Employers
2.01-1 The Company has adopted this Plan, and any affiliate
approved by the Company may adopt this Plan for its employees.
2.01-2 "Affiliate" means a corporation, person or other entity
that is a member, with an Employer, of any of the following:
(a) A controlled group under section 414(b) of the Internal
Revenue Code.
(b) A group of trades or businesses under common control under
section 414(c) of the Internal Revenue Code.
(c) An affiliated service group under section 414(m) of the
Internal Revenue Code.
(d) A group of businesses required to be aggregated under
section 414(o) of the Internal Revenue Code.
2.01-3 "Employer" means the Company and any adopting Affiliate.
This Plan is or may be a single plan maintained by multiple employers in which
all of the Plan assets are available to pay benefits for all participants.
2.02 Service for Affiliates
2.02-1 Transfer of employment from one Affiliate to another
shall not cause a termination or Break in Service.
2.02-2 Work for any Affiliate, whether or not an adopting
Employer, shall be counted as Service after the business becomes an Affiliate
or an earlier date fixed by the Company or in a statement of adoption.
2.02-3 If a business is acquired by the Company or an Affiliate
and not continued as a separate Affiliate, Service for employees of the
acquired business who become employees of the Company or the acquiring
Affiliate shall be counted from their date of hire by the Company or the
Affiliate. Past service for the acquired business may be counted from dates
fixed by the Company, filed with the Committee and announced to affected
employees.
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2.02-4 If an employee is employed by two or more Affiliates at
the same time, the following rules shall apply:
(a) Service for both Affiliates shall count to determine whether
a Service Year is a Year of Service.
(b) The employee shall receive an allocation of ESOP
contributions, if any, based on compensation from each Employer.
2.03 Adoption Procedure
An Affiliate may adopt this Plan by a written statement signed by
the Affiliate, approved by the Company and filed with the Trustee. The
statement shall include the effective date of adoption and any special
provisions that are to be applicable only to employees of the adopting
Affiliate.
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ARTICLE III
Eligibility and Service
3.01 Conditions of Eligibility
3.01-1 An Employee shall participate as follows:
(a) Participation shall start on the first Entry Date on or next
after the date the employee satisfies the following requirements:
(1) The employee is at least age 21.
(2) The employee has completed one Year of Service.
(3) The employee is a Qualified Employee.
(b) Participation in ESOP contributions and related forfeitures
shall continue as provided in 5.01-4.
3.01-2 "Qualified Employee" means any employee of Employer
except the following:
(a) An employee covered by a collective bargaining agreement
that does not provide for participation in this Plan.
(b) A leased employee treated as an employee for qualified
retirement plan purposes solely because of section 414(n) of the
Internal Revenue Code.
3.01-3 Every employee having an account under this Plan shall be
known as a participant. The Committee shall inform participants about the
Plan and furnish enrollment forms to provide such information as may be
required by the Committee and designating beneficiaries.
3.01-4 "Entry Date" means any January 1 or July 1, and any other
date designated by the Committee.
3.02 Service
3.02-1 "Service Year" means:
(a) For initial eligibility under 3.01 and Break in Service
under 3.04 the initial Employment Year and each Plan Year
starting with the Plan Year in which the initial Employment Year
ends.
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(b) For vesting under 9.01 - a Plan Year.
(c) For continued participation in contributions and forfeitures
- a Plan Year.
3.02-2 "Employment Year" means the 12-month period starting on
the date the employee first performs an Hour of Service.
3.02-3 "Year of Service" means the following:
(a) Each Service Year in which an employee has 1,000 or more
Hours of Service.
(b) A Plan Year in which a participant is employed at an annual
rate of 1,000 Hours of Service or more in part of the year shall
be a Year of Service for participation in contributions and
forfeitures (not for vesting) if one of the following applies:
(1) The partial year ends due to death or disability under
8.02 or retirement.
(2) The partial year begins on rehire as a Qualified
Employee, employment continues through the end of the Plan
Year and either a Break in Service has not occurred or
pre-Break Service is counted for participation under 3.04-2.
3.02-4 "Hours of Service" are the following:
(a) Hours, whether or not worked, for which an employee is
directly or indirectly paid or entitled to payment, subject to
3.02-5.
(b) Regularly scheduled hours during leave of absence under
3.03.
(c) Hours covered by a back pay award or agreement, regardless
of mitigation of damages, unless already counted.
(d) Hours paid for at or after termination of employment for
vacation, holiday, layoff, sick leave, disability or jury duty.
(e) Hours as a leased employee under 3.01-2(b) or in another
non-Qualified Employment capacity.
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3.02-5 The following shall apply to Hours of Service for periods
not worked:
(a) Hours shall be computed and attributed to Service Years in
accordance with Department of Labor Regulations sections
2530.200b-2(b) and (c).
(b) Hours directly or indirectly paid for under 3.02-4(a)
include regularly scheduled hours during periods of disability
when an individual is receiving payments from Employer or from an
insurance company under a policy maintained by Employer or under
workers' compensation laws.
(c) Hours directly or indirectly paid for under 3.02-4(a) do not
include hours during periods in which an individual receives
payments only under unemployment compensation laws, regardless of
the source of payment.
(d) Hours counted under 3.02-4(d) do not include any hours on
account of severance pay, except severance pay measured by
applying a rate of pay to a period of time.
3.02-6 Hours of Service shall be credited as follows:
(a) For an hourly paid employee, actual hours shall be credited
under 3.02-4.
(b) For a salaried employee, 45 hours shall be credited for each
week in which the employee has one or more hours as defined in
3.02-4.
3.03 Leaves of Absence
3.03-1 An employee on leave of absence shall be treated as
employed for all purposed under this plan.
3.03-2 Leave of absence under 3.03-1 shall mean the following:
(a) Leave of absence authorized by Employer if the employee
returns or retires within the time prescribed and otherwise
fulfills all conditions imposed by Employer.
(b) Leave of absence in accordance with Employer policies
because of illness or accident, including disability that does
not result in retirement, if the employee returns promptly after
recovery.
(c) Periods of military service if the employee returns with
employment rights protected by law.
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3.03-3 In authorizing leaves of absence, Employer shall treat
all employees who are similarly situated alike as much as possible.
3.03-4 If a person on leave fails to meet the conditions of the
leave or fails to return to work when required, the following shall apply:
(a) If the leave is not for military service and the failure is
because of death, disability under 8.02 or retirement, employment
shall be terminated and accrual of Service shall stop when the
failure occurs.
(b) If (a) does not apply, employment shall be terminated and
accrual of Service shall stop as of the date the leave began.
(c) No previous allocation of contributions or forfeitures shall
be changed.
(d) Any resulting forfeiture shall occur not earlier than the
end of the Plan Year in which the failure occurs.
3.04 Break in Service
3.04-1 A "Break in Service" shall be determined as follows:
(a) A Break in Service shall occur when an employee has five
consecutive Break-in-Service Years.
(b) Subject to (c), a "Break-in-Service Year" is a Service Year
in which an employee who has terminated employment has not more
than 500 Hours of Service.
(c) Regardless of Hours of Service, an employee absent because
of maternity or paternity shall not, because of such absence,
have a Break-in-Service Year until the second Service Year ending
after the Service Year in which the absence begins, subject to
(e) below.
(d) "Absence because of maternity or paternity" means an absence
from Service because of any of the following:
(1) Pregnancy.
(2) Birth of the employee's child or care following
adoption or placement for adoption.
(3) Adoption of the employee's child or care following
adoption or placement for adoption.
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(e) Paragraph (c) above shall not apply unless the employee
furnishes timely information satisfactory to the Committee to
establish the following:
(1) That the absence was due to maternity or paternity.
(2) The length of the absence.
3.04-2 Intermittent periods of Service shall be aggregated until
there is a Break in Service. If a Break in Service occurs and the employee
has later Service, Service before the Break shall be counted as follows:
(a) For vesting, pre-Break Service shall be counted if the tests
in (b) below are met and the employee has a Year of Service after
the Break.
(b) For eligibility for participation, pre-Break Service shall be
counted only if either of the following applies:
(1) The employee had a vested interest before the Break.
(2) The number of Years of Service before the Break is
greater than the number of consecutive Break-in-Service
Years.
3.04-3 If an employee has a Break in Service, has later Service
and Service before the Break is counted, the employee shall participate
immediately on resumption of employment as a Qualified Employee. If Service
before the Break is not counted, the employee shall be treated as newly hired
and shall participate when eligible under 3.01. In that event, the first day
of Service after rehire shall start a new Employment Year.
3.04-4 If all or part of a participant's account is forfeited
under 9.04 and the participant has a Break in Service, the forfeited amount
shall not be restored on rehire. If the participant resumes Service and
Service before the Break is counted for vesting, Service before and after the
Break shall be combined for vesting of future contributions.
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ARTICLE IV
Compensation; General Contribution Rules
4.01 Application of Provisions
The provisions of this Article shall apply to ESOP contributions
under Article V.
4.02 Compensation
4.02-1 "Compensation" means the following subject to the limits
in 4.02-2:
(a) For deductibility under 4.03 and the annual addition limit
under 4.04-2, compensation means taxable pay reportable on IRS
Form W-2 under Internal Revenue Code section 3401(a),
disregarding limitations based on the nature or location of the
employment.
