10-K405 1 k1136.txt RIVERVIEW BANCORP, INC. FORM 10-K 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, 2001 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. ------------------------------------------------------------------------------ (Exact name of small business registrant as specified in its charter) Washington 91-1838969 ---------------------------------------------- ------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) I.D. Number) 900 Washington St., Ste. 900,Vancouver, Washington 98660 -------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (360) 693-6650 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share ------------------------ (Title of Class) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained herein, and no disclosure will be contained, to the best of the Registrant's knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the Registrant, based on the closing sales price of the registrant's Common Stock as quoted on the Nasdaq National Market System under the symbol "RVSB" on May 18, 2001, was approximately $47,714,160 (4,655,040 shares at $10.25 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 2001 Annual Meeting of Shareholders (Part III). Part I ITEM 1. BUSINESS ----------------- GENERAL Riverview Bancorp, Inc. ("Company"), a Washington corporation, was organized on June 23, 1997 for the purpose of becoming the holding company for Riverview Community Bank (the "Bank"), upon the Bank's reorganization as a wholly owned subsidiary of the Company resulting from the conversion of Riverview, M.H.C., Camas, Washington ("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, 2001, the Company had total assets of $432.0 million, total deposits of $295.5 million and shareholders' equity of $52.7 million. All references to the Company herein include the Bank where applicable. The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. The 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 commercial ("commercial") loans, commercial real estate loans and consumer loans. MARKET AREA The Company conducts operations from its home office in Vancouver and twelve branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, Vancouver (five branch offices) and Longview, Washington. The Company's market area for lending and deposit taking activities encompasses Clark, Cowlitz, Skamania and Klickitat Counties, throughout the Columbia River Gorge area. The Company operates a trust and financial services company, Riverview Asset Management Corporation, located in downtown Vancouver, Washington. Riverview Mortgage, a mortgage broker division of the Company originates mortgage loans (including construction loans) for various mortgage companies predominantly in the Portland 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. Vancouver is located in Clark County which is just north of Portland, Oregon. Several businesses are located in the Vancouver area because of the favorable tax structure and 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. Located in the Vancouver 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. LENDING ACTIVITIES GENERAL. At March 31, 2001, the Company's total net loans receivable, including loans held for sale, amounted to $296.9 million, or 68.7% of total assets at that date. The principal lending activity of the Company is the 2 origination of residential mortgage loans through its mortgage banking activities, including residential construction loans and loans collateralized by commercial properties. While the Company has historically emphasized real estate mortgage loans secured by one to four residential real estate, it has been diversifying its loan portfolio by focusing on increasing the number of originations of commercial , commercial real estate and consumer loans. A substantial portion of the Company's loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area. LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated. At March 31, ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) Real estate loans: One- to- four family(1) $117,152 35.67% $102,542 37.61% $83,275 39.03% $96,225 51.93% $94,536 57.07% Multi-family 11,073 3.37 10,921 4.01 7,558 3.54 4,790 2.58 5,439 3.28 Construction one-to- four family 60,041 18.28 49,338 18.10 45,524 21.34 35,003 18.89 32,529 19.64 Construction multi-family 4,514 1.37 4,669 1.71 4,209 1.97 5,352 2.89 547 0.33 Construction commercial 6,806 2.07 3,597 1.32 6,184 2.90 - - 634 0.38 Land 24,230 7.38 25,475 9.34 24,932 11.68 16,431 8.87 7,900 4.77 Commercial real estate 56,540 17.21 42,871 15.72 22,181 10.40 9,667 5.22 8,997 5.43 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total real estate loans 280,356 85.35 239,413 87.81 193,863 90.86 167,468 90.38 150,582 90.90 Commercial 23,099 7.03 15,976 5.87 4,049 1.90 1,732 0.93 794 0.48 Consumer loans: Automobile loans 3,223 0.98 2,875 1.05 3,146 1.47 2,829 1.53 2,889 1.74 Savings account loans 440 0.13 356 0.13 490 0.23 653 0.35 734 0.44 Home equity loans 18,761 5.71 11,148 4.09 9,096 4.26 9,885 5.33 8,254 4.98 Other consumer loans 2,596 0.80 2,864 1.05 2,728 1.28 2,741 1.48 2,416 1.46 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total consumer loans 25,020 7.62 17,243 6.32 15,460 7.24 16,108 8.69 14,293 8.62 Total loans and loans held for sale 328,475 100.00% 272,632 100.00% 213,372 100.00% 185,308 100.00% 165,669 100.00% ====== ====== ====== ====== ====== Less: Undisbursed loans in process 26,223 18,880 22,278 19,354 11,087 Unamortized loan origination fees, net of direct costs 3,475 3,355 2,770 2,340 1,967 Unearned discounts - 1 1 2 10 Allowance for possible loan losses 1,916 1,362 1,146 984 831 Total loans receivable, -------- -------- -------- -------- -------- net(1) $296,861 $249,034 $187,177 $162,628 $151,774 ======== ======== ======== ======== ========
(1)...Includes loans held for sale of $569,000, none, $341,000, $1.4 million, and $80,000 at March 31, 2001, 2000, 1999, 1998 and 1997, respectively. ONE- TO- FOUR FAMILY REAL ESTATE LENDING. The majority of the residential loans are secured by one- to four- family residences located in the Company's primary market area. Underwriting standards require that one- to four- family portfolio loans generally be owner occupied and that loan amounts not exceed 80% or (90% with private mortgage 3 insurance) of the current appraised value or cost, whichever is lower, of the underlying collateral. Terms typically range from 15 to 30 years as well as balloon mortgage loans with terms of either five or seven years. The Company originates both fixed rate mortgages and adjustable rate mortgages ("ARMs") with repricing based on Treasury Bill or other index. The ability to generate volume in ARMs, however, is largely a function of consumer preference and the interest rate environment. In addition to originating one- to- four family loans for its portfolio, the Company is an active mortgage broker for several third party mortgage lenders. In recent periods, such mortgage brokerage activities have reduced the volume of fixed rate one- to- four family loans that are originated and sold by the Company. See "-- Lending Activities -- Loan Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage Brokerage." 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." As a marketing incentive, the Company offers ARM loans with a discounted or "teaser" rate of up to 1.25% below the normal rate offered. The borrower, however, is qualified at the fully indexed rate. Annual and lifetime interest rate caps are based on the initial discounted rate. "Teaser" rate loans are subject to a prepayment penalty during the first three years of the loan term if the borrower repays more than 20% of the outstanding principal balance per year. During the first year, the penalty is 3% of the outstanding principal balance; during year two, the penalty is 2% of the outstanding principal balance; and during year three, the penalty is 1% of the outstanding principal balance. The Company does not originate negative amortization loans. The retention of ARM loans in the portfolio helps reduce the Company's exposure to changes in interest rates. There are, however, unquantifiable credit risks resulting from the potential of increased costs arising from changed rates to be paid by the customer. It is possible that during periods of rising interest rates the risk of default on ARM loans may increase as a result of repricing and the increased costs to the borrower. Furthermore, because "teaser" rate loans originated by the Company generally provide for initial rates of interest below the rates which would apply were the adjustment index used for pricing initially (discounting), these loans are subject to increased risks of default or delinquency. Another consideration is that although ARM loans allow the Company to increase the sensitivity of its asset base to changes in interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Company has no assurance that yields on ARM loans will be sufficient to offset increases in its cost of funds. While one- to- four family residential real estate loans typically are originated with 30-year terms and the Company permits its ARM loans to be assumed by qualified borrowers, such loans generally remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all of the fixed interest rate loans in the Company's loan portfolio contain due-on-sale clauses providing that the Company may declare the unpaid amount due and payable upon the sale of the property securing the loan. The Company enforces these due-on-sale clauses to the extent permitted by law. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. The Company requires title insurance insuring the status of its lien on all of the real estate secured loans and also requires that the fire and extended coverage casualty insurance (and, if appropriate, flood insurance) be maintained in an amount at least equal to the lesser of the loan balance and the replacement cost of the improvements. Where the value of the unimproved real estate exceeds the amount of the loan on the real estate, the Company may make exceptions to its property insurance requirements. CONSTRUCTION LENDING. The Company actively originates three types of residential construction loans: (i) speculative construction loans, (ii) custom construction loans and (iii) construction/permanent loans. Subject to market conditions, the Company intends to increase its residential construction lending activities. To a substantially lesser extent, the 4 Company also originates construction loans for the development of multi-family and commercial properties. The composition of the Company's construction loan portfolio was as follows: At March 31, -------------------------------------------------- 2001 2000 --------------------- ---------------------- Amount(1) Percent Amount(1) Percent --------- ------- --------- ------- (Dollars in thousands) Speculative construction $27,925 33.26% $24,855 33.88% Commercial construction 9,131 10.88 3,597 4.90 Custom/presold construction 10,064 11.99 9,732 13.26 Construction/permanent 22,754 27.11 17,754 24.19 Construction/land 14,068 16.76 17,443 23.77 -------- ------- -------- -------- Total $83,942 100.00% $73,381 100.00% ======= ====== ======= ====== (1) Includes loans in process. Speculative construction loans are made to home builders and are termed "speculative" because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Company or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to debt service the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified. At March 31, 2001, the Company had two borrowers with aggregate outstanding speculative loan balances of more than $1.0 million. All of the loans to these two borrowers were performing according to their terms and these loans totaled amounted to $2.8 million at March 31, 2001. Unlike speculative construction loans, presold construction loans are made for homes that have buyers. Presold construction loans are made to home builders who, at the time of construction, have a signed contract with a home buyer who has a commitment for permanent financing for the finished home with the Company or another lender. Custom construction loans are made to the homeowner. Custom/presold construction loans are generally originated for a term of 12 months. At March 31, 2001, the largest short-term custom construction loan and presold construction loan had outstanding balances of $514,000 and $189,000, respectively, and were performing according to the original terms. Construction/permanent loans are originated to the homeowner rather than the home builder along with a commitment by the Company to originate a permanent loan to the homeowner to repay the construction loan at the completion of construction. The construction phase of a construction/permanent loan generally lasts six months. 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. When the Company issues a commitment to provide permanent financing upon completion of construction, the loan fee charged on the construction loan is 0.75% higher as a protection against the risk of an increase in interest rates before the permanent loan is funded. This additional loan fee may not completely protect the Company from rapidly rising interest rates. See "-- Lending Activities -- Mortgage Brokerage." See "-- Lending Activities -- Loan Originations, Sales and Purchases" and "-- Lending Activities -- Mortgage Loan Servicing." At March 31, 2001, the largest outstanding construction/permanent loan had an outstanding balance of $560,000 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. 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 5 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. The Company has sought to address these risks by adhering to strict underwriting policies, disbursement procedures, and monitoring practices. In addition, because the Company's construction lending is in its primary market area, changes in the local economy and real estate market could adversely affect the Company's construction loan portfolio. Of the $9.1 million commercial construction loans outstanding at March 31, 2001, the loan commitment amount ranges between $220,000 and $4.0 million. At March 31, 2001, the largest outstanding construction commercial loan had an outstanding balance of $2.0 million and was performing according to its terms. MULTI-FAMILY LENDING. Multi-family mortgage loans generally have terms which range up to 25 years with maximum loan-to-value ratio up to 75%. Both fixed and adjustable rate loans are offered with a variety of terms to meet the multi-family residential financing needs. At March 31, 2001, the largest outstanding multi-family mortgage had an outstanding loan balance of $1.2 million and was performing according to original terms. Multi-family mortgage lending affords the Company an opportunity to receive interest at rates higher than those generally available from one- to- four family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to- four family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. The Company also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements. LAND LENDING. The Company originates loans to local real estate developers with whom it has established relationships for the purpose of developing residential subdivisions (i.e., installing roads, sewers, water and other utilities), as well as loans to individuals to purchase building lots. Land development loans are secured by a lien on the property and made for a period not to exceed five years with an interest rate that adjusts with the prime rate, and are made with loan-to-value ratios not exceeding 75%. Monthly interest payments are required during the term of the loan. Subdivision loans are structured so that the Company is repaid in full upon the sale by the borrower of approximately 90% of the subdivision lots. All of the Company's land loans are secured by property located in its primary market area. In addition, the Company also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements. At March 31, 2001, the largest outstanding land loan was $2.0 million and was performing according to original terms. Loans secured by undeveloped land or improved lots involve greater risks than one- to- four family residential mortgage loans because such loans are advanced upon the predicted future value of the developed property. If the estimate of such future value proves to be inaccurate, in the event of default and foreclosure, the Company may be confronted with a property the value of which is insufficient to assure full repayment. The Company attempts to minimize this risk by limiting the maximum loan-to-value ratio on land loans to 65% of the estimated developed value of the secured property. Loans on raw land may run the risk of adverse zoning changes, environmental or other restrictions on future use. COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real estate loans at both variable and fixed interest rates and secured by properties, such as office buildings, retail/wholesale facilities and industrial buildings, located in its primary market area. The principal balance of an average commercial real estate loan generally ranges between $50,000 and $600,000. At March 31, 2001, the largest commercial real estate loan had an outstanding balance of $3.5 million and is secured by an office building located in the Company's primary market area. At March 31, 2001, the loan was performing according to its original terms. 