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, 1999
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 Common Stock, par value $.01 per share
Section 12(g) of the Act: --------------------------------------
(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 26, 1999, was approximately $69,189,000 (5,780,824 shares at $11.97 per
share). It is assumed for purposes of this calculation that none of the
Registrant's officers, directors and 5% stockholders (including the Riverview
Community Bank, FSB Employee Stock Ownership Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 1999
Annual Meeting of Shareholders (Part III).
<PAGE>
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 Community Bank ("the Bank"), upon the Bank's reorganization as a
wholly owned subsidiary of the Company resulting from the conversion of
Riverview, M.H.C., Camas, Washington ("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. At March
31, 1999, the Company had total assets of $302.6 million, total deposits of
$200.3 million and shareholders' equity of $56.9 million. All references to
the Company herein include the Bank where applicable.
The Bank is regulated by the Office of Thrift Supervision ("OTS"),
its primary regulator, and by the Federal Deposit Insurance Corporation
("FDIC"), the insurer of its deposits. The Bank's deposits are insured by the
FDIC up to applicable legal limits under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1937.
The Bank is a community oriented financial institution offering
traditional financial services to the residents of its primary market area.
The Bank considers Clark, Cowlitz, Klickitat and Skamania Counties of
Washington as its primary market area. The 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 Bank is also an active originator of residential
construction loans, business loans and consumer loans.
Market Area
The Bank conducts operations from its home office in Camas and nine
branch offices in Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (three branch offices) and Longview, Washington. The
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 Bank faces strong competition from many financial institutions
for deposits and loan originations.
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Lending Activities
General. At March 31, 1999, the Bank's total net loans receivable
amounted to $187.2 million, or 61.9% of total assets at that date. The
principle lending activity of the Bank is the origination of residential
mortgage loans through its mortgage banking activities, including residential
construction loans, though the Bank has originated loans collateralized by
commercial properties. The Bank, to a lesser extent, also makes consumer
loans and commercial business loans. A substantial portion of the Bank's loan
portfolio is secured by real estate, either as primary or secondary
collateral, located in its primary market area.
Loan Portfolio Analysis. The following table sets forth the
composition of the Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
At March 31,
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1999 1998 1997 1996 1995
--------------- ---------------- ----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
One- to-
four
family(1).$83,275 44.49% $96,225 59.18% $ 94,536 62.29% $ 88,140 68.77% $ 73,047 70.39%
Multi-
family... 7,558 4.04 4,790 2.95 5,439 3.58 2,958 2.31 2,048 1.97
Construction
one- to- four
family.... 45,524 24.32 35,003 21.52 32,529 21.43 22,596 17.63 20,822 20.07
Construction
multi-
family..... 4,209 2.25 5,352 3.29 547 0.36 361 0.28 - -
Construction
commercial 6,184 3.30 - - 634 0.42 500 0.39 344 0.33
Land....... 24,932 13.32 16,431 10.10 7,900 5.21 7,546 5.89 5,226 5.04
Commercial
real
estate.... 17,554 9.38 9,407 5.78 8,997 5.93 6,518 5.08 5,335 5.14
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real
estate
loans... 189,236 101.10 167,208 102.82 150,582 99.22 128,619 100.35 106,822 102.94
Commercial
business.. 8,676 4.64 1,992 1.22 794 0.53 969 0.76 925 0.89
Consumer loans:
Automobile
loans.... 3,146 1.68 2,829 1.74 2,889 1.90 2,384 1.86 1,623 1.56
Savings account
loans.... 490 0.26 653 0.40 734 0.48 613 0.48 480 0.46
Home equity
loans.... 9,096 4.86 9,885 6.08 8,254 5.44 5,107 3.99 1,743 1.68
Other consumer
loans.... 2,728 1.46 2,741 1.69 2,416 1.59 1,695 1.32 1,448 1.40
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans... 15,460 8.26 16,108 9.91 14,293 9.41 9,799 7.65 5,294 5.10
Total loans
and loans
held
for sale.. 213,372 185,308 165,669 139,387 113,041
Less:
Undisbursed
loans in
process.. 22,278 11.91 19,354 11.90 11,087 7.30 8,876 6.93 7,098 6.84
Unamortized
loan
origination
fees, net
of direct
costs.... 2,770 1.48 2,340 1.44 1,967 1.30 1,678 1.3 11,502 1.45
Unearned
discounts 1 - 2 - 10 0.01 11 0.01 12 0.01
Allowance
for possible
loan
losses... 1,146 0.61 984 0.61 831 0.55 653 0.51 657 0.63
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable,
net(1)... $187,177 100.00% $162,628 100.00% $151,774 100.00% $128,169 100.00% $103,772 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
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</TABLE>
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(1) Includes loans held for sale of $341,000, $1.4 million, $80,000, $1.9
million and $247,000 March 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
One- to- Four Family Real Estate Lending. Historically, the 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, 1999,
approximately $83.3 million, or 44.5% of total net loans receivable, consisted
of loans secured by one- to- four family residential real estate. One- to-
four family mortgage loans and one-to-four family construction loans accounted
for $112.6 million, or 71.0% of total loan originations, for the year ended
March 31, 1999.
In addition to originating one- to- four family loans for its
portfolio, the 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 Bank. See "-- Lending Activities -- Loan
Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage
Brokerage."
The Bank originates both fixed-rate mortgage loans and ARM loans
secured by one- to- four family properties. 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 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 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 Bank offers ARM loans at rates and terms competitive with market
conditions. At March 31, 1999, $54.5 million, or 42.4%, of the 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, 1999, the 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 5.50% to 6.50% 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 Bank does not originate negative
amortization loans.
As a marketing incentive, the 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 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
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<PAGE>
originated by the 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
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 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 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 Bank's loan portfolio contain due-on-sale clauses providing that
the Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. The 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 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 Bank may
make exceptions to its property insurance requirements.
The 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
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 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 Bank intends to increase
its residential construction lending activities. To a substantially lesser
extent, the Bank also originates construction loans for the development of
multi-family and commercial properties.
The composition of the Bank's construction loan portfolio was as
follows:
At March 31,
-----------------------------------------
1999 1998
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Amount(1) Percent Amount(1) Percent
--------- ------- --------- -------
(Dollars in thousands)
Speculative construction......... $27,252 37.76% $26,771 54.00%
Commercial construction.......... 6,184 8.57 - -
Custom construction.............. 4,883 6.77 7,200 14.52
Construction/permanent........... 17,335 24.02 6,289 12.68
Construction/land................ 16,518 22.88 9,321 18.80
------- ------ ------- ------
Total.......................... $72,172 100.00% $49,581 100.00%
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(1) Includes loans in process.
5
<PAGE>
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 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 Bank lends
to approximately 50 local builders, many of whom may have only one or two
speculative loans outstanding from the Bank. The 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 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 1.0% 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, 1999,
the Bank had nine borrowers each with aggregate outstanding speculative loan
balances of more than $1.0 million all of which were performing according to
their respective terms and the largest of which amounted to $5.4 million,
which was owned 50% by the Bank in a participatory contract.
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 Bank or another lender. Custom construction loans are
generally originated for a term of 12 months, with fixed interest rates
ranging from 7.25% to 7.50%, 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, 1999, the largest short-term custom construction loan had
an outstanding balance of $528,000 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 Bank to originate a
permanent loan to the home owner to repay the construction loan at the
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 7.25%, 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 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 Bank issues a commitment to provide permanent
financing upon completion of construction, the interest rate charged on the
construction loan generally includes an additional 0.75% fee 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, 1999,
the largest outstanding construction/permanent loan had an outstanding balance
of $416,000 and was performing according to its terms.
The Bank also provides construction financing for non-residential
properties (i.e., multi-family and commercial properties). The Bank has
increased its commercial lending resources with the intent of increasing the
amount of commercial loan balances such as commercial construction loans. At
March 31, 1999, construction loans amounted to $10.4 million and the largest
outstanding commercial construction/permanent loan had an outstanding balance
of $2.0 million and was performing according to its terms.
All construction loans must be approved by the 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 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 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 Bank requires that the borrower
increase the loan amount by
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<PAGE>
depositing its own funds into a loans in process account and the 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
Bank personnel. At inception, the 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 Bank regularly monitors
the construction loan portfolio and the economic conditions and housing
inventory. Property inspections are performed by the Bank's property
inspector. The Bank believes that the internal monitoring system helps reduce
many of the risks inherent in its construction lending.
Construction lending affords the 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 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 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 Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices. In
addition, because the Bank's construction lending is in its primary market
area, changes in the local economy and real estate market could adversely
affect the Bank's construction loan portfolio.
Multi-Family Lending. At March 31, 1999, the Bank had $7.6 million,
or 4.0% of the Bank's total net loans receivable, secured by multi-family
dwelling units (more than four units) located primarily in the Bank's primary
market area.
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, 1999, 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 Bank's primary market area. At
March 31, 1999, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally
75%. The Bank requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Bank also
inspects the subject property annually.
Multi-family mortgage lending affords the 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 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 Bank also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
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<PAGE>
Land Lending. The 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, 1999, subdivision development loans totaled $16.5 million, or
8.8% of total net loans receivable, and building lot loans amounted to $8.4
million, or 4.5% of the total net loans receivable. The land loan balance of
$24.9 million consisted of twenty two land development loans five of which are
each greater than $2.0 million as compared to the March 31, 1998 land loan
balance of $16.4 million which consisted of thirteen land development loans
of which four were greater than $2.0 million. Land development loans are
secured by a lien on the property and made for a period not to exceed five
years with an interest rate that adjusts with the prime rate, and are made
with loan-to-value ratios not exceeding 75%. Monthly interest payments are
required during the term of the loan. Subdivision loans are structured so
that the Bank is repaid in full upon the sale by the borrower of approximately
90% of the subdivision lots. All of the Bank's land loans are secured by
property located in its primary market area. In addition, the Bank also
generally obtains personal guarantees from financially capable parties based
on a review of personal financial statements.
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 Bank may be confronted with a property the value
of which is insufficient to assure full repayment. The Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on land loans
to 65% of the estimated developed value of the secured property. Loans on raw
land may run the risk of adverse zoning changes, environmental or other
restrictions on future use. At March 31, 1999, the Bank had a $47,000 land
loan accounted for on a non-accrual basis.
Commercial Real Estate Lending. Commercial real estate loans totaled
$17.6 million, or 9.4% of total net loans receivable at March 31, 1999. The
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, 1999, the largest commercial real
estate loan had an outstanding balance of $834,000 and is secured by a motel
located in the Bank's primary market area. Such loan was performing according
to its terms at March 31, 1999.
The Bank requires appraisals of all properties securing commercial
real estate loans. Appraisals are performed by an independent appraiser
designated by the Bank, and are reviewed by management. The 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 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 real estate loans are generally limited to 75%.
The Bank generally obtains loan guarantees from financially capable parties
based on a review of personal financial statements.
Commercial real estate lending affords the 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 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.
Commercial Business Lending. The Bank engages in limited but
increasing amounts of commercial business lending. At March 31, 1999,
commercial business loans amounted to $8.7 million, or 4.6% of total net loans
receivable as compared to $2.0 million, or 1.2% at March 31, 1998. Commercial
business loans are generally made to customers who are well known to the Bank
and are generally secured by business equipment or other property and are made
at
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<PAGE>
variable rates of interest equal to a negotiated margin above the prime rate.
The 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. At March 31, 1999, the Bank had
one commercial loan accounted for on a nonaccrual basis in the amount of
$208,000.
Consumer Lending. The 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, 1999, consumer loans totaled $15.5 million, or
8.2% of total net loans receivable.
Home equity lines of credit are secured by a second mortgage on the
borrower's primary residence. At March 31, 1999, approved home equity lines
of credit totaled $12.7 million, of which $9.1 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 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, 1999, one-to-four family second mortgage
loans amounted to $2.3 million.
The 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.
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 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 Bank adds a general provision to its consumer loan loss
allowance, based on general economic conditions and prior loss experience.
9
<PAGE>
Loan Maturity. The following table sets forth certain information at
March 31, 1999 regarding the dollar amount of loans maturing in the 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
Within Year to Years to Years to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(In thousands)
Residential one-
to- four family:
Adjustable-rate.... $21,998 $11,486 $2,035 $3,301 $15,692 $54,512
Fixed-rate......... 13,545 9,359 7,895 22,615 20,532 73,946
Other residential and
all non-residential:
Adjustable-rate.... 12,423 6,534 1,158 1,878 8,927 30,920
Fixed-rate......... 1,620 4,839 5,375 12,882 4,801 29,517
Consumer and
commercial:
Adjustable-rate.... 647 550 420 967 6,267 8,851
Fixed-rate......... 5,623 4,181 3,638 1,497 346 15,285
------- ------- ------- ------- ------- --------
Total gross
loans............ $55,856 $36,949 $20,521 $43,140 $56,565 $213,031
======= ======= ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due one
year after March 31, 1999 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.............. $60,401 $32,514
Other mortgage loans.............. 27,897 18,497
Consumer and commercial............ 9,662 8,204
------- -------
Total............................ $97,960 $59,215
======= =======
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 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 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 primary market area.
Loan Solicitation and Processing. The 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 Bank also uses commissioned loan
brokers and television and print advertising to market its products and
services.
10
<PAGE>
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 Bank. The Bank's residential mortgage loan documents conform to FHLMC
standards.
Residential mortgage loans within the FHLMC lending limit (currently
$240,000) may be approved by the Senior 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 Senior
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. All loans are subsequently ratified by the full Board of
Directors.
The Bank's policy requires borrowers to obtain certain types of
insurance to protect the Bank's interest in the collateral securing the loan.
The Bank requires either a title insurance policy insuring that the 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
Bank requires escrows for insurance on all loans with a loan-to-value
exceeding 80%.
Loan Commitments. The 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 Bank had outstanding mortgage loan commitments of
approximately $13.3 million at March 31, 1999.
Loan Originations, Sales and Purchases. While the 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, 1999 and 1998, the Bank's total loan
originations were $158.7 million and $105.3 million, respectively, of which
43.5% and 64.6%, respectively, were subject to periodic interest rate
adjustment and 56.5% and 35.4% were fixed-rate loans, respectively.
