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, 2000
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
30, 2000, was approximately $41,671,000 (4,902,503 shares at $8.50 per share).
It is assumed for purposes of this calculation that none of the Registrant's
officers, directors and 5% stockholders (including the Riverview Bancorp
Employee Stock Ownership Plan) are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 2000
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, 2000, the
Company had total assets of $344.7 million, total deposits of $232.4 million
and shareholders' equity of $48.5 million. All references to the Company
herein include the Bank where applicable.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Bank's deposits are insured by the FDIC up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since
1937.
The Bank is a community oriented financial institution offering traditional
financial services to the residents of its primary market area. The Company
considers Clark, Cowlitz, Klickitat and Skamania Counties of Washington as its
primary market area. The Company is engaged primarily in the business of
attracting deposits from the general public and using such funds 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 Company is also an active originator of residential construction
loans, business loans and consumer loans.
Market Area
The Company conducts operations from its home office in Camas and eleven
branch offices in Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (five branch offices) and Longview, Washington with a
new Washougal facility to replace the existing Washougal facility planned for
first quarter of fiscal year 2000. The Company's market area for lending and
deposit taking activities encompasses Clark, Cowlitz, Skamania and Klickitat
Counties, throughout the Columbia River Gorge area. The Company operates a
trust and financial services company, Riverview Asset Management Corporation,
located in downtown Vancouver, Washington. Riverview Mortgage, a mortgage
broker division of the Company originates mortgage loans (including
construction loans) for various mortgage companies predominantly in Portland
and Seattle metropolitan areas, as well as for the Company. The Business and
Professional Banking Division located at the downtown Vancouver main branch
offers commercial and business banking services. 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 Company faces strong competition from many financial institutions for
deposits and loan originations.
2
<PAGE>
Lending Activities
General. At March 31, 2000, the Company's total net loans receivable amounted
to $249.0 million, or 72.3% of total assets at that date. The principal
lending activity of the Company is the origination of residential mortgage
loans through its mortgage banking activities, including residential
construction loans, though the Company has originated loans collateralized by
commercial properties. While the Company has historically emphasized real
estate mortgage loans secured by one to four residential real estate, it has
been diversifying its loan portfolio by focusing on increasing the number of
originations of commercial business ("commercial"), commercial real estate
and consumer loans. A substantial portion of the Company's loan portfolio is
secured by real estate, either as primary or secondary collateral, located in
its primary market area.
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated
<TABLE>
At March 31,
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2000 1999 1998 1997 1996
--------------- ---------------- ----------------- ----------------- ----------------
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) $102,542 37.61% $ 83,275 39.03% $ 96,225 51.93% $ 94,536 57.07% $ 88,140 63.23%
Multi-
family 10,921 4.01 7,558 3.54 4,790 2.58 5,439 3.28 2,958 2.12
Construc-
tion one-
to- four
family 49,338 18.10 45,524 21.34 35,003 18.89 32,529 19.64 22,596 16.21
Construc-
tion
multi-
family 4,669 1.71 4,209 1.97 5,352 2.89 547 0.33 361 0.26
Construc-
tion
commer-
cial 3,597 1.32 6,184 2.90 - - 634 0.38 500 0.36
Land 25,475 9.34 24,932 11.68 16,431 8.87 7,900 4.77 7,546 5.41
Commercial
real
estate 42,871 15.72 22,181 10.40 9,667 5.22 8,997 5.43 6,518 4.68
Total -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
real
estate
loans 239,413 87.81 193,863 90.86 167,468 90.38 150,582 90.90 128,619 92.27
Commercial 15,976 5.87 4,049 1.90 1,732 0.93 794 0.48 969 0.70
Consumer
loans:
Automobile
loans 2,875 1.05 3,146 1.47 2,829 1.53 2,889 1.74 2,384 1.71
Savings
account
loans 356 0.13 490 0.23 653 0.35 734 0.44 613 0.44
Home equity
loans 11,148 4.09 9,096 4.26 9,885 5.33 8,254 4.98 5,107 3.66
Other
consumer
loans 2,864 1.05 2,728 1.28 2,741 1.48 2,416 1.46 1,695 1.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total
consumer
loans 17,243 6.32 15,460 7.24 16,108 8.69 14,293 8.62 9,799 7.03
Total loans
and loans
held for
sale 272,632 100.00% 213,372 100.00% 185,308 100.00% 165,669 100.00% 139,387 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed
loans in
process 18,880 22,278 19,354 11,087 8,876
Unamortized
loan
origination
fees, net
of direct
costs 3,355 2,770 2,340 1,967 1,678
Unearned
discounts 1 1 2 10 11
Allowance for
possible
loan
losses 1,362 1,146 984 831 653
-------- -------- -------- -------- --------
Total
loans
receivable,
net(1) $249,034 $187,177 $162,628 $151,774 $128,169
======== ======== ======== ======== ========
3
</TABLE>
<PAGE>
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(1) Includes loans held for sale of none, $341,000, $1.4 million, $80,000
and $1.9 million at March 31, 2000, 1999, 1998, 1997 and 1996,
respectively.
One- to- Four Family Real Estate Lending. Historically, the Company's primary
lending activity has been the origination of mortgage loans to enable
borrowers to purchase one- to- four family properties. At March 31, 2000,
approximately $102.5 million, or 37.6% of total 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
$151.9 million, or 55.7% of total loans receivable, at March 31, 2000.
In addition to originating one- to- four family loans for its portfolio, the
Company is an active mortgage broker for several third party mortgage lenders.
In recent periods, such mortgage brokerage activities have reduced the volume
of fixed-rate one- to- four family loans that are originated and sold by the
Company. See "-- Lending Activities -- Loan Originations, Sales and Purchases"
and "-- Lending Activities -- Mortgage Brokerage."
The Company 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 Company 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 Company 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 Company offers ARM loans at rates and terms competitive with market
conditions. At March 31, 2000, $20.4 million, or 7.5%, of the Company's 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, 2000, the Company 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 7.250% to 7.875% 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 Company does not originate negative
amortization loans.
As a marketing incentive, the Company offers ARM loans with a discounted or
"teaser" rate of up to 1.75% below the normal rate offered. The borrower,
however, is qualified at the fully indexed rate. Annual and lifetime interest
rate caps are based on the initial discounted rate. "Teaser" rate loans are
subject to a prepayment penalty during the first three years of the loan term
if the borrower repays more than 20% of the outstanding principal balance per
year. During the first year, the penalty is 3% of the outstanding principal
balance; during year two, the penalty is 2% of the outstanding principal
balance; and during year three, the penalty is 1% of the outstanding principal
balance.
4
<PAGE>
The retention of ARM loans in the portfolio helps reduce the Company's
exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs arising from
changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Furthermore,
because "teaser" rate loans originated by the Company generally provide for
initial rates of interest below the rates which would apply were the
adjustment index used for pricing initially (discounting), these loans are
subject to increased risks of default of delinquency. Another consideration
is that although ARM loans allow the Company to increase the sensitivity of
its asset base to changes in interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. Because of these considerations, the Company has no assurance that
yields on ARM loans will be sufficient to offset increases in its cost of
funds.
While one- to- four family residential real estate loans typically are
originated with 30-year terms and the Company permits its ARM loans to be
assumed by qualified borrowers, such loans generally remain outstanding for
substantially shorter periods because borrowers often prepay their loans in
full upon sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all of the fixed interest rate
loans in the Company's loan portfolio contain due-on-sale clauses providing
that the Company may declare the unpaid amount due and payable upon the sale
of the property securing the loan. The Company enforces these due-on-sale
clauses to the extent permitted by law. Thus, average loan maturity is a
function of, among other factors, the level of purchase and sale activity in
the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Company requires title insurance insuring the status of its lien on all of
the real estate secured loans and also requires that the fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance and
the replacement cost of the improvements. Where the value of the unimproved
real estate exceeds the amount of the loan on the real estate, the Company may
make exceptions to its property insurance requirements.
The Company generally does not make conventional mortgage 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 Company 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 and increased
residential housing demand in its primary market area, the Company actively
originates three types of residential construction loans: (i) speculative
construction loans, (ii) custom construction loans and (iii)
construction/permanent loans. Subject to market conditions, the Company
intends to increase its residential construction lending activities. To a
substantially lesser extent, the Company also originates construction loans
for the development of multi-family and commercial properties.
5
<PAGE>
The composition of the Company's construction loan portfolio was as follows:
At March 31,
-----------------------------------------
2000 1999
------------------ ------------------
Amount(1) Percent Amount(1) Percent
--------- ------- --------- -------
(Dollars in thousands)
Speculative construction $24,855 33.88% $25,441 35.25%
Commercial construction 3,597 4.90 6,184 8.57
Custom construction 9,732 13.26 6,694 9.28
Construction/permanent 17,754 24.19 17,335 24.02
Construction/land 17,443 23.77 16,518 22.88
------- ------ ------- ------
Total $73,381 100.00% $72,172 100.00%
======= ====== ======= ======
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(1) Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Company or another lender for the finished
home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. The Company
lends to approximately 70 local builders, many of whom may have only one or
two speculative loans outstanding from the Company. The Company 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 Company 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, 2000, the Company had one borrower with aggregate outstanding speculative
loan balances of more than $1.0 million which was performing according to
terms and amounted to $1.2 million.
Unlike speculative construction loans, custom construction loans are made to
home builders who, at the time of construction, have a signed contract with a
home buyer who has a commitment for permanent financing for the finished home
with the Company or another lender. Custom construction loans are generally
originated for a term of 12 months, with fixed interest rates ranging from
7.625% to 8.500%, 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, 2000, the largest short-term custom construction loan had an
outstanding balance of $474,000 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 Company 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 7.625%
to 8.500%, 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 Company 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 Company issues a commitment to provide permanent
financing upon completion of construction, the interest rate charged on the
construction loan is 0.25% to 1.25% higher as a protection against the risk of
an increase in interest rates before the permanent loan is funded.
6
<PAGE>
This additional interest rate spread may not completely protect the Company
from rapidly rising interest rates. See "-- Lending Activities -- Loan
Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage Loan
Servicing." At March 31, 2000, the largest outstanding construction/permanent
loan had an outstanding balance of $413,000 and was performing according to
its terms.
The Company also provides construction financing for non-residential
properties (i.e., construction multi-family and construction commercial
properties). The Company has increased its commercial lending resources with
the intent of increasing the amount of commercial real estate loan balances
such as construction commercial and construction multi-family loans. At March
31, 2000, construction commercial loans totaled $3.6 million and construction
multi-family loans totaled $4.7 million. The largest outstanding
construction commercial loan had an outstanding balance of $1.8 million and
was performing according to its terms. The largest outstanding construction
multi-family loan had a balance of $2.6 million and was performing according
to its terms.
All construction loans must be approved by the Company'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 Company 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 Company 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 Company requires that the
borrower increase the loan amount or deposit their own funds into a
loans-in-process account and the Company 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 Company
personnel. At inception, the Company 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 Company regularly monitors the
construction loan portfolio and the economic conditions and housing inventory.
Property inspections are performed by the Company's property inspector. The
Company believes that the internal monitoring system helps reduce many of the
risks inherent in its construction lending.
Construction lending affords the Company the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating
both a property's value at completion of the project and the estimated cost of
the project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, the Company may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value upon completion proves to be inaccurate, the Company may be
confronted with a project whose value is insufficient to assure full
repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the 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 Company has sought to address these risks by adhering to
strict underwriting policies, disbursement procedures, and monitoring
practices. In addition, because the Company's construction lending is in its
primary market area, changes in the local economy and real estate market could
adversely affect the Company's construction loan portfolio.
7
<PAGE>
Multi-Family Lending. At March 31, 2000, the Company had $10.9 million, or
4.0% of the Company's total loans receivable, secured by multi-family dwelling
units (more than four units) located primarily in the Company'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 or 25 year terms with five or ten year calls. Multi-family loans
generally range in principal balance from $200,000 to $400,000. At March 31,
2000, the largest multi-family loan had an outstanding principal balance of
$1.2 million and was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally 75%. The
Company requires its multi-family loan borrowers to submit financial
statements and rent rolls on the subject property annually. The Company also
inspects the subject property annually.
Multi-family mortgage lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by multi-family properties
are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in
the real estate market or the economy. The Company seeks to minimize these
risks by strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the
loan. The Company also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
Land Lending. The Company originates loans to local real estate developers
with whom it has established relationships for the purpose of developing
residential subdivisions (i.e., installing roads, sewers, water and other
utilities), as well as loans to individuals to purchase building lots. At
March 31, 2000, subdivision development loans totaled $14.1 million, or 5.2%
of total loans receivable, and building lot loans amounted to $2.0 million, or
1% of the total loans receivable. The land loan balance of $25.5 million
consisted of 173 land loans, six of which are each greater than $1.0 million
as compared to the March 31, 1999 land loan balance of $24.9 million, of which
five 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 Company is repaid in full upon the sale by the borrower of
approximately 90% of the subdivision lots. All of the Company's land loans
are secured by property located in its primary market area. In addition, the
Company also generally obtains personal guarantees from financially capable
parties based on a review of personal financial statements.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to- four family residential mortgage loans because such loans are
advanced upon the predicted future value of the developed property. If the
estimate of such future value proves to be inaccurate, in the event of default
and foreclosure, the Company may be confronted with a property the value of
which is insufficient to assure full repayment. The Company attempts to
minimize this risk by limiting the maximum loan-to-value ratio on land loans
to 65% of the estimated developed value of the secured property. Loans on raw
land may run the risk of adverse zoning changes, environmental or other
restrictions on future use. At March 31, 2000, the Company had a $26,000 land
loan accounted for on a non-accrual basis.
8
<PAGE>
Commercial Real Estate Lending. Commercial real estate loans totaled $42.9
million, or 15.72% of total loans receivable at March 31, 2000 as compared to
$22.2 million, or 10.40%. The growth in commercial real estate loan balances
reflects the increased emphasis the Company has placed on originating
commercial real estate loans. The Company has been able to increase the
balance of outstanding commercial real estate loans and commitments due to the
strong local economy, and the consolidation of some local competitors offering
commercial real estate loans. The Company has also hired several experienced
commercial bankers from competitors in the local market. The Company
originates commercial real estate loans at both variable and fixed interest
rates and secured by properties, such as office buildings, retail/wholesale
facilities and industrial buildings, located in its primary market area. The
principal balance of an average commercial real estate loan generally ranges
between $300,000 and $500,000. At March 31, 2000, the largest commercial real
estate loan had an outstanding balance of $3.6 million and is secured by an
office building located in the Company's primary market area. The loan was
performing according to its terms at March 31, 2000.
The Company requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent appraiser designated
by the Company, and are reviewed by management. The Company 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 Company generally imposes a debt coverage ratio of not less than 1.2 to 1
for originated loans secured by income producing properties. Loan-to-value
ratios on commercial real estate loans are generally limited to 75%. The
Company generally obtains loan guarantees from financially capable parties
based on a review of personal financial statements.
Commercial real estate lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy. The Company seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.
Commercial Lending. Commercial loans amounted to $16.0 million, or 5.88% of
total loans receivable at March 31, 2000 as compared to $4.0 million, or 1.90%
at March 31, 1999. The growth in commercial loan balances reflects the
increased emphasis the Company has placed on originating commercial loans. The
Company has been able to increase the balance of outstanding commercial loans
and commitments due to the strong local economy, and the consolidation of some
local competitors offering commercial loans. The Company has also hired
several experienced commercial bankers from competitors in the local market.
The Company underwrites its commercial loans on the basis of the borrower's
cash flow and the ability to service debt from earnings and the Company seeks
to structure such loans to have more than one source of repayment. The
decision to grant a commercial loan depends on the creditworthiness and the
cash flow of the borrower (and any guarantors), while liquidation of
collateral is a secondary source of repayment. Commercial loans are generally
made to customers who are well known to the Company and are generally secured
by business equipment or other property. Lines of credit are made at variable
rates of interest equal to a negotiated margin above the prime rate and term
loans are at a fixed rate. The Company also generally obtains personal
guarantees from financially capable parties based on a review of personal
financial statements.
