-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCgfmmbniSJEJK8FTp+iY5QXkscLOKfdjgjBLchTEQhANz57HHeaCXZf1lbMEXFh jF8Z9qrO+cHIjODwolG76g== 0000939057-03-000158.txt : 20030604 0000939057-03-000158.hdr.sgml : 20030604 20030604142400 ACCESSION NUMBER: 0000939057-03-000158 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RIVERVIEW BANCORP INC CENTRAL INDEX KEY: 0001041368 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 911838969 STATE OF INCORPORATION: WA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22957 FILM NUMBER: 03732242 BUSINESS ADDRESS: STREET 1: 900 WASHINGTON STREET STREET 2: SUITE 900 CITY: VANCOUVER STATE: WA ZIP: 98660 BUSINESS PHONE: 360-693-6650 MAIL ADDRESS: STREET 1: 900 WASHINGTON STREET STREET 2: SUITE 900 CITY: VANCOUVER STATE: WA ZIP: 98660 10-K 1 k031136.txt RIVERVIEW BANCORP 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, 2003 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 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) Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and disclosure will not be contained, to the best of the Registrant's knowledge, in any definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [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 September 30, 2002, was approximately $64,907,872 (4,284,348 shares at $15.15 per share). It is assumed for purposes of this calculation that none of the Registrant's officers, directors and 5% stockholders (including the Riverview Bancorp, Inc. Employee Stock Ownership Plan) are affiliates. As of May 15, 2003, there were issued and outstanding 4,358,704 shares of the Registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE 1.Portions of Registrant's Definitive Proxy Statement for the 2003 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 Savings Bank FSB, upon the its reorganization as a wholly-owned subsidiary of the Company resulting from the conversion of Riverview, M.H.C., Camas, Washington, from a federal mutual holding company to a stock holding company ("Conversion and Reorganization"). The Conversion and Reorganization was completed on September 30, 1997. Riverview Savings Bank, FSB changed its name to Riverview Community Bank (the "Bank") effective June 29, 1998. At March 31, 2003, the Company had total assets of $419.9 million, total deposits of $320.7 million and shareholders' equity of $54.5 million. All references to the Company herein include the Bank where applicable. The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") system since 1937. The Company is a progressive community-oriented, financial institution, which emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington as its primary market area. The Company is engaged primarily in the business of attracting deposits from the general public and using such funds in its primary market area to originate mortgage loans secured by one- to- four family residential real estate, multi-family, commercial construction, commercial real estate and non-mortgage loans providing financing for business commercial ("commercial") and consumer purposes. Commercial real estate loans and commercial loans have grown from 10.40% and 1.90% of the loan portfolio, respectively, in fiscal 1999 to 30.02% and 10.11%, respectively, in fiscal 2003. The Company continues to change the composition of its loan portfolio and the deposit base as part of its migration to commercial banking. The consolidation among financial institutions in the Company's primary market area has created a significant gap in the ability of the consolidated financial institutions to serve customers. The Company's strategic plan includes targeting this customer base, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will emphasize controlled growth and the diversification of its loan portfolio to include a higher portion of commercial and commercial real estate loans. A related goal is to increase the proportion of personal and business checking account deposits used to fund these new loans. Significant portions of these new loan products carry adjustable rates, higher yields or shorter terms and higher credit risk than the traditional fixed-rate mortgages. The strategic plan stresses increased emphasis on non-interest income, including increased fees for asset management and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. The Company is well positioned to attract new customers and to increase its market share given that the administrative headquarters and eight of its twelve branches are located in Clark County, the fastest growing county in the state of Washington according to the U.S. Census Bureau. In order to support its strategy of growth without compromising its local, personal service to its customers and a commitment to asset quality, the Company has made significant investments in experienced branch, lending, asset management and support personnel and has incurred significant costs in facility expansion. The Company's efficiency ratios reflect this investment and will remain relatively high by industry standards for the foreseeable future due to the emphasis on growth and local, personal service. Control of non-interest expenses remains a high priority for the management of the Company. The Company continuously reviews new products and services to give its customers more financial options. With an emphasis on growth of non-interest income and control of non-interest expense, all new technology and services are reviewed for business development and cost saving purposes. The Company continues to experience growth in the 2 customer usage of the online banking services. Customers are able to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill-paying. This online service has also enhanced the delivery of cash management services to commercial customers. The internet banking branch web site is www.riverviewbank.com. Market Area The Company conducts operations from its home office in Vancouver and 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, Oregon 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 lower energy costs in Washington as compared to Oregon. Washington has no state income tax and Clark County operates a public electric utility that provides relatively lower cost electricity. Located in the Vancouver area are Sharp Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory and Wafer Tech, as well as several support industries. In addition to this industrial base, the Columbia River Gorge Scenic Area has been a source of tourism, which has transformed the area from its past dependence on the timber industry. The Company has strong competition from many financial institutions for deposits and loan originations. Lending Activities General. At March 31, 2003, the Company's total net loans receivable, including loans held for sale, amounted to $301.8 million, or 71.9% of total assets at that date. The principal lending activity of the Company is the origination of residential mortgage loans through its mortgage banking activities, including residential construction loans and loans collateralized by commercial properties. While the Company has historically emphasized real estate mortgage loans secured by one- to- four residential real estate, it has been diversifying its loan portfolio by focusing on increasing the number of originations of commercial, commercial real estate and consumer loans. A substantial portion of the Company's loan portfolio is secured by real estate, either as primary or secondary collateral, located in its primary market area. Loan Portfolio Analysis. The following table sets forth the composition of the Company's loan portfolio by type of loan at the dates indicated. 3 At March 31, ------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 -------------- -------------- -------------- -------------- -------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) Real estate loans: One- to- four family(1) $59,999 17.72% $73,536 22.62% $117,152 35.67% $102,542 37.61% $83,275 39.03% Multi-family 6,313 1.86 9,895 3.04 11,073 3.37 10,921 4.01 7,558 3.54 Construction one- to- four family 70,397 20.79 71,148 21.89 60,041 18.28 49,338 18.10 45,524 21.34 Construction multi-family 2,100 0.62 4,000 1.23 4,514 1.37 4,669 1.71 4,209 1.97 Construction commercial 4,531 1.34 5,230 1.61 6,806 2.07 3,597 1.32 6,184 2.90 Land 34,630 10.23 27,406 8.43 24,230 7.38 25,475 9.34 24,932 11.68 Commercial real estate 101,672 30.02 84,094 25.87 56,540 17.21 42,871 15.72 22,181 10.40 ------- ----- ------ ----- ------ ----- ------ ----- ------ ----- Total real estate loans 279,642 82.58 275,309 84.69 280,356 85.35 239,413 87.81 193,863 90.86 Commercial 34,239 10.11 23,319 7.17 23,099 7.03 15,976 5.87 4,049 1.90 Consumer loans: Automobile loans 1,458 0.43 2,132 0.66 3,223 0.98 2,875 1.05 3,146 1.47 Savings account loans 319 0.09 515 0.16 440 0.13 356 0.13 490 0.23 Home equity loans 21,088 6.23 21,598 6.65 18,761 5.71 11,148 4.09 9,096 4.26 Other consumer loans 1,927 0.56 2,134 0.67 2,596 0.80 2,864 1.05 2,728 1.28 ------- ----- ------ ----- ------ ----- ------ ----- ------ ----- Total consumer loans 24,792 7.31 26,379 8.14 25,020 7.62 17,243 6.32 15,460 7.24 Total loans and loans held for sale 338,673 100.00% 325,007 100.00% 328,475 100.00% 272,632 100.00% 213,372 100.00% Less: ====== ====== ====== ====== ====== Undisbursed loans in process 31,222 30,970 26,223 18,880 22,278 Unamortized loan origination fees, net of direct cost 2,901 2,970 3,475 3,355 2,770 Unearned discounts - - - 1 1 Allowance for loan losses 2,739 2,537 1,916 1,362 1,146 Total loans receivable, ------- ------- ------- ------- ------- net(1) $301,811 $288,530 $296,861 $249,034 $187,177 ======= ======= ======= ======= ======= (1) Includes loans held for sale of $1.5 million, $1.8 million, $569,000, none, and $341,000 at March 31, 2003, 2002, 2001, 2000 and 1999 respectively.
4 One- to- Four Family Real Estate Lending. The majority of the residential loans are secured by one- to four- family residences located in the Company's primary market area. Underwriting standards require that one- to four- family portfolio loans generally be owner occupied and that loan amounts not exceed 80% or (95% with private mortgage insurance) of the lesser of current appraised value or cost of the underlying collateral. Terms typically range from 15 to 30 years 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 "-- Loan Originations, Sales and Purchases" and "-- Mortgage Brokerage." The Company generally sells fixed-rate mortgage loans with maturities of 15 years or more and balloon mortgages to the Federal Home Loan Mortgage Corporation ("FHLMC"), servicing retained. See "-- Loan Originations, Sales and Purchases" and " -- Mortgage Loan Servicing." 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/presold construction loans and (iii) construction/permanent loans. Subject to market 5 conditions, the Company intends to increase its residential construction lending activities. To a lesser extent, the Company also originates construction loans for the development of multi-family and commercial properties. At March 31, 2003 and 2002, the composition of the Company's construction loan portfolio was as follows: At March 31, ------------------------------------ 2003 2002 ----------------- ----------------- Amount(1) Percent Amount(1) Percent -------- ------- -------- ------- (Dollars in thousands) Speculative construction $ 32,379 33.24% $ 26,791 28.43% Commercial/multi-family construction 10,750 11.04 13,605 14.44 Custom/presold construction 7,286 7.48 13,094 13.89 Construction/permanent 26,590 27.30 26,078 27.67 Construction/land 20,412 20.94 14,673 15.57 -------- ------- -------- ------- Total $ 97,417 100.00% $ 94,241 100.00% ======== ======= ======== ======= (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, 2003, the Company had one borrower with aggregate outstanding speculative loan balances of more than $1.0 million, which totaled $2.3 million and were performing according to original terms. At March 31, 2003, three speculative construction loans to one borrower that totaled $300,300 were on non-accrual. 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, 2003, the largest short-term custom construction loan and presold construction loan had outstanding balances of $549,000 and $250,000, respectively, and were performing according to original terms. Construction/permanent loans are originated to the homeowner rather than the home builder along with a commitment by the Company to originate a permanent loan to the homeowner to repay the construction loan at the completion of construction. The construction phase of a construction/permanent loan generally lasts six to nine months. At the completion of construction, the Company may either originate a fixed-rate mortgage loan or an ARM loan or use its mortgage brokerage capabilities to obtain permanent financing for the customer with another lender. At completion of construction, the Company- originated fixed interest rate permanent loan's interest rate is set at a market rate and for adjustable interest rate loans the interest rates adjust on their first adjustment date. See "-- Mortgage Brokerage." See "-- Loan Originations, Sales and Purchases" and "-- Mortgage Loan Servicing." At March 31, 2003, the largest outstanding construction/permanent loan had an outstanding balance of $553,000 and was performing according to its original terms. The Company also provides construction financing for non-residential properties (i.e., multi-family and commercial properties). The Company has increased its commercial lending resources with the intent of increasing the amount of commercial real estate loan balances such as construction commercial and construction multi-family loans. Construction lending affords the Company the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, generally involves a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of 6 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 $10.8 million commercial construction loans outstanding at March 31, 2003, the loan commitment amount ranged between $560,000 and $4.5 million. At March 31, 2003, the largest outstanding construction commercial loan had an outstanding balance of $2.2 million and was performing according to its original 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, 2003, the largest multi-family mortgage had an outstanding loan balance of $2.5 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, 2003, the largest outstanding land loan was $3.4 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 $100,000 and $1.0 million. At March 31, 2003, the largest commercial real estate loan had an outstanding balance of $5.2 million and is secured by an office building located in the Company's primary market area. At March 31, 2003, the loan was performing according to its original terms. Commercial real estate lending affords the Company an opportunity to receive interest at rates higher than those generally available from one- to- four family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to- four family residential mortgage loans. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks by limiting the maximum loan-to-value ratio to 7 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. At March 31, 2003, the Company had no commercial real estate loans accounted for on a nonaccrual basis. Commercial Lending. The Company's commercial loan portfolio has increased to 10.11% of the total loan portfolio at March 31, 2003 from 1.90% at March 31, 1999. The Company was able to increase the balance of outstanding commercial loans and commitments due to the local economy, the consolidation of some local competitors offering commercial loans and the hiring of several experienced commercial bankers from competitors in the local market. The commercial loan portfolio has grown from 7.17% at March 31, 2002 to 10.11% at March 31, 2003. Commercial loans are generally made to customers who are well known to the Company and are typically secured by business equipment or other property. The Company's commercial loans may be structured as term loans or as lines of credit. Commercial term loans are generally made to finance the purchase of assets and have maturities of five years or less. Commercial lines of credit are typically made for the purpose of providing working capital and usually approved with a term of one year or less. Lines of credit are made at variable rates of interest equal to a negotiated margin above an index rate and term loans are at a fixed rate. The Company also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements. Commercial lending involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial loans are often collateralized by equipment, inventory, accounts receivable or other business assets including real estate, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. At March 31, 2003, the Company had no commercial loan accounted for on a nonaccrual basis. Consumer Lending. The Company originates a variety of consumer loans, including home equity lines of credit, home equity term loans, home improvement loans, loans for debt consolidation and other purposes, automobile loans, boat loans and savings account loans. Home equity lines of credit and home equity term loans are typically secured by a second mortgage on the borrower's primary residence. Home equity lines of credit are made at loan-to-value ratios of 90% or less, taking into consideration the outstanding balance on the first mortgage on the property. Home equity lines of credit have a variable interest rate while home equity term loans have a fixed rate of interest. The Company's procedures for underwriting consumer loans include an assessment of the applicant's payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. Consumer loans generally entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as mobile homes, automobiles, boats and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by the borrower against the Company as the holder of the loan, and a borrower may be able to assert claims and defenses, which it has against the seller of the underlying collateral. At March 31, 2003, one consumer loan for $22,300 is on non-accrual. 8 Loan Maturity. The following table sets forth certain information at March 31, 2003 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 $ - $ - $ 76 $ 504 $22,825 $23,405 Fixed rate 731 8,860 10,904 5,107 10,992 36,594 Construction: Adjustable rate 49,377 23,322 - - - 72,699 Fixed rate 24,718 - - - - 24,718 Other real estate: Adjustable rate 9,546 4,382 10,217 25,821 11,985 61,951 Fixed rate 5,910 14,641 17,840 18,021 3,863 60,275 Commercial: Adjustable rate 22,277 429 1,593 519 - 24,818 Fixed rate 2,555 1,971 4,790 105 - 9,421 Consumer: Adjustable rate 309 55 627 412 19,024 20,427 Fixed rate 446 1,175 1,141 307 1,296 4,365 ------- ------ ------ ------ ------ ------- Total gross loans $115,869 $54,835 $47,188 $50,796 $69,985 $338,673 ======= ====== ====== ====== ====== ======= The following table sets forth the dollar amount of all loans due one year after March 31, 2003 which have fixed interest rates or have floating or adjustable interest rates. Fixed- Floating or Rates Adjustable Rates ------ ---------------- (In thousands) Residential one- to- four family $ 35,863 $ 23,405 Construction loans - 23,322 Other real estate loans 54,365 52,405 Commercial 6,866 2,541 Consumer 3,919 20,118 ------- ------- Total $101,013 $121,791 ======= ======= Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of a loan is substantially less than its contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Company the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property. The average life of mortgage loans tends to increase, however, when current mortgage loan market rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan market rates. Furthermore, management believes that a significant number of the Company's residential mortgage loans are outstanding for a period less than their contractual terms because of the transitory nature of many of the borrowers who reside in its primary market area. Loan Solicitation and Processing. The Company's lending activities are subject to the written, non-discriminatory, underwriting standards and loan origination procedures established by the Board of Directors and management. The 9 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 loans conditioned upon the occurrence of certain events. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are conditional, and are honored for up to 45 days subject to the Company's usual terms and conditions. Collateral is not required to support commitments. At March 31, 2003, the Company had outstanding commitments to originate loans in the amount of $21.4 million. Loan Originations, Sales and Purchases. While the Company originates adjustable-rate and fixed-rate loans, its ability to generate each type of loan depends upon relative customer demand for loans in its primary market area. During the years ended March 31, 2003 and 2002, the Company's total loan originations were $298.4 million and $273.9 million, respectively, of which 63.2% and 61.8%, respectively, were subject to periodic interest rate adjustment and 36.8% and 38.2%, respectively, were fixed-rate loans. The Company customarily sells the fixed-rate residential one- to- four family mortgage loans that it originates with maturities of 15 years or more to the FHLMC as part of its asset liability strategy. The sale of 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. Servicing is retained on loans sold to FHLMC. Interest rates on residential one- to -four family mortgage loan applications are typically locked during the application stage for periods ranging from 30 to 90 days, the most typical period being 45 days. These loans are locked with FHLMC under a best-efforts delivery program. The Company makes every effort to deliver these loans before their ratelocks expire. This arrangement requires the Company to deliver the loans to FHLMC within ten days of funding. Delays in funding the loans can require a lock extension. The cost of a lock extension at times is borne by the borrower and at times by the Company. These lock extension costs paid by the Company are not expected to have a material impact to operations. This activity is managed daily. There can be no assurance that the Company will be successful in its efforts to reduce the risk of interest rate fluctuation between the time of origination of a mortgage loan and the time of the ultimate sale of the loan. To the extent that the Company does not adequately manage its interest rate risk, the Company may incur significant mark-to-market losses or losses relating to the sale of such loans, adversely affecting financial condition and results of operations. The Company is not an active purchaser of loans. The following table shows total loans originated, sold and repaid during the periods indicated. 10 For the Years Ended March 31, ------------------------------ 2003 2002 2001 ------ ------ ------ (In thousands) Total net loans receivable and loans held for sale at beginning of period $288,530 $296,861 $249,034 Loans originated: ------- ------- ------- Mortgage loans: One- to- four family 45,004 40,398 23,978 Multi-family 6,936 219 1,087 Construction one- to- four family 87,049 81,809 71,602 Construction commercial real estate 3,267 14,585 9,345 Construction multi-family 2,597 - - Land and commercial real estate 61,671 57,942 31,957 Commercial 68,083 55,213 47,426 Consumer 23,784 23,697 21,062 ------- ------- ------- Total loans originated 298,391 273,863 206,457 Residential one- to- four family loans sold (56,097) (35,701) (7,563) Repayment of principal (227,101) (203,466) (147,415) Loans securitized - (40,347) - Decrease in other items, net (1,912) (2,680) (3,652) ------- ------- ------- Net increase (decrease) in loans 13,281 (8,331) 47,827 Total net loans receivable and loans held ------- ------- ------- for sale at end of period $301,811 $288,530 $296,861 ======= ======= ======= Mortgage Brokerage. In addition to originating mortgage loans for retention in its portfolio, the Company employs nine commissioned brokers who originate mortgage loans (including construction loans) for various mortgage companies predominately in the Portland metropolitan area, as well as for the Company. The loans brokered to 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, 2003, brokered loans totaled $200.3 million (including $77.7 million brokered to the Company). Gross fees of $1.7 million (excluding the portion of fees shared with the commissioned brokers) were recognized for the year ended March 31, 2003. 