UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
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
--------------
Indicate by check mark whether the registrant (1) has 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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 5,811,936 shares outstanding as of August 2, 2005.
Form 10-Q
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets
as of June 30, 2005 and March 31, 2005 1
Consolidated Statements of Income
Three Months Ended June 30, 2005 and 2004 2
Consolidated Statements of Shareholders' Equity
for the Year Ended March 31, 2005 and the
Three Months Ended June 30, 2005 3
Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-14
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-25
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 25-26
Item 4: Controls and Procedures 26
Part II. Other Information 27-28
-----------------
SIGNATURES 29-32
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND MARCH 31, 2005
JUNE 30, MARCH 31,
(In thousands, except share data) 2005 2005
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts
of $52,262 and $45,501) $ 74,485 $ 61,719
Loans held for sale 159 510
Investment securities available for sale,
at fair value (amortized cost of $24,136
and $22,993) 24,148 22,945
Mortgage-backed securities held to maturity,
at amortized cost (fair value of $2,297
and $2,402) 2,260 2,343
Mortgage-backed securities available for sale,
at fair value (amortized cost of $10,913
and $11,756) 10,828 11,619
Loans receivable (net of allowance for loan
losses of $6,526 and $4,395) 561,012 429,449
Real estate owned - 270
Prepaid expenses and other assets 2,166 1,538
Accrued interest receivable 2,664 2,151
Federal Home Loan Bank stock, at cost 7,350 6,143
Premises and equipment, net 9,339 8,391
Deferred income taxes, net 2,483 2,624
Mortgage servicing intangible, net 458 470
Goodwill 26,356 9,214
Core deposit intangible, net 1,055 578
Bank owned life insurance 12,726 12,607
--------- ---------
TOTAL ASSETS $737,489 $572,571
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest-bearing $ 79,268 $ 79,508
Interest-bearing 503,562 377,370
--------- ---------
582,830 456,878
Accrued expenses and other
liabilities 8,259 5,858
Advance payments by borrowers
for taxes and insurance 98 313
Federal Home Loan Bank advances 58,904 40,000
--------- ---------
Total liabilities 650,091 503,049
COMMITMENTS AND CONTINGENCIES - -
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:
June 30, 2005 - 5,810,940 issued,
5,810,936 outstanding 58 50
March 31, 2005 - 5,015,753 issued,
5,015,749 outstanding
Additional paid-in capital 57,991 41,112
Retained earnings 30,737 29,874
Unearned shares issued to employee
stock ownership trust (1,340) (1,392)
Accumulated other comprehensive loss (48) (122)
--------- ---------
Total shareholders' equity 87,398 69,522
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 737,489 $572,571
========= =========
See notes to consolidated financial statements.
1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
June 30,
(In thousands, except share data) (Unaudited) 2005 2004
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 9,597 $ 6,626
Interest on investment securities -
taxable 186 124
Interest on investment securities -
non-taxable 43 44
Interest on mortgage-backed securities 145 160
Other interest and dividends 254 139
------- -------
Total interest income 10,225 7,093
------- -------
INTEREST EXPENSE:
Interest on deposits 2,471 1,043
Interest on borrowings 656 496
------- -------
Total interest expense 3,127 1,539
------- -------
Net interest income 7,098 5,554
Less provision for loan losses 450 140
------- -------
Net interest income after provision for
loan losses 6,648 5,414
------- -------
NON-INTEREST INCOME:
Fees and service charges 1,486 1,170
Asset management fees 364 272
Gain on sale of loans held for sale 126 175
Gain on sale of real estate owned 21 -
Loan servicing income 27 19
Gain on sale of land and fixed assets - 828
Bank owned life insurance income 120 154
Other 43 22
------- -------
Total non-interest income 2,187 2,640
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,399 2,646
Occupancy and depreciation 803 773
Data processing 365 249
Amortization of core deposit intangible 49 81
Advertising and marketing expense 231 251
Federal Deposit Insurance Corporation
insurance premium 15 15
State and local taxes 135 153
Telecommunications 63 64
Professional fees 363 123
Other 673 477
------- -------
Total non-interest expense 6,096 4,832
------- -------
INCOME BEFORE INCOME TAXES 2,739 3,222
PROVISION FOR INCOME TAXES 918 1,023
------- -------
NET INCOME $ 1,821 $ 2,199
======= =======
Earnings per common share:
Basic $ 0.33 $ 0.46
Diluted 0.33 0.45
Weighted average number of shares
outstanding:
Basic 5,451,976 4,790,785
Diluted 5,519,699 4,864,583
See notes to consolidated financial statements.
2
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2005
AND THE THREE MONTHS ENDED JUNE 30, 2005
(Unaudited)
Unearned
Shares Accum-
Issued to ulated
Employee Other
Common Addi- Stock Compre-
Stock tional Owner- hensive
(In thousands, except ---------------- Paid-in Retained ship Income
per share data) Shares Amount Capital Earnings Trust (Loss) Total
- ---------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance April 1, 2004 4,974,975 $ 50 $40,187 $26,330 $ (1,598) $ 213 $ 65,182
Cash dividends
($0.62 per share) - - - (2,985) - - (2,985)
Exercise of stock options 40,774 - 536 - - - 536
Earned ESOP shares - - 314 - 206 - 520
Tax benefit, stock option - - 75 - - - 75
--------- ------- ------- ------- ------- ------- --------
5,015,749 50 41,112 23,345 (1,392) 213 63,328
Comprehensive income:
Net income - - - 6,529 - - 6,529
Other comprehensive
income:
Unrealized holding
loss on securities of
$1,120 (net of $577
tax effect) less class-
ification adjustment
for net losses included
in net income of $785
(net of $404 tax effect) - - - - - (335) (335)
--------
Total comprehensive income - - - - - - 6,194
--------- ------- ------- ------- ------- ------- --------
Balance March 31, 2005 5,015,749 50 41,112 29,874 (1,392) (122) 69,522
Cash dividends
($0.17 per share) - - - (958) - - (958)
Exercise of stock options 6,822 - 94 - - - 94
Stock issued in connection
with acquisition 788,365 8 16,706 - - - 16,714
Earned ESOP shares - - 79 - 52 - 131
---------- ------- ------- ------- ------- ------- --------
5,810,936 58 57,991 28,916 (1,340) (122) 85,503
Comprehensive income:
Net income - - - 1,821 - - 1,821
Other comprehensive
income:
Unrealized holding
gain on securities
of $74 (net of $38
tax effect) - - - - - 74 74
--------- ------- ------- ------- ------- ------- --------
Total comprehensive income - - - - - - 1,895
--------- ------- ------- ------- ------- ------ --------
Balance June 30, 2005 5,810,936 $58 $57,991 $30,737 $(1,340) $(48) $87,398
========= ====== ======= ======= ======= ===== =======
See notes to consolidated financial statements.