The Company's commercial loans may be structured as term loans or as lines of
credit. Commercial term loans are generally made to finance the purchase of
assets and have maturities of five years or less. Commercial lines of
9
<PAGE>
credit are typically made for the purpose of providing working capital and
usually approved with a term of one year or less.
At March 31, 2000 the largest outstanding commercial loan balance to a
borrower was $2.1 million consisting of a term loan and a line of credit. The
loan was performing according to its terms at March 31, 2000. The average
size of outstanding loan balances is approximately $100,000 and the principal
amount of such loans generally are amounts of $300,000 or less.
Commercial lending involves greater risk than residential mortgage lending and
involves risks that are different from those associated with residential and
commercial real estate lending. Real estate lending is generally considered
to be collateral based lending with loan amounts based on predetermined loan
to collateral values and liquidation of the underlying real estate collateral
is viewed as the primary source of repayment in the event of borrower default.
Although commercial loans are often collateralized by equipment, inventory,
accounts receivable or other business assets including real estate, the
liquidation of collateral in the event of a borrower default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment. At March 31, 2000, the Company had one commercial loan accounted
for on a nonaccrual basis in the amount of $99,000.
Consumer Lending. The Company originates a variety of consumer loans,
including home equity lines of credit, home equity term loans, home
improvement loans, loans for debt consolidation and other purposes,
automobile, boat loans and savings account loans. At March 31, 2000,
consumer loans totaled $17.2 million, or 6.3% of total loans receivable.
Home equity lines of credit and home equity term loans are typically secured
by a second mortgage on the borrowers primary residence. At March 31, 2000,
the outstanding balance of home equity term loans was $1.6 million. At
March 31, 2000, approved home equity lines of credit totaled $16.0 million, of
which $9.6 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. Home equity lines of credit
have a variable interest rate while the home equity term loans have a fixed
rate of interest. The Company's procedures for underwriting consumer loans
include an assessment of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loans.
Although the applicant's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the security,
if any, to the proposed loan amount.
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as mobile homes, automobiles,
boats and recreational vehicles. In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for
the outstanding loan and the remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by the borrower against
the Company as the holder of the loan, and a borrower may be able to assert
claims and defenses which it has against the seller of the underlying
collateral.
Loan Maturity. The following table sets forth certain information at March
31, 2000 regarding the dollar amount of loans maturing in the Company's
portfolio based on their contractual terms to maturity, but does not include
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and
10
<PAGE>
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 $ - $ 5 $ 28 $ 412 $19,911 $20,356
Fixed rate 984 3,245 14,047 29,003 34,902 82,181
Construction:
Adjustable rate 30,315 20,342 - - - 50,657
Fixed rate 19,974 2,750 - - - 22,724
Other real estate:
Adjustable rate 4,314 585 272 671 4,694 10,536
Fixed rate 4,327 2,474 12,658 21,728 11,771 52,958
Commercial:
Adjustable rate 5,633 650 716 - - 6,999
Fixed rate 1,106 1,116 3,079 3,677 - 8,978
Consumer:
Adjustable rate 274 48 857 328 9,113 10,620
Fixed rate 1,211 1,319 2,265 1,156 672 6,623
------- ------- ------- ------- ------- --------
Total gross loans $68,138 $32,534 $33,922 $56,975 $81,063 $272,632
======= ======= ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due one year
after March 31, 2000 which have fixed interest rates and have floating or
adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates
----- ----------------
(In thousands)
Residential one- to- four family $ 81,197 $ 20,356
Construction loans 2,750 20,342
Other real estate loans 48,631 6,222
Commercial 7,872 1,366
Consumer 5,412 10,346
------- -------
Total $145,862 $58,632
======== =======
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of a loan is substantially less than
its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgage loans are substantially higher than current
mortgage loan market rates. Furthermore, management believes that a
significant number of the Company's residential mortgage loans are outstanding
for a period less than their contractual terms because of the transitory
nature of many of the borrowers who reside in its primary market area.
11
<PAGE>
Loan Solicitation and Processing. The Company's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management.
The customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers. The Company also uses commissioned loan
brokers and television and print advertising to market its products and
services.
Upon receipt of a loan application, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. A loan applicant's income is verified through the
applicant's employer or from the applicant's tax returns. In the case of a
real estate loan, an appraisal of the real estate intended to secure the
proposed loan is undertaken, generally by an independent appraiser approved by
the Company. The Company's residential mortgage loan documents conform to
FHLMC standards.
Residential mortgage loans of not more than $350,000 may be approved by the
Senior Vice President of Lending. Loans of more than $350,000 up to and
including $600,000 are approved by the Internal Loan Committee which requires
approval of any two members consisting of the Chief Executive Officer,
Executive Vice Presidents and designated Senior Vice Presidents. All loans in
excess of $600,000 must be approved by the Executive Loan Committee consisting
of the Chief Executive Officer and two other members of the Board of
Directors. All loans are subsequently ratified by the full Board of Directors.
The Company's policy requires borrowers to obtain certain types of insurance
to protect the Company's interest in the collateral securing the loan. The
Company requires either a title insurance policy insuring that the Company 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
Company requires escrows for insurance on all loans with a loan- to-value
exceeding 80%.
Loan Commitments. The Company issues commitments to originate residential
mortgage loans, commercial real estate mortgage loans, consumer loans, and
commercial loan commitments conditioned upon the occurrence of certain events.
The Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments. Commitments to extend credit are conditional,
generally 14-day agreements to lend to a customer subject to the Company's
usual terms and conditions. Collateral is not required to support
commitments.
At March 31, 2000, the Company had commitments to originate fixed rate
mortgage loans of $3.6 million at interest rates ranging from 7.625% to 11.0%.
At March 31, 2000, adjustable rate mortgage loan commitments were $160,000 at
an interest rate of 9.875%. Undisbursed balance of mortgage loans closed was
$18.9 million at March 31, 2000. Consumer loan commitments totaled $2.1
million and unused lines of consumer credit totaled $7.3 million at March 31,
2000. Commercial and commercial real estate loan commitments totaled $3.1
million and unused lines of commercial and commercial real estate credit
totaled $13.9 million at March 31, 2000.
Loan Originations, Sales and Purchases. While the Company 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, 2000 and 1999, the Company's total loan
originations were $156.8 million and $158.7 million, respectively, of which
47.6% and 43.5%, respectively, were subject to periodic interest rate
adjustment and 52.4% and 56.5% were fixed-rate loans, respectively.
The Company customarily sells the fixed-rate residential one- to- four family
mortgage loans that it originates with maturities of 15 years or more to the
FHLMC as part of its asset liability strategy. The sale of such loans allows
the Company to continue to make loans during periods when savings flows
decline or funds are not otherwise available for lending purposes; however,
the Company assumes an increased risk if such loans cannot be sold in a rising
interest rate environment. Changes in the level of interest rates and the
condition of the local and national
12
<PAGE>
economies affect the amount of loans originated by the Company and demanded by
investors to whom the loans are sold. Generally, the Company's residential
one- to- four family mortgage loan origination and sale activity and,
therefore, its results of operations, may be adversely affected by an
increasing interest rate environment to the extent such environment results in
decreased loan demand by borrowers and/or investors. Accordingly, the volume
of loan originations and the profitability of this activity can vary
significantly from period to period. Mortgage loans are sold to the FHLMC on
a nonrecourse basis whereby foreclosure losses are generally the
responsibility of the FHLMC and not the Company. The Company may originate
fixed rate loans for investment when funded with long-term funds to mitigate
interest rate risk.
Between the time that residential one- to- four family mortgage loan
origination commitments are issued and the time the loans are sold, the
Company is exposed to movements in the price (due to changes in interest
rates) of such loans (or of securities into which such loans are sometimes
converted). Differences between the volume or timing of actual loan
originations and in management's estimates or in actual sales of the loans can
expose the Company to significant losses. This activity is managed daily.
There can be no assurance that the Company will be successful in its efforts
to reduce the risk of interest rate fluctuation between the time of
origination of a mortgage loan and the time of the ultimate sale of the loan.
To the extent that the Company does not adequately manage its interest rate
risk, the Company may incur significant mark-to-market losses or losses
relating to the sale of such loans, adversely affecting financial condition
and results of operations.
The Company is not an active purchaser of loans and has not purchased loans in
the past three years.
The following table shows total loans originated, sold and repaid during the
periods indicated.
For the Years Ended March 31,
-----------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Total net loans receivable at beginning
of period $187,177 $162,628 $151,774
-------- -------- --------
Loans originated:
Mortgage loans:
Residential one- to- four family 20,609 43,947 29,748
Multi-family 490 - 139
Construction one- to- four family 67,955 68,649 49,391
Land and commercial real estate 48,057 36,355 20,737
Commercial 14,717 4,290 1,080
Consumer 5,004 5,410 4,232
-------- -------- --------
Total loans originated 156,832 158,651 105,327
Residential one- to- four family loans
sold (4,224) (25,809) (7,007)
Repayment of principal (88,179) (106,036) (88,263)
(Increase) decrease in other items, net (2,572) (2,257) 797
-------- -------- --------
Net increase in loans 61,857 24,549 10,854
-------- -------- --------
Total net loans receivable at end of period $249,034 $187,177 $162,628
======== ======== ========
Mortgage Brokerage. In addition to originating mortgage loans for retention
in its portfolio, the Company employs six 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 Company. The loans brokered to such mortgage companies are closed in the
name of and funded by the purchasing mortgage
13
<PAGE>
company and they are not originated as an asset of the Company. In return,
the Company 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 Company, they
are closed on the Company's books as if the Company had originated them and
the commissioned broker receives a fee of approximately 0.50% of the loan
amount. During the year ended March 31, 2000, brokered loans totaled $107.1
million (including $65.9 million brokered to the Company). Gross fees of $1.1
million (excluding the portion of fees shared with the commissioned brokers)
were recognized for the year ended March 31, 2000.
Mortgage Loan Servicing. The Company is a qualified servicer for the FHLMC.
The Company's general policy is to close its residential loans on the FHLMC
modified loan documents to facilitate future sales to the FHLMC. The Company
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 Company retains a portion of the interest paid by
the borrower on the loans as consideration for its servicing activities.
The Company generally retains the servicing rights on the fixed-rate mortgage
loans that it sells to the FHLMC. At March 31, 2000, total loans serviced for
others were $82.4 million.
In 1994, the Company purchased the servicing rights to an underlying portfolio
of residential mortgage loans secured by properties predominately located in
the Seattle Metropolitan Area. At March 31, 2000, the carrying value of these
purchased servicing rights was $218,000 and was being amortized over the life
of the underlying loan servicing.
Loan Origination and Other Fees. The Company generally receives loan
origination fees and discount "points." Loan fees and points are a percentage
of the principal amount of the loan that are charged to the borrower for
funding the loan. The Company 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 Company had $3.3 million of net deferred loan fees at March 31,
2000. The Company also receives loan servicing fees on the loans it sells and
on which it retains the servicing rights.
Delinquencies. The Company's collection procedures for all loans except
consumer loans provide for a series of contacts with delinquent borrowers. A
late charge delinquency notice is first sent to the borrower when the loan
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 Company generally initiates
foreclosure proceedings. In certain instances, however, the Company may
decide to modify the loan or grant a limited moratorium on loan payments to
enable 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 is 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.
14
<PAGE>
The following table sets forth information with respect to the Company's
nonperforming assets at the dates indicated. At the dates indicated, the
Company had no restructured loans within the meaning of SFAS No. 15.
At March 31,
---------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate $1,153 $1,052 $401 $ 76 $541
Commercial 99 208 105 - -
Consumer 26 33 - 11 7
------ ------ ---- ---- ----
Total 1,278 1,293 506 87 548
------ ------ ---- ---- ----
Accruing loans which are contractually
past due 90 days or more - 5 11 - -
------ ------ ---- ---- ----
Total of nonaccrual and
90 days past due loans 1,278 1,298 517 87 548
------ ------ ---- ---- ----
Real estate owned (net) 65 30 - 135 -
------ ------ ---- ---- ----
Total nonperforming assets $1,343 $1,328 $517 $222 $548
====== ====== ==== ==== ====
Total loans delinquent 90 days
or more to net loans 0.51% 0.69% 0.32% 0.06% 0.43%
Total loans delinquent 90 days or
more to total assets 0.37 0.43 0.19 0.04 0.26
Total nonperforming assets to
total assets 0.39 0.44 0.19 0.10 0.26
The $1.3 million nonaccrual balance of real estate loans at March 31, 2000,
consisted of $695,000 nonaccrual construction loans, $138,000 one- to- four
family residential loans, $320,000 lot loans and $125,000 commercial and
consumer loans. The gross amount of interest income on the nonaccrual loans
that would have been recorded during the year ended March 31, 2000 if the
nonaccrual loans had been current in accordance with their original terms was
approximately $80,000. For the year ended March 31, 2000, no interest was
earned on the nonaccrual loans and included in interest and fees on loan
receivable interest income.
Subsequent to March 31, 2000, one loan has paid in full and the remaining
loans have gone into or are pending foreclosure.
15
<PAGE>
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Company.
The aggregate amount of the Company's classified assets, general loss
allowances, specific loss allowances and charge-offs were as follows at the
dates indicated:
At or For the Year
Ended March 31,
------------------
2000 1999
---- ----
(In thousands)
Substandard assets $1,472 $1,757
Doubtful assets - 219
Loss assets - -
General loss allowances 1,362 1,146
Specific loss allowances - -
Charge-offs 488 85
The substandard assets at March 31, 2000 are made up of five residential
construction loans totaling $695,000, three one- to- four residential loans
totaling $364,000, a land and development loan totaling $293,000 and
commercial and consumer loans totaling $120,000 being classified as
substandard.
Real Estate Owned. Real estate properties acquired through foreclosure or by
deed-in-lieu of foreclosure are recorded at the lower of cost or fair value
less estimated costs of disposal. Valuations are periodically performed by
management and an allowance for loan losses is established by a charge to
operations if the carrying value exceeds the estimated net realizable value.
At March 31, 2000, the Company owned two properties with a recorded value of
$65,000.
Allowance for Loan Losses. The Company'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
16
<PAGE>
are established. At March 31, 2000, the Company had an allowance for loan
losses of $1.4 million, or 0.50% of total outstanding loans at that date.
Based on past experience and future expectations, management believes that
loan loss reserves are adequate.
While the Company believes it has established its existing allowance for loan
losses in accordance with generally accepted
accounting principles ("GAAP"), there can be no assurance that regulators, in
reviewing the Company's loan portfolio, will not
request the Company to increase significantly its allowance for loan losses,
therefore negatively affecting the Company's
financial condition and results of operations.
The following table sets forth an analysis of the Company's allowance for loan
losses for the periods indicated.