(b) For determination of Highly Compensated Employees under
4.02-3,compensation under (a) above shall be adjusted as follows:
(1) Amounts described in (c)(1) below shall be included.
(2) Amounts realized from the exercise of a non-qualified
stock option or from the lapse of restrictions on restricted
property shall be excluded.
(c) For the allocations of ESOP contributions under 5.01,
compensation means the amount under (a) above adjusted as
follows:
(1) Elective contributions to any tax-qualified retirement
plan of one Employer and any amounts set aside by the
participant from otherwise taxable income under a welfare
benefit plan qualified under section 125 of the Internal
Revenue Code shall be included.
(2) Any reimbursements or other expense allowances, fringe
benefits, moving expenses, severance or disability pay and
other deferred compensation and welfare benefits shall be
excluded.
(3) Commissions in excess of $50,000 in any Plan Year shall
be excluded.
4.02-2 Compensation shall be limited as follows:
(a) The limit of Compensation for any participant for a Plan
Year or Limitation Year shall be $160,000 or the dollar
limitation then in effect under section
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401(a)(17) of the Internal Revenue Code and the regulations
thereunder for such Year.
(b) For Plan Years ending on or before December 31, 1996,
compensation of a Highly Compensated Employee as defined in
section 4.02-3 who is a 5 percent owner or is one of the 10
highest paid employees shall be aggregated with compensation from
Employer to the spouse or a lineal descendant under age 19 to
determine the limit.
(c) If the limit is exceeded because of aggregation under (b)
above, pay counted for each aggregated employee shall be reduced
pro rata to stay within the limit.
(d) Compensation shall be based only upon amounts paid during
the Plan Year.
4.02-3 "Highly Compensated Employee" is defined in section
414(q) of the Internal Revenue Code and related Treasury regulations. In
determining which employees are highly compensated employees, the following
shall apply:
(a) For Plan Years ending on or before December 31, 1996, a
highly compensated employee for a Plan Year is an employee who
has performed services for Employer during the Year or the prior
Plan Year and is one of the following:
(1) An owner of 5 percent or more of an Employer during
either Year.
(2) A person paid over $75,000 for either Year.
(3) A person paid over $50,000 for either Year who is among
the highest paid 20 percent of employees of Employer or
either year, aggregating employees of all statutory
Affiliates under 2.01-2 and excluding employees to the
extent provide by applicable regulations.
(4) An officer of Employer paid over $45,000 for either
Year, or the highest paid officer if no officer is paid over
$45,000 for a Year. The number of officers counted in any
Year under this provision shall not exceed either 50 or the
greater of 3 or 10 percent of the employees of Employer.
(5) A family member in either Year of a Highly Compensated
Employee who is a 5 percent owner or is one of the 10
highest paid employees for the Year. For this purpose,
family members include the spouse, lineal ancestors, lineal
descendants, and spouses of lineal descendants, and spouses
of lineal ancestors and descendants.
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(b) For Plan Years beginning after December 31, 1996, "Highly
Compensated Employee" shall be defined as an employee who:
(1) was at any time a 5 percent owner of the Company, or
(2) for the preceding Plan Year, was paid over $80,000 (or
such greater amount authorized pursuant to Section 414(q) of
the Code), and, if elected by the Company, was in the
top-paid group of employees for such preceding Plan Year.
(c) The dollar amounts in (a) and (b) above shall be adjusted in
accordance with Treasury regulations for changes in cost of
living.
(d) Former employees shall be taken into account in accordance
with applicable regulations.
(e) Pay for this purpose shall mean Compensation under 4.02-
1(b).
4.03 Deductibility
4.03-1 Contributions are conditioned upon deductibility under
section 404 of the Internal Revenue Code, except to the extent that deductible
contributions are not sufficient to pay principal and interest on an ESOP
loan. To the extent a deduction is disallowed, 13.08 shall apply.
4.03-2 If contributions would exceed the limit because of
another defined contribution plan, the amount recovered under 13.08 shall be
charged in the same order as reductions under 4.05-2.
4.04 Limit on Annual Additions
4.04-1 Benefits shall be limited in accordance with the
following rules as provided in Internal Revenue Code section 415 and related
regulations. The following provisions shall be applied in a manner consistent
with the Code and regulations, which are incorporated by this reference.
4.04-2 No annual addition for any participant shall be more than
the lesser of the following:
(a) $30,000 plus any authorized cost-of-living adjustments.
(b) 25 percent of the participant's Compensation, under
4.02-1(a), for the Limitation Year.
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4.04-3 "Annual addition" means for any Limitation Year the ESOP
contributions for the year, and any reallocated forfeitures, subject to the
following:
(a) Allocations to a participant's account of Leveraged Company
Stock shall be calculated with reference to Employer
contributions used to repay the loan.
(b) Contributions applied to pay interest on an ESOP Loan and
allocations of forfeitures of Leveraged Company Stock shall be
excluded if no more than one-third of all contributions for the
year under the ESOP are contributed for the benefit of highly
compensated employees.
(c) "Highly Compensated Employee" is defined in 4.02-3.
(d) "Leveraged Company Stock" is defined in 11.04.
4.04-4 In applying the limitations on annual additions the
following rules shall apply:
(a) All employers who are Affiliates under 2.01-2, with the
adjustments provided in Internal Revenue Code section 415(h),
shall be considered a single employer.
(b) The annual additions under all defined contribution plans
shall be combined.
(c) For purposes of 4.04-2(a) only, any contribution to a
separate account for post-retirement medical benefits under a
funded welfare benefit plan for a key employee shall be
considered an annual addition under a defined contribution plan.
4.04-5 If Employer maintains one or more other defined
contribution plans at any time, the annual additions under all such plans
shall be combined for purposed of applying the above limitations. For the
purposes of 4.04-2(a) only, any contribution to a separate account for
post-retirement medical benefits for a key employee under a funded welfare
benefit plan shall be considered such an annual addition.
4.04-6 If Employer maintains or has maintained one or more
defined benefit pension plans at any time, the following shall apply:
(a) The defined benefit fraction under all such plans combined
with the defined contribution fraction under this plan and all
other defined contribution plans currently or previously
maintained by Employer shall not exceed 1.0 for any individual.
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(b) The defined benefit fraction numerator shall be the
participant's projected annual normal retirement benefit. The
denominator shall be the maximum benefit under section 415(b)(1)
of the Internal Revenue Code, adjusted under (d).
(c) The defined contribution fraction numerator shall be the sum
of all annual additions for the participant since the plan's
inception. The denominator shall be the sum of the maximum
annual additions under section 415(c)(1) of the Internal Revenue
Code for all years of the participant's employment with Employer,
adjusted under (d).
(d) The denominators under (b) and (c) shall be the smaller of
the maximum percentage limitation amount times 1.4 or the maximum
dollar limitation amount times 1.25.
4.05 Adjustments to Satisfy Limits
4.05-1 If an annual addition for a participant would exceed the
limit in 4.04, contributions and any forfeiture reallocations shall be reduced
pursuant to Treasury Regulation section 1.415-1(d) as necessary to eliminate
the excess as follows:
(a) The following amounts shall be reduced in the order stated:
(1) Forfeitures derived from ESOP contributions.
(2) ESOP contributions.
(b) If a participant's forfeiture allocations are reduced, the
amount shall be reallocated to other participants.
(c) Any forfeitures that cannot be reallocated under (b) because
of the annual addition limitation shall be placed in a suspense
account and allocated as soon as possible. No revaluation
adjustment shall be made in the suspense account for investment
results. If the plan terminates and there are unallocated
forfeitures, they shall be returned to Employer.
4.05-2 If an annual addition for a participant would exceed the
limit in 4.04 because of any other tax qualified retirement plan of an
Employer, the contributions, forfeiture reallocations and benefits under the
plans shall be reduced as necessary to meet the limit, in the following order:
(a) Benefits under any defined benefit pension plan.
(b) Annual additions under any defined contribution plan, other
than this plan.
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(c) Forfeitures allocated with ESOP contributions under this
plan.
(d) ESOP contributions under this plan.
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ARTICLE V
ESOP Contributions, Allocations, Etc.
5.01 ESOP Contributions
5.01-1 Subject to 4.03 and 5.01-2, for each Plan Year each
Employer shall make contributions to the ESOP in such amounts, if any, as may
be fixed by the Company.
5.01-2 If the ESOP is funded with an ESOP Loan, the following
shall apply:
(a) The amount fixed by the Company under 5.01-1 shall be
sufficient to pay principal and interest currently due under any
ESOP Loan.
(b) Each contribution shall be applied to repayment of the ESOP
Loan, to the extent directed by the Company, under the applicable
Leveraged ESOP Suspense Account procedures in accordance with
5.03.
5.01-3 ESOP contributions may be in cash or in Company stock,
subject to the following rules:
(a) Contributions to the extent necessary to pay principal and
interest on an ESOP Loan shall be in cash.
(b) "Company stock" means common stock of the Company or an
Affiliate of the Company that is readily tradable on an
established securities market or, if not readily tradable, common
stock with the greatest voting and dividend rights.