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, 2003, total loans serviced for others were $128.2 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, 2003, the carrying value of these purchased servicing rights was $30,000 and was being amortized over the life of the underlying loan servicing. Loan Origination and Other Fees. The Company generally receives loan origination fees and discount "points." Loan fees and points are a percentage of the principal amount of the loan that is charged to the borrower for funding the loan. The Company usually charges origination fees of 1.5% to 2.0% on one- to- four family residential real estate loans, long-term commercial real estate loans and residential construction loans. Commercial loan fees are based on terms of the 11 individual loan. Current accounting standards require fees received for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Deferred fees associated with loans that are sold are recognized as gain on sale of loans. The Company had $2.9 million of net deferred loan fees at March 31, 2003. The Company also receives loan servicing fees on the loans it sells and on which it retains the servicing rights. See Note 8 of Notes to Consolidated Financial Statements. Delinquencies. The Company's collection procedures for all loans except consumer loans provide for a series of contacts with delinquent borrowers. A late charge delinquency notice is first sent to the borrower when the loan secured by real estate becomes 17 days past due. A follow-up telephone call, or letter if the borrower cannot be contacted by telephone, is made when the loan becomes 22 days past due. A delinquency notice is sent to the borrower when the loan becomes 30 days past due. When payment becomes 60 days past due, a notice of default letter is sent to the borrower stating that foreclosure proceedings will commence unless the delinquency is cured. If a loan continues in a delinquent status for 90 days or more, the Company generally initiates foreclosure proceedings. In certain instances, however, the Company may decide to modify the loan or grant a limited moratorium on loan payments to enable borrowers to reorganize their financial affairs. A delinquent consumer loan borrower is contacted on the fifteenth day of delinquency. A letter of intent to repossess collateral is mailed to the borrower after the loan becomes 45 days past due and repossession proceedings are initiated after the loan becomes 90 days delinquent. Delinquencies in commercial loans are handled on a case by case basis. Generally, notices are sent and personal contact is made with the borrower when the loan is 15 days past due. Loan officers are responsible for collecting loans they originate or 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 it is the Company's general policy that when a loan is 90 days delinquent or when collection of interest appears doubtful, it is placed on nonaccrual status, at which time the accrual of interest ceases and the reserve for any unrecoverable accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan. Real estate owned is real estate acquired in settlement of loans and consists of real estate acquired through foreclosure or deeds in lieu of foreclosure. The acquired real estate is recorded at net realizable value. The Company periodically reviews the property's net realizable value and a charge to operations is taken if the property's recorded value exceeds the property's net realizable value. The following table sets forth information with respect to the Company's nonperforming assets. At the dates indicated, the Company had no restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15. 12 At March 31, -------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on a nonaccrual basis: Residential real estate $ 301 $ 830 $ 153 $ 833 $1,052 Commercial real estate - 297 - - - Land - 180 - 320 - Commercial - 54 50 99 208 Consumer 22 39 116 26 33 ------ ------ ------ ------ ------ Total 323 1,400 319 1,278 1,293 ------ ------ ------ ------ ------ Accruing loans which are contractually past due 90 days or more - 122 226 - 5 ------ ------ ------ ------ ------ Total of nonaccrual and 90 days past due loans 323 1,522 545 1,278 1,298 ------ ------ ------ ------ ------ Real estate owned (net) 425 853 473 65 30 ------ ------ ------ ------ ------ Total nonperforming assets $ 748 $2,375 $1,018 $1,343 $1,328 ====== ====== ====== ====== ====== Total loans delinquent 90 days or more to net loans 0.11% 0.53% 0.18% 0.51% 0.69% Total loans delinquent 90 days or more to total assets 0.08 0.39 0.13 0.37 0.43 Total nonperforming assets to total assets 0.18 0.61 0.24 0.39 0.44 The gross amount of interest income on the nonaccrual loans that would have been recorded during the year ended March 31, 2003 if the nonaccrual loans had been current in accordance with their original terms was approximately $6,000. For the year ended March 31, 2003, no interest was earned on the nonaccrual loans and included in interest and fees on loans receivable interest income. Loans not included in nonperforming or past due categories, but where information about possible credit problems causes management to be uncertain about the borrower's ability to comply with existing repayment terms, totaled $2.4 million at March 31, 2003 and $2.9 million at March 31, 2002. Asset Classification. The OTS has adopted various regulations regarding problem assets of savings institutions. The regulations require that each insured institution review and classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, OTS examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If an asset or portion thereof is classified as loss, the insured institution establishes specific allowances for loan losses for the full amount of the portion of the asset classified as loss. All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful can be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" and monitored by the Company. 13 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, 2003 2002 ------ ------ (In thousands) Substandard assets $2,740 $3,724 Doubtful assets - Loss assets - - General loss allowances 2,739 2,537 Specific loss allowances - - Charge-offs 428 439 The substandard assets at March 31, 2003 are consisted of three residential construction loans totaling $316,000, one land loan totaling $100,000, two commercial real estate loans totaling $212,000, one consumer loan totaling $22,000 and thirteen commercial borrowers with loans totaling $2.1 million. Real Estate Owned. Real estate properties acquired through foreclosure or by deed-in-lieu of foreclosure are recorded at the lower of cost or fair value less estimated costs of disposal. Management periodically performs valuations and an allowance for loan losses is established by a charge to operations if the carrying value exceeds the estimated net realizable value. At March 31, 2003, the Company owned three properties with a recorded value of $425,000 compared to $853,000 at March 31, 2002. The $425,000 recorded value consists of two land loans totaling $70,000 and one one-to four-family loan of $355,000. Allowance for Loan Losses. The Company maintains an allowance for loan losses to provide for losses inherent in the loan portfolio. The adequacy of the allowance is evaluated monthly to maintain the allowance at levels sufficient to provide for inherent losses. A key component to the evaluation is the Company's internal loan review and loan classification system. The internal loan review system provides for at least an annual review by the internal audit department of all loans that meet selected criteria. The Internal Loan Classification Committee reviews and monitors the risk and quality of the Company's loan portfolio. The Internal Loan Classification Committee members include the Credit Administrator, Chairman and Chief Executive Officer, Chief Financial Officer, Executive Vice President Credit Administration and Senior Vice President Business & Professional Banking. Credit officers are expected to monitor their portfolios and make recommendations to change loan grades whenever changes are warranted. At least annually, loans that are delinquent 60 days or more and with specified outstanding loan balances are subject to review by the internal audit department. The Internal Loan Classification Committee meets quarterly to approve any changes to loan grades, monitor loan grades and to recommend any changes to the loan grades. The Company uses the OTS loan classifications of special mention, substandard, doubtful and loss plus the additional loan classifications of pass and watch in order to assign a loan grade to be used in the determination of the proper amount of allowance for loan losses. The definition of a pass classification represents a level of credit quality, which contains no well-defined deficiency or weakness. The definition of watch classification is used to identify a loan that currently contains no well-defined deficiency or weakness, but it is determined to be desirable to closely monitor the loan. The Company uses the loan classifications from the internal loan review and Internal Loan Classification Committee in the following manner to determine the amount of the allowance for loan losses. The calculation of the allowance for loan losses must consider loan classification in order to determine the amount of the allowance for loan losses for the required three separate elements of the allowance for losses: general allowances, allocated allowances and unallocated allowances. 14 The general allowance element relates to assets with no well-defined deficiency or weakness (i.e., assets classified pass or watch) and takes into consideration loss that is imbedded within the portfolio but has not been realized. Borrowers are impacted by events well in advance of a lender's knowledge that may ultimately result in a loan default and eventual loss. Examples of such loss-causing events in the case of consumer or one- to four- family residential loans would be a borrower job loss, divorce or medical crisis. Examples in commercial or construction loans may be loss of customers due to competition or economy changes. General allowances for each major loan type are determined by applying loss factors that take into consideration past loss experience, asset duration, economic conditions and overall portfolio quality to the associated loan balance. The allocated allowance element relates to assets with well-defined deficiencies or weaknesses (i.e., assets classified special mention, substandard, doubtful or loss). The OTS loss factors are applied against current classified asset balances to determine the amount of allocated allowances. Included in these allowances are those amounts associated with loans where it is probable that the value of the loan has been impaired and the loss can be reasonably estimated. The unallocated allowance element is more subjective and is reviewed quarterly to take into consideration estimation errors and economic trends that are not necessarily captured in determining the general and allocated valuation. At March 31, 2003, the Company had an allowance for loan losses of $2.7 million, or 0.89% of total outstanding net loans at that date. Based on past experience and probable losses inherent in the loan portfolio, management believes that loan loss reserves are adequate. While the Company believes it has established its existing allowance for loan losses in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP"), there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to increase significantly its allowance for loan losses, thereby negatively affecting the Company's financial condition and results of operations. The following table sets forth an analysis of the Company's allowance for loan losses for the periods indicated. 15 Year Ended March 31, -------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of period $2,537 $1,916 $1,362 $1,146 $ 984 ------ ------ ------ ------ ------ Provision for loan losses 727 1,116 949 675 240 Recoveries: Residential real estate 2 - - - - Land 63 - - - - Commercial - - - 1 - Consumer 13 25 18 28 7 ------ ------ ------ ------ ------ Total recoveries 78 25 18 29 7 ------ ------ ------ ------ ------ Charge-offs: Residential real estate 140 88 226 48 28 Land 17 - - - - Commercial 119 185 27 282 - Consumer 152 166 160 158 57 ------ ------ ------ ------ ------ Total charge-offs 428 439 413 488 85 ------ ------ ------ ------ ------ Net charge-offs 350 414 395 459 78 ------ ------ ------ ------ ------ Dispositions (1) - 81 - - - Net change in allowance for unfunded loan commitments and lines of credit (175) - - - - ------ ------ ------ ------ ------ Balance at end of period $2,739 $2,537 $1,916 $1,362 $1,146 ====== ====== ====== ====== ====== Ratio of allowance to total net loans outstanding during period 0.89% 0.86% 0.63% 0.54% 0.60% Ratio of net charge-offs(recoveries) to average net loans outstanding during period 0.12 0.14 0.14 0.21 0.04 Ratio of allowance to total of nonaccrual and 90 days past due loans 847.99 166.69 351.56 106.58 88.30 Changes in the allowance for unfunded loan commitments and lines of credit: Year Ended March 31, -------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (Dollars in thousands) Beginning Balance $ - $ - $ - $ - $ - Net change in allowance for unfunded loan commitments and lines of credit 175 - - - - ------ ------ ------ ------ ------ Ending Balance $ 175 $ - $ - $ - $ - ====== ====== ====== ====== ====== (1) Allowance reclassified with securitization of one-to four-family loans to mortgage-backed securities. 16 The following table sets forth the breakdown of the allowance for loan losses by loan category and is based on applying a specific loan loss factor to the related loan category outstanding loan balances as of the date of the allocation for the periods indicated. At March 31, ------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------------- --------------- --------------- --------------- --------------- Loan Loan Loan Loan Loan Category Category Category Category Category as a as a as a as a as a Percent Percent Percent Percent Percent of 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 $ 122 19.50% $ 191 24.99% $ 263 38.73% $ 259 40.34% $ 218 43.51% Multi-family 24 2.05 37 3.36 42 3.66 41 4.30 10 3.95 Construction one-to-four family 194 14.24 319 14.77 224 13.57 304 13.50 292 16.18 Construction multi-family 5 0.30 20 1.25 21 0.19 10 1.29 10 1.11 Construction commercial 20 1.31 26 1.38 34 1.41 17 1.02 44 1.56 Land 196 10.36 192 8.79 206 7.83 223 9.62 32 11.91 Commercial real estate 1,046 33.05 869 28.58 580 18.69 224 16.86 180 11.59 Commercial loans 796 11.13 668 7.92 354 7.64 160 6.28 198 2.12 Consumer loans: Secured 141 7.63 180 8.47 154 7.65 90 5.70 89 6.65 Unsecured 33 0.43 27 0.49 34 0.63 29 1.09 37 1.42 Unallocated 162 - 8 - 4 - 5 - 36 - Total allowance for loan ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ losses $2,739 100.00% $2,537 100.00% $1,916 100.00% $1,362 100.00% $1,146 100.00% ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
17 Investment Activities OTS regulated institutions have authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the applicable FHLB, certificates of deposit of federally insured institutions, certain bankers' acceptances and federal funds. Subject to various restrictions, OTS regulated institutions may also invest a portion of their assets in commercial paper, corporate debt securities and mutual funds, the assets of which conform to the investments that federally chartered savings institutions are otherwise authorized to make directly. Federal regulations require the Company to maintain a minimum sufficient liquidity to ensure its safe and sound operation. Liquid assets include cash, cash equivalents consisting of short-term interest-earning deposits, certain other time deposits, and other obligations generally having remaining maturities of less than five years. See "Regulation." It is the 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 The Bank's and Company's assets and liabilities. At March 31, 2003, the Bank's liquidity ratio, the ratio of cash and eligible investments to the sum of withdrawable savings and borrowings due within one year, was 12.25%. The Investment Committee, composed of the Company's Chief Executive Officer and Chief Financial Officer, makes investment decisions. The Company's investment objectives are: (i) to provide and maintain liquidity within regulatory guidelines; (ii) to maintain a balance of high quality, diversified investments to minimize risk; (iii) to provide collateral for pledging requirements; (iv) to serve as a balance to earnings; and (v) to optimize returns. At March 31, 2003, the Company's investment and mortgage-backed securities portfolio totaled approximately $36.8 million and consisted primarily of obligations of federal agencies, and Federal National Mortgage Association ("FNMA") and FHLMC mortgage-backed securities. At March 31, 2003, the Company's investment securities portfolio did not contain any tax-exempt securities of any issuer with an aggregate book value in excess of 10% of the Company's consolidated shareholders' equity, excluding those securities issued by the U.S. Government or its agencies. The Board of Directors sets the investment policy of the Company which dictates that investments be made based on the safety of the principal amount, liquidity requirements of the Company and the return on the investments. At March 31, 2003, 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. 18 The following table sets forth the investment securities portfolio and carrying values at the dates indicated. The fair value of the investment and mortgage-backed securities portfolio was $36.9 million, $59.8 million and $76.1 million at March 31, 2003, 2002 and 2001, respectively. At March 31, ----------------------------------------------------------------- 2003 2002 2001 ------------------- ------------------- ------------------- Carrying Percent of Carrying Percent of Carrying Percent of Value Portfolio Value Portfolio Value Portfolio -------- --------- -------- --------- -------- --------- (Dollars in thousands) Held to maturity (at amortized cost): Real estate mortgage investment conduits ("REMICs") $ 1,803 4.90% $ 1,804 3.02% $ 1,805 2.38% FHLMC mortgage-backed securities 589 1.60 964 1.62 1,680 2.21 FNMA mortgage-backed securities 909 2.47 1,618 2.71 2,920 3.84 Municipal securities - - - - 861 1.13 -------- -------- -------- -------- -------- -------- 3,301 8.97 4,386 7.35 7,266 9.56 Available for sale (at fair value): -------- -------- -------- -------- -------- -------- FHLB debentures - - - - 6,937 9.13 REMICs 6,421 17.45 25,114 42.10 40,943 53.90 FHLMC mortgage-backed securities 6,097 16.57 10,972 18.39 451 0.59 FNMA mortgage-backed securities 551 1.50 913 1.53 1,745 2.30 School district bonds 2,751 7.48 2,601 4.36 2,625 3.46 Trust preferred securities 4,975 13.52 - - - - Equity securities 12,700 34.51 15,674 26.27 15,999 21.06 -------- -------- -------- -------- -------- -------- 33,495 91.03 55,274 92.65 68,700 90.44 -------- -------- -------- -------- -------- -------- Total investment securities $36,796 100.00% $59,660 100.00% $75,966 100.00% ======== ======== ======== ======== ======== ========
The following table sets forth the maturities and weighted average yields in the securities portfolio at March 1, 2003. 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 $ - -% $ 982 4.06% $1,126 4.27% $ 643 4.77% REMICs - - - - 811 2.38 7,413 2.86 FHLMC mortgage-backed securities - - 6,250 6.24 2 10.50 434 4.23 FNMA mortgage-backed securities 28 5.52 839 6.83 - - 593 4.77 Trust preferred securities - - - - - - 4,975 3.20 Equity securities - - - - - - 12,700 3.81 ------ -------- ------ -------- ------ -------- ------ -------- Total $ 28 5.52% $8,071 6.03% $1,939 3.48% $26,758 3.48% ====== ======= ====== ======= ====== ======= ======= =======
(1) For available for sale securities carried at fair value, the weighted average yield is computed using amortized cost. Average yield calculations exclude equity securities that have no stated yield or maturity. 19 In addition to U.S. Government treasury obligations, the Company invests in mortgage-backed securities and real estate mortgage investment conduits ("REMICs"). Mortgage-backed securities ("MBS") (which are also known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family mortgages. Principal and interest payments on mortgage-backed securities are passed from the mortgage originators, through intermediaries (i.e., FNMA, FHLMC, the Government National Mortgage Association ("GNMA") or private 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, 2003, the Company held REMICs with a net carrying value of $8.2 million, of which $1.8 million were classified as held-to-maturity and $6.4 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, 2003, the Company owned no privately issued REMICs. Investments in mortgage-backed securities, including REMICs, involve a risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. The investment in school district bonds was $2.8 million at March 31, 2003 compared to $2.6 million at March 31, 2002. Total equity securities investment was $12.7 million at March 31, 2003, compared to $15.7 million at March 31, 2002. In the second quarter of fiscal 2003, the Company purchased $5.0 million of trust preferred securities which are a portion of the mezzanine tranche of a $500.0 million pooled preferred trust securities indexed to the three month libor interest rate. In the fourth quarter of fiscal 2003, the Company recognized a $2.3 million non-cash pre-tax charge to operations for investments in FHLMC preferred stock and FNMA preferred stock. The Company accounts for these securities in accordance with SFAS No. 115. Under SFAS No. 115, if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss will be realized as expense on the income statement. Based on a number of factors, including the magnitude of the drop in the market value below the Company's cost and the length of time the market value had been below cost, management concluded that the decline in value was other-than-temporary at the end of the fourth quarter of fiscal year 2003. Accordingly, the other-than-temporary impairment was realized in the income statement, in the amount of $700,000 for FNMA preferred stock and $1.6 million FHLMC preferred stock. A corresponding reduction in unrealized losses in shareholders' equity was realized in the amount of $462,000 for FNMA preferred stock and $1.1 million for FHLMC preferred stock. Deposit Activities and Other Sources of Funds General. Deposits, loan repayments and loan sales are the major sources of the Company's funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. 20 Deposit Accounts. 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. 21 Deposit Balances The following table sets forth information concerning the Company's certificates of deposit, other interest-bearing and non-interest bearing deposits at March 31, 2003. Percent Interest Minimum of Total Rate Term Category Amount Balance Deposits - -------- ---- --------------------- ------- ------- -------- (In thousands) 0.350% None NOW accounts $ 100 $27,113 8.45% 1.824 None High Yield checking 25,000 35,537 11.08 0.750 None Regular savings 500 24,855 7.75 1.011 None Money market 2,500 53,717 16.75 None None Non-interest checking 100 78,464 24.46 ------- ----- Total transaction accounts 219,686 68.49 Certificates of Deposit ----------------------- 1.564 91 Days Fixed-term, Fixed-rate 2,500 9,510 2.96 1.455 182-364 Days Fixed-term, Fixed-rate 2,500 13,592 4.24 2.055 12-17 Months Fixed-term, Fixed-rate 2,500 35,034 10.92 1.380 18 Months Fixed-term, Variable rate, Individual Retirement account ("IRA") 100 1,149 0.36 2.314 18-23 Months Fixed-term, Fixed-rate 2,500 2,518 0.79 3.304 24-35 Months Fixed-term, Fixed-rate 2,500 19,834 6.18 4.798 36-59 Months Fixed-term, Fixed-rate 2,500 6,404 2.00 5.353 60-83 Months Fixed-term, Fixed-rate 2,500 10,137 3.16 5.228 84-120 Months Fixed-term, Fixed-rate 2,500 2,878 0.90 ------- ----- Total certificates of deposit 101,056 31.51% ------- ----- Total deposits $320,742 100.00% ======= ====== 22 Deposit Flow The following table sets forth the balances of deposit accounts in the various types offered by the Company at the dates indicated. At March 31, ---------------------------------------------------------------------------- 2003 2002 2001 ------------------------ ------------------------ ------------------------ Increase/ Increase/ Increase/ Balance Percent Decrease) Balance Percent Decrease) Balance Percent Decrease) ------- ------- -------- ------- ------- -------- ------- ------- -------- (Dollars in thousands) Non-interest-bearing demand $78,464 24.46% $ 45,890 $32,574 12.54% $ 4,639 $27,935 9.45% $ 3,194 NOW accounts 27,113 8.45 (5,597) 32,710 12.60 567 32,143 10.88 11,167 High-yield checking 35,537 11.08 30,183 5,354 2.06 5,354 - - - Regular savings accounts 24,855 7.75 2,916 21,939 8.45 3,112 18,827 6.37 (1,013) Money market deposit accounts 53,717 16.75 (928) 54,645 21.04 8,921 45,724 15.47 1,104 Certificates of deposits which mature(1): Within 12 months 71,155 22.19 (15,784) 86,939 33.48 (55,084) 142,023 48.06 48,149 Within 12-36 months 22,619 7.05 3,249 19,370 7.46 (4,303) 23,673 8.01 897 Beyond 36 months 7,282 2.27 1,123 6,159 2.37 961 5,198 1.76 (330) ------- ------- -------- ------- ------- -------- ------- ------- -------- Total $320,742 100.00% $ 61,052 $259,690 100.00% $(35,833)$295,523 100.00% $ 63,168 ======= ====== ======== ======= ====== ======== ======= ====== ========