The 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 Bank to continue to
make loans during periods when savings flows decline or funds are not
otherwise available for lending purposes; however, the 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 Bank
and demanded by investors to whom the loans are sold. Generally, the 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 Bank.
Between the time that origination commitments are issued and the time
the loans are sold, the 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 Bank to significant losses. This activity is managed
daily. There can be no assurance that the 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 Bank does not adequately manage its interest rate risk,
the 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 Bank is not an active purchaser of loans.
11
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
For the Years Ended March 31,
-----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Total net loans receivable at beginning
of period................................ $162,628 $151,774 $128,169
Loans originated:
Residential one- to- four family.......... 43,947 29,748 24,039
Multi-family.............................. - 139 479
Construction one- to- four family......... 68,649 49,391 43,887
Construction other........................ - - 1,646
Land and non-residential.................. 36,355 20,737 9,983
Other loans............................... 9,700 5,312 5,617
-------- -------- --------
Total loans originated.................. 158,651 105,327 85,651
Residential one- to- four family loans
sold..................................... (26,253) (7,006) (6,943)
Repayment of principal..................... (104,334) (78,682) (52,426)
(Increase) in loans in process............. (2,924) (8,267) (2,211)
(Increase) in other items, net............. (591) (518) (466)
-------- -------- --------
Net increase in loans...................... 24,549 10,854 23,605
Total net loans receivable at end of -------- -------- --------
period.................................... $187,177 $162,628 $151,774
======== ======== ========
Mortgage Brokerage. In addition to originating mortgage loans for
retention in its portfolio, the 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 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 Bank. In return, the Bank receives a
fee ranging from 1% to 1.25% of the loan amount that it shares with the
commissioned broker. For loans brokered to the Bank, they are closed on the
Bank's books as if the 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, 1999, brokered loans totaled $141.1 million (including $60.3
million brokered to the Bank). Gross fees of $944,000 (excluding the portion
of fees shared with the commissioned brokers) were recognized for the year
ended March 31, 1999.
Mortgage Loan Servicing. The Bank is a qualified servicer for the
FHLMC. The Bank's general policy is to close its residential loans on the
FHLMC modified loan documents to facilitate future sales to the FHLMC. The
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 Bank retains a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.
The Bank generally retains the servicing rights on the fixed-rate
mortgage loans that it sells to the FHLMC. At March 31, 1999, total loans
serviced for others were $84.6 million.
In 1994, the 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, 1999, the value of
these purchased servicing rights was $263,000 and was being amortized over the
life of the underlying loan servicing.
12
<PAGE>
Loan Origination and Other Fees. The 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 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 Bank had $2.8 million of net deferred loan fees at
March 31, 1999. The Bank also receives loan servicing fees on the loans it
sells and on which it retains the servicing rights.
Delinquencies. The 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 Bank generally initiates
foreclosure proceedings. In certain instances, however, the 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.
13
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates indicated, the Bank
had no restructured loans within the meaning of SFAS No. 15.
At March 31,
---------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate................ $1,052 $401 $ 76 $541 $239
Commercial............................. 208 105 - - -
Consumer............................... 33 - 11 7 1
------ ---- ---- ---- ----
Total................................ 1,293 506 87 548 240
------ ---- ---- ---- ----
Accruing loans which are contractually
past due 90 days or more............... 5 11 - - -
------ ---- ---- ---- ----
Total of nonaccrual and
90 days past due loans................ 1,298 517 87 548 240
------ ---- ---- ---- ----
Real estate owned (net)................. 30 - 135 - -
------ ---- ---- ---- ----
Total nonperforming assets......... $1,328 $517 $222 $548 $240
====== ==== ==== ==== ====
Total loans delinquent 90 days
or more to net loans.................. 0.69% 0.32% 0.06% 0.43% 0.23%
Total loans delinquent 90 days or
more to total assets.................. 0.43 0.19 0.04 0.26 0.13
Total nonperforming assets to
total assets.......................... 0.44 0.19 0.10 0.26 0.13
The 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 $64,000 would have been recorded for the year ended March 31,
1999. Income of approximately $8,000 was received and recorded on nonaccrual
loans for the year ended March 31, 1999.
The $1.1 million nonaccrual balance of residential real estate loans
at March 31, 1999, consisted of five nonaccrual construction loans, two
one-to-four family residential loans and one lot loan. Subsequent to March
31,1999, three loans have paid in full and three loans have gone to
foreclosure.
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 Bank.
14
<PAGE>
The aggregate amount of the 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,
------------------
1999 1998
---- ----
(In thousands)
Substandard assets.......................... $1,757 $677
Doubtful assets............................. 219 -
Loss assets................................. - -
General loss allowances..................... 1,146 984
Specific loss allowances.................... - -
Charge-offs................................. 85 38
The increase in the substandard assets at March 31, 1999 to $1,757 is
primarily the result of five residential construction loans totaling $860,00
being classified as substandard. Three of these five construction loans
subsequent to March 31, 1999, have been foreclosed and two loans have paid
off.
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, 1999, the Bank owned one
property with a recorded value of $30,000.
Allowance for Loan Losses. The 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, 1999, the Bank had an allowance for loan
losses of $1.1 million, or .54% of total outstanding loans at that date.
Based on past experience and future expectations, management believes that
loan loss reserves are adequate.
While the 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 Bank's
loan portfolio, will not request the Bank to increase significantly its
allowance for loan losses, therefore negatively affecting the Bank's financial
condition and results of operations.
15
<PAGE>
The following table sets forth an analysis of the Bank's allowance
for loan losses for the periods indicated.
Year Ended March 31,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period..... $984 $831 $653 $657 $647
Provision for loan losses.......... 240 180 180 - -
Recoveries:
Residential real estate........... - - 1 8 3
Consumer.......................... 7 11 8 11 26
Total recoveries................ 7 11 9 19 29
Charge-offs:
Residential real estate........... 28 - - - -
Consumer.......................... 57 38 11 23 19
Total charge-offs............... 85 38 11 23 19
Net charge-offs (recoveries).. 78 27 2 4 (10)
Balance at end of period........... $1,146 $984 $831 $653 $657
Ratio of allowance to total loans
outstanding at end of period...... 0.54% 0.53% 0.50% 0.47% 0.58%
Ratio of net charge-offs
(recoveries) to average loans
outstanding during period......... 0.04 0.02 0.00 0.00 (0.01)
Ratio of allowance to total of
nonaccrual and 90 days past due
loans............................. 88.30 190.32 955.17 119.16 273.75
16
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category
for the periods indicated.
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ --------------- ---------------- --------------- ----------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a as a as a as a as a
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
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..... $213 42.57% $118 54.52% $124 60.34% $115 65.35% $ 97 66.44%
Nonresidential.. 47 20.74 136 13.94 224 10.20 225 10.09 170 9.34
Construction.... 302 25.38 177 21.78 103 20.35 58 16.83 53 18.72
Consumer.......... 126 7.24 169 8.69 153 8.63 98 7.03 63 4.68
Commercial........ 422 4.07 100 1.07 40 0.48 46 0.70 46 0.82
Unallocated....... 36 - 284 - 187 - 111 - 228 -
Total allowance ------ ------ ---- ------ ---- ------ ---- ------ ---- ------
for loan losses $1,146 100.00% $984 100.00% $831 100.00% $653 100.00% $657 100.00%
====== ====== ==== ====== ==== ====== ==== ====== ==== ======
17
</TABLE>
<PAGE>
Investment Activities
OTS regulated institutions have authority to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
applicable FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, such OTS regulated institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered
savings institutions are otherwise authorized to make directly. 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 Associations -- Federal Home Loan Bank System." The 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 Bank to maintain a minimum amount of
liquid assets. See "REGULATION." The balance of the 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. The Bank is required under applicable federal
regulations to maintain specified levels of "liquid" investments in qualifying
types of U.S. governments, federal agency, qualifying mortgage related
securities and other investments. At March 31, 1999, the Bank's regulatory
liquidity ratio was 52.9%, which exceeded regulatory requirements. It is the
intention of management to hold securities with short maturities in the Bank's
investment portfolio in order to enable the 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 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, 1999, the Bank's investment and mortgage-backed
securities portfolio totaled approximately $84.3 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, 1999, the 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 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 Bank which
dictates that investments be made based on the safety of the principal amount,
liquidity requirements of the Bank and the return on the investments. At
March 31, 1999, 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 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.
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 $84.6 million, $71.8
million and $53.8 million at March 31, 1999, 1998 and 1997, respectively.
18
<PAGE>
At March 31,
----------------------------------------------------
1999 1998 1997
----------------- --------------- -----------------
Percent Percent Percent
Carry- of Carry- of Carry- of
ing Port- ing Port- ing 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%
FNMA debentures........ - - - - 2,000 3.72
FHLB debentures........ 4,000 4.74 7,336 10.28 10,467 19.47
Real estate mortgage
investment conduits
("REMICs")............ 3,162 3.75 5,627 7.89 6,641 12.36
FHLMC mortgage-backed
securities............ 3,370 4.00 5,111 7.16 6,800 12.65
FNMA mortgage-backed
securities............ 6,183 7.33 9,603 13.46 12,961 24.12
Municipal Securities... 943 1.12 - - - -
------- ------ ------- ------ ------- ------
17,658 20.94 28,677 40.19 46,858 87.18
------- ------ ------- ------ ------- ------
Available for sale
(at market value):
U.S. Government
treasury
obligations........... - - 2,974 4.17 2,924 5.44
FNMA debentures........ - - 1,003 1.41 - -
FHLB debentures........ 11,441 13.57 6,000 8.41 975 1.82
REMICs................. 49,501 58.71 22,059 30.92 1,903 3.54
FHLMC mortgage-backed
securities............ 701 0.84 1,038 1.45 1,087 2.02
FNMA mortgage-backed
securities............ 3,169 3.76 9,593 13.45 - -
Municipal securities... 906 1.07 - - - -
Equity securities...... 934 1.11 - - - -
------- ------ ------- ------ ------- ------
66,652 79.06 42,667 59.81 6,889 12.82
------- ------ ------- ------ ------- ------
Total investment
securities........... $84,310 100.00% $71,344 100.00% $53,747 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth the maturities and weighted average
yields in the securities portfolio at March 31, 1999.
<TABLE>
Less Than One to More Than Five More Than
One Year Five Years to Ten Years Ten Years
----------------- ---------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal securities......... $ - -% $ - -% $ 906 4.06% $ 943 5.50%
FHLB debentures.............. 4,000 6.87 4,013 6.41 2,491 6.38 4,937 6.26
REMICs....................... - - - - 1,781 6.16 50,882 6.06
FHLMC mortgage-backed
securities.................. - - 37 8.33 2,622 6.41 1,412 6.82
FNMA mortgage-backed
securities.................. 191 5.74 445 5.63 6,304 6.57 2,412 6.94
Equity securities............ - - - - - - 934 -
------ ------ ------- -------
Total...................... $4,191 6.82% $4,495 6.35% $14,104 6.31% $61,520 5.99%
====== ====== ======= =======
- ---------------
(1) For available-for-sale securities carried at fair value, the weighted average yield is computed
using amortized cost. Average yield calculations exclude equity securities that have no stated
yield or maturity.
19
</TABLE>
<PAGE>
In addition to U.S. Government Treasury obligations, the 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 Bank. Mortgage-backed securities generally increase the quality
of the 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 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 nd 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 Bank prohibit the purchase of high risk REMICs. At March 31, 1999, the
Bank held REMICs with a net carrying value of $52.7 million, of which $3.2
million were classified as held-to-maturity and $49.5 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, 1999, the 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 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 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 Bank considers the rates offered by its competition,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. The Bank generally reviews its deposit mix and
pricing weekly.
20
<PAGE>
Deposit Balances
The following table sets forth information concerning the Bank's
certificates of deposit and other interest-bearing deposits at March 31, 1999.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
- ---- ---- -------- ------ ------- --------
(In thousands)
1.500% None NOW Accounts $ 100 $20,785 10.38%
2.750 None Regular Savings 100 21,301 10.63
1.750 None Maxi Checking 2,500 2,509 1.25
3.945 None Money Market 2,500 25,222 12.59
None None Non-interest Checking 100 10,419 5.20
Certificates of Deposit
-----------------------
4.342 28-92 Days Fixed-Term, Fixed-Rate 1,000 2,808 1.40
4.753 4-6 Months Fixed-Term, Fixed-Rate 1,000 13,924 6.95
5.201 12-17 Months Fixed-Term, Fixed-Rate 1,000 58,720 29.32
4.848 18 Months Fixed-Term, Variable
Rate, Individual
Retirement Account
("IRA") 1,000 530 0.26
5.367 18-23 Months Fixed-Term, Fixed-Rate 1,000 3,844 1.92
5.550 24-35 Months Fixed-Term, Fixed-Rate 1,000 23,647 11.81
5.440 36-59 Months Fixed-Term, Fixed-Rate 1,000 4,039 2.02
5.997 60-83 Months Fixed-Term, Fixed-Rate 1,000 10,961 5.47
5.799 84-119 Months Fixed-Term, Fixed-Rate 1,000 1,602 0.80
-------- ------
Total $200,311 100.00%
======== ======
21
<PAGE>
<TABLE>
Deposit Flow
The following table sets forth the balances of deposit accounts in the various types offered by
the Bank at the dates indicated.
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- ---------------------------
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>
Non-interest-bearing
demand............ $ 10,419 5.20% $ 986 $ 9,433 5.25% $ 2,348 $ 7,085 4.18% $ 1,738
NOW checking....... 20,785 10.38 1,489 19,296 10.73 822 18,474 10.91 1,469
Regular savings
accounts.......... 21,301 10.63 1,372 19,929 11.08 (1,305) 21,234 12.53 (541)
Money market deposit
accounts.......... 27,731 13.84 7,491 20,240 11.26 1,081 19,159 11.31 1,388
Fixed-rate certificates
which mature(1):
Within 12 months 16,732 8.35 6,543 10,189 5.67 (69,520) 79,709 47.05 12,197
Within 12-36
months........ 86,741 43.31 1,056 85,685 47.64 67,469 18,216 10.75 (4,230)
Beyond 36 months 16,602 8.29 1,549 15,053 8.37 9,514 5,539 3.27 (764)
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total......... $200,311 100.00% $20,486 $179,825 100.00% $10,409 $169,416 100.00% $11,257
======== ====== ======= ======== ====== ======= ======== ====== =======
- ----------------
(1) IRAs of $12.0 million, $11.0 million, and $10.9 million at March 31, 1999, 1998 and 1997,
respectively, are included in certificate balances.
