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 December 31, 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Check one:
Large accelerated filer( ) Accelerated filer(X) Non-accelerated filer( )
Indicate by check mark whether the registrant is a shell corporation (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
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 January 31, 2006.
Form 10-Q
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
--------------------- ------
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets
as of December 31, 2005 and March 31, 2005 1
Consolidated Statements of Income
Three and Nine Months Ended December 31, 2005 and 2004 2
Consolidated Statements of Shareholders' Equity
Year Ended March 31, 2005 and the
Nine Months Ended December 31, 2005 3
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended December 31, 2005 and 2004 4
Consolidated Statements of Cash Flows
Nine Months Ended December 31, 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 14-28
Item 3: Quantitative and Qualitative Disclosures About Market Risk 29
Item 4: Controls and Procedures 29-30
Part II. Other Information 31-32
-----------------
Item 1: Legal Proceedings
Item 2: Unregistered Sale of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits
SIGNATURES 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND MARCH 31, 2005
(In thousands, except share and DECEMBER 31, MARCH 31,
per share data)(Unaudited) 2005 2005
- -----------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $8,338
and $45,501) $ 34,451 $ 61,719
Loans held for sale - 510
Investment securities available for sale, at fair
value (amortized cost of $24,124 and $22,993) 24,011 22,945
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $2,013 and $2,402) 1,991 2,343
Mortgage-backed securities available for sale, at
fair value(amortized cost of $9,044 and $11,756) 8,791 11,619
Loans receivable (net of allowance for loan losses
of $7,050 and $4,395) 599,634 429,449
Real estate owned - 270
Prepaid expenses and other assets 2,103 1,538
Accrued interest receivable 3,324 2,151
Federal Home Loan Bank stock, at cost 7,350 6,143
Premises and equipment, net 14,648 8,391
Deferred income taxes, net 2,450 2,624
Mortgage servicing intangible, net 403 470
Goodwill 26,058 9,214
Core deposit intangible, net 948 578
Bank owned life insurance 12,968 12,607
------- -------
TOTAL ASSETS $ 739,130 $ 572,571
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits accounts $ 592,208 $ 456,878
Accrued expenses and other liabilities 8,559 5,858
Advanced payments by borrowers for taxes and
insurance 146 313
Federal Home Loan Bank advances 40,071 40,000
Junior subordinated debenture 7,217 -
------- -------
Total liabilities 648,201 503,049
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:
December 31, 2005 - 5,811,940 issued,
5,811,936 outstanding 58 50
March 31, 2005 - 5,015,753 issued,
5,015,749 outstanding
Additional paid-in capital 58,225 41,112
Retained earnings 34,125 29,874
Unearned shares issued to employee stock
ownership trust (1,237) (1,392)
Accumulated other comprehensive loss (242) (122)
------- -------
Total shareholders' equity 90,929 69,522
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 739,130 $ 572,571
======= =======
See notes to consolidated financial statements.
1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(In thousands, except share and December 31, December 31,
per share data)(Unaudited) 2005 2004 2005 2004
- ----------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $11,783 $ 6,883 $32,390 $20,506
Interest on investment securities
- taxable 211 162 592 498
Interest on investment securities
- non-taxable 42 - 128 -
Interest on mortgage-backed securities 128 158 411 482
Other interest and dividends 126 293 630 633
------ ------ ------ ------
Total interest income 12,290 7,496 34,151 22,119
------ ------ ------ ------
INTEREST EXPENSE:
Interest on deposits 3,290 1,438 8,820 3,741
Interest on borrowings 457 509 1,595 1,509
------ ------ ------ ------
Total interest expense 3,747 1