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME Three Months Ended
June 30,
(In thousands) (Unaudited) 2005 2004
- ------------------------------------------------------------------------------
Net income $ 1,821 $ 2,199
Other comprehensive income
Change in fair value of securities
available for sale, net of tax 74 (686)
------- -------
Total comprehensive income $ 1,895 $ 1,513
======= =======
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS Ended JUNE 30,
(In thousands) (Unaudited) 2005 2004
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,821 $ 2,199
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 319 486
Mortgage servicing rights valuation
adjustment (10) (16)
Provision for loan losses 450 140
Noncash expense related to ESOP 131 125
Increase in deferred loan origination
fees, net of amortization 196 3
Federal Home Loan Bank stock dividend - (44)
Origination of loans held for sale (5,217) (8,485)
Proceeds from sales of loans held for sale 5,597 8,087
Net gain on loans held for sale, sale of
real estate owned, mortgage-backed
securities, investment securities and
premises and equipment (128) (861)
Income from bank owned life insurance (120) (154)
Changes in assets and liabilities:
Increase in prepaid expenses and other
assets (652) 10
Decrease in accrued interest receivable 38 82
Increase (decrease) in accrued expenses
and other liabilities 1,896 (313)
--------- -------
Net cash provided by operating
activities 4,321 1,259
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (146,040) (94,525)
Principal repayments/refinance on loans 133,440 93,817
Proceeds from call, maturity, or sale
of investment securities available for sale 250 -
Principal repayments on investment
securities available for sale 37 37
Purchase of mortgage-backed securities
available for sale - (5,000)
Principal repayments on mortgage-backed
securities available for sale 843 1,030
Principal repayments on mortgage-backed
securities held to maturity 83 68
Purchase of premises and equipment (114) (51)
Acquisition, net of cash received (14,716) -
Additions to real estate owned - (13)
Proceeds from sale of real estate owned
and premises and equipment 273 33
--------- --------
Net cash used in investing
activities (25,945) (4,604)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
deposit accounts 46,262 (6,484)
Dividends paid (751) (669)
Proceeds from Federal Home Loan Bank
advances - 15,100
Repayment of Federal Home Loan Bank advances (11,000) (15,100)
Net decrease in advance payments by borrowers (215) (234)
Proceeds from exercise of stock options 94 166
--------- --------
Net cash provided by (used in) financing
activities 34,390 (7,221)
--------- --------
NET INCREASE (DECREASE) IN CASH 12,766 (10,566)
CASH, BEGINNING OF PERIOD 61,719 47,907
--------- --------
CASH, END OF PERIOD $ 74,485 $ 37,341
========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 3,103 $ 1,583
SUPPLEMENTAL DISCLOSURE OF BANK ACQUISITION
Issuance of common stock $ (16,714) -
Investments acquired 1,417 -
Fair value of loans receivable acquired 119,536 -
Other assets acquired 3,388 -
Deposits assumed (79,691) -
Borrowings and other liabilities assumed (30,362) -
Goodwill 17,142 -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other
liabilities $ 750 $ 743
Receivable from sale and leaseback of
premises - 2,391
Financed sale of real estate owned - (228)
Fair value adjustment to securities
available for sale 112 (1,039)
Income tax effect related to fair value
adjustment (38) 353
See notes to consolidated financial statements.
5
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Quarterly Reports on Form 10-Q and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States
of America. However, all adjustments that are, in the opinion of management,
necessary for a fair presentation of the interim unaudited financial
statements have been included. All such adjustments are of a normal recurring
nature.
The unaudited consolidated financial statements should be read in conjunction
with the audited financial statements included in the Riverview Bancorp, Inc.
Annual Report on Form 10-K for the year ended March 31, 2005. The results of
operations for the three months ended June 30, 2005 are not necessarily
indicative of the results which may be expected for the fiscal year ending
March 31, 2006. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Riverview Bancorp, Inc. and
Subsidiary include all the accounts of Riverview Bancorp, Inc. (the "Company")
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. ("RAM Corp.") All inter-company transactions and balances
have been eliminated in consolidation.
3. ACQUISITION
On April 22, 2005, the Company completed the acquisition of American Pacific
Bank ("APB"). The cost to acquire APB's 2,804,618 shares of common stock was
payment in cash for 1,404,000 shares at a transaction value of $11.94 per
share and the issuance of 788,365 shares of the Company's common stock at a
price of $21.20 per share for the remaining 1,400,618 shares. All APB stock
options were cashed out at a cost of $873,240, the difference between the
transaction value of $11.94 per share and the options' respective exercise
prices prior to completion of the merger. The acquisition was accounted for
using the purchase method of accounting and, accordingly, the assets and
liabilities of APB were recorded at their respective fair values. Core
deposit intangible is being amortized using an accelerated method over ten
years. The excess of the purchase price over net fair value of the assets and
liabilities acquired was recorded as goodwill in the amount of $17.1 million.
Goodwill is not tax deductible because the transaction is nontaxable for
Internal Revenue Service purposes. The purchased assets and assumed
liabilities were recorded as follows (dollars in thousands):
Assets
------
Cash $ 3,433
Investments 1,417
Building and equipment 1,080
Loans 119,536
Core deposit intangible 526
Goodwill 17,142
Other, net 1,781
-------
Total assets 144,915
Liabilities
-----------
Deposits (79,691)
Borrowings (29,904)
Other liabilities (457)
--------
Total liabilities (110,052)
6
Net acquisition costs $34,863
Less:
Stock issued in acquisition (16,714)
Cash acquired (3,433)
-------
Cash used in acquisition, net
of cash acquired $14,716
=======
The following unaudited pro forma financial information for the three months
ended June 30, 2005 and 2004 assumes that the APB acquisition occurred as of
April 1, 2004, after giving effect to certain adjustments. The pro forma
results have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which may occur in the
future or that would have occurred had the APB acquisition been consummated on
the date indicated.
Pro Forma Financial Information for
the Three Months Ended June 30,
2005 2004
--------------------------------------
(in thousands)
Net interest income $ 7,335 $ 6,803
Non-interest income 2,174 1,935
Non-interest expense 6,444 7,218
Net income 1,743 959
Earnings per common share:
Basic $ 0.28 $ 0.17
Diluted 0.28 0.17
4. STOCK-BASED COMPENSATION
At June 30, 2005, the Company had two stock-option plans. The Company
accounts for these plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no stock-based
compensation cost is reflected in net income as all options granted under the
Company's plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provision of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" to
stock-based compensation awards:
Three Months Ended June 30,
--------------------------
2005 2004
--------- -------
Net income (in thousands):
As reported $1,821 $2,199
Deduct: Total stock based
compensation expense determined
under fair value based method
for all options, net of related
tax benefit (88) (23)
Pro forma 1,733 2,176
Earnings per common share - basic:
As reported $0.33 $0.46
Pro forma 0.32 0.45
Earnings per common share - fully diluted:
As reported $0.33 $0.45
Pro forma 0.31 0.45
7
5. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that
are dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options. Employee Stock Ownership Plan ("ESOP") shares are not
considered outstanding for earnings per share purposes until they are
committed to be released.
Three Months Ended
June 30,
-------------------------
2005 2004
--------- --------
Basic EPS computation:
Numerator-Net income $ 1,821,000 $ 2,199,000
Denominator-Weighted average common
shares outstanding 5,451,976 4,790,785
Basic EPS $ 0 .33 $ 0 .46
=========== ===========
Diluted EPS computation:
Numerator-Net Income $ 1,821,000 $ 2,199,000
Denominator-Weighted average
common shares outstanding 5,451,976 4,790,785
Effect of dilutive stock options 67,723 73,798
----------- -----------
Weighted average common shares
and common stock equivalents 5,519,699 4,864,583
Diluted EPS $ 0.33 $ 0.45
=========== ===========
6. 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
--------- ---------- ---------- ---------
June 30, 2005
- -------------
Trust Preferred $ 5,000 $ 31 $ - $ 5,031
Agency securities 15,202 5 (120) 15,087
Municipal bonds 3,934 96 - 4,030
--------- -------- -------- ---------
Total $ 24,136 $ 132 $ (120) $ 24,148
========= ======== ======== =========
March 31, 2005
- --------------
Trust Preferred $ 5,000 $ 31 $ - $ 5,031
Agency securities 14,021 - (179) 13,842
Municipal bonds 3,972 100 - 4,072
--------- -------- -------- ---------
Total $ 22,993 $ 131 $ (179) $ 22,945
========= ======== ======== =========
The contractual maturities of investment securities available for sale are as
follows (in thousands):
Amortized Estimated
June 30, 2005 Cost Fair Value
- ------------- --------- ----------
Due in one year or less $ 800 $ 798
Due after one year through five years 16,340 16,297
Due after ten years 6,996 7,053
--------- ----------
Total $ 24,136 $ 24,148
========= ==========
8
Investment securities with an amortized cost of $9.9 million and $9.0 million
and a fair value of $9.8 million and $8.9 million at June 30, 2005 and March
31, 2005, respectively, were pledged as collateral for advances at the Federal
Home Loan Bank ("FHLB") of Seattle. Investment securities with an amortized
cost of $1.1 million and a fair value of $1.2 million at both June 30, 2005
and March 31, 2005 were pledged as collateral for treasury tax and loan funds
held by the Bank. Investment securities with an amortized cost of $5.0
million and a fair value of $5.0 million at both June 30, 2005 and March 31,
2005 were pledged as collateral for borrowings from the discount window at the
Federal Reserve Bank.