22
</TABLE>
<PAGE>
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit in the
Bank classified by rates as of the dates indicated.
At March 31,
---------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Below 4.00%........................ $ 102 $ - $ 212
4.00 - 4.99%...................... 37,303 1,912 4,063
5.00 - 5.99%...................... 73,315 86,738 82,336
6.00 - 7.99%...................... 9,344 22,255 16,786
8.00 - 9.99%...................... 11 22 67
-------- -------- --------
Total............................ $120,075 $110,927 $103,464
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at March 31, 1999.
Amount Due
-----------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
-------- ----- --------- ------- -----
(In thousands)
Below 4.00%................ $ 102 $ - $ - $ - $ 102
4.00 - 4.99%.............. 33,331 3,261 529 182 37,303
5.00 - 5.99%.............. 55,586 11,445 2,604 3,680 73,315
6.00 - 7.99%.............. 4,425 1,806 954 2,159 9,344
8.00 - 8.99%.............. 11 - - - 11
------- ------- ------ ------ --------
Total..................... $93,455 $16,512 $4,087 $6,021 $120,075
======= ======= ====== ====== ========
The following table presents the amount and weighted average rate of
time deposits equal to or greater than $100,000 at March 31, 1999.
Weighted
Maturity Period Amount Average Rate
- --------------- ------ ------------
(Dollars in thousands)
Three months or less $ 7,442 5.43%
Over three through six months 8,598 5.35
Over six through 12 months 8,026 5.28
Over 12 months 4,859 5.82
-------
Total $28,925 5.43
=======
23
<PAGE>
Deposit Activities
The following table sets forth the deposit activities of the Bank for
the periods indicated.
Year Ended March 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Beginning balance.............. $179,825 $169,416 $158,159
Net increase before
interest credited............. 12,382 2,971 4,223
Interest credited.............. 8,104 7,438 7,034
Net increase in -------- -------- --------
savings deposits.............. 20,486 10,409 11,257
-------- -------- --------
Ending balance................. $200,311 $179,825 $169,416
======== ======== ========
In the unlikely event the Bank is liquidated, depositors are entitled
to full payment of their deposit accounts prior to any payment being made to
the stockholders of the Bank. Substantially all of the Bank's depositors are
residents of the States of Washington or Oregon.
Borrowings. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business
purposes. The 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
Bank's first mortgage loans.
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's 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 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, 1999, the Bank had $42.6 million of outstanding advances
from the FHLB-Seattle under an available credit facility of $103.9 million.
Approximately $35.0 million of such outstanding advances were used to purchase
mortgage-backed securities, classified as available for sale at March 31,
1999, 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 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, 1999, the Bank had
no reverse repurchase agreements outstanding.
24
<PAGE>
The following tables set forth certain information concerning the
Bank's borrowings at the dates and for the periods indicated.
At March 31,
--------------------------
1999 1998 1997
---- ---- ----
Weighted average rate paid on
FHLB advances.................... 4.87% 5.96% 6.49%
Year Ended March 31,
--------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Maximum amounts of FHLB
advances outstanding
at any month end $49,550 $ 33,550 $32,750
Approximate average FHLB
advances outstanding 34,008 30,512 29,068
Approximate weighted
average rate paid on
FHLB advances 5.36% 6.47% 6.50%
REGULATION
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners Loan Act ("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 Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and
the form and content of the Bank's mortgage documents. The Bank 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 to review the Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department
of the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS 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, to
25
<PAGE>
ensure that the FHLBs carry out their housing finance mission, to ensure that
the FHLBs remain adequately capitalized and able to raise funds in the capital
markets, and to ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB-Seattle, is required to acquire and
hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB-Seattle. The Bank is in compliance with this requirement with
an investment in FHLB-Seattle stock of $2.6 million at March 31, 1999.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Seattle.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one
of three capital categories based on the institution's financial information,
as of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act")
was enacted, which, among other things, imposed a special one-time assessment
on SAIF member institutions, including the Bank, to recapitalize the SAIF. As
a result of the DIF Act and the special one-time assessment, 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 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 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits are charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013%. Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur until the earlier of
December 31, 1999, or the date the BIF and SAIF are merged.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by
the FDIC or the OTS. Management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Liquidity Requirements. 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.
26
<PAGE>
Government, state or federal agency obligations, mortgage- backed securities
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.
Prompt Corrective Action. The FDIA requires each federal banking
agency 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%.
The FDIA also provides that 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 is engaging in an unsafe
or unsound practice. 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, 1999, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. Management is aware of no conditions relating
to these safety and soundness standards which would require submission of a
plan of compliance.
Qualified Thrift Lender Test. All savings associations, including
the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 1999, the Bank met the test and its QTL percentage
was 94%.
27
<PAGE>
Any savings association that fails to meet the QTL test must convert
to a national bank charter, unless it requalifies as a QTL and thereafter
remains a QTL. If an association does not requalify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC permits it
to transfer to the BIF. If such an association has not yet requalified or
converted to a national bank, its new investments and activities are limited
to those permissible for both a savings association and a national bank, and
it is limited to national bank branching rights in its home state. In
addition, the association is immediately ineligible to receive any new FHLB
borrowings and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies.
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 stockholders' equity, noncummulative 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.
Institutions that fail 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' 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 Bank.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the 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.
28
<PAGE>
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 totaled 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 as
risk-weighted assets.
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, 1999, the Bank's core capital of approximately $46.5
million, or 15.7% of adjusted total assets, was $37.6 million in excess of
the OTS requirement of $8.9 million, or 3% of adjusted total assets. As of
such date, the Bank's tangible capital of approximately $46.5 million, or
15.7% of adjusted total assets, was $42.1 million in excess of the OTS
requirement of $4.4 million, or 1.5% of adjusted total assets. Finally, at
March 31, 1999, the Bank had risk-based capital of approximately $47.1
million, or 28.6% of total risk-weighted assets, which was $33.9 million in
excess of the OTS risk-based capital requirement of $13.2 million, or 8% of
risk-weighted assets.
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 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
29
<PAGE>
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 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 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 loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At March 31, 1999, the Bank's
regulatory limit on loans to one borrower was $7.1 million. At March 31,
1999, the Bank's two largest aggregate amount of loans to one borrower were
each $4.7 million.
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 guaranty and
similar types of transactions. Any loan or extension of credit by the 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
30
<PAGE>
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 Bank has not
been significantly affected by the rules regarding transactions with
affiliates.
The 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 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. Regulation O also places individual and aggregate limits
on the amount of loans the Bank may make to such persons based, in part, on
the 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 institution's CRA rating. The Bank received a "satisfactory"
rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $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,
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<PAGE>
(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.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income The Bank's
deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were computed
using an amount based on the Bank's actual loss experience, or a percentage
equal to 8% of the Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Bank's loss experience, the Bank generally recognized a
bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-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 Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced
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<PAGE>
by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Bank makes a "nondividend
distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which the 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 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 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 Bank will not file a consolidated
tax return, except that if the Company or the 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 Bank's federal income tax returns have not been audited
within the past five years.
State Taxation
General. The Bank is subject to a business and occupation tax
imposed under Washington law at the rate of 1.50% of gross receipts; however,
interest received on loans secured by mortgages or deeds of trust on
residential properties is exempt from such tax.
Audits. The 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 Bank has paid.
Competition
There are several financial institutions in the Bank's primary market
area from which the 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 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 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 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, 1999, the Bank's investments
of $545,000 in Riverview Services, Inc. ("Riverview Services") its wholly
owned subsidiary, and the investment of $945,000 in Riverview Assets
Management Corp. ("RAM Corp"), a 90% owned subsidiary, were within these
limitations.
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<PAGE>
Riverview Services, a wholly-owned subsidiary, acts as trustee for
deeds of trust on mortgage loans granted by the Bank, and receives a
reconveyance fee of approximately $60 for each deed of trust. Riverview
Services had net income of $75,000 for the fiscal year ended March 31, 1999
and total assets of $549,000 at that date. Riverview Services' operations are
included in the consolidated financial statements of the Company.
RAM Corp is a trust company providing trust, estate planning and
investment management services. RAM Corp commenced business December 1998 and
had a net loss of $61,000 for the fiscal year ended March 31, 1999 and total
assets of $1.2 million at that date. RAM Corp earns fees on the management of
assets held in fiduciary or agency capacity. At March 31, 1999, total assets
under management approximated $21.0 million. RAM Corp's operations are
included in the consolidated financial statements of the Company.
Personnel
As of March 31, 1999, the Bank had 111 full-time equivalent
employees, none of whom are represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.
Executive Officers. The following table sets forth certain
information regarding the executive officers of the Company.
Name Age(1) Position
- ---- ------ --------
Patrick Sheaffer 57 President and Chief Executive Officer
Ron Wysaske 46 Executive Vice President, Treasurer and Chief
Financial Officer
- ------------
(1) At March 31, 1999.
Patrick Sheaffer joined the Bank in 1965 and has served as President
and Chief Executive Officer since 1976. He became Chairman of the Board in
March 1993. He is responsible for the daily operations and the management of
the Bank. Mr. Sheaffer is active in numerous professional and civic
organizations. Mr. Sheaffer is a founding director of Epitope Biotech
Company, a Nasdaq-listed company located in Portland, Oregon.
Ron Wysaske joined the Bank in 1976. Before joining the Bank, he was
an audit and tax accountant at Price Waterhouse & Co. He became Executive
Vice President, Treasurer and Chief Financial Officer in 1981. He is
responsible for administering all finance, accounting and treasury functions
at the Bank. He is a member of several professional organizations, including
the American Institute of Certified Public Accountants, the Financial Managers
Society and the Financial Executive Institute. Mr. Wysaske is a licensed
certified public accountant in the State of Washington.
Item 2. Properties
- -------------------
The following table sets forth certain information relating to the
Bank's offices as of March 31, 1999.
Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In millions)
Main Office:
700 N.E. Fourth Avenue 1975 25,000 $45.4
Camas, Washington(3)
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Approximate
Location Year Opened Square Footage Deposits
- -------- ----------- -------------- --------
(In millions)
Branch Offices:
1737 B Street 1963 2,200 $24.6
Washougal, Washington
225 S.W. 2nd Street 1971 1,700 $23.5
Stevenson, Washington(3)
330 E. Jewett Boulevard 1977 3,200 $17.9
White Salmon, Washington
15 N.W. 13th Avenue 1979 2,000 $17.7
Battle Ground, Washington(3)
412 South Columbus 1983 2,500 $10.9
Goldendale, Washington
11505-K N.E. Fourth Plain
Boulevard 1994 3,500 $12.0
Vancouver, Washington(3)
"Orchards" Office
7735 N.E. Highway 99 1994 4,800 $28.9
Vancouver, Washington(2)(3)
"Hazel Dell" Office
1011 Washington Way 1994 2,000 $16.7
Longview, Washington(2)(3)
900 Washington St. 1998 5,300 $3.9
Vancouver, Washington (1)(3)
- ---------------
(1) Leased.
(2) Former branches of Great American Federal Savings Association, San
Diego, California, that were acquired from the Resolution Trust
Corporation on May 13, 1994. In the acquisition, the Bank assumed all
insured deposit liabilities of both branch offices totaling
approximately $42.0 million.
(3) Location of an automated teller machine.
The 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, 1999, the net book value of the Bank's office properties,
furniture, fixtures and equipment was $6.2 million.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving
the Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Bank's business. The 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 Bank.
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<PAGE>
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, 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
-------
At March 31, 1999, the Company had 5,780,824 shares of Common Stock
issued and outstanding, 933 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 Bank. OTS
regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. The OTS imposes certain limitations on the payment of dividends
from the Bank to the Holding Company which utilize a three-tiered approach
that permits various levels of distributions based primarily upon a savings
association's capital level. See "REGULATION Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." In addition, the 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 Bank below the amount
required for the liquidation account to be established pursuant to the 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 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 1999 and 1998 fiscal years. At March 31,
1999, there were 11 market makers in the Company's common stock as reported by
the Nasdaq Stock Market.