__________________ (1) IRAs of $12.9 million, $12.8 million and $12.8 million at March 31, 2003, 2002 and 2001, respectively, are included in certificate balances. 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, -------------------------- 2003 2002 2001 ------ ------ ------ (In thousands) Below 2.00% $43,969 $14,919 $ - 2.00 - 2.99% 17,483 30,028 - 3.00 - 3.99% 18,770 24,390 40 4.00 - 4.99% 7,452 13,014 5,772 5.00 - 5.99% 7,058 10,717 45,544 6.00 - 7.99% 6,324 19,400 119,538 ------ ------ ------ Total $101,056 $112,468 $170,894 ======= ======= ======= The following table sets forth the amount and maturities of certificates of deposit at March 31, 2003. Amount Due -------------------------------------------------- Less Than 1-2 After After One Year Years 2-3 Years 3 Years Total -------- ------- --------- ------- ------- (In thousands) Below 2.00% $ 39,225 $ 4,176 $ 500 $ 68 $ 43,969 2.00 - 2.99% 10,943 4,529 1,998 13 17,483 3.00 - 3.99% 12,755 4,399 391 1,225 18,770 4.00 - 4.99% 3,217 1,161 888 2,186 7,452 5.00 - 5.99% 2,086 790 780 3,402 7,058 6.00 - 7.99% 2,929 1,697 1,310 388 6,324 -------- ------- --------- ------- ------- Total $ 71,155 $16,752 $ 5,867 $ 7,282 $101,056 ======== ======= ========= ======= ======= The following table presents the amount and weighted average rate of time deposits equal to or greater than $100,000 at March 31, 2003. Weighted Maturity Period Amount Average Rate - --------------- -------- ------------ (Dollars in thousands) Three months or less $ 12,751 2.46% Over three through six months 4,675 2.49 Over six through 12 months 4,309 2.69 Over 12 Months 8,552 4.21 -------- ------ Total $ 30,287 2.99% ======== ====== 24 Deposit Activities The following table sets forth the deposit activities of the Company for the periods indicated. Year Ended March 31, -------------------------- 2003 2002 2001 ------ ------ ------ (In thousands) Beginning balance $259,690 $295,523 $232,355 Net (decrease) increase before interest credited 55,535 (44,789) 52,002 Interest credited 5,517 8,956 11,166 Net (decrease) increase in ------ ------ ------ savings deposits 61,052 (35,833) 63,168 ------ ------ ------ Ending balance $320,742 $259,690 $295,523 ======= ======= ======= 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 and investment securities. The FHLB functions as a central reserve bank providing credit for savings and loan associations and certain other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's assets or on the FHLB's assessment of the institution's creditworthiness. The FHLB determines specific lines of credit for each member institution and the Bank has a 35% of total assets line of credit with the FHLB-Seattle to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At March 31, 2003, the Bank had $40.0 million of outstanding advances from the FHLB-Seattle under an available credit facility of $104.9 million. The following tables set forth certain information concerning the Company's borrowings at the dates and for the periods indicated. At March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Weighted average rate paid on FHLB advances 4.90% 6.10% 6.62% 25 Year Ended March 31, -------------------------- 2003 2002 2001 ------ ------ ------ (Dollars in thousands) Maximum amounts of FHLB advances outstanding at any month end $74,500 $99,500 $80,000 Average FHLB advances outstanding 53,174 89,499 72,825 Weighted average rate paid on FHLB advances 5.53% 6.25% 6.79% 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 ("FDIA"), and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Bank's relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Bank's mortgage documents. The Bank 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, 2003 was $90,905. 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. 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 26 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 $5.6 million at March 31, 2003. 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. The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid in the past and could do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future. 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. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. The FDIC makes risk classification of all insured institutions for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semi-annual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. The premium schedule for BIF and SAIF insured institutions rangesfrom 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 1.88 basis points for each $100 in domestic deposits for SAIF and BIF insured institutions. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in 2017 through 2019. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated 27 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. Federal regulations require the Bank to maintain sufficient liquidity to ensure its safe and sound operation. Liquid assets include cash, cash equivalents consisting of short-term interest-earning deposits, certain other time deposits and other obligations generally having remaining maturities of less than five years. Liquidity management is both a daily and long-term responsibility of management. The Company adjusts liquid assets based upon management's assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-bearing deposits, and (iv) the objectives of its asset/liability management program. 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. At March 31, 2003, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the OTS. Standards for Safety and Soundness. The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Bank fails to meet any standard prescribed by the Guidelines, the OTS may require the Bank to submit to it 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, 2003, the Bank met the test and its QTL percentage was 75.65%. 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." 28 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, 2003, the Bank had tangible capital of $48.2 million, or 11.66% of adjusted total assets, which is approximately $42.0 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. At March 31, 2003, the Bank had $369,000 in core deposit intangible and $629,000 in servicing assets. 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, 2003, the Bank had core capital equal to $48.2 million, or 11.66% of adjusted total assets, which is $35.8 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, 2003, the Bank had total risk-based capital of approximately $50.9 million, including $48.2 million in core capital and $2.7 million in qualifying supplementary capital, and risk-weighted assets of $320.4 million, or total capital of 15.89% of risk-weighted assets. This amount was $25.3 million above the 8% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association," which is an institution 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 regulations impose 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. Generally, savings institutions, such as the Bank, that before and after the proposed distribution remain well-capitalized, may make capital distributions during any calendar year equal to the greater of 100% of net income 29 for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings institutions proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. See "Capital Requirements." 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, 2003, the Bank's internal limit was 80% of the regulatory limit on loans to one borrower or $6.1 million. At March 31, 2003, the Bank's largest single loan to one borrower was $5.8 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. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Bank include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Community Reinvestment Act. Under the federal Community Reinvestment Act ("CRA"), all federally-insured financial institutions have a continuing and affirmative obligation consistent with safe and sound operations to help meet all the credit needs of 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 this 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 30 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 $25,000 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. Financial Service Modernization. On November 12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was signed into law. The purpose of this legislation was 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) repealed the historical restrictions and eliminates many federal and state law barriers to affiliations among banks, securities firms, insurance companies and other financial service providers; (b) provided a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies; (c) broadened the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries; (d) provided an enhanced framework for protecting the privacy of consumer information; (e) adopted a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system; (f) modified the laws governing the implementation of the CRA; and (g) addressed 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. 31 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 of its subsidiaries (other than the Bank 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 QTL, within one year the Company must register as, and will become subject to, the significant activity restrictions applicable to bank holding companies. See "Federal Regulation of Savings Associations -- Qualified Thrift Lender Test" for information regarding the Bank's QTL. The USA Patriot Act General. In response to the events of September 11th, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. New Legislation. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: - - Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. - - Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October 26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened. - Section 312 of the Act requires financial institutions that establish, maintain, administer or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. - - Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any 32 country), and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks. - - Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. During the first quarter of 2002 the Federal Crimes Enforcement Network (FinCEN), a bureau of the Department of Treasury, issued proposed and interim regulations to implement the provisions of Sections 312 and 352 of the USA Patriot Act. To date, it has not been possible to predict the impact the USA PATRIOT ACT and its implementing regulations may have on the Company and the Bank. Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") was signed into law by President Bush on July 30, 2002 in response to public concerns regarding corporate accountability in connection with the recent accounting scandals at Enron and WorldCom. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act is the most far-reaching U.S. securities legislation enacted in some time. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission ("SEC"), under the Securities Exchange Act of 1934 ("Exchange Act"). The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. The Sarbanes-Oxley Act addresses, among other matters: * audit committees; * certification of financial statements by the chief executive officer and the chief financial officer; * the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; * a prohibition on insider trading during pension plan black out periods; * disclosure of off-balance sheet transactions; * a prohibition on personal loans to directors and officers; * expedited filing requirements for Form 4's; 33 * disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; * "real time" filing of periodic reports; * the formation of a public accounting oversight board; * auditor independence; and * various increased criminal penalties for violations of securities laws. The Sarbanes-Oxley Act contains provisions which became effective upon enactment on July 30, 2002 and provisions which will become effective from within 30 days to one year from enactment. The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. TAXATION Federal Taxation General. The Company and the Bank report their income on a fiscal year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company or the Bank. Bad Debt Reserve. Historically, savings institutions, such as the Bank, which met certain definitional tests primarily related to their assets and the nature of their business ("qualifying thrift"), were permitted to establish a reserve for bad debts and to make annual additions thereto, which may have been deducted in arriving at their taxable income. The Bank's deductions with respect to "qualifying real property loans," which are generally loans secured by certain interest in real property, were computed using an amount based on the Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable income, computed with certain modifications and reduced by the amount of any permitted additions to the non-qualifying reserve. Due to the Bank's loss experience, the Bank generally recognized a bad debt deduction equal to 8% of taxable income. Congress revised the thrift bad debt rules in 1996. The new rules eliminated the 8% of taxable income method for deducting additions to the tax bad debt reserves for all thrifts for tax years beginning after December 31, 1995. These rules also required that all institutions recapture all or a portion of their bad debt reserves added since the base year (last taxable year beginning before January 1, 1988). At March 31, 2003, 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 34 reserve. The amount of additional taxable income created from an Excess Distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if, after the Conversion and Reorganization, the Bank makes a "nondividend distribution," then approximately one and one-half times the Excess Distribution would be includable in gross income for federal income tax purposes, assuming a 34% corporate income tax rate (exclusive of state and local taxes). See "Regulation" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserve. Corporate Alternative Minimum Tax. The Code imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. In addition, only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). For taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million is imposed on corporations, including the Company, whether or not an Alternative Minimum Tax is paid. Dividends-Received Deduction. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Bank and the Company will not file a consolidated tax return, except that if the Bank or the Company owns more than 20% of the stock of a corporation distributing a dividend, then 80% of any dividends received may be deducted. Audits. The Company's federal income tax returns have been audited through the tax year ended March 31, 1999. State Taxation General. The Company is subject to a business and occupation tax imposed under Washington law at the rate of 1.50% of gross receipts; however, interest received on loans secured by mortgages or deeds of trust on residential properties is exempt from such tax. Audits. The Company's business and occupation tax returns have been audited through the tax year ended March 31, 2001. 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, 2003, the Bank's investments of $725,000 in Riverview Services, Inc. ("Riverview Services") its wholly owned subsidiary, and the investment of $545,000 in Riverview Asset Management Corp. ("RAM Corp"), a 90% owned subsidiary, were within these limitations. 35 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 $70 for each deed of trust. Riverview Services had net income of $68,000 for the fiscal year ended March 31, 2003 and total assets of $729,000 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 during December 1998 and had a net loss of $58,000 for the fiscal year ended March 31, 2003 and total assets of $695,000 at that date. RAM Corp earns fees on the management of assets held in fiduciary or agency capacity. At March 31, 2003, total assets under management approximated $114.8 million. RAM Corp's operations are included in the Consolidated Financial Statements of the Company. Personnel As of March 31, 2003, the Company had 157 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 63 Chairman of the Board. President and Chief Executive Officer Ron Wysaske 50 Executive Vice President, Treasurer and Chief Financial Officer (1) At March 31, 2003. Patrick Sheaffer joined the Bank in 1965 and has served as President and Chief Executive Officer of the Bank since 1976. He became Chairman of the Board of the Bank in 1993. He has been Chairman of the Board, President and Chief Executive Officer of the Company since its in inception in 1997. 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. Prior to that, he was an audit and tax accountant at Price Waterhouse & Co. He became Executive Vice President, Treasurer and Chief Financial Officer of the Bank in 1981 and of the Company at inception in 1997. He is responsible for administering all finance, support and administrative functions at the Company. He is a certified public accountant in the State of Washington, but is not licensed to practice publicly and is active in numerous professional and civic organizations. 36 Item 2. Properties - ------------------- The following table sets forth certain information relating to the Company's offices as of March 31, 2003. Approximate Location Year Opened Square Footage Deposits - -------- ----------- -------------- -------- Main Office: (In millions) 900 Washington, Suite 900 Vancouver, Washington (1) 2000 16,000 $ 14.7 Branch Offices: 700 N.E. Fourth Avenue Camas, Washington (3) 1975 25,000 42.2 3307 Evergreen Way Washougal, Washington (1)(3)(4) 1963 3,200 26.8 225 S.W. 2nd Street Stevenson, Washington (3) 1971 1,700 24.6 330 E. Jewett Boulevard White Salmon, Washington (3)(5) 1977 3,200 24.0 15 N.W. 13th Avenue Battle Ground, Washington (3)(6) 1979 2,900 26.0 412 South Columbus Goldendale, Washington (3) 1983 2,500 14.2 11505-K N.E. Fourth Plain Boulevard Vancouver, Washington (3) 1994 3,500 15.6 "Orchards" Office 7735 N.E. Highway 99 Vancouver, Washington (1)(2)(3) 1994 4,800 24.7 "Hazel Dell" Office 1011 Washington Way Longview, Washington (2)(3) 1994 2,000 13.3 900 Washington St., Suite 100 Vancouver, Washington (1)(3) 1998 5,300 76.3 1901-E N.E. 162nd Avenue Vancouver, Washington (1)(3) 1999 3,200 9.6 800 N.E. Tenny Road, Suite D Vancouver, Washington (3) 2000 3,200 10.0 37 (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, 2003, the net book value of the Company's office properties, furniture, fixtures and equipment was $9.7 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, 2003. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - -------------------------------------------------------------------------- At March 31, 2003, there were 4,585,543 shares Company Common Stock issued and 4,358,704 outstanding, 769 stockholders of record and an estimated 1,000 holders in nominee or "street name." Under Washington law, the Company is prohibited from paying a dividend if, as a result of its payment, the Company would be unable to pay its debts as they become due in the normal course of business, or if the Company's total liabilities would exceed its total assets. The principal source of funds for the Company is dividend payments from the Bank. OTS regulations require the Bank to give the OTS 30 days advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to 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 Reorganization. See Note 1 of Notes to Consolidated Financial Statements. 