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of June 30,
2005 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ---------- ----- ---------- ----- ----------
Agency securities $11,947 $ (84) $ 1,964 $ (36) $ 13,911 $ (120)
------- ------- ------- -------- -------- ---------
Total temporarily
impaired
securities $11,947 $ (84) $ 1,964 $ (36) $ 13,911 $ (120)
======= ======= ======= ======== ======== =========
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment.
The Company realized no gains or losses on sales of investment securities
available for sale for the three-month periods ended June 30, 2005 and 2004.
7. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2005 Cost Gains Losses Value
- ------------- --------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 1,802 $ 24 $ - $ 1,826
FHLMC mortgage-backed
securities 161 3 - 164
FNMA mortgage-backed
securities 297 10 - 307
--------- --------- --------- ----------
Total $ 2,260 $ 37 $ - $ 2,297
========= ========= ========= ==========
March 31, 2005
- --------------
Real estate mortgage
investment conduits $ 1,802 $ 43 $ - $ 1,845
FHLMC mortgage-backed
securities 218 6 - 224
FNMA mortgage-backed
securities 323 10 - 333
--------- --------- --------- ----------
Total $ 2,343 $ 59 $ - $ 2,402
========= ========= ========= ==========
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
June 30, 2005 Cost Fair Value
- ------------- --------- ----------
Due after one year through five years $ 17 $ 17
Due after five years through ten years 25 26
Due after ten years 2,218 2,254
-------- --------
Total $ 2,260 $ 2,297
======== ========
Mortgage-backed securities held to maturity with an amortized cost of $1.8
million and $1.8 million and a fair value of $1.8 million and $1.9 million at
June 30, 2005 and March 31, 2005, respectively, were pledged as collateral for
governmental public funds held by the Bank. Mortgage-backed securities held to
maturity with an amortized cost of $208,000 and $248,000 and a fair value of
$215,000 and $255,000 at June 30, 2005 and March 31, 2005, respectively, were
pledged as collateral for treasury tax and loan funds held by the Bank. The
real estate mortgage investment conduits consist of Federal Home Loan Mortgage
Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie
Mae") securities.
9
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2005 Cost Gains Losses Value
- ------------- --------- ---------- ---------- ---------
Real estate mortgage
investment conduits $ 1,682 $ 28 $ - $ 1,710
FHLMC mortgage-backed
securities 9,034 3 (121) 8,916
FNMA mortgage-backed
securities 197 5 - 202
--------- -------- ------- --------
Total $ 10,913 $ 36 $ (121) $ 10,828
========= ======== ======= ========
March 31, 2005
- --------------
Real estate mortgage
investment conduits $ 1,846 $ 27 $ - $ 1,873
FHLMC mortgage-backed
securities 9,677 12 (182) 9,507
FNMA mortgage-backed
securities 233 6 - 239
--------- -------- ------- --------
Total $ 11,756 $ 45 $ (182) $ 11,619
========= ======== ======= ========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
June 30, 2005 Cost Fair Value
- ------------- --------- ----------
Due after one year through five years $ 1,202 $ 1,208
Due after five years through ten years 8,109 7,991
Due after ten years 1,602 1,629
-------- --------
Total $ 10,913 $ 10,828
======== ========
Expected maturities of mortgage-backed securities held to maturity and
available for sale will differ from contractual maturities because borrowers
may have the right to prepay obligations.
Mortgage-backed securities available for sale with an amortized cost of $10.7
million and $11.5 million and a fair value of $10.6 million and $11.4 million
at June 30, 2005 and March 31, 2005, respectively, were pledged as collateral
for FHLB advances. Mortgage-backed securities available for sale with an
amortized cost of $36,000 and $45,000 and a fair value of $37,000 and $47,000
at June 30, 2005 and March 31, 2005, respectively, were pledged as collateral
for treasury tax and loan funds held by the Bank.
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of June 30,
2005 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ---------- ----- ---------- ----- ----------
FHLMC mortgage-
backed
securities $7,859 $(121) $ - $ - $7,859 $(121)
------ ----- ----- ------- ------ -----
Total temporarily
impaired
securities $7,859 $(121) $ - $ - $7,859 $(121)
====== ===== ====== ======== ====== =====
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment.
The Company realized no gains or losses on sales of mortgage-backed securities
available for sale for the three months ended June 30, 2005 and 2004.
10
8. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
June 30, March 31,
2005 2005
---------- ------------
Residential:
One to four-family $ 34,324 $ 36,514
Multi-family 2,037 2,568
Construction:
One to four-family 48,932 44,415
Commercial real estate 29,390 11,138
Commercial 67,239 58,042
Consumer:
Secured 29,040 28,782
Unsecured 4,811 1,668
Land 36,924 29,151
Commercial real estate 318,631 224,691
--------- ---------
571,328 436,969
Less:
Deferred loan fees 3,790 3,125
Allowance for loan losses 6,526 4,395
--------- ---------
Loans receivable, net $ 561,012 $ 429,449
========= =========
Most of the Bank's business activity is with customers located in the states
of Washington and Oregon. Loans and extensions of credit outstanding at one
time to one borrower are generally limited by federal regulation to 15% of the
Bank's shareholders' equity, excluding accumulated other comprehensive
income/(loss). As of June 30, 2005 and March 31, 2005, the Bank had no loans
to one borrower in excess of the regulatory limit and also had no individual
industry concentrations of credit.
9. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Three Months Ended
June 30,
-----------------------
2005 2004
------- -------
Beginning balance $ 4,395 $ 4,481
Provision for losses 450 140
Charge-offs (258) (133)
Recoveries 51 1
Allowance transferred from APB
acquisition 1,888 -
-------- --------
Ending balance $ 6,526 $ 4,489
======== ========
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Three Months Ended
June 30,
-----------------------
2005 2004
------- -------
Beginning balance $ 253 $ 191
Net increase (decrease) in allowance
for unfunded loan commitments and
lines of credit 76 (12)
------ ------
Ending balance $ 329 $ 179
====== ======
The allowance for unfunded loan commitments is included in other liabilities
on the consolidated balance sheets. The provision for unfunded commitments is
charged to non-interest expense.
11
At June 30, 2005 and March 31, 2005, the Company's recorded investment in
impaired loans was $1.9 million and $456,000 respectively. Specific reserves
for impaired loans totaled $103,000 and none at June 30, 2005 and March 31,
2005, 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 $1.2 million during the three months ended June 30, 2005 and
$1.0 million for the year ended March 31, 2005. Interest income recognized on
impaired loans was $4,000 for the three months ended June 30, 2005 and $9,000
for the year ended March 31, 2005. Loans past due 90 days or more and still
accruing interest totaled $497,000 and none at June 30, 2005 and March 31,
2005 respectively.