Cash Dividend
Fiscal Year Ended March 31, 1999 High Low Declared
- -------------------------------- ---- --- --------
Quarter Ended March 31, 1999............... $13.50 $11.75 $0.060
Quarter Ended December 31, 1998............ 13.63 11.75 0.060
Quarter Ended September 30, 1998........... 17.00 11.25 0.060
Quarter Ended June 30, 1998................ 19.13 16.00 0.060
Cash Dividend
Fiscal Year Ended March 31, 1998 High Low Declared
- -------------------------------- ---- --- --------
Quarter Ended March 31, 1998............... $17.88 $15.50 $0.035
Quarter Ended December 31, 1997............ 18.00 12.88 0.030
Quarter Ended September 30, 1997........... 12.82 8.75 -
Quarter Ended June 30, 1997................ 9.46 7.10 0.024
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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,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets................ $302,601 $273,174 $224,385 $209,506 $190,609
Loans receivable, net(1).... 187,177 162,628 151,774 128,169 103,772
Mortgage-backed certificates
held to maturity, at
amortized cost............. 12,715 20,341 26,402 28,375 31,922
Mortgage-backed certificates
available for sale, at fair
value...................... 53,372 32,690 2,990 2,004 -
Cash and interest-bearing
deposits................... 17,207 27,482 6,951 5,585 6,499
Investment securities held
to maturity, at amortized
cost....................... 4,943 8,336 20,456 29,729 36,767
Investment securities
available for sale,
at fair value.............. 13,280 9,977 3,899 3,932 -
Deposit accounts............ 200,311 179,825 169,416 158,159 145,449
FHLB advances............... 42,550 29,550 27,180 26,050 23,000
Shareholders' equity........ 56,867 61,082 25,022 23,086 20,533
At March 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income........... $23,114 $20,302 $17,476 $15,996 $13,232
Interest expense.......... 9,925 9,389 8,923 8,416 5,927
------ ------- ------- ------- -------
Net interest income....... 13,189 10,913 8,553 7,580 7,305
Provision for loan losses. 240 180 180 - -
Net interest income after ------ ------- ------- ------- -------
provision for loan losses 12,949 10,733 8,373 7,580 7,305
Gains from sale of loans
securities and real
estate owned............. 283 269 106 396 111
Non-interest income....... 2,591 2,211 1,768 1,619 1,139
Non-interest expenses(2).. 9,055 7,218 7,204 5,607 4,889
Income before federal ------ ------- ------- ------- -------
income tax provision and
extraordinary item....... 6,768 5,995 3,043 3,988 3,666
Provision for federal
income taxes............. 2,305 2,071 1,035 1,375 1,220
------ ------- ------- ------- -------
Net income................ $4,463 $ 3,924 $ 2,008 $ 2,613 $ 2,446
====== ======= ======= ======= =======
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At March 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans
outstanding............. 2,956 3,155 3,260 2,939 2,894
Deposit accounts......... 21,639 20,395 19,300 18,318 16,816
Full service offices..... 10 9 9 9 9
At or For the Year Ended March 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets.. 1.55% 1.56% 0.92% 1.31% 1.41%
Return on average equity.. 7.33 9.15 8.38 12.02 12.59
Dividend payout ratio
(3)(4)(7)................ 30.38 11.77 10.56 6.62 16.80
Interest rate spread...... 3.83 3.72 3.72 3.62 4.11
Net interest margin....... 4.81 4.61 4.19 4.05 4.49
Non-interest expense to
average assets(5)........ 3.14 2.87 3.30 2.80 2.82
Efficiency ratio (non-
interest expense divided by
the sum of net interest
income and non-interest
income)(6)............... 56.37 53.89 69.09 58.44 57.15
Asset Quality Ratios:
Average interest-earning
assets to interest-bearing
liabilities.............. 127.02 122.21 110.80 109.63 110.39
Allowance for loan losses
to total loans at end of
period................... 0.54 0.53 0.50 0.47 0.58
Net charge-offs (recoveries)
to average outstanding
loans during the period.. 0.04 0.02 - - (0.01)
Ratio of nonperforming assets
to total assets.......... 0.44 0.19 0.10 0.26 0.13
Capital Ratios:
Average equity to average
assets................... 21.08 17.02 10.98 10.87 11.20
Equity to assets at end of
fiscal year.............. 18.79 22.36 11.15 11.02 10.77
- ------------------
(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 Bank had been waived
by the MHC
(4) Excludes cash dividends waived by the MHC.
(5) Non-interest 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.
(7) Net income divided by dividends paid.
38
<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 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 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 Bank also actively originates residential and construction loans
secured by properties located in its primary market area. To a lesser extent,
the Bank also originates consumer loans, business loans, commercial real
estate loans, and land loans. In addition, the Bank invests in U.S.
Government and federal agency obligations, mortgage-backed securities, and
municipal securities. The 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 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 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 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 Bank's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to home mortgage lending,
consumer installment lending, small business lending and providing quality
financial services to local customers. The 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 individuals and business
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.
Year 2000
The "Year 2000 problem" arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19". Systems that calculate, compare or sort using the incorrect
date may cause erroneous results, ranging from system malfunctions to
incorrect or incomplete processing. If not remedied, potential risks include
business disruption or temporary shutdown and financial loss. The Company
principally utilizes third-party computer service providers and third-party
software for its information technology needs. As a result, the Year 2000
compliance of the Company's information technology assets, such as computer
hardware, software and systems, is primarily dependent upon the Year 2000
compliance efforts and results of its third-party vendors. The Year 2000
compliance of the Company's non- information technology assets, which include
automated teller machines ("ATM"), copiers, fax machines, elevators,
39
<PAGE>
microfilmers, and HVAC systems, is also primarily dependent upon Year 2000
compliance efforts and results of third-parties.
State of Readiness. The Company began developing a plan to address
the Year 2000 issues in 1997, and in 1998 appointed a Year 2000 Committee
comprised of representatives from all key areas of the Company, including
Senior Management. The Year 2000 Committee has developed and is currently
implementing a comprehensive project to make all information technology assets
and all non-information technology assets Year 2000 compliant. Testing of
hardware has been completed and non-compliant information technology hardware
has been replaced or ordered. The committee provides periodic reports to the
Company's Board of Directors in order to assist them in their Year 2000
readiness oversight role.
The Company's non-information technology assets have also been
assessed for Year 2000 compliance. Manufacturers, installers, and/or servicers
of each have been contacted for certification of Year 2000 readiness. Of the
Company's non-information technology assets, only ATM operating systems were
determined to be in need of replacement for six ATMs, and these ATM operating
systems have been replaced.
The Year 2000 Committee's plan to make all Company assets Year 2000
compliant is comprised of the following phases:
1. Awareness - Educational initiatives on Year 2000 issues and
concerns. This phase is ongoing, especially as it relates to
customers.
2. Assessment - Inventory of all technology assets and
identification of third-party vendors and service providers. This
phase has been completed.
3. Renovation - Review of vendor and service providers responses to
the Company's Year 2000 inquiries and development of a follow-up
plan and timeline. This phase has been completed.
4. Validation - The Year 2000 Committee's readiness initiative is
currently in this phase. This phase consists of testing all
systems as well as testing of third-party vendors and service
providers for year 2000 issues. Testing of mission-critical
automated systems was substantially completed at the close of
1998. Testing of renovations and new systems will continue
throughout 1999.
5. Implementation - This phase has begun with the replacement of all
micro-computer hardware which was determined not to be Year 2000
compliant. As previously mentioned, six ATM operating systems
have been replaced in connection with this phase. The Company's
Year 2000 plan provides for Year 2000 readiness to be completed
by mid-1999 consistent with OTS guidelines. As the Company
progresses through the validation phase, the Company expects to
determine necessary remedial actions and subsequently provide
for their implementation, with respect to any third-party vendors
or service providers who are ultimately determined to not be Year
2000 compliant.
Costs to Address the Year 2000 Issue. The total cost of carrying out
the Company's plan to address the Year 2000 issue is currently estimated to be
approximately $200,000, including estimates of personnel costs, and is
comprised primarily of costs for equipment and software that will be acquired
and depreciated over its useful life in accordance with Company policy. Any
personnel and consulting costs have been and will continue to be expensed as
incurred. These currently contemplated Year 2000 compliance costs are expected
to be funded primarily through operating cash flows and are not expected to
have a material adverse effect on the Company's business, financial condition
or results of operations. To date, the costs incurred related to Year 2000,
excluding estimates of personnel costs, are approximately $90,000.
40
<PAGE>
Risks Presented by the Year 2000 Issue. Because the Company is
substantially dependent upon the proper functioning of its computer systems
and the computer systems and services of third parties, a failure of those
computer systems and services to be Year 2000 compliant could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company relies heavily on third-party vendors and service
providers for its information technology needs. The Company's primary
third-party computer service provider is a computer service bureau that
provides data processing for virtually all of the Company's savings and
checking accounts, lending and loan servicing, general ledger, fixed assets
and accounts payable. Some of these functions operate in-house on network
micro-computers, but they are all integrated and interfaced with the third-
party service bureau system. The third-party's data processing services are
mission-critical services for the Company and a failure of this provider's
services to be Year 2000 compliant could cause substantial disruption of the
Company's business and could have a material adverse financial impact on the
Company. Testing of this third-party data processing service bureau started
during the fourth quarter of the calendar year 1998 was completed during the
first quarter of the calendar year 1999.
If this third-party service provider or other third-party providers
with which the Company has material relationships are not Year 2000 compliant,
the following problems could result: (i) in the case of vendors, important
services upon which the Company depends, such as telecommunications and
electrical power, could be interrupted, (ii) in the case of third-party
service providers, the Company could receive inaccurate or outdated
information, which could impair the Company's ability to perform critical data
functions, such as the processing of deposit accounts, loan servicing and
internal accounting, and (iii) in the case of governmental agencies, such as
the Federal Home Loan Bank, and correspondent banks, such agencies and
financial institutions could fail to provide funds to the Company, which could
materially impair the Company's liquidity and affect the Company's ability to
fund loans and deposit withdrawals. In addition, whether or not the Company is
Year 2000 compliant, the Company may experience an outflow of deposits if
customers are concerned about the integrity of financial institutions' records
regarding customer accounts.
Contingency Plans. Where it is possible to do so, the Company has
scheduled testing with third-party vendors and service providers. Where it is
not possible, the Company will rely upon certifications of Year 2000
compliance from third-party vendors and service providers. As of March 31,
1999, certifications of Year 2000 compliance have been received from most of
the Company's third-party vendors and service providers. Testing with
selected mission critical providers has been scheduled for the first quarter
of 1999. The Company will supplement its existing business continuity plans
to deal with the special circumstances of Year 2000 problems.
There can be no assurance that the Company's Year 2000 plans will
effectively address the Year 2000 issue, that the Company's estimates of the
timing and costs of completing the plan will ultimately be accurate or that
the impact of any failure of the Company or its third-party vendors and
service providers to be Year 2000 compliant will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
Comparison of Financial Condition at March 31, 1999 and 1998
Total assets were $302.6 million at March 31, 1999, compared to
$273.2 million at March 31, 1998. This increase resulted primarily from the
growth in the loan portfolio and the increase in investment securities and
mortgage-backed securities. These increases were funded primarily by deposit
growth and an increase in FHLB advances.
Loans receivable, net, were $186.8 million at March 31, 1999 compared
to $161.2 million at March 31, 1998, a 15.9% increase. Increases primarily in
residential and commercial construction loans as well as commercial, land, and
non-residential 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 $341,000 at March 31, 1999, compared to $1.4
million at March 31, 1998. The difference resulted primarily from timing
differences in the funding of loans.
Cash and cash equivalents decreased to $17.2 million at March 31,
1999, from $27.5 million at March 31, 1998 as a result of loan growth, and
mortgage-backed and investment securities growth.
41
<PAGE>
Investment securities held-to-maturity were $4.9 million at March 31,
1999, compared to $8.3 million at March 31, 1998. The $3.4 million decrease
was a result of investment maturities.
Investment securities available-for-sale were $13.3 million at March
31, 1999, compared to $10.0 million at March 31, 1998. The $3.3 million
increase reflected the investment of excess liquidity.
Mortgage-backed securities held-to-maturity were $12.7 million at
March 31, 1999, compared to $20.3 million at March 31, 1998. The decrease is a
result of prepayments.
Mortgage-backed securities available-for-sale were $53.4 million at
March 31, 1999, compared to $32.7 million at March 31, 1998. The $20.7
million net increase reflected the investment of FHLB advance proceeds of
$30.0 million borrowed September 1998, and the result of prepayments.
Total deposits were $200.3 million at March 31, 1999, compared to
$179.8 million at March 31, 1998. Management attributes this increase
primarily to the growth in the Bank's market area and to promotions of
checking and money market deposit accounts.
FHLB advances increased to $42.6 million at March 31, 1999 from $29.6
million at March 31, 1998. Approximately $35.0 million of the outstanding
advances at March 31, 1999 and $15.0 million at March 31, 1998 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 decreased $4.2 million to $56.9 million at March
31, 1999 from $61.1 million at March 31, 1998 primarily as a result of
treasury share repurchases of $5.5 million, Management Recognition and
Development Plan ("MRDP") share repurchases of $2.0 million, and growth in
retained earnings, less cash dividends of $1.4 million paid to the Public
Stockholders.
Comparison of Operating Results for the Years Ended March 31, 1999 and 1998
Net Income. Net income was $4.5 million, or $0.78 per share for the
year ended March 31, 1999, compared to $3.9 million, or $0.66 per share for
the year ended March 31, 1998. 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, 1999, primarily as a result
of higher net interest income.
Net Interest Income. Net interest income increased $2.3 million to
$13.2 million for the year ended March 31, 1999 compared to $10.9 million for
the year ended March 31, 1998. The increased net interest income resulted
primarily from the increase in the average balance of net loans to $174.7
million in 1999 compared to $159.4 million in 1998, and the increase in the
average balance of mortgage-backed securities to $61.0 million in 1999
compared to $43.9 million in 1998. Net interest margin for the year ended
March 31, 1999 rose to 4.81% from 4.61% for the 1998 fiscal year primarily as
a result of the loan and investment earnings on funds provided by deposit
growth and increases in FHLB advances.
Interest Income. Interest income totaled $23.1 million and $20.3
milion, for fiscal years 1999 and 1998, respectively. Average
interest-earning assets increased 15.8% to $274.2 million for the year ended
March 31, 1999, compared to $236.8 million for the year ended March 31, 1998,
and the yield on all interest-earning assets was 8.43% for fiscal year 1999
compared to 8.57% for fiscal year 1998.
Interest Expense. Interest expense for the year ended March 31,
1999 totaled $9.9 million, a $0.5 million, or 5.7% increase from $9.4 million
the prior year. The increase was primarily a result of an increase in the
average balances of certificate of deposits from $105.4 million to $116.2
million for the 1998 and 1999 fiscal years, respectively, as a result of
deposit growth. The average cost on other interest-bearing liabilities
(primarily FHLB advances) was
42
<PAGE>
5.35% in fiscal 1999 compared to 6.29% in fiscal 1998 as a result of the
renewal of maturing and borrowing of new FHLB advances at lower interest
rates. The average balance of other interest-bearing liabilities for the year
ended March 31, 1999 was $34.0 million compared to $31.0 million for the year
ended March 31, 1998. The effect was to produce interest expense of $1.8
million for other interest-bearing liabilities for the year ended March 31,
1999, compared to $2.0 million for the year ended March 31, 1998.