6 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. 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. 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 credit are typically made for the purpose of providing working capital and usually approved with a term of one year or less. Commercial lending involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial loans are often collateralized by equipment, inventory, accounts receivable or other business assets including real estate, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. At March 31, 2001, the Company had one commercial loan accounted for on a nonaccrual basis in the amount of $50,000. CONSUMER LENDING. The Company originates a variety of consumer loans, including home equity lines of credit, home equity term loans, home improvement loans, loans for debt consolidation and other purposes, automobile, boat loans and savings account loans. Home equity lines of credit and home equity term loans are typically secured by a second mortgage on the borrower's primary residence. Home equity lines of credit are made at loan-to-value ratios of 90% or less, taking into consideration the outstanding balance on the first mortgage on the property. Home equity lines of credit have a variable interest rate while the home equity term loans have a fixed rate of interest. The Company's procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. The outstanding principal balance of home equity loans increased by $7.6 million to $24.2 million at March 31, 2001, reflecting the increased marketing effort during the year ended March 31, 2001. 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 7 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, 2001 regarding the dollar amount of loans maturing in the Company's portfolio based on their contractual terms to maturity, but does not include potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances do not include unearned discounts, unearned income and allowance for loan losses. 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 $ 2 $ 142 $ 23 $ 403 $20,011 $20,581 Fixed rate 1,115 6,186 23,711 23,485 42,072 96,569 Construction: Adjustable rate 36,301 15,836 - - - 52,137 Fixed rate 29,673 2,183 - - - 31,856 Other real estate: Adjustable rate 7,925 3,248 575 915 4,485 17,148 Fixed rate 4,450 5,299 19,601 21,236 11,479 62,065 Commercial: Adjustable rate 10,449 1,092 161 971 - 12,673 Fixed rate 2,438 1,789 3,325 2,873 - 10,425 Consumer: Adjustable rate 301 85 980 347 15,422 17,135 Fixed rate 1,218 1,451 2,492 1,055 1,670 7,886 ------- ------- ------- ------- ------- -------- Total gross loans $93,872 $37,311 $50,868 $51,285 $95,139 $328,475 ======= ======= ======= ======= ======= ======== The following table sets forth the dollar amount of all loans due one year after March 31, 2001 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 $ 95,454 $ 20,579 Construction loans 2,183 15,836 Other real estate loans 57,615 9,223 Commercial 7,987 2,224 Consumer 6,668 16,834 -------- ------- Total $169,907 $64,696 ======== ======= 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 8 generally give the Company the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. Furthermore, management believes that a significant number of the Company's residential mortgage loans are outstanding for a period less than their contractual terms because of the transitory nature of many of the borrowers who reside in its primary market area. LOAN SOLICITATION AND PROCESSING. The Company's lending activities are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management. The customary sources of loan originations are realtors, walk-in customers, referrals and existing customers. The Company also uses commissioned loan brokers and print advertising to market its products and services. The Company's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan, the adequacy of the value of the property that will secure the loan, and, in the case of commercial and multi-family real estate loans, the cash flow of the project and the quality of management involved with the project. The Company's lending policy requires borrowers to obtain certain types of insurance to protect the Company's interest in the collateral securing the loan. Loans are approved at various levels of management, depending upon the amount of the loan. LOAN COMMITMENTS. The Company issues commitments to originate residential mortgage loans, commercial real estate mortgage loans, consumer loans, and commercial 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 for both real estate and for commercial loans to lend to a customer subject to the Company's usual terms and conditions. Collateral is not required to support commitments. At March 31, 2001, the Company had outstanding commitments to originate loans in the amount of $7.6 million. 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, 2001 and 2000, the Company's total loan originations were $206.5 million and $156.8 million, respectively, of which 43.6% and 47.6%, respectively, were subject to periodic interest rate adjustment and 56.4% and 52.4% were fixed-rate loans, respectively. The Company customarily sells the fixed-rate residential one- to- four family mortgage loans that it originates with maturities of 15 years or more to the FHLMC as part of its asset liability strategy. The sale of such loans allows the Company to continue to make loans during periods when savings flows decline or funds are not otherwise available for lending purposes; however, the Company assumes an increased risk if such loans cannot be sold in a rising interest rate environment. Changes in the level of interest rates and the condition of the local and national economies affect the amount of loans originated by the Company and demanded by investors to whom the loans are sold. Generally, the Company's residential one- to- four family mortgage loan origination and sale activity and, therefore, its results of operations, may be adversely affected by an increasing interest rate environment to the extent such environment results in decreased loan demand by borrowers and/or investors. Accordingly, the volume of loan originations and the profitability of this activity can vary significantly from period to period. Mortgage loans are sold to the FHLMC on a nonrecourse basis whereby foreclosure losses are generally the responsibility of the FHLMC and not the Company. 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 9 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, ---------------------------------- 2001 2000 1999 ------ ------ ------ (In thousands) Total net loans receivable at beginning of period $249,034 $187,177 $162,628 -------- -------- -------- Loans originated: Mortgage loans: Residential one- to- four family 23,978 20,609 43,947 Multi-family 1,087 490 - Construction one- to- four family 71,602 67,955 68,649 Land and commercial real estate 31,957 48,057 36,355 Construction Non-residential 9,345 - - Commercial 47,426 14,717 4,290 Consumer 21,062 5,004 5,410 -------- -------- -------- Total loans originated 206,457 156,832 158,651 Residential one-to-four family loans sold (7,563) (4,224) (25,809) Repayment of principal (147,415) (88,179) (106,036) (Increase) decrease in other items, net (3,652) (2,572) (2,257) -------- -------- -------- Net increase in loans 47,827 61,857 24,549 -------- -------- -------- Total net loans receivable at end of period $296,861 $249,034 $187,177 ======== ======== ======== MORTGAGE BROKERAGE. In addition to originating mortgage loans for retention in its portfolio, the Company employs seven commissioned brokers who originate mortgage loans (including construction loans) for various mortgage companies predominately in the Portland 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 company and are not originated as an asset of the Company. In return, the Company receives a fee ranging from 1% to 1.5% of the loan amount that it shares with the commissioned broker. Loans brokered to the Company are closed on the Company's books as if the Company had originated them and the commissioned broker receives a fee of approximately 0.50% of the loan amount. During the year ended March 31, 2001, brokered loans totaled $109.4 million (including $66.9 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, 2001. MORTGAGE LOAN SERVICING. The Company is a qualified servicer for the FHLMC. The Company's general policy is to close its residential loans on the FHLMC modified loan documents to facilitate future sales to the FHLMC. Upon sale the Company continues to collect payments on the loans, to supervise foreclosure proceedings, if necessary, and otherwise to service the loans. The Company generally retains the servicing rights on the fixed-rate mortgage loans that it sells to the FHLMC. At March 31, 2001, total loans serviced for others were $78.6 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, 2001, the carrying value of these purchased servicing rights was $138,000 and was being amortized over the life of the underlying loan servicing. 10 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 1.5% to 2.5% 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 gain on sale of loans. The Company had $3.5 million of net deferred loan fees at March 31, 2001. 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 secured by real estate becomes 17 days past due. A follow-up telephone call, or letter if the borrower cannot be contacted by telephone, is made when the loan becomes 22 days past due. A delinquency notice is sent to the borrower when the loan becomes 30 days past due. When payment becomes 60 days past due, a notice of default letter is sent to the borrower stating that foreclosure proceedings will commence unless the delinquency is cured. If a loan continues in a delinquent status for 90 days or more, the Company generally initiates foreclosure proceedings. In certain instances, however, the Company may decide to modify the loan or grant a limited moratorium on loan payments to enable borrowers to reorganize their financial affairs. A delinquent consumer loan borrower is contacted on the fifteenth day of delinquency. A letter of intent to repossess collateral is mailed to the borrower after the loan becomes 45 days past due and repossession proceedings are initiated after the loan becomes 90 days delinquent. Delinquencies in commercial loans are handled on a case by case basis. Generally, notices are sent and personal contact is made with the borrower when the loan is 15 days past due. Loan officers are responsible for collecting loans they originate or are assigned to them. Depending on the nature of the loan or type of collateral securing the loan, negotiations, or other actions, are undertaken depending upon what the circumstances warrant. NONPERFORMING ASSETS. Loans are reviewed regularly and 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. The following table sets forth information with respect to the Company's nonperforming assets. At the dates indicated, the Company had no restructured loans within the meaning of Statement of Accounting Standards ("SFAS") No. 15. 11 At March 31, ------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a nonaccrual basis: Residential real estate $ 153 $1,153 $1,052 $ 401 $ 76 Commercial 50 99 208 105 - Consumer 116 26 33 - 11 -------- ------ ------ ------ ----- Total 319 1,278 1,293 506 87 -------- ------ ------ ------ ----- Accruing loans which are contractually past due 90 days or more 226 - 5 11 - ------- ------ ------ ------ ------ Total of nonaccrual and 90 days past due loans 545 1,278 1,298 517 87 ------- ------ ------ ------ ------ Real estate owned (net) 473 65 30 - 135 ------- ------ ------ ------ ------ Total nonperforming assets $1,018 $1,343 $1,328 $517 $222 ======= ====== ====== ====== ====== Total loans delinquent 90 days or more to net loans 0.18% 0.51% 0.69% 0.32% 0.06% Total loans delinquent 90 days or more to total assets 0.13 0.37 0.43 0.19 0.04 Total nonperforming assets to total assets 0.24 0.39 0.44 0.19 0.10 The $319,000 nonaccrual balance of real estate loans at March 31, 2001, consisted of $153,000 one- to- four family residential loans, $50,000 commercial and $116,000 consumer loans. The gross amount of interest income on the nonaccrual loans that would have been recorded during the year ended March 31, 2001 if the nonaccrual loans had been current in accordance with their original terms was approximately $15,000. For the year ended March 31, 2001, no interest was earned on the nonaccrual loans and included in interest and fees on loan receivable interest income. ASSET CLASSIFICATION. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant 12 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, -------------------- 2001 2000 ---- ---- (In thousands) Substandard assets $863 $1,472 Doubtful assets 5 - Loss assets - - General loss allowances 1,916 1,362 Specific loss allowances - - Charge-offs 413 488 The substandard assets at March 31, 2001 are made up of one residential construction loan totaling $210,000, one one- to- four residential loan totaling $150,000, a land and development loan totaling $225,000 and commercial and other loans totaling $278,000 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, 2001, the Company owned three properties with a recorded value of $473,000 compared to $65,000 at March 31, 2000. The $473,000 recorded value is made up of five properties consisting of three land loans totaling $422,000 and one single family of $51,000. 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 are established. At March 31, 2001, the Company had an allowance for loan losses of $1.9 million, or 0.58% of total outstanding loans at that date. Based on past experience and future expectations, management believes that loan loss reserves are adequate. While the Company believes it has established its existing allowance for loan losses in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"), there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses, thereby negatively affecting the Company's financial condition and results of operations. 13 The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated. Year Ended March 31, ------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period $1,362 $ 1,146 $984 $831 $653 ------ ------ ------ ------ ------ Provision for loan losses 949 675 240 180 180 Recoveries: Residential real estate - - - - 1 Commercial - 1 - - - Consumer 18 28 7 11 8 ------ ------ ------ ------ ------ Total recoveries 18 29 7 11 9 ------ ------ ------ ------ ------ Charge-offs: Residential real estate 226 48 28 - - Commercial 27 282 - - - Consumer 160 158 57 38 11 ------ ------ ------ ------ ------ Total charge-offs 413 488 85 38 11 ------ ------ ------ ------ ------ Net charge-offs 395 459 78 27 2 ------ ------ ------ ------ ------ Balance at end of period. $1,916 $1,362 $1,146 $984 $831 ====== ====== ====== ====== ====== Ratio of allowance to total loans outstanding at end of period 0.58% 0.50% 0.54% 0.53% 0.50% Ratio of net charge-offs to average loans outstanding during period. 0.14 0.21 0.04 0.02 0.00 Ratio of allowance to total of nonaccrual and 90 days past due loans. 351.56 106.58 88.30 190.32 955.17 14 The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. At March 31, ---------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 -------------- -------------- -------------- -------------- -------------- Loan Loan Loan Loan Loan Category Category Category Category Category as a Percent as a Percent as a Percent as a Percent as a Percent of Total of Total of Total of Total of Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in thousands) Real estate - mortgage One- to- four family $ 263 35.67% $ 259 37.62% $ 218 39.03% $ 192 51.93% $ 282 57.06% Multi-family 42 3.37 41 4.01 10 3.54 10 2.58 16 3.28 Construction one- to- four family 224 18.28 304 18.10 292 21.34 154 18.89 99 19.64 Construction multi-family 21 1.37 10 1.71 10 1.97 23 2.89 2 0.33 Construction commercial 34 2.07 17 1.32 44 2.90 - - 2 0.38 Land 206 7.38 223 9.34 32 11.68 33 8.87 27 4.77 Commercial real estate 580 17.21 224 15.72 180 10.40 19 5.22 24 5.43 Commercial loans 354 7.03 160 5.86 198 1.90 100 0.93 40 0.48 Consumer loans: Secured 154 7.05 90 5.31 89 5.96 142 7.21 128 7.17 Unsecured 34 0.57 29 1.01 37 1.28 27 1.48 24 1.46 Unallocated 4 - 5 - 36 - 284 - 187 - ------ ------ ------- ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses $1,916 100.00% $1,362 100.00% $1,146 100.00% $ 984 100.00% $ 831 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