10. LOANS HELD FOR SALE
The Company identifies loans held for sale at the time of origination, which
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.
11. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in mortgage servicing rights
("MSRs") and the related allowance for the periods indicated and other related
financial data (in thousands):
Three Months
Ended June 30,
-----------------
2005 2004
------ ------
Balance at beginning of period, net $ 470 $ 624
Additions 39 40
Amortization (61) (79)
Change in valuation allowance 10 16
------ ------
Balance at end of period, net $ 458 $ 601
====== ======
Valuation allowance at beginning
of period $ 84 $ 106
Change in valuation allowance (10) (16)
------ ------
Valuation allowance balance at
end of period $ 74 $ 90
====== ======
The Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial assets. At June
30, 2005 and March 31, 2005, the fair value of MSRs totaled $897,000 and $1.1
million, respectively. The June 30, 2005 fair value was estimated using
various discount rates and a range of PSA values (the Bond Market
Association's standard prepayment values) that ranged from 153 to 1,478.
Amortization expense for the net carrying amount of MSRs at June 30, 2005 is
estimated as follows (in thousands):
Year Ending
March 31,
--------------------
2006 $136
2007 106
2008 91
2009 74
2010 32
After 2010 19
----
Total $458
====
12. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $1.1 million at June 30, 2005
and $578,000 at March 31, 2005. Amortization expense related to the core
deposit intangible during the three months ended June 30, 2005 and 2004
totaled $49,000 and $81,000, respectively. During the three months ended June
30, 2005, the Company had additions to core deposit intangibles totaling
$526,000 in connection with the acquisition of American Pacific Bank.
12
Amortization expense for the net core deposit intangible at June 30, 2005 is
estimated to be as follows (in thousands):
Year Ending
March 31,
-------------------
2006 $ 160
2007 184
2008 155
2009 131
2010 111
After 2010 314
------
Total $1,055
======
13. BORROWINGS
Borrowings are summarized as follows (in thousands):
At June 30, 2005 At March 31, 2005
---------------- -----------------
Federal Home Loan Bank
advances $58,904 $40,000
Weighted average interest
rate: 4.33% 5.05%
Borrowings have the following maturities at June 30, 2005 (in thousands):
Year Ending
March 31,
--------------------
2006 $ 25,904
2007 28,000
2008 5,000
--------
Total $ 58,904
========
14. NEW ACCOUNTING PRONOUNCEMENTS
For the quarter ended June 30, 2005, there were no new accounting
pronouncements that will have a significant impact on the Company's financial
statements. For a discussion of recent accounting pronouncements and their
impact on the Company, see Note 1 of the Notes to Consolidated Financial
Statement included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2005.
15. COMMITMENTS AND CONTINGENCIES
Off-balance sheet arrangements. 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, and 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. Because some
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. 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. The allowance for unfunded loan
commitments was $329,000 at June 30, 2005.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies and is required in instances where the Bank deems necessary.
13
The following is a summary of commitments and contingent liabilities with
off-balance sheet risk as of June 30, 2005:
Contract or
Notional
(In Thousands) Amount
- -------------- ------------
Commitments to originate loans:
Adjustable-rate $ 52,715
Fixed-rate 2,398
Standby letters of credit 1,872
Undisbursed loan funds, and unused
lines of credit 168,403
-----------
Total $ 225,388
===========
At June 30, 2005, the Company had firm commitments to sell $159,000 of
residential loans to FHLMC. These agreements are short-term, fixed-rate
commitments and no material gain or loss is likely.
Other Contractual Obligations. In connection with certain asset sales, the
Bank typically makes representations 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 June 30, 2005,
loans under warranty totaled $118.7 million, which substantially represents
the unpaid principal balance of the Company's loans serviced for others
portfolio. The Bank believes that the potential for loss under these
arrangements is remote. Accordingly, no contingent liability is recorded in
the financial statements.
At June 30, 2005, scheduled maturities of certificates of deposit, FHLB
advances and future minimum operating lease commitments were as follows (in
thousands):
Within 1-3 4-5 Over Total
1 year Years Years 5 Years Balance
------- ------- ------- ------- --------
Certificates of deposit $113,734 $50,749 $28,408 $ 5,513 $198,404
FHLB advances 45,904 13,000 - - 58,904
Operating leases 1,158 2,277 2,035 1,745 7,215
-------- ------- ------- ------- --------
Total other contractual
obligations $160,796 $66,026 $30,443 $ 7,258 $264,523
======== ======= ======= ======= ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------------
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 the safe harbor with respect to all forward-looking statements contained in
this Quarterly Report. The Company has used forward-looking statements to
describe future plans and strategies, including its expectations of 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 values 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 undertakes no obligation to publish revised
forward-looking statements to reflect the occurrence of unanticipated events
or circumstances after the date hereof.
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 ("GAAP") in the preparation of the Company's Consolidated Financial
Statements. The Company has identified four policies that, as a result of
judgments, estimates and assumptions inherent in those policies, are critical
to an understanding of the Company's Consolidated Financial Statements. These
policies relate to the methodology for the determination of the allowance for
loan losses, the impairment of goodwill, the valuation of mortgage servicing
rights and the impairment of investments. These policies and the judgments,
estimates and assumptions are described in greater detail in subsequent
sections of Management's Discussion and Analysis and in the notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended March 31, 2005. Management believes that the
judgments, estimates and
14
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.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses is maintained at a level sufficient to provide
for probable 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.
Goodwill
- --------
Goodwill is initially recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired. Goodwill is presumed to have an indefinite useful life and
is tested, at least annually, for impairment at the reporting unit level.
Management performs an annual review in the fourth quarter of each year, or
more frequently if indicators of potential impairment exist, to determine if
the recorded goodwill is impaired. This impairment review process compares
the fair value of the Bank to its carrying value, including the goodwill
related to the Bank. If the fair value exceeds the carrying value, goodwill
of the Bank unit is not considered impaired and no additional analysis is
necessary. As of June 30, 2005, there have been no events or changes in
circumstances that would indicate a potential impairment.
Mortgage Servicing Rights
- -------------------------
The Company stratifies its MSRs 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 MSRs 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
prepayment 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 MSRs portfolio.
The Company's methodology for estimating the fair value of MSRs 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 fair value of MSRs is limited by the existing conditions
and assumptions made as of the date of analysis. 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 were paid off earlier than
anticipated. Moreover, because 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.
MSRs are the discounted present value of the future net cash flows projected
from the servicing portfolio. Accordingly, prepayment risk subjects the
Company's MSRs to impairment. Impairment of MSRs is recorded in the amount
that the estimated fair value is less than the carrying value of the MSRs on a
strata by strata basis.
Investment Valuation
- --------------------
The Company's determination of impairment for various types of investments
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity 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 for which the fair value is less than the carrying value. The
review includes determining whether certain indicators demonstrate that 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 this 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.
15
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 shareholders' equity as accumulated
other comprehensive income (loss), 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 an impairment is
other-than-temporary is that an impairment shall be deemed
other-than-temporary unless positive evidence indicating that the 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 (1) the length of
time and the extent to which the fair value has been less than amortized cost,
(2) the financial condition and near-term prospects of the issuer and (3) the
Company's 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.