Year Ended March 31,
---------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $1,146 $ 984 $831 $653 $657
------ ------ ---- ---- ----
Provision for loan losses 675 240 180 180 -
Recoveries:
Residential real estate - - - 1 8
Commercial 1 - - - -
Consumer 28 7 11 8 11
------ ------ ---- ---- ----
Total recoveries 29 7 11 9 19
------ ------ ---- ---- ----
Charge-offs:
Residential real estate 48 28 - - -
Commercial 282 - - - -
Consumer 158 57 38 11 23
------ ------ ---- ---- ----
Total charge-offs 488 85 38 11 23
------ ------ ---- ---- ----
Net charge-offs 459 78 27 2 4
------ ------ ---- ---- ----
Balance at end of period $1,362 $1,146 $984 $831 $653
====== ====== ==== ==== ====
Ratio of allowance to total loans
outstanding at end of period 0.50% 0.54% 0.53% 0.50% 0.47%
Ratio of net charge-offs to
average loans outstanding
during period 0.21 0.04 0.02 0.00 0.00
Ratio of allowance to total of
nonaccrual and 90 days past
due loans 106.58 88.30 190.32 955.17 119.16
17
<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,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ --------------- ---------------- --------------- ----------------
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
One- to- four
family $ 259 37.62% $ 218 39.03% $192 51.93% $282 57.06% $285 63.23%
Multi-family 41 4.01 10 3.54 10 2.58 16 3.28 10 2.12
Construction one-
to- four family 304 18.10 292 21.34 154 18.89 99 19.64 56 16.21
Construction multi-
family 10 1.71 10 1.97 23 2.89 2 0.33 1 0.26
Construction
commercial 17 1.32 44 2.90 - - 2 0.38 1 0.36
Land 223 9.34 32 11.68 33 8.87 27 4.77 24 5.41
Commercial real
estate 224 15.72 180 10.40 19 5.22 24 5.43 21 4.68
Commercial loans 160 5.86 198 1.90 100 0.93 40 0.48 46 0.70
Consumer loans:
Secured 90 5.31 89 5.96 142 7.21 128 7.17 81 5.81
Unsecured 29 1.01 37 1.28 27 1.48 24 1.46 17 1.22
Unallocated 5 - 36 - 284 - 187 - 111 -
Total allowance ------ ------ ------ ------ ---- ------ ---- ------ ---- ------
for loan losses $1,362 100.00% $1,146 100.00% $984 100.00% $831 100.00% $653 100.00%
====== ====== ====== ====== ==== ====== ==== ====== ==== ======
18
</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 Company 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 Company to maintain a minimum amount of liquid
assets. See "REGULATION." The balance of the Company'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 Company 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, 2000, the Bank's regulatory liquidity ratio was
23.1%, which exceeded regulatory requirements. It is the intention of
management to hold securities with short maturities in the Bank's and
Company's investment portfolio in order to match more closely the
interest-rate sensitivities of its assets and liabilities.
Investment decisions are made by the Investment Committee composed of the
Chief Executive Officer and Chief Financial Officer. The Company's investment
objectives are: (i) to provide and maintain liquidity within regulatory
guidelines; (ii) to maintain a balance of high quality, diversified
investments to minimize risk; (iii) to provide collateral for pledging
requirements; (iv) to serve as a balance to earnings; and (v) to optimize
returns. At March 31, 2000, the Company's investment and mortgage-backed
securities portfolio totaled approximately $61.8 million and consisted
primarily of obligations of federal agencies, and Federal National Mortgage
Association ("FNMA") and FHLMC mortgage-backed securities.
At March 31, 2000, the Company'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 Company's consolidated
shareholders' equity, excluding those securities issued by the U.S. Government
or its agencies.
The Board of Directors sets the investment policy of the Company which
dictates that investments be made based on the safety of the principal amount,
liquidity requirements of the Company and the return on the investments. At
March 31, 2000, no investment securities were held for trading. The policy
does not permit investment in non-investment grade bonds and permits
investment in various types of liquid assets permissible under OTS regulation,
which includes U.S. Treasury obligations, securities of various federal
agencies, "bank qualified" municipal bonds, certain certificates of deposits
of insured banks, repurchase agreements and federal funds.
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires the classification of securities at acquisition into one of
three categories: held to maturity, available for sale, or trading. See Note
1 of Notes to Consolidated Financial Statements.
19
<PAGE>
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated. The market value of the investment
and mortgage-backed securities portfolio was $61.7 million, $84.6 million and
$71.8 million at March 31, 2000, 1999 and 1998, respectively.
At March 31,
----------------------------------------------------
2000 1999 1998
----------------- --------------- -----------------
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%
FHLB debentures - - 4,000 4.74 7,336 10.28
Real estate mortgage
investment conduits
("REMICs") 1,985 3.21 3,162 3.75 5,627 7.89
FHLMC mortgage-backed
securities 2,377 3.84 3,370 4.00 5,111 7.16
FNMA mortgage-backed
securities 4,295 6.95 6,183 7.33 9,603 13.46
Municipal securities 903 1.46 943 1.12 - -
------- ------ ------- ------ ------- ------
9,560 15.46 17,658 20.94 28,677 40.19
------- ------ ------- ------ ------- ------
Available for sale
(at market value):
U.S. Government
treasury obligations - - - - 2,974 4.17
FNMA debentures - - - - 1,003 1.41
FHLB debentures 9,709 15.70 11,440 13.57 6,000 8.41
REMICs 36,561 59.14 49,502 58.71 22,059 30.92
FHLMC mortgage-backed
securities 612 0.99 701 0.84 1,038 1.45
FNMA mortgage-backed
securities 2,205 3.57 3,169 3.76 9,593 13.45
Municipal securities 2,435 3.94 906 1.07 - -
Equity securities 739 1.20 934 1.11 - -
------- ------ ------- ------ ------- ------
52,261 84.54 66,652 79.06 42,667 59.81
------- ------ ------- ------ ------- ------
Total investment
securities $61,821 100.00% $84,310 100.00% $71,344 100.00%
======= ====== ======= ====== ======= ======
20
<PAGE>
The following table sets forth the maturities and weighted average yields in
the securities portfolio at March 31, 2000.
<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 $ - -% $ - -% $ 1,862 4.18% $ 1,477 5.21%
FHLB debentures - - 2,950 6.44 2,359 6.53 4,400 6.26
REMICs - - - - 1,637 6.62 36,909 6.27
FHLMC mortgage-backed
securities - - 1,366 6.02 616 6.99 1,005 6.60
FNMA mortgage-backed
securities - - 4,352 6.70 487 6.63 1,662 6.65
Equity securities - - - - - - 739 -
------ ---- ------ ---- ------- ---- ------- ----
Total $ - -% $ 8,668 6.50% $ 6,961 5.96% $46,192 6.25%
====== ==== ======= ==== ======= ==== ======= ====
</TABLE>
-------------
(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.
In addition to U.S. Government treasury obligations, the Company 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 Company. Mortgage-backed securities generally increase the
quality of the Company's assets by virtue of the guarantees that back them,
are more liquid than individual mortgage loans and may be used to
collateralize borrowings as other obligations of the Company. See Note 4 of
Notes to Consolidated Financial Statements for additional information.
REMICs are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes
these securities may represent attractive alternatives relative to other
investments because of the wide variety of maturity, repayment and interest
rate options available. Current investment practices of the Company prohibit
the purchase of high risk REMICs. At March 31, 2000, the Company held REMICs
with a net carrying value of $38.5 million, of which $2.0 million were
classified as held-to-maturity and $36.5 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, 2000, the Company 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.
21
<PAGE>
Investment in school district bonds increased to $2.4 million at March 31,
2000 from $906,000 at March 31, 1999. The increased investment in tax free
securities reflects the after tax yields available on these securities and the
community reinvestment that was done by the purchase of these securities.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and loan sales are the major sources of
the Company's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
Deposit Accounts. Deposits are attracted from within the Company'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 Company considers the rates offered by its competition, profitability to
the Company, matching deposit and loan products and its customer preferences
and concerns. The Company generally reviews its deposit mix and pricing
weekly.
22
<PAGE>
Deposit Balances
The following table sets forth information concerning the Company's
certificates of deposit, other interest-bearing and non-interest bearing
deposits at March 31, 2000.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ---- -------- ------ ------- --------
(In thousands)
1.500% None NOW Accounts $ 100 $ 20,976 9.03%
2.750 None Regular Savings 100 19,840 8.54
4.685 None Money Market 2,500 44,620 19.20
None None Non-interest Checking 100 24,741 10.65
Certificates of Deposit
-----------------------
5.238 28-92 Days Fixed-Term, Fixed-Rate 1,000 5,063 2.18
5.473 4-6 Months Fixed-Term, Fixed-Rate 1,000 19,237 8.28
5.273 12-17 Months Fixed-Term, Fixed-Rate 1,000 52,823 22.73
5.744 18 Months Fixed-Term, Variable
Rate, Individual
Retirement Account
("IRA") 1,000 774 0.33
5.400 18-23 Months Fixed-Term, Fixed-Rate 1,000 4,248 1.83
5.420 24-35 Months Fixed-Term, Fixed-Rate 1,000 22,782 9.80
5.477 36-59 Months Fixed-Term, Fixed-Rate 1,000 4,437 1.91
5.946 60-83 Months Fixed-Term, Fixed-Rate 1,000 11,239 4.84
5.821 84-119 Months Fixed-Term, Fixed-Rate 1,000 1,575 0.68
-------- ------
Total $232,355 100.00%
======== ======
23
<PAGE>
<TABLE>
Deposit Flow
The following table sets forth the balances of deposit accounts in the various types offered by the Company
at the dates indicated.
At March 31,
------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ---------------------------
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 $ 24,741 10.65% $14,322 $ 10,419 5.20% $ 986 $ 9,433 5.25% $ 2,348
NOW checking 20,976 9.03 191 20,785 10.38 1,489 19,296 10.73 822
Regular savings
accounts 19,840 8.54 (1,461) 21,301 10.63 1,372 19,929 11.08 (1,305)
Money market deposit
accounts 44,620 19.20 16,889 27,731 13.84 7,491 20,240 11.26 1,081
Fixed-rate certificates
which mature(1):
Within 12 months 24,301 10.46 7,569 16,732 8.35 6,543 10,189 5.67 (69,520)
Within 12-36 months 80,627 34.70 (6,114) 86,741 43.31 1,056 85,685 47.64 67,469
Beyond 36 months 17,250 7.42 648 16,602 8.29 1,549 15,053 8.37 9,514
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total $232,355 100.00% $32,044 $200,311 100.00% $20,486 $179,825 100.00% $10,409
======== ====== ======= ======== ====== ======= ======== ====== =======
---------------
(1) IRAs of $11.6 million, $12.0 million and $11.0 million at March 31, 2000, 1999 and 1998,
respectively, are included in certificate balances.
24
</TABLE>
<PAGE>
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated.
At March 31,
---------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Below 4.00% $ - $ 102 $ -
4.00 - 4.99% 25,070 37,303 1,912
5.00 - 5.99% 82,319 73,315 86,738
6.00 - 7.99% 14,789 9,344 22,255
8.00 - 9.99% - 11 22
-------- -------- --------
Total $122,178 $120,075 $110,927
======== ======== ========
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 2000.
Amount Due
-----------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
-------- ----- --------- ------- -----
(In thousands)
4.00 - 4.99% $ 21,359 $ 3,262 $ 250 $ 199 $ 25,070
5.00 - 5.99% 67,793 9,528 2,123 2,875 82,319
6.00 - 7.99% 5,117 5,274 1,944 2,454 14,789
-------- ------- ------ ------ --------
Total $ 94,269 $18,064 $4,317 $5,528 $122,178
======== ======= ====== ====== ========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at March 31, 2000.
Weighted
Maturity Period Amount Average Rate
--------------- ------ ------------
(Dollars in thousands)
Three months or less $ 13,991 5.54%
Over three through six months 6,999 5.33
Over six through 12 months 9,283 5.82
Over 12 months 5,941 5.83
-------- ----
Total $ 36,214 5.62%
======== ====
25
<PAGE>
Deposit Activities
The following table sets forth the deposit activities of the Company for the
periods indicated.
Year Ended March 31,
--------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Beginning balance $ 200,311 $ 179,825 $ 169,416
Net increase before
interest credited 23,454 12,382 2,971
Interest credited 8,590 8,104 7,438
Net increase in
savings deposits 32,044 20,486 10,409
--------- --------- ---------
Ending balance $ 232,355 $ 200,311 $ 179,825
========= ========= =========
In the unlikely event the Company is liquidated, depositors are entitled to
full payment of their deposit accounts prior to any payment being made to the
shareholders of the Company. Substantially all of the Bank's depositors are
residents of the States of Washington or Oregon.
Borrowings. Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company 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
Company'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 assets or on the FHLB's assessment of the institution's
creditworthiness. The FHLB determines specific lines of credit for each member
institution and the Bank has a 35% of total assets line of credit with the
FHLB-Seattle. At March 31, 2000, the Bank had $60.6 million of outstanding
advances from the FHLB-Seattle under an available credit facility of $119.0
million.
The following tables set forth certain information concerning the Company's
borrowings at the dates and for the periods indicated.
At March 31,
--------------------------
2000 1999 1998
---- ---- ----
Weighted average rate paid on
FHLB advances.................... 6.24% 4.87% 5.96%
26
<PAGE>
Year Ended March 31,
--------------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
Maximum amounts of FHLB
advances outstanding
at any month end $60,550 $ 49,550 $33,550
Approximate average FHLB
advances outstanding 45,406 34,008 30,512
Approximate weighted
average rate paid on
FHLB advances 5.47% 5.36% 6.47%
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance
Act, and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with
its depositors and borrowers is also regulated to a great extent, especially
in such matters as the ownership of deposit accounts and the form and content
of the Bank's mortgage documents. The Bank is required to file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Bank and
their operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS has extensive authority over the operations of savings associations.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to fund
the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2000 was $72,000.
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
27
<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 $3.1 million at March 31, 2000.
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 institutions 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.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
six basis points for each $100 in domestic deposits for SAIF members while BIF
insured institutions pay an assessment equal to about 1.50 basis points for
each $100 in domestic deposits. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.
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 Company.
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.
28
<PAGE>
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of specified liquid assets equal
to a monthly average of not less than a specified percentage of its net
withdrawable accounts deposit plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS
to any amount within the range of 4% to 10%. Monetary penalties may be
imposed for failure to meet liquidity requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
undercapitalized. An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be significantly undercapitalized and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be critically undercapitalized. Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is critically undercapitalized. OTS regulations also
require that a capital restoration plan be filed with the OTS within 45 days
of the date a savings institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In
addition, numerous mandatory supervisory actions become immediately applicable
to an undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At March 31, 2000, 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 assets (as defined by regulation) in
qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings association may
maintain 60% of its assets in those assets specified in Section 7701(a)(19) of
the Internal Revenue Code ("Code"). Under either test, such assets primarily
consist of residential housing related loans and investments. At March 31,
2000, the Bank met the test and its QTL percentage was 83.41%.
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
29
<PAGE>
requalified or converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and
a national bank, and it is limited to national bank branching rights in its
home state. In addition, the association is immediately ineligible to receive
any new FHLB borrowings and is subject to national bank limits for payment of
dividends. If such association has not requalified or converted to a national
bank within three years after the failure, it must divest of all investments
and cease all activities not permissible for a national bank. In addition, it
must repay promptly any outstanding FHLB borrowings, which may result in
prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See -- Savings and Loan Holding
Company Regulations.
Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). At March 31, 2000, the Bank had
tangible capital of $41.7 million, or 12.3% of adjusted total assets, which is
approximately $36.6 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date. At March 31, 2000, the Bank had $1.3
million in core deposit intangible and $1.8 million in deferred taxes and
servicing asset.
The capital standards also require core capital equal to at least 3% to 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2000, the Bank
had core capital equal to $41.7 million, or 12.3% of adjusted total assets,
which is $31.4 million above the minimum leverage ratio requirement of 3% as
in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On March 31, 2000, the Bank had total risk-based capital of approximately
$42.5 million, including $41.7 million in core capital and $1.4 million in
qualifying supplementary capital, and risk-weighted assets of $213.4 million,
or total capital of 19.9% of risk-weighted assets. This amount was $25.4
million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its
30
<PAGE>
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC any of these measures on the Bank or the
Company may have a substantial adverse effect on their operations and
profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions on
savings associations with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. The OTS also
prohibits a savings association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result of such action, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with the
association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided that
the Bank notify the OTS 30 days before it declares the capital distribution
and that the following requirements are met: (i) the Bank has a regulatory
rating in one of the two top examination categories, (ii) the Bank is not of
supervisory concern, and will remain adequately or well capitalized, as
defined in the OTS prompt corrective action regulations, following the
proposed distribution, and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does not meet these stated requirements, it must obtain the prior approval of
the OTS before declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements or the
OTS notifies it that it is in need of more than normal supervision, the Bank's
ability to make capital distributions will be restricted. In addition, no
distribution will be made if the Bank is notified by the OTS that a proposed
capital distribution would constitute an unsafe and unsound practice, which
would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2000, the Bank's limit on loans to one borrower was $6.4 million. At
March 31, 2000, the Bank's largest single loan to one borrower was $5.4
million, which was performing according to its original terms.