38 The common stock of the Company has traded on the Nasdaq National Market System under the symbol "RVSB" since October 2, 1997. From October 22, 1993 until October 2, 1997, the common stock of the Company traded on The Nasdaq SmallCap Market under the same symbol. The following table sets forth the high and low trading prices, as reported by Nasdaq, and cash dividends paid for each quarter during 2003 and 2002 fiscal years. At March 31, 2003, there were nine market makers in the Company's common stock as reported by the Nasdaq Stock Market. Cash Dividends Fiscal Year Ended March 31, 2003 High Low Declared - -------------------------------- ------ ------- -------- Quarter Ended March 31, 2003 $17.04 $14.64 $0.125 Quarter Ended December 31, 2002 15.24 13.63 0.125 Quarter Ended September 30, 2002 15.71 14.00 0.125 Quarter Ended June 30, 2002 14.75 13.05 0.125 Cash Dividends Fiscal Year Ended March 31, 2002 High Low Declared - -------------------------------- ------ ------- -------- Quarter Ended March 31, 2002 $14.00 $11.93 $0.11 Quarter Ended December 31, 2001 12.35 10.90 0.11 Quarter Ended September 30, 2001 12.00 10.00 0.11 Quarter Ended June 30, 2001 10.50 9.25 0.11 39 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, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (In thousands) FINANCIAL CONDITION DATA: Total assets $419,904 $392,101 $431,996 $344,680 $302,601 Loans receivable, net(1) 301,811 288,530 296,861 249,034 187,177 Mortgage-backed securities held to maturity, at amortized cost 3,301 4,386 6,405 8,657 12,715 Mortgage-backed securities available for sale, at fair value 13,069 36,999 43,139 39,378 53,372 Cash and interest-bearing deposits 60,858 22,492 38,935 15,786 17,207 Investment securities held to maturity, at amortized cost - - 861 903 4,943 Investment securities available for sale, at fair value 20,426 18,275 25,561 12,883 13,280 Deposit accounts 320,742 259,690 295,523 232,355 200,311 FHLB advances 40,000 74,500 79,500 60,550 42,550 Shareholders' equity 54,511 53,677 52,721 48,489 56,867 Year Ended March 31, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (In thousands) OPERATING DATA: Interest income $ 26,461 $ 29,840 $ 31,343 $ 25,438 $ 23,114 Interest expense 8,417 14,318 16,288 11,073 9,925 ------ ------ ------ ------ ------ Net interest income 18,044 15,522 15,055 14,365 13,189 Provision for loan losses 727 1,116 949 675 240 Net interest income after ------ ------ ------ ------ ------ provision for loan losses 17,317 14,406 14,106 13,690 12,949 Gains (losses) from sale of loans, securities and real estate owned (531) 1,964 129 151 283 Gain on sale of land and fixed assets - 4 540 - - Other non-interest income 4,469 4,583 3,293 2,746 2,591 Non-interest expenses 14,908 13,953 12,867 10,832 9,055 Income before federal income ------ ------ ------ ------ ------ tax provision 6,347 7,004 5,201 5,755 6,768 Provision for federal income taxes 1,988 2,136 1,644 1,878 2,305 ------ ------ ------ ------ ------ Net income $ 4,359 $ 4,868 $ 3,557 $ 3,877 $ 4,463 ====== ====== ====== ====== ====== 40 At March 31, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ OTHER DATA: Number of: Real estate loans outstanding 2,904 2,176 2,510 2,188 1,906 Deposit accounts 25,752 26,625 26,068 23,653 21,639 Full service offices 12 12 12 12 10 At of For the Year Ended March 31, ---------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ KEY FINANCIAL RATIOS: Performance Ratios: Return on average assets 1.07% 1.16% 0.94% 1.22% 1.55% Return on average equity 7.99 9.01 7.04 7.15 7.33 Dividend payout ratio (2) 49.97 41.27 52.29 47.13 30.38 Interest rate spread 4.28 3.29 3.37 3.88 3.83 Net interest margin 4.83 4.04 4.27 4.78 4.81 Non-interest expense to average assets 3.66 3.34 3.41 3.41 3.14 Efficiency ratio (non-interest expense divided by the sum of net interest income and non- interest income) 67.82 63.21 67.66 62.75 56.37 Asset Quality Ratios: Average interest-earning assets to interest- bearing liabilities 124.62 120.49 119.75 124.51 127.02 Allowance for loan losses to total loans at end of period 0.81 0.78 0.58 0.50 0.54 Net charge-offs to average outstanding loans during the period 0.12 0.14 0.14 0.21 0.04 Ratio of nonperforming assets to total assets 0.18 0.61 0.24 0.39 0.44 Capital Ratios: Average equity to average assets 13.39 12.93 13.41 17.05 21.08 Equity to assets at end of fiscal year 12.98 13.69 12.20 14.07 18.79 (1) Includes loans held for sale. (2) Dividends paid divided by net income. 41 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------- General Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes thereto and the other sections contained in this Form 10-K. Special Note Regarding Forward-Looking Statements Management's Discussion and Analysis and other portions of this report contain certain "forward-looking statements" concerning the future operations of the Company. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of such safe harbor with respect to all "forward-looking statements" contained in our Annual Report. The Company has used "forward-looking statements" to describe future plans and strategies, including its expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, deposit flows, demand for mortgages and other loans, real estate value and vacancy rates, the ability of the Company to efficiently incorporate acquisitions into its operations, competition, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. The Company does not undertake to update any forward-looking statement that may be made on behalf of the Company. Proposed Acquisition On February 6, 2003, the Company announced the signing of a definitive agreement for the acquisition of Today's Bancorp, Inc. by merger. Upon completion of the transaction, Today's Bancorp, Inc. shareholders, with a total of 1.1 million shares of common stock outstanding, may elect to receive either $13.77 per share in cash or 0.8261 Riverview Bancorp, Inc. shares for each share of Today's Bancorp, Inc. The exchange ratio is subject to adjustment under certain conditions. The Company will issue approximately 473,995 shares of its own stock to acquire approximately 45% percent of Today's Bancorp, Inc. outstanding shares at an exchange ratio of 0.8261 Riverview shares for each share of Today's Bancorp Inc. The remaining 55 % of outstanding Today's Bancorp, Inc. shares will be acquired for an aggregate of approximately $9.6 million in cash. If the elections with respect to the form of consideration filed by Today's shareholders differs from the 45% stock, 55% cash ratio, the mix of stock and cash to individual shareholders used to effect the acquisition could change. The merger, which has been unanimously approved by the directors of both companies, is subject to certain conditions, including the approval of the shareholders of Today's Bancorp, the receipt of regulatory approvals, and the registration of the shares to be issued in the merger with the Securities and Exchange Commission. The merger is expected to be completed in the third calendar quarter of 2003. The combined organization will have assets of approximately $540 million, deposits of approximately $430 million, and shareholders' equity of approximately $60 million. Critical Accounting Policies The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's Consolidated Financial Statements. The Company has identified three policies, that due to judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements. These 42 policies relate to the methodology for the determination of the allowance for loan losses, the valuation of the mortgage servicing rights ("MSR's") and the impairment of investments. These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management's Discussions and Analysis and in the notes to the Consolidated Financial Statements included herein. In particular, Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies," describes generally the Company's accounting policies and Note 8 provides details used in valuing the Company's MSR's and the effect of changes to certain assumptions. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company's Consolidated Financial Statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in the Company's results of operations or financial condition. 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 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. The Company stratifies its MSR's based on the predominant characteristics of the underlying financial assets including coupon interest rate and contractual maturity of the mortgage. An estimated fair value of MSR's is determined quarterly using a discounted cash flow model. The model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, loan maturity and interest rate. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSR's portfolio. The Company's methodology for estimating the fair value of MSR's is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on the fair value. Thus, any measurement of MSR's fair value is limited by the conditions existing and assumptions made as of the date made. Those assumptions may not be appropriate if they are applied to a different time. Future expected net cash flows from servicing a loan in the servicing portfolio would not be realized if the loan is paidoff earlier than anticipated. Moreover, since most loans within the servicing portfolio do not contain penalty provisions for early payoff, the Company will not receive a corresponding economic benefit if the loan pays off earlier than expected. MSR's are the discounted present value of the future net cash flows projected from the servicing portfolio. Accordingly, prepayment risk subjects the Company's MSR's to impairment. MSR's impairment is recorded in the amount that the estimated fair value is less than the MSR's carrying value on a strata by strata basis. The Company's determination of impairment for various types of investments accounted for in accordance with SFAS No. 115 is predicated on the notion of other-than-temporary. The key indicator that an investment may be impaired is that the fair value of the investment is less than its carrying value. Each reporting period the Company reviews those investments that the fair value is less than their carrying value. The review includes determining whether certain indicators indicated the fair value of the investment has been negatively impacted. These indicators include deteriorating financial condition, regulatory, economic or technological changes, downgrade by a rating agency and length of time the fair value has been less than carrying value. If any indicators of impairment are present, management determines the fair value of the investment and compares to its carrying value. If the fair value of the investment is less than the carrying value of the investment, the investment is considered impaired and a determination must be made as to whether the impairment is other-than-temporary. 43 Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method. If the cost basis of these securities is determined to be other-than-temporary impaired, the amount of the impairment is charged to operations. Securities available for sale are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to contractual maturity. Unrealized holding gains and losses, or valuation allowances established for net unrealized losses, are excluded from earnings and reported as a separate component of stockholders' equity as accumulated other comprehensive income, net of income taxes, unless the security is deemed other-than-temporary impaired. If the security is determined to be other-than-temporary impaired, the amount of the impairment is charged to operations. The Company's underlying principle in determining whether impairment is other-than temporary is an impairment shall be deemed other-than-temporary unless positive evidence indicating that an investment's carrying value is recoverable within a reasonable period of time outweighs negative evidence to the contrary. Evidence that is objectively determinable and verifiable is given greater weight than evidence that is subjective and or not verifiable. Evidence based on future events will generally be less objective as it is based on future expectations and therefore is generally less verifiable or not verifiable at all. Factors considered in evaluating whether a decline in value is other-than-temporary include, (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near-term prospects of the issuer and (c) our intent and ability to retain the investment for a period of time. In situations in which the security's fair value is below amortized cost but it continues to be probable that all contractual terms of the security will be satisfied, and that the decline is due solely to changes in interest rates (not because of increased credit risk), and the Company asserts that it has positive intent and ability to hold that security to maturity, no other-than-temporary impairment is recognized. Operating Strategy In the fiscal year ended March 31, 1998, the Company began to implement a growth strategy to broaden the products and services from traditional thrift offerings to those more closely related to commercial banking. The growth strategy included four elements, geographic and product expansion, loan portfolio diversification, development of relationship banking and maintenance of asset quality. Since the end of fiscal 1998, the Company has added three branches including the branch at the main office for administration in downtown Vancouver. The Washougal branch was relocated to a new facility; the Stevenson, White Salmon and Goldendale branches were remodeled. The number of automated teller machines more than doubled from six to thirteen so that each branch location now is serviced by at least one automated teller machine. The Company's growing commercial customer base has enjoyed new products and the improvements in existing products. These new products include business checking, internet banking and new loan products. Retail customers have benefited from expanded choices ranging from additional automated teller machines, consumer lending products, checking accounts, debit cards, 24 hour account information service and internet banking. Fiscal 2003 marked the 80th anniversary since Riverview Community Bank opened its doors in 1923. The historical emphasis has been on residential real estate lending. The Company is focused on diversifying the loan portfolio through expansion of commercial loans. In fiscal 2000, the Company had four experienced commercial lenders and currently there are five commercial lenders who are expanding the commercial lending services available to Riverview's customers. In the fiscal 1999, commercial loans as a percentage of the loan portfolio were 1.90%. Commercial loans were 10.11% of total loans at the end of fiscal year 2003. Commercial lending has higher credit risk, wider interest margins and shorter loan terms than residential lending which can increase the loan portfolio profitability. The Company's relationship banking has been enhanced by the 1998 addition of RAM Corp, a trust company directed by experienced trust officers, through expanded loan products serviced by experienced commercial and consumer lending officers, and an expanded branch network led by experienced branch managers. Development of relationship banking has been the key to the Company's growth. Assets under management have increased from 44 approximately $21.0 million at March 31, 1999 to approximately $114.8 at March 31, 2003. Net Interest Income The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and its cost of funds, which consists of interest paid on deposits and borrowings. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. When interest- earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The level of non- interest income and expenses also affects the Company's profitability. Non- interest income includes deposit service fees, income associated with the origination and sale of mortgage loans, brokering loans, loan servicing fees, income from real estate owned, net gains and losses on sales of interest- earning assets 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, 2003 and 2002 At March 31, 2003, the Company had total assets of $419.9 million compared with $392.1 million at March 31, 2002. The increase in total assets reflects the increase in loans outstanding and cash. Cash, including interest-earning accounts, totaled $60.9 million at March 31, 2003, compared to $22.5 million at March 31, 2002. The $300,000 decrease in loans held for sale to $1.5 million at March 31, 2003 compared to $1.8 million at March 31, 2002, reflects the variable demand for residential loan refinancing. As interest rates fall loan volume shifts to fixed rate production. Conversely, in a rising interest rate environment loan volume will shift to adjustable rate production. Selling fixed interest rate mortgage loans allows the Company to reduce the interest rate risk associated with long term fixed interest rate products. It also frees up funds to make new loans and diversify the loan portfolio. We continue to service the loans we sell, maintaining the customer relationship and generating ongoing non-interest income. Loans receivable, net, were $300.3 million at March 31, 2003, compared to $286.7 million at March 31, 2002, a 4.7% increase. Increases primarily in commercial, land and commercial real estate were partially offset by decreases in one- to- four family residential, residential construction, multi-family, multi-family construction, commercial construction, 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 areas. There were $1.5 million in loans held-for-sale at March 31, 2003, compared to $1.8 million at March 31, 2002. Cash and cash equivalents increased to $60.9 million at March 31, 2003, from $22.5 million at March 31, 2002 as a result of an increase in deposits. Investment securities available-for-sale was $20.4 million at March 31, 2003, compared to $18.3 million at March 31, 2002. The $2.1 million increase reflects the $1.4 million sale of common stock of banks, the purchase of $5.0 million of trust preferred securities and unrealized market gains and loses. Mortgage-backed securities held-to-maturity was $3.3 million at March 31, 2003, compared to $4.4 million at March 31, 2002. The $1.1 million net decrease was a result of pay downs. Mortgage-backed securities available-for-sale was $13.1 million at March 31, 2003, compared to $37.0 million at March 31, 2002. The $23.9 million net decrease reflects pay downs. Deposits totaled $320.7 million at March 31, 2003 compared to $259.7 million at March 31, 2002. The deposit increase is primarily due to the increase in non-interest bearing account balances. Checking accounts and money market accounts ("transaction accounts") total average outstanding balance increased 42.2% to $164.5 million at 45 March 31, 2003, compared to $115.7 million at March 31, 2002. Transaction accounts represented 55.4% and 43.0% of average total outstanding balance of deposits at March 31, 2003 and March 31, 2002, respectively. FHLB advances decreased to $40.0 million at March 31, 2003 from $74.5 million at March 31, 2002 due to the increase in the Company's deposit balances, prepayments on one- to- four mortgage loans and mortgage-backed securities. Shareholders' equity increased $834,000 to $54.5 million at March 31, 2003 from $53.7 million at March 31, 2002 primarily as a result of the $4.8 million of total comprehensive income offset by $2.9 million stock repurchased and retired and $2.2 million of cash dividends paid to shareholders. Comparison of Operating Results for the Years Ended March 31, 2003 and 2002 Net Income. Net income was $4.4 million, or $0.99 per diluted share for the year ended March 31, 2003, compared to $4.9 million, or $1.06 per diluted share for the year ended March 31, 2002. Earnings were lower for the year ended March 31, 2003, primarily as a result of the pre-tax other-than- temporary non-cash charges of $1.6 million for FHLMC preferred stock and $700,000 for FNMA preferred stock. Net Interest Income. Net interest income for fiscal year 2003 was $18.0 million, representing a $2.5 million, or a 16.2% increase, from fiscal year 2002. This improvement reflected a 3.4% decrease in average balance of interest earning assets (primarily decreases in the average balance of mortgage-backed securities partially offset by an increase in the average balance of non-mortgage loans) to $379.9 million, which was offset by a 6.6% decrease in average balance of interest-bearing liabilities (primarily a decrease in FHLB borrowings and certificates of deposits) to $304.8 million. The ratio of average interest earning assets to average interest bearing liabilities increased to 124.6% in 2003 from 120.5% in 2002 which indicates that the interest earning asset growth is being funded less by interest- bearing liabilities as compared to capital and non-interest-bearing demand deposits. Interest Income. Interest income totaled $26.5 million and $29.8 million, for fiscal 2003 and 2002, respectively. Average interest-bearing assets decreased $13.3 million to $379.9 million for fiscal 2003 from $393.2 million for fiscal 2002. The yield on interest-earning assets was 7.04% for fiscal year 2003 compared to 7.68% for fiscal 2002. The decreased yield is the primarily the result of the lower yields on loans that reflect the Federal Reserve Board discount rate cuts that occurred during the fiscal 2002 and 2003. Interest Expense. Interest expense for the year ended March 31, 2003 totaled $8.4 million, a $5.9 million decrease from $14.3 million for the year ended March 31, 2002. The decrease in interest expense is the result of lower rates of interest paid on deposits and FHLB borrowings due to the Federal Reserve Board discount rate cuts that occurred during the fiscal 2002 and 2003. The weighted average interest rate of total deposits decreased from 3.69% for the year ended March 31, 2002 to 2.18% for the year ended March 31, 2003. The weighted average interest rate of FHLB borrowings decreased from 6.25% for the year ended March 31, 2002 to 5.53% for the year ended March 31, 2003. The decrease in certificate of deposits average balance plus the decrease in average balance of FHLB borrowings was a significant contributor to lower interest expense in fiscal 2003. Provision for Loan Losses. The provision for loan losses for the year ended March 31, 2003 was $727,000 compared to $1.1 million for the year ended March 31, 2002. The fiscal 2003 provision for loan losses exceeded net loan charge- offs by $377,000, resulting in an increase in the allowance for loan losses to $2.5 million. Net charge-offs to average net loans for fiscal 2003 declined to 0.12% from 0.14% for fiscal 2002. The mix of the loan portfolio showed an increase in the balances of commercial, land and commercial real estate loans for fiscal 2003 as compared to fiscal 2002. The reduced balances in fiscal 2003 substandard assets and the reallocation of allowance among different parts of the portfolio offset these increases in loan balances. The reallocation of the allowance resulted from the annual review of the allocation of general allowances for each major loan type based on applying loss factors that take into consideration past loss experience, asset duration, economic conditions and overall portfolio quality to the associated loan balance. 46 The Company establishes a general reserve for loan losses through a periodic provision for loan losses based on management's evaluation of the loan portfolio and current economic conditions. The provisions for loan losses are based on management's estimate of net realizable value or fair value of the collateral, as applicable, and the Company's actual loss experience, and standards applied by the OTS and the FDIC. The Company regularly reviews its loan portfolio, including non-performing loans, to determine whether any loans require classification or the establishment of appropriate reserves. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. These agencies may require the Company to provide additions to the allowance for loan losses based upon judgments different from those of management. The allowance for loan losses is provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, and detailed analysis of individual loans for which full collectibility may not be assured. The detailed analysis includes techniques to estimate the fair value of the loan collateral and the existence of potential alternative sources of repayment. Assessment of the adequacy of the allowance for loan losses involves subjective judgments regarding future events, and thus there can be no assurance those additional provisions for credit losses will not be required in future periods. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company's control. Any increase or decrease in the provision for loan losses has a corresponding negative or positive effect on net income. The allowance for loan losses at March 31, 2003 was $2.7 million, or 0.89% of period end net loans, compared to $2.5 million, or 0.86% of period end net loans, at March 31, 2002. Management considered the allowance for loan losses at March 31, 2003 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio. As a result of the decrease in nonaccrual loans during the year ended March 31, 2002, the ratio of the allowance for loan losses to nonaccrual loans increased to 847.99% at March 31, 2003 from 166.69% at March 31, 2002. This ratio is subject to significant fluctuations from year to year as a result of various factors such as the mix of loan types in the portfolio, economic prospects of the borrowers, and in the case of secured loans, the value and marketability of collateral . Non-Interest Income. Non-interest income decreased $2.6 million or 66.4% for the twelve months ended March 31, 2003 to $3.9 million compared $6.6 million for the same period in 2002. Excluding the fiscal 2003, $2.1 pretax loss on sale of securities and other-than-temporary impairment on equity investments and the fiscal 2002 $863,000 pretax gain on sale of securities, non-interest income increased $388,000 or 6.8% for the year ended March 31, 2003 when compared to the prior year. The fiscal 2003 $162,000 gain on sale of equity securities available for sale was more than offset by the $2.3 million for the write-downs in the amortized cost basis of equity investments where the decline in value was deemed other-than-temporary. These write-downs are non-cash charges that are recorded as realized losses in the income statement, with a corresponding reduction in unrealized losses in shareholders' equity, even though there were no sales of the securities. As such, the write-downs do not impact shareholders' equity or the carrying value of the investments since the investments are marked to market value, in accordance with SFAS No. 115. For the twelve months ended March 31, 2003, fees and service charges increased $556,000 or 15.0% when compared to the twelve months ended March 31, 2002. The $556,000 increase in fees and service charges is primarily due to the growth in deposit products and mortgage broker fees. Mortgage broker fees (included in fees and service charges) totaled $1.5 million for the year ended March 31, 2003 compared to $1.3 million for the previous year. Mortgage broker commission compensation expense was $1.1 million for the fiscal ended March 31, 2003 compared to $1.0 million for the fiscal ended March 31, 2002. Increases in mortgage broker fees and commission compensation expense are a result of the increase in brokered loan production from $188.4 million in 2002 to $200.3 million in 2003. Asset management services income was $742,000 for the year 2003 compared to $745,000 for the year 2002. RAM Corp had $114.8 million in total assets under management at March 31, 2003 when compared to $109.8 million at March 31, 2002. Non-Interest Expense. Non-interest expense increased $995,000, or 6.8%, to $14.9 million for fiscal year 2003 compared to $14.0 million for fiscal year 2002. The principal component of the Company's non-interest expense is salaries and employee benefits. For the year ended March 31, 2003, salaries and employee benefits, which includes mortgage broker commission compensation, was $8.4 million, or a 8.1% increase over the prior year total of $7.8 million. Full-time equivalent employees increased to 157 at March 31, 2003 from 147 at March 31, 2002. 47 The acquisition of the Hazel Dell and Longview branches from the Resolution Trust Corporation ("RTC") in fiscal 1995 (see Item 2. 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 ($369,000 at March 31, 2003) is being amortized over the remaining life of the underlying customer relationships currently estimated at fourteen months. The amortization expense of CDI was $327,000 for both fiscal years 2003 and 2002. Provision for Federal Income Taxes. Provision for federal income taxes was $2.0 million for the year ended March 31, 2003 compared to $2.1 million for the year ended March 31, 2002 as a result of lower income before taxes. The effective tax rate for fiscal year 2003 was 31.3% compared to 30.5% for fiscal 2002. Reference is made to Note 12 of the Notes to Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, herein for further discussion of the Company's federal income taxes. Comparison of Operating Results for the Years Ended March 31, 2002 and 2001 Net Income. Net income was $4.9 million, or $1.06 per diluted share, for the year ended March 31, 2002, compared to $3.6 million, or $0.77 per diluted share, for the year ended March 31, 2001. Earnings were higher for the year ended March 31, 2002 primarily as a result of increased non-interest income. Net Interest Income. Net interest income for fiscal 2002 was $15.5 million, representing a $467,000, or a 3.1% increase, from fiscal year 2001. This improvement reflected a 10.3% increase in average earning assets (primarily increases in average loan balances due to a 33.1% increase in non-mortgage loans and a 190.0% increase in daily interest-bearing assets) to $393.2 million, which offset a 23 basis point reduction in the net interest margin to 4.04%. The ratio of average interest earning assets to average interest bearing liabilities increased to 120.5% in 2002 from 119.8% in 2001, which indicates that the interest earning asset growth is being funded less by interest bearing liabilities as compared to capital, which is non-interest bearing. Interest Income. Interest income totaled $29.8 million and $31.3 million, for fiscal years 2002 and 2001, respectively. Average interest-bearing assets increased $36.7 million to $393.2 million for fiscal year ended 2002 from $356.5 million for fiscal ended 2001. The yield on interest-earning assets was 7.68% for fiscal 2002 compared to 8.84% for fiscal ended 2001. The decreased yield is the result of the lower yields on loans that reflect the eight Federal Reserve Board discount rate cuts that occurred during the fiscal 2002. Interest Expense. Interest expense for the year ended March 31, 2002 totaled $14.3 million, a $2.0 million decrease from $16.3 million for the year ended March 31, 2001. The decrease in interest expense is the result of lower rates of interest paid on deposits due to the eight Federal Reserve Board discount rate cuts that occurred during the fiscal year 2002. The weighted average interest rate of total deposits decreased from 5.05% for the year ended March 31, 2001 to 3.69% for the year ended March 31, 2002. The decrease in total deposit average interest rate was partially offset by the $12.0 million increase in total average deposits to $236.9 million at March 31, 2002. Provision for Loan Losses. The provision for loan losses for the year ended March 31, 2002 was $1.1 million compared to $949,000 for the year ended March 31, 2001. The fiscal year 2002 provision for loan losses exceeded net loan charge-offs by $702,000, resulting in an increase in the allowance for loan losses to $2.5 million. Net charge-offs to average net loans for fiscal 2002 and 2001 has remained a constant 0.14%. The allowance for loan losses at March 31, 2002 was $2.5 million, or 0.78% of period end gross loans, compared to $1.9 million, or 0.58% of period end gross loans, at March 31, 2001. Management considered the allowance for loan losses at March 31, 2002 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 $2.6 million or 65.3% for the twelve months ended March 31, 2002 compared to the same period in 2001. Excluding the fiscal 2002, $863,000 pretax gain on sale of securities and fiscal year 2001, $540,000 pretax gain on sale of land and fixed assets, non-interest income increased $2.3 48 million or 66.2% for the year ended March 31, 2002 when compared to the prior year. For the twelve months ended March 31, 2002, fees and service charges increased $1.1 million when compared to the twelve months ended March 31, 2001. The $1.1 million increase in fees and service charges is primarily due to the growth in deposit products, mortgage broker fees and asset management services. Mortgage broker fees (included in fees and service charges) totaled $1.3 million for the year ended March 31, 2002 compared to $579,000 for the previous year. Mortgage broker commission compensation expense was $1.0 million for the fiscal ended March 31, 2002 compared to $581,000 for the fiscal year ended March 31, 2001. Increases in mortgage broker fees and commission compensation expense are a result of the increase in brokered loan production from $109.4 million in 2001 to $188.4 million in 2002. Asset management services income increased $236,000 or 46.4% for fiscal 2002 compared to year 2001. RAM Corp had $109.8 million in total assets under management at March 31, 2002 compared to $92.2 million at March 31, 2001. Non-Interest Expense. Non-interest expense increased $1.1 million, or 8.5%, to $14.0 million for fiscal year 2002 compared to $12.9 million for fiscal year 2001. The principal component of the Company's non-interest expense is salaries and employee benefits. For the year ended March 31, 2002, salaries and employee benefits, which includes mortgage broker commission compensation, was $7.8 million, or an 11.4% increase over the prior year total of $7.0 million. Full-time equivalent employees have held steady at 147 at March 31, 2002 and March 31, 2001. In the second quarter of fiscal year 2001, the Company's main office for administration was relocated from Camas to the Vancouver address of 900 Washington, Suite 900, a 16,000 square foot leased facility. Provision for Federal Income Taxes. Provision for federal income taxes was $2.1 million for the year ended March 31, 2002 compared to $1.6 million for the year ended March 31, 2001 as a result of higher income before taxes. The effective tax rate for fiscal year 2002 was 30.5% compared to 31.6% for fiscal 2001. Reference is made to Note 12 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%. Non-accruing loans were included in the average loan amounts outstanding. 49 Year Ended March 31, ------------------------------------------------------------------------------- 2003 2002 2001 ------------------------- ------------------------- ------------------------- 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 $173,486 $13,854 7.99% $195,419 $16,786 8.59% $205,895 $19,286 9.37% Non-mortgage loans 129,254 9,816 7.59 95,004 8,086 8.51 71,392 6,985 9.78 ------- --------- ------ ------- --------- ------ ------- --------- ------ Total net loans (1) 302,740 23,670 7.82 290,423 24,872 8.56 277,287 26,271 9.47 Mortgage-backed securities 28,615 1,241 4.34 49,575 2,677 5.40 46,151 3,144 6.81 Investment securities 20,914 1,204 5.76 22,567 1,511 6.70 20,200 1,318 6.52 Daily interest-bearing assets 22,190 319 1.44 25,583 798 3.12 8,827 530 6.00 Other earning assets 5,440 329 6.05 5,078 342 6.73 4,056 262 6.48 Total interest-earning ------- --------- ------ ------- --------- ------ ------- --------- ------ assets 379,899 26,763 7.04 393,226 30,200 7.68 356,521 31,525 8.84 Non-interest-earning assets: Office properties and equipment, net 10,060 10,365 10,295 Real estate, net - - 134 Other non-interest-earning assets 17,809 14,402 10,189 ------- ------- ------- Total assets $407,768 $417,993 $377,139 ======= ======= ======= Interest-bearing liabilities: Regular savings accounts $22,861 182 0.80 $19,747 292 1.48 $19,586 536 2.74 NOW accounts 64,916 960 1.48 29,442 215 0.73 21,897 315 1.44 Money market accounts 54,514 692 1.27 53,761 1,307 2.43 44,911 2,182 4.86 Certificates of deposit 109,380 3,642 3.33 133,907 6,915 5.16 138,492 8,314 6.00 ------- --------- ------ ------- --------- ------ ------- --------- ------ Total deposits 251,671 5,476 2.18 236,857 8,729 3.69 224,886 11,347 5.05 Other interest-bearing liabilities 53,174 2,941 5.53 89,499 5,589 6.24 72,825 4,941 6.78 Total interest-bearing ------- --------- ------ ------- --------- ------ ------- --------- ------ liabilities 304,845 8,417 2.76 326,356 14,318 4.39 297,711 16,288 5.47 Non-interest-bearing liabilities: Non-interest-bearing deposits 45,109 32,529 26,635 Other liabilities 3,246 5,078 2,232 ------- ------- ------- Total liabilities 353,200 363,963 326,578 Shareholders' equity 54,568 54,030 50,561 Total liabilities and ------- ------- ------- shareholders' equity $407,768 $417,993 $377,139 ======= ======= ======= Net interest income $18,346 $15,882 $15,237 ====== ====== ====== Interest rate spread 4.28% 3.29% 3.37% ==== ==== ==== Net interest margin 4.83% 4.04% 4.27% ==== ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 124.62% 120.49% 119.75% ====== ====== ====== Tax Equivalent Adjustment $ 302 $ 360 $ 182 ===== ===== =====
(1) Includes non-accrual loans. 50 Yields Earned and Rates Paid The following table sets forth for the periods and at the date indicated the weighted average yields earned on the Company's assets, the weighted average interest rates paid on the Company's liabilities, together with the net yield on interest-earning assets on a tax equivalent basis. At March 31, Year Ended March 31, ------------ ------------------------ 2003 2003 2002 2001 ------ ------ ------ ------ Weighted average yield earned on: Total net loans(1) 6.72% 7.13% 7.91% 8.89% Mortgage-backed securities 4.42 4.34 5.40 6.81 Investment securities 5.47 5.76 6.70 6.52 All interest-earning assets 5.94 6.49 7.19 8.39 Weighted average rate paid on: Deposits 1.33 2.18 3.69 5.05 FHLB advances and other borrowings 4.90 5.53 6.25 6.78 All interest-bearing liabilities 1.72 2.76 4.39 5.47 Interest rate spread (spread between weighted average rate on all interest- earning assets and all interest-bearing liabilities)(1) 4.22 3.73 2.81 2.92 Net interest margin (net interest income(expense) as a percentage of average interest-earning assets)(1) 4.48 4.28 3.56 3.82 (1) Weighted average yield on total net loans excludes deferred loan fees. 51 Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to: (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes in rate/volume (change in rate multiplied by change in volume). Rate/volume variance is allocated based on the percentage relationship of changes in volume and changes in rate to the total net change. Year Ended March 31, -------------------------------------------------- 2003 vs 2002 2002 vs 2001 ------------------------ ------------------------ Increase(Decrease) Increase(Decrease) Due to Total Due To Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ------ -------- ------ ------ -------- (In thousands) Interest Income: Mortgage loans $(1,803)$(1,129) $(2,932) $ (951)$(1,547) $(2,498) Non-mortgage loans 2,468 (738) 1,730 1,814 (714) 1,100 Mortgage-backed securities (980) (456) (1,436) 260 (727) (467) Investment securities (1) (106) (201) (307) 157 36 193 Daily interest-bearing (95) (384) (479) 359 (91) 268 Other earning assets 28 (41) (13) 69 10 79 ------ ------ -------- ------ ------ -------- Total interest income (488) (2,949) (3,437) 1,708 (3,033) (1,325) ------ ------ -------- ------ ------ -------- Interest Expense: Regular savings accounts 57 (167) (110) 4 (248) (244) NOW accounts 403 342 745 235 (334) (99) Money market accounts 18 (634) (616) 570 (1,445) (875) Certificates of deposit (1,114) (2,159) (3,273) (268) (1,132) (1,400) Other interest-bearing liabilities (2,065) (582) (2,647) 995 (346) 649 ------ ------ -------- ------ ------ -------- Total interest expense (2,701) (3,200) (5,901) 1,536 (3,505) (1,969) ------ ------ -------- ------ ------ -------- Net interest income (1) $2,213 $ 251 $2,464 $ 172 $ 472 $ 644 ===== ====== ======= ====== ====== ======= (1) Taxable equivalent Asset and Liability Management The Company's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets. Interest rate sensitivity will increase by retaining portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one-to-four family mortgage loans with terms of more than 15 years. However, the Company may originate fixed rate loans for investment when funded with long-term funds to mitigate interest rate risk. The Company relies on retail deposits as its primary source of funds. Management believes retail deposits reduce the effects of interest rate fluctuations because they generally represent a stable source of funds. As part of its interest rate risk management strategy, the Company promotes transaction accounts and certificates of deposit with terms up to ten years. The Company has adopted a strategy that is designed to maintain or improve the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve: the origination of adjustable rate loans or purchase of adjustable rate mortgage-backed securities for its portfolio; growing commercial, consumer and residential 52 construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to- four family residential mortgage loans; matching asset and liability maturities; investing in short term mortgage-backed and other securities; and the origination of fixed-rate loans for sale in the secondary market and the retention of the related loan servicing rights. This approach has remained consistent throughout the past year as the Company has experienced a change in the mix of loans, deposits, and FHLB advances. 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, 2003, ARM loans and adjustable rate mortgage-backed securities constituted $195.2 million, or 65.25%, of the Company's total combined mortgage loan and mortgage-backed securities portfolio. This compares to ARM loans and adjustable rate mortgage-backed securities at March 31, 2002 that totaled $136.2 million, or 43.1%, 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 $128.2 million at March 31, 2003, including $7.4 million of purchased mortgage servicing. The purchase of loan servicing replaced loan servicing balances extinguished through prepayment of the underlying loans. The average balance of the servicing portfolio was $127.3 million and produced loan servicing expense of $619,000 for the year ended March 31, 2003. See "Item 1. Business -- Lending Activities -- Mortgage Loan Servicing." Consumer loans, commercial loans and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Company's exposure to fluctuations in interest rates. Adjustable interest rate consumer, commercial, construction and other loans totaled $203.3 million or 60.0% of total gross loans at March 31, 2003 as compared to $156.4 million or 48.1% at March 31, 2002. At March 31, 2003, the construction, commercial, consumer and other loan portfolios amounted to $97.4 million, $34.2 million, $24.8 million and $122.2 million, or 28.8%, 10.1%, 7.3% and 36.1% of total gross loans, respectively. See "Item 1. Business -- Lending Activities -- Construction Lending" and " -- Lending Activities -- Consumer Lending." The Company also invests in short-term to medium-term U.S. Government securities as well as mortgage-backed securities issued or guaranteed by U.S. Government agencies. At March 31, 2003, the combined portfolio of $36.8 million had an average term to repricing or maturity of 9.89 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 53 impacts of immediate changes in interest rates at the specified levels based on the latest OTS report dated December 31, 2002. At December 31, 2002 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 $73,063 $(1,161) (2)% 16.45% (18) bp 200 bp 74,211 (12) 0 16.66 3 bp 100 bp 74,720 497 1 16.74 11 bp 0 bp 74,223 - - 16.63 - (100)bp 73,073 (1,150) (2) 16.36 (27) bp (200)bp(1) - - - - - (300)bp(1) - - - - - (1) No minus 200-300 bp because the 3-month treasury bill was 1.155% at December 31, 2002. For example, the above table illustrates that an instantaneous 100 basis point increase in market interest rates at December 31, 2002 would increase the Company's NPV by approximately $497,000, or 1%, at that date. At December 31, 2001, an instantaneous 100 basis point increase in market interest rates would have reduced the Company's NPV by approximately $4.5 million, or 7%, at that date. The $4.0 million decrease in the reduction of NPV to $497,000 at December 31, 2002 is the result of the impact of more adjustable loan balances in the loan portfolio at December 31, 2002 as compared to December 31, 2001. Certain assumptions used by the OTS in assessing the interest rate risk of savings associations within its region were used in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods 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. Furthermore, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Liquidity and Capital Resources The Company's primary sources of funds are customer deposits, proceeds from principal and interest payments on loans and the sale of loans, maturing securities and FHLB advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, satisfy other financial commitments and to take advantage of investment opportunities. The Company generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At March 31, 2003, cash and cash equivalents totaled $60.9 million, or 14.5%, of total assets. The Bank has a 35% of total assets line of credit with the FHLB-Seattle to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At March 31, 2003, the Bank had $40.0 million of outstanding advances from the FHLB-Seattle under an available credit facility of $104.9 million. 54 Liquidity management is both a short- and long-term responsibility of the Company's management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected loan sales, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) liquidity of its asset/liability management program. Excess liquidity is invested generally in interest-bearing overnight deposits and other short-term government and agency obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral for borrowing at the Federal Reserve Bank discount window. At March 31, 2003, the Bank's ratio of cash and eligible investments to the sum of withdrawable savings and borrowings due within one year was 12.25%. The Company's primary investing activity is the origination of loans. During the years ended March 31, 2003, 2002 and 2001, the Company originated $298.4 million, $273.9 million and $206.5 million of loans, respectively. At March 31, 2003, the Company had outstanding mortgage loan commitments of $10.2 million and undisbursed balance of mortgage loans closed of $31.2 million. Consumer loan commitments totaled $2.1 million and unused lines of consumer credit totaled $16.5 million at March 31, 2003. Commercial real estate loan commitments totaled $7.8 and undisbursed balance of commercial real estate loans closed was $8.0 million at March 31, 2003. Commercial loan commitments totaled $1.3 million and unused commercial lines of credit totaled $19.7 million at March 31, 2003. 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, 2003 totaled $71.2 million. Historically, the Company has been able to retain a significant amount of its deposits as they mature. The Bank's primary sources of funds are deposits, FHLB borrowings, proceeds from the principal and interest payments on loans and securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, prepayment of mortgage loans and mortgage-backed securities are greatly influenced by general interest rates, economic conditions and competition. The low interest rate environment has created high demand for fixed rate single family loans and repayment of existing single family mortgage loans and mortgage-backed securities. The Company's business plan emphasizes the sale of fixed rate mortgages as part of its interest rate risk strategy. The increase in the cash flows from operating activities of loans sold of $56.3 million for the fiscal 2003 compared to $35.7 million for fiscal 2002 reflects this strategy. The Bank has experienced growth in deposit accounts that has caused a net increase in cash flows from deposits of $61.1 million for fiscal 2003 as compared to a $35.8 million decrease in net cash flows for the same period in the prior year. The deposit growth experienced during fiscal year 2003 has been primarily in transaction accounts. This increase in deposit cash flows has allowed the Bank to repay $39.5 million in FHLB advances. Should the Bank require funds beyond its ability to generate them internally, additional funds are available through the use of FHLB borrowings. At March 31, 2003 advances from FHLB totaled $40.0 million and the Bank had additional borrowing capacity available of $64.9 million from the FHLB. Sources of capital and liquidity for the Company on a stand-alone basis include distributions from the Bank and the issuance of debt or equity. Dividends and other capital distributions from the Bank are subject to regulatory restrictions. OTS regulations require the Bank to maintain specific amounts of regulatory capital. As of March 31, 2003, the Bank complied with all regulatory capital requirements as of that date with tangible, core and risk-based capital ratios of 11.66%, 11.66% and 15.89%, respectively. For a detailed discussion of regulatory capital requirements, see "REGULATION -- Federal Regulation of Savings Associations -- Capital Requirements." 