General
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 along with Multnomah and Marion counties of Oregon as its primary
market area. The Company is engaged primarily in the business of attracting
deposits from the general public and using these funds in its primary market
area to originate mortgage loans secured by commercial real estate, one to
four-family residential real estate, multi-family, commercial construction,
and non-mortgage loans providing financing for business commercial
("commercial") and consumer purposes. Commercial real estate loans and
commercial loans have grown from 18.70% and 7.64% of the loan portfolio,
respectively, at March 31, 2001 to 60.9% and 11.8%, respectively, at June 30,
2005. The Company continues to change the composition of its loan portfolio
and the deposit base as part of its transition to commercial banking. The
Company's strategic plan includes targeting the commercial banking customer
base in its primary market area, specifically small and medium size
businesses, professionals and wealth building individuals. In pursuit of
these goals, the Company emphasizes 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 traditional fixed-rate
mortgages. The strategic plan stresses increased emphasis on non-interest
income, including asset management fees 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 nine of its 16 branches are located in Clark
County, the fastest growing county in the State of Washington according to the
U.S. Census Bureau. The Company's acquisition of American Pacific Bank in
Oregon positions it for growth in the vibrant Portland market as well.
In order to support its strategy of growth without compromising local,
personal service to customers and its 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 Company's management.
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. In-house
processing of checks and check imaging has supported the Bank's increased
service to customers and at the same time has increased efficiency. The
Company
16
continues to experience growth in customer use of 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 web site is www.riverviewbank.com.
Market Area
With its home office and six branches in Vancouver, Washington and branch
offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale and Longview, the Company continues to provide local, personal
service to its customers in Southwest Washington. The acquisition of American
Pacific Bank in April 2005 resulted in three offices in Oregon, two in the
Portland metropolitan area and one in Aumsville. The market area for lending
and deposit taking activities encompasses Clark, Cowlitz, Skamania and
Klickitat Counties throughout the Columbia River Gorge area of Washington, and
Multnomah and Marion Counties in Oregon.
The Company operates a trust and financial services company, RAM Corp.,
located in downtown Vancouver. Riverview Mortgage, a mortgage broker division
of the Company, originates mortgage (including construction) loans for various
mortgage companies in the Portland metropolitan area, as well as for the
Company. Commercial and business banking services are offered by the Business
and Professional Banking Division located at both the downtown Vancouver and
Portland branch.
Vancouver, located in Clark County, is north of Portland, Oregon. Several
large employers including Sharp Microelectronics, Hewlett Packard, Georgia
Pacific, Underwriters Laboratory and Wafer Tech are located in Northern Oregon
and Southwestern Washington. Major employers in Portland include Intel Corp.,
Providence Health System, Fred Meyer, Legacy Health System and Kaiser
Permanente. In addition to the expanding industry base, the Columbia River
Gorge is a popular tourist destination, generating revenue for all the
communities within the area. As a result, the area's economy has become less
dependent on the timber industry.
Comparison of Financial Condition at June 30, 2005 and March 31, 2005
At June 30, 2005, the Company had total assets of $737.5 million, compared
with $572.6 million at March 31, 2005. The increase in total assets was
primarily due to the $128 million in assets acquired in the American Pacific
Bank transaction. The balance of the increase was due to organic growth in
the loan portfolio and to goodwill recorded in APB transaction.
Cash, including interest-earning accounts, totaled $74.5 million at June 30,
2005, compared to $61.7 million at March 31, 2005. Cash used net of cash
acquired in the April 2005 acquisition of American Pacific Bank was $14.7
million.
Loans held for sale totaled $159,000 at June 30, 2005, compared to $510,000 at
March 31, 2005. The balance of loans held for sale can vary significantly
from period to period reflecting the interest rate environment, loan demand by
borrowers, and loan origination for sale by mortgage brokers versus loan
origination for the Company's loan portfolio. The Company originates
fixed-rate residential loans for sale in the secondary market and retains the
related loan servicing rights. 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. The Company continues to service the loans it
sells, maintaining the customer relationship and generating ongoing
non-interest income.
Loans receivable, net, totaled $561.0 million at June 30, 2005, compared to
$429.4 million at March 31, 2005, an increase of $131.6 million. This
increase was largely due to the acquisition of $119.5 million in loans in the
American Pacific Bank transaction. Commercial real estate loans increased
$112.2 million, due primarily to American Pacific Bank 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.
Investment securities available-for-sale totaled $24.1 million at June 30,
2005, compared to $22.9 million at March 31, 2005. Investments of $1.4
million were acquired as a result of the American Pacific Bank transaction.
17
Mortgage-backed securities available-for-sale totaled $10.8 million at June
30, 2005, compared to $11.6 million at March 31, 2005.
Prepaid expenses and other assets were $2.2 million at June 30, 2005, compared
to $1.5 million at March 31, 2005. The $628,000 increase is due primarily to
two-year non-compete agreements entered into with executives of American
Pacific Bank.
FHLB stock totaled $7.4 million at June 30, 2005. This reflects an increase
of $1.2 million as a result of the acquisition of American Pacific Bank.
Premises and equipment, net totaled $9.3 million at June 30, 2005 compared to
$8.4 million at March 31, 2005. Fixed assets of $1.1 million were acquired
from American Pacific Bank.
Goodwill increased from $9.3 million at March 31, 2005 to $26.4 million at
June 30, 2005, an increase of $17.1 million. The increase in goodwill arose
as a result of the American Pacific Bank acquisition. As of June 30, 2005,
there have been no events or changes in circumstances that would indicate a
potential impairment.
Core deposit intangible increased $526,000 due to the American Pacific Bank
transaction, offset by amortization of $49,000, for a balance of $1.1 million
at June 30, 2005.
Bank owned life insurance increased to $12.7 million at June 30, 2005, from
$12.6 million at March 31, 2005, reflecting an increase in cash surrender
value of the policies.
Deposit accounts totaled $582.8 million at June 30, 2005, compared to $456.9
million at March 31, 2005. The increase is a combination of $79.7 million in
deposits acquired in the American Pacific Bank transaction, and organic
growth. The average outstanding balance of checking accounts and money market
accounts ("transaction accounts") increased to $340.8 million for the quarter
ended June 30, 2005, compared to $289.1 million for the quarter ended March
31, 2005. Transaction accounts represented 64.8% and 66.9% of average total
outstanding balance of deposits for the quarters ended June 30, 2005 and March
31, 2005, respectively. The average outstanding balance of certificates of
deposit increased $42.2 million to $185.3 million, compared to $143.1 million
for the quarter ended March 31, 2005. All categories of deposits reflect
increases as a result of the American Pacific Bank acquisition.
FHLB advances totaled $58.9 million at June 30, 2005 and $40.0 million at
March 31, 2005. The $18.9 million increase was the net effect of $29.9
million in advances acquired in the American Pacific Bank transaction, offset
by repayments of $11.0 million.
Shareholders' Equity and Capital Resources
Shareholders' equity increased $17.9 million to $87.4 million at June 30, 2005
from $69.5 million at March 31, 2005. The increase was primarily a result of
the $16.7 million of common stock issued in the APB acquisition. An increase
in equity of $1.8 million due to earnings for the quarter was partially offset
by cash dividends paid to shareholders of $958,000. Exercise of stock
options, earned ESOP shares and the tax effect of SFAS No. 115 adjustment to
securities comprised the remaining $300,000 increase
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 in accordance with 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 capital to
risk-weighted assets, Tier I capital to risk- weighted assets, 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 June 30, 2005.