31
<PAGE>
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 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. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings association may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of 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
32
<PAGE>
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
The Bank is a unitary savings and loan company subject to regulatory oversight
of the OTS. Accordingly, the Bank is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Bank and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
Acquisitions. Federal law and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Company and any other subsidiaries (other
than the Company or any other SAIF insured savings association) would
generally become subject to additional restrictions. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. Federal law
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift lender
test, within one year the Bank must register as, and will become subject to,
the significant activity restrictions applicable to bank holding companies.
See Federal Regulation of Savings Associations Qualified Thrift Lender Test
for information regarding the Company's qualified thrift lender test.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Company or the Bank.
33
<PAGE>
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). At March 31, 2000, the Bank had a
taxable temporary difference of approximately $1.1 million that arose before
1987 (base-year amount). For taxable years beginning after December 31, 1995,
the Bank's bad debt deduction will be determined under the experience method
using a formula based on actual bad debt experience over a period of years.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution continues to carry on the business of banking. In addition,
the balance of the pre-1987 bad debt reserves continues to be subject to
provisions of present law referred to below that require recapture in the case
of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend distributions"
to the Company, such distributions will be considered to result in
distributions from the balance of its bad debt reserve as of December 31, 1987
(or a lesser amount if the Bank's loan portfolio decreased since December 31,
1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes). See "Regulation" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Company's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Company, whether
or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100% of
dividends received from the Company as a member of the same affiliated group
of corporations. The corporate dividends-received deduction is
34
<PAGE>
generally 70% in the case of dividends received from unaffiliated corporations
with which the Bank and the Company will not file a consolidated tax return,
except that if the Bank or the Company owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company's federal income tax returns have not been audited within
the past six years.
State Taxation
General. The Company is subject to a business and occupation tax imposed
under Washington law at the rate of 1.50% of gross receipts; however, interest
received on loans secured by mortgages or deeds of trust on residential
properties is exempt from such tax.
Audits. The Company's business and occupation tax returns have not been
audited within the past four years.
Competition
There are several financial institutions in the Company's primary market area
from which the Company faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of
loans. Its most direct competition for savings deposits and loans has
historically come from other thrift institutions, credit unions and commercial
banks located in its market area. Particularly in times of high interest
rates, the Company has faced additional significant competition for investors'
funds from money market mutual funds and other short-term money market
securities and corporate and government securities. The Company's competition
for loans comes principally from other thrift institutions, credit unions,
commercial banks, mortgage banking companies and mortgage brokers.
Subsidiary Activities
Under OTS regulations, the Bank is authorized to invest up to 3% of its assets
in subsidiary corporations, with amounts in excess of 2% only if primarily for
community purposes. At March 31, 2000, the Company's investments of $575,000
in Riverview Services, Inc. ("Riverview Services") its wholly owned
subsidiary, and the investment of $827,000 in Riverview Asset Management Corp.
("RAM Corp"), a 90% owned subsidiary, were within these limitations.
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 $31,000 for the fiscal year ended March 31, 2000 and total assets of
$577,000 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 $14,000 for the fiscal year ended March 31, 2000 and total assets of
$959,000 at that date. RAM Corp earns fees on the management of assets held
in fiduciary or agency capacity. At March 31, 2000, total assets under
management approximated $62.7 million. RAM Corp's operations are included in
the consolidated financial statements of the Company.
Personnel
As of March 31, 2000, the Company had 132 full-time equivalent employees, none
of whom are represented by a collective bargaining unit. The Company believes
its relationship with its employees is good.
35
<PAGE>
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age(1) Position
---- ------ --------
Patrick Sheaffer 60 President and Chief Executive Officer
Ron Wysaske 47 Executive Vice President, Treasurer and Chief
Financial Officer
---------------
(1) At March 31, 2000.
Patrick Sheaffer joined the Company 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
Company. 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 Company in 1976. Before joining the Company, 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
Company. 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.
36
<PAGE>
Item 2. Properties
-------------------
The following table sets forth certain information relating to the Company's
offices as of March 31, 2000.
Approximate
Location Year Opened Square Footage Deposits
-------- ----------- -------------- --------
(In millions)
Main Office:
700 N.E. Fourth Avenue 1975 25,000 $44.3
Camas, Washington(3)
Branch Offices:
1737 B Street 1963 2,200 $25.1
Washougal, Washington
225 S.W. 2nd Street 1971 1,700 $23.0
Stevenson, Washington(3)
330 E. Jewett Boulevard 1977 3,200 $21.1
White Salmon, Washington
15 N.W. 13th Avenue 1979 2,000 $20.4
Battle Ground, Washington(3)
412 South Columbus 1983 2,500 $12.0
Goldendale, Washington
11505-K N.E. Fourth Plain
Boulevard 1994 3,500 $14.7
Vancouver, Washington(3)
"Orchards" Office
7735 N.E. Highway 99 1994 4,800 $30.7
Vancouver, Washington(2)(3)
"Hazel Dell" Office
1011 Washington Way 1994 2,000 $14.1
Longview, Washington(2)(3)
900 Washington St. 1998 5,300 $25.1
Vancouver, Washington (1)(3)
1901-E N.E. 162nd Avenue(1)(3)
Vancouver, Washington(3) 1999 3,200 $1.9
800 N.E. Tenny Road, Suite D
Vancouver, Washington(3) 2000 3,200 -
37
<PAGE>
-----------------
(1) Leased.
(2) Former branches of Great American Federal Savings Association, San Diego,
California, that were acquired from the Resolution Trust Corporation on
May 13, 1994. In the acquisition, the Company assumed all insured
deposit liabilities of both branch offices totaling approximately $42.0
million.
(3) Location of an automated teller machine.
The Company's main office for administration will be relocated from Camas to
the downtown Vancouver address of 900 Washington Street, a 16,000 square foot
leased facility, in the second quarter of the fiscal year 2001. The 900
Washington Street lease is for ten years with two five year options to renew
the current lease. The Washougal branch office will be relocated to 3307
Evergreen Way, a 3,200 square foot facility, during the first quarter of the
fiscal year 2001.
The Company uses an outside data processing system to process customer records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations. At
March 31, 2000, the net book value of the Company's office properties,
furniture, fixtures and equipment was $9.1 million.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. The Company is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2000.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
---------------------------------------------------------------------------
Matters
-------
At March 31, 2000, the Company had 4,902,503 shares of Common Stock issued and
outstanding, 882 stockholders of record and an estimated 920 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 Company may not declare or pay a
cash dividend on its capital stock if the effect thereof would be to reduce
the regulatory capital of
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<PAGE>
the Company below the amount required for the liquidation account to be
established pursuant to the Company's Plan of Conversion adopted in connection
with the Conversion and Reorganization. See Note 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 Company traded on The Nasdaq
SmallCap Market under the same symbol. The following table sets forth the
high and low trading prices, as reported by Nasdaq, and cash dividends paid
for each quarter during the 2000 and 1999 fiscal years. At March 31, 2000,
there were ten market makers in the Company's common stock as reported by the
Nasdaq Stock Market.
Cash Dividend
Fiscal Year Ended March 31, 2000 High Low Declared
-------------------------------- ---- --- --------
Quarter Ended March 31, 2000 $10.50 $8.00 $0.090
Quarter Ended December 31, 1999 12.50 9.50 0.090
Quarter Ended September 30, 1999 13.00 11.00 0.090
Quarter Ended June 30, 1999 12.31 11.13 0.090
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
39
<PAGE>
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,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $344,680 $302,601 $273,174 $224,385 $209,506
Loans receivable, net(1) 249,034 187,177 162,628 151,774 128,169
Mortgage-backed certificates
held to maturity, at
amortized cost 8,657 12,715 20,341 26,402 28,375
Mortgage-backed certificates
available for sale, at
fair value 39,378 53,372 32,690 2,990 2,004
Cash and interest-bearing
deposits 15,786 17,207 27,482 6,951 5,585
Investment securities held to
maturity, at amortized cost 903 4,943 8,336 20,456 29,729
Investment securities
available for sale, at
fair value 12,883 13,280 9,977 3,899 3,932
Deposit accounts 232,355 200,311 179,825 169,416 158,159
FHLB advances 60,550 42,550 29,550 27,180 26,050
Shareholders' equity 48,489 56,867 61,082 25,022 23,086
At March 31,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income $25,438 $23,114 $20,302 $17,476 $15,996
Interest expense 11,073 9,925 9,389 8,923 8,416
------- ------- ------- ------- -------
Net interest income 14,365 13,189 10,913 8,553 7,580
Provision for loan losses 675 240 180 180 -
Net interest income after ------- ------- ------- ------- -------
provision for loan losses 13,690 12,949 10,733 8,373 7,580
Gains from sale of loans,
securities and real
estate owned 151 283 269 106 396
Non-interest income 2,746 2,591 2,211 1,768 1,619
Non-interest expenses(2) 10,832 9,055 7,218 7,204 5,607
Income before federal ------- ------- ------- ------- -------
income tax provision
and extraordinary item 5,755 6,768 5,995 3,043 3,988
Provision for federal
income taxes 1,878 2,305 2,071 1,035 1,375
------- ------- ------- ------- -------
Net income $ 3,877 $ 4,463 $ 3,924 $ 2,008 $ 2,613
======= ======= ======= ======= =======
40
<PAGE>
At March 31,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
OTHER DATA:
Number of:
Real estate loans
outstanding 2,771 2,956 3,155 3,260 2,939
Deposit accounts 23,653 21,639 20,395 19,300 18,318
Full service offices 12 10 9 9 9
At or For the Year Ended March 31,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.22% 1.55% 1.56% 0.92% 1.31%
Return on average equity 7.15 7.33 9.15 8.38 12.02
Dividend payout ratio(3)
(4)(7) 47.13 30.38 11.77 10.56 6.62
Interest rate spread 3.88 3.83 3.72 3.72 3.62
Net interest margin 4.78 4.81 4.61 4.19 4.05
Non-interest expense to
average assets(5) 3.41 3.14 2.87 3.30 2.80
Efficiency ratio (non-
interest expense divided
by the sum of net
interest income and
non-interest income)(6) 62.75 56.37 53.89 69.09 58.44
Asset Quality Ratios:
Average interest-earning
assets to interest-
bearing liabilities 124.51 127.02 122.21 110.80 109.63
Allowance for loan losses
to total loans at end of
period 0.50 0.54 0.53 0.50 0.47
Net charge-offs to average
outstanding loans during
the period 0.21 0.04 0.02 - -
Ratio of nonperforming
assets to total assets 0.39 0.44 0.19 0.10 0.26
Capital Ratios:
Average equity to average
assets 17.05 21.08 17.02 10.98 10.87
Equity to assets at end
of fiscal year 14.07 18.79 22.36 11.15 11.02
-----------------
(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.
41
<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 Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Form 10-K.
Special Note Regarding Forward-Looking Statements
Management's discussion and analysis and other portions of this report contain
certain "forward-looking statements" concerning the future operations of
Riverview Bancorp, Inc. Management desires to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 and
is including this statement for the express purpose of availing the Company of
the protections of such safe harbor with respect to all "forward-looking
statements" contained in our Annual Report. We have used "forward-looking
statements" to describe future plans and strategies, including our
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
the ability of the Company to efficiently incorporate acquisitions into its
operations, competitive products and pricing, loan delinquency rates, and
changes in federal and state regulation. These factors should be considered
in evaluating the "forward-looking statements," and undue reliance should not
be placed on such statements.
Operating Strategy
Historically the Company's business has consisted 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 Company has also actively originated residential and
construction loans secured by properties located in its primary market area.
To a lesser extent, the Company also originated consumer loans, commercial
loans, commercial real estate loans, and land loans. In the fiscal year ended
March 31, 2000, the Company began to implement a growth strategy to broaden
the Company's products and services from traditional thrift offerings to those
more closely related to community banking. That strategy included increased
emphasis on commercial lending, emphasizing growth in commercial loans and
related non-interest-bearing deposits and development of trust banking.
Substantial expenses were incurred to provide support for this growth
strategy. These expenses have been concentrated in facilities expansion and
personnel hired in anticipation of growth and expanded market share.
The Company invests in U.S. Government and federal agency obligations,
mortgage-backed securities, and municipal securities. The Company intends to
continue to fund its assets primarily with retail deposits and through FHLB-
Seattle advances.
The Company's business strategy is to operate as a well-capitalized,
profitable and independent community bank, dedicated to home mortgage lending,
consumer installment lending, commercial lending and providing quality
financial services to local customers. The Company has sought to implement
this strategy by: (i) emphasizing the origination of residential mortgage
loans, including one- to- four family residential construction loans and
pursuing growth in commercial lending; (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
42
<PAGE>
interest rate risk exposure by striving to match 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.
Net Interest Income
The Company'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 and borrowings. Net interest income is also affected by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Company's
profitability is also affected by the level of non-interest income and
expenses. Non-interest income includes deposit service fees, income
associated with the origination and sale of mortgage loans, brokering loans,
loan servicing fees, income from real estate owned and net gains and losses on
sales of interest-earning assets. Non-interest expenses include compensation
and benefits, occupancy and equipment expenses, deposit insurance premiums,
data servicing expenses and other operating costs. The Company's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and regulation and monetary and fiscal policies.
Year 2000
The Company was successful in its five phase approach to the year 2000
computer compliance project. The year-end transition from 1999 to 2000 has
not presented any issues to date. However, monitoring of our systems will
continue to ensure they continue to operate properly. Appropriate
modifications will be made, if necessary. The estimated year 2000 project
cost, excluding estimated personnel costs, was $108,000 which was within the
original projections.
Comparison of Financial Condition at March 31, 2000 and 1999
The company's total assets were $344.7 million at March 31, 2000, compared to
$302.6 million at March 31, 1999. This increase resulted primarily from the
growth in the loan portfolio. The growth in the loan portfolio was funded
primarily by deposit growth and an increase in FHLB advances.
Loans receivable, net, were $249.0 million at March 31, 2000, compared to
$186.8 million at March 31, 1999, a 33.3% increase. Increases primarily in
residential, commercial and commercial real estate loans contributed to the
increase in loans receivable, net. The growth in commercial and commercial
real estate loan balances reflects the increased emphasis the Company has
placed on originating such loans. The Company has been able to increase the
balance of outstanding commercial loans, commercial real estate loans and
commitments due to the strong local economy, and the consolidation of some
local competitors offering these products. The Company has also hired several
experienced commercial bankers from competitors in the local market. The
growth in one- to- four family residential mortgages reflects the impact of
increasing interest rates and managements decision to retain mortgages in the
loan portfolio. A substantial portion of the Company's loan portfolio is
secured by real estate, either as primary or secondary collateral located in
its primary market areas.
There were no loans held-for-sale at March 31, 2000, compared to $341,000 at
March 31, 1999.
Cash and cash equivalents decreased to $15.8 million at March 31, 2000, from
$17.2 million at March 31, 1999 as a result of loan growth.
43
<PAGE>
Investment securities held-to-maturity were $903,000 at March 31, 2000,
compared to $4.9 million at March 31, 1999. The $4.0 million decrease was a
result of investment maturities.
Investment securities available-for-sale were $12.9 million at March 31, 2000,
compared to $13.3 million at March 31, 1999. The $400,000 decrease was a
result of investment maturities.
Mortgage-backed securities held-to-maturity were $8.7 million at March 31,
2000, compared to $12.7 million at March 31, 1999. The $4.0 million net
decrease is a result of prepayments.