(c) Contributions in cash shall be applied as soon as reasonably
practicable to buy Company stock unless the Trustee determines
that it is not prudent to do so or the cash is applied to pay
principal or interest on an ESOP Loan.
5.01-4 ESOP contributions shall be combined with forfeitures
with respect to ESOP contributions and allocated as follows:
(a) Subject to 5.06, ESOP contributions shall be allocated to
each participant in the same ratio that the Compensation (as
determined under 4.02-1(c)) of such participant as a Qualified
Employee bears to the total Compensation (as determined under
4.02-1(c)) of all such Participants for the Plan Year. For a new
participant, the allocation shall be based on such compensation
for the part year after participation starts.
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(b) A participant must have a Year of Service for the Plan Year
under 3.02-3 and be employed as a Qualified Employee at the end
of the Plan Year unless (c) below applies.
(c) The Year of Service requirement in (b) and the Plan Year-end
requirement shall be waived for an otherwise eligible participant
who terminates employment during the year because of death,
disability under 8.02-2 or retirement.
5.01-5 This plan shall be a stock bonus plan with respect to
ESOP contributions.
5.01-6 No participant shall be required or permitted to make
contributions to the ESOP.
5.02 Time of Payment
Employer shall make payments to the Trustee to cover all ESOP
contributions as follows:
(a) Employer may pay such contributions in a lump sum or
periodically throughout and after the end of the year.
(b) All contributions for a Plan Year shall be paid within the
regular or extended time for filing Employer's federal income tax
for the year. Any amount paid after the end of the Plan Year or
a tax year of Employer shall be treated as paid on the last day
of that Plan Year or tax year if (i) the contribution is paid
within the time specified in this paragraph and (ii) the
contribution is designated by Employer as attributable to the
Plan Year or tax.
5.03 Leveraged ESOP Suspense Accounts
5.03-1 The Committee shall maintain an unallocated Leveraged
ESOP Suspense Account for each ESOP Loan to purchase Leveraged Company Stock.
The following amounts shall be credited to the Leveraged ESOP Suspense
Account:
(a) Proceeds from the ESOP Loan.
(b) Leveraged Company Stock acquired with ESOP Loan proceeds.
(c) Amounts contributed by an Employer under the ESOP and
designated by the Employer for repayment of the ESOP Loan.
(d) Earnings received on assets held in the Leveraged ESOP
Suspense Account.
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5.03-2 A separate Leveraged ESOP Suspense Account shall be
maintained for each ESOP Loan.
5.04 Allocations from Leveraged ESOP Suspense Account
5.04-1 Subject to 5.04-5, the Committee shall determine in
accordance with applicable law and regulations the number of shares of
Leveraged Company Stock to be released from each Leveraged ESOP Suspense
Account and allocated to participants' accounts under either 5.04-2 or 5.04-3
as follows:
(a) The number of shares released shall be based on ESOP
contributions designated for repayment of the ESOP Loan during
the year.
(b) Allocations shall be made as of each Plan Year and each
special allocation date designated by the Committee during the
Plan Year.
(c) Allocations shall be based on nonmonetary units
corresponding with the Trustee's cost for the stock being
allocated.
(d) To the extent that earnings on Leveraged Company Stock need
not be retained in a suspense account to repay money borrowed,
such earnings shall be included in the allocations under (c).
5.04-2 Subject to 5.04-3, -4 and -5 and 5.06, the number of
shares released shall equal the number of shares held in the account
multiplied by the principal paid for the Plan Year on the loan to buy the
stock and divided by the outstanding principal at the start of the year.
5.04-3 Shares may be released under 5.04-2 only if the following
requirements are met:
(a) The ESOP Loan provides for payment each year of principal
and interest at a cumulative rate that is not less rapid at any
time than level annual payments of principal and interest over
not more than 10 years.
(b) No payment is classified as interest except to the extent
that it would be treated as interest under standard loan
amortization tables.
(c) The term of the loan, including renewals, extensions and
refinancings, does not exceed 10 years.
5.04-4 The alternative procedure described in this provision
shall apply if elected by the Committee or if the requirements of 5.04-3 are
not met. Subject to 5.04-5 and 5.05, under the alternative method, the number
of shares of leveraged Company stock to be released
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from a Leveraged ESOP Suspense Account shall be proportionate to the principal
and interest payments for the year on the ESOP Loan as follows:
(a) The proportion shall be the total principal and interest
paid for the Plan Year divided by the total principal and
interest to be paid on such borrowed funds as of the start of the
Plan Year.
(b) If the interest under the loan is variable, future interest
shall be computed at the rate in effect on the regular valuation
date.
5.04-5 If an ESOP Loan is repaid with the proceeds of another
loan (Replacement ESOP Loan), the following shall apply:
(a) The repayment shall not release shares for allocation to
participants.
(b) Shares released by the repayment shall be transferred to a
Leveraged ESOP Suspense Account for the Replacement ESOP Loan.
5.05 Treatment of Dividends
5.05-1 Subject to 5.05-2 and 5.05-4, dividends payable, if any,
with respect to Company Stock held by the Trust may be used, to the extent
permitted by law and the terms of such Company stock on which such dividends
are paid, for the purpose of repaying any ESOP Loan if such dividends are paid
with respect to Company Stock acquired with the proceeds of such ESOP Loan.
In the event that dividends paid with respect to allocated Company Stock are
used to repay an ESOP Loan, section 404(k)(2)(B) of the Internal Revenue Code
shall apply.
5.05-2 Subject to 5.05-3, the Trustee shall, if directed to do
so by the Company, distribute cash dividends on allocated Company stock held
by the ESOP Trust as follows:
(a) Dividend distributions shall be paid in cash no later than
90 days after the end of the Plan Year in which the dividends are
received by the ESOP Trust.
(b) The amount distributed shall be the amount otherwise
allocable to an individual's account for the dividend.
(c) Any Trust earnings on a dividend before distribution shall
be retained in the ESOP Trust and allocated to the ESOP account
of the participant or beneficiary affected.
(d) The Committee may allow participants to elect to have
dividends retained in their accounts rather than distributed
currently in cash.
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5.05-3 Company direction under 5.05-2 must be in writing and may
be revoked at any time before the dividend is distributed.
5.05-4 Any dividends not used to repay an ESOP loan or
distributed to participants under 5.05-2 shall be retained in the Trust and
allocated to participants' accounts in the same manner as dividends
distributed under 5.05-2.
5.06 Limitations on Allocations of Special Assets
5.06-1 Allocation of a special asset to restricted participants
and 25-percent shareholders is subject to the limits set out below. For this
purpose, the following definitions apply:
(a) "Special asset" means any of the following:
(1) Company stock purchased in a qualifying sale.
(2) Any other asset attributable to Company stock in (1) or
allocable in place of Company stock in (1).
(b) "Qualifying sale" means any sale of Company stock to which
Internal Revenue Code section 1042 applies.
(c) "Restricted participant" means a person who sells Company
stock to the plan in a qualifying sale or the spouse, brother,
sister, ancestor or lineal descendant of such a person.
(d) "A 25-percent shareholder" means a person who, under
applicable regulations, owns directly or indirectly more than 25
percent of the following:
(1) Any class of outstanding stock of the Company or any
corporation affiliated with the Company under section
409(1)(4) of the Internal Revenue Code.
(2) The total value of any class of outstanding stock of the
Company or any affiliated corporation.
5.06-2 No special asset shall be allocated to a restricted
participant during the period that begins on the date Company stock is
purchased in a qualifying stock sale and ends on the later of the following:
(a) The tenth anniversary of the qualifying sale.
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(b) The date of the final allocation under 5.05 attributable to
payment of an ESOP Loan that financed the purchase of the Company
stock in the qualifying sale.
5.06-3 No special asset shall be allocated to a participant who
is a 25-percent shareholder during the 12-month period ending on the date of a
qualifying sale or on the date on which the special asset is allocated. An
allocation of special assets to a participant who later becomes a 25-percent
shareholder shall not be affected.
5.07 Limitation on Allocation to Highly Compensated Participants.
5.07-1 Notwithstanding the foregoing provisions of this ARTICLE
if more than one-third of ESOP Contributions for a Plan Year which are
deductible under section 404(a)(9) of the Internal Revenue Code would be
allocated, in the aggregate, to participants described in 4.02-3, then
allocations to such participants shall be reduced, pro rata, in an amount
sufficient to reduce the amounts allocated to such participants to an amount
not in excess of one-third of such deductible contributions with respect to
such Plan Year.
5.07-2 Any contributions which are prevented from being
allocated due to the restriction contained in 5.07-1 shall be allocated to
other participants as though the participants described in 4.02-3 did not
participate in the Plan.
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ARTICLE VI
Participants' Accounts
6.01 Participants' Accounts
6.01-1 The Committee shall keep such separate accounts for each
participant as may be necessary to administer the plan property.
6.01-2 The Committee shall furnish each participant annually a
statement showing contributions and forfeiture allocations, vesting and
account balances.
6.02 Valuations and Adjustments
6.02-1 As of each regular or special valuation date the Trustee
shall value the shares of Company stock and other assets at their fair market
values and report the values to the Committee.
6.02-2 Whenever the Committee finds it desirable to avoid a
material distorting in benefits or otherwise to administer the plan properly,
it may do either of the following:
(a) Call for a special valuation.