Provision for Loan Losses. The provision for loan losses for the
year ended March 31, 1999 was $240,000 compared to $180,000 for the year ended
March 31, 1998. 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 judgments 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, 1999 was $1.1 million, or .54% of total
loans receivable compared to $984,000, or .53% at March 31, 1998. At March 31,
1999, management deemed the allowance for loan losses adequate at that date.
Non-performing assets totaled $1.3 million, or .44% of total assets at March
31, 1999 as compared to $517,000, or .19% at March 31, 1998.
Non-Interest Income. The Company's principle 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 1999 and 1998 was $2.9
million and $2.5 million, respectively. Mortgage broker fees (included in fees
and service charges) totaled $944,000 for the year ended March 31, 1999
compared to $746,000 for the previous year and related commission
compensation expense was $740,000 for the fiscal year ended March 31, 1999
compared to $624,000 for the fiscal year ended March 31, 1998, both as a
result of an increase in brokered loan production from $89.2 million in 1998
to $141.1 million in 1999. For the fiscal year ended March 31, 1999, gains on
sale of loans and investments totaled $283,000 compared to $269,000 of gains
recorded in 1998. The total loans-serviced-for-others portfolio was $84.6
million at March 31, 1999 and generated $116,000 of servicing fees for fiscal
1999, versus $249,000 for fiscal 1998. The reduction in servicing fees was
due to loan prepayments. The purchased and originated mortgage servicing
rights assets were $263,000 and $335,000, respectively at March 31, 1999, and
were being amortized over the life of the underlying loan servicing.
Non-Interest Expense. Non-interest expense increased $1.8 million,
or 25.5% to $9.1 million for fiscal year 1999 compared to $7.2 million for
fiscal year 1998. The principle component of the Bank's non-interest expense
was salaries and employee benefits. For the year ended March 31, 1999,
salaries and employee benefits, which includes mortgage broker commission
compensation, was $5.0 million, or a $1.0 million increase over the prior year
total of $4.0 million. As mentioned previously, commission compensation
expense was $740,000 for the fiscal year ended March 31, 1999 compared to
$624,000 for the fiscal year ended March 31, 1998. Full-time equivalent
employees have increased to 111 at March 31, 1999 from 92 at March 31, 1998.
Other components of non-interest expense include building, furniture, and
equipment depreciation and expense, data processing expense, and advertising
expense.
43
<PAGE>
The acquisition of the Hazel Dell and Longview branches from the
Resolution Trust Corporation ("RTC") in fiscal 1995 (see "Item 1. Business --
Properties," and the related acquisition of $42 million in customer deposits
created a $3.2 million core deposit intangible asset ("CDI"), representing the
excess of cost over fair value of deposits acquired. The CDI ( $1.7 million at
March 31, 1999) is being amortized over the remaining life of the underlying
customer relationships; currently estimated at five years. The amortization
cost of the CDI was $327,000 for both fiscal years 1999 and 1998.
Provision for Federal Income Taxes. Provision for federal income
taxes was $2.3 million for the year ended March 31, 1999 compared to $2.1
million for the year ended March 31, 1998 as a result of higher income before
taxes. The effective tax rate for fiscal year 1999 was 34.1% compared to 34.5%
for fiscal 1998.
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 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 re-capitalize 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
million 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 totaled $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
totaled $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 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 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 totaled $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. 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)
totaled $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
44
<PAGE>
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 totaled
$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
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 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
Bank's ongoing insurance premiums from an average of 23.0 basis points to 6.5
basis point. FDIC insurance premiums totaled $114,000 for the year ended March
31, 1998, compared to $275,000 for the year ended March 31, 1997.
For the year ended March 31, 1998, salaries and employee benefits,
which includes mortgage broker commission compensation, was $4.0 million, or
an $860,000 increase over the prior year total of $3.2 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 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 amortization of the CDI related to the
acquisition from the RTC in May 1994 was $327,000 for both fiscal years 1998
and 1997.
Provision For Federal Income Taxes. Provision for federal 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.
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.
45
<PAGE>
<TABLE>
Year Ended March 31,
-------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- --------------------------- ---------------------------
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.... $154,450 $15,117 9.79% $142,463 $13,596 9.54% $128,552 $12,087 9.40%
Non-mortgage loans 20,288 1,998 9.85 16,909 1,642 9.71 12,835 1,252 9.75
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total net loans. 174,738 17,115 9.79 159,372 15,238 9.56 141,387 13,339 9.43
Mortgage-backed
securities........ 61,041 3,755 6.15 43,880 3,010 6.86 30,212 2,135 7.07
Investment
securities........ 20,031 1,215 6.07 19,077 1,221 6.40 29,048 1,832 6.31
Daily interest-
earning........... 16,131 838 5.19 12,622 687 5.44 708 40 5.65
Other earning assets 2,275 191 8.40 1,865 146 7.83 2,619 130 4.96
Total interest- -------- ------- ---- -------- ------- ---- -------- ------- ----
earning assets... 274,216 23,114 8.43 236,816 20,302 8.57 203,974 17,476 8.57
Non-interest-earning
assets:
Office properties
and equipment, net 5,412 4,748 4,516
Real estate, net.. 471 471 471
Other non-interest-
earning assets... 8,488 9,872 9,375
-------- -------- --------
Total assets...... $288,587 $251,907 $218,336
======== ======== ========
Interest-bearing
liabilities:
Regular savings
accounts......... $20,374 560 2.75 $ 20,097 553 2.75 $21,408 588 2.75
NOW accounts...... 23,875 309 1.29 19,480 287 1.47 15,915 234 1.47
Money market
accounts......... 21,470 790 3.68 17,784 649 3.65 18,046 617 3.42
Certificates of
deposit.......... 116,165 6,445 5.55 105,382 5,949 5.65 99,657 5,595 5.61
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits.... 181,884 8,104 4.46 162,743 7,438 4.57 155,026 7,034 4.54
Other interest-
bearing liabilities 34,008 1,821 5.35 31,039 1,951 6.29 29,068 1,889 6.50
Total interest- -------- ------- ---- -------- ------- ---- -------- ------- ----
bearing
liabilities...... 215,892 9,925 4.60 193,782 9,389 4.85 184,094 8,923 4.85
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits.......... 9,636 12,466 7,047
Other liabilities.. 2,212 2,776 3,229
-------- -------- --------
Total liabilities. 227,740 209,024 194,370
Shareholders'
equity 60,847 42,883 23,966
Total liabilities -------- -------- --------
and shareholders'
equity.............$288,587 $251,907 $218,336
======== ======== ========
Net interest income. $13,189 $10,913 8,553
======= ======= =====
Interest rate spread 3.83% 3.72% 3.72%
==== ==== ====
Net interest margin. 4.81% 4.61% 4.19%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities........ 127.02% 122.21% 110.80%
====== ====== ======
46
</TABLE>
<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 Bank's assets, the
weighted average interest rates paid on the Bank's liabilities, together with
the net yield on interest-earning assets.
Year Ended March 31,
At March 31, -----------------------
1999 1999 1998 1997
---- ---- ---- ----
Weighted average yield earned on:
Total net loans(1)................. 8.34% 8.59% 8.74% 8.58%
Mortgage-backed securities......... 6.03 6.15 6.86 7.07
Investment securities ............. 5.93 6.07 6.40 6.31
All interest-earning assets........ 7.56 7.66 8.02 7.98
Weighted average rate paid on:
Deposits........................... 4.12 4.46 4.57 4.54
FHLB advances and other borrowings. 4.87 5.35 6.29 6.50
All interest-bearing liabilities... 4.25 4.60 4.85 4.85
Interest rate spread (spread
between weighted average rate on
all interest-earning assets and all
interest-bearing liabilities)(1)... 3.30 3.06 3.17 3.13
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)(1)........ N/A 4.04 4.06 3.60
- --------------------
(1) Weighted average yield on total net loans at March 31, 1999, excludes
deferred loan fees.
47
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on net interest income of the 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,
----------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------ ---------------------------
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.... $1,144 $ 348 $ 29 $ 1,521 $1,308 $181 $ 20 $1,509
Non-mortgage
loans............ 328 23 5 356 397 (5) (2) 390
Mortgage-backed
securities....... 1,177 (311) (121) 745 966 (63) (28) 875
Investment
securities....... 61 (64) (3) (6) (629) 27 (9) (611)
Daily interest-
bearing.......... 191 (31) (9) 151 673 (1) (25) 647
Other earning
assets........... 32 11 2 45 (37) 75 (22) 16
Total interest- ------ ----- ----- ------ ------ ---- ---- ------
earning assets. 2,933 (24) (97) 2,812 2,678 214 (66) 2,826
------ ----- ----- ------ ------ ---- ---- ------
Interest Expense:
Regular savings
accounts......... 8 (1) - 7 (36) 1 - (35)
NOW accounts...... 65 (35) (8) 22 52 1 - 53
Money market
accounts......... 135 5 1 141 (9) 42 (1) 32
Certificates of
deposit.......... 609 (102) (11) 496 321 31 2 354
Other interest-
bearing
liabilities...... 187 (289) (28) (130) 128 (62) (4) 62
Total interest- ------ ----- ----- ------ ------ ---- ---- ------
bearing
liabilities... 1,004 (422) (46) 536 456 13 (3) 466
Net increase ------ ----- ----- ------ ------ ---- ---- ------
(decrease) in
interest income... $1,929 $ 398 $ (51) $2,276 $2,222 $201 $(63) $2,360
====== ===== ===== ====== ====== ==== ==== ======
Asset and Liability Management
The Bank's principle financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The 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 principle 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 selling
fixed-rate one- to- four family mortgage loans with terms of more than 15
years. The 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 Bank promotes transaction accounts and certificates of deposit with terms
up to ten years.
The 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
48
<PAGE>
related loan servicing rights. This approach has remained consistent
throughout the past year as the Bank has experienced growth in assets,
deposits, and FHLB advances.
Deposit accounts typically react more quickly to changes in market
interest rates than mortgage loans because of the shorter maturities of
deposits. As a result, sharp increases in interest rates may adversely affect
the Bank's earnings while decreases in interest rates may beneficially affect
the Bank's earnings. To reduce the potential volatility of the 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 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 Bank has also invested in adjustable rate
mortgage-backed securities to increase the level of short term adjustable
assets. At March 31, 1999, ARM loans and adjustable rate mortgage-backed
securities constituted $76.9 million, or 33.0%, of the Bank's total combined
mortgage loan and mortgage-backed securities portfolio. Although the 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 Bank's mortgage servicing activities provide additional
protection from interest rate risk. The 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 totaled
$84.6 million at March 31, 1999, including $24.7 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 $85.4 million and produced service fees of
$153,000 for the year ended March 31, 1999. See "Item 1. Business -- Lending
Activities -- Mortgage Loan Servicing."
Consumer loans, commercial loans and construction loans typically
have shorter terms and higher yields than permanent residential mortgage
loans, and accordingly reduce the Bank's exposure to fluctuations in interest
rates. At March 31, 1999, the construction, commercial and consumer loan
portfolios amounted to $72.2 million, $8.7 million and $15.5 million, or
38.6%, 4.6% and 8.3% of total net loans receivable, respectively. See "Item
1. Business -- Lending Activities -- Construction Lending" and " -- Lending
Activities -- Consumer Lending."
The 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, 1999, the combined portfolio of $83.4
million, excluding equity securities, had an average term to repricing or
maturity of 3.3 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 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%. Based
on the Bank's regulatory capital levels at December 31, 1998 (the latest date
available), the Bank believes that, if the proposed regulation was implemented
at that date, the regulation would not have had a material adverse effect on
the Bank's regulatory capital compliance.
49
<PAGE>
At December 31, 1998
------------------------------------------------------------
Net Portfolio Value as a
Net Portfolio Value Percent of Present
---------------------------------- Value of Assets
Change Dollar Dollar Percent ------------------------
In Rates Amount Change Change NPV Ratio Change
- -------- ------ ------ ------ --------- ------
(Dollars in thousands)
400 bp $40,697 $(16,558) (29)% 14.29% (442) bp
300 bp 45,414 (11,842) (21) 15.63 (309) bp
200 bp 49,966 (7,290) (13) 16.87 (185) bp
100 bp 54,248 (3,008) (5) 17.98 (73) bp
- bp 57,256 - - 18.71 - bp
(100) bp 58,616 1,361 2 18.99 27 bp
(200) bp 59,910 2,655 5 19.23 52 bp
(300) bp 62,024 4,768 8 19.68 96 bp
(400) bp 64,067 6,812 12 20.09 138 bp
The above table illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at December 31, 1998 would
reduce the Bank's NPV by approximately $7.3 million, or 13%, 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 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 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 Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At March 31, 1999,
cash and cash equivalents totaled $14.4 million, or 4.9% of total assets. At
March 31, 1999, the Bank also maintained an uncommitted credit facility with
the FHLB-Seattle that provided for immediately available advances up to an
aggregate amount of $103.9 million, under which $42.6 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 Bank's liquidity ratio at March 31, 1999 was
52.9%.
Liquidity management is both a short- and long-term responsibility of
the Bank's management. The Bank adjusts its investments in liquid assets
based upon management's assessment of (i) expected loan demand, (ii) projected
50
<PAGE>
loan sales, (iii) expected deposit flows, (iv) yields available on interest-
bearing deposits, and (v) liquidity of its asset/liability management program.
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. If the Bank requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral for repurchase agreements.
The Bank's primary investing activity is the origination of one- to-
four family mortgage loans. During the years ended March 31, 1999, 1998 and
1997, the Bank originated $112.6 million, $79.1 million and $67.9 million of
such loans, respectively. At March 31, 1999, the Bank had mortgage loan
commitments totaling $13.3 million, consumer loan commitments totaling $9.1
million, and undisbursed loans in process totaling $22.3 million. The 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, 1999 totaled $93.5 million. Historically, the
Bank has been able to retain a significant amount of its deposits as they
mature.
OTS regulations require the Bank to maintain specific amounts of
regulatory capital. As of March 31, 1999, the Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 15.7%, 15.7% and 28.6%, respectively. For a
detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of Savings Associations -- Capital Requirements."