Mortgage-backed securities available-for-sale were $39.4 million at March 31,
2000, compared to $53.4 million at March 31, 1999. The $14.0 million net
decrease is a result of prepayments.
Total deposits were $232.3 million at March 31, 2000, compared to $200.3
million at March 31, 1999. Management attributes this increase primarily to
the growth in the Company's market area particularly the increase in
commercial loans and to promotions of checking and money market deposit
accounts. Checking deposits are a part of the relationship in servicing
commercial loan customers.
FHLB advances increased to $60.6 million at March 31, 2000 from $42.6 million
at March 31, 1999. The $18.0 million increase in the outstanding advances at
March 31, 2000 were used to fund the growth in the loan portfolio.
Shareholders' equity decreased $8.4 million to $48.5 million at March 31, 2000
from $56.9 million at March 31, 1999 primarily as a result of common share
repurchases of $9.8 million, offset by share activity in Management
Recognition Development Plan ("MRDP"), Employee Stock Ownership Plan ("ESOP")
and exercise of options of $876,000, and growth in retained earnings, less
cash dividends of $1.8 million paid to the shareholders.
Comparison of Operating Results for the Years Ended March 31, 2000 and 1999
Net Income. Net income was $3.9 million, or $0.76 per share for the year
ended March 31, 2000, compared to $4.5 million, or $0.78 per share for the
year ended March 31, 1999. Earnings were lower for the year ended March 31,
2000 primarily as a result of increased non-interest expenses and higher
provision for loan losses.
Net Interest Income. Net interest income for fiscal year 2000 was $14.4
million, representing a $1.2 million, or a 8.9% increase, from fiscal year
1999. This improvement reflected a 10% increase in average earning assets
(primarily increases in average loan balances due to a 19% increase for
mortgage loans and 78% increase in non-mortgage loans) to $220.5 million,
which more than offset a 3 basis point reduction in the net interest margin to
4.78%.
Interest Income. Interest income totaled $25.4 million and $23.1 million, for
fiscal years 2000 and 1999, respectively. Average interest-bearing assets
increased $28.1 million to $302.3 million for fiscal year ended 2000 from
$274.2 million for fiscal year ended 1999. The yield on interest-earning
assets was 8.44% for fiscal year 2000 compared to 8.43% for fiscal year ended
1999.
Interest Expense. Interest expense for the year ended March 31, 2000 totaled
$11.1 million, a $1.2 million increase from $9.9 million for the year ended
March 31, 1999. The increase in interest expense was the result of the 12%
growth in average interest-bearing liabilities to $242.8 million at March 31,
2000 from $215.9 million at March 31, 1999. The increase was due primarily to
the $15.6 million growth in the average balance of money market accounts to
$37.0 million at year end March 31, 2000 compared to $21.5 million at March
31, 1999. Other interest bearing liabilities increased $11.4 million to $45.4
million at March 31, 2000 due to increased FHLB borrowings.
44
<PAGE>
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2000 was $675,000 compared to $240,000 for the year ended March 31,
1999. The fiscal year 2000 provision for loan losses exceeded net loan
charge-offs by $216,000, resulting in an increase in the allowance for loan
losses to $1.3 million. While the loan portfolio has grown substantially in
fiscal year 2000 the asset quality has remained solid as demonstrated by the
nonperforming asset to total assets ratio of 0.39% at March 31, 2000 and 0.44%
at March 31, 1999. The $282,000 commercial loan charge-offs was composed of
four commercial loans and the largest charge-off was $104,000.
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, 2000 was $1.4 million, or 0.50% of
period end loans compared to $1.1 million, or 0.54% of period end loans at
March 31, 1999. Management considered the allowance for loan losses at March
31, 2000 to be adequate to cover foreseeable loan losses based on the
assessment of various factors affecting the loan portfolio.
Non-Interest Income. Non-interest income increased $23,000 or 1.0% for the
twelve months ended March 31, 2000 compared to the same period in 1999. For
the twelve months ended March 31, 2000, fees and service charges increased
$125,000 when compared to the same period for the prior year. The $125,000
increase in service charges reflects the growth in checking service charges
and trust fee income that was partially offset by the reduction in mortgage
broker loan fees caused by the reduction in residential mortgage refinance
activity. Mortgage broker fees (included in fees and service charges) totaled
$448,000 for the year ended March 31, 2000 compared to $944,000 for the
previous year. Mortgage broker commission compensation expense was $499,000
for the fiscal year ended March 31, 2000 compared to $740,000 for the fiscal
year ended March 31, 1999. Decreases in mortgage broker fees and commission
compensation expense are a result of the decrease in brokered loan production
from $141.1 million in 1999 to $107.1 million in 2000 reflecting the higher
interest rate environment. Gains on sale of loans held for resale decreased
$222,000 for the twelve months ended March 31, 2000 compared to the same
period in the prior year reflecting management's decision to retain the
majority of the originated residential one- to four- loan mortgage loans in
the loan portfolio.
Non-Interest Expense. Non-interest expense increased $1.8 million, or 19.6% to
$10.8 million for fiscal year 2000 compared to $9.1 million for fiscal year
1999. The principal component of the Company's non-interest expense was
salaries and employee benefits. For the year ended March 31, 2000, salaries
and employee benefits, which includes mortgage broker commission compensation,
was $5.8 million, or a 16% increase over the prior year total of $5.0 million.
As mentioned previously, commission compensation expense was $499,000 for the
fiscal year ended March 31, 2000 compared to $740,000 for the fiscal year
ended March 31, 1999. Full-time equivalent employees have
45
<PAGE>
increased to 132 at March 31, 2000 from 111 at March 31, 1999. Other
components of non-interest expense include building, furniture, and equipment
depreciation and expense, data processing expense, and advertising expense
reflect the Company's expansion in branches and continuing investment in
computer technology.
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 ($1.3 million at March 31,
2000) is being amortized over the remaining life of the underlying customer
relationships; currently estimated at four years. The amortization cost of the
CDI was $327,000 for both fiscal years 2000 and 1999.
Provision for Federal Income Taxes. Provision for federal income taxes was
$1.9 million for the year ended March 31, 2000 compared to $2.3 million for
the year ended March 31, 1999 as a result of higher income before taxes. The
effective tax rate for fiscal year 2000 was 32.6% compared to 34.1% for fiscal
1999. Reference is made to Note 10 of the Notes to Consolidated Financial
Statements, in Item 8, Financial Statements and Supplementary Data, herein for
further discussion of the Company's federal income taxes.
Comparison of Operating Results for the Years Ended March 31, 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 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 million, 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 $500,000, 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 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 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,
46
<PAGE>
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 principal sources of non-interest income
include loan fees, deposit service charges, and net gains on the sale of
securities and loans available for sale. Non-interest income including gains
on sales of assets for fiscal years 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 principal component of the Company'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.
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.
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.
47
<PAGE>
<TABLE>
Year Ended March 31,
-------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ---------------------------
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 $184,343 $16,889 9.16% $154,450 $15,117 9.79% $142,463 $13,596 9.54%
Non-mortgage loans 36,116 3,541 9.80 20,288 1,998 9.85 16,909 1,642 9.71
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total net loans 220,459 20,430 9.27 174,738 17,115 9.79 159,372 15,238 9.56
Mortgage-backed
securities 56,735 3,585 6.32 61,041 3,755 6.15 43,880 3,010 6.86
Investment
securities 16,168 971 6.01 20,031 1,215 6.07 19,077 1,221 6.40
Daily interest-
bearing assets 6,217 312 5.02 16,131 838 5.19 12,622 687 5.44
Other earning
assets 2,715 219 8.07 2,275 191 8.40 1,865 146 7.83
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets 302,294 25,517 8.44 274,216 23,114 8.43 236,816 20,302 8.57
Non-interest-earning
assets:
Office properties
and equipment, net 7,277 5,412 4,748
Real estate, net 471 471 471
Other non-interest-
earning assets 7,968 8,488 9,872
-------- -------- --------
Total assets $318,010 $288,587 $251,907
======== ======== ========
Interest-earning
liabilities:
Regular savings
accounts $ 20,654 569 2.75 $ 20,374 560 2.75 $ 20,097 553 2.75
NOW accounts 21,757 303 1.39 23,875 309 1.29 19,480 287 1.47
Money market
accounts 37,029 1,588 4.29 21,470 790 3.68 17,784 649 3.65
Certificates of
deposit 117,948 6,131 5.20 116,165 6,445 5.55 105,382 5,949 5.65
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits 197,388 8,591 4.35 181,884 8,104 4.46 162,743 7,438 4.57
Other interest-
bearing
liabilities 45,406 2,483 5.47 34,008 1,821 5.35 31,039 1,951 6.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing
liabilities 242,794 11,074 4.56 215,892 9,925 4.60 193,782 9,389 4.85
Non-interest-
bearing liabilities:
Non-interest-
bearing deposits 19,982 9,636 12,466
Other liabilities 1,004 2,212 2,776
-------- -------- --------
Total liabilities 263,780 227,740 209,024
Shareholders'
equity 54,230 60,847 42,883
-------- -------- --------
Total liabilities
and shareholders'
equity $318,010 $288,587 $251,907
======== ======== ========
Net interest income $14,443 $13,189 $10,913
======= ======= =======
Interest rate spread 3.88% 3.83% 3.72%
==== ==== ====
Net interest margin 4.78% 4.81% 4.61%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 124.51% 127.02% 122.21%
====== ====== ======
48
</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 Company's assets, the weighted
average interest rates paid on the Company's liabilities, together with the
net yield on interest-earning assets.
Year Ended March 31,
At March 31, -----------------------
2000 2000 1999 1998
---- ---- ---- ----
Weighted average yield earned on:
Total net loans(1)................. 8.34% 8.59% 8.74% 8.58%
Weighted average yield earned on:
Total net loans(1) 8.58% 8.54 8.59% 8.74%
Mortgage-backed securities 6.33 6.32 6.15 6.86
Investment securities 6.36 6.01 6.07 6.40
All interest-earning assets 8.10 7.90 7.66 8.02
Weighted average rate paid on:
Deposits 4.10 4.35 4.46 4.57
FHLB advances and other borrowings 6.24 5.47 5.35 6.29
All interest-bearing liabilities 4.55 4.56 4.60 4.85
Interest rate spread (spread between
weighted average rate on all
interest-earning assets and all
interest-bearing liabilities)(1) 3.56 3.34 3.06 3.17
Net interest margin (net interest
income (expense) as a percentage
of average interest-earning
assets)(1) 3.68 4.24 4.04 4.06
----------------
(1) Weighted average yield on total net loans at March 31, 2000, excludes
deferred loan fees.
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<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
Year Ended March 31,
----------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------ ---------------------------
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 $2,926 $(967) $(187) $1,772 $1,144 $ 348 $ 29 $1,521
Non-mortgage loans 1,559 (9) (7) 1,543 328 23 5 356
Mortgage-backed
securities (265) 102 (7) (170) 1,177 (311) (121) 745
Investment
securities (234) (12) 2 (244) 61 (64) (3) (6)
Daily interest-
bearing (515) (28) 17 (526) 191 (31) (9) 151
Other earning
assets 37 (7) (1) 29 32 11 2 45
Total interest- ------ ----- ----- ------ ------ ---- ---- -----
earning assets 3,508 (921) (183) 2,404 2,933 (24) (97) 2,812
------ ----- ----- ------ ------ ---- ---- -----
Interest Expense:
Regular savings
accounts 8 1 - 9 8 (1) - 7
NOW accounts (27) 23 (2) (6) 65 (35) (8) 22
Money market
accounts 573 131 95 799 135 5 1 141
Certificates of
deposit 99 (407) (7) (315) 609 (102) (11) 496
Other interest-
bearing
liabilities 610 39 13 662 187 (289) (28) (130)
------ ----- ----- ------ ------ ---- ---- -----
Total interest-
bearing
liabilities 1,263 (213) 99 1,149 1,004 (422) (46) 536
------ ----- ----- ------ ------ ---- ---- -----
Net increase
(decrease) in
interest income $2,245 $(708) $(282) $1,255 $1,929 $398 $ (51) $2,276
====== ===== ===== ====== ====== ==== ===== ======
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Company has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of the
Company's interest-earning assets 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. However, the Company may originate fixed rate loans for investment
when funded with long-term funds to mitigate interest rate risk. The Company
relies on retail deposits as its primary source of funds. Management believes
retail deposits reduce the effects of interest rate fluctuations because they
generally represent a stable source of funds. As part of its interest rate
risk management strategy, the Company promotes transaction accounts and
certificates of deposit with terms up to ten years.
50
<PAGE>
The Company has adopted a strategy that is designed to maintain or improve the
interest rate sensitivity of assets relative to its liabilities. The primary
elements of this strategy involve the origination of ARM loans or purchase of
adjustable rate mortgage-backed securities for its portfolio; growing
commercial, consumer and residential construction loans as a portion of total
net loans receivable because of their generally shorter terms and higher
yields than other one- to- four family residential mortgage loans; matching
asset and liability maturities; investing in short term mortgage-backed and
other securities; and the origination of fixed-rate loans for sale in the
secondary market and the retention of the related loan servicing rights. This
approach has remained consistent throughout the past year as the Company has
experienced 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 Company's
earnings while decreases in interest rates may beneficially affect the
Company's earnings. To reduce the potential volatility of the Company's
earnings, management has sought to improve the match between asset and
liability maturities and rates, while maintaining an acceptable interest rate
spread. Pursuant to this strategy, the Company actively originates ARM loans
for retention in its loan portfolio. Fixed-rate mortgage loans with terms of
more than 15 years generally are originated for the intended purpose of resale
in the secondary mortgage market. The Company has also invested in adjustable
rate mortgage-backed securities to increase the level of short term adjustable
assets. At March 31, 2000, ARM loans and adjustable rate mortgage-backed
securities constituted $68.6 million, or 25.8%, of the Company's total
combined mortgage loan and mortgage-backed securities portfolio. Although the
Company has sought to originate ARM loans, the ability to originate and
purchase such loans depends to a great extent on market interest rates and
borrowers' preferences. Particularly in lower interest rate environments,
borrowers often prefer to obtain fixed rate loans.
The Company's mortgage servicing activities provide additional protection from
interest rate risk. The Company retains servicing rights on all mortgage
loans sold. As market interest rates rise, the fixed rate loans held in
portfolio diminish in value. However, the value of the servicing portfolio
tends to rise as market interest rates increase because borrowers tend not to
prepay the underlying mortgages, thus providing an interest rate risk hedge
versus the fixed rate loan portfolio. The loan servicing portfolio totaled
$82.4 million at March 31, 2000, 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 $84.5 million and produced service fees of
$189,000 for the year ended March 31, 2000. See "Item 1. Business -- Lending
Activities -- Mortgage Loan Servicing."
Consumer loans, commercial loans and construction loans typically have shorter
terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Company's exposure to fluctuations in interest rates.
Commercial loans are adjustable interest rate loans. At March 31, 2000, the
construction, commercial and consumer loan portfolios amounted to $57.6
million, $16.0 million and $17.2 million, or 21.1%, 5.9% and 6.3% of total
loans receivable, respectively. See "Item 1. Business -- Lending Activities
-- Construction Lending" and " -- Lending Activities -- Consumer Lending."
The Company also invests in short-term to medium-term U.S. Government
securities as well as mortgage-backed securities issued or guaranteed by U.S.
Government agencies. At March 31, 2000, the combined portfolio of $61.1
million, excluding equity securities, had an average term to repricing or
maturity of 10.4 years. See "Item 1. Business -- Investment Activities."