As of June 30, 2005, the most recent notification from the OTS categorized the
Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain
18
minimum total capital and Tier I capital to risk-weighted assets, core capital
to total assets and tangible capital to tangible assets (set forth in the
table below). There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 2005
Total Capital:
(To Risk-Weighted
Assets) $63,616 10.62% $47,923 8.0% $59,904 10.0%
Tier I Capital:
(To Risk-Weighted
Assets) 57,090 9.53 23,961 4.0 35,942 6.0
Tier I Capital:
(To Adjusted
Tangible
Assets) 57,090 8.08 21,206 3.0 35,344 5.0
Tangible Capital:
(To Tangible
Assets) 57,090 8.08 10,603 1.5 N/A N/A
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2005
Total Capital:
(To Risk Weighted
Assets) $57,397 12.37% $37,116 8.0% $46,396 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 53,002 11.42 18,558 4.0 27,837 6.0
Tier I Capital:
(To Adjusted
Tangible
Assets) 53,002 9.54 16,664 3.0 27,773 5.0
Tangible Capital:
(To Tangible
Assets) 53,002 9.54 8,332 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 June 30, 2005 (in thousands):
Equity $ 84,640
Net unrealized securities loss 48
Goodwill and other intangibles (27,552)
Servicing asset (46)
---------
Tangible capital 57,090
General valuation allowance 6,526
---------
Total capital $ 63,616
=========
Liquidity
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, proceeds from the sale of loans,
maturing securities and FHLB advances. While maturities and scheduled
19
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, satisfy other financial commitments and take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At June 30, 2005,
cash totaled $74.5 million, or 10.1%, of total assets. The Bank has a line of
credit with the FHLB of Seattle in the amount of 30% of total assets to the
extent the Bank provides qualifying collateral and holds sufficient FHLB
stock. At June 30, 2005, the Bank had $58.9 million in outstanding advances
from the FHLB of Seattle under an available credit facility of $220.2 million,
limited to available collateral. The Bank also had a $10.0 million line of
credit available from Pacific Coast Bankers Bank and a $5.0 million borrowing
capability at the Federal Reserve discount window at June 30, 2005. The Bank
had no borrowings outstanding under either of these credit arrangements at
June 30, 2005.
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.
Off-Balance Sheet Arrangements and Other Contractual Obligations
Through the normal course of operations, the Company enters into certain
contractual obligations and other commitments. Obligations generally relate
to funding of operations through deposits and borrowings as well as leases for
premises. Commitments generally relate to lending operations.
The Company has obligations under long-term operating leases, principally for
building space and land. Lease terms generally cover a five-year period, with
options to extend, and are non-cancelable.
The Company has commitments to originate fixed and variable rate mortgage
loans to customers. Because some commitments expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Undisbursed loan funds and unused lines of credit include funds
not disbursed, but committed to construction projects and home equity and
commercial lines of credit. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer
to a third party.
For further information regarding the Company's off-balance sheet arrangements
and other contractual obligations, see Note 15 of the Notes to Consolidated
Financial Statements.
Asset Quality
The allowance for loan losses was $6.5 million at June 30, 2005 and $4.4
million at March 31, 2005. Management believes the allowance for loan losses
at June 30, 2005 is adequate to cover probable credit losses existing in the
loan portfolio at that date. No assurances, however, can be given that future
additions to the allowance for loan losses will not be necessary. 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. Pertinent factors considered include size and composition of the
portfolio, actual loss experience, industry trends and data, current economic
conditions, and detailed analysis of individual loans. The appropriate
allowance level is estimated based upon factors and trends identified by
management at the time the consolidated financial statements are prepared.
Commercial loans are considered to involve a higher degree of credit risk than
one to four-family residential loans, and tend to be more vulnerable to
adverse conditions in the real estate market and deteriorating economic
conditions.
Non-performing assets were $2.4 million, or 0.33% of total assets at June 30,
2005, compared with $726,000 or 0.13% of total assets at March 31, 2005. At
June 30, 2005 the APB acquisition had no impact on the $2.4 million of non-
performing assets. The $1.9 million balance of non-accrual loans is composed
of one residential construction loan, two commercial real estate loans, one
land loan, two consumer loans, and nine commercial loans. The following table
sets forth information regarding the Company's non-performing assets.
June 30, 2005 March 31, 2005
------------- ---------------
(dollars in thousands)
Loans accounted for on a nonaccrual
basis:
Residential real estate $ 280 $ -
Commercial real estate 391 198
Land 43 -
Commercial 1,033 97
Consumer 176 161
-------- --------
Total 1,923 456
-------- --------
Accruing loans which are
contractually past due
90 days or more 497 -
-------- --------
20
Total of nonaccrual and
90 days past due loans 2,420 456
Real estate owned (net) - 270
-------- ---------
Total non-performing assets $ 2,420 $ 726
======== =========
Total loans delinquent 90 days
or more to net loans 0.43% 0.10%
Total loans delinquent 90 days or
more to total assets 0.33 0.08
Total non-performing assets
to total assets 0.33 0.13
Comparison of Operating Results for the Three Months Ended June 30, 2005 and
2004
Financial Highlights. Net income for the three months ended June 30, 2005 was
$1.8 million, or $0.33 per basic share ($0.33 per diluted share), compared to
net income of $2.2 million, or $0.46 per basic share ($0.45 per diluted share)
for the three months ended June 30, 2004. Net interest income after provision
for loan losses increased $1.2 million compared to the same quarter last year.
Non-interest income increased in the categories of fees and service charges
and asset management fees. The prior year quarter included an $828,000
pre-tax gain on the sale and leaseback of the Company's Camas branch and
operations center. The Company's operating results also reflect a $1.3
million increase in other non-interest expenses due to the acquisition of APB
in April 2005. Excluding the $828,000 pre-tax gain on the sale of the branch,
net income for the three months ended June 30, 2004 was $1.7 million, or $0.34
per basic share and diluted share.
The annualized return on average assets was 1.09% for the three months ended
June 30, 2005, compared to 1.74% for the three months ended June 30, 2004.
For the same periods, the annualized return on average common equity was 8.89%
compared to 13.32%. The efficiency ratio (excluding intangible asset
amortization), which is defined as the percentage of non-interest expenses to
total revenue, was 64.77% for the first quarter of fiscal 2006 as compared to
57.54% for the three months ended June 30, 2004.
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 on sales of assets, bank- owned life
insurance income 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.
Net interest income for the three months ended June 30, 2005 was $7.1 million,
representing a $1.5 million, or 27.8% increase, compared to the same prior
year period. Average interest earning assets increased 32.9% due to organic
growth and as a result of the American Pacific Bank acquisition. The increase
in interest-earning assets was accompanied by a 34.6% increase in average
balances of interest-bearing liabilities to $505.6 million. Growth in
interest bearing deposits came from natural growth and deposits acquired from
American Pacific Bank. Average interest-earning assets to average
interest-bearing liabilities totaled 120.4% for the three-month period ended
June 30, 2005 compared to 122.0% in the same prior year period.
Interest Income. Interest income totaled $10.2 million and $7.1 million, for
the three months ended June 30, 2005 and 2004, respectively. This improvement
was related to a $151.0 million or 32.9% increase in the average balance
21
of interest-earning assets to $609.0 million. The American Pacific Bank
acquisition resulted in an increase of $120.0 million in interest-earning
assets (see Note 3 of the Notes to Consolidated Financial Statements). The
yield on interest-earning assets was 6.76% for the three months ended June 30,
2005 compared to 6.25% for the same three months ended June 30, 2004. During
the past year, the Federal Reserve Board has increased federal funds interest
rates nine times, resulting in improved yields on both loans and investments.
Riverview did not receive a dividend on FHLB of Seattle stock during the
quarter ended June 30, 2005 compared to dividends of $44,000 during the same
quarter a year ago. The FHLB of Seattle has been operating under a regulatory
directive since May 2005 and it has announced that all future dividends will
be suspended until its financial position and
performance improves.