(b) Defer pending distributions until after the next regular
valuation date.
6.02-3 If Company stock is publicly traded, fair market value
shall be based on the market price for the stock unless otherwise required by
law at the time of the valuation. Company stock that is not publicly traded
shall be valued by a qualified, independent person or organization engaged by
the Committee.
6.03 Rollovers and Transfers
6.03-1 The Trustee shall not accept rollover contributions or
transfers from another tax-qualified retirement plan or Individual Retirement
Account (IRA) from any participant.
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ARTICLE VII
Retirement Benefits
7.01 Entitlement; Retirement Dates; Participation After Mandatory
Benefit Starting Date
7.01-1 A participant shall be entitled to benefits on retirement
or on reaching the mandatory benefit starting date under 7.04-2.
7.01-2 Retirement shall occur on termination of employment after
reaching one of the following dates:
(a) Normal retirement date, which shall be age 65.
(b) A deferred retirement date, which shall be any date after
normal retirement date.
7.01-3 Commencing benefits under 7.04-2 while still employed
shall not constitute retirement and shall not prevent continued participation
in contributions or forfeiture allocations. Contributions and forfeitures
allocated to the account of a participant after the distribution date under
7.04-2 shall be distributed as soon as practicable, and in any case not later
than the end of the calendar year after the calendar year that includes the
allocation date.
7.01-4 If a person entitled to receive benefits is rehired, the
benefit shall not be paid until later termination of employment except as
provided in 7.04-2. When the participant later terminates employment, the
amount of benefit shall be redetermined.
7.02 Amount and Form of Benefit
7.02-1 On retirement, the benefit shall be based on the
participant's entire account, which shall be 100 percent vested under 9.01-2,
adjusted through the last regular or special valuation on or before
distribution or segregation.
7.02-2 Benefits shall be paid as provided in 7.05-1.
7.02-3 If the participant's accounts are distributed before the
final allocation of contributions and forfeitures is made, a final payment
shall be made to the participant promptly after allocation.
7.02-4 If the participant dies before payment of the account,
it shall be paid as a death benefit under Article VIII.
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7.03 Application for Benefits; Time of Payment
7.03-1 A participant or beneficiary eligible for benefits must
apply in writing as follows:
(a) Application shall be made on a form prescribed by the
Committee.
(b) Application shall be made after receipt of the explanation
in 7.03-2(c) and within 90 days before benefits are to start.
7.03-2 Subject to 7.04, the participant shall specify the time
of payment of retirement benefits in the application and the following shall
apply:
(a) Subject to (b), the Committee shall direct the Trustee to
pay benefits as soon as reasonably possible after retirement
whether or not an application is filed.
(b) The Committee may delay payment of benefits for a reasonable
period necessary to process payment but in no event beyond 60
days after the latest of the following:
(1) The end of the Plan Year of retirement.
(2) The date the amount is known.
(3) The date an application is received.
(c) The Committee shall, between 30 and 90 days before benefits
are to start, give the participant or other eligible recipient an
explanation of the following:
(1) The right to elect to have a direct rollover under
7.03-5.
(2) The applicability of mandatory withholding if a direct
rollover could be elected under 7.03-5 and is not.
(3) The applicable rules on rollover and taxation of the
distribution as required by section 402(f) of the Internal
Revenue Code.
(d) If a distribution of benefits is one to which sections 401
(a)(11) and 417 of the Internal Revenue Code do not apply, such
distribution may commence less than 30 days after the notice
required under section 1.411(a)-11(c) of the Treasury Regulations
is given, provided that:
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(1) The Administrative Committee clearly informs the
participant that the participant has a right to a period
of at least 30 days after receiving the notice to
consider the decision of whether or not to elect a
distribution (and, if applicable, a particular
distribution option), and
(2) the participant, after receiving the notice,
affirmatively elects a distribution.
7.03-3 Unless the participant consents to a later date, benefits
under the ESOP must be paid no later than the following:
(a) Leveraged Company Stock shall be distributed by the end
of the Plan Year in which the loan is repaid.
(b) All other distributions shall occur by the end of the
Plan Year that starts after the date of retirement or
disability under 8.02.
7.03-4 If the date for payment has passed and the Committee has
not located the participant or beneficiary, the Committee shall distribute the
benefit into a custodial account in a financial institution in the name of the
participant or beneficiary. This shall constitute a lump sum distribution to
which regular tax reporting and withholding requirements shall apply.
7.03-5 An eligible recipient of an eligible rollover
distribution may elect before a benefit is paid to have the benefit
distributed by a direct rollover into an eligible retirement plan and the
following shall apply:
(a) The recipient shall furnish the Committee sufficient
information to identify the eligible retirement plan and the
fund holds to whom the transfer should be paid.
(b) "Eligible retirement plan" is defined in section 402(c)
(8)(b) of the Internal Revenue Code.
(c) "Eligible rollover distribution" is defined in section
402(c)(4) of the Internal Revenue Code.
(d) "Eligible recipient" means the participant, the spouse of
a deceased participant and a spouse or former spouse who is an
alternate payee under a qualified domestic relations order.
7.04 Distribution Rules
7.04-1 Benefits shall be paid in accordance with the following
overriding rules as provided in Treasury Regulation sections 1.401(a)(9)-1 and
- -2.
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7.04-2 Payment to a participant shall be made not later than the
later to occur of the April 1 of the calendar year following the calendar year
(i) in which the participant reaches 70 1/2, or (ii) the calendar year in
which the Participant terminates employment. Clause (ii) shall not apply in
the case of a 5% of owner of an Employer (as defined in Section 416(i) of the
Code).
7.05 Distribution and Transfer of Company Stock
7.05-1 Distributions under the ESOP shall be paid as follows:
(a) Amounts in a participant's ESOP account that have been
invested pursuant to an election to diversify under 11.02-3 shall
be paid in cash.
(b) All amounts remaining in the participant's ESOP account
shall be paid in whole shares of Company stock and cash for
fractional shares. Company Stock distributed under the ESOP
shall be transferable only in conformance with applicable state
and federal securities laws.
7.06 Right to Sell Distributed Shares
7.06-1 This section shall apply to Company stock that meets both
of the following criteria as defined by applicable regulations:
(a) It is not subject to a trading limitation.
(b) It is not publicly traded.
Company stock is publicly traded if it is listed on a national securities
exchange or quoted on a system sponsored by a national securities association.
7.06-2 If non-Leveraged Company Stock subject to this section is
distributed from the trust, the holder may require the Company to buy the
stock, subject to 7.06-5, as follows:
(a) The stock must be held by a participant, former participant,
beneficiary of a participant, or a person who received the stock
by gift from or by reason of the death of such a participant or
beneficiary, or by the trustee or custodian of an individual
retirement account of any of the above persons.
(b) The holder may elect within 60 days after it is distributed
to sell any of the stock to the Company.
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(c) If the holder does not sell all the stock under (b), the
Company must notify the holder of the value of the stock as of
the end of the Plan Year in which the 60 day period ends. The
holder may then elect within 60 days after receipt of the notice
to sell any of the remaining stock to the Company.
(d) A sale under (b) or (c) shall be carried out under 7.06-4.
7.06-3 If Leveraged Company Stock subject to this section is
distributed from the trust, the holder may require the Company to buy any of
the stock, subject to 7.06-5, as follows:
(a) The stock must be held by a participant, former participant,
beneficiary of a participant, or a person who received the stock
by gift from or by reason of the death of such a participant or
beneficiary.
(b) An election to sell must be made by the holder within 15
months after the stock is distributed excluding any period after
distribution during which the Company is not permitted by
applicable federal or state law to make such a purchase.
(c) Company stock that is publicly traded but ceases to be
publicly traded within 15 months shall remain subject to the
election described in 7.06-3(b) for the remainder of the 15 month
period. The Company must so notify the holder according to
applicable regulations.
7.06-4 The price and terms of payment for a purchase under
7.06-2 and 7.06-3 shall be as follows:
(a) The purchase price shall be the fair market value as of the
last valuation date or the date of exercise as required by
applicable regulations. The fair market value shall be
determined under 6.02-3.
(b) The Company may elect before any payment is due to pay in a
lump sum or installments, subject to the following:
(1) Installment payments may only be made on repurchase of
Company stock distributed by lump sum payment.
(2) Installment payments must be at least as fast as
substantially equal periodic payments, not less frequently
than annually, over a period not longer than five years.
(3) Any amount payable in installments shall bear interest
a reasonable rate determined by the Company from the date of
the election to sell.
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(4) Any amount payable in installments shall be secured by
Company stock or other assets with a value equal to at least
125% of the outstanding balance.
(c) The lump sum or initial installment shall be paid within 30
days after the election.
7.06-5 The Company may grant the Trustee an option to assume the
rights and obligations of the Company under 7.06-2 through 7.06-4 if the
Trustee has sufficient available assets to do so. The Company may grant such
option any time before the closing of the sale by delivering to the Trustee a
notice authorizing the Trustee to make the purchase. In that event, the
Trustee may elect to buy the stock and determine the method of payment under
7.06-4, including interest rate under 7.06-4(b)(3).
7.06-6 Except as provided under this section and 11.05,
Leveraged Company Stock shall not be subject to a put, call, or other option,
or buy--sell or similar arrangement.