A measure of the Company's exposure to differential changes in interest rates
between assets and liabilities is provided by the test required by OTS Thrift
Bulletin No. 13a, "Interest Rate Risk Management." This test measures the
impact on net interest income and on net portfolio value of an immediate
change in interest rates in 100 basis point increments. Using data compiled by
the OTS, the Company receives a report which measures interest rate risk by
modeling the change in net portfolio value ("NPV") over a variety of interest
rate scenarios. This procedure for measuring interest rate risk was developed
by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period). NPV is the present value of expected
cash flows from assets,
51
<PAGE>
liabilities and off-balance sheet contracts. Following are the estimated
impacts of immediate changes in interest rates at the specified levels based
on the latest OTS report dated December 31, 1999.
At December 31, 1999
------------------------------------------------------------
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)
300 bp $40,187 $(17,971) (31)% 13.00% (460) bp
200 bp 45,428 (12,730) (22) 14.40 (320) bp
100 bp 50,933 (7,226) (12) 15.81 (179) bp
0 bp 58,159 - - 17.60 - bp
(100) bp 60,483 2,324 4 18.11 51 bp
(200) bp 62,969 4,810 8 18.65 105 bp
(300) bp 65,108 6,949 12 19.10 150 bp
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1999 would reduce the
Company's NPV by approximately $12.7 million, or 22%, at that date. At
December 31, 1998 an instantaneous 200 basis point increase in market interest
rates would have reduced the Company's NPV by approximately $7.3 million, or
13%, at that date. The $5.4 million increase in the reduction of NPV to $12.7
million at December 31, 1999 is the result of several factors. The primary
factors for fiscal year 2000 are the impact of the increased FHLB borrowings
that reprice within one year and the smaller percentage of the total loans
receivable that reprice within one year. In fiscal year 2000, the refinancing
activity of one- to- four residential mortgage loans from adjustable rate
loans to fixed rate loans increased the balance of fixed rate mortgages. This
increase more than offset the increase in the adjustable rate commercial loans
receivable balance for this time period.
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 Company'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 Company 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
52
<PAGE>
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At March 31, 2000, cash and
cash equivalents totaled $14.3 million, or 4.2% of total assets. At March 31,
2000, the Company also maintained an uncommitted credit facility with the
FHLB-Seattle that provided for immediately available advances up to an
aggregate amount of $119.0 million, under which $60.6 million was outstanding.
The Company intends to extend the terms of these advances.
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, 2000 was
23.1%.
Liquidity management is both a short- and long-term responsibility of the
Company's management. The Company adjusts its investments in liquid assets
based upon management's assessment of (i) expected loan demand, (ii) projected
loan sales, (iii) expected deposit flows, (iv) yields available on interest-
bearing deposits, and (v) liquidity of its asset/liability management
program. Excess liquidity is invested generally in interest-bearing overnight
deposits and other short-term government and agency obligations. If the
Company requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for borrowing at
the Federal Reserve Bank discount window. The Company's primary investing
activity is the origination of one- to- four family mortgage loans. During
the years ended March 31, 2000, 1999 and 1998, the Company originated $88.6
million, $112.6 million and $79.1 million of such loans, respectively. At
March 31, 2000, the Company had outstanding mortgage loan commitments of $3.8
million and undisbursed balance of mortgage loans closed of $18.9 million.
Consumer loan commitments totaled $2.1 million and unused lines of consumer
credit totaled $7.3 million at March 31, 2000. Commercial and commercial real
estate loan commitments totaled $3.1 million and unused lines of commercial
and commercial real estate credit totaled $13.9 million at March 31, 2000.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments. Certificates of deposit that are scheduled to
mature in less than one year from March 31, 2000 totaled $94.3 million.
Historically, the Company 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, 2000, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 12.3%, 12.3% and 19.9%, 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 1998, the Financial Accounting Standards Board ("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.
Effect of Inflation and Changing Prices
<PAGE>
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
53
<PAGE>
without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Quantitative Aspects of Market Risk. The Company does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments. Furthermore, the
Company is not subject to foreign currency exchange rate risk or commodity
price risk. For information regarding the sensitivity to interest rate risk
of the Company's interest-earning assets and interest-bearing liabilities, see
the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio
Analysis," "Lending Activities -- Investment Activities" and "-- Deposit
Activities and Other Sources of Funds and -- Lending Activities --
Certificates of Deposit by Rates and Maturities" contained herein.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the
exposure of its earnings to changes in market interest rates by attempting to
manage the mismatch between asset and liability maturities and interest rates.
The principal element in achieving this objective is to increase the interest-
rate sensitivity of the Company's interest-earning assets 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 Company maintains an investment portfolio of U.S. Government
and agency securities with contractual maturities of between zero and two
years. The Company relies on retail deposits as its primary source of funds.
Management believes retail deposits reduce the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
As part of its interest rate risk management strategy, the Company promotes
transaction accounts and certificates of deposit with terms up to four years.
For additional information, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained herein.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at March 31, 2000. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
54
<PAGE>
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 8.58% $126,771 $10,904 $32,049 $55,563 $47,345 $272,632 $269,150
Mortgage-
backed
securities 6.33 20,791 7 5,711 1,753 19,773 48,035 47,973
Investments
and other
interest-
earning
assets 6.36 - 2,950 - 4,221 6,615 13,786 13,737
FHLB stock 7.07 615 1,230 1,229 - - 3,074 3,074
Interest-
Sensitive
Liabilities:
NOW
accounts 1.50 4,195 8,390 8,391 - - 20,976 20,976
Non-interest
checking
accounts - 4,948 9,896 9,897 - - 24,741 24,741
Savings
accounts 2.75 3,968 7,936 7,936 - - 19,840 19,840
Money
market 4.69 8,924 17,848 17,848 - - 44,620 44,620
Certificate
accounts 5.41 94,269 22,381 4,881 647 - 122,178 121,788
FHLB
advances 6.24 60,550 - - - - 60,550 60,570
Off-Balance
Sheet Items:
Commitments
to extend
Credit - 9,028 - - - - 9,028 9,028
Unused lines
of credit - 40,131 - - - - 40,131 40,131
55
<PAGE>
Item 8. Financial Statements and Supplementary Data
-----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for Years Ended March 31, 2000, 1999, 1998
and Independent Auditors' Report
TABLE OF CONTENTS
------------------------------------------------------------------------------
Page
Independent Auditors' Report 57
Consolidated Balance Sheets as of March 31, 2000 and 1999 58
Consolidated Statements of Income for the Years Ended March 31, 2000,
1999 and 1998 59
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 2000, 1999 and 1998 60
Consolidated Statements of Cash Flows for the Years Ended March 31,
2000, 1999 and 1998 61
Notes to Consolidated Financial Statements 62-78
56
<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, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Riverview Bancorp, Inc. and
Subsidiary as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Portland, Oregon
May 12, 2000
57
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
(In thousands, except share data) 2000 1999
------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $5,378
and $11,612) $ 15,786 $ 17,207
Loans held for sale - 341
Investment securities held to maturity, at amortized
cost(fair value of $854 and $4,980) 903 4,943
Investment securities available for sale, at fair
value(amortized cost of $14,421 and $13,751) 12,883 13,280
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $8,595 and $12,939) 8,657 12,715
Mortgage-backed securities available for sale, at
fair value (amortized cost of $40,974 and $53,808) 39,378 53,372
Loans receivable (net of allowance for loan losses
of $1,362 and $1,146) 249,034 186,836
Real estate owned 65 30
Prepaid expenses and other assets 875 895
Accrued interest receivable 1,881 1,543
Federal Home Loan Bank stock, at cost 3,074 2,614
Premises and equipment, net 9,088 6,185
Land held for development 471 471
Deferred income taxes, net 1,236 493
Core deposit intangible, net 1,349 1,676
--------- ---------
TOTAL ASSETS $ 344,680 $ 302,601
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 232,355 $ 200,311
Accrued expenses and other liabilities 3,147 2,834
Advance payments by borrowers for taxes and
insurance 139 39
Federal Home Loan Bank advances 60,550 42,550
--------- ---------
Total liabilities 296,191 245,734
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,
2000 - 4,902,503 issued, 4,521,209 outstanding;
1999 - 5,780,824 issued, 5,346,322 outstanding 49 58
Additional paid-in capital 38,457 48,120
Retained earnings 15,652 13,602
Unearned shares issued to employee stock ownership
trust (2,422) (2,743)
Unearned shares held by the management recognition
and development plan (1,178) (1,571)
Accumulated other comprehensive loss (2,069) (599)
--------- ---------
Total shareholders' equity 48,489 56,867
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 344,680 $ 302,601
========= =========
See notes to consolidated financial statements.
58
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In thousands, except share data) 2000 1999 1998
------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 20,430 $ 17,115 $ 15,238
Interest on investment securities 893 1,215 1,221
Interest on mortgage-backed securities 3,585 3,755 3,010
Other interest and dividends 530 1,029 833
Total interest income 25,438 23,114 20,302
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 8,590 8,104 7,438
Interest on borrowings 2,483 1,821 1,951
--------- --------- ---------
Total interest expense 11,073 9,925 9,389
--------- --------- ---------
Net interest income 14,365 13,189 10,913
Less provision for loan losses 675 240 180
--------- --------- ---------
Net interest income after
provision for loan losses 13,690 12,949 10,733
--------- --------- ---------
NON-INTEREST INCOME:
Fees and service charges 2,505 2,380 1,845
Gain on sale of loans held for sale 24 246 80
Gain on sale of securities - 37 189
Gain on sale of other real estate owned 127 1 -
Loan servicing income 128 116 249
Other 113 94 117
--------- --------- ---------
Total non-interest income 2,897 2,874 2,480
--------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,761 5,029 4,023
Occupancy and depreciation 1,362 1,117 1,021
Data Processing 781 581 318
Amortization of core deposit intangible 327 327 327
Marketing expense 579 336 248
FDIC insurance premium 99 109 114
Other 1,923 1,556 1,167
--------- --------- ---------
Total non-interest expense 10,832 9,055 7,218
--------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 5,755 6,768 5,995
PROVISION FOR FEDERAL INCOME TAXES 1,878 2,305 2,071
--------- --------- ---------
NET INCOME $ 3,877 $ 4,463 $ 3,924
========= ========= =========
Earnings per common share:
Basic $0.76 $0.78 $0.66
Diluted 0.74 0.76 0.65
Weighted average number of shares
outstanding:
Basic 5,108,725 5,705,697 5,918,973
Diluted 5,205,977 5,837,000 6,060,314
See notes to consolidated financial statements.
59
<PAGE>
<TABLE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Accumu-
Unearned lated
Shares Other
Addi- Issued to Unearned Compre-
(In thousands Common Stock tional Employee Shares hensive
except share ---------------- Paid-In Retained Ownership Issued to Income
data) Shares Amount Capital Earnings Trust MRDP (Loss) Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance April 1,
1997 6,043,656 $ 2,416 $16,043 $ 7,033 $ (386) $ - $ (84) $25,022
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)
Shares acquired
by ESOT (285,660) - - - (2,856) - - (2,856)
Exercise of stock
options 26,578 2 88 - - - - 90
Earned ESOP share 24,632 - 188 - 249 - - 437
---------- ------ ------- -------- ------- -------- ------- -------
5,809,456 62 53,399 6,571 (2,993) - (84) 56,955
Comprehensive
income:
Net income - - - 3,924 - - - 3,924
Other comprehen-
sive income:
Net unrealized
holding loss on
securities of
$328 (net of
$169 tax bene-
fit) less re-
classification
adjustment for
net gains included
in net income of
$125 (net of $64
tax expense) - - - - - - 203 203
-------
Total comprehen-
sive income - - - - - - - 4,127
---------- ------ ------- -------- ------- -------- ------- -------
Balance, March 31,
1998 5,809,456 62 53,399 10,495 (2,993) - 119 61,082
Cash dividends - - - (1,356) - - (1,356)
Exercise of stock
options 39,777 - 141 - - - - 141
Stock repurchased
and retired (413,279) (4) (5,457) - - - - (5,461)
Earned ESOP shares 24,632 - 52 - 250 - - 302
Shares acquired by
MRDP (142,830) - (15) - - (1,964) - (1,979)
Earned MRDP shares 28,566 - - - - 393 - 393
---------- ------ ------- -------- ------- -------- ------- -------
5,346,322 58 48,120 9,139 (2,743) (1,571) 119 53,122
Comprehensive
income:
Net income - - - 4,463 - - - 4,463
Other comprehen-
sive loss:
Unrealized
holding loss
on securities
of $694 (net
of $357 tax
benefit) less
reclassification
adjustment for
gains included
in net income
of $24 (net of
$13 tax expense) - - - - - - (718) (718)
-------
Total comprehensive
income - - - - - - - 3,745
---------- ------ ------- -------- ------- -------- ------- -------
Balance March 31,
1999 5,346,322 58 48,120 13,602 (2,743) (1,571) (599) 56,867
Cash dividends - - - (1,827) - - - (1,827)
Exercise of stock
options 34,096 - 137 - - - - 137
Stock repurchase and
retired (912,404) (9) (9,825) - - - - (9,834)
Earned ESOP shares 24,629 - 25 - 321 - - 346
Earned MRDP shares 28,566 - - - - 393 - 393
---------- ------ ------- -------- ------- -------- ----- -------
4,521,209 49 38,457 11,775 (2,422) (1,178) (599) 46,082
Comprehensive income:
Net income - - - 3,877 - - - 3,877
Other comprehensive
loss:
Unrealized holding
loss on securi-
ties of $1,454
(net of $749 tax
benefit) less
reclassification
adjustment for
net gains included
in net income of
$16 (net of $8
tax expense) - - - - - - (1,470) (1,470)
------
Total comprehensive
income - - - - - - - 2,407
---------- ------ ------- -------- ------- -------- ------- -------
Balance March 31,
2000 4,521,209 $ 49 $38,457 $ 15,652 $(2,422) $ (1,178) $(2,069) $48,489
========= ====== ======= ======== ======= ======== ======= =======
See notes to consolidated financial statements
60
</TABLE>
<PAGE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In thousands) 2000 1999 1998
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,877 $ 4,463 $ 3,924
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,289 1,196 854
Provision for losses on loans 675 240 180
Provision for deferred income taxes, net 15 (266) -
Noncash expense related to ESOP 268 302 437
Noncash expense related to MRDP 393 589 -
Increase in deferred loan origination
fees, net of amortization 585 430 372
Federal Home Loan Bank stock dividend (192) (173) (146)
Net gain on sale of real estate owned,
mortgage-backed securities, and
investment securities and premises
and equipment (30) (37) (189)
Changes in assets and liabilities:
Decrease (increase) in loans held for sale 341 1,089 (1,350)
(Increase) decrease in prepaid
expenses and other assets (59) (13) 259
Decrease (increase) in accrued interest
receivable (338) 53 (148)
Increase (decrease) in accrued expenses
and other liabilities 440 115 (34)
--------- --------- ---------
Net cash provided by operating activities 7,264 7,988 4,159
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (156,832) (158,651) (105,327)
Principal repayments on loans 88,179 106,036 88,263
Loans sold 4,224 25,809 7,007
Proceeds from call, maturity, or sale
of investment securities available
for sale 1,000 19,057 10,003
Purchase of investment securities
available for sale (1,673) (21,452) (15,974)
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)
Proceeds from sale of mortgage-backed
securities available for sale - - 2,280
Principal repayments on mortgage-backed
securities held to maturity 4,123 7,721 6,218
Principal repayments on mortgage-backed
securities available for sale 12,690 11,795 2,421
Principal repayments on investment
securities held to maturity 40 - -
Purchase of investment securities
held to maturity - (982) -
Proceeds from call or maturity of
investment securities held to maturity 4,000 4,368 12,033
Purchase of premises and equipment (3,724) (2,058) (755)
Purchase of Federal Home Loan Bank stock (268) (475) (64)
Proceeds from sale of real estate owned,
premises and equipment 936 404 135
--------- --------- ---------
Net cash used in investing activities (47,305) (43,161) (27,785)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 32,044 20,486 10,409
Dividends paid (1,827) (1,244) (304)
Proceeds from issuance of common stock,
net of related costs - - 34,724
Stock purchased for ESOP - - (2,856)
Repurchase of common stock (9,834) (5,461) -
Stock acquired for MRDP - (1,979) -
Proceeds from Federal Home Loan Bank
advances 220,864 30,000 35,800
Repayment of Federal Home Loan Bank
advances (202,864) (17,000) (33,430)
Net increase (decrease) in advance
payments by borrowers 100 (45) (39)
Repayment of other borrowed funds - - (237)
Proceeds from exercise of stock options 137 141 90
Net cash provided by financing --------- --------- ---------
activities 38,620 24,898 44,157
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (1,421) (10,275) 20,531
CASH, BEGINNING OF YEAR 17,207 27,482 6,951
--------- --------- ---------
CASH, END OF YEAR $ 15,786 $ 17,207 $ 27,482
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 10,952 $ 9,841 $ 9,424
Income taxes 1,815 2,774 2,003
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned $ 971 $ 498 $ 10
Dividends declared and accrued in other
liabilities 415 327 215
Fair value adjustment to securities
available for sale (2,227) (1,088) 306
Income tax effect related to fair
value adjustment 757 370 (103)
See notes to consolidated financial statements.