Impact of Accounting Pronouncements and Regulatory Policies
Recently Issued Accounting Pronouncements. In June 1997, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes requirements for disclosure of
comprehensive income. The Company adopted SFAS No. 130 on April 1, 1998. All
prior periods presented have been restated to conform to the provisions of
this statement.
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. The Company adopted SFAS No. 131 on
April 1, 1998. The Company has determined it does not have separate
identifiable segments as defined by this statement.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement becomes effective for fiscal year 2001, and should not be applied
retroactively to financial statements of prior periods. The adoption of
provisions of SFAS No. 133 is not expected to have a material impact on the
financial statements of the Company.
Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use. Statement of Position ("SOP") 98-1 requires the
capitalization of certain costs incurred in connection with developing or
obtaining software for internal use. Historically, the Company has expensed a
portion of such costs as incurred. This statement becomes effective for
fiscal year 2000. The adoption of the provisions of SOP 98-1 is not expected
to have a material impact on the financial statements of the Company.
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 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.
51
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Quantitative Aspects of Market Risk. The 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 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 Bank's interest-earning assets and interest-bearing liabilities, see
the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio
Analysis," "Lending Activities -- Investment Activities" and "-- Deposit
Activities and Other Sources of Funds" and "-- Lending Activities --
Certificates of Deposits by Rates and Maturities" contained herein.
Qualitative Aspects of Market Risk. The Bank's principle financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The 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
principle 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 Bank maintains an investment portfolio of U.S. Government and
agency securities with contractual maturities of between zero and two years.
The 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
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.
52
<PAGE>
The following table shows the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at March 31, 1999. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
One After After
Within Year 3 Years 5 Year Beyond
Average One to 3 to 5 to 10 10 Fair
Rate Year Years Years Years Years Total Value
---- ---- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-Sensitive
Assets:
Loans
receivable.. 8.33% $96,130 $11,466 $16,908 $36,994 $25,679 $187,177 $189,498
Mortgage-
backed
securities.. 6.03 191 483 - 10,707 54,706 66,087 66,311
Investments
and other
interest-
earning
assets...... 5.73 15,612 4,956 - 2,490 5,843 28,901 28,938
FHLB stock... 7.75 523 1,045 1,046 - - 2,614 2,614
Interest-
Sensitive
Liabilities:
NOW
accounts.... 1.50 4,658 9,318 9,318 - - 23,294 23,294
Non-interest
checking
accounts.... - 2,083 4,168 4,168 - - 10,419 10,419
Savings
accounts.... 2.75 4,261 8,520 8,520 - - 21,301 21,301
Money market. 3.97 5,044 10,089 10,089 - - 25,222 25,222
Certificate
accounts.... 5.29 93,455 20,599 5,442 579 - 120,075 120,158
FHLB
advances.... 4.87 7,000 5,550 30,000 - - 42,550 42,480
Off-Balance
Sheet Items:
Commitments
to extend
credit...... 7.86 13,314 - - - - 13,314 13,314
Unused lines
of credit... 9.85 9,146 - - - - 9,146 9,146
53
<PAGE>
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
- --------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
Independent Auditors' Report 55
Consolidated Balance Sheets as of March 31, 1999 and 1998 56
Consolidated Statements of Income for the Years Ended March 31, 1999,
1998 and 1997 57
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 1999, 1998 and 1997 58
Consolidated Statements of Cash Flows for the Years Ended March 31,
1999, 1998 and 1997 59
Notes to Consolidated Financial Statements 60
54
<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 as of March 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 1999. 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 the Riverview Bancorp, Inc. and
Subsidiary as of March 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 14, 1999
55
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
(In thousands, except share data) 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $11,612
and $20,504) $ 17,207 $ 27,482
Loans held for sale 341 1,430
Investment securities held to maturity, at
amortized cost (fair value of $4,980 and $8,394) 4,943 8,336
Investment securities available for sale, at fair
value (amortized cost of $13,751 and $9,961) 13,280 9,977
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $12,939 and $20,758) 12,715 20,341
Mortgage-backed securities available for sale, at
fair value (amortized cost of $53,808 and $32,526) 53,372 32,690
Loans receivable (net of allowance for loan losses
of $1,146 and $984) 186,836 161,198
Real estate owned 30 -
Prepaid expenses and other assets 895 882
Accrued interest receivable 1,543 1,597
Federal Home Loan Bank stock 2,614 1,966
Premises and equipment 6,185 4,802
Land held for development 471 471
Deferred income taxes, net 493 -
Core deposit intangible, net 1,676 2,002
---------- ----------
TOTAL ASSETS $ 302,601 $ 273,174
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 200,311 $ 179,825
Accrued expenses, minority interest and other
liabilities 2,834 2,490
Advance payments by borrowers for taxes and
insurance 39 84
Deferred income taxes, net - 143
Federal Home Loan Bank advances 42,550 29,550
---------- ----------
Total liabilities 245,734 212,092
COMMITMENTS AND CONTINGENCIES (NOTE 16)
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000
authorized, 1999 - 6,194,103 issued, 5,346,322
outstanding; 1998 - 6,154,326 issued, 5,809,456
outstanding 62 62
Additional paid-in capital 53,577 53,399
Retained earnings 13,602 10,495
Treasury shares at cost, 1999 - 413,279 shares;
1998 - none (5,461) -
Unearned shares issued to employee stock ownership
trust (2,743) (2,993)
Unearned shares held by the management recognition
and development plan (1,571) -
Accumulated other comprehensive income (loss) (599) 119
---------- ----------
Total shareholders' equity 56,867 61,082
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 302,601 $ 273,174
========== ==========
See notes to consolidated financial statements.
56
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In thousands, except share data) 1999 1998 1997
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 17,115 $ 15,238 $ 13,339
Interest on investment securities 1,215 1,221 1,832
Interest on mortgage-backed securities 3,755 3,010 2,135
Other interest and dividends 1,029 833 170
--------- --------- ---------
Total interest income 23,114 20,302 17,476
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 8,104 7,438 7,034
Interest on borrowings 1,821 1,951 1,889
--------- --------- ---------
Total interest expense 9,925 9,389 8,923
--------- --------- ---------
Net interest income 13,189 10,913 8,553
Less provision for loan losses 240 180 180
--------- --------- ---------
Net interest income after
provision for loan losses 12,949 10,733 8,373
--------- --------- ---------
NON-INTEREST INCOME:
Fees and service charges 2,380 1,845 1,368
Gain on sale of loans held for sale 246 80 69
Gain on sale of securities 37 189 37
Loan servicing income 116 249 279
Other 95 117 121
--------- --------- ---------
Total non-interest income 2,874 2,480 1,874
--------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,029 4,023 3,163
Occupancy and depreciation 1,698 1,339 1,174
Amortization of core deposit intangible 327 327 327
Marketing expense 336 248 257
FDIC insurance premium 109 114 275
Special SAIF assessment - - 947
Other 1,556 1,167 1,061
--------- --------- ---------
Total non-interest expense 9,055 7,218 7,204
--------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 6,768 5,995 3,043
PROVISION FOR FEDERAL INCOME TAXES 2,305 2,071 1,035
--------- --------- ---------
NET INCOME $ 4,463 $ 3,924 $ 2,008
========= ========= =========
Earnings per common share:
Basic $0.78 $0.66 $0.33
Diluted 0.76 0.65 0.33
Weighted average number of shares
outstanding:
Basic 5,705,697 5,918,973 6,027,491
Diluted 5,837,000 6,060,314 6,111,203
See notes to consolidated financial statements.
57
<PAGE>
<TABLE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Unearned
Shares Accumu-
Issued lated
to Other
Addi- Employee Unearned Compre-
(In thousands Common Stock tional Owner- Shares hensive
except share --------------- Paid-In Retained Treasury ship Issued to Income
data) Shares Amount Capital Earnings Stock Trust MRDP (Loss) Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance April 1,
1996 5,465,387 $ 2,195 $12,233 $ 9,137 $ - $ (439) $ - $ (40) $23,086
Comprehensive income:
Net income - - - 2,008 - - - - 2,008
Other comprehensive
income:
Net unrealized
holding loss on
securities of $20
(net of $10 tax
benefit) less
reclassification
adjustment for net
gains included in
net income of $24
(net of $13 tax
expense) - - - - - - - (44) (44)
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 (3,900) - (54) - - -
--------- ------ --------- -------- ------- ------- -------- ----- -------
Balance, March 31,
1997 6,043,656 2,416 16,043 7,033 - (386) - (84) 25,022
Comprehensive income:
Net income - - - 3,924 - - - - 3,924
Other comprehensive
income:
Net unrealized
holding gain on
securities of $328
(net of $169 tax
expense) less
reclassification
adjustment for net
gains included in
net income of $125
(net of $64 tax
expense) - - - - - - - 203 203
Retirement of
Mutual Holding
Company Stock (3,570,270) (1,408) 1,494 - - - - - 86
Issuance and exchange
of common stock
as a result of
conversion/
reorganization 3,570,750 (948) 35,586 - - - - - 34,638
Retirement of
fractional 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
--------- ------ --------- -------- ------- ------- -------- ----- -------
Balance March 31,
1998 5,809,456 62 53,399 10,495 - (2,993) - 119 61,082
Comprehensive income:
Net income - - - 4,463 - - - - 4,463
Other comprehensive
income:
Net unrealized
holding loss on
securities of
$694 (net of $357
tax benefit) less
reclassification
adjustment for net
gains included in
net income of $24
(net of $13 tax
expense) - - - - - - - (718) (718)
Cash dividends - - - (1,356) - - - - (1,356)
Exercise of stock
options 39,777 - 141 - - - - - 141
Earned ESOP shares 24,632 - 52 - - 250 - - 302
Treasury shares
acquired (413,279) - - - (5,461) - - - (5,461)
Shares acquired by
MRDP (142,830) - (15) - - - (1,964) - (1,979)
Earned MRDP shares 28,566 - - - - - 393 - 393
--------- ------ --------- -------- ------- ------- -------- ----- -------
Balance March 31,
1999 5,346,322 $ 62 $ 53,577 $ 13,602 $(5,461) $(2,743) $ (1,571) $(599) $56,867
========= ====== ========= ======== ======= ======= ======== ===== =======
See notes to consolidated financial statements.
58
</TABLE>
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,463 $ 3,924 $ 2,008
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,196 854 794
Provision for losses on loans 240 180 180
Provision for deferred income taxes, net (266) - -
Noncash expense related to ESOP 302 437 172
Noncash expense related to MRDP 589 - -
Increase in deferred loan origination
fees, net of amortization 430 372 289
Federal Home Loan Bank stock dividend (173) (146) (130)
Net gain on sale of real estate owned,
mortgage-backed securities, and
investment securities and premises and
equipment (37) (189) (37)
Changes in assets and liabilities:
Decrease (increase) in loans held for
sale 1,089 (1,350) 1,861
Decrease (increase) in prepaid expenses
and other assets (13) 259 (93)
Decrease (increase) in accrued interest
receivable 53 (148) 62
Increase in accrued expenses, minority
interest and other liabilities 115 (34) 562
--------- --------- ---------
Net cash provided by operating
activities 7,988 4,159 5,668
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (158,651) (105,327) (85,651)
Principal repayments on loans 131,845 95,270 59,369
Proceeds from call, maturity, or sale
of investment securities available
for sale 19,057 10,003 3,535
Purchase of investment securities
available for sale (21,452) (15,974) (3,502)
Purchase of equity securities (1,356) (1,014) -
Proceeds from sale of equity securities - 1,165 -
Purchase of mortgage-backed securities
available for sale (33,377) (34,176) (1,100)
Proceeds from sale of mortgage-backed
securities available for sale - 2,280 -
Principal repayments on mortgage-
backed securities held to maturity 7,721 6,218 5,104
Principal repayments on mortgage-
backed securities available for sale 11,795 2,421 80
Purchase of mortgage-backed securities
held to maturity - - (3,035)
Purchase of investment securities
held to maturity (982) - -
Proceeds from call or maturity of
investment securities held to maturity 4,368 12,033 9,265
Purchase of premises and equipment (2,058) (755) (699)
Purchase of Federal Home Loan Bank stock (475) (64) -
Proceeds from sale of real estate owned,
premises and equipment 404 135 140
--------- --------- ---------
Net cash used in investing
activities (43,161) (27,785) (16,494)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 20,486 10,409 11,257
Dividends paid (1,244) (304) (200)
Proceeds from issuance of common stock,
net of related costs - 34,724 -
Stock purchased for ESOP - (2,856) -
Treasury stock acquired (5,461) - -
Stock acquired for MRDP (1,979) - -
Proceeds from Federal Home Loan Bank
advances 30,000 35,800 68,880
Repayment of Federal Home Loan Bank
advances (17,000) (33,430) (67,750)
Net decrease in advance payments by
borrowers (45) (39) 72
Repayment of other borrowed funds - (237) (79)
Proceeds from exercise of stock options 141 90 12
--------- --------- ---------
Net cash provided by financing
activities 24,898 44,157 12,192
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (10,275) 20,531 1,366
CASH, BEGINNING OF YEAR 27,482 6,951 5,585
--------- --------- ---------
CASH, END OF YEAR $ 17,207 $ 27,482 $ 6,951
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 9,841 $ 9,424 $ 8,921
Income taxes 2,774 2,003 951
NONCASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned $ 498 $ 10 $ 269
Dividends declared and accrued in
other liabilities 327 215 58
Fair value adjustment to securities
available for sale (1,088) 306 (65)
Income tax effect related to fair
value adjustment 370 (103) 21
See notes to consolidated financial statements.
59
<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 Community Bank (the "Bank"), the Bank's
wholly-owned subsidiary, Riverview Services, Inc. and the Bank's majority
owned subsidiary, Riverview Asset Management Corp. All significant
intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations - The Bank is a ten branch community-oriented financial
institution operating in rural and suburban communities in southwest
Washington state. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such funds, together with other
borrowings, to invest in various consumer-based real estate loans, other
consumer and business 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
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 Statement of Financial Accounting Standards
("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
60
<PAGE>
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 years ended March 31, 1999, 1998 and 1997.