7.06-7 The right to sell under this section and the restriction
in 7.06-6 shall continue even if the ESOP ceases to be a qualified employee
stock ownership plan.
7.07 Right of First Refusal
7.07-1 Shares of the Company Stock purchased with the proceeds
of a Loan and distributed by the Trustee may be subject to a "right of first
refusal." Such a "right" shall provide that prior to any subsequent transfer,
the shares must first be offered in writing to the Company at a price equal to
the greater of (i) the then fair market value of such shares of Company Stock
or (ii) the purchase price offered by a buyer, other than the Company or
Trustee, making a good faith (as determined by the Committee) offer to
purchase such shares of Company Stock.
7.07-2 The Trust or the Company, as the case may be, may accept
the offer as to part or all of the Company Stock at any time during a period
not exceeding 14 days after receipt of such offer by the Trust, on terms and
conditions no less favorable to the shareholder than those offered by the
independent third party buyer. Any installment purchase shall be made
pursuant to a note secured by the shares purchased and shall bear a reasonable
rate of interest as determined by the Committee. If the offer is not accepted
by the Trust, or the Company, or both, then the proposed transfer may be
completed within a reasonable prior following the end of the 14 day period,
but only upon terms and conditions of the third party buyer's prior offer.
7.07-3 Shares of Company Stock which are publicly traded with
the meaning of Code Section 409(h)(1)(B) at the time such right may otherwise
be exercised shall not be subject to this "right of first refusal."
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ARTICLE VIII
Benefits on Death or Disability
8.01 Benefits on Death
8.01-1 A deceased participant's vested account, adjusted to the
last regular or special valuation date before payment and including any final
allocation for the year of death, shall be paid as a death benefit to the
beneficiary in a lump sum in the form provided under 7.05-1. If death occurs
before employment terminates, the participant's account shall be fully vested.
8.01-2 The beneficiary shall make application under 8.03-1.
Distributions from the ESOP must begin no later than the end of the Plan Year
that starts after the date of death. If the Committee has not located the
beneficiary within the time for payment, 7.03-4 shall apply.
8.02 Benefits on Disability
8.02-1 A participant whose employment ends because of disability
shall be fully vested and entitled to receive benefits. Subject to 8.02-3,
benefits shall be paid by lump sum at a time fixed under 9.03.
8.02-2 A disabled participant is one who as a result of illness
or injury suffers from a condition of mind or body that permanently prevents
continued employment by Employer. The Committee shall determine the existence
of disability and may have the participant examined by and rely on advice from
a medical examiner satisfactory to the Committee in making the determination.
8.02-3 If the participant notifies the Committee in writing that
benefits after disability would reduce any other disability benefit, the
Committee shall defer payment until the other benefit stops, subject to
7.04-2.
8.03 Designation of Beneficiary
8.03-1 Each participant shall file a designation of
beneficiaries with the Committee as follows:
(a) The designation shall name a specific beneficiary or
beneficiaries, which may include a trust. The beneficiaries may
be changed from time to time in accordance with these provisions.
(b) A designation by a married participant of a beneficiary
other than the surviving spouse shall not be effective unless
either of the following applies:
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(1) The spouse executes a consent in writing that
acknowledges the effect of the designation and is witnessed
by a plan representative or notary public.
(2) The consent cannot be obtained because the spouse
cannot be located or because of other circumstances provided
by applicable regulations.
(c) A determination in good faith by the Committee that (b) has
been complied with shall be final and binding if the Committee
has exercised proper fiduciary care in making the determination.
(d) The designated beneficiary or other recipient described
below shall receive any residual benefit after death of a
participant.
8.03-2 If the participant's marital status changes after the
participant has designated a beneficiary, the following shall apply, subject
to any applicable qualified domestic relations order under 13.06-2:
(a) If the participant is married at death but was unmarried
when the designation was made, the designation shall be void
unless the spouse is the beneficiary or the spouse consents to
the designation in the manner prescribed above.
(b) If the participant is unmarried at death but was married
when the designation was made, the benefit shall be paid as
though the former spouse had predeceased the participant.
(c) If the participant was married when the designation was made
and is married to a different spouse at death, the designation
shall be void unless the new spouse consents to it in the manner
prescribed above.
8.03-3 If a beneficiary dies after the death of a participant
but before full distribution to the beneficiary, any benefit to which the
beneficiary was entitled shall be paid to the estate of the deceased
beneficiary.
8.03-4 The following shall apply to any part of a benefit as to
which no valid designation of beneficiary is in effect at death:
(a) Subject to (b) and (c) below, the benefit shall be paid in
the following order of priority:
(1) To the participant's surviving spouse.
(2) To the participant's surviving children in equal
shares.
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(3) To the participant's estate.
(b) If a beneficiary designated under (a) above or under 8.03-1
disclaims a benefit, the benefit shall be paid as though that
beneficiary had predeceased the participant.
(c) If a surviving spouse entitled to a benefit consents after
the participant's death to the participant's designation of
another beneficiary, the other beneficiary shall be a validly
designated beneficiary as to such benefit.
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ARTICLE IX
Benefits After Termination of Employment
9.01 Vesting
9.01-1 Amounts attributable to ESOP contributions shall be
vested as follows based on Years of Service under 3.02 completed after age 18:
Years of Service
after age 18 Percent Vested
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
9.01-2 A participant who, while employed by Employer, dies,
becomes disabled under 8.02-2 or becomes eligible for retirement shall be
fully vested.
9.02 Distributable Amount
9.02-1 Absent rehire and restoration under 9.05, a participant
whose employment terminates for any reason, other than retirement, disability
under 8.02 or death, shall receive only the vested interest under 9.01.
9.02-2 The amount to be forfeited shall be determined under
9.04-2(a). The amount of the vested benefit shall be based on the last
regular or special valuation on or before payment or segregation under 9.03.
9.03 Payment of benefits
9.03-1 Subject to 7.04-2, the participant shall specify the time
of payment of benefits after termination of employment in the application
under 7.03, and the following shall apply:
(a) Subject to (b) below, the Committee shall direct the Trustee
to pay benefits as soon as reasonably possible, whether or not an
application has been filed, if either of the following applies:
(1) The distributable amount has never been over $3,500.
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(2) The participant has reached normal retirement date.
(b) Subject to (e), the committee may delay payment for a
reasonable period necessary to process payment but in no event
beyond 60 days after the latest of the following:
(1) The end of the Plan Year of retirement.
(2) The date the amount is known.
(3) The date an application is received.
(c) The Committee shall, between 30 and 90 days before benefits
are to start, give the participant the explanation described in
7.03-2(c) and, unless (a) above applies, an explanation of the
right to defer payment until normal retirement date.
(d) If a person entitled to receive benefits is rehired, the
benefit shall not be paid until later termination of employment,
except as provided in 7.04-2. When the participant later
terminates, the amount of the benefit shall be redetermined.
(e) Unless the participant consents to a later date, benefits
under the ESOP shall be paid no later than the following:
(1) Leveraged Company Stock shall be distributed by the end
of the Plan Year in which the loan is repaid.
(2) All other distributions shall occur by the close of the
fifth Plan Year after the Plan Year of termination of
employment.
(3) In the case of a participant with a distributable
amount which has a value in excess of seven hundred ten
thousand dollars ($710,000) (as adjusted pursuant to section
409(o)(2) of the Internal Revenue Code) on the Valuation
Date coincident with or immediately preceding the date
distributions are scheduled to commence, all other
distributions shall occur by the close of the fifth Plan
Year plus one additional year (but not more than five
additional years) for each one hundred forty thousand
dollars ($140,000) (as adjusted pursuant to section
409(o)(2) of the Internal Revenue Code) or fraction thereof
by which the value of such distributable amount exceeds
seven hundred ten thousand dollars ($710,000) (as adjusted
pursuant to section 409(o)(2) of the Internal Revenue Code).
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9.03-2 If the date for payment has passed and the Committee has
not located the participant or beneficiary, the Committee shall distribute the
benefit under the procedure described in 7.03-4.
9.04 Forfeiture of Unvested Amounts
9.04-1 The unvested portion of a participant's account(s) shall
be forfeited at the earlier of the following:
(a) The first Plan Year-end at which all of the following are
true:
(1) The participant has no vested interest or the
participant's vested interest has been distributed fully.
(2) The participant is not then an employee.
(b) The end of the Plan Year in which the fifth Break-in-Service
Year ends.
9.04-2 Leveraged Company Stock in a participant's account(s)
shall be forfeited only after all other forfeitable assets in the
participant's account(s) have been forfeited.
9.04-3 Forfeitures shall be accounted for as follows:
(a) The amount forfeited shall be based on the balance in the
account as of the end of the Plan Year in which forfeiture
occurs.
(b) Forfeitures shall first be applied to restore prior
forfeitures under 9.05.
(c) Any forfeitures remaining after application under (b) shall
be pooled and reallocated under 5.01-4 among all remaining
participants, regardless of their Employer.
9.04-4 A zero vested balance of a participant shall be treated
as though distributed immediately when employment terminates.