61
<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 twelve branch community-oriented
financial institution operating in rural and suburban communities in southwest
Washington state. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such funds, together with other
borrowings, to invest in various consumer-based real estate loans, other
consumer and commercial loans, investment securities, and mortgage-backed
securities.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with 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 Company has the ability and positive intent to hold them to
maturity. Investment securities held to maturity are carried at cost, adjusted
for amortization of premiums and accretion of discounts to maturity.
Unrealized losses on securities held to maturity due to fluctuations in fair
value are recognized when it is determined that an other than temporary
decline in value has occurred. Investment securities bought and held
principally for the purpose of sale in the near term are classified as trading
securities. Investment securities not classified as trading securities, or as
held to maturity securities, are classified as securities available for sale.
For purposes of computing gains and losses, cost of securities sold is
determined using the specific identification method. Unrealized holding gains
and losses on securities available for sale are excluded from earnings and
reported net of tax as a separate component of shareholders' equity until
realized.
Trading Account Securities Activity - Under the terms of the Company's
investment policy, the Company 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 Company assets.
Securities in the Company's trading portfolio are carried at fair value. There
was no trading activity during the years ended March 31, 2000, 1999, and 1998.
62
<PAGE>
Real Estate Owned ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken based upon detailed analysis of
the fair value of collateral underlying loans on which the Company is in the
process of foreclosing. Such collateral is transferred into REO at the lower
of recorded cost or fair value less estimated costs of disposal. Subsequently,
properties are evaluated and for any additional declines in value the Company
writes down the REO directly and charges operations for the diminution in
value. The amounts the Company will ultimately recover from REO may differ
from the amounts used in arriving at the net carrying value of these assets
because of future market factors beyond the Company's control or because of
changes in the Company's strategy for the sale of the property.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level sufficient to provide for 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
Leasehold Improvements 25 years
Loans Held for Sale - Under the terms of the Company's investment policy, the
Company is authorized to sell certain loans when such sales result in higher
net yields. Accordingly, such loans are classified as held for sale in the
accompanying consolidated financial statements and are carried at the lower of
aggregate cost or net realizable value.
Mortgage Servicing - Fees earned for servicing loans for the Federal Home Loan
Mortgage Corporation ("FHLMC") are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
The Company records its mortgage servicing rights at fair values in accordance
with SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, which requires the Company to allocate the
total cost of all mortgage loans, whether originated or purchased, to the
mortgage servicing rights and the loans (without the mortgage servicing
rights) based on their relative fair values if it is practicable to estimate
those fair values. The Company is amortizing the mortgage servicing assets,
which totaled $319,000 and $335,000 at March 31, 2000 and 1999, 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. The Company files a consolidated federal income
tax return.
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
Company intends to develop either for Company operation or for ultimate sale.
63
<PAGE>
Employee Stock Ownership Plan - The Company sponsors a leveraged ESOP. The
ESOP is accounted for in accordance with the American Institute of Certified
Public Accountants Statement of Position ("SOP") 93-6, Employer's Accounting
for Employee Stock Ownership Plans. Stock and cash dividends on allocated
shares are recorded as a reduction of 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 Company. 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 dilutive potential common shares 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 the fair value of all stock-based
awards on the date of grant. Alternatively, entities may continue to apply
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. The
Company elected to continue the accounting methods prescribed by APB Opinion
No. 25 and related interpretations which measure compensation cost using the
intrinsic value method. Under the intrinsic value method, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the stock at grant date over the amount an employee must pay to
acquire the stock.
Reclassification Certain 1999 and 1998 amounts have been reclassified in
order to conform to the 2000 presentation.
Recently Issued Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("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.
2. INTEREST RATE RISK MANAGEMENT
The Company is engaged principally in gathering deposits supplemented with
Federal Home Loan Bank ("FHLB") borrowings and providing first mortgage loans
to individuals and commercial enterprises, commercial loans to businesses, and
consumer loans to individuals. At March 31, 2000 and 1999, the asset portfolio
consisted of fixed and variable rate interest-earning assets. Those assets
were funded primarily with short-term deposits and borrowings from the FHLB
that have market interest rates that vary over time. The shorter maturity of
the interest-sensitive liabilities indicates that the Company could be exposed
to interest rate risk because, generally in an increasing rate environment,
interest-bearing liabilities will be repricing faster at higher interest rates
than interest-earning assets, thereby reducing net interest income, as well as
the market value of long-term assets. Management is aware of this interest
rate risk and 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, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
Municipal securities $ 903 $ - $ (49) $ 854
--------- ---------- ---------- ---------
$ 903 $ - $ (49) $ 854
========= ========== ========== =========
March 31, 1999
Agency securities $ 4,000 $ 13 $ - $ 4,013
Municipal securities 943 24 - 967
--------- ---------- ---------- ---------
$ 4,943 $ 37 $ - $ 4,980
========= ========== ========== =========
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<PAGE>
The contractual maturities of securities held to maturity are as follows (in
thousands):
Amortized Estimated
March 31, 2000 Cost Fair Value
--------- ----------
Due after ten years $ 903 $ 854
--------- ----------
$ 903 $ 854
========= ==========
There were no sales of investment securities classified as held to maturity
during the years ended March 31, 2000, 1999 and 1998.
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
Agency securities $ 10,489 $ - $ (780) $ 9,709
Equity securities 1,356 - (617) 739
School district bonds 2,576 - (141) 2,435
--------- ---------- ---------- ---------
$ 14,421 $ - $ (1,538) $ 12,883
========= ========== ========== =========
March 31, 1999
Agency securities $ 11,489 $ 13 $ (62) $ 11,440
Equity securities 1,356 - (422) 934
School district bonds 906 - - 906
--------- ---------- ---------- ---------
$ 13,751 $ 13 $ (484) $ 13,280
========= ========== ========== =========
The contractual maturities of securities available for sale are as follows (in
thousands):
Amortized Estimated
March 31, 2000 Cost Fair Value
--------- ----------
Due after one year through five years $ 3,000 $ 2,950
Due after five years through ten years 4,459 4,221
Due after ten years 6,962 5,712
--------- ----------
$ 14,421 $ 12,883
========= ==========
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, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 1,985 $ 2 $ (14) $ 1,973
FHLMC mortgage-
backed securities 2,377 20 (46) 2,351
FNMA mortgage-
backed securities 4,295 28 (52) 4,271
--------- ---------- ---------- ---------
$ 8,657 $ 50 $ (112) $ 8.595
========= ========== ========== =========
March 31, 1999
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
========= ========== ========== =========
65
<PAGE>
Mortgage-backed securities held to maturity with an amortized cost of $322,000
and $386,000 and a fair value of $314,000 and $388,000 at March 31, 2000 and
1999, respectively, were pledged as collateral for public funds held by the
Company. The real estate mortgage investment conduits consist of FHLMC and
Federal National Mortgage Association ("FNMA") securities.
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
March 31, 2000 Cost Fair Value
--------- ----------
Due after one year through five years $ 3,832 $ 3,758
Due after five years through ten years 491 482
Due after ten years 4,334 4,355
--------- ----------
$ 8,657 $ 8,595
========= ==========
There were no sales of mortgage-backed securities held to maturity during the
years ended March 31, 2000, 1999 and 1998.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2000 Cost Gains Losses Value
--------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 38,137 $ - $ (1,576) $ 36,561
FHLMC mortgage-
backed securities 619 - (7) 612
FNMA mortgage-
backed securities 2,218 9 (22) 2,205
--------- ---------- ---------- ---------
$ 40,974 $ 9 $ (1,605) $ 39,378
========= ========== ========== =========
March 31, 1999
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
========= ========== ========== =========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 2000 Cost Fair Value
--------- ----------
Due after one year through five years $ 1,908 $ 1,886
Due after five years through ten years 2,289 2,249
Due after ten years 36,777 35,243
--------- ----------
$ 40,974 $ 39,378
========= ==========
Expected maturities of mortgage-backed securities held to maturity will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
Mortgage-backed securities available for sale with an amortized cost of $20.9
million and a fair value of $19.6 million at March 31, 2000 were pledged as
collateral for the discount window at the Federal Reserve Bank.
Mortgage-backed securities with an amortized cost of $5.1 million and $4.0
million and a fair value of $5.0 million and $4.0 million at March 31, 2000
and 1999, respectively, were pledged as collateral for treasury tax and loan
funds held by the Company.
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<PAGE>
5. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
March 31,
--------------------------
2000 1999
---------- ----------
Residential:
One- to- four family $ 102,542 $ 82,934
Multi-family 10,921 7,558
Construction:
One- to- four family 49,338 45,524
Multi-family 4,669 4,209
Commercial real estate 3,597 6,184
Commercial 15,976 4,049
Consumer:
Secured 14,488 12,691
Unsecured 2,755 2,769
Land 25,475 24,932
Commercial real estate 42,871 22,181
---------- ----------
272,632 213,031
Less:
Undisbursed portion of loans 18,880 22,278
Deferred loan fees 3,355 2,770
Allowance for loan losses 1,362 1,146
Unearned discounts 1 1
---------- ----------
Loans receivable, net $ 249,034 $ 186,836
========== ==========
The Company originates residential real estate loans, commercial real estate,
multi-family real estate, commercial and consumer loans. Approximately 99.8%
of the mortgage loans in the Company'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 Company's results of operations depending
on the severity of such downturn.
Loans, by maturity or repricing date, were as follows (in thousands):
March 31,
--------------------------
2000 1999
---------- ----------
Adjustable rate loans:
Within one year $ 99,169 $ 93,883
After one but within three years - 400
---------- ----------
99,169 94,283
---------- ----------
Fixed rate loans:
Within one year 27,602 20,788
After one but within three 10,904 18,379
After three but within five years 32,049 16,908
After five but within ten years 55,563 36,994
After ten years 47,345 25,679
---------- ----------
173,463 118,748
---------- ----------
$ 272,632 $ 213,031
========== ==========
Mortgage 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 FHLB 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. Commercial loans with adjustable rates primarily reprice
based on the prime rate.
The Company services loans for others totaling $82.4 million, $84.6 million
and $87.4 million as of March 31, 2000, 1999 and 1998. These loan balances are
not included in the consolidated balance sheets as they are not assets of the
Company.
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
67
<PAGE>
Year Ended March 31,
--------------------------
2000 1999
---------- ----------
Beginning balance $ 741 $ 538
Originations 131 560
Principal repayments (124) (357)
---------- ----------
Ending balance $ 748 $ 741
========== ==========
6. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowances for loan losses is as follows (in
thousands):
Year Ended March 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Beginning balance $ 1,146 $ 984 $ 831
Provision for losses 675 240 180
Charge-offs (488) (85) (38)
Recoveries 29 7 11
-------- -------- --------
Ending balance $ 1,362 $ 1,146 $ 984
======== ======== ========
At March 31, 2000 and 1999, the Company's recorded investment in loans for
which an impairment has been recognized under the guidance of SFAS No. 114 and
SFAS No. 118 was $1.3 million and $1.3 million, 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 $668,000, $953,000 and $343,000
during the years ended March 31, 2000, 1999 and 1998, respectively.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
Year Ended March 31,
--------------------------
2000 1999
---------- ----------
Land $ 2,160 $ 1,399
Buildings and improvements 5,825 4,684
Leasehold improvements 177 46
Furniture and equipment 4,035 3,382
Construction in progress 1,080 320
---------- ----------
Subtotal 13,277 9,831
Less accumulated depreciation (4,189) (3,646)
---------- ----------
Total $ 9,088 $ 6,185
========== ==========
Depreciation expense was $773,000, $656,000 and $583,000 for years ended March
31, 2000, 1999, and 1998, respectively.
The Company is obligated under various noncancellable lease agreements for
land and buildings which require future minimum rental payments, exclusive of
taxes and other charges, as follows (in thousands):
Year ending March 31:
2001 $ 427
2002 519
2003 533
2004 484
2005 490
Thereafter 4,231
------
Total $6,684
======
Rent expense was $87,000, $49,000 and $8,000 for the years ended March 31,
2000, 1999 and 1998, respectively.
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<PAGE>
8. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands)
Weighted Weighted
Average March 31, Average March 31,
Account Type Rate 2000 Rate 1999
------------ -------- ---------- -------- ----------
NOW Accounts:
Non-interest-bearing 0.00 % $ 10,419 0.00 % $ 9,433
NOW Accounts:
Non-interest-bearing 0.00 % $ 24,741 0.00 % $ 10,419
Regular 1.50 20,976 1.50 20,785
Maxi - - 1.75 2,509
Money market 4.69 44,620 3.95 25,222
Savings accounts 2.75 19,840 2.75 21,301
Certificates of deposit 5.41 122,178 5.29 120,075
---------- ----------
Total 4.12 $ 232,355 4.14 $ 200,311
========== ==========
The weighted average rate is based on interest rates at the end of the period.
Certificates of deposit as of March 31, 2000, mature as follows (in
thousands):
Amount
------
Less than one year $ 94,269
One year to two years 18,064
Two years to three years 4,317
Three years to four years 2,545
Four years to five years 2,336
After five years 647
---------
Total $ 122,178
=========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation ("FDIC").
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
------------------------------------
2000 1999 1998
-------- -------- --------
NOW Accounts:
Regular $ 302 $ 281 $ 261
Maxi 1 28 26
Money market accounts 1,588 790 649
Savings accounts 569 560 553
Certificates of deposit 6,130 6,445 5,949
-------- -------- --------
Total $ 8,590 $ 8,104 $ 7,438
======= ======== ========
9. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2000, advances from FHLB totaled $60.6 million, of which $55.6
million had fixed interest rates ranging from 6.14% to 8.03% with a weighted
average interest rate at March 31, 2000 of 6.27%. The remaining $5.0 million
adjustable rate advances had a weighted average interest rate at March 31,
2000 of 5.94%, which is based on one month Libor as quoted by FHLB-Seattle.
At March 31, 2000, the Company had additional borrowing commitments available
of $58.4 million from the FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB by certain investment and mortgage-backed
securities, stock owned by the Company, deposits with the FHLB, and certain
mortgages on deeds of trust securing such properties as provided in the
agreements with the FHLB.
Payments required to service the Company's FHLB advances during the next five
years ended March 31 are as follows:
2001 - $60.6 million. The Company intends to extend the terms of these
advances.