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 55 impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. This statement is effective for fiscal year ended March 31, 2003. Management does not expect that the provisions of SFAS No. 148 will impact the Company's results of operations or financial condition. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosure requirements in this Interpretation are effective for the year ended March 31, 2003. The Company has adopted the provisions of FIN No. 45. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Quantitative Aspects of Market Risk. The Company does not maintain a trading account for any class of financial instrument nor does it engage in hedging activities or purchase high-risk derivative instruments. Furthermore, the Company is not subject to foreign currency exchange rate risk or commodity price risk. For information regarding the sensitivity to interest rate risk of the Company's interest-earning assets and interest-bearing liabilities, see the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio Analysis," "-- Investment Activities" and "-- Deposit Activities and Other Sources of Funds -- Certificates of Deposit by Rates and Maturities" contained herein. Qualitative Aspects of Market Risk. The Company's principal financial objective is to achieve long-term profitability while limiting its exposure to fluctuating market interest rates. The Company intends to reduce risk where appropriate but accept a degree of risk when warranted by economic circumstances. The Company has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the mismatch between asset and liability maturities and interest rates. The principal element in achieving this objective is to increase the interest rate sensitivity of the Company's interest-earning assets. Interest rate sensitivity will increase by retaining portfolio loans with interest rates subject to periodic adjustment to market conditions and selling fixed-rate one- to- four family mortgage loans with terms of more than 15 years. Interest rates on residential one- to -four family mortgage loan applications are typically locked during the application stage for periods ranging from 30 to 90 days, the most typical period being 45 days. These loans are locked with FHLMC under a best-efforts delivery program. The Company makes every effort to deliver these loans before their ratelocks expire. This arrangement requires the Company to deliver the loans to FHLMC within ten days of funding. Delays in funding the loans can require a lock extension. The cost of a lock extension at times is borne by the borrower and at times by the Company. These lock extension costs paid by the Company are not expected to have a material impact to operations. This activity is managed daily. 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. 56 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, 2003. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments. One After After Within Year 3 Years 5 Years Beyond Average One To 3 To 5 To 10 10 Fair Rate Year Years Years Years Years Total Value ------- ------ ----- ----- ----- ----- ----- ----- (Dollars in thousands) Interest-Sensitive Assets: Loans receivable 6.72% $189,649 $55,731 $53,337 $23,805 $16,151 $338,673 $346,567 Mortgage-backed securities 4.42 12,872 2,750 740 8 - 16,370 16,472 Investments and other interest-earning assets 2.55 55,839 4,300 982 1,769 - 62,890 62,890 FHLB stock 6.04 1,130 2,258 2,258 - - 5,646 5,646 Interest-Sensitive Liabilities: NOW accounts 0.35 5,423 10,845 10,845 - - 27,113 27,113 High-yield checking 1.82 7,107 14,215 14,215 - - 35,537 35,537 Non-interest checking accounts - 15,692 31,386 31,386 - - 78,464 78,464 Savings accounts 0.75 4,971 9,942 9,942 - - 24,855 24,855 Money market 1.01 10,743 21,487 21,487 - - 53,717 53,717 Certificate accounts 2.77 71,155 22,619 5,001 2,281 - 101,056 102,322 FHLB advances 4.90 35,000 - 5,000 - - 40,000 42,267 Off-Balance Sheet Items: Commitments to extend credit - 21,366 - - - - 21,366 21,366 Unused lines of credit - 75,502 - - - - 75,502 75,502
57 Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------- RIVERVIEW BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements for Years Ended March 31, 2003, 2002 and 2001 Independent Auditors' Report TABLE OF CONTENTS - ----------------------------------------------------------------------------- Page Independent Auditors' Report 59 Consolidated Balance Sheets as of March 31, 2003 and 2002 60 Consolidated Statements of Income for the Years Ended March 31, 2003, 2002 and 2001 61 Consolidated Statements of Shareholders' Equity for the Years Ended March 31, 2003, 2002 and 2001 62 Consolidated Statements of Cash Flows for the Years Ended March 31, 2003, 2002 and 2001 63 Notes to Consolidated Financial Statements 64 58 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, 2003 and 2002, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Riverview Bancorp, Inc. and Subsidiary as of March 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Portland, Oregon May 2, 2003 59 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2003 AND 2002 (In thousands, except share data) 2003 2002 - ----------------------------------------------------------------------------- ASSETS Cash (including interest-earning accounts of $42,464 and $14,369) $ 60,858 $ 22,492 Loans held for sale 1,501 1,826 Investment securities available for sale, at fair value (amortized cost of $20,265 and $18,925) 20,426 18,275 Mortgage-backed securities held to maturity, at amortized cost (fair value of $3,403 and $4,485) 3,301 4,386 Mortgage-backed securities available for sale, at fair value(amortized cost of $12,669 and $36,462) 13,069 36,999 Loans receivable (net of allowance for loan losses of $2,739 and $2,537) 300,310 286,704 Real estate owned 425 853 Prepaid expenses and other assets 854 525 Accrued interest receivable 1,492 1,902 Federal Home Loan Bank stock, at cost 5,646 5,317 Premises and equipment, net 9,703 10,607 Deferred income taxes, net 1,321 607 Mortgage servicing rights, net 629 912 Core deposit intangible, net 369 696 ------- ------- TOTAL ASSETS $419,904 $392,101 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposit accounts $320,742 $259,690 Accrued expenses and other liabilities 4,364 4,001 Advance payments by borrowers for taxes and insurance 287 233 Federal Home Loan Bank advances 40,000 74,500 ------- ------- Total liabilities 365,393 338,424 COMMITMENTS AND CONTINGENCIES (NOTE 18) SHAREHOLDERS' EQUITY: Serial preferred stock, $.01 par value; 250,000 authorized, issued and outstanding, none - - Common stock, $.01 par value; 50,000,000 authorized, issued and outstanding: 2003 - 4,585,543 issued, 4,358,704 outstanding 46 47 2002 - 4,735,066 issued, 4,458,456 outstanding Additional paid-in capital 33,525 35,725 Retained earnings 22,389 20,208 Unearned shares issued to employee stock ownership trust (1,804) (2,010) Unearned shares held by the management recognition and development plan (15) (218) Accumulated other comprehensive income (loss) 370 (75) ------- ------- Total shareholders' equity 54,511 53,677 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $419,904 $392,101 ======= ======= See notes to consolidated financial statements. 60 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED MARCH 31, 2003, 2002 AND 2001 (In thousands, except share data) 2003 2002 2001 - ----------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans receivable $ 23,670 $ 24,872 $ 26,271 Interest on investment securities 200 327 820 Interest on mortgage-backed securities 1,241 2,677 3,144 Other interest and dividends 1,350 1,964 1,108 ------- ------- ------- Total interest income 26,461 29,840 31,343 ------- ------- ------- INTEREST EXPENSE: Interest on deposits 5,475 8,729 11,347 Interest on borrowings 2,942 5,589 4,941 ------- ------- ------- Total interest expense 8,417 14,318 16,288 ------- ------- ------- Net interest income 18,044 15,522 15,055 Less provision for loan losses 727 1,116 949 Net interest income after provision for ------- ------- ------- loan losses 17,317 14,406 14,106 ------- ------- ------- NON-INTEREST INCOME: Fees and service charges 4,263 3,707 2,631 Asset management fees 742 745 509 Gain on sale of loans held for sale 1,552 1,067 94 (Loss) gain on sale of securities and impairment (2,138) 863 - Gain on sale of other real estate owned 55 34 35 Loan servicing income (expense) (619) 57 67 Gain on sale of land and fixed assets - 4 540 Other 83 74 86 ------- ------- ------- Total non-interest income 3,938 6,551 3,962 ------- ------- ------- NON-INTEREST EXPENSE: Salaries and employee benefits 8,395 7,763 6,989 Occupancy and depreciation 2,481 2,199 1,947 Data processing 834 776 926 Amortization of core deposit intangible 327 327 327 Advertising and marketing expense 605 540 601 FDIC insurance premium 47 51 46 State and local taxes 383 402 319 Telecommunications 225 259 256 Professional fees 399 346 247 Other 1,212 1,290 1,209 ------- ------- ------- Total non-interest expense 14,908 13,953 12,867 ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAXES 6,347 7,004 5,201 PROVISION FOR FEDERAL INCOME TAXES 1,988 2,136 1,644 ------- ------- ------- NET INCOME $ 4,359 $ 4,868 $ 3,557 ======= ======= ======= Earnings per common share: Basic $ 1.00 $ 1.06 $ 0.78 Diluted 0.99 1.06 0.77 Weighted average number of shares outstanding: Basic 4,365,855 4,572,253 4,579,091 Diluted 4,424,733 4,612,468 4,640,249 See notes to consolidated financial statements. 61 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 2003, 2002 AND 2001 Unearned Shares Issued to Employee Unearned Accumulated Common Stock Additional Stock Shares Other (In thousands, --------------- Paid-In Retained Ownership Issued to Comprehensive except share data) Shares Amount Capital Earnings Trust MRDP Income(Loss) Total - ----------------------------------------------------------------------------------------------------------- Balance April 1, 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 Cash Dividends - - - (2,009) - - - (2,009) Exercise of stock options 22,345 - 91 - - - - 91 Stock repurchased and retired (268,700) (3) (3,120) - - - - (3,123) Earned ESOP shares 24,633 - 77 - 207 - - 284 Earned MRDP shares 25,138 - (10) - - 544 - 534 --------- ------ ------ ------ ------ ------ ------ ------ 4,458,456 47 35,725 15,340 (2,010) (218) (386) 48,498 Comprehensive income: Net income - - - 4,868 - - - 4,868 Other comprehensive income: Unrealized holding gain on securities of $881 (net of $454 tax effect) less reclassification adjustment for net gains included in net income of $570 (net of $293 tax effect) - - - - - - 311 311 ------ Total comprehensive income - - - - - - - 5,179 --------- ------ ------ ------ ------ ------ ------ ------ Balance March 31, 2002 4,458,456 47 35,725 20,208 (2,010) (218) (75) 53,677 Cash dividends - - - (2,178) - - - (2,178) Exercise of stock options 46,577 - 417 - - - - 417 Stock repurchased and retired (196,100) (1) (2,881) - - - - (2,882) Earned ESOP shares 24,633 - 166 - 206 - - 372 Tax benefit associated with MRDP - - 98 - - - - 98 Earned MRDP shares 25,138 - - - - 203 - 203 --------- ------ ------ ------ ------ ------ ------ ------ 4,358,704 46 33,525 18,030 (1,804) (15) (75) 49,707 Comprehensive income: Net income - - - 4,359 - - - 4,359 Other comprehensive income: Unrealized holding loss on securities of $966 (net of $498 tax effect) less reclassification adjustment for net losses included in net income of $1,411 (net of $727 tax effect) - - - - - - 445 445 ------ Total comprehensive income - - - - - - - 4,804 --------- ------ ------ ------ ------ ------ ------ ------ Balance March 31, 2003 4,358,704 $ 46 $33,525 $22,389 $(1,804) $ (15) $ 370 $54,511 ========= ====== ====== ====== ====== ====== ====== ======
See notes to consolidated financial statements. 62 RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2003, 2002 AND 2001 (In thousands) 2003 2002 2001 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,359 $ 4,868 $ 3,557 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,108 1,623 1,452 Mortgage servicing rights impairment 320 44 49 Provision for losses on loans 727 1,116 949 Provision (credit) for deferred income taxes (942) 89 (487) Noncash expense related to ESOP 372 284 214 Noncash expense related to MRDP 203 544 416 Increase (decrease) in deferred loan origination fees, net of amortization 728 (79) 120 Federal Home Loan Bank stock dividend (329) (342) (263) Origination of loans held for sale (55,771) (36,959) (8,132) Proceeds from sales of loans held for sale 56,311 35,686 7,563 Net loss (gain) on sale of real estate owned, mortgage-backed securities, investment securities and premises and equipment 582 (1,941) (456) Changes in assets and liabilities: (Increase) decrease in other assets (240) 1,094 104 Increase (decrease) in accrued interest receivable 280 417 (513) Increase in accrued expenses and other liabilities 173 2 722 ------ ------ ------ Net cash provided by operating activities 8,881 6,446 5,295 ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations (242,620)(236,904)(198,327) Principal repayments on loans 227,101 203,466 147,415 Proceeds from call, maturity, or sale of investment securities available for sale 1,518 2,500 3,000 Purchase of investment securities available for sale (5,000) - - Purchase of equity securities - - (15,000) Purchase of mortgage-backed securities available for sale - (4,967) (8,055) Proceeds from sale of mortgage-backed securities available for sale - 25,944 - Principal repayments on mortgage-backed securities held to maturity 1,084 2,017 2,255 Principal repayments on mortgage-backed securities available for sale 23,728 25,754 5,745 Principal repayments on investment securities held to maturity - 861 42 Principal repayments on investment securities available for sale - 4,641 359 Purchase of premises and equipment (256) (2,063) (2,507) Purchase of Federal Home Loan Bank stock - (543) (1,095) Proceeds from sale of real estate owned, premises and equipment 1,915 2,264 3,463 ------ ------ ------ Net cash provided (used) by investing activities 7,470 22,970 (62,705) ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts 61,052 (35,833) 63,168 Dividends paid (2,126) (2,009) (1,860) Repurchase of common stock (2,882) (3,123) - Proceeds from Federal Home Loan Bank advances 5,000 23,300 164,686 Repayment of Federal Home Loan Bank advances (39,500) (28,300)(145,736) Net increase in advance payments by borrowers 54 15 79 Proceeds from exercise of stock options 417 91 222 ------ ------ ------ Net cash provided (used) by financing activities 22,015 (45,859) 80,559 ------ ------ ------ NET INCREASE (DECREASE) IN CASH 38,366 (16,443) 23,149 CASH, BEGINNING OF YEAR 22,492 38,935 15,786 ------ ------ ------ CASH, END OF YEAR $60,858 $22,492 $38,935 ====== ====== ====== SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Interest $ 8,666 $14,610 $15,906 Income taxes 2,912 2,025 2,222 NONCASH INVESTING AND FINANCING ACTIVITIES: Mortgage loans securitized and classified as mortgage-backed securities available for sale $ - $40,347 $ - Transfer of loans to real estate owned 1,527 2,373 2,585 Dividends declared and accrued in other liabilities 545 494 471 Fair value adjustment to securities available for sale 674 472 2,550 Income tax effect related to fair value adjustment (229) (161) (867) See notes to consolidated financial statements. 63 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 the Company'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 the Company's stock issued as of September 30, 1997. Interest Income on Loans - 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 or available for sale due to fluctuations in fair value are recognized when it is determined that an other than temporary decline in value has occurred. Investment securities bought and held principally for the purpose of sale in the near term are classified as trading securities. 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 64 based upon detailed analysis of the fair value of collateral underlying loans on which the Company is in the process of foreclosing. Such collateral is transferred into REO at the lower of recorded cost or fair value less estimated costs of disposal. Subsequently, properties are evaluated and for any additional declines in value the Company writes down the REO directly and charges operations for the diminution in value. The amounts the Company will ultimately recover from REO may differ from the amounts used in arriving at the net carrying value of these assets because of future market factors beyond the Company's control or because of changes in the Company's strategy for the sale of the property. Allowance for Loan Losses - The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management's continuing analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current 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. Allowance for Unfunded Loan Commitments - The allowance for unfunded loan commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities 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 40 years Furniture and equipment 3 to 20 years Leasehold improvements 15 to 25 years Loans Held for Sale - The Company identifies loans held for sale at the time of origination and they are carried at the lower of aggregate cost or net realizable value. Market values are derived from available market quotations for comparable pools of mortgage loans. Adjustments for unrealized losses, if any, are charged to income. Gains or losses on sales of loans held for sale are recognized at the time of the sale and are determined by the difference between the net sales proceeds and the allocated basis of the loans sold. The Company capitalizes mortgage servicing rights ("MSR's") acquired through either the purchase of MSR's, the sale of originated mortgage loans or the securitization of mortgage loans with servicing rights retained. Upon sale of mortgage loans held for sale the total cost of the mortgage loans designated for sale is allocated to mortgage loans with and without MSR's based on their relative fair values. The MSR's are included as a component of gain on sale of loans. The MSR's are amortized in proportion to and over the estimated period of the net servicing life. Such amortization is reflected as a component of loan servicing income (expense). Mortgage Servicing - Fees earned for servicing loans for the Federal Home Loan Mortgage Corporation ("FHLMC") are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. MSR's are the rights to service loans. Loan servicing includes collecting payments, remitting funds to investors, insurance companies and tax authorities, collecting delinquent payments, and foreclosing on properties when necessary. The Company records its originated mortgage servicing rights at fair values in accordance with SFAS No. 140, Accounting 65 for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which requires the Company to allocate the total cost of all mortgage loans sold to the MSR's and the loans (without the MSR's) based on their relative fair values if it is practicable to estimate those fair values. The Company stratifies its MSR's based on the predominant characteristics of the underlying financial assets including coupon interest rate and contractual maturity of the mortgage. An estimated fair value of MSR's is determined quarterly using a discounted cash flow model. The model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, loan maturity and interest rate. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSR's portfolio. The Company is amortizing the MSR's assets, which totaled $629,000 and $912,000 at March 31, 2003 and 2002, respectively, over the period of estimated net servicing income. The MSR's are periodically reviewed for impairment based on their fair value. The fair value of the MSR's, for the purposes of impairment, is measured using a discounted cash flow analysis based on market adjusted discount rates, anticipated prepayment speeds, mortgage loan term and coupon rate. Market sources are used to determine prepayment speeds and the Office of Thrift Supervision ("OTS") is the source for ancillary income, servicing cost and pre-tax required yield. Impairment losses are recognized through a valuation allowance for each impaired stratum, with any associated provision recorded as a component of loan servicing income (expense). Core Deposit Intangible - The deposit base premium of $369,000 at March 31, 2003 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. Advertising and Marketing Expense - Cost incurred for advertising, merchandising, market research, community investment, travel and business development are classified as marketing expense and are expensed as incurred. Income Taxes - Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized. The Company files a consolidated federal income tax return. Earnings Per Share - The Company accounts for earnings per share in accordance with SFAS No. 128, Earnings Per Share, which requires all companies whose capital structure include dilutive potential common shares to make a dual presentation of basic and diluted earnings per share for all periods presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period, excluding restricted stock. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and has been computed after giving consideration to the weighted average diluted effect of the Company's stock options and the shares issued under the Company's Management Retention and Development Plan ("MRDP"). Cash - Includes amounts on hand, due from banks and interest-earning deposits in other banks. Stock-Based Compensation - 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, or 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. 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 dividend yield represents average yields over the previous six-year period. Volatility is measured using the fluctuation in month-end closing stock prices over a seven-year period. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average 66 assumptions: Risk Free Expected Expected Expected Interest Rate Life (yrs) Volatility Dividends ------------- --------- ---------- --------- Fiscal 2003 4.01% 5.42 31.59% 3.23% Fiscal 2002 5.14% 6.15 33.67% 2.92% Fiscal 2001 5.33% 6.90 35.85% 2.65% 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 2003, 2002 and 2001 awards was $3.54, $2.87 and $3.09, respectively. Only stock options are considered in this calculation and not MRDP shares. If the accounting provisions of the SFAS No. 123 had been adopted, the effect on 2003, 2002 and 2001 net income would have been reduced to the following pro forma amounts: Year ended March 31, ---------------------------- 2003 2002 2001 Net income: ------ ------ ------ As reported $4,359,000 $4,868,000 $3,557,000 Deduct: Total stock based compensation expense determined under fair value based method for all options, net of related tax benefit 180,000 228,000 226,000 Pro forma 4,179,000 4,640,000 3,331,000 Earnings per common share - basic: As reported $1.00 $1.06 $0.78 Pro forma 0.96 1.01 0.73 Earnings per common share - fully diluted: As reported $0.99 $1.06 $0.77 Pro forma 0.94 1.01 0.72 Employee Stock Ownership Plan - The Company sponsors a leveraged ESOP. The ESOP is accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 93-6, Employer's Accounting for Employee Stock Ownership Plans. Stock and cash dividends on allocated shares are recorded as a reduction of additional paid in capital and paid directly to plan participants or distributed directly to participants' accounts. As shares are released, compensation expense is recorded equal to the then current market price of the shares and the shares become available for earnings per share calculations. The Company records cash dividends on unallocated shares as a reduction of debt and accrued interest. Reclassification - Certain 2002 and 2001 amounts have been reclassified in order to conform to the 2003 presentation. Business segments - The Company operates a single business segment. The financial information that is used by the chief operating decision maker in allocating resources and assessing performance is only provided for one reportable segment as of March 31, 2003, 2002 and 2001. Recently Issued Accounting Pronouncements - In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. This statement is effective for fiscal year ended March 31, 2003. Management does not expect that the provisions of SFAS No. 148 will impact the Company's results of operations or financial condition. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 is an interpretation of 67 FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosure requirements in this Interpretation are effective for the year ended March 31, 2003. The Company has adopted the provisions of FIN No. 45. 2. INTEREST RATE RISK MANAGEMENT The Company is engaged principally in gathering deposits supplemented with Federal Home Loan Bank ("FHLB") advances and providing first mortgage loans to individuals and commercial enterprises, commercial loans to businesses, and consumer loans to individuals. At March 31, 2003 and 2002, the asset portfolio consisted of fixed and variable rate interest-earning assets. Those assets were funded primarily with short-term deposits and advances from the FHLB that have market interest rates that vary over time. The shorter maturity of the interest-sensitive liabilities indicates that the Company could be exposed to interest rate risk because, generally in an increasing rate environment, interest-bearing liabilities will be repricing faster at higher interest rates than interest-earning assets, thereby reducing net interest income, as well as the market value of long-term assets. Management is aware of this interest rate risk and actively monitors such risk and manages it to the extent practicable. 3. INVESTMENT SECURITIES The amortized cost and approximate fair value of investment securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- March 31, 2003 - -------------- Trust Preferred $ 5,000 $ - $ (25) $ 4,975 Equity securities 12,700 - - 12,700 School district bonds 2,565 186 - 2,751 --------- ---------- ---------- --------- Total $ 20,265 $ 186 $ (25) $ 20,426 ========= ========== ========== ========= March 31, 2002 - -------------- Equity securities $ 16,356 $ 27 $ (709) $ 15,674 School district bonds 2,569 34 (2) 2,601 --------- ---------- ---------- --------- Total $ 18,925 $ 61 $ (711) $ 18,275 ========= ========== ========== ========= The contractual maturities of securities available for sale are as follows (in thousands): Amortized Estimated Cost Fair Value --------- ---------- March 31, 2003 - -------------- Due after one year through five years $ 908 $ 982 Due after five years through ten years 1,040 1,125 Due after ten years 18,317 18,319 --------- ---------- Total $ 20,265 $ 20,426 ========= ========== Investment securities with an amortized cost of $12.7 million and $15.0 million and a fair value of $12.7 million and $14.4 million at March 31, 2003 and March 31, 2002, respectively, were pledged as collateral for advances at the FHLB. In the fourth quarter of fiscal 2003, the Company recognized a pre-tax other-than-temporary impairment for investments in 68 FHLMC preferred stock and FNMA preferred stock that totaled $2.3 million. The Company accounts for these securities in accordance with SFAS No. 115. Under SFAS No. 115, if the decline in fair market value below cost is determined to be other than temporary, the unrealized loss will be realized as expense on the income statement. Based on a number of factors, including the magnitude of the drop in the market value below the Company's cost and the length of time the market value had been below cost, management concluded that the decline in value was other than temporary at the end of the fourth quarter of fiscal 2003. Accordingly, the pre-tax other-than-temporary impairment was realized in the income statement, in the amount of $700,000 for Federal National Mortgage Association ("FNMA") preferred stock and $1.6 million Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock. A corresponding reduction in unrealized losses in shareholders' equity was realized in the amount of $462,000 for FNMA preferred stock and $1.1 million for FHLMC preferred stock. The Company realized gains on sale on investment securities available for sale of $162,000 in fiscal 2003 and none in fiscal 2002 or 2001. The Company had no realized losses on sale of investment securities available for sale in fiscal 2003, 2002 and 2001. 4. MORTGAGE-BACKED SECURITIES Mortgage-backed securities held to maturity consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- March 31, 2003 - -------------- Real estate mortgage investment conduits $ 1,803 $ 57 $ - $ 1,860 FHLMC mortgage-backed securities 589 13 - 602 FNMA mortgage-backed securities 909 32 - 941 --------- ---------- ---------- --------- Total $ 3,301 $ 102 $ - $ 3,403 ========= ========== ========== ========= March 31, 2002 - -------------- Real estate mortgage investment conduits $ 1,804 $ 40 $ - $ 1,844 FHLMC mortgage-backed securities 964 12 - 976 FNMA mortgage-backed securities 1,618 47 - 1,665 --------- ---------- ---------- --------- Total $ 4,386 $ 99 $ - $ 4,485 ========= ========== ========== ========= Mortgage-backed securities held to maturity with an amortized cost of $2.2 million and $2.8 million and a fair value of $2.3 million and $2.9 million at March 31, 2003 and 2002, respectively, were pledged as collateral for governmental public funds held by the Bank. Mortgage-backed securities with an amortized cost of $385,000 and a fair value of $399,000 at March 31, 2003 were pledged as collateral for treasury tax and loan funds held by the Bank. The real estate mortgage investment conduits consist of FHLMC and FNMA securities. The contractual maturities of mortgage-backed securities classified as held to maturity are as follows (in thousands): Amortized Estimated Cost Fair Value --------- ---------- March 31, 2003 - -------------- Due in one year or less $ 28 $ 28 Due after one year through five years 558 575 Due after five years through ten years 2 2 Due after ten years 2,713 2,798 --------- ---------- Total $ 3,301 $ 3,403 ========= ========== 69 Mortgage-backed securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- March 31, 2003 - -------------- Real estate mortgage investment conduits $ 6,327 $ 100 $ (6) $ 6,421 FHLMC mortgage-backed securities 5,811 286 - 6,097 FNMA mortgage-backed securities 531 20 - 551 --------- ---------- ---------- --------- Total $ 12,669 $ 406 $ (6) $ 13,069 ========= ========== ========== ========= March 31, 2002 - -------------- Real estate mortgage investment conduits $ 25,053 $ 144 $ (83) $ 25,114 FHLMC mortgage-backed securities 10,519 453 - 10,972 FNMA mortgage-backed securities 890 23 - 913 --------- ---------- ---------- --------- Total $ 36,462 $ 620 $ (83) $ 36,999 ========= ========== ========== ========= The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands): Amortized Estimated Cost Fair Value --------- ---------- March 31, 2003 - -------------- Due after one year through five years $ 6,230 $ 6,531 Due after five years through ten years 801 811 Due after ten years 5,638 5,727 --------- ---------- Total $ 12,669 $ 13,069 ========= ========== 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 none and $6.3 million and a fair value of none and $6.3 million at March 31, 2003 and 2002, respectively, were pledged as collateral for the discount window at the Federal Reserve Bank. Mortgage-backed securities with an amortized cost of $11.9 million and $23.3 million and a fair value of $12.2 million and $23.8 million at March 31, 2003 and March 31, 2002, respectively, were pledged as collateral for advances at the Federal Home Loan Bank. Mortgage-backed securities with an amortized cost of $316,000 and $4.9 million and a fair value of $327,000 and $4.8 million at March 31, 2003 and March 31, 2002, respectively, were pledged as collateral for treasury tax and loan funds held by the Bank. The Company realized gains on sale of mortgage-backed securities available for sale of $863,000 in fiscal 2002 and none in fiscal year 2003 or 2001. The Company realized no losses on sale of mortgage-backed securities available for sale in fiscal 2003, 2002 and 2001. 70 5. LOANS RECEIVABLE Loans receivable excluding loans held for sale consisted of the following (in thousands): March 31, ------------------ 2003 2002 Residential: ------ ------ One- to- four family $ 58,498 $ 71,710 Multi-family 6,313 9,895 Construction: One- to- four family 70,397 71,148 Multi-family 2,100 4,000 Commercial real estate 4,531 5,230 Commercial 34,239 23,319 Consumer Secured 23,458 24,932 Unsecured 1,334 1,447 Land 34,630 27,406 Commercial real estate 101,672 84,094 ------- ------- 337,172 323,181 Less: Undisbursed portion of loans 31,222 30,970 Deferred loan fees 2,901 2,970 Allowance for loan losses 2,739 2,537 ------- ------- Loans receivable, net $300,310 $286,704 ======= ======= The Company originates residential real estate loans, commercial real estate, multi-family real estate, commercial and consumer loans. Substantially all of the mortgage loans in the Company's portfolio are secured by properties located in Washington and Oregon. A further economic downturn in these areas would likely have a negative impact on the Company's results of operations depending on the severity of such downturn. Loans receivable including loans held for sale, by maturity or repricing date, were as follows (in thousands): March 31, ------------------ 2003 2002 Adjustable rate loans: ------ ------ Within one year $155,289 $139,649 After one but within three years 29,084 10,044 After three but within five years 18,662 6,559 After five but within ten years 265 117 ------- ------- 203,300 156,369 Fixed rate loans: Within one year 34,360 34,387 After one but within three 26,647 24,778 After three but within five years 34,675 45,558 After five but within ten years 23,540 31,160 After ten years 16,151 32,755 ------- ------- 135,373 168,638 ------- ------- $338,673 $325,007 ======= ======= 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. Aggregate loans to officers and directors, all of which are current, consist of the following (in thousands): 71 Year Ended March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Beginning balance $ 539 $ 813 $ 442 Originations 368 184 486 Principal repayments (592) (458) (115) ------ ------ ------ Ending balance $ 315 $ 539 $ 813 ====== ====== ====== 6. ALLOWANCE FOR LOAN LOSSES A reconciliation of the allowances for loan losses is as follows (in thousands): Year Ended March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Beginning balance $ 2,537 $ 1,916 $ 1,362 Provision for losses 727 1,116 949 Charge-offs (428) (439) (413) Recoveries 78 25 18 Allowance reclassified with loan securitization - (81) - Net change in allowance for unfunded loan commitments and lines of credit (175) - - ------ ------ ------ Ending balance $ 2,739 $ 2,537 $ 1,916 ====== ====== ====== Changes in the allowance for unfunded loan commitments and lines of credit were as follows (in thousands): Year Ended March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Beginning balance $ - $ - $ - Net change in allowance for unfunded loan commitments and lines of credit 175 - - ------ ------ ------ Ending balance $ 175 $ - $ - ====== ====== ====== The allowance for unfunded loan commitments was $175,000 at March 31, 2003. The allowance for unfunded loan commitments for prior years was not material. At March 31, 2003, 2002 and 2001, the Company's recorded investment in impaired loans was $323,000, $1.4 million and $319,000, respectively. The allowance for loan losses in excess of specific reserves is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's analysis of the allowance. The average investment in impaired loans was approximately $1.1 million, $1.1 million and $836,000 during the years ended March 31, 2003, 2002 and 2001, respectively. 7. PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following (in thousands): March 31, ----------------- 2003 2002 ------ ------ Land $ 2,026 $ 2,026 Buildings and improvements 7,008 7,002 Leasehold improvements 927 927 Furniture and equipment 6,076 5,965 ------ ------ Subtotal 16,037 15,920 Less accumulated depreciation (6,334) (5,313) ------ ------ Total $ 9,703 $ 10,607 ====== ====== 72 Depreciation expense was $1.1 million, $1.0 million and $970,000 for years ended March 31, 2003, 2002, and 2001, respectively. The Company is obligated under various noncancellable lease agreements for land and buildings that require future minimum rental payments, exclusive of taxes and other charges, as follows (in thousands): Year ending March 31, --------------------- 2004 $ 657 2005 607 2006 631 2007 643 2008 657 Thereafter 3,062 ----- Total $6,257 ===== Rent expense was $634,000, $619,000 and $375,000 for the years ended March 31, 2003, 2002 and 2001, respectively. 8. MORTGAGE SERVICING RIGHTS The following table is a summary of the activity in MSR's and the related allowance for the periods indicated and other related financial data (in thousands): March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Balance at beginning of period $ 912 $ 447 $ 537 Additions 671 704 57 Amortization (634) (195) (98) Impairment write down (320) (44) (49) ------ ------ ------ Balance end of period $ 629 $ 912 $ 447 ====== ====== ====== Allowance at beginning of period $ 93 $ 49 $ - Provision for impairment 320 44 49 ------ ------ ------ Allowance balance at end of period $ 413 $ 93 $ 49 ====== ====== ====== The Company evaluates MSR's for impairment by stratifying MSR's based on the predominant risk characteristics of the underlying financial assets. At March 31, 2003, the MSR's fair value totaled $629,000, which was estimated using discount rate and a range of PSA (The Bond Market Association's standard prepayment) values that ranged from 289 to 1,193. Mortgage loans serviced for others (in millions): March 31, -------------------------- 2003 2002 2001 ------ ------ ------ Total $ 128.2 $ 123.6 $ 78.6 ====== ====== ====== The sensitivity analysis in the table below is hypothetical and should be used with caution. As the figures indicate changes in fair value based on a 25% or 50%, decrease or increase in assumptions generally cannot be easily extrapolated because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities (in thousands): 73 5 Year 7 Year 15 Year 30 Year Mortgages Mortgages Mortgages Mortgages Total --------- --------- --------- --------- ----- Fair Value of MSR's $ 10 $ 25 $ 245 $ 349 $ 629 Impact of changes in PSA Impact on fair value of 25% decrease 2 6 48 79 135 Impact on fair value of 50% decrease 5 15 130 210 360 Impact on fair value of 25% increase (1) (4) (32) (53) (90) Impact on fair value of 50% increase (2) (7) (54) (91) (154) Impact of changes in discount Future cash flows discounted at 8.75% 8.75% 8.75% 8.75% Impact on fair value of 25% decrease $ - $ 1 $ 7 $ 10 $ 18 Impact on fair value of 50% decrease 1 2 15 19 37 Impact on fair value of 25% increase - (1) (7) (11) (19) Impact on fair value of 50% increase (1) (1) (15) (22) (39) 9. INTANGIBLE ASSETS, NET Intangible assets consisted of the following at March 31, 2003 and 2002 (in thousands): March 31, ----------------- 2003 2002 ------ ------ Mortgage servicing rights $ 629 $ 912 Core deposit intangible 369 696 ------ ------ Total $ 998 $1,608 ====== ====== At March 31, 2003 and 2002 the Company had $2,900 and $2,573 accumulated amortization related to core deposits intangibles. Amortization and write-downs of intangible assets for 2003 and 2002 were as follows (in thousands): Year Ended March 31, -------------------- 2003 2002 ------ ------ Mortgage servicing rights $ 954 $ 239 Core deposit intangible 327 327 ------ ------ Total $1,281 $ 566 ====== ====== Amortization expense for the net carrying amount of intangible assets at March 31, 2003 is estimated to be as follows (in thousands): Fiscal year ------------------- 2004 $ 843 2005 141 2006 10 2007 4 ----- Total $ 998 ===== 74 10. DEPOSIT ACCOUNTS Deposit accounts consisted of the following (dollars in thousands): Weighted Weighted Average March 31, Average March 31, Account Type Rate 2003 Rate 2002 - ------------ -------- -------- -------- -------- NOW Accounts: Non-interest-bearing 0.00% $ 78,464 0.00% $ 32,574 Regular 0.35 27,113 0.44 32,710 High yield checking 1.82 35,537 3.47 5,354 Money market 1.01 53,717 1.73 54,645 Savings accounts 0.75 24,855 0.95 21,939 Certificates of deposit 2.77 101,056 3.79 112,468 ----- -------- ----- -------- Total 1.33% $320,742 2.21% $259,690 ===== ======== ===== ======== The weighted average rate is based on interest rates at the end of the period. Certificates of deposit as of March 31, 2003, mature as follows (in thousands): Amount ------ Less than one year $ 71,155 One year to two years 16,752 Two years to three years 5,867 Three years to four years 2,342 Four years to five years 2,659 After five years 2,281 ------- Total $ 101,056 ======= 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, -------------------------- 2003 2002 2001 ------ ------ ------ NOW Accounts: Regular $ 138 $ 211 $ 315 High yield checking 821 4 - Money market 692 1,307 2,182 Savings accounts 182 292 536 Certificates of deposit 3,642 6,915 8,314 ------ ------ ------ Total $ 5,475 $ 8,729 $11,347 ====== ====== ====== 11. FEDERAL HOME LOAN BANK ADVANCES At March 31, 2003 advances from FHLB totaled $40.0 million, of which $35.0 million had fixed interest rates ranging from 4.650% to 6.380% with a weighted average interest rate of 4.904%. The remaining $5.0 million adjustable rate advance had a weighted average interest rate of 1.490%, which is based on 3 month LIBOR plus 11 basis points as quoted by the FHLB-Seattle. The weighted average interest rate for fixed and adjustable rate advances was 5.53%, 6.25% and 6.79% for the years ended March 31, 2003, 2002 and 2001, respectively. At March 31, 2003, the Bank had additional borrowing commitments available of $104.9 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 75 deeds of trust securing such properties as provided in the agreements with the FHLB. At March 31, 2003, the Bank had a collateral balance of approximately $90.2 million with the FHLB. Payments required to service the Bank's FHLB advances during the next five years ended March 31 are as follows: 2006 - $15.0 million; 2007 - $20.0 million; and 2008 - $5.0 million. 12. FEDERAL INCOME TAXES Federal income tax provision (benefit) for the years ended March 31 consisted of the following (in thousands): 2003 2002 2001 ------ ------ ------ Current $ 2,930 $ 2,047 $ 2,131 Deferred (942) 89 (487) ------ ------ ------ Total $ 1,988 $ 2,136 $ 1,644 ====== ====== ====== 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: 2003 2002 2001 ------ ------ ------ Statutory federal income tax rate 34.0% 34.0% 34.0% ESOP market value adjustment 0.9 0.4 0.1 Interest income on municipal securities (0.6) (0.7) (1.1) Dividend received deduction (2.6) (2.8) (1.4) Other, net (0.4) (0.4) - ------ ------ ------ Effective federal income tax rate 31.3% 30.5% 31.6% ====== ====== ====== Taxes related to gains on sales of securities were $55,000, $276,000 and none for the years ended March 31, 2003, 2002 and 2001, respectively. The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at March 31, 2003 and 2002 are as follows (in thousands): 2003 2002 ------ ------ Deferred tax assets: Deferred compensation $ 436 $ 385 Loan loss reserve 907 805 Core deposit intangible 328 291 Accrued expenses 137 142 Accumulated depreciation 129 81 Net realized loss on securities available for sale 782 - Net unrealized loss on securities available for sale - 38 Other 58 97 ------ ------ Total deferred tax asset 2,777 1,839 ------ ------ Deferred tax liabilities: FHLB stock dividend (851) (740) Tax qualified loan loss reserve (47) (94) Net unrealized gain on securities available for sale (190) - Other (368) (398) ------ ------ Total deferred tax liability (1,456) (1,232) ------ ------ Deferred tax asset, net $1,321 $ 607 ====== ====== 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 76 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 2003 and 2002 taxable years. The Company has qualified under provisions of the IRC to compute federal income taxes after deductions of additions to the bad debt reserves. At March 31, 2003, 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, 2003 or 2002 based on the Company's anticipated future ability to generate taxable income from operations. 13. EMPLOYEE BENEFITS PLANS Retirement Plan - The Riverview Bancorp, Inc. Employees' Savings and Profit Sharing Plan (the "Plan") is a defined contribution profit-sharing plan incorporating the provisions of Section 401(k) of the Internal Revenue Code ("IRC"). The plan covers all employees with at least six months and 500 hours of service who are over the age of 18. The Company matches 50% of the employee's elective contribution up to 3% of the employee's compensation. Company expenses related to the Plan for the years ended March 31, 2003, 2002 and 2001 were $88,000, $76,000 and $66,000, respectively. Directors Deferred Compensation Plan - Directors may elect to defer their monthly directors' fees until retirement with no income tax payable by the director until retirement benefits are received. This alternative is made available to them through a nonqualified deferred compensation plan. The Company accrues annual interest on the unfunded liability under the Directors Deferred Compensation Plan based upon a formula relating to gross revenues, which amounted to 7.82%, 8.32% and 8.06% for the years ended March 31, 2003, 2002 and 2001, respectively. The estimated liability under the plan is accrued as earned by the participant. At March 31, 2003 and 2002, the Company's aggregate liability under the plan was $1.1 million. 