9.05 Restoration of Forfeited Amounts
9.05-1 If a participant is rehired before a Break in Service but
after a forfeiture under 9.04-1(a) because of an imputed or actual full
distribution, the forfeited amount, unadjusted for interim gains or losses,
shall be subject to restoration under 9.05-2. If the rehire occurs after a
Break in Service, no restoration shall occur.
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9.05-2 An amount subject to restoration under 9.05-1 shall be
credited to the participant's ESOP account, as of the first Plan-Year-end
after rehire and application under 9.05-4. Amounts restored shall be derived
first from forfeitures for the Plan Year of restoration, and then from
additional Employer contributions.
9.05-3 A rehired participant under 9.05-1 may repay the full
amount previously distributed from a partially vested account as follows:
(a) Repayment shall be made in a single lump sum. Partial
repayments shall not be allowed.
(b) Repayment may only be made while the participant remains
employed, and may not be made later than five years after rehire.
(c) Repaid amounts shall be fully vested and shall be accounted
for in such manner as the Committee may decide.
(d) Repayment cannot be made in whole or in part by rollover
from another plan or IRA.
9.05-4 In order to receive a restoration under 9.05-1 and
9.05-2, a participant must apply for restoration within the time allowed for
repayment under 9.05-3. Repayment shall not be required.
9.06 Vesting After Rehire
9.06-1 A participant who is fully vested on termination of
employment shall remain fully vested after rehire.
9.06-2 The following rules shall apply in determining future
vested balances for ESOP contributions after rehire of a participant who is
not fully vested:
(a) If the rehire occurs before a distribution is made from the
account or if the participant repays a distribution under 9.05-3
after rehire, the following shall apply:
(1) Subject to (2), the participant's future vested balance
shall be determined by applying the vesting schedule to the
entire account.
(2) In no event shall the vested amount under (1) be less
than the amount repaid under 9.05-3, adjusted for investment
results after the date of repayment.
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(b) If the rehire occurs after a distribution is made from the
account and before the participant has five-year Break in Service
and no repayment is made under 10.05-3, the participant's future
vested balance shall be determined by taking the following steps:
(1) Multiplying the participant's vesting percentage times
the sum of the current account balance and the amount
previously distributed.
(2) Subtracting the amount previously distributed.
(c) If the rehire occurs after the participant has a Break in
Service, the following shall apply:
(1) Any unforfeited and undistributed residue of the
participant's partially vested account shall remain fully
vested and be carried as a separate account until the
participant's future contributions are fully vested.
(2) The forfeited balance shall not be restored.
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ARTICLE X
Plan Administration
10.01 Administrative Committee
10.01-1 The plan shall be administered by an Administrative
Committee of one or more persons appointed by the chief executive officer of
the Company, who may delegate that function. The Committee shall have a Chair
chosen from among its members and a secretary who need not be a member.
Minute shall be kept of all proceedings of the Committee. The Committee may
act at a meeting by a majority vote of a quorum present or without a meeting
by action recorded in a memorandum signed by a majority of all members. A
majority of members shall constitute a quorum.
10.01-2 Any member of the Committee may resign on 15 days'
notice to the chief executive officer. The Company or delegate may remove any
Committee member without having to show cause. All vacancies on the Committee
shall be filled as soon as reasonably practicable. Until a new appointment is
made, the remaining members of the Committee shall have authority to act
although less than a quorum.
10.01-3 The Committee shall keep records of all relevant data
about the rights of all persons under the plan. The Committee shall determine
eligibility to participate and the time, manner, amount and recipient of
payment of benefits and the Service of any employee and shall instruct the
Trustee on distributions. Any person have an interest under the plan may
consult the Committee at any reasonable time.
10.01-4 The Committee shall interpret the plan and the related
trusts, shall decide any questions about the rights of participants and their
beneficiaries and in general shall administer the plan and trusts. Any
decisions by the Committee shall be final and bind all parties. The Committee
shall have absolute discretion to carry out its responsibilities.
10.01-5 The Committee shall be the plan administrator under
federal laws and regulations applicable to plan administration and shall
comply with such laws and regulations. The Chair of the Committee shall be an
agent for service of process on the plan at the Company's address.
10.01-6 The Committee may delegate all or part of its
administrative duties to one or more agents and may retain advisors to assist
it. The Committee may consult with and rely upon the advice of counsel who
may be counsel for an Employer. The Committee shall appoint any independent
public accountant required for the plan.
10.01-7 Each Employer shall furnish the Committee any
information reasonably requested by it for plan administration.
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10.02 Company and Employer Functions
10.02-1 The power to appoint or remove any Committee member may
be exercised only by the chief executive officer under 10.01. The Company and
the Employers have no administrative authority or function and are not plan
fiduciaries.
10.02-2 Except as provided in 10.03-3, all Company or Employer
functions or responsibilities shall be exercised by the chief executive
officer of the Company, who may delegate all or any part of those functions.
10.02-3 The power to fix ESOP contributions and amend or
terminate the plan or related trusts may be exercised only by the Board of
Directors of the Company, except as provided in 10.03-4.
10.02-4 The chief executive officer of the Company or a delegate
may amend the plan to make technical, administrative or editorial changes on
advice of counsel to comply with applicable law or to simplify or clarify the
plan.
10.02-5 The Board of Directors of the Company or an Employer
shall have no administrative or investment authority or function. Membership
on the Board shall not, by itself, cause a person to be considered a plan
fiduciary.
10.03 Claims Procedure
10.03-1 Any person claiming a benefit or requesting information,
an interpretation or a ruling under the plan shall present the request in
writing to the Committee Chair, who shall respond in writing as soon as
practicable.
10.03-2 If the claim or request is denied, the written notice of
denial shall state the following:
(a) The reasons for denial, with specific reference to the plan
provisions on which the denial is based.
(b) A description of any additional material or information
required for review of the claim and an explanation of why it is
necessary.
(c) An explanation of the plan's claim review procedure.
10.03-3 The initial notice of denial shall normally be given
within 90 days after receipt of the claim. If special circumstances require
an extension of time, the claimant shall be so notified and the time limit
shall be 180 days.
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10.03-4 Any person whose claim or request is denied or who has
not received a response within 30 days may request review by notice in writing
to the Committee chair. The original decision shall be reviewed by the
Committee who may, but shall not be required to, grant the claimant a hearing.
On review, whether or not there is a hearing, the claimant may have
representation, examine pertinent documents and submit issues and comments in
writing.
10.03-5 The decision on review shall normally be made within 60
days. If an extension is required for a hearing or other special
circumstances, the claimant shall be so notified and the time limit shall be
120 days. The decision shall be in writing and shall state the reasons and
the relevant plan provisions. All decisions on review shall be final and
binding on all parties concerned.
10.04 Expenses
10.04-1 Members of the Committees shall not be compensated for
services. The Committee shall be reimbursed for all expenses.
10.04-2 The Company may elect to pay any administrative fees or
expenses and may allocate the cost among the Employers. Otherwise the
expenses and fees shall be paid from the Plan assets. Expenses related to a
particular account or an investment fund may be charged directly to that
account or fund.
10.05 Indemnity and Bonding
10.05-1 The Company shall indemnify and defend any plan
fiduciary who is an officer, director or employee of Employer from any claim
or liability that arises from any action or inaction in connection with the
plan subject to the following rules:
(a) Coverage shall be limited to actions taken in good faith
that the fiduciary reasonably believed were not opposed to the
best interest of the plan.
(b) Negligence by the fiduciary shall be covered to the fullest
extent permitted by law.
(c) Coverage shall be reduced to the extent of any insurance
coverage.
10.06-2 Plan fiduciaries shall be bonded to the extent required
by applicable law for the protection of plan assets.
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<PAGE>
ARTICLE XI
Investment of Trust Funds
11.01 Trust Funds
11.01-1 Benefits under the ESOP shall be funded through the
Riverview Savings Bank Employee Stock Ownership Trust (the "ESOP Trust")
established by agreement between the Company and one or more Trustees who are
referred to herein as the "Trustee." The ESOP Trust shall be a separate trust
for assets contributed and held under the ESOP.
11.01-2 Contributions shall be paid to the Trustee who shall
pool them for investment. The Trustee shall have no regard for the separate
interests of individual participants and shall rely on the Committee in paying
benefits. The Trustee shall accept the sums paid and need not determine the
required amount of contributions or collect any contribution not voluntarily
paid.
11.02 ESOP Trust
11.02-1 Except as provided in 11.02-2, all assets attributable
to ESOP contributions or ESOP Loans shall be held in the ESOP Trust. The
interest of any lender under an ESOP Loan shall relate only to assets of the
ESOP Trust.
11.02-2 All assets of the ESOP Trust shall be invested primarily
in Company stock unless the Trustee determines that it is not prudent to do so
or 11.02-3 applies.
11.02-3 Participants may elect to diversify amounts allocated to
their ESOP accounts as follows:
(a) A diversification election shall be allowed in each of the
six Plan Years starting with the year in which the participant
first qualifies under (b).
(b) The diversification election shall only be available to a
participant who is age 55 or older with 10 or more years of
participation in the ESOP.
(c) During the first five years under (a), a participant may
elect to have up to 25 percent of the total of the amounts
attributable to ESOP contributions invested in investment funds
under (e). During the sixth year as provided under (a), the
applicable percentage shall be 50 percent.