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<PAGE>
10. FEDERAL INCOME TAXES
Federal income tax provisions for the years ended March 31 consisted of the
following (in thousands):
2000 1999 1998
--------- --------- ---------
Current $ 1,863 $ 2,571 $ 2,071
Deferred 15 (266) -
--------- --------- ---------
Total $ 1,878 $ 2,305 $ 2,071
========= ========= =========
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:
2000 1999 1998
--------- -------- ---------
Statutory federal income tax rate 34.0% 34.0 % 34.0 %
Unqualified disposition of
incentive stock options - - (4.7)
ESOP market value adjustment 0.4 0.3 3.1
Interest income on municipal securities (0.9) (0.2) -
Other, net (0.9) - 2.1
----- ----- -----
Effective federal income tax rate 32.6% 34.1 % 34.5%
===== ===== =====
Taxes related to gains on sales of securities were $8,000, $13,000, and
$64,000 for the years ended March 31, 2000, 1999, and 1998, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 2000 and 1999
are as follows (in thousands):
2000 1999
------- --------
Deferred tax assets:
Deferred compensation $ 345 $ 301
Loan loss reserve 463 390
Core deposit intangible 217 181
Accrued expenses 77 53
Accumulated depreciation 97 63
Net unrealized loss on securities
available for sale 1,066 308
------- --------
Total deferred tax asset 2,265 1,296
Deferred tax liabilities: ------- --------
FHLB stock dividend (550) (459)
Tax qualified loan loss reserve (188) (235)
Other (291) (109)
------- --------
Total deferred tax liability (1,029) (803)
------- --------
Deferred tax asset, net $ 1,236 $ 493
======= ========
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
allowed the Company the opportunity to defer the recapture of the excess
reserve for a period of up to two years if the Company meets a residential
loan requirement. The Company met the requirement to delay recapture for the
1998 and 1997 taxable years and recaptured $47,000 in each of the 2000 and
1999 taxable years.
The Company has qualified under provisions of the IRC to compute federal
income taxes after deductions of additions to the bad debt reserves. At March
31, 2000, the Company had a taxable temporary difference of approximately
$1.1million that arose before 1987 (base-year amount). In accordance with
SFAS No. 109, a deferred tax liability has not been recognized for the
temporary difference. Management does not expect this temporary difference to
reverse in the foreseeable future. No valuation allowance for deferred tax
assets was deemed necessary at March 31, 2000 or 1999 based on the Company's
anticipated future ability to generate taxable income from operations.
70
<PAGE>
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 Company matches 50% of the
employee's elective contribution up to 3% of the employee's compensation.
Company expenses related to the Plan for the years ended March 31, 2000, 1999,
and 1998 were $46,000, $41,000, and $36,000, 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 8.20%, 8.30%, and 7.63% for the
years ended March 31, 2000, 1999, and 1998, respectively. The estimated
liability under the plan is accrued as earned by the participant. At March 31,
2000 and 1999, the Company's aggregate liability under the plan was $1.0
million and $884,000, 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 $183,000, $149,000, and $145,000 in bonuses during the years
ended March 31, 2000, 1999, and 1998, respectively. Accrued bonuses were
$174,000 and $176,000 at March 31, 2000 and 1999, respectively.
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 are authorized but unissued shares. Awards under the MDRP were
made in the form of restricted shares of common stock that are subject to
restrictions on transfer of ownership. Compensation expense in the amount of
the fair value of the common stock at the date of the grant to the plan
participant will be recognized over a five year vesting period, with 20%
vesting immediately upon grant. On October 1, 1998 the number of restricted
shares granted under the MRDP were 99,980 shares to executive officers and
42,850 shares to non-employee directors. Compensation expense of $393,000 and
$589,000 was recognized for the years ended March 31, 2000 and 1999,
respectively.
Stock Option Plans In October 1993, the Board of Directors approved a Stock
Option and Incentive Plan ("1993 Plan") for officers, directors, and key
employees, which authorizes the grant of stock options. The maximum number of
shares of common stock of the Company which may be issued under the 1993 Plan
is 244,539 shares. All options granted under this plan are immediately
exercisable and expire October 22, 2003.
In July 1998, shareholders of the Company approved the adoption of the 1998
Stock Option Plan ("1998 Plan") 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, 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
Grants 29,998 10.63
Forfeited (6,000) 13.75
Options exercised (34,096) 4.06
--------- --------
Outstanding March 31, 2000 425,756 $ 10.40
========= ========
71
<PAGE>
Additional information regarding options outstanding as of March 31, 2000 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 3.56 111,951 $ 2.82 111,951 $ 2.82
6.32 to 8.91 4.87 18,845 8.24 14,845 8.07
12.00 to 13.75 8.51 294,960 13.41 112,984 13.52
---- ------- ------- ------- -------
7.03 425,756 $ 10.40 239,780 $ 8.19
==== ======= ======= ======= =======
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:
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- --------- ---------- ---------
Fiscal 2000 6.26 % 7.00 39.07 % 2.17 %
Fiscal 1999 4.68 % 6.00 40.75 % 1.29 %
Fiscal 1998 6.85 % 5.58 34.24 % 1.45 %
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 2000, 1999 and 1998 awards was $4.39, $5.61 and $3.25,
respectively. If the accounting provisions of the SFAS No. 123 had been
adopted as of the beginning of fiscal 1996, the effect on 2000, 1999 and 1998
net income would have been reduced to the following pro forma amounts:
Year ended March 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
Net income:
As reported $3,877,000 $4,463,000 $3,924,000
Pro forma 3,877,000 4,267,000 3,893,000
Earnings per common share basic:
As reported $0.76 $0.78 $0.66
Pro forma 0.76 0.75 0.66
Earnings per common share fully diluted:
As reported $0.74 $0.76 $0.65
Pro forma 0.74 0.73 0.64
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
$268,000, $302,000 and $437,000 for years ended March 31, 2000, 1999 and 1998,
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.
72
<PAGE>
ESOP share activity is summarized in the following table:
Unreleased Allocated
ESOP and Released
Shares Shares Total
---------- ------------ -------
Balance, April 1, 1997 83,829 111,806 195,635
Issuance September 30, 1997 285,660 - 285,660
Allocation December 31, 1997 (24,632) 24,632 -
-------- -------- -------
Balance, March 31, 1998 344,857 136,438 481,295
Allocation December 31, 1998 (24,632) 24,632 -
-------- -------- -------
Balance, March 31, 1999 320,225 161,070 481,295
Allocation December 31, 1999 (24,629) 24,629 -
-------- -------- -------
Balance, March 31, 2000 295,596 185,699 481,295
======== ======== =======
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, 2000 or
1999.
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, 2000 or
1999.
The Company 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company'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 Company 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 Company meets all capital adequacy requirements to which it is subject as
of March 31, 2000.
As of March 31, 2000, the most recent notification from the OTS categorized
the Company as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Company must
maintain minimum total capital and Tier I capital to risk weighted assets,
core capital to total assets and tangible capital to tangible assets (set
forth in the table below). There are no conditions or events since that
notification that management believes have changed the Company's category.
The Company'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, 2000 ------ ----- ------ ----- ------ -----
Total Capital:
(To Risk Weighted Assets) $ 42,543 19.9% $ 17,079 8.0% $ 21,349 10.0%
Tier I Capital:
(To Risk Weighted Assets) 41,652 19.5 N/A N/A 12,809 6.0
Core Capital:
(To Total Assets) 41,652 12.3 10,185 3.0 16,976 5.0
Tangible Capital:
(To Tangible Assets) 41,652 12.3 5,093 1.5 N/A N/A
73
<PAGE>
<PAGE>
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
The following table is a reconciliation of the Company's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at March 31, 2000 (in thousands):
Equity $ 42,436
Net unrealized securities loss 1,635
Core deposit intangible (1,349)
Deferred tax and servicing asset (1,070)
---------
Tangible capital 41,652
Land held for development (471)
General valuation allowance 1,362
---------
Total capital $ 42,543
=========
At periodic intervals, the OTS and the FDIC routinely examine the Company's
financial statements as part of their legally prescribed oversight of the
savings and loan industry. Based on their examinations, these regulators can
direct that the Company's financial statements be adjusted in accordance with
their findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Company's 2000
financial statements. In view of the uncertain regulatory environment in which
the Company operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 2000 financial
statements cannot presently be determined.
14. EARNINGS PER SHARE
Basic earning per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that
are dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options. ESOP shares are not considered outstanding for earnings per
share purposes until they are committed to be released. For the year ended
March 31, 2000, options to purchase 290,962 shares of common stock (of which
284,962 remained unexercised at March 31, 2000) were not included in the
computation of diluted EPS because to do so would have been antidilutive.
74
<PAGE>
Years Ended March 31,
---------------------------------------
2000 1999 1998
Basic EPS computation: ----------- ----------- -----------
Numerator-Net Income $ 3,877,000 $ 4,463,000 $ 3,924,000
Denominator-Weighted average
common shares outstanding 5,108,725 5,705,697 5,918,973
Basic EPS $ 0.76 $ 0.78 $ 0.66
=========== =========== ===========
Diluted EPS computation:
Numerator-Net Income $ 3,877,000 $ 4,463,000 $ 3,924,000
Denominator-Weighted average
common shares outstanding 5,108,725 5,705,697 5,918,973
Effect of dilutive stock options 97,252 128,045 141,341
Effect of dilutive MRDP - 3,258 -
----------- ----------- -----------
Weighted average common shares
and common stock equivalents 5,205,977 5,837,000 6,060,314
Diluted EPS $ 0.74 $ 0.76 $ 0.65
=========== =========== ===========
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,
2000 and 1999 (in thousands):
2000 1999
--------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
Assets:
Cash $ 15,786 $ 15,786 $ 17,207 $ 17,207
Investment securities held
to maturity 903 854 4,943 4,980
Investment securities
available for sale 12,883 12,883 13,280 13,280
Mortgage-backed securities
held to maturity 8,657 8,595 12,715 12,939
Mortgage-backed securities
available for sale 39,378 39,378 53,372 53,372
Loans receivable, net 249,034 245,896 186,836 189,157
Loans held for sale - - 341 341
FHLB stock 3,074 3,074 2,614 2,614
Liabilities:
Demand deposits 110,177 110,177 80,236 80,236
Time deposits 122,178 121,788 120,075 120,158
FHLB advances - short-term 60,550 60,570 7,000 6,988
FHLB advances - long-term - - 35,550 35,492
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
75
<PAGE>
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, 2000 and 1999.
Other - The carrying value of other financial instruments was determined to be
a reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 2000 and 1999.
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 Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate
mortgage, commercial and consumer loans. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are generally conditional 14-day agreements to
lend to a customer subject to the Company's usual terms and conditions.
Collateral is not required to support commitments.
At March 31, 2000, the Company had commitments to originate fixed rate
mortgage loans of $3.6 million at interest rates ranging from 7.625% to 11.0%.
At March 31, 2000, adjustable rate mortgage loan commitments were $160,000 at
an interest rate of 9.875%. Undisbursed balance of mortgage loans closed was
$18.9 million at March 31, 2000. Consumer loan commitments totaled $2.1
million and unused lines of consumer credit totaled $7.3 million at March 31,
2000. Commercial and commercial real estate loan commitments totaled $3.1
million and unused lines of commercial and commercial real estate credit
totaled $13.9 million at March 31, 2000.
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
liquidity.
17. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
March 31, 2000 AND 1999
(In thousands) 2000 1999
------------------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of
$1,448 and $2,774) $ 1,588 $ 2,792
Investment securities available for sale, at
fair value (amortized cost of $3,356 and $3,356) 2,699 2,934
Loan receivable from the Bank - 2,710
Investment in the Bank 42,436 47,826
Other assets 2,022 925
Deferred income, taxes 219 144
--------- ---------
TOTAL ASSETS $ 48,964 $ 57,331
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 60 $ 464
Dividend payable 415 -
Shareholders' equity 48,489 56,867
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,964 $ 57,331
========= =========
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<PAGE>
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2000 AND 1999
(In thousands) 2000 1999
------------------------------------------------------------------------------
INCOME:
Interest on investment securities and other
short-term investments $ 279 $ 532
Interest on loan receivable from the Bank 586 237
--------- ---------
Total income 865 769
--------- ---------
EXPENSE:
Management service fees paid to the Bank 40 40
Other expenses 104 139
--------- ---------
Total expense 144 179
--------- ---------
INCOME BEFORE FEDERAL INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK 721 590
PROVISION FOR FEDERAL INCOME TAXES 239 201
--------- ---------
INCOME OF PARENT COMPANY 482 389
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 3,395 4,074
--------- ---------
NET INCOME $ 3,877 $ 4,463
========= =========
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000 AND 1999
(In thousands) 2000 1999
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,877 $ 4,463
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in undistributed earnings of the Bank (3,395) (4,074)
Provision for deferred taxes 4 -
Earned ESOP shares 268 302
Earned MRDP shares 393 393
Changes in assets and liabilities:
Decrease (increase) in prepaid expenses and
other assets 537 (782)
Increase (decrease) in accrued expenses and
other liabilities 68 (97)
--------- ---------
Net cash provided by operating activities 1,752 205
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend received from the Bank 6,367 2,000
Proceeds from call, maturity, or sale of
investment securities available for sale - 2,000
Purchase of investment securities available
for sale - (1,356)
Principal repayment on loan receivable from
the Bank 2,710 112
--------- ---------
Net cash provided by investing activities 9,077 2,756
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,827) (1,244)
Repurchase of common stock (9,834) (5,461)
Stock acquired for MRDP - (1,979)
Investment in majority owned subsidiary (509) -
Proceeds from exercise of stock options 137 141
--------- ---------
Net cash used in financing activities (12,033) (8,543)
--------- ---------
NET DECREASE IN CASH (1,204) (5,582)
CASH, BEGINNING OF YEAR 2,792 8,374
--------- ---------
CASH, END OF YEAR $ 1,588 $ 2,792
========= =========
77
<PAGE>
RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except share data) Three Months Ended
------------------------------------------------------------------------------
March 31 December 31 September 30 June 30
-------- ----------- ------------ -------
2000:
Interest income $ 6,931 $ 6,382 $ 6,153 $ 5,972
Interest expense 3,076 2,827 2,625 2,545
Net interest income 3,855 3,555 3,528 3,427
Provision for loan
losses 253 242 90 90
Non-interest income 747 659 728 763
Non-interest expense 2,850 2,742 2,612 2,628
Income before income
taxes 1,499 1,230 1,554 1,472
Provision for income
taxes 484 362 523 509
-------- ----------- ------------ -------
Net income $ 1,015 $ 868 $ 1,031 $ 963
======== =========== ============ =======
Basic earnings per
share $ 0.21 $ 0.17 $ 0.20 $ 0.18
======== =========== ============ =======
Diluted earnings per
share (1) $ 0.21 $ 0.17 $ 0.19 $ 0.18
======== =========== ============ =======
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
======== =========== ============ =======
(1) Quarterly earnings per share varies from annual earnings per share due to
rounding.
78
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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 Company" in the Proxy Statement
is incorporated herein by reference.
79
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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 Severance Compensation Agreement**
10.6 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, 2000.
----------------
* 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, 1998, and incorporated herein by reference.
80
<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 21, 2000 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 21, 2000 Date: June 21, 2000
By: /s/ Robert K. Leick By: /s/ Paul Runyan
---------------------------- ------------------------------
Robert K. Leick Paul L. Runyan
Director Director
Date: June 21, 2000 Date: June 21, 2000
By: /s/ Edward R. Geiger By: /s/ Dale E. Scarbrough
---------------------------- ------------------------------
Edward R. Geiger Dale E. Scarbrough
Director Director
Date: June 21, 2000 Date: June 21, 2000
By: /s/ Gary R. Douglass
----------------------------
Gary R. Douglass
Director
Date: June 21, 2000
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
------
Riverview Bancorp, Inc.
Subsidiaries (a) Percentage Owned State of Incorporation
---------------- ---------------- ----------------------
Riverview Community Bank 100% Washington
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.
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Exhibit 23
Consent of Independent Auditors
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-66049 and 333-38887 of Riverview Bancorp, Inc. on Form S-8, of our report
dated May 12, 2000, appearing in the Annual Report on Form 10-K of Riverview
Bancorp, Inc. for the year ended March 31, 2000.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
June 20, 2000
<PAGE>