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 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 Bank 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 Bank 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
61
<PAGE>
Bank is amortizing the mortgage servicing assets, which totaled $335,000 and
$125,000 at March 31, 1999 and 1998, 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 non-interest 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.
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
("SOP") 93-6, Employer's Accounting for Employee Stock Ownership Plans. 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 by the Bank. 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 life of the ESOP.
Earnings Per Share - The Company accounts for earnings per share in accordance
with SFAS No. 128, Earnings Per Share, which requires all companies whose
capital structure include convertible securities and options to make a dual
presentation of basic and diluted earnings per share for all periods
presented.
Cash - Includes amounts on hand, due from banks, and interest-earning deposits
in other banks with original maturities of 90 days or less.
Stock-Based Compensation - Effective April 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock Based Compensation, which permits entities to
recognize as expense over the expected life 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.
Reclassification - Certain 1998 and 1997 amounts have been reclassified in
order to conform to 1999 presentation.
Recently Issued Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB" ) issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes requirements for disclosure of
comprehensive income. The Company adopted SFAS No. 130 on April 1, 1998. All
prior periods presented have been restated to conform to the provisions of
this statement.
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. The Company adopted SFAS No. 131 on April 1,
1998. The Company has determined it does not have separate identifiable
segments as defined by this statement.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. This
statement becomes effective for fiscal year 2001, and will not be applied
retroactively to financial statements of prior periods. The adoption of
provisions of SFAS No. 133 is not expected to have a material impact on the
financial statements of the Company.
62
<PAGE>
Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use. Statement of Position ("SOP") 98-1 requires the capitalization
of certain costs incurred in connection with developing or obtaining software
for internal use. Historically, the Company has expensed a portion of such
costs as incurred. This statement becomes effective for fiscal year 2000. The
adoption of the provisions of SOP 98-1 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, 1999
and 1998, 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, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
Agency securities $ 4,000 $ 13 $ - $ 4,013
Municipal securities 943 24 - 967
--------- ---------- ---------- ---------
$ 4,943 $ 37 $ - $ 4,980
========= ========== ========== =========
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
========= ========== ========== =========
The contractual maturities of securities held to maturity are as follows (in
thousands):
Amortized Estimated
March 31, 1999 Cost Fair Value
--------- ----------
Due in one year or less $ 4,000 $ 4,013
Due after one year through five years 943 967
--------- ----------
$ 4,943 $ 4,980
========= ==========
There were no sales of investment securities classified as held to maturity
during the years ended March 31, 1999, 1998 and 1997.
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
63
<PAGE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
Agency securities $ 11,489 $ 13 $ (62) $ 11,440
Equity securities 1,356 - (422) 934
Municipal securities 906 - - 906
--------- ---------- ---------- ---------
$ 13,751 $ 13 $ (484) $ 13,280
========= ========== ========== =========
March 31, 1998
Agency securities $ 7,000 $ 13 $ (9) $ 7,004
U.S. Treasury securities 2,961 12 - 2,973
--------- ---------- ---------- ---------
$ 9,961 $ 25 $ (9) $ 9,977
========= ========== ========== =========
The contractual maturities of securities available for sale are as follows (in
thousands):
Amortized Estimated
March 31, 1999 Cost Fair Value
--------- ----------
Due after one year through five years $ 4,000 $ 4,013
Due after five years through ten years 2,500 2,490
Due after ten years 7,251 6,777
--------- ----------
$ 13,751 $ 13,280
========= ==========
Investment securities with an amortized cost of $4.0 million and $1.0 million
and a fair value of $4.0 million and $995,000 at March 31, 1999 and 1998,
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, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 3,162 $ 100 $ - $ 3,262
FHLMC mortgage-backed
securities 3,370 33 (5) 3,398
FNMA mortgage-backed
securities 6,183 97 (1) 6,279
--------- ---------- ---------- ---------
$ 12,715 $ 230 $ (6) $ 12,939
========= ========== ========== =========
March 31, 1998
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
========= ========== ========== =========
The real estate mortgage investment conduits consist of FHLMC and Federal
National Mortgage Association ("FNMA") securities.
64
<PAGE>
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
March 31, 1999 Cost Fair Value
--------- ----------
Due in one year or less $ 191 $ 192
Due after one year through five years 483 484
Due after five years through ten years 5,568 5,637
Due after ten years 6,473 6,626
--------- ----------
$ 12,715 $ 12,939
========= ==========
There were no sales of mortgage-backed securities held to maturity during the
years ended March 31, 1999, 1998 and 1997.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 1999 Cost Gains Losses Value
--------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 50,002 $ 34 $ (534) $ 49,502
FHLMC mortgage-backed
securities 686 15 - 701
FNMA mortgage-backed
securities 3,120 49 - 3,169
--------- ---------- ---------- ---------
$ 53,808 $ 98 $ (534) $ 53,372
========= ========== ========== =========
March 31, 1998
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
========= ========== ========== =========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 1999 Cost Fair Value
--------- ----------
Due after five years through ten years $ 5,062 $ 5,139
Due after ten years 48,746 48,233
--------- ----------
$ 53,808 $ 53,372
======== ==========
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 $386,000
and $522,000 and a fair value of $388,000 and $523,000 at March 31, 1999 and
1998, respectively, were pledged as collateral for public funds held by the
Bank.
65
<PAGE>
5. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
March 31,
--------------------------
1999 1998
Residential: ---------- ----------
One to four family $ 82,934 $ 94,795
Multi-family 7,558 4,790
Construction:
One to four family 45,524 35,003
Multi-family 4,209 5,352
Commercial real estate 6,184 -
Commercial 8,676 1,992
Consumer:
Secured 12,691 13,638
Unsecured 2,769 2,470
Land 24,932 16,431
Non-residential 17,554 9,407
---------- ----------
213,031 183,878
Less:
Undisbursed portion of loans 22,278 19,354
Deferred loan fees 2,770 2,340
Allowance for loan losses 1,146 984
Unearned discounts 1 2
---------- ----------
Loans receivable, net $ 186,836 $ 161,198
========== ==========
The Bank originates residential real estate loans and, to a lesser extent,
commercial and multi-family real estate and consumer loans. Approximately
99.8% 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.
Loans, by maturity or repricing date, were as follows (in thousands):
March 31,
--------------------------
1999 1998
---------- ----------
Adjustable rate loans:
Within one year $ 93,883 $ 90,571
After one but within five years 400 629
---------- ----------
94,283 91,200
Fixed rate loans: ---------- ----------
Within one year 20,788 20,572
After one but within five years 35,287 24,973
After five but within ten years 36,994 14,280
After ten years 25,679 32,853
---------- ----------
118,748 92,678
---------- ----------
$ 213,031 $ 183,878
========== ==========
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 $84,631,000, $87,410,000 and
$98,751,000 as of March 31, 1999, 1998 and 1997. These loan balances are not
included in the consolidated balance sheets as they are not assets of the
Bank.
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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,
--------------------------
1999 1998
---------- ----------
Beginning balance $ 538 $ 521
Originations 560 137
Principal repayments (357) (120)
---------- ----------
Ending balance $ 741 $ 538
========== ==========
6. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowances for loan losses is as follows (in
thousands):
Year Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Beginning balance $ 984 $ 831 $ 653
Provision for losses 240 180 180
Write-offs (85) (38) (11)
Recoveries 7 11 9
-------- -------- --------
Ending balance $ 1,146 $ 984 $ 831
======== ======== ========
At March 31, 1999 and 1998, 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 $1,300,000 and $506,000, 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 $953,000, $343,000 and $326,000
during the years ended March 31, 1999, 1998 and 1997, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
Year Ended March 31,
--------------------------
1999 1998
---------- ----------
Land $ 1,399 $ 1,399
Buildings and improvements 4,730 3,751
Furniture and equipment 3,702 2,811
Subtotal 9,831 7,961
Less accumulated depreciation (3,646) (3,159)
---------- ----------
Total $ 6,185 $ 4,802
========== ===========
Depreciation expense was $656,000, $583,000 and $464,000 for years ended March
31, 1999, 1998, and 1997, respectively.
67
<PAGE>
8. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands):
Average Average
Interest March 31, Interest March 31,
Account Type Rate 1999 Rate 1998
- ------------ -------- ---------- -------- ----------
NOW Accounts:
Non-interest-bearing 0.00 % $ 10,419 0.00 % $ 9,433
Regular 1.50 20,785 1.50 19,296
Maxi 1.75 2,509 1.75 1,299
Money market 3.95 25,222 3.75 18,941
Savings accounts 2.75 21,301 2.75 19,929
Certificates of deposit 5.29 120,075 5.70 110,927
---------- ----------
Total $ 200,311 $ 179,825
========== ==========
Weighted average interest
rate 4.14 % 4.39 %
==== ====
Certificates of deposit as of March 31, 1999, mature as follows (in
thousands):
Amount
-----------
Less than one year $ 93,455
One year to two years 16,512
Two years to three years 4,087
Three years to four years 2,911
Four years to five years 2,531
After five years 579
-----------
Total $ 120,075
===========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation.
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
------------------------------------
1999 1998 1997
-------- -------- --------
NOW Accounts:
Regular $ 281 $ 261 $ 234
Maxi 28 26 29
Money market accounts 790 649 588
Savings accounts 560 553 588
Certificates of deposit 6,445 5,949 5,595
-------- -------- --------
Total $ 8,104 $ 7,438 $ 7,034
========= ======== ========
9. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 1999, advances from the Federal Home Loan Bank ("FHLB") totaled
$42,550,000, of which $37,550,000 had fixed interest rates ranging from 4.490%
to 8.026% with a weighted average interest rate of 4.853%. The remaining
$5,000,000 adjustable rate advances had a weighted average interest rate of
4.965%, 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 Advance Rate.
At March 31, 1999, the Bank had additional borrowing commitments available of
$61.4 million from the FHLB.
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<PAGE>
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: 2000 - $7,000,000; 2001 - $5,550,000; and
2004 - $30,000,000.
10. FEDERAL INCOME TAXES
Federal income tax provisions for the years ended March 31 consisted of the
following (in thousands):
1999 1998 1997
--------- --------- ---------
Current $ 2,571 $ 2,071 $ 1,035
Deferred (266) - -
--------- --------- ---------
Total $ 2,305 $ 2,071 $ 1,035
========= ========= =========
A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the years ended March 31 is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 34.0% 34.0 % 34.0 %
Unqualified disposition of
incentive stock options - (4.7) -
ESOP market value adjustment 0.3 3.1 2.1
Interest income on municipal securities (0.2) - -
Other, net - 2.1 (2.1)
---- ---- ----
Effective federal income tax rate 34.1% 34.5 % 34.0%
==== ==== ====
Taxes related to gains on sales of securities were $13,000, $64,000, and
$13,000 for the years ended March 31, 1999, 1998, and 1997, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 1999 and 1998
are as follows (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Deferred compensation $ 301 $ 262
Loan loss reserve 390 335
Core deposit intangible 181 144
Accrued expenses 53 53
Accumulated depreciation 63 48
Net unrealized loss on securities
available for sale 308 -
-------- --------
Total deferred tax asset 1,296 842
Deferred tax liabilities: -------- --------
FHLB stock dividend (459) (400)
Tax qualified loan loss reserve (235) (282)
Net unrealized gain on securities
available for sale - (62)
Other (109) (241)
-------- --------
Total deferred tax liability (803) (985)
-------- --------
Deferred tax asset (liability), net $ 493 $ (143)
======== ========
69
<PAGE>
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 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 1998 and 1997 taxable years and
recaptured $47,000 in the 1999 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, 1999. The Company files a
consolidated federal income tax return.
No valuation allowance for deferred tax assets was deemed necessary at March
31, 1999 or 1998 based on the Company's anticipated future ability to generate
taxable income from operations.
11. EMPLOYEE BENEFITS 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 IRC. 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, 1999, 1998,
and 1997 were $41,000, $36,000, and $52,000, 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 8.30%, 7.63%, and 7.90% for the
years ended March 31, 1999, 1998, and 1997, respectively. The estimated
liability under the plan is accrued as earned by the participant. At March 31,
1999 and 1998, the Company's aggregate liability under the plan was $884,000
and $772,000, 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 $149,000, $145,000, and $140,000 in bonuses during the years
ended March 31, 1999, 1998, and 1997, respectively. Accrued bonuses were
$180,000 and $145,000 at March 31, 1999 and 1998.
Management Recognition and Development Plan ("MRDP") - On July 23, 1998,
shareholders of the Company approved the adoption of the MRDP for the benefit
of officers, employees and non-employee directors of the Company.
The objective of the MRDP is to retain personnel of experience and ability in
key positions by providing them with a proprietary interest in the Company.
The Company reserved 142,830 shares of common stock to be issued under the
MRDP which may be either authorized but unissued shares, or shares held by
the Company in its treasury. Awards under the MDRP were made in the form of
restricted shares of common stock that are subject to restrictions on transfer
of ownership. Compensation expense in the amount of the fair value of the
common stock at the date of the grant to the plan participant will be
recognized over a 5 year vesting period, with 20% vesting immediately upon
grant. On October 1, 1998 the number of restricted shares granted under the
MRDP were 99,980 shares to executive officers and 42,850 shares to non-
employee directors. Compensation expense of $589,000 for the year March 31,
1999 was recognized.
Stock Option Plans In October 1993, the Board of Directors approved a Stock
Option and Incentive Plan ("1993 Plan") for officers, directors, and key
employees, which authorizes the grant of stock options. The maximum number of
shares of common stock of the Company which may be issued under the 1993 Plan
is 244,539 shares. All options granted under this plan are immediately
exercisable and expire October 22, 2003.
70
<PAGE>
In July 1998, shareholders of the Company approved the adoption of the 1998
Stock Option Plan ("1998 Plan") which authorizes the grant of stock options.
The 1998 Plan was effective October 1, 1998 and the plan will expire on the
tenth anniversary of the effective date, unless terminated sooner by the
board. The maximum number of shares of common stock of the Company which may
be issued under the 1998 plan is 357,075 shares. Options granted under the
1998 plan are exercisable at the discretion of the Board. On October 1,
1998, under the 1998 Plan, 257,962 shares were granted to executive officers,
non-employee directors and employees.