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. The Company has an incentive program for branch managers that is paid to the managers based on the attainment of certain goals. Under these programs, the Company paid $414,000, $360,000 and $262,000 in bonuses during the years ended March 31, 2003, 2002 and 2001, respectively. Accrued bonuses were $345,000 and $381,000 at March 31, 2003 and 2002, respectively. Management Recognition and Development Plan - On July 23, 1998, shareholders of the Company approved the adoption of the MRDP for the benefit of officers, employees and non-employee directors of the Company. The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company. The Company reserved 142,830 shares of common stock to be issued under the MRDP which are authorized but unissued shares. Awards under the MDRP were made in the form of restricted shares of common stock that are subject to restrictions on transfer of ownership. Compensation expense in the amount of the fair value of the common stock at the date of the grant to the plan participant 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 $201,000, $361,000 and $393,000 was recognized for the years ended March 31, 2003, 2002 and 2001, 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. In July 1994, shareholders of the Company approved the adoption of the 1993 Plan. 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") that authorizes the grant of stock options. The 1998 Plan was effective October 1, 1998 and will expire on the tenth anniversary of the effective date, unless terminated sooner by the Board. The maximum number of shares of common stock of the Company that may be issued under the 1998 plan is 357,075 shares. Options granted under the 1998 plan vest 77 in five years. On October 1, 1998, under the 1998 Plan, 257,962 shares were granted to executive officers, non-employee directors and employees. Stock option activity is summarized in the following table: Weighted Average Number of Exercise Shares Price --------- -------- 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 Grants 5,000 9.30 Options exercised (22,345) 4.09 --------- -------- Outstanding March 31, 2002 344,493 12.46 Grants 15,000 14.00 Forfeited (50,366) 13.75 Options exercised (46,577) 8.96 --------- -------- Outstanding March 31, 2003 262,550 $ 12.92 ========= ======== Additional information regarding options outstanding as of March 31, 2003 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 - -------------- ----------- ----------- -------- ----------- -------- $ 6.32 - 9.30 4.71 29,781 $ 8.73 19,782 $ 8.61 10.13 - 14.97 5.51 232,769 13.46 217,369 13.46 ----- ------- ----- ------- ----- 5.42 262,550 $ 12.92 237,151 $ 13.05 ===== ======= ===== ======= ===== 14. EMPLOYEE STOCK OWNERSHIP PLAN The Company sponsors an Employee Stock Ownership Plan ("ESOP") that covers all employees with at least one year and 1000 hours of service who are over the age of 21. Shares are released for allocation and allocated to participant accounts on December 31 of each year until 2011. ESOP compensation expense included in salaries and benefits was $372,000, $284,000 and $214,000 for years ended March 31, 2003, 2002 and 2001, 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, 2000 295,596 185,696 481,292 Allocation December 31, 2000 (24,633) 24,633 - ------ ------ ------- Balance, March 31, 2000 270,963 210,329 481,292 Allocation December 31, 2001 (24,633) 24,633 - ------ ------ ------- Balance, March 31, 2001 246,330 234,962 481,292 Allocation December 31, 2002 (24,633) 24,633 - ------ ------ ------- Balance, March 31, 2003 221,697 259,595 481,292 ======= ======= ======= 78 15. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS The Company's Board of Directors authorized 250,000 shares of serial preferred stock as part of the Conversion and Reorganization completed on September 30, 1997. No preferred shares were issued or outstanding at March 31, 2003 or 2002. 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, 2003 or 2002. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk, weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, of core capital to total assets and tangible capital to tangible assets (set forth in the table below). Management believes the Bank meets all capital adequacy requirements to which it is subject as of March 31, 2003. As of March 31, 2003, 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): 79 For Categorized as "Well Capital Capitalized" Under Adequacy Prompt Corrective Actual Purposes Action Provision ----------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- March 31, 2003 Total Capital: (To Risk Weighted Assets) $50,893 15.89% $25,629 8.0% $32,037 10.0% Tier I Capital: (To Risk Weighted Assets) 48,154 15.03 N/A N/A 19,222 6.0 Tier I Capital: (To Adjusted Total Assets) 48,154 11.66 12,389 3.0 20,649 5.0 Tangible Capital: (To Tangible Assets) 48,154 11.66 6,195 1.5 N/A N/A For Categorized as "Well Capital Capitalized" Under Adequacy Prompt Corrective Actual Purposes Action Provision ----------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- March 31, 2002 Total Capital: (To Risk Weighted Assets) $51,077 17.04% $23,987 8.0% $29,984 10.0% Tier I Capital: (To Risk Weighted Assets) 48,549 16.19 N/A N/A 17,990 6.0 Tier I Capital: (To Adjusted Total Assets) 48,549 12.52 11,637 3.0 19,395 5.0 Tangible Capital: (To Tangible Assets) 48,549 12.52 5,819 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, 2003 (in thousands): Equity $ 48,956 Net unrealized securities loss (370) Core deposit intangible (369) Servicing asset (63) --------- Tangible capital 48,154 General valuation allowance 2,739 --------- Total capital $ 50,893 ========= At periodic intervals, the OTS and the Federal Deposit Insurance Corporation ("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 2003 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 2003 financial statements cannot presently be determined. 16. 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 80 conversion of outstanding stock options. ESOP shares are not considered outstanding for earnings per share purposes until they are committed to be released. Year Ended March 31, ---------------------------- 2003 2002 2001 ------ ------ ------ Basic EPS computation: Numerator-Net income $4,359,000 $4,868,000 $3,557,000 Denominator-Weighted average common shares outstanding 4,365,855 4,572,253 4,579,091 Basic EPS $ 1.00 $ 1.06 $ 0.78 Diluted EPS computation: ========= ========= ========= Numerator-Net Income $4,359,000 $4,868,000 $3,557,000 Denominator-Weighted average common shares outstanding 4,365,855 4,572,253 4,579,091 Effect of dilutive stock options 50,437 32,940 61,158 Effect of dilutive MRDP 8,441 7,275 - Weighted average common shares ------ ------ ------ and common stock equivalents 4,424,733 4,612,468 4,640,249 Diluted EPS $ 0.99 $ 1.06 $ 0.77 ========= ========= ========= 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The Company using available market information and appropriate valuation methodologies has determined the estimated fair value amounts. However, considerable judgment is necessary to interpret market data in the development of the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair value of financial instruments is as follows (in thousands): March 31, ------------------------------------- 2003 2002 ------------------ ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ------ -------- ------ Assets: Cash and cash equivalents $ 60,858 $ 60,858 $ 22,492 $ 22,492 Investment securities available for sale 20,426 20,426 18,275 18,275 Mortgage-backed securities held to maturity 3,301 3,403 4,386 4,485 Mortgage-backed securities available for sale 13,069 13,069 36,999 36,999 Loans receivable, net 300,310 308,204 286,704 292,685 Loans held for sale 1,501 1,501 1,826 1,826 Mortgage servicing rights 629 629 912 919 FHLB stock 5,646 5,646 5,317 5,317 Liabilities: Demand - Savings deposits 219,686 219,753 147,222 147,222 Time deposits 101,056 102,322 112,468 112,964 FHLB advances - short-term - - 39,500 39,983 FHLB advances - long-term 40,000 42,267 35,000 35,456 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. 81 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. Mortgage Servicing Rights - The fair value of mortgage servicing rights was determined using the Company's model, which incorporates the expected life of the loans, estimated cost to service the loans, servicing fees received and other factors. The Company calculates MSR's fair value by stratifying MSR's based on the predominant risk characteristics that include the underlying loan's interest rate, cash flows of the loan, origination date and term. Key economic assumptions that vary due to changes in market interest rates are used to determine the fair value of the MSR's and include expected prepayment speeds, which impact the average life of the portfolio, annual service cost, annual ancillary income and the discount rate used in valuing the cash flows. At March 31, 2003, the MSR's fair value totaled $629,000, which was estimated using a range of PSA (The Bond Market Association's standard prepayment) values that ranged from 289 to 1,193. 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, 2003 and 2002. 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, 2003 and 2002. 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. 18. COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are conditional, and are honored for up to 45 days subject to the Company's usual terms and conditions. Collateral is not required to support commitments. At March 31, 2003, the Company had commitments to originate fixed rate mortgage loans of $4.4 million at interest rates ranging from 4.0% to 7.25%. At March 31, 2003, commitments to originate adjustable rate mortgage loans were $5.8 million at an average interest rate of 5.91%. Undisbursed balance of mortgage loans closed was $31.2 million at March 31, 2003. Commitments to originate consumer loans totaled $2.1 million and unused lines of consumer credit totaled $16.5 million at March 31, 2003. Commercial real estate loan commitments to originate loans totaled $7.8 million. Undisbursed balance of commercial real estate mortgage loans closed was $8.0 million at March 31, 2003. Commercial loan commitments totaled $1.3 million and unused commercial lines of credit totaled $19.7 million. The allowance for unfunded loan commitments was $175,000 at March 31, 2003. 82 At March 31, 2003, the Company had firm commitments to sell $1.5 million of residential loans to FHLMC. These agreements are short term fixed rate commitments and no material gain or loss is likely. In connection with certain asset sales, the Bank typically makes representation and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against loss. As of March 31, 2003, loans under warranty totaled $120.8 million, which substantially represents the unpaid principal balance of the Company's loans serviced for other portfolio. The Bank believes that the potential for loss under these arrangements is remote. Accordingly, no contingent liability is recorded in the financial statements. 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. 19. PROPOSED ACQUISITION On February 6, 2003 the Company announced the signing of a definitive agreement for the acquisition of Today's Bancorp, Inc. by merger. Upon completion of the transaction, Today's Bancorp, Inc. shareholders, with a total of 1.1 million shares of common stock outstanding, may elect to receive either $13.77 per share in cash or 0.8261 Riverview Bancorp, Inc. shares for each share of Today's Bancorp, Inc. The exchange ratio is subject to adjustment under certain conditions. The Company will issue approximately 473,995 shares of its own stock to acquire approximately 45% percent of Today's Bancorp Inc. outstanding shares at an exchange ratio of 0.8261 Riverview shares for each share of Today's Bancorp Inc. The remaining 55% of outstanding Today's Bancorp, Inc. shares will be acquired for an aggregate of approximately $9.6 million in cash. If the elections with respect to the form of consideration filed by Today's shareholders differs from the 45% stock, 55% cash ratio, the mix of stock and cash to individual shareholders used to effect the acquisition could change. The merger, which has been unanimously approved by the directors of both companies, is subject to certain conditions, including the approval of the shareholders of Today's Bancorp, Inc., the receipt of regulatory approvals, and the registration of the shares to be issued in the merger with the Securities and Exchange Commission. The merger is expected to be completed in the third calendar quarter of 2003. The combined organization will have assets of approximately $540 million, deposits of approximately $430 million and shareholders' equity of approximately $60 million. 83 20. RIVERVIEW BANCORP, INC. (PARENT COMPANY) BALANCE SHEETS MARCH 31, 2003 AND 2002 (In thousands) 2003 2002 - ----------------------------------------------------------------------------- ASSETS Cash (including interest earning accounts of $5,663 and $2,145) $ 5,717 $ 2,226 Investment securities available for sale, at fair value (amortized cost of none and $1,356) - 1,323 Investment in the Bank 48,956 49,283 Other assets 505 1,367 Deferred income taxes (4) 7 --------- --------- TOTAL ASSETS $ 55,174 $ 54,206 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expenses and other liabilities $ 118 $ 35 Dividend payable 545 494 Shareholders' equity 54,511 53,677 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 55,174 $ 54,206 ========= ========= RIVERVIEW BANCORP, INC. (PARENT COMPANY) STATEMENTS OF INCOME YEARS ENDED MARCH 31, 2003, 2002 AND 2001 (In thousands) 2003 2002 2001 - ----------------------------------------------------------------------------- INCOME: Interest on investment securities and other short-term investments $ 48 $ 93 $ 202 Interest on loan receivable from the Bank 193 206 217 Gain on sale of securities 162 - - -------- -------- -------- Total income 403 299 419 -------- -------- -------- EXPENSE: Management service fees paid to the Bank 107 28 28 Other expenses 165 159 113 -------- -------- -------- Total expense 272 187 141 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 131 112 278 PROVISION FOR FEDERAL INCOME TAXES 1 31 87 -------- -------- -------- INCOME OF PARENT COMPANY 130 81 191 EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 4,229 4,787 3,366 -------- -------- -------- NET INCOME $ 4,359 $ 4,868 $ 3,557 ======== ======== ======== 84 RIVERVIEW BANCORP, INC. (PARENT COMPANY) STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2003, 2002 AND 2001 (In thousands) 2003 2002 2001 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,359 $ 4,868 $ 3,557 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed earnings of the Bank (4,229) (4,787) (3,366) Earned ESOP shares 372 284 214 Earned MRDP shares 203 544 416 Net gain on sale of investment securities (162) - - Changes in assets and liabilities: (Increase) decrease in other assets 126 (269) 116 Decrease in accrued expenses and other liabilities 84 54 (1) -------- -------- -------- Net cash provided by operating activities 753 694 936 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Dividend received from the Bank 6,094 4,000 - Proceeds from call, maturity, or sale of investment securities available for sale 1,518 - 2,000 -------- -------- -------- Net cash provided by investing activities 7,612 4,000 2,000 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (2,127) (2,009) (1,860) Repurchase of common stock (2,882) (3,123) - Investment in majority owned subsidiary (282) (191) (122) Proceeds from exercise of stock options 417 91 222 -------- -------- -------- Net cash used by financing activities (4,874) (5,232) (1,760) -------- -------- -------- NET (DECREASE) INCREASE IN CASH 3,491 (538) 1,176 CASH, BEGINNING OF YEAR 2,226 2,764 1,588 -------- -------- -------- CASH, END OF YEAR $ 5,717 $ 2,226 $ 2,764 ======== ======== ======== 85 RIVERVIEW BANCORP, INC. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): (In thousands, except share data) Three Months Ended - ----------------------------------------------------------------------------- March 31 December 31 September 30 June 30 -------- ----------- ------------ ------- Fiscal 2003: Interest income $ 6,377 $ 6,494 $ 6,810 $ 6,780 Interest expense 1,651 1,935 2,107 2,724 Net interest income 4,726 4,559 4,703 4,056 Provision for loan losses 210 190 82 245 Non-interest income (730) 1,994 1,264 1,410 Non-interest expense 3,804 3,695 3,717 3,692 Income before income taxes (18) 2,668 2,168 1,529 Provision for income taxes (39) 896 674 457 -------- ----------- ------------ ------- Net income $ 21 $ 1,772 $ 1,494 $ 1,072 ======== =========== ============= ======= Basic earnings per share(1) $ 0.00 $ 0.41 $ 0.34 $ 0.24 ======== =========== ============= ======= Diluted earnings per share(1) $ 0.00 $ 0.40 $ 0.34 $ 0.24 ======== =========== ============= ======= Fiscal 2002: Interest income $ 6,641 $ 7,246 $ 7,623 $ 8,330 Interest expense 2,572 3,246 3,950 4,550 Net interest income 4,069 4,000 3,673 3,780 Provision for loan losses 396 210 - 510 Non-interest income 1,461 1,637 2,150 1,303 Non-interest expense 3,614 3,469 3,350 3,520 Income before income taxes 1,520 1,958 2,473 1,053 Provision for income taxes 464 599 777 296 -------- ----------- ------------ ------- Net income $ 1,056 $ 1,359 $ 1,696 $ 757 ======== =========== ============= ======= Basic earnings per share(1) $ 0.24 $ 0.30 $ 0.37 $ 0.16 ======== =========== ============= ======= Diluted earnings per share(1) $ 0.23 $ 0.30 $ 0.36 $ 0.16 ======== =========== ============= ======= (1) Quarterly earnings per share varies from annual earnings per share due to rounding. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - ------------------------------------------------------------------------ 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 for the 2003 Annual Meeting of Stockholders, and "Part I -- Business -- Personnel -- Executive Officers" of this report, is incorporated herein by reference. Reference is made to the cover page of this report for information regarding compliance with Section 16(a) of the Exchange Act. Item 11. Executive Compensation - -------------------------------- The information contained under the sections captioned "Executive Compensation" and "Directors' Compensation" under "Proposal I - Election of Directors" in the Proxy Statement for the 2003 Annual Meeting of Stockholders is incorporated herein by reference. 86 Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information required by this item is incorporated herein by reference to the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Executive Compensation" in the Proxy Statement for the 2003 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information set forth under the section captioned "Proposal I - Election of Directors - Transactions with Management" in the Proxy Statement for the 2003 Annual Meeting of Stockholders is incorporated herein by reference. Item 14. Controls and Procedures - --------------------------------- (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the ------------------------------------------------ Company's disclosure controls and procedures (as defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management within the 90-day period preceding the filing date of this annual report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuing that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. (b) Changes in Internal Controls: In the fiscal year ended March 31, 2003, the ---------------------------- Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. 87 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) 1. Financial Statements See "Part II -Item 8. Financial Statements and Supplementary Data." 2. Financial Statement Schedules All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 3. Exhibits 3.1 Articles of Incorporation of the Registrant* 3.2 Bylaws of the Registrant* 4 Form of Certificate of Common Stock of the Registrant* 10.1 Employment Agreement with Patrick Sheaffer** 10.2 Employment Agreement with Ronald A. Wysaske** 10.3 Severance Agreement with Michael C. Yount** 10.4 Severance Agreement with Karen Nelson** 10.5 Severance Agreement with John A. Karas 10.6 Employee Severance Compensation Plan** 10.7 Employee Stock Ownership Plan*** 10.8 Management Recognition and Development Plan**** 10.9 1998 Stock Option Plan**** 10.10 1993 Stock Option and Incentive Plan**** 21 Subsidiaries of Registrant 23 Consent of Independent Auditors 99 Certificates Pursuant to Section 906 of the Sabanes-Oxley Act * Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 333-30203), and incorporated herein by reference. ** Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. *** Filed as an exhibit to the Registrant's Form 10-K for the year ended March 31, 1998, and incorporated herein by reference. **** Filed on October 23, 1998, as an exhibit to the Registrant's Registration Statement on Form S-8, and incorporated herein by reference. (b) Reports on Form 8-K One Current Report on Form 8-K was filed during the quarter ended March 31, 2003. The Form 8-K was filed on February 6, 2003, which announced that the Company and the Bank had entered into a definitive merger agreement with Today's Bancorp, Inc. and its wholly-owned subsidiary, Today's Bank, Vancouver, Washington. 88 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 30, 2003 By: /s/ Patrick Sheaffer -------------------- Patrick Sheaffer Chairman of the Board 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/ Ronald A. Wysaske -------------------- --------------------- Patrick Sheaffer Ronald A. Wysaske Chairman of the Board Executive Vice President, Treasurer President and Chief Executive Officer and Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting Officer) Date: May 30, 2003 Date: May 30, 2003 By: /s/ Robert K. Leick By: /s/ Paul L. Runyan -------------------- ------------------- Robert K. Leick Paul L. Runyan Director Director Date: May 30, 2003 Date: May 30, 2003 By: /s/ Edward R. Geiger By: /s/ Gary R. Douglass -------------------- ------------------- Edward R. Geiger Gary R. Douglass Director Director Date: May 30, 2003 Date: May 30, 2003 By: /s/ Michael D. Allen -------------------- Michael D. Allen Director Date: May 30, 2003 89 Certification Required By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 I, Patrick Sheaffer, certify that: 1. I have reviewed this annual report on Form 10-K of Riverview Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 30, 2003 /S/ Patrick Sheaffer Patrick Sheaffer President and Chief Executive Officer 90 Certification Required By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 I, Ronald Wysaske, certify that: 1. I have reviewed this annual report on Form 10-K of Riverview Bancorp, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 30, 2003 /S/ Ronald Wysaske Ronald Wysaske Chief Financial Officer 91 Exhibit 21 Subsidiaries of the Registrant Parent - ------ Riverview Bancorp, Inc. Subsidiaries (a) Percentage State of Incorporation - ---------------- ---------- ---------------------- Owned ----- Riverview Community Bank 100% Federal Riverview Services, Inc. (b) 100% Washington Riverview Asset Management Corp. (b) 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. (b) This corporation is a subsidiary of Riverview Community Bank. 92 Exhibit 23 Consent of Independent Auditors INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 333-66049 and 333-38887 on Form S-8 and 333-104538 on Form S-4 of Riverview Bancorp, Inc., of our report dated May 2, 2003, appearing in the Annual Report on Form 10-K of Riverview Bancorp, Inc. for the year ended March 31, 2003. /s/DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Portland, Oregon June 4, 2003 93 EXHIBIT 99 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF RIVERVIEW BANCORP, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley act of 2002 and in connection with this annual report on Form 10-K that: 1. the report fully complies with the requirements of sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations. /S/ Patrick Sheaffer /S/ Ronald Wysaske Patrick Sheaffer Ronald Wysaske Chief Executive Officer Chief Financial Officer Dated: May 30, 2003 94 -----END PRIVACY-ENHANCED MESSAGE-----