(d) Elections under (c) must be made no later than 90 days after
the end of the applicable Plan Year, and shall be carried out
within 180 days after the end of the applicable Plan Year.
Diversification elections, once made become irrevocable following
90 days after the applicable Plan Year.
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(e) Investment alternatives under (c) shall be specified by the
Committee and must include at least three options not
inconsistent with any applicable regulations under section
401(a)(28) of the Internal Revenue Code.
11.03 Voting Company Stock
11.03-1 Participants shall be permitted in accordance with
applicable federal regulations to direct the manner of exercise of voting
rights on shares of Company stock including fractional shares allocated to any
of their accounts, as follows:
(a) Participants may direct the voting of shares on any matter
on which shareholders are entitled to vote. The Trustee shall
follow the Participant's directions unless the Trustee determines
that it would be inconsistent with its fiduciary duties to do so.
(b) The Company shall make available to the Committee to provide
to the Trustees and plan participants all notices and information
provided to its shareholders in connection with the exercise of
their voting rights.
(c) The Committee shall solicit directions from participants to
vote the shares of Company stock allocated to participants
accounts in the same manner as proxies are solicited generally
from shareholders of Company Stock.
(d) If a participant fails to give directions, such voting rights
may be exercised in the same manner as voting rights with respect
to unallocated shares as provided in 11.03-2.
(e) Except as required for trust administration or by law,
individual participant voting instructions shall be held by the
Trustee in confidence.
11.03-2 The Trustee shall vote all unallocated Company Stock
held in the Trust only as directed by the Committee, in the Committee's sole
discretion, after the Committee determines such action to be in the best
interests of participants and beneficiaries.
11.04 ESOP Loans
11.04-1 At the direction of the Committee, the Trustee may
borrow money (an "ESOP Loan") to buy Company stock ("Leveraged Company
Stock"), or to repay a prior ESOP Loan to buy such stock as follows:
(a) The ESOP Loan must be on terms permitted under and be
subject to the conditions of applicable law and regulations.
(b) The interest rate may not exceed a reasonable rate at the
time the loan is made.
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(c) On default, the value of trust assets transferred in
satisfaction for the loan shall not exceed the amount of the
default. If the lender is a disqualified person, the loan must
provide that assets transferred on default of the loan will not
exceed the amount by which the plan has failed to meet the
payment schedule of the loan.
(d) The loan must be without recourse against the plan. The
only trust assets that may be used as security for the ESOP Loan
are the following:
(1) The Leveraged Company Stock purchased with ESOP Loan
proceeds.
(2) The Leveraged Company Stock purchased with the proceeds
of a prior ESOP Loan repaid with the proceeds of the current
ESOP Loan.
(e) The lender may not have a right to any assets held under the
plan other than the following:
(1) Collateral given for the loan under (d).
(2) ESOP contributions made in cash to repay the ESOP Loan.
(3) Earnings on the assets in (1) and (2) above.
(f) ESOP contributions (other than Company Stock) and income
from such contributions and from Leveraged Company Stock may be
used to repay the ESOP Loan, as directed by the Company. Unused
amounts may be carried over to a future year. No other amounts
may be used to pay on an ESOP Loan.
(g) The ESOP Loan must be primarily for the benefit of
participants and beneficiaries.
11.04-2 All assets acquired with the proceeds of an ESOP Loan
shall be held in a suspense account under 5.03 and allocated under 5.04.
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<PAGE>
ARTICLE XII
Amendment; Termination; Merger
12.01 Amendment
12.01-1 The Company may amend this plan at any time by written
instrument as follows:
(a) No amendment shall revest any of the plan assets in any
Employer or otherwise modify the plan so that it would not be for
the exclusive benefit of eligible employees except as required or
permitted by applicable law and regulations.
(b) No amendment shall reduce any participant's accrued benefit,
or the vested percentage of that accrued benefit, as of the date
the amendment is adopted or is effective, whichever is later.
(c) No amendment shall increase the Years of Service required
for vesting without allowing each participant with at least three
Years of Service on the date the amendment is adopted a 60-day
period to elect in writing to the Committee to have the prior
vesting schedule continue to apply to future benefits under the
plan. The 60-day election period shall begin on the latest of
the following:
(1) The date the amendment is adopted.
(2) The date the amendment is effective.
(3) The date the participant is provided written notice of
the amendment.
12.02 Termination
12.02-1 The Company may terminate this plan or discontinue
contributions at any time. In the event of any total or partial termination
or discontinuance, the accounts of all affected participants shall be fully
vested and nonforfeitable. The Company may request a ruling from the Internal
Revenue Service on the effect of termination on the qualification of the plan.
12.02-2 If the Plan is terminated, or contributions permanent
discontinued, the Company, at its discretion, may (at that time or at any
later time) direct the Trustee to distribute the amounts in a participant's
Accounts in accordance with the distribution provisions of the Plan. If the
Company does not direct such distribution, each Participant's Account shall be
maintained until distributed in accordance with the provisions of the Plan
(determined without regard to this section) as though the Plan had not been
terminated or contributions discontinued.
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<PAGE>
12.03 Treatment of Employers
12.03-1 All employees of all Employers, including the Company,
shall be treated as though employed by one Employer for purposes of
determining total or partial termination. For this purpose the plan shall be
treated as one plan and not as a collection of separate plans of the
Employers. If some or all of the employees of an Employer terminate
employment, this shall be viewed in the context of the whole plan to determine
whether there has been a partial termination and whether accelerated vesting
is required.
12.03-2 An Employer may be excluded from the plan with respect
to its employees at any time by the Company. Such exclusion shall not
automatically constitute a termination or partial termination of the plan.
Employees of the excluded Affiliate shall be treated as having terminated
employment if the affiliate ceases to maintain its affiliated status. Unless
the Committee determines or the Internal Revenue Service rules that the
exclusion constitutes a partial termination of the plan, the rights of the
employees of the excluded Affiliate shall not become fully vested and
nonforfeitable as a result of the exclusion. If the excluded Affiliate retain
its affiliated status with the Company, its employees shall continue to accrue
Service for purpose of vesting, but shall not be eligible to participate in
contributions and forfeitures with respect to pay after the effective date of
the exclusion.
12.04 Merger
If this plan is merged or consolidated with or the assets or
liabilities are transferred to any other plan or trust, the benefit that each
participant would receive if the plan terminated just afterwards shall be at
least as much as if it terminated just before.
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<PAGE>
ARTICLE XIII
Miscellaneous Provisions
13.01 Information Furnished
13.01-1 The Trustee may accept as correct and rely on any
information furnished by an Employer or the Committee. The Trustee and the
Committee may not demand an audit, investigation or disclosure of the records
of Employer.
13.02 Applicable Law
This Plan shall be construed according to the laws of Washington
except as preempted by federal law.
13.03 Plan Binding on All Parties
This plan shall be binding upon the heirs, personal
representatives, successors and assigns of all present and future parties.
13.04 Not a Contract of Employment
The plan shall not be a contract of employment between an
Employer and any employee, and no employee may object to amendment or
termination of the plan. The Plan shall not prevent any Employer from
discharging any employee at any time.
13.05 Notices
Except as otherwise required or permitted under this plan or
applicable law, any notice or direction under this plan shall be in writing
and shall be effective when actually delivered or transmitted electronically
or when deposited postpaid as first-class mail. Mail shall be directed to the
address stated in this plan or in a statement of adoption or to such other
address as a party may specify by notice to the other parties. Notice to the
Committee shall be sent to the Company's address.
13.06 Benefits not Assignable; Qualified Domestic Relations Orders
13.06-1 This plan is for the personal protection of the
participants. No vested or unvested interest of any participant or
beneficiary may be assigned, alienated, seized by legal process, transferred
or subjected to the claims or creditors in any way, except as provided in
13.06-2.
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<PAGE>
13.06-2 Benefits shall be paid in accordance with a qualified
domestic relations order (QDRO) under section 414(p) of the Internal Revenue
Code pursuant to procedures established by the Committee.
13.07 Nondiscrimination
The Company, each Employer, and the Committee shall to the
fullest extent possible treat all person who may be similarly situated alike
under this Plan.
13.08 Nonreversion of Assets
13.08-1 Subject to 1.02-2 and the following paragraphs, no part
of the contributions or the principal or income of this plan shall be paid to
or revested in an Employer or be used other than for the exclusive benefit of
the participants and their beneficiaries.
13.08-2 A contribution may be returned to an Employer to the
extent that either of the following applies:
(a) The contribution was made by mistake of fact.
(b) A deduction for the contribution under 4.03-1 other than an
ESOP contribution excepted under 4.03-1, is disallowed.
13.08-3 Return of contributions under 13.08-2 shall be subject
to the following:
(a) Any return must occur within one year of the mistaken
payment or disallowance of the deduction.
(b) The returnable amount shall be reduced by a pro rata share
of any investment losses attributable to the contribution and by
any amounts that cannot be charged under (c) below.
(c) The amounts returned shall be charged to participants'
accounts in the same proportion as the accounts were credited
with the contribution. No participant's account shall be charged
more than it was previously credited.