15 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 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, 2001, the Bank's regulatory liquidity ratio was 28.2%, 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 Company's 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, 2001, the Company's investment and mortgage-backed securities portfolio totaled approximately $76.0 million and consisted primarily of obligations of federal agencies, and Federal National Mortgage Association ("FNMA") and FHLMC mortgage-backed securities. At March 31, 2001, 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, 2001, 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 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. 16 The following table sets forth the investment securities portfolio and carrying values at the dates indicated. The fair value of the investment and mortgage-backed securities portfolio was $76.1 million, $61.7 million, and $84.6 million at March 31, 2001, 2000 and 1999, respectively. At March 31, ---------------------------------------------------------- 2001 2000 1999 ------------------- ------------------- ------------------ Carrying Percent of Carrying Percent of Carrying Percent of Value Portfolio Value Portfolio Value Portfolio ----- --------- ----- --------- ----- --------- (Dollars in thousands) Held to maturity (at amortized cost): FHLB debentures $ - - % $ - - % $4,000 4.74% Real estate mortgage investment conduits ("REMICs") 1,805 2.38 1,985 3.21 3,162 3.75 FHLMC mortgage-backed securities 1,680 2.21 2,377 3.84 3,370 4.00 FNMA mortgage-backed securities 2,920 3.84 4,295 6.95 6,183 7.33 Municipal securities 861 1.13 903 1.46 943 1.12 ------ ----- ------ ------ -------- ------- 7,266 9.56 9,560 15.46 17,658 20.94 ------ ----- ------ ------ -------- ------- Available for sale (at fair value): FHLB debentures 6,937 9.13 9,709 15.70 11,440 13.57 REMICs 40,943 53.90 36,561 59.14 49,502 58.71 FHLMC mortgage-backed securities 451 0.59 612 0.99 701 0.84 FNMA mortgage-backed securities 1,745 2.30 2,205 3.57 3,169 3.76 Municipal securities 2,625 3.46 2,435 3.94 906 1.07 Equity securities 15,999 21.06 739 1.20 934 1.11 ------- ------ ------ ------ ------- ------ 68,700 90.44 52,261 84.54 66,652 79.06 ------- ------ ------ ------ ------- ------ Total investment securities $75,966 100.00% $61,821 100.00% $84,310 100.00% ======= ====== ======= ====== ======= ====== The following table sets forth the maturities and weighted average yields in the securities portfolio at March 31, 2001. 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) Municipal securities $- -% $ - -% $2,000 4.17% $1,486 5.20% FHLB debentures - - - - 2,505 6.53 4,432 6.26 REMICs - - 574 6.50 1,023 6.20 41,151 6.60 FHLMC mortgage-backed securities - - 889 6.01 453 6.99 789 7.72 FNMA mortgage-backed securities - - 3,176 6.72 296 6.66 1,193 8.32 Equity securities - - - - - - 15,999 - ------ -------- ------ -------- ------ -------- ------ ------- Total $ - -% $4,639 6.56% $ 6,277 5.76% $65,050 6.59% ====== ======== ====== ======== ====== ======== ====== ======= (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. 17 In addition to U.S. Government treasury obligations, the Company invests in mortgage-backed securities and real estate mortgage investment conduits ("REMICs"). Mortgage-backed securities (which are also known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family mortgages. Principal and interest payments on mortgage-backed securities are passed from the mortgage originators, through intermediaries (i.e., FNMA, FHLMC, the Government National Mortgage Association ("GNMA") or private issues) that pool and repackage the participation interests in the form of securities, to investors such as the Company. Mortgage-backed securities generally increase the quality of the Company's assets by virtue of the guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. See Note 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, 2001, the Company held REMICs with a net carrying value of $42.7 million, of which $1.8 million were classified as held-to-maturity and $40.9 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, 2001, the Company owned $7.7 million of privately issued REMICs. Investments in mortgage-backed securities, including REMICs, involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. The investment in school district bonds was $2.6 million at March 31, 2001 compared to $2.4 million at March 31, 2000. Equity securities increased to $16.0 million at March 31. 2001 from $739,000 at March 31, 2000 reflecting investments in FNMA and FHLMC variable rate non-cumulative preferred stock. DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS GENERAL. Deposits, loan repayments and loan sales are the major sources of the Company's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. DEPOSIT ACCOUNTS. Deposits are attracted from within the Company's primary market area through the offering of a broad selection of deposit instruments, including demand deposits, negotiable order of withdrawal ("NOW") accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. Historically the Company has focused on retail deposits. Expansion in commercial lending has led to growth in business deposits including demand deposit accounts. 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. 18 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, 2001. Percent Interest Minimum of Total Rate Term Category Amount Balance Deposits ----- ---- -------- ------- ------- -------- (In thousands) 1.500% None NOW Accounts $ 100 $ 32,143 10.88% 2.750 None Regular Savings 100 18,827 6.37 3.994 None Money Market 2,500 45,724 15.47 None None Non-interest Checking 100 27,935 9.45 Certificates of Deposit ----------------------- 5.746 91 Days Fixed-Term, Fixed-Rate 1,000 12,105 4.10 6.327 182-364 Days Fixed-Term, Fixed-Rate 1,000 39,809 13.47 6.375 12-17 Months Fixed-Term, Fixed-Rate 1,000 71,725 24.27 5.198 18 Months Fixed-Term, Variable Rate, Individual Retirement Account ("IRA") 1,000 1,137 0.38 6.049 18-23 Months Fixed-Term, Fixed-Rate 1,000 5,351 1.81 6.038 24-35 Months Fixed-Term, Fixed-Rate 1,000 24,576 8.32 5.786 36-59 Months Fixed-Term, Fixed-Rate 1,000 5,413 1.83 5.969 60-83 Months Fixed-Term, Fixed-Rate 1,000 9,775 3.31 5.835 84-120 Months Fixed-Term, Fixed-Rate 1,000 1,003 0.34 -------- ------ Total $295,523 100.00% ======== ====== 19 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, -------------------------------------------------------------------------------- 2001 2000 1999 -------------------------- -------------------------- -------------------------- Increase/ Increase/ Increase/ Balance Percent (Decrease) Balance Percent (Decrease) Balance Percent (Decrease) ------- ------- ---------- ------- ------- ---------- ------- ------- ---------- (Dollars in thousands) Non-interest-bearing demand $27,935 9.45% $ 3,194 $24,741 10.65% $ 14,322 $10,419 5.20% $ 986 NOW checking 32,143 10.88 11,167 20,976 9.03 191 20,785 10.38 1,489 Regular savings accounts 18,827 6.37 (1,013) 19,840 8.54 (1,461) 21,301 10.63 1,372 Money market deposit accounts 45,724 15.47 1,104 44,620 19.20 16,889 27,731 13.84 7,491 Fixed-rate certificates which mature(1): Within 12 months 51,913 17.57 27,612 24,301 10.46 7,569 16,732 8.35 6,543 Within 12-36 months 102,789 34.78 22,162 80,627 34.70 (6,114) 86,741 43.31 1,056 Beyond 36 months 16,192 5.48 (1,058) 17,250 7.42 648 16,602 8.29 1,549 --------- ------- ------- ------- ----- ------- ------- ------ -------- Total $295,523 100.00% $63,168 $232,355 100.00% $32,044 $200,311 100.00% $20,486 ======== ====== ======= ======== ====== ======= ======== ====== =======
------------------ (1) IRAs of $12.8 million, $11.6 million and $12.0 million at March 31, 2001, 2000 and 1999, respectively, are included in certificate balances. 20 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, ---------------------------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Below 4.00% $ 40 $ - $ 102 4.00 - 4.99% 5,772 25,070 37,303 5.00 - 5.99% 45,544 82,319 73,315 6.00 - 7.99% 119,538 14,789 9,344 8.00 - 9.99% - - 11 ------- -------- -------- Total $170,894 $122,178 $120,075 ======= ======== ======== The following table sets forth the amount and maturities of certificates of deposit at March 31, 2001. Amount Due --------------------------------------------------------- Less Than 1-2 After After One Year Years 2-3 Years 3 Years Total --------- ----- --------- ------- ------ (In thousands) Below 4.00% $ 27 $ 13 $ - $ - $ 40 4.00 - 4.99% 4,793 815 100 64 5,772 5.00 - 5.99% 36,673 5,136 2,053 1,682 45,544 6.00 - 7.99% 100,529 12,877 2,678 3,454 119,538 ------- ------ ------- ------- ------- Total $142,022 $18,841 $4,831 $ 5,200 $170,894 ======= ====== ======= ======= ======= The following table presents the amount and weighted average rate of time deposits equal to or greater than $100,000 at March 31, 2001. Weighted Maturity Period Amount Average Rate --------------- ------------ ------------ (Dollars in thousands) Three months or less $ 30,477 6.42% Over three through six months 20,829 6.52 Over six through 12 months 17,436 6.29 Over 12 months 6,259 6.38 ---------- ---- Total $ 75,001 6.41% ========== ==== 21 DEPOSIT ACTIVITIES The following table sets forth the deposit activities of the Company for the periods indicated. Year Ended March 31, --------------------------------------- 2001 2000 1999 ------ ------ ------ (In thousands) Beginning balance $232,355 $200,311 $179,825 Net increase before interest credited 51,821 23,454 12,382 Interest credited 11,347 8,590 8,104 -------- -------- -------- Net increase in savings deposits 63,168 32,044 20,486 -------- -------- -------- Ending balance $295,523 $232,355 $200,311 ======== ======== ======== 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 relies upon advances from the FHLB-Seattle to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB-Seattle are typically secured by the 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, 2001, the Bank had $79.5 million of outstanding advances from the FHLB-Seattle under an available credit facility of $149.9 million. The following tables set forth certain information concerning the Company's borrowings at the dates and for the periods indicated. At March 31, ---------------------------------- 2001 2000 1999 ---- ---- ---- Weighted average rate paid on FHLB advances 6.62% 6.24% 4.87% 22 Year Ended March 31, 2001 2000 1999 ------ ------ ------ (Dollars in thousands) Maximum amounts of FHLB advances outstanding at any month end. $80,000 $60,550 $49,550 Average FHLB advances outstanding 72,825 45,406 34,008 Weighted average rate paid on FHLB advances 6.79% 5.47% 5.36% 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, 2001 was $71,907. 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 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. 23 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 $4.4 million at March 31, 2001. Among other benefits, the FHLB provides a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB-Seattle. FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal agency established originally to insure the deposits, up to prescribed statutory limits, of federally insured banks and to preserve the safety and soundness of the banking industry. The FDIC maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law. As insurer of the Bank's deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. Under applicable regulations, the FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the reporting period ending seven months before the assessment period. The capital categories are: (i) well-capitalized, (ii) adequately capitalized, or (iii) undercapitalized. An institution is also placed in one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned with the most well-capitalized, healthy institutions receiving the lowest rates. 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 2.1 basis points for each $100 in domestic deposits for both BIF and SAIF members. These assessments, which are revised quarterly 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 Federal Insurance Act ("FDIA"), insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. Management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts 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. 24 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, 2001, 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, 2001, the Bank met the test and its QTL percentage was 85.40%. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See -- Savings and Loan Holding Company Regulations. 25 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, 2001, the Bank had tangible capital of $46.5 million, or 10.9% of adjusted total assets, which is approximately $40.1 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At March 31, 2001, the Bank had $1.0 million in core deposit intangible and $1.2 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, 2001, the Bank had core capital equal to $46.5 million, or 10.9% of adjusted total assets, which is $33.7 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, 2001, the Bank had total risk-based capital of approximately $48.4 million, including $46.5 million in core capital and $1.9 million in qualifying supplementary capital, and risk-weighted assets of $282.7 million, or total capital of 17.1% of risk-weighted assets. This amount was $25.8 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 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 of 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 26 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, 2001, the Bank's limit on loans to one borrower was $7.3 million. At March 31, 2001, the Bank's largest single loan to one borrower was $3.5 million, which was performing according to its original terms. ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. When a savings association establishes or acquires a subsidiary or elects to conduct any new activity through a subsidiary that the association controls, the savings association must notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders. The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the SAIF. If so, it may require that no SAIF member engage in that activity directly. TRANSACTIONS WITH AFFILIATES. Savings associations must comply with Sections 23A and 23B of the Federal Reserve Act 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. 27 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 their delineated communities. The CRA does not establish specific lending requirements or programs nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to meet all the credit needs of its delineated community. The CRA requires the federal banking agencies, in connection with regulatory examinations, to assess an institution's record of meeting the credit needs of its delineated community and to take such record into account in evaluating regulatory applications to establish a new branch office that will accept deposits, relocate an existing office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution, among others. The CRA requires public disclosure of an institution's CRA rating. The Bank received a "satisfactory" rating as a result of its latest evaluation. REGULATORY AND CRIMINAL ENFORCEMENT PROVISIONS. The OTS has primary enforcement responsibility over savings institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $27,500 per day, or $1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. SAVINGS AND LOAN HOLDING COMPANY REGULATIONS GENERAL. The Company is a unitary savings and loan company subject to regulatory oversight of the OTS. Accordingly, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings 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. NEW LEGISLATION. On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was signed into law. The purpose of this legislation is to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. Generally, the Act: (a) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers; (b) provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies; (c) broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries; (d) provides an enhanced framework for protecting the privacy of consumer information; (e) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system; (f) modifies the laws governing the implementation of the CRA; and 28 (g) addresses a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions. 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. 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. 29 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, 2001, 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 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 seven 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 five years. 30 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, other short-term money market securities, corporate and government securities. The Company's competition for loans comes principally from other thrift institutions, credit unions, commercial banks, mortgage banking companies and mortgage brokers. SUBSIDIARY ACTIVITIES Under OTS regulations, the Bank is authorized to invest up to 3% of its assets in subsidiary corporations, with amounts in excess of 2% only if primarily for community purposes. At March 31, 2001, the Company's investments of $606,000 in Riverview Services, Inc. ("Riverview Services") its wholly owned subsidiary, and the investment of $687,000 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, 2001 and total assets of $608,000 at that date. Riverview Services' operations are included in the Consolidated Financial Statements of the Company. RAM Corp is an asset management company providing trust, estate planning and investment management services. RAM Corp commenced business December 1998 and had a net loss of $156,000 for the fiscal year ended March 31, 2001 and total assets of $890,000 at that date. RAM Corp earns fees on the management of assets held in fiduciary or agency capacity. At March 31, 2001, total assets under management approximated $92.2 million. RAM Corp's operations are included in the Consolidated Financial Statements of the Company. PERSONNEL As of March 31, 2001, the Company had 147 full-time equivalent employees, none of whom are represented by a collective bargaining unit. The Company believes its relationship with its employees is good. EXECUTIVE OFFICERS. The following table sets forth certain information regarding the executive officers of the Company. Name Age(1) Position ---- ------ -------- Patrick Sheaffer 61 President and Chief Executive Officer Ron Wysaske 48 Executive Vice President, Treasurer and Chief Financial Officer (1) At March 31, 2001. PATRICK SHEAFFER joined the Bank in 1965 and has served as President and Chief Executive Officer since 1976. He became Chairman of the Board in March 1993. He is responsible for the daily operations and the management of the Company. Mr. Sheaffer is active in numerous professional and civic organizations. RON WYSASKE joined the Bank 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. 31 ITEM 2. PROPERTIES ------------------- The following table sets forth certain information relating to the Company's offices as of March 31, 2001. Approximate Location Year Opened Square Footage Deposits (In millions) Main Office: 900 Washington, Suite 900 Vancouver, Washington(1)(3) 2000 16,000 $ 9.3 Branch Offices: 700 N.E. Fourth Avenue 1975 25,000 $46.7 Camas, Washington(3) 3307 Evergreen Way 1963 3,200 $26.2 Washougal, Washington(1)(3)(4) 225 S.W. 2nd Street 1971 1,700 $32.6 Stevenson, Washington(3) 330 E. Jewett Boulevard 1977 3,200 $24.4 White Salmon, Washington(3)(5) 15 N.W. 13th Avenue 1979 2,900 $22.6 Battle Ground, Washington(3)(6) 412 South Columbus 1983 2,500 $25.6 Goldendale, Washington(3) 11505-K N.E. Fourth Plain Boulevard 1994 3,500 $15.3 Vancouver, Washington(3) "Orchards" Office 7735 N.E. Highway 99 1994 4,800 $31.7 Vancouver, Washington9(1)(2)(3) "Hazel Dell" Office 1011 Washington Way 1994 2,000 $16.8 Longview, Washington(2)(3) 900 Washington St., Suite 100 1998 5,300 $32.8 Vancouver, Washington (1)(3) 1901-E N.E. 162nd Avenue Vancouver, Washington(1)(3) 1999 3,200 $ 7.0 800 N.E. Tenny Road, Suite D Vancouver, Washington(3) 2000 3,200 $ 6.0 32 (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. (4) New facility in 2001. (5) New facility in 2000. (6) New facility in 1994. During second quarter of fiscal year 2001, the Company's main office for administration was relocated from Camas to the downtown Vancouver address of 900 Washington Street. The Washougal branch office was relocated during the first quarter of the fiscal year 2001. The Company uses an outside data processing system to process customer records and monetary transactions, post deposit and general ledger entries and record activity in installment lending, loan servicing and loan originations. At March 31, 2001, the net book value of the Company's office properties, furniture, fixtures and equipment was $10.1 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, 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------------- At March 31, 2001, the Company had 4,981,421 shares of Common Stock issued and outstanding, 844 stockholders of record and an estimated 1,000 holders in nominee or "street name." Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets. The principal source of funds for the Company 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 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 33 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 2001 and 2000 fiscal years. At March 31, 2001, there were ten market makers in the Company's common stock as reported by the Nasdaq Stock Market. Cash Dividends Fiscal Year Ended March 31, 2001 High Low Declared -------------------------------- ---- --- -------- Quarter Ended March 31, 2001 $9.75 $8.25 $0.100 Quarter Ended December 31, 2000 8.88 8.03 0.100 Quarter Ended September 30, 2000 8.88 8.00 0.100 Quarter Ended June 30, 2000 9.38 8.00 0.100 Cash Dividends Fiscal Year Ended March 31, 2000 High Low Declare -------------------------------- ---- --- --------- 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 34 ITEM 6. SELECTED FINANCIAL DATA --------------------------------- The following tables set forth certain information concerning the consolidated financial position and results of operations of the Company at the dates and for the periods indicated. At March 31, ---------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ FINANCIAL CONDITION DATA: (In thousands) Total assets $431,996 $344,680 $302,601 $273,174 $224,385 Loans receivable, net(1) 296,861 249,034 187,177 162,628 151,774 Mortgage-backed securities held to maturity, at amortized cost 6,405 8,657 12,715 20,341 26,402 Mortgage-backed securities available for sale, at fair value 43,139 39,378 53,372 32,690 2,990 Cash and interest-bearing deposits 38,935 15,786 17,207 27,482 6,951 Investment securities held to maturity, at amortized cost 861 903 4,943 8,336 20,456 Investment securities available for sale, at fair value 25,561 12,883 13,280 9,977 3,899 Deposit accounts 295,523 232,355 200,311 179,825 169,416 FHLB advances 79,500 60,550 42,550 29,550 27,180 Shareholders' equity 52,721 48,489 56,867 61,082 25,022 Year Ended March 31, ---------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ OPERATING DATA: (In thousands) Interest income $31,343 $25,438 $23,114 $20,302 $17,476 Interest expense 16,288 11,073 9,925 9,389 8,923 ------- ------- ------- ------- ------- Net interest income 15,055 14,365 13,189 10,913 8,553 Provision for loan losses 949 675 240 180 180 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 14,106 13,690 12,949 10,733 8,373 Gains from sale of loans, securities and real estate owned 94 151 283 269 106 Gain on sale of land and fixed assets 540 - - - - Other non-interest income 3,328 2,746 2,591 2,211 1,768 Non-interest expenses(2) 12,867 10,832 9,055 7,218 7,204 ------- ------- ------- ------- ------- Income before federal income tax provision and extraordinary item 5,201 5,755 6,768 5,995 3,043 Provision for federal income taxes 1,644 1,878 2,305 2,071 1,035 ------- ------- ------- ------- ------- Net income $ 3,557 $ 3,877 $ 4,463 $ 3,924 $ 2,008 ======= ======= ======= ======= ======= 35 At March 31, ---------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ OTHER DATA: Number of: Real estate loans outstanding 3,423 3,151 2,956 3,155 3,260 Deposit accounts 26,068 23,653 21,639 20,395 19,300 Full service offices 12 12 10 9 9 At or For the Year Ended March 31, ---------------------------------------------- 2001 2000 1999 1998 1997 ------ ----- ------ ------ ------ KEY FINANCIAL RATIOS: Performance Ratios: Return on average assets 0.94% 1.22% 1.55% 1.56% 0.92% Return on average equity 7.04 7.15 7.33 9.15 8.38 Dividend payout ratio(3)(4)(7) 52.29 47.13 30.38 11.77 10.56 Interest rate spread 3.37 3.88 3.83 3.72 3.72 Net interest margin 4.27 4.78 4.81 4.61 4.19 Non-interest expense to average assets(5) 3.41 3.41 3.14 2.87 3.30 Efficiency ratio (non- interest expense divided by the sum of net interest income and non-interest income)(6) 67.66 62.75 56.37 53.89 69.09 Asset Quality Ratios: Average interest-earning assets to interest-bearing liabilities 119.75 124.51 127.02 122.21 110.80 Allowance for loan losses to total loans at end of period 0.58 0.50 0.54 0.53 0.50 Net charge-offs to average outstanding loans during the period 0.14 0.21 0.04 0.02 - Ratio of nonperforming assets to total assets 0.24 0.39 0.44 0.19 0.10 Capital Ratios: Average equity to average assets 13.41 17.05 21.08 17.02 10.98 Equity to assets at end of fiscal year 12.20 14.07 18.79 22.36 11.15 (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% for the year ended March 31, 1997 without special SAIF assessment. (7) Dividends paid divided by net income. 36 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. The Company has used "forward-looking statements" to describe future plans and strategies, including its expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, 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 In the fiscal year ended March 31, 1998, the Company began to implement a growth strategy to broaden the products and services from traditional thrift offerings to those more closely related to commercial banking. The growth strategy included four elements, geographic and product expansion, loan portfolio diversification, development of relationship banking and maintenance of asset quality. Since the end of fiscal 1998, the Company has added three branches including the branch at the main office for administration in downtown Vancouver. The Washougal branch was relocated to a new facility, the Stevenson, White Salmon and Goldendale branches were remodeled. The number of automated teller machines was doubled from six to twelve so that each branch location now is serviced by an automated teller machine. The Company's growing commercial customer base has enjoyed new products and the improvements in existing products. These new products include business checking, internet banking and new loan products. Retail customers have benefited from expanded choices ranging from additional automated teller machines , consumer lending products, checking accounts, debit cards, 24 hour account information service and internet banking. The fiscal year 1998 marked the 75th year anniversary since Riverview Community Bank opened its doors in 1923. The historical emphasis has been on residential real estate lending. The portfolio diversification is focused toward the expansion of commercial loans. Four experienced commercial lenders were hired to implement the expansion in commercial lending. In the fiscal year 1998 commercial loans as a percentage of the loan portfolio were 0.93%. The commercial loan portfolio stands at 7.03% at the end of fiscal year 2001. Commercial lending has wider interest margins and shorter loan terms than residential lending which can increase the loan portfolio profitability. The 1998 addition of RAM Corp a trust company directed by experienced trust officers, expanded loan products serviced by experienced commercial and consumer lending officers, expanded branch network lead by experienced branch managers, enhances the Company's relationship banking. Development of relationship banking has been the key 37 to the Company's growth in assets and profitability. Total assets of the Company has increased 58% since the end of fiscal year 1998. The Company has a strong tradition of safety and soundness and balance sheet growth reflects this tradition. The ratio of nonperforming assets to total assets continues this strong tradition and is 0.24% at March 31, 2001. 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, net gains and losses on sales of interest-earning assets and asset management fee income. Non-interest expenses include compensation and benefits, occupancy and equipment expenses, deposit insurance premiums, data servicing expenses and other operating costs. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation and monetary and fiscal policies. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2001 AND 2000 The Company's total assets were $432.0 million at March 31, 2001, compared to $344.7 million at March 31, 2000. This increase resulted primarily from the growth in the loan portfolio, cash and investment securities. The growth was funded primarily by deposit growth and an increase in FHLB advances. Loans receivable, net, were $296.3 million at March 31, 2001, compared to $249.0 million at March 31, 2000, a 19.0% increase. Increases primarily in residential, residential construction, commercial construction, commercial, commercial real estate and consumer loans contributed to the increase in loans receivable, net. The growth in commercial and commercial real estate loan balances reflects the Company's increased emphasis 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 decreasing interest rates and management's 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 $569,000 in loans held-for-sale at March 31, 2001, compared to zero at March 31, 2000. Cash and cash equivalents increased to $38.9 million at March 31, 2001, from $15.8 million at March 31, 2000 as a result of deposit growth. Investment securities held-to-maturity were $861,000 at March 31, 2001, compared to $903,000 at March 31, 2000. The $42,000 decrease was a result of investment paydowns. Investment securities available-for-sale were $25.6 million at March 31, 2001, compared to $12.9 million at March 31, 2000. The $12.7 million increase reflects the $15.0 million purchase of FNMA and FHLMC preferred stock, the $3.0 million of callable agencies and $300,000 of paydowns. Mortgage-backed securities held-to-maturity were $6.4 million at March 31, 2001, compared to $8.7 million at March 31, 2000. The $2.3 million net decrease is a result of paydowns. 