Stock option activity, which includes the impact of stock dividends, is
summarized in the following table:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding April 1, 1996 202,228 $ 2.96
Grants 13,947 6.02
Options exercised (4,184) 2.82
--------- --------
Outstanding March 31, 1997 211,991 3.16
Grants 17,044 8.43
Forfeited (2,788) 5.83
Options exercised (26,578) 3.45
--------- --------
Outstanding March 31, 1998 199,669 3.54
Grants 278,962 13.64
Forfeited (3,000) 13.75
Options exercised (39,777) 3.56
--------- --------
Outstanding March 31, 1999 435,854 $ 9.93
========= ========
Additional information regarding options outstanding as of March 31, 1999 is
as follows:
Options Outstanding Options Exercisable
------------------------ ---------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Contractual Number Exercise Number Exercise
Exercise Price Life (years) Outstanding Price Exercisable Price
- -------------- ------------ ----------- -------- ----------- --------
$2.82 to $4.48 4.58 143,055 $ 3.00 143,055 $ 3.00
6.32 to 8.43 4.58 16,837 8.08 16,837 8.08
12.00 to 13.75 9.50 275,962 13.64 55,192 13.64
---- ------- ------- ------- -------
7.70 435,854 $ 9.93 215,084 $ 6.13
==== ======= ======= ======= =======
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 the 1993 Plan and 1998 Plan.
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:
71
<PAGE>
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- --------- ---------- ---------
Fiscal 1999 4.68 % 6.00 40.75 % 1.29 %
Fiscal 1998 6.85 5.58 34.24 1.45
Fiscal 1997 6.85 6.58 25.03 2.46
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 1999, 1998 and 1997 awards was $5.61, $3.25 and $2.05,
respectively. If the accounting provisions of the SFAS No. 123 had been
adopted as of the beginning of fiscal 1996, the effect on 1999, 1998 and 1997
net income would have been reduced to the following pro forma amounts:
Year ended March 31,
-------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income:
As reported $4,463,000 $3,924,000 $2,008,000
Pro forma 4,267,000 3,893,000 1,989,000
Earnings per common share basic:
As reported $0.78 $0.66 $0.33
Pro forma 0.75 0.66 0.33
Earnings per common share fully diluted:
As reported $0.76 $0.65 $0.33
Pro forma 0.73 0.64 0.33
For the year ended March 31, 1999, options to purchase 257,962 shares of
common stock (of which 254,962 remained unexercised at March 31, 1999) were
not included in the computation of diluted EPS because to do so would have
been antidilutive.
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. ESOP compensation expense included in salaries and benefits was
$302,000, $437,000 and $173,000 for years ended March 31, 1999, 1998 and 1997,
respectively.
In conjunction with the Conversion and Reorganization, the Company purchased
an additional 285,660 shares equal to eight percent of the total number of
shares issued in the offering, for future allocation to eligible participants.
ESOP share activity is summarized in the following table:
Unreleased Allocated
ESOP and Released
Shares Shares Total
---------- ------------ -------
Balance, April 1, 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
Allocation December 31, 1998 (24,632) 24,632 -
------- ------- -------
Balance, March 31, 1999 320,238 161,056 481,294
======= ======= =======
72
<PAGE>
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, 1999 or
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, 1999 or
1998.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk, weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, of core capital to total assets, and tangible
capital to tangible assets (set forth in the table below). Management believes
the Bank meets all capital adequacy requirements to which it is subject as of
March 31, 1999.
As of March 31, 1999, 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.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
Categorized
as "Well
For Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
--------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
March 31, 1999 ------ ----- ------ ----- ------ -----
Total Capital:
(To Risk Weighted Assets) $ 47,145 28.6% $ 13,213 8.0% $ 16,516 10.0%
Tier I Capital:
(To Risk Weighted Assets) 46,470 28.1 N/A N/A 9,909 6.0
Core Capital:
(To Total Assets) 46,470 15.7 8,861 3.0 14,768 5.0
Tangible Capital:
(To Tangible Assets) 46,470 15.7 4,430 1.5 N/A N/A
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
73
<PAGE>
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at March 31, 1999 (in thousands):
Equity $ 47,826
Net unrealized securities loss 320
Core deposit intangible (1,676)
-----------
Tangible capital 46,470
Land held for development (471)
General valuation allowance 1,146
-----------
Total capital $ 47,145
===========
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 1999 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 1999 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 was 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.
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 committed to be released.
Years Ended March 31,
---------------------------------------
1999 1998 1997
Basic EPS computation: ----------- ----------- -----------
Numerator-Net Income $ 4,463,000 $ 3,924,000 $ 2,008,000
Denominator-Weighted average
common shares outstanding 5,705,697 5,918,973 6,027,491
Basic EPS $ 0.78 $ 0.66 $ 0.33
Diluted EPS computation: =========== =========== ===========
Numerator-Net Income $ 4,463,000 $ 3,924,000 $ 2,008,000
Denominator-Weighted average
common shares outstanding 5,705,697 5,918,973 6,027,491
Effect of dilutive stock options 128,045 141,341 83,712
Effect of dilutive MRDP 3,258 - -
Weighted average common shares ----------- ----------- -----------
and common stock equivalents 5,837,000 6,060,314 6,111,203
Diluted EPS $ 0.76 $ 0.65 $ 0.33
=========== =========== ===========
74
<PAGE>
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,
1999 and 1998 (in thousands):
1999 1998
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Assets:
Cash $ 17,207 $ 17,207 $ 27,482 $ 27,482
Investment securities held to
maturity 4,943 4,980 8,336 8,394
Investment securities available
for sale 13,280 13,280 9,977 9,977
Mortgage-backed securities
held to maturity 12,715 12,939 20,341 20,758
Mortgage-backed securities
available for sale 53,372 53,372 32,690 32,690
Loans receivable, net 186,836 189,157 161,198 163,131
Loans held for sale 341 341 1,430 1,430
FHLB stock 2,614 2,614 1,966 1,966
Liabilities:
Demand deposits 80,236 80,236 68,898 68,898
Time deposits 120,075 120,158 110,927 111,004
FHLB advances - short-term 7,000 6,988 17,000 17,062
FHLB advances - long-term 35,550 35,492 12,550 12,627
Fair value estimates, methods, and assumptions are set forth below.
Investments and Mortgage-Backed Securities - Fair values were based on quoted
market rates and dealer quotes.
Loans Receivable - Loans were priced using a discounted cash flow method. The
discount rate used was the rate currently offered on similar products, risk
adjusted for credit concerns or dissimilar characteristics.
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 time deposits with no stated maturity such as
non-interest-bearing demand deposits, savings, NOW accounts, and money market
and checking accounts was equal to the amount payable on demand. The fair
value of time deposits with stated maturity was based on the discounted value
of contractual cash flows. The discount rate was estimated using rates
currently available in the local market.
Federal Home Loan Bank Advances - The fair value for FHLB advances was based
on the discounted cash flow method. The discount rate was estimated using
rates currently available from the FHLB.
Off-Balance Sheet Financial Instruments - The estimated fair value of loan
commitments approximates fees recorded associated with such commitments as of
March 31, 1999 and 1998.
Other - The carrying value of other financial instruments was determined to be
a reasonable estimate of their fair value.
75
<PAGE>
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 1999 and 1998.
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.
16. COMMITMENTS AND CONTINGENCIES
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, 1999, the Bank had commitments to originate fixed rate mortgage
loans of $9.7 million at interest rates ranging from 6.50% to 9.75%. At March
31, 1999, adjustable rate mortgage loan commitments were $3.6 million at
interest rates ranging from 8.75% to 9.75%. Collateral is not required to
support commitments. Consumer loan commitments totaled $9.1 million at March
31, 1999.
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operation, or
liquidity.
17. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
MARCH 31, 1999 AND 1998
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of
$2,774 and $8,374) $ 2,792 $ 8,374
Investment securities available for sale, at
fair value (amortized cost of $3,356 and $4,000) 2,934 3,991
Loan receivable from the Bank 2,710 2,822
Investment in the Bank 47,826 46,197
Other assets 1,069 146
--------- ---------
TOTAL ASSETS $ 57,331 $ 61,530
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 464 $ 448
Shareholders' equity 56,867 61,082
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,331 $ 61,530
========= =========
76
<PAGE>
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1999 AND 1998
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
INCOME:
Interest on investment securities and other
short-term investments $ 532 $ 332
Interest on loan receivable from the Bank 237 127
Gain on sale of securities - 151
--------- ---------
Total income 769 610
--------- ---------
EXPENSE:
Management service fees paid to the Bank 40 40
Other expenses 139 -
--------- ---------
Total expense 179 40
--------- ---------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK 590 570
PROVISION FOR FEDERAL INCOME TAXES 201 197
--------- ---------
INCOME OF PARENT COMPANY 389 373
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 4,074 3,551
--------- ---------
NET INCOME $ 4,463 $ 3,924
========= =========
77
<PAGE>
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1999 AND 1998
(In thousands) 1999 1998
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,463 $ 3,924
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of the Bank (4,074) (3,551)
Earned ESOP shares 302 -
Earned MRDP shares 393 -
Net gain on investment securities available for sale - (151)
Changes in assets and liabilities:
Increase in other assets (782) (146)
(Decrease) increase in accrued expenses and
other liabilities (97) 448
--------- ---------
Net cash provided by operating activities 205 524
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to the Bank - (17,222)
Dividend received from the Bank 2,000 -
Proceeds from call, maturity, or sale of investment
securities available for sale 2,000 6,165
Purchase of investment securities available for sale (1,356) (10,014)
Funding provided to the Bank for the purchase of
common stock for ESOP - (3,108)
Principal repayment on loan receivable from the Bank 112 286
--------- ---------
Net cash provided by (used in) investing
activities 2,756 (23,893)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,244) (184)
Stock purchased for ESOP - (2,856)
Treasury stock acquired (5,461) -
Stock acquired for MRDP (1,979) -
Proceeds from issuance of common stock, net of
related costs - 34,724
Proceeds from exercise of stock options 141 59
--------- ---------
Net cash (used in) provided by financing
activities (8,543) 31,743
--------- ---------
NET (DECREASE) INCREASE IN CASH (5,582) 8,374
CASH, BEGINNING OF YEAR 8,374 -
--------- ---------
CASH, END OF YEAR $ 2,792 $ 8,374
========= =========
78
<PAGE>
18. RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except share data) Three Months Ended
- ------------------------------------------------------------------------------
March 31 December 31 September 30 June 30
-------- ----------- ------------ -------
1999:
Interest income $ 5,743 $ 6,153 $ 5,596 $ 5,622
Interest expense 2,611 2,634 2,348 2,332
Net interest income 3,132 3,519 3,248 3,290
Provision for loan
losses 60 60 60 60
Non-interest income 675 818 699 682
Non-interest expense 2,456 2,616 2,066 1,917
Income before income
taxes 1,291 1,661 1,821 1,995
Provision for income
taxes 306 606 655 738
-------- ----------- ------------ -------
Net income $ 985 $ 1,055 $ 1,166 $ 1,257
======== =========== ============ =======
Basic earnings per
share (1) $ 0.18 $ 0.19 $ 0.20 $ 0.22
======== =========== ============ =======
Diluted earnings per
share(1) $ 0.17 $ 0.18 $ 0.19 $ 0.21
======== =========== ============ =======
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
Non-interest income 841 579 591 469
Non-interest 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 $ 0.23 $ 0.19 $ 0.12 $ 0.12
======== =========== ============ =======
Diluted earnings per
share $ 0.23 $ 0.18 $ 0.12 $ 0.12
======== =========== ============ =======
(1) Quarterly earnings per share varies from annual earnings per share due to
rounding.
79
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I -
Election of Directors" contained in the Company's Proxy Statement, and "Part I
- -- Business -- Personnel -- Executive Officers" of this report, is
incorporated herein by reference. Reference is made to the cover page of this
report for information regarding compliance with Section 16(a) of the Exchange
Act.
Item 11. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation," "Directors' Compensation" and "Benefits" under "Proposal I -
Election of Directors" 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 "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy
Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of
Directors" and "Security Ownership of Certain Beneficial owners
and Management" in 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.
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I - Election of Directors" and
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the section captioned "Proposal I -
Election of Directors - Certain Transactions with the Bank" in the Proxy
Statement is incorporated herein by reference.
80
<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
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K: No Forms 8-K were filed during the quarter
ended March 31, 1999.
- ------------------
* 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.
*** Filed as an exhibit to the Registrant's Form 10-K for the year ended March
31, 1999, and incorporated herein by reference.
81
<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: June 25, 1999 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: June 25, 1999 Date: June 25, 1999
By: /s/ Robert K. Leick By: /s/ Paul L. Runyan
-------------------------- --------------------------------------
Robert K. Leick Paul L. Runyan
Director Director
Date: June 25, 1999 Date: June 25, 1999
By: /s/ Roger Malfait By: /s/ Dale E. Scarbrough
-------------------------- --------------------------------------
Roger Malfait Dale E. Scarbrough
Director Director
Date: June 25, 1999 Date: June 25, 1999
By: /s/ Gary R. Douglass
--------------------------
Gary R. Douglass
Director
Date: June 25, 1999
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
Riverview Bancorp, Inc.
Subsidiaries (a) Percentage Owned State of Incorporation
- ---------------- ---------------- ----------------------
Riverview Community Bank 100% United States
Riverview Services, Inc. 100% Washington
Riverview Asset Management Corp. 90% Washington
- ----------------
(a) The operation of the Registrant's wholly and majority owned subsidiaries
are included in the Registrant's Financial Statements contained in Item 8
of this Form 10-K.
<PAGE>
Exhibit 23
Consent of Independent Auditors
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-66049 of Riverview Bancorp, Inc., on Form S-8, of our report dated May 14,
1999, appearing in the Annual Report on Form 10-K of Riverview Bancorp, Inc.
for the year ended March 31, 1999.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 25, 1999
<PAGE>
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<PERIOD-END> MAR-31-1999
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<COMMON> 62
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