Interest Expense. Interest expense was $3.1 million for the three months ended
June 30, 2005, compared to $1.5 million for the same period in 2004. Average
interest-bearing liabilities increased $130.0 million to $505.6 million for
the three months ended June 30, 2005 compared to $375.6 million for the same
prior year period. This increase includes the effect of $72.0 million in
interest bearing deposits acquired from APB. The change in interest expense
reflects the higher rates of interest paid on deposits and FHLB borrowings due
to Federal Reserve Board federal funds rate increases during the last year.
The weighted average interest rate on total deposits increased to 2.21% for
the three months ended June 30, 2005 from 1.25% for the same period in the
prior year. The weighted average cost of FHLB borrowings decreased to 4.61%
for the three months June 30, 2005 from 4.84% for same period in the prior
year. An additional $29.9 million in FHLB borrowings was acquired from
American Pacific Bank.
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.
22
Quarter Ended June 30,
---------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning
assets:
Mortgage loans $434,753 $ 8,009 7.39% $300,583 $ 5,345 7.13%
Non-mortgage loans 98,269 1,588 6.48 89,143 1,281 5.76
-------- ----- ----- -------- ------ -----
Total net
loans(1) 533,022 9,597 7.22 389,726 6,626 6.82
Mortgage-backed
securities (2) 13,630 145 4.27 16,184 160 3.97
Investment
securities (2) 23,884 290 4.87 32,739 278 3.41
Daily interest-
bearing assets 31,379 225 2.88 13,695 31 0.91
Other earning
assets 7,058 - 0.00 6,034 44 2.92
-------- ----- ----- -------- ------ -----
Total interest-
earning assets 608,973 10,257 6.76 458,378 7,139 6.25
Non-interest-earning
assets:
Office properties
and equipment, net 8,691 9,652
Other non-interest-
earning assets 54,500 39,783
-------- --------
Total assets $672,164 $507,813
======== ========
Interest-bearing
liabilities:
Regular savings
accounts $ 37,713 51 0.54 $ 29,866 41 0.55
NOW accounts 124,369 402 1.30 105,131 197 0.75
Money market
accounts 101,139 547 2.17 69,013 164 0.95
Certificates
of deposit 185,308 1,471 3.18 130,484 641 1.97
-------- ----- ----- -------- ------ -----
Total deposits 448,529 2,471 2.21 334,494 1,043 1.25
Other interest-
bearing
liabilities 57,052 656 4.61 41,100 496 4.84
-------- ----- ----- -------- ------ -----
Total interest-
bearing
liabilities 505,581 3,127 2.48 375,594 1,539 1.64
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 77,587 60,657
Other liabilities 6,867 5,342
-------- --------
Total
liabilities 590,035 441,593
Shareholders'
equity 82,129 66,220
-------- --------
Total liabilities
and shareholders'
equity $672,164 $507,813
======== ========
Net interest income $ 7,130 $ 5,600
======= =======
Interest rate spread 4.28% 4.61%
====== ======
Net interest margin 4.70% 4.90%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 120.45% 122.04%
====== ======
Tax Equivalent
Adjustment (3) $ 32 $ 46
======= ========
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available
for sale, historical cost balances were utilized; therefore, the yield
information does not give effect to changes in fair value that are
reflected as a component of shareholders' equity.
(3) Tax-equivalent adjustment relates to non-taxable investment interest
income and preferred equity securities dividend income. The federal
statutory tax rate was 35% and 34% for the three months ended June 30,
2005 and 2004, respectively.
23
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company for the quarter ended June 30, 2005.
Variances that were immaterial have been allocated based upon the percentage
relationship of changes in volume and changes in rate to the total net change.
Three Months Ended June 30,
----------------------------------
2005 vs 2004
----------------------------------
Increase (Decrease)
Due to
------------------- Total
Increase
Volume Rate (Decrease)
------ ------- ----------
(In thousands)
Interest Income:
Mortgage loans $ 2,464 $ 200 $ 2,664
Non-mortgage loans 138 169 307
Mortgage-backed securities (26) 11 (15)
Investment securities (1) (87) 99 12
Daily interest-bearing 73 121 194
Other earning assets 6 (50) (44)
------- ------ -------
Total interest income 2,568 550 3,118
------- ------ -------
Interest Expense:
Regular savings accounts 11 (1) 10
NOW accounts 40 165 205
Money market accounts 102 281 383
Certificates of deposit 337 493 830
Other interest-bearing
liabilities 185 (25) 160
------- ------ -------
Total interest expense 675 913 1,588
------- ------ -------
Net interest income (1) $ 1,893 $ (363) $ 1,530
======= ====== =======
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the three months
ended June 30, 2005 was $450,000, compared to $140,000 for the same period in
the prior year. Net charge-offs for the current period were $207,000,
compared to $132,000 for the same period last year. The ratio of allowance for
loan losses to total net loans was 1.15% at June 30, 2005, compared to 1.16%
at June 30, 2004. The acquisition of American Pacific Bank added $1.9 million
to the allowance for loan losses. Annualized net charge-offs to average net
loans for the three-month period ended June 30, 2005 totaled to 0.16% compared
to 0.14% for the same period in the prior year. During the quarter ended June
30, 2005, management evaluated known and inherent risks in the loan portfolio
and concluded there was increased credit risk in the commercial real estate
loan portfolio. Based on the analysis, changes were made in the estimation,
assumptions and allocation of the allowance for loan losses. The estimated
commercial real estate loan loss rate was increased by 0.125% to 0.813% to
cover the probable losses inherent in the commercial real estate loan
portfolio. Management considered the allowance for loan losses at June 30,
2005 to be adequate to cover probable losses inherent in the loan portfolio
based on the assessment of various factors affecting the loan portfolio.
Non-Interest Income. Non-interest income decreased $453,000 or 17.2% for the
quarter ended June 30, 2005 to $2.2 million compared to $2.6 million for the
quarter ended June 30, 2004. In the prior year quarter, an $828,000 pre-tax
gain on the sale and leaseback of the Camas branch and operations center
facility significantly increased non-interest income. The decrease from prior
year due to the gain on sale was partially offset by increases in fees and
service charges for the quarter ended June 30, 2005 of $316,000. Asset
management fees from fiduciary services also increased, by $92,000. Asset
management services income was $364,000 for the quarter ended June 30, 2005,
compared to $272,000 for the quarter ended June 30, 2004. RAM Corp. had
$202.0 million in total assets under management at June 30, 2005, compared to
$141.5 million at June 30, 2004.
In the current quarter a greater portion of the mortgage refinance activity
was in brokered mortgage loans which resulted in gains on the sale of loans
decreasing $49,000 for the quarter ended June 30, 2005 to $126,000 compared to
$175,000 for the quarter ended June 30, 2004. Loan servicing income for the
quarter ended June 30, 2005 includes
24
a $10,000 write-up to the market value of mortgage servicing rights as
compared to a $16,000 write-up in market value of mortgage servicing rights
for the same prior year period. For the same periods, loan-servicing income
also included amortization of mortgage servicing rights of $61,000 and
$79,000, respectively. The decrease in amortization is due to the reduction
of early payoffs of loans sold with servicing retained.
Non-Interest Expense. Non-interest expense increased $1.3 million, or 26.2%,
to $6.1 million for the three-month period ended June 30, 2005, compared to
$4.8 million for the three months ended June 30, 2004. One measure of a bank's
ability to contain non-interest expense is the efficiency ratio, which is
calculated by dividing total non-interest expense (less intangible asset
amortization) by the sum of net interest income plus non-interest income (less
intangible asset amortization and lower of cost or market adjustments). The
Company's efficiency ratio excluding intangible asset amortization and lower
cost or market adjustments was 64.77% for the three months ended June 30,
2005, compared to 57.54% for the same period in the prior year. Excluding the
gain on the sale and leaseback of the Company's Camas branch, the efficiency
ratio for the three months ended June 20, 2004 was 63.95%.