38 Mortgage-backed securities available-for-sale were $43.1 million at March 31, 2001, compared to $39.4 million at March 31, 2000. The $3.7 million net decrease reflects paydowns. Total deposits were $295.5 million at March 31, 2001, compared to $232.4 million at March 31, 2000. Management attributes this $63.1 million increase primarily to the growth in the Company's market area, particularly the increase in commercial loans and to increased public deposits. FHLB advances increased to $79.5 million at March 31, 2001 from $60.6 million at March 31, 2000. The $18.9 million increase in the outstanding advances at March 31, 2001 were used to fund the growth in the loan and investment portfolio. Shareholders' equity increased $4.2 million to $52.7 million at March 31, 2001 from $48.5 million at March 31, 2000 primarily as a result of the $5.2 million of total comprehensive income and issuance of stock under various incentive plans offset by cash dividends of $1.9 million paid to the shareholders. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2001 AND 2000 NET INCOME. Net income was $3.6 million, or $0.78 per share for the year ended March 31, 2001, compared to $3.9 million, or $0.76 per share for the year ended March 31, 2000. Earnings were lower for the year ended March 31, 2001 primarily as a result of reduced net interest margin, increased non-interest expenses and higher provision for loan losses. NET INTEREST INCOME. Net interest income for fiscal year 2001 was $15.1 million, representing a $690,000, or a 4.8% increase, from fiscal year 2000. This improvement reflected a 17.9% increase in average earning assets (primarily increases in average loan balances due to a 11.7% increase for mortgage loans and 97.6% increase in non-mortgage loans) to $277.3 million, which offset a 51 basis point reduction in the net interest margin to 4.27%. The ratio of average interest earning assets to average interest bearing liabilities decreased to 1.20% in 2001 from 1.25% in 2000 which indicates that the interest earning asset growth is being funded more by interest bearing liabilities as compared to capital, which is non-interest bearing. INTEREST INCOME. Interest income totaled $31.3 million and $25.4 million, for fiscal years 2001 and 2000, respectively. Average interest-bearing assets increased $54.2 million to $356.5 million for fiscal year ended 2001 from $302.3 million for fiscal year ended 2000. The yield on interest-earning assets was 8.84% for fiscal year 2001 compared to 8.44% for fiscal year ended 2000. The increased yield reflects the higher yield on net loans and investments in 2001 compared to 2000. INTEREST EXPENSE. Interest expense for the year ended March 31, 2001 totaled $16.3 million, a $5.2 million increase from $11.1 million for the year ended March 31, 2000. The increase in interest expense was the result of the 22.6% growth in average interest-bearing liabilities to $297.7 million at March 31, 2001 from $242.8 million at March 31, 2000. The increase was due primarily to the $7.9 million growth in the average balance of money market accounts to $44.9 million and the $20.5 million growth in average balance certificates of deposit to $138.5 million at year end March 31, 2001. Other interest bearing liabilities increased $27.4 million to $72.8 million at March 31, 2001 due to increased FHLB borrowings. PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended March 31, 2001 was $949,000 compared to $675,000 for the year ended March 31, 2000. The fiscal year 2001 provision for loan losses exceeded net loan charge-offs by $554,000 resulting in an increase in the allowance for loan losses to $1.9 million. While the loan portfolio has grown substantially in fiscal year 2001 the asset quality has remained solid as demonstrated by the nonperforming asset to total assets ratio of 0.24% at March 31, 2001 and 0.39% at March 31, 2000. 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 39 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, 2001 was $1.9 million, or 0.58% of period end loans compared to $1.4 million, or 0.50% of period end loans at March 31, 2000. Management considered the allowance for loan losses at March 31, 2001 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 $1.1 million or 36.8% for the twelve months ended March 31, 2001 compared to the same period in 2000. Excluding the $540,000 pretax gain on sale of land and fixed assets, non-interest income increased $525,000 or 18.1% for the year ended March 31, 2001 when compared to the prior year. For the twelve months ended March 31, 2001, fees and service charges increased $430,000 when compared to the twelve months ended March 31, 2000. The $430,000 increase in service charges is primarily due to the growth in checking accounts, ATM and debit cards and mortgage broker fees. Mortgage broker fees (included in fees and service charges) totaled $579,000 for the year ended March 31, 2001 compared to $448,000 for the previous year. Mortgage broker commission compensation expense was $581,000 for the fiscal year ended March 31, 2001 compared to $499,000 for the fiscal year ended March 31, 2000. Increases in mortgage broker fees and commission compensation expense are a result of the increase in brokered loan production from $107.1 million in 2000 to $109.4 million in 2001. Asset management services income increased $205,000 or 67.4% for the year 2001 compared to year 2000. RAM Corp had $92.2 million or a 47.0% increase in total assets under management at March 31, 2001 when compared to March 31, 2000. The $61,000 decrease in loan servicing income is the result of the decrease in the balance of loans serviced for others caused by paydowns. NON-INTEREST EXPENSE. Non-interest expense increased $2.1 million, or 19.4% to $12.9 million for fiscal year 2001 compared to $10.8 million for fiscal year 2000. The principal component of the Company's non-interest expense was salaries and employee benefits. For the year ended March 31, 2001, salaries and employee benefits, which includes mortgage broker commission compensation, was $7.0 million, or a 20.7% increase over the prior year total of $5.8 million. Full-time equivalent employees have increased to 147 at March 31, 2001 from 132 at March 31, 2000. Expansion of the branch system by adding the 800 Tenney Road branch in the first quarter of fiscal year 2001 and expansion in lending areas, trust and administration are reflected in the increase in FTE. Other components of non-interest expense include building, furniture, and equipment depreciation and expense, data processing expense, and advertising expense reflecting the Company's expansion in branches and continuing investment in computer technology. In second quarter of fiscal year 2001, the Company's main office for administration relocated from Camas to the Vancouver address of 900 Washington, Suite 900, a 16,000 square foot leased facility. 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 ($1.0 million at March 31, 2001) is being amortized over the remaining life of the underlying customer relationships currently estimated at four years. The amortization expense of CDI was $327,000 for both fiscal years 2001 and 2000. 40 PROVISION FOR FEDERAL INCOME TAXES. Provision for federal income taxes was $1.6 million for the year ended March 31, 2001 compared to $1.9 million for the year ended March 31, 2000 as a result of lower income before taxes. The effective tax rate for fiscal year 2001 was 31.6% compared to 32.6% for fiscal 2000. 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 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. 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 $232.4 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 41 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. 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 $1.4 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 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 asset management services 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 42 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 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 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. 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. Interest income on tax exempt securities has been adjusted to a taxable-equivalent basis using the statutory Federal income tax rate of 34%. 43 Year Ended March 31, ------------------------------------------------------------------------------ 2001 2000 1999 ------------------------ ------------------------ ---------- ------------- Interest Interest Interest Average and Yield/ Average and Yield/ Average and Yield/ Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost ------- --------- ------ ------- --------- ------ ------- --------- ------ (Dollars in thousands) Interest-earning assets: Mortgage loans $205,895 $19,286 9.37% $184,343 $16,889 9.16% $154,450 $15,117 9.79% Non-mortgage loans 71,392 6,985 9.78 36,116 3,541 9.80 20,288 1,998 9.85 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total net loans 277,287 26,271 9.47 220,459 20,430 9.27 174,738 17,115 9.79 Mortgage-backed securities 46,151 3,144 6.81 56,735 3,585 6.32 61,041 3,755 6.15 Investment securities 20,200 1,318 6.52 16,168 971 6.01 20,031 1,215 6.07 Daily interest-bearing assets 8,827 530 6.00 6,217 312 5.02 16,131 838 5.19 Other earning assets 4,056 262 6.48 2,715 219 8.07 2,275 191 8.40 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest-earning assets 356,521 31,525 8.84 302,294 25,517 8.44 274,216 23,114 8.43 Non-interest-earning assets: Office properties and equipment, net 10,295 7,277 5,412 Real estate, net 134 471 471 Other non-interest- earning assets 10,189 7,968 8,488 -------- -------- -------- Total assets $377,139 $318,010 $288,587 ======== ======== ======== Interest-earning liabilities: Regular savings accounts $ 19,586 536 2.74 $ 20,654 569 2.75 $ 20,374 560 2.75 NOW accounts 21,897 315 1.44 21,757 303 1.39 23,875 309 1.29 Money market accounts 44,911 2,182 4.86 37,029 1,588 4.29 21,470 790 3.68 Certificates of deposit 138,492 8,314 6.00 117,948 6,131 5.20 116,165 6,445 5.55 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total deposits 224,886 11,347 5.05 197,388 8,591 4.35 181,884 8,104 4.46 Other interest-bearing liabilities 72,825 4,941 6.78 45,406 2,483 5.47 34,008 1,821 5.35 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities 297,711 16,288 5.47 242,794 11,074 4.56 215,892 9,925 4.60 Non-interest-bearing liabilities: Non-interest-bearing deposits 26,635 19,982 9,636 Other liabilities 2,232 1,004 2,212 -------- -------- -------- Total liabilities 326,578 263,780 227,740 Shareholders' equity 50,561 54,230 60,847 -------- -------- -------- Total liabilities and shareholders' equity $377,139 $318,010 $288,587 ======== ======== ======== Net interest income $15,237 $14,443 $13,189 ======= ======= ======= Interest rate spread 3.37% 3.88% 3.83% ===== ===== ===== Net interest margin 4.27% 4.78% 4.81% ===== ===== ===== Ratio of average interest-earning assets to average interest-bearing liabilities 119.75% 124.51% 127.02% ====== ====== ======
44 YIELDS EARNED AND RATES PAID The following table sets forth for the periods and at the date indicated the weighted average yields earned on the Company's assets, the weighted average interest rates paid on the Company's liabilities, together with the net yield on interest-earning assets. At March 31, Year Ended March 31, ------------ -------------------------- 2001 2001 2000 1999 ------ ------ ------ ------ Weighted average yield earned on: Total net loans(1) 8.53% 8.89% 8.54% 8.59% Mortgage-backed securities 6.65 6.81 6.32 6.15 Investment securities 6.88 6.52 6.01 6.07 All interest-earning assets 7.98 8.39 7.90 7.66 Weighted average rate paid on: Deposits 4.53 5.05 4.35 4.46 FHLB advances and other borrowings 6.62 6.78 5.47 5.35 All interest-bearing liabilities 4.97 5.47 4.56 4.60 Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities)(1) 3.01 2.92 3.34 3.06 Net interest margin (net interest income (expense) as a percentage of average interest-earning assets)(1) 3.13 3.82 4.24 4.04 (1) Weighted average yield on total net loans excludes deferred loan fees. 45 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, ------------------------------------------------------------ 2001 vs. 2000 2000 vs. 1999 Increase (Decrease) Increase (Decrease) Due to Due to -------------------- Total -------------------- Total Rate/ Increase Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) ------ ---- ------ --------- ------ ---- ------ -------- (In Thousands) Interest Income: Mortgage loans $1,975 $377 $ 43 $2,395 $2,926 $(967) $(189) $1,770 Non-mortgage loans 3,459 (7) (7) 3,445 1,559 (8) (7) 1,544 Mortgage-backed securities (669) 280 (52) (441) (265) 102 (7) (170) Investment securities 242 84 21 347 (234) (12) 2 (244) Daily interest- bearing 131 61 26 218 (515) (28) 17 (526) Other earning assets 108 (43) (21) 44 37 (7) (1) 29 Total interest ------ ---- ------ --------- ------ ---- ------ -------- income(taxable equivalent) 5,246 752 10 6,008 3,508 (920) (185) 2,403 ------ ---- ------ --------- ------ ---- ------ -------- Interest Expense: Regular savings accounts (29) (4) - (33) 8 1 - 9 NOW accounts 2 10 - 12 (27) 24 (2) (5) Money market accounts 338 211 45 594 573 131 95 799 Certificates of deposit 1,068 949 165 2,182 99 (407) (6) (314) Other interest- bearing liabilities 1,499 598 362 2,459 610 39 11 660 Total interest expense 2,878 1,764 572 5,214 1,263 (212) 98 1,149 ------ ---- ------ --------- ------ ---- ------ -------- Net interest income (taxable equivalent) $2,368(1,012) $(562) $ 794 $2,245 $(708) $(283) $1,254 ====== ===== === === ===== === === ===== ASSET AND LIABILITY MANAGEMENT The Company's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets. Interest rate sensitivity will increase by retaining portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one- to- four family mortgage loans with terms of more than 15 years. However, the Company may originate fixed rate loans for investment when funded with long-term funds to mitigate interest rate risk. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with terms up to ten years. The Company has adopted a strategy that is designed to maintain or improve the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve the origination of 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 46 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, 2001, ARM loans and adjustable rate mortgage-backed securities constituted $140.0 million, or 37.4%, 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 $78.6 million at March 31, 2001, including $17.5 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 $81.1 million and produced service fees of $67,000 for the year ended March 31, 2001. 