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<PAGE>
ARTICLE XIV
Top-Heavy Rules
14.01 General. This ARTICLE shall only be applicable if the Plan
becomes a Top-Heavy Plan under section 416 of the Internal Revenue Code. If
the Plan does not become a Top-Heavy Plan, then none of the provisions of this
ARTICLE shall be operative. The provisions of this ARTICLE shall be
interpreted and applied in a manner consistent with the requirements of
section 416 of the Internal Revenue Code and the regulations thereunder.
14.02 Minimum Contribution.
14.02-1 For each Plan Year that the Plan is a Top- Heavy Plan,
the Company shall make a Company Contribution to be allocated directly to the
Account of each Non-Key Employee as set forth in this section.
14.02-2 The amount of the Employer Contribution (and
forfeitures) required to be contributed and allocated for a Plan Year by this
section is three percent (3%) of the Top-Heavy Compensation for that Plan Year
of each Non-Key Employee who is both a Participant and an Employee on the last
day of the Plan Year for which the Employer Contribution is made, with
adjustments as provided herein. If the Employer Contribution allocated to the
Accounts of each Key Employee for a Plan Year is less than three percent (3%)
of his or her Top-Heavy Compensation, then the Employer Contribution required
by the preceding sentence shall be reduced for that Plan Year to the same
percentage of Top-Heavy Compensation that was allocated to the Account of the
Key Employee whose Account received the greatest allocation of Employer
Contributions for that Plan Year, when computed as a percentage of Top-Heavy
Compensation.
14.02-3 The contribution required by this section shall be
reduced for a Plan Year to the extent of any Employer Contributions made and
allocated under this Plan or any other contributions from the Employer made
and allocated under any other Aggregated Plans.
14.03 Definitions. The following terms shall have the meanings
specified herein and shall be interpreted in a manner consistent with Section
416 of the Internal Revenue Code.
(1) Aggregated Plans.
(i) The Plan, any plan that is part of a "required
aggregation group" and any plan that is part of a
"permissive aggregation group" that the Company treats as an
Aggregated Plan.
(ii) The "required aggregation group" consists of each plan
of the Company in which a Key Employee participates (in the
Plan Year containing the Determination Date or any of the
four (4) preceding Plan Years) and each other plan of the
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<PAGE>
Company which enables any plan of the Company in which a Key
Employee participates to meet the requirements of section
401(a)(4) or section 410(b) of the Code.
(iii) The "permissive aggregation group" consists of any
plan not included in the "required aggregation group" if the
Aggregated Plan described in subparagraph (i) above would
continue to meet the requirements of section 401(a)(4) and
410 of the Internal Revenue Code with such additional plan
being taken into account.
(2) Determination Date. The last day of the preceding Plan
Year, or, in the case of the first Plan Year of any plan, the
last day of such Plan Year. The computations made on the
Determination Date shall utilize information from the immediately
preceding Valuation Date.
(3) Key Employee.
(i) An Employee (or former Employee) who, at any time
during the Plan Year containing the Determination Date or
any of the four (4) preceding Plan Years, is:
(A) An officer of an Employer with annual Top-Heavy
Compensation for the Plan Year greater than one hundred
fifty percent (150%) of the amount in effect under
section 415(c)(1)(A) of the Internal Revenue Code for
the calendar year in which that Plan Year ends;
(B) one of the ten (10) Employees owning (or
considered as owning under section 318 of the Internal
Revenue Code) the largest interest in an Employer, who
has more than one-half of one percent (.5%) interest in
an Employer, and who has annual Top-Heavy Compensation
for the Plan Year at least equal to the maximum dollar
limitation under section 415(c)(1)(A) of the Internal
Revenue Code for the calendar year in which that Plan
Year ends;
(C) a five percent (5%) or greater shareholder in an
Employer; or
(D) a one percent (1%) shareholder in an Employer with
annual Top-Heavy Compensation from the Employer of more
than one hundred fifty thousand dollars ($150,000).
(ii) For purposes of paragraphs (3)(i)(C) and (3)(i)(D),
the rules of section 414(b), (c) and (m) of the Internal
Revenue Code shall not apply. Beneficiaries of an Employee
shall acquire the character of such Employee and inherited
benefits will retain the character of the benefits of the
Employee who performed services.
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(4) Non-Key Employee. Any Employee who is not a Key Employee.
(5) Super Top-Heavy Plan. A Top-Heavy Plan in which the sum of
the present value of the cumulative accrued benefits and accounts
for Key Employees exceeds ninety percent (90%) of the comparable
sum determined for all Employees. The foregoing determination
shall be made in the same manner as the determination of a
Top-Heavy Plan under this section.
(6) Top-Heavy Compensation. The term Top-Heavy Compensation
shall have the same meaning as the term Compensation has under
4.02-1(a).
(7) Top-Heavy Plan. The Plan is a Top-Heavy Plan for a Plan
Year if, as of the Determination Date for that Plan Year, the sum
of (i) the present value of the cumulative accrued benefits for
Key Employees under all Defined Benefit Plans that are Aggregated
Plans and (ii) the aggregate of the accounts of Key Employees
under all Defined Contribution Plans that are Aggregated Plans
exceeds sixty percent (60%) of the comparable sum determined for
all Employees.
(8) Years of Top-Heavy Service. The number of years of service
with an Employer that must be counted under section 411(a) of the
Internal Revenue Code, disregarding all service that may be
disregarded under section 411(a)(4) of the Internal Revenue Code.
14.04 Special Rules.
14.04-1 For purposes of determining the present value of the
cumulative accrued benefit for any Participant or the amount of the Account of
any Participant, such present value or amount shall be increased by the
aggregate distributions made with respect to such Participant under the Plan
during the Plan Year that includes the Determination Date and the four (4)
preceding Plan Years (if such amounts would otherwise have been omitted).
14.04-2 In the case of unrelated rollovers and transfers, (i)
the plan making the distribution or transfer is to count the distribution as a
distribution under section 416(g)(3) of the Internal Revenue Code, and (ii)
the plan accepting the rollover or transfer is not to consider the rollover or
transfer as part of the accrued benefit if such rollover or transfer was
accepted after December 31, 1983, but is to consider it as part of the accrued
benefit if such rollover or transfer was accepted before January 1, 1984. For
this purpose, rollovers and transfers are to be considered unrelated if they
are both initiated by the Employee and made from a plan maintained by one
employer to a plan maintained by another employer.
In the case of related rollovers and transfers, the plan making
the distribution or transfer is not to count the distribution or transfer
under section 416(g)(3) of the Code, and the plan accepting the rollover or
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<PAGE>
transfer counts the rollover or transfer in the present value of the accrued
benefits. For this purpose, rollovers and transfers are to be considered
related if they are not unrelated this 14.05-2.
14.04-3 If any individual is a Non-Key Employee with respect to
any plan for any Plan Year, but such individual was a Key Employee with
respect to such plan for any prior Plan Year, any accrued benefit for such
Employee (and the Account of such Employee) shall not be taken into account.
14.04-4 Beneficiaries of Key Employees and former Key Employees
are considered to be Key Employees and Beneficiaries of Non-Key Employees and
former Non-Key Employees are considered to be Non-Key Employees.
14.04-5 For Plan Years beginning before 1985, contributions
attributable to a salary reduction or similar arrangement shall not be taken
into account.
14.05 Adjustment of Limitations.
14.05-1 If this Article is applicable, then the contribution and
benefit limitations in 4.04-6 shall be reduced as provided under section
416(h) of the Internal Revenue Code.
14.05-2 shall be applicable for any Plan Year in which either:
(a) the Plan is a Super Top-Heavy Plan; or
(b) the Plan both is a Top-Heavy Plan (but not a Super Top-Heavy
Plan) and provides Employer Contributions (and forfeitures) to
the Account of any Non-Key Employee in an amount less than four
percent (4%) of such Participant's Top-Heavy Compensation, as
determined in accordance with this Article.
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<PAGE>
IN WITNESS WHEREOF, Riverview Savings Bank has caused this Plan to be
executed by its duly authorized officer this 8th day of May, 1997.
Attest: RIVERVIEW SAVINGS BANK
/s/ Phyllis Kreibich By: /s/ Patrick Sheaffer
- ----------------------------- ---------------------------------
Secretary President
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<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Riverview Bancorp, Inc.
Subsidiaries (a) Percentage Owned State of Incorporation
- ---------------- ---------------- ----------------------
Riverview Savings Bank, FSB 100% United States
Riverview Services, Inc. 100% Washington
- ----------------------
(a) The operation of the Registrant's wholly owned subsidiaries are included
in the Registrant's Financial Statements contained in Item 8 of this Form
10-K.
<PAGE>
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<PERIOD-END> MAR-31-1998
<CASH> 6978
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<TRADING-ASSETS> 0
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<ALLOWANCE> 984
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<DEPOSITS> 179825
<SHORT-TERM> 17000
<LIABILITIES-OTHER> 2717
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<COMMON> 62
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<INTEREST-TOTAL> 20302
<INTEREST-DEPOSIT> 7438
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<LOAN-LOSSES> 180
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<EXPENSE-OTHER> 7218
<INCOME-PRETAX> 5995
<INCOME-PRE-EXTRAORDINARY> 5995
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3924
<EPS-PRIMARY> 0.66
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<YIELD-ACTUAL> 8.57
<LOANS-NON> 506
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