The principal component of the Company's non-interest expense is salaries and
employee benefits. For the three months ended June 30, 2005, salaries and
employee benefits, which include mortgage broker commission compensation, was
$3.4 million, a 28.5% increase over the three months ended June 30, 2004 total
of $2.6 million. The majority of the increase is due to the acquisition of
American Pacific Bank on April 23, 2005 which added several commercial lenders
and branch personnel. This acquisition also contributed to increases in
occupancy and depreciation, data processing, telecommunication and other
expense.
The acquisition of American Pacific Bank and its $79.7 million in deposits
created a $526,000 core deposit intangible ("CDI"), representing the excess of
cost over fair market value of acquired deposits. The acquisition of Today's
Bank in July 2003 created CDI of $820,000. CDI resulting from a 1995
acquisition was fully amortized during the three months ended June 30, 2004.
CDI is amortized over a ten-year life using an accelerated amortization
method. The amortization expense was $49,000 for the three months ended June
30, 2005 compared to $82,000 for the prior year period.
Other non-interest expense for the three months ended June 30, 2005 was
$673,000, a 41.1% increase over the $477,000 for the three months ended June
30, 2004. The majority of the increase over the prior period was due to the
acquisition of American Pacific Bank, including amortization expense related
to non-compete agreements of $47,000. Increases in printing costs, office
supplies, demand account supplies, postage and courier and bank service
charges were also attributable to the acquisition. The Bank also recorded
$60,000 in deconversion expense related to American Pacific Bank's credit card
portfolio which the Bank plans to sell in the second quarter of fiscal year
2006. The prior year quarter included a loss of $107,000 to write off the
remaining net book value of the leasehold improvements related to a Today's
Bank branch, and a $25,000 write down of other real estate owned to its net
realizable value.
Provision for Income Taxes. Provision for income taxes was $918,000 for the
three months ended June 30, 2005, compared to $1.0 million for the three
months ended June 30, 2004. The effective tax rate for three months ended June
30, 2005 was 33.0% compared to 31.8% for the three months ended June 30, 2004.
The effective tax rate increased from prior quarter primarily as a result of
state income taxes related to Oregon operations. The Bank has three branches
in Oregon as a result of acquiring American Pacific Bank. The Company's
overall effective tax rate at June 30, 2005 takes into account Oregon
apportionment factors for property, payroll and sales.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's Asset Liability Committee is responsible for implementing the
interest rate risk policy, which sets forth limits established by the Board of
Directors of acceptable changes in net interest income, and the portfolio
value from changes in interest rates. The OTS defines net portfolio value as
the present value of expected cash flows from existing assets minus the
present value of expected cash flows from existing liabilities plus the
present value of expected cash flows from existing off-balance sheet
contracts. The Asset Liability Committee reviews, among other items, economic
conditions, the interest rate outlook, the demand for loans, the availability
of deposits and borrowings, and the Company's current operating results,
liquidity, capital and interest rate exposure. In addition, the Asset
Liability Committee monitors asset and liability characteristics on a regular
basis and performs analyses to determine the potential impact of various
business strategies in controlling interest rate risk and other potential
impact of these strategies upon future earnings under various interest rate
scenarios. Based on these reviews, the Asset Liability Committee formulates a
strategy that is intended to implement the objectives contained in its
business plan
25
without exceeding limits set forth in the Company's interest rate risk policy
for losses in net interest income and net portfolio value.
There has not been any material change in the market risk disclosures
contained in the Company's Annual Report on Form 10-K for the year ended March
31, 2005.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Rule
13(a)-15(e) of the Securities Exchange Act of 1934) 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 as of the end of the period covered by this 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 ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Securities and Exchange
Act of 1934 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 SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2005,
the Company did not make any significant changes in, nor were any corrective
actions required, regarding its internal controls or other factors that could
materially affect these controls. The Company intends to continually review
and evaluate the design and effectiveness of its disclosure controls and
procedures and to improve its controls and procedures over time and to correct
any deficiencies that it may discover in the future. The goal is to ensure
that senior management has timely access to all material financial and
non-financial information concerning the Company's business. While the
Company believes the present design of its disclosure controls and procedures
is effective to achieve its goal, future events affecting its business may
cause the Company to modify its disclosure controls and procedures.
26
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
----------------------------------------------------------------------
The following table summarizes the Company's share repurchases for the
quarter ended June 30, 2005.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Total Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased (1) per Share Program Program(2)
------ ------------- --------- ------- ----------
April 1 - April 30, 2005 - $ - - -
May 1 - May 31, 2005 - - - -
June 1 - June 30, 2005 - - - -
Total - $ - - 133,204
======= ======= ======= =======
(1) Of these shares, no shares were purchased other than through a
publicly announced program.
(2) In September 2002, the Company announced a stock repurchase of up
to 5%, or 214,000 shares of its outstanding common stock. This
program expires when all shares under the plan have been
repurchased. On July 21, 2005 the Company announced a stock
repurchase of up to 290,248 shares of its outstanding common stock,
representing approximately 5% of outstanding shares.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibits:
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
4 Form of Certificate of Common Stock of the Registrant (1)
10.1 Employment Agreement with Patrick Sheaffer (2)
10.2 Employment Agreement with Ronald A. Wysaske (2)
10.3 Severance Agreement with Karen Nelson (2)
10.4 Severance Agreement with John A. Karas (3)
10.5 Employee Severance Compensation Plan (2)
27
10.6 Employee Stock Ownership Plan (4)
10.7 Management Recognition and Development Plan (5)
10.8 1998 Stock Option Plan (5)
10.9 1993 Stock Option and Incentive Plan (5)
10.10 2003 Stock Option Plan (6)
31.1 Certifications of the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
31.2 Certifications of the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
32 Certifications of the Chief Executive Officer and
Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
(1) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (Registration No. 333- 30203), and incorporated herein by
reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997, and incorporated
herein by reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the year ended March 31, 2002, and incorporated herein by
reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the year ended March 31, 1998, and incorporated herein by
reference.
(5) Filed on October 23, 1998, as an exhibit to the Registrant's
Registration Statement on Form S-8, and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Definitive Annual Meeting
Proxy Statement for the 2003 Annual Meeting of Shareholders, and
incorporated herein by reference.
28
SIGNATURES
Pursuant to the requirements 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.
By: /s/ Patrick Sheaffer By: /s/ Ron Dobyns
------------------------- ------------------------
Patrick Sheaffer Ron Dobyns
Chairman of the Board Senior Vice President
Chief Executive Officer (Chief Financial and Accounting
(Principal Executive Officer) Officer)
Date: August 9, 2005 Date: August 9, 2005
29
Exhibit 31.1
- ------------
Section 302 Certification
I, Patrick Sheaffer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13(a)-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting
Date: August 9, 2005
/S/ Patrick Sheaffer
------------------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
30
Exhibit 31.2
- ------------
Section 302 Certification
I, Ron Dobyns, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13(a)-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting
Date: August 9, 2005
/S/ Ron Dobyns
----------------------------
Ron Dobyns
Chief Financial Officer
31
Exhibit 32
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 hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q 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, Riverview Bancorp, Inc's financial condition and
results of operations.
/S/ Patrick Sheaffer /S/ Ron Dobyns
---------------------- ----------------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: August 9, 2005 Dated: August 9, 2005
32