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, 2001, the construction, commercial and consumer loan portfolios amounted to $83.9 million, $23.1 million and $25.0 million, or 28.3%, 7.8% and 8.4% 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, 2001, the combined portfolio of $76.0 million had an average term to repricing or maturity of 11.4 years, excluding equity securities. See "Item 1. Business -- Investment Activities." A measure of the Company's exposure to differential changes in interest rates between assets and liabilities is provided by the test required by OTS Thrift Bulletin No. 13a, "Interest Rate Risk Management." This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Using data compiled by the OTS, the Company receives a report which measures interest rate risk by modeling the change in net portfolio value ("NPV") over a variety of interest rate scenarios. This procedure for measuring interest rate risk was developed by the OTS to replace the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that mature or reprice within a specific time period). NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels based on the latest OTS report dated December 31, 2000. 47 At December 31, 2000 ---------------------------------------------------------------- Net Portfolio Value -------------------------- Net Portfolio Value as a Percent of Present Value of Assets Change Dollar Dollar Percent ---------------------------------- In Rates Amount Change Change NPV Ratio Change -------- ------ ------ ------ --------- ------ (Dollars in thousands) 300 bp $42,815 $(16,276) (28)% 11.17% (342) bp 200 bp 47,542 (11,549) (20) 12.19 (239) bp 100 bp 52,815 (6,276) (11) 13.30 (128) bp 0 bp 59,091 - - 14.59 - (100) bp 62,185 3,094 5 15.17 58 bp (200) bp 64,444 5,352 9 15.56 97 bp (300) bp 67,700 8,609 15 16.14 155 bp For example, the above table illustrates that an instantaneous 200 basis point increase in market interest rates at December 31, 2000 would reduce the Company's NPV by approximately $11.5 million, or 20%, at that date. At December 31, 1999 an instantaneous 200 basis point increase in market interest rates would have reduced the Company's NPV by approximately $12.7 million, or 22%, at that date. The $1.2 million decrease in the reduction of NPV to $11.5 million at December 31, 2000 is the result of several factors. The primary factors for fiscal year 2001 are the impact of the decreased FHLB borrowings that reprice within one year and the larger percentage of the total loans receivable that reprice within one year. In fiscal year 2001, the refinancing activity of one- to- four residential mortgage loans from adjustable rate loans to fixed rate loans did not outpace the increased balance of adjustable rate loans in the loan portfolio. 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 more, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and the sale of loans, maturing securities and FHLB advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations, deposit withdrawals, satisfy other financial commitments and to take advantage of investment opportunities. The Company generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2001, cash and cash equivalents totaled $38.9 million, or 9.0% of total assets. At March 31, 2001, the Company also maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of $149.9 million, under which $79.5 million was outstanding. OTS regulations require savings institutions to maintain an average daily balance of liquid assets (cash and eligible investments) equal to at least 4.0% of the average daily balance of its net withdrawable deposits and short-term borrowings. The Bank's liquidity ratio at March 31, 2001 was 28.22%. 48 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, 2001, 2000 and 1999, the Company originated $95.6 million, $88.6 million and $112.6 million of such loans, respectively. At March 31, 2001, the Company had outstanding mortgage loan commitments of $4.3 million and undisbursed balance of mortgage loans closed of $26.2 million. Consumer loan commitments totaled $2.6 million and unused lines of consumer credit totaled $11.4 million at March 31, 2001. Commercial and commercial real estate loan commitments totaled $710,000 and unused lines of commercial and commercial real estate credit totaled $14.4 million at March 31, 2001. 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, 2001 totaled $142.0 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, 2001, the Bank complied with all regulatory capital requirements as of that date with tangible, core and risk-based capital ratios of 10.88%, 10.88% and 17.13%, 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. The effective date of this Statement was deferred by the issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. SFAS No.133 was amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. This statement becomes effective for fiscal year 2002, and will not be applied retroactively to financial statements of prior periods. Upon adoption of provisions of SFAS No. 133 at April 1, 2001, the Company did not have derivate instruments and there was no impact on the financial statements of the Company. In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and replaced SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of provisions of SFAS No. 140 is not expected to have a material impact on the financial statements of the Company. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation is reflected in the increased cost of the 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. 49 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- QUANTITATIVE ASPECTS OF MARKET RISK. The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of the Company's interest-earning assets and interest-bearing liabilities, see the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio Analysis," "Investment Activities--Investment Securities Portfolio and Carrying Values" and " Deposit Activities and Other Sources of Funds -- Certificates of Deposit by Rates and Maturities" contained herein. QUALITATIVE ASPECTS OF MARKET RISK. The Company's principal financial objective is to achieve long-term profitability while limiting its exposure to fluctuating market interest rates. The Company intends to reduce risk where appropriate but accept a degree of risk when warranted by economic circumstances. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets. Interest rate sensitivity will increase by retaining portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one- to- four family mortgage loans with terms of more than 15 years. Consumer and commercial loans are originated and held in portfolio as the short term nature of these portfolio loans match durations more closely with the short term nature of retail deposits such as now accounts, money market accounts and savings accounts. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with longer terms to maturity. Except for immediate short term cash needs, and depending on the current interest rate environment, FHLB advances will usually be of longer term. For additional information, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein. The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at March 31, 2001. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments. 50 One After After Within Year 3 Years 5 Years Beyond Average One to 3 to 5 to 10 10 Fair Rate Year Years Years Years Years Total Value ---- ---- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Interest-Sensitive Assets: Loans receivable 8.53% $155,919 $19,557 $49,129 $48,649 $55,221 $328,475 $332,656 Mortgage-backed securities 6.65 20,230 218 4,421 749 23,926 49,544 49,625 Investments and other interest-earning assets 6.08 - - - 4,505 21,917 26,422 26,428 FHLB stock 6.49 886 1,773 1,773 - - 4,432 4,432 Interest-Sensitive Liabilities: NOW accounts 1.50 6,429 12,857 12,857 - - 32,143 32,143 Non-interest checking accounts - 5,587 11,174 11,174 - - 27,935 27,935 Savings accounts 2.75 3,765 7,531 7,531 - - 18,827 18,827 Money market 3.99 9,145 18,290 18,289 - - 45,724 45,724 Certificate accounts 6.21 142,022 23,672 4,659 541 - 170,894 172,057 FHLB advances 6.62 25,000 39,500 15,000 - - 79,500 81,208 Off-Balance Sheet Items: Commitments to extend Credit - 7,663 - - - - 7,663 7,663 Unused lines of credit - 52,097 - - - - 52,097 52,097
51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------- RIVERVIEW BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements for Years Ended March 31, 2001, 2000, 1999 and Independent Auditors' Report TABLE OF CONTENTS -------------------------------------------------------------------------------- PAGE Independent Auditors' Report 53 Consolidated Balance Sheets as of March 31, 2001 and 2000 54 Consolidated Statements of Income for the Years Ended March 31, 2001, 2000 and 1999 55 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2001, 2000 and 1999 56 Consolidated Statements of Cash Flows for the Years Ended March 31, 2001, 2000 and 1999 57 Notes to Consolidated Financial Statements 58 52 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, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Riverview Bancorp, Inc. and Subsidiary as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Portland, Oregon May 11, 2001 53 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE DATA) 2001 2000 -------------------------------------------------------------------------------- ASSETS Cash (including interest-earning accounts of $26,460 and $5,378) $ 38,935 $ 15,786 Loans held for sale 569 - Investment securities held to maturity, at amortized cost (fair value of $867 and $854) 861 903 Investment securities available for sale, at fair value (amortized cost of $26,060 and $14,421) 25,561 12,883 Mortgage-backed securities held to maturity, at amortized cost (fair value of $6,486 and $8,595) 6,405 8,657 Mortgage-backed securities available for sale, at fair value (amortized cost of $43,224 and $40,974) 43,139 39,378 Loans receivable (net of allowance for loan losses of $1,916 and $1,362) 296,292 249,034 Real estate owned 473 65 Prepaid expenses and other assets 1,002 875 Accrued interest receivable 2,394 1,881 Federal Home Loan Bank stock, at cost 4,432 3,074 Premises and equipment, net 10,055 9,088 Land held for development - 471 Deferred income taxes, net 856 1,236 Core deposit intangible, net 1,022 1,349 -------- -------- TOTAL ASSETS $431,996 $344,680 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposit accounts $295,523 $232,355 Accrued expenses and other liabilities 4,034 3,147 Advance payments by borrowers for taxes and insurance 218 139 Federal Home Loan Bank advances 79,500 60,550 -------- -------- Total liabilities 379,275 296,191 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, 2001 - 4,981,421 issued, 4,655,040 outstanding; 2000 - 4,902,503 issued, 4,521,209 outstanding 50 49 Additional paid-in capital 38,687 38,457 Retained earnings 17,349 15,652 Unearned shares issued to employee stock ownership trust (2,217) (2,422) Unearned shares held by the management recognition and development plan (762) (1,178) Accumulated other comprehensive loss (386) (2,069) --------- -------- Total shareholders' equity 52,721 48,489 --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 431,996 $344,680 ========= ======== See notes to consolidated financial statements. 54 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED MARCH 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA) 2001 2000 1999 -------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans receivable $ 26,271 $ 20,430 $ 17,115 Interest on investment securities 820 893 1,215 Interest on mortgage-backed securities 3,144 3,585 3,755 Other interest and dividends 1,108 530 1,029 -------- -------- -------- Total interest income 31,343 25,438 23,114 -------- -------- -------- INTEREST EXPENSE: Interest on deposits 11,347 8,590 8,104 Interest on borrowings 4,941 2,483 1,821 -------- -------- -------- Total interest expense 16,288 11,073 9,925 -------- -------- -------- Net interest income 15,055 14,365 13,189 Less provision for loan losses 949 675 240 -------- -------- -------- Net interest income after provision for loan losses 14,106 13,690 12,949 -------- -------- -------- NON-INTEREST INCOME: Fees and service charges 2,631 2,201 2,362 Asset management fee 509 304 18 Gain on sale of loans held for sale 94 24 246 Gain on sale of securities - - 37 Gain on sale of other real estate owned 35 127 1 Loan servicing income 67 128 116 Gain on sale of land and fixed assets 540 - - Other 86 113 94 -------- -------- -------- Total non-interest income 3,962 2,897 2,874 -------- -------- -------- NON-INTEREST EXPENSE: Salaries and employee benefits 6,989 5,761 5,029 Occupancy and depreciation 1,947 1,362 1,117 Data processing 926 781 581 Amortization of core deposit intangible 327 327 327 Marketing expense 601 579 336 FDIC insurance premium 46 99 109 State and local taxes 319 250 188 Telecommunications 256 263 216 Professional fees 247 360 242 Other 1,209 1,050 910 -------- -------- -------- Total non-interest expense 12,867 10,832 9,055 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAXES 5,201 5,755 6,768 PROVISION FOR FEDERAL INCOME TAXES 1,644 1,878 2,305 -------- -------- -------- NET INCOME $ 3,557 $ 3,877 $ 4,463 ======== ======== ======== Earnings per common share: Basic $0.78 $0.76 $0.78 Diluted 0.77 0.74 0.76 Weighted average number of shares outstanding: Basic 4,579,091 5,108,725 5,705,697 Diluted 4,640,249 5,205,977 5,837,000 See notes to consolidated financial statements. 55 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 2001, 2000 AND 1999 UNEARNED SHARES ISSUED TO EMPLOYEE UNEARNED ACCUMULATED COMMON STOCK ADDITIONAL STOCK SHARES OTHER COMPRE- (IN THOUSANDS, PAID-IN RETAINED OWNERSHIP ISSUED TO HENSIVE EXCEPT SHARE DATA) SHARES AMOUNT CAPITAL EARNINGS TRUST MRDP INCOME(LOSS) TOTAL ------------------------------------------------------------------------------------------------------------ Balance, April 1, 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 comprehensive loss: Unrealized holding loss on securities of $694 (net of $357 tax effect) 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 repurchased 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 securities of $1,454 (net of $749 tax effect) 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 Cash Dividends - - - (1,860) - - - (1,860) Exercise of stock options 78,918 1 221 - - - - 222 Earned ESOP shares 24,633 - 9 - 205 - - 214 Earned MRDP shares 30,280 - - - - 416 - 416 --------- ---- ------- ------ ----- ----- ---- ------- 4,655,040 50 38,687 13,792 (2,217) (762) (2,069) 47,481 Comprehensive income: Net income - - - 3,557 - - - 3,557 Other comprehensive income: Unrealized holding gain on securities of $1,683 (net of $867 tax effect) - - - - - - 1,683 1,683 ----- Total comprehensive income - - - - - - - 5,240 --------- ---- ------- ------ ----- ----- ---- ------- Balance March 31, 2001 4,655,040 $50 $38,687 $17,349 $(2,217) $(762) $(386) $52,721 ========= ==== ======= ======= ======= ====== ===== =======
See notes to consolidated financial statements. 56 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2001, 2000 AND 1999 (IN THOUSANDS) 2001 2000 1999 ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,557 $3,877 $4,463 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,501 1,289 1,196 Provision for losses on loans 949 675 240 (Provision) benefit for deferred income taxes, net (487) 15 (266) Noncash expense related to ESOP 214 268 302 Noncash expense related to MRDP 393 393 589 Increase in deferred loan origination fees, net of amortization 120 585 430 Federal Home Loan Bank stock dividend (263) (192) (173) Net gain on sale of real estate owned, mortgage- backed securities, investment securities and premises and equipment (456) (30) (37) Changes in assets and liabilities: Decrease (increase) in loans held for sale (569) 341 1,089 (Increase) decrease in prepaid expenses and other assets 127 (59) (13) Decrease (increase) in accrued interest receivable (513) (338) 53 Increase in accrued expenses and other liabilities 722 440 115 ------ ------ ------ Net cash provided by operating activities 5,295 7,264 7,988 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations (205,890) (156,832) (158,651) Principal repayments on loans 147,415 88,179 106,036 Loans sold 7,563 4,224 25,809 Proceeds from call, maturity, or sale of investment securities available for sale 3,000 1,000 19,057 Purchase of investment securities available for sale - (1,673) (21,452) Purchase of equity securities (15,000) - (1,356) Purchase of mortgage-backed securities available for sale (8,055) - (33,377) Principal repayments on mortgage-backed securities held to maturity 2,255 4,123 7,721 Principal repayments on mortgage-backed securities available for sale 5,745 12,690 11,795 Principal repayments on investment securities held to maturity 42 40 - Principal repayment on investment securities available for sale 359 - - Purchase of investment securities held to maturity - - (982) Proceeds from call or maturity of investment securities held to maturity - 4,000 4,368 Purchase of premises and equipment (2,507) (3,724) (2,058) Purchase of Federal Home Loan Bank stock (1,095) (268) (475) Proceeds from sale of real estate owned, premises and equipment 3,463 936 404 ------ ------ ------ Net cash used in investing activities (62,705) (47,305) (43,161) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 63,168 32,044 20,486 Dividends paid (1,860) (1,827) (1,244) Repurchase of common stock - (9,834) (5,461) Stock acquired for MRDP - - (1,979) Proceeds from Federal Home Loan Bank advances 164,686 220,864 30,000 Repayment of Federal Home Loan Bank advances (145,736) (202,864) (17,000) Net increase (decrease) in advance payments by borrowers 79 100 (45) Proceeds from exercise of stock options 222 137 141 ------ ------ ------ Net cash provided by financing activities 80,559 38,620 24,898 ------ ------ ------ NET INCREASE (DECREASE) IN CASH 23,149 (1,421) (10,275) CASH, BEGINNING OF YEAR 15,786 17,207 27,482 ------ ------ ------ CASH, END OF YEAR $38,935 $15,786 $17,207 ======= ======= ======= SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Interest $15,906 $10,952 $9,841 Income taxes 2,222 1,815 2,774 NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of loans to real estate owned $ 2,585 $ 971 $ 498 Dividends declared and accrued in other liabilities 471 415 327 Fair value adjustment to securities available for sale 2,550 (2,227) (1,088) Income tax effect related to fair value adjustment (867) 757 370 See notes to consolidated financial statements. 57 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 inter-company 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 accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"), requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenue and expense during the reporting period. Actual results could differ from those estimates. 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. INTEREST INCOME - Interest on loans is credited to income as earned. When the collectibility of the interest is in doubt, 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. 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. 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 58 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 15 to 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 $310,000, $319,000 and $335,000 at March 31, 2001, 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 -Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized. The Company files a consolidated federal income tax return. 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 that the Company originally intended to develop either for Company operation or for ultimate sale. The property was sold during the second quarter of fiscal year 2001 at a gain of $182,000. 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 59 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. 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 2000 and 1999 amounts have been reclassified in order to conform to the 2001 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. The effective date of this Statement was deferred by the issuance of SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133. SFAS No.133 was amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. This statement becomes effective for fiscal year 2002, and will not be applied retroactively to financial statements of prior periods. Upon adoption of provisions of SFAS No. 133 at April 1, 2001, the Company did not have derivative instruments and there was no impact on the financial statements of the Company. In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and replaced SFAS No. 125 of the same title. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of provisions of SFAS No. 140 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, 2001 and 2000, 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. 60 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, 2001 COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- Municipal securities $ 861 $ 6 $ - $ 867 ========== ========== ========== ========= MARCH 31, 2000 Municipal securities $ 903 $ - $ (49) $ 854 ========== ========== ========== ========= The contractual maturities of securities held to maturity are as follows (in thousands): AMORTIZED ESTIMATED MARCH 31, 2001 COST FAIR VALUE -------------- ------------ Due after ten years $ 861 $ 867 ============== ============ 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, 2001 COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- Agency securities $ 7,132 $ 4 $ (199) $ 6,937 Equity securities 16,356 21 (378) 15,999 School district bonds 2,572 53 - 2,625 --------- ---------- ---------- --------- $ 26,060 $ 78 $ (577) $ 25,561 ========= ========== ========== ========= MARCH 31, 2000 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 ========= ========== ========== ========= The contractual maturities of securities available for sale are as follows (in thousands): AMORTIZED ESTIMATED MARCH 31, 2001 COST FAIR VALUE --------- ---------- Due after five years through ten years $ 4,456 $ 4,505 Due after ten years 21,604 21,056 ----------- ---------- $ 26,060 $ 25,561 =========== ========== 61 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, 2001 COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- Real estate mortgage investment conduits $ 1,805 $ 15 $ - $ 1,820 FHLMC mortgage-backed securities 1,680 13 (1) 1,692 FNMA mortgage-backed securities 2,920 54 - 2,974 --------- ---------- ---------- --------- $ 6,405 $ 82 $ (1) $ 6,486 ========= ========== ========== ========= MARCH 31, 2000 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 ========= ========== =========== ========= Mortgage-backed securities held to maturity with an amortized cost of $3.9 million and $322,000 and a fair value of $3.9 million and $314,000 at March 31, 2001 and 2000, 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") and privately issued securities. The contractual maturities of mortgage-backed securities classified as held to maturity are as follows (in thousands): AMORTIZED ESTIMATED MARCH 31, 2001 COST FAIR VALUE --------- ---------- Due after one year through five years $ 2,510 $ 2,531 Due after five years through ten years 298 303 Due after ten years 3,597 3,652 ---------- ---------- $ 6,405 $ 6,486 ========== ========== Mortgage-backed securities available for sale consisted of the following (in thousands): GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR MARCH 31, 2001 COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- Real estate mortgage investment conduits $ 41,067 $ 144 $ (268) $ 40,943 FHLMC mortgage-backed securities 441 10 - 451 FNMA mortgage-backed securities 1,716 29 - 1,745 ---------- ---------- ---------- --------- $ 43,224 $ 183 $ (268) $ 43,139 ========== ========== ========== ========= MARCH 31, 2000 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 ========== ========== ========== ========= 62 The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands): AMORTIZED ESTIMATED MARCH 31, 2001 COST FAIR VALUE --------- ---------- Due after one year through five years $ 2,102 $ 2,129 Due after five years through ten years 1,444 1,474 Due after ten years 39,678 39,536 --------- ---------- $ 43,224 $ 43,139 ========= ========= 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 $16.2 million and $20.9 million and a fair value of $16.0 million and $19.6 million at March 31, 2001 and March 31, 2000, respectively, 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 $5.1 million and a fair value of $5.1 million and $5.0 million at March 31, 2001 and 2000, respectively, were pledged as collateral for treasury tax and loan funds held by the Company. 5. LOANS RECEIVABLE Loans receivable consisted of the following (in thousands): MARCH 31, 2001 2000 -------- -------- Residential: One- to- four family $ 116,583 $ 102,542 Multi-family 11,073 10,921 Construction: One- to- four family 60,041 49,338 Multi-family 4,514 4,669 Commercial real estate 6,806 3,597 Commercial 23,099 15,976 Consumer: Secured 23,148 14,488 Unsecured 1,872 2,755 Land 24,230 25,475 Commercial real estate 56,540 42,871 --------- ---------- 327,906 272,632 Less: Undisbursed portion of loans 26,223 18,880 Deferred loan fees 3,475 3,355 Allowance for loan losses 1,916 1,362 Unearned discounts - 1 --------- ---------- Loans receivable, net $ 296,292 $ 249,034 ========= ========== The Company originates residential real estate loans, commercial real estate, multi-family real estate, commercial and consumer loans. Substantially all of the mortgage loans in the Company's portfolio are secured by properties located in Washington and Oregon. 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. 63 Loans, by maturity or repricing date, were as follows (in thousands): MARCH 31, 2001 2000 --------- ---------- Adjustable rate loans: Within one year $ 117,025 $ 99,169 After one but within three years 2,649 - --------- ---------- 119,674 99,169 --------- ---------- Fixed rate loans: Within one year 38,894 27,602 After one but within three 16,908 10,904 After three but within five years 49,129 32,049 After five but within ten years 48,649 55,563 After ten years 55,221 47,345 --------- ---------- 208,801 173,463 --------- ---------- $ 328,475 $ 272,632 ========= ========== Mortgage loans receivable with adjustable rates primarily reprice based on the one year U.S. Treasury index and reprice a maximum of 2% per year and up to 6% over the life of the loan. The remaining adjustable rate loans reprice based on the prime lending rate or the FHLB cost of funds index. Commercial loans with adjustable rates primarily reprice based on the prime rate. The Company services loans for others totaling $78.6 million and $82.4 million as of March 31, 2001 and 2000. 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): YEAR ENDED MARCH 31, 2001 2000 1999 --------- ---------- --------- Beginning balance $ 442 $ 422 $ 538 Originations 486 135 297 Principal repayments (115) (115) (413) --------- -------- --------- Ending balance $ 813 $ 442 $ 422 ========= ========= ========= 6. ALLOWANCE FOR LOAN LOSSES A reconciliation of the allowances for loan losses is as follows (in thousands): YEAR ENDED MARCH 31, 2001 2000 1999 ------- -------- ------- Beginning balance $ 1,362 $ 1,146 $ 984 Provision for losses 949 675 240 Charge-offs (413) (488) (85) Recoveries 18 29 7 ------- --------- --------- Ending balance $ 1,916 $ 1,362 $ 1,146 ======= ======== ======== At March 31, 2001, 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 $319,000, $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 $836,000, $668,000 and $953,000 during the years ended March 31, 2001, 2000 and 1999, respectively. 64 7. PREMISES AND EQUIPMENT Premises and equipment consisted of the following (in thousands): MARCH 31, 2001 2000 -------- -------- Land $ 2,026 $ 2,160 Buildings and improvements 6,948 5,825 Leasehold improvements 420 177 Furniture and equipment 4,961 4,035 Construction in progress 32 1,080 -------- -------- Subtotal 14,387 13,277 Less accumulated depreciation (4,332) (4,189) -------- -------- Total $ 10,055 $ 9,088 ======== ======== Depreciation expense was $970,000, $773,000 and $656,000 for years ended March 31, 2001, 2000, and 1999, 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, --------------------- 2002 $ 587 2003 598 2004 552 2005 487 2006 506 Thereafter 3,789 ------ Total $ 6,519 ======= Rent expense was $375,000, $87,000 and $49,000 for the years ended March 31, 2001, 2000 and 1999, respectively. 8. DEPOSIT ACCOUNTS Deposit accounts consisted of the following (dollars in thousands) WEIGHTED WEIGHTED AVERAGE MARCH 31, AVERAGE MARCH 31, ACCOUNT TYPE RATE 2001 RATE 2000 ------------ ------- --------- -------- ---------- NOW Accounts: Non-interest-bearing 0.00% $ 27,935 0.00% $ 24,741 Regular 1.50 32,143 1.50 20,976 Money market 3.99 45,724 4.69 44,620 Savings accounts 2.75 18,827 2.75 19,840 Certificates of deposit 6.21 170,894 5.41 122,178 ----- -------- ----- --------- Total 4.55 $295,523 4.12 $232,355 ======== ======== The weighted average rate is based on interest rates at the end of the period. 65 Certificates of deposit as of March 31, 2001, mature as follows (in thousands): AMOUNT ------ Less than one year $ 142,023 One year to two years 18,840 Two years to three years 4,831 Three years to four years 2,540 Four years to five years 2,120 After five years 540 ------- Total $ 170,894 ======= 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, 2001 2000 1999 --------- -------- -------- NOW Accounts: Regular $ 315 $ 302 $ 281 Maxi - 1 28 Money market accounts 2,182 1,588 790 Savings accounts 536 569 560 Certificates of deposit 8,314 6,130 6,445 --------- -------- -------- Total $ 11,347 $ 8,590 $ 8,104 ========= ======== ======== 9. FEDERAL HOME LOAN BANK ADVANCES At March 31, 2001, advances from FHLB totaled $79.5 million, which had fixed interest rates ranging from 5.38% to 7.22% with a weighted average interest rate at March 31, 2001 of 6.62%. At March 31, 2001, the Company had additional borrowing capacity available of $70.4 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: 2002 - $25.0 million, 2003-$39.5 million; and 2006-$15.0 million. 66 10. FEDERAL INCOME TAXES Federal income tax provisions for the years ended March 31 consisted of the following (in thousands): 2001 2000 1999 ---------- -------- -------- Current $ 2,131 $ 1,863 $ 2,571 Deferred (487) 15 (266) ---------- -------- -------- Total $ 1,644 $ 1,878 $ 2,305 ========== ======== ========= 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: 2001 2000 1999 ------ ------ ------ Statutory federal income tax rate 34.0% 34.0% 34.0% ESOP market value adjustment 0.1 0.4 0.3 Interest income on municipal securities (1.1) (0.9) (0.2) Other, net (1.4) (0.9) - ------ ------ ------ Effective federal income tax rate 31.6% 32.6% 34.1% ====== ====== ====== Taxes related to gains on sales of securities were zero, zero, and $13,000 for the years ended March 31, 2001, 2000, and 1999, respectively. The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31, 2001 and 2000 are as follows (in thousands): 2001 2000 -------- -------- Deferred tax assets: Deferred compensation $ 399 $ 345 Loan loss reserve 595 463 Core deposit intangible 254 217 Accrued expenses 114 77 Accumulated depreciation 60 97 Net unrealized loss on securities available for sale 199 1,066 Other 224 69 -------- ------- Total deferred tax asset 1,845 2,334 -------- ------- Deferred tax liabilities: FHLB stock dividend (642) (550) Tax qualified loan loss reserve (141) (188) Other (206) (360) -------- ------- Total deferred tax liability (989) (1,098) -------- ------- Deferred tax asset, net $ 856 $ 1,236 ======== ======= 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 2001 and 2000 taxable years. 67 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, 2001, the Company had a taxable temporary difference of approximately $1.1 million 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, 2001 or 2000 based on the Company's anticipated future ability to generate taxable income from operations. 11. EMPLOYEE BENEFITS PLANS RETIREMENT PLAN - The Riverview Retirement and Savings Plan (the "Plan") is a defined contribution profit-sharing plan incorporating the provisions of Section 401(k) of the IRC. The plan covers all employees with at least one year of service who are over the age of 21. The 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, 2001, 2000, and 1999 were $66,000, $46,000, and $41,000, 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 8.06%, 8.20%, and 8.30% for the years ended March 31, 2001, 2000, and 1999, respectively. The estimated liability under the plan is accrued as earned by the participant. At March 31, 2001 and 2000, the Company's aggregate liability under the plan was $1.1 million and $1.0 million, 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 $262,000, $183,000, and $149,000 in bonuses during the years ended March 31, 2001, 2000, and 1999, respectively. Accrued bonuses were $270,000 and $174,000 at March 31, 2001 and 2000, 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 MRDP 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, $393,000 and $589,000 was recognized for the years ended March 31, 2001, 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. 68 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, 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 Grants 15,000 8.83 Options exercised (78,918) 2.82 ----------- ---------- OUTSTANDING MARCH 31, 2001 361,838 $ 11.99 =========== ========== Additional information regarding options outstanding as of March 31, 2001 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 2.56 33,033 $ 2.82 33,033 $ 2.82 6.32 to 9.22 5.48 33,845 8.51 18,846 8.23 10.13 to 13.75 7.51 294,960 13.41 171,976 13.48 ---- ------- ------- -------- ------- 6.87 361,838 $11.99 223,855 $ 11.47 ==== ======= ====== ======== ======= 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 2001 5.33% 6.90 35.85 % 2.65 % Fiscal 2000 6.26 % 7.00 39.07 % 2.17 % Fiscal 1999 4.68 % 6.00 40.75 % 1.29 % 69 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 2001, 2000 and 1999 awards was $3.09, $4.39 and $5.61, respectively. If the accounting provisions of the SFAS No. 123 had been adopted as of the beginning of fiscal 1996, the effect on 2001, 2000 and 1999 net income would have been reduced to the following pro forma amounts: YEAR ENDED MARCH 31, 2001 2000 1999 ---------- ---------- ---------- Net income: As reported $3,557,000 $3,877,000 $4,463,000 Pro forma 3,551,000 3,877,000 4,267,000 Earnings per common share - basic: As reported $0.78 $0.76 $0.78 Pro forma 0.78 0.76 0.75 Earnings per common share - fully diluted: As reported $0.77 $0.74 $0.76 Pro forma 0.77 0.74 0.73 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 $215,000, $268,000 and $302,000 for years ended March 31, 2001, 2000 and 1999, respectively. In conjunction with the Conversion and Reorganization, the Company purchased an additional 285,660 shares equal to eight percent of the total number of shares issued in the offering, for future allocation to eligible participants. ESOP share activity is summarized in the following table: UNRELEASED ALLOCATED ESOP AND RELEASED SHARES SHARES TOTAL ---------- ------------ ------- BALANCE, APRIL 1, 1998 344,857 136,435 481,292 Allocation December 31, 1998 (24,632) 24,632 - ------- ---------- ------- BALANCE, MARCH 31, 1999 320,225 161,067 481,292 Allocation December 31, 1999 (24,629) 24,629 - --------- ---------- ------- BALANCE, MARCH 31, 2000 295,596 185,696 481,292 Allocation December 31, 2000 (24,633) 24,633 - --------- --------- ------- BALANCE, MARCH 31, 2001 270,963 210,329 481,292 ======== ======== ======= 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, 2001 or 2000. 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, 2001 or 2000. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk, weightings, and other factors. 70 Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, of core capital to total assets, and tangible capital to tangible assets (set forth in the table below). Management believes the Bank meets all capital adequacy requirements to which it is subject as of March 31, 2001. As of March 31, 2001, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Company must maintain minimum total capital and Tier I capital to risk weighted assets, core capital to total assets and tangible capital to tangible assets (set forth in the table below). There are no conditions or events since that notification that management believes have changed the Company's category. The Bank's actual and required minimum capital amounts and ratios are presented in the following table (dollars in thousands): CATEGORIZED AS "WELL CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISION ------ ----------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- MARCH 31, 2001 Total Capital: (To Risk Weighted Assets) $48,407 17.13% $22,613 8.0% $28,266 10.0% Tier I Capital: (To Risk Weighted Assets) 46,491 16.45 N/A N/A 16,960 6.0 Core Capital: (To Total Assets) 46,491 10.88 12,820 3.0 21,366 5.0 Tangible Capital: (To Tangible Assets) 46,491 10.88 6,410 1.5 N/A N/A CATEGORIZED AS "WELL CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY 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 The following table is a reconciliation of the Bank's capital, calculated according to generally accepted accounting principles to regulatory tangible and risk-based capital at March 31, 2001 (in thousands): Equity $ 47,402 Net unrealized securities loss 156 Core deposit intangible (1,022) Deferred tax and servicing asset (45) ------------ Tangible capital 46,491 General valuation allowance 1,916 ----------- Total capital $ 48,407 =========== 71 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 2001 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 2001 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, 2001, options to purchase 309,960 shares of common stock were not included in the computation of diluted EPS because to do so would have been antidilutive. YEARS ENDED MARCH 31, 2001 2000 1999 -------- -------- -------- Basic EPS computation: Numerator-Net Income $3,557,000 $3,877,000 $4,463,000 Denominator-Weighted average common shares outstanding 4,579,091 5,108,725 5,705,697 Basic EPS $ 0.78 $ 0.76 $ 0.78 ========== ========== ========== Diluted EPS computation: Numerator-Net Income $3,557,000 $3,877,000 $4,463,000 Denominator-Weighted average common shares outstanding 4,579,091 5,108,725 5,705,697 Effect of dilutive stock options 61,158 97,252 128,045 Effect of dilutive MRDP - - 3,258 ---------- ---------- ---------- Weighted average common shares and common stock equivalents 4,640,249 5,205,977 5,837,000 Diluted EPS $ 0.77 $ 0.74 $ 0.76 ========== ========== ========== 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. 72 The estimated fair value of financial instruments is as follows at March 31, 2001 and 2000 (in thousands): 2001 2000 ---------------- ---------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----- ----- ----- ----- Assets: Cash $38,935 $38,935 $15,786 $15,786 Investment securities held to maturity 861 867 903 854 Investment securities available for sale 25,561 25,561 12,883 12,883 Mortgage-backed securities held to maturity 6,405 6,486 8,657 8,595 Mortgage-backed securities available for sale 43,139 43,139 39,378 39,378 Loans receivable, net 296,292 300,473 249,034 245,896 Loans held for sale 569 569 - - FHLB stock 4,432 4,432 3,074 3,074 Liabilities: Demand deposits 124,629 124,629 110,177 110,177 Time deposits 170,894 172,057 122,178 121,788 FHLB advances - short-term 25,000 25,500 60,550 60,570 FHLB advances - long-term 54,500 55,708 - - Fair value estimates, methods, and assumptions are set forth below. INVESTMENTS AND MORTGAGE-BACKED SECURITIES - Fair values were based on quoted market rates and dealer quotes. LOANS RECEIVABLE - Loans were priced using a discounted cash flow method. The discount rate used was the rate currently offered on similar products, risk adjusted for credit concerns or dissimilar characteristics. No adjustment was made to the entry-value interest rates for changes in credit of performing loans for which there are no known credit concerns. Management believes that the risk factor embedded in the entry-value interest rates, along with the general reserves applicable to the loan portfolio for which there are no known credit concerns, result in a fair valuation of such loans on an entry-value basis. DEPOSITS - The fair value of time deposits with no stated maturity such as non-interest-bearing demand deposits, savings, NOW accounts, and money market and checking accounts was equal to the amount payable on demand. The fair value of time deposits with stated maturity was based on the discounted value of contractual cash flows. The discount rate was estimated using rates currently available in the local market. FEDERAL HOME LOAN BANK ADVANCES - The fair value for FHLB advances was based on the discounted cash flow method. The discount rate was estimated using rates currently available from the FHLB. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - The estimated fair value of loan commitments approximates fees recorded associated with such commitments as of March 31, 2001 and 2000. 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, 2001 and 2000. 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. 73 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, 2001, the Company had commitments to originate fixed rate mortgage loans of $2.7 million at interest rates ranging from 6.38% to 9.75%. At March 31, 2001, commitments to originate adjustable rate mortgage loans were $1.6 million at an average interest rate of 9.71%. Undisbursed balance of mortgage loans closed was $26.2 million at March 31, 2001. Commitments to originate consumer loans totaled $2.6 million and unused lines of consumer credit totaled $11.4 million at March 31, 2001. Commercial and commercial real estate loan commitments to originate loans totaled $710,000 and unused lines of commercial and commercial real estate credit totaled $14.4 million at March 31, 2001. 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, 2001 AND 2000 (IN THOUSANDS) 2001 2000 ------------------------------------------------------------------------------- ASSETS Cash (including interest earning accounts of $2,670 and $1,448) $ 2,764 $ 1,588 Investment securities available for sale, at fair value (amortized cost of $1,356 and $3,356) 1,009 2,699 Investment in the Bank 47,402 42,436 Other assets 1,906 2,022 Deferred income taxes 114 219 ---------- --------- TOTAL ASSETS $ 53,195 $ 48,964 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expenses and other liabilities $ 3 $ 60 Dividend payable 471 415 Shareholders' equity 52,721 48,489 ---------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 53,195 $ 48,964 ========== ========= 74 RIVERVIEW BANCORP, INC. (PARENT COMPANY) STATEMENTS OF INCOME YEARS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS) 2001 2000 ------------------------------------------------------------------------------- INCOME: Interest on investment securities and other short-term investments $ 202 $ 279 Interest on loan receivable from the Bank 217 586 -------- --------- Total income 419 865 -------- --------- EXPENSE: Management service fees paid to the Bank 28 40 Other expenses 113 104 -------- --------- Total expense 141 144 -------- --------- INCOME BEFORE FEDERAL INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 278 721 PROVISION FOR FEDERAL INCOME TAXES 87 239 -------- --------- INCOME OF PARENT COMPANY 191 482 EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 3,366 3,395 -------- --------- NET INCOME $ 3,557 $ 3,877 ======== ========== 75 RIVERVIEW BANCORP, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS) 2001 2000 ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,557 $ 3,877 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of the Bank (3,366) (3,395) Provision for deferred taxes - 4 Earned ESOP shares 215 268 Earned MRDP shares 416 393 Changes in assets and liabilities: Decrease in prepaid expenses and other assets 115 537 Decrease (increase) in accrued expenses and other liabilities (1) 68 --------- --------- Net cash provided by operating activities 936 1,752 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Dividend received from the Bank - 6,367 Proceeds from call, maturity, or sale of investment securities available for sale 2,000 - Principal repayment on loan receivable from the Bank - 2,710 --------- --------- Net cash provided by investing activities 2,000 9,077 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (1,860) (1,827) Repurchase of common stock - (9,834) Investment in majority owned subsidiary (122) (509) Proceeds from exercise of stock options 222 137 --------- --------- Net cash used in financing activities (1,760) (12,033) ---------- --------- NET INCREASE (DECREASE) IN CASH 1,176 (1,204) CASH, BEGINNING OF YEAR 1,588 2,792 ---------- --------- CASH, END OF YEAR $ 2,764 $ 1,588 ========== ========= 76 RIVERVIEW BANCORP, INC. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): (IN THOUSANDS, EXCEPT SHARE DATA) THREE MONTHS ENDED ------------------------------------------------------------------------------ MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 -------- ----------- ------------ ------- 2001: Interest income $ 8,389 $ 7,986 $ 7,723 $ 7,245 Interest expense 4,546 4,217 4,022 3,503 Net interest income 3,843 3,769 3,701 3,742 Provision for loan losses 215 140 - 594 Non-interest income 1,131 905 1,160 766 Non-interest expense 3,587 3,231 3,126 2,923 Income before income taxes 1,172 1,303 1,735 991 Provision for income taxes 375 400 556 313 ---------- ---------- ---------- --------- Net income $ 797 $ 903 $ 1,179 $ 678 ========== ========== ========== ========= Basic earnings per share $ 0.17 $ 0.20 $ 0.26 $ 0.15 ========== ========== ========== ========= Diluted earnings per share $ 0.17 $ 0.19 $ 0.26 $ 0.15 ========== ========== ========== ========= 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 ========== ========== ========== ========= (1) Quarterly earnings per share varies from annual earnings per share due to rounding. 77 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. 78 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, 2001. * 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. 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVERVIEW BANCORP, INC. Date: May 25, 2001 By: /s/ Patrick Sheaffer -------------------- Patrick Sheaffer President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Patrick Sheaffer By: /s/ Ron Wysaske -------------------- --------------- Patrick Sheaffer Ron Wysaske President and Chief Executive Executive Vice President and Chief Officer Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: May 25, 2001 Date: May 25, 2001 By: /s/ Robert K. Leick By: /s/ Paul L. Runyan -------------------- ------------------- Robert K. Leick Paul L. Runyan Director Director Date: May 25, 2001 Date: May 25, 2001 By: /s/ Edward R. Geiger By: /s/ Gary R. Douglass -------------------- -------------------- Edward R. Geiger Gary R. Douglas Director Director Date: May 25, 2001 Date: May 25, 2001 By: /s/ Michael D. Allen --------------------- Michael D. Allen Director Date: May 25, 2001 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent ------ Riverview Bancorp, Inc. Subsidiaries (a) Percentage Owned State of Incorporation ---------------- ---------------- ---------------------- Riverview Community Bank 100% Federal 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. EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS Deloitte & Touche LLP Suite 3900 111 S.W. Fifth Avenue Portland, Oregon 97204-3642 Tel: (503) 222-1341 Fax: (503) 224-2172 www.us.deloitte.com DELOITTE & TOUCHE INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 333-66049 and 333-38887 of Riverview Bancorp, Inc., on the Form S-8, of our report dated May 11, 2001, appearing in the Annual Report on Form 10-K of Riverview Bancorp, Inc. for the year ended March 31, 2001. /s/Deloitte & Touche LLP DELOITTE & TOUCHE LLP Portland, Oregon May 29, 2001 --------- Deloitte Touche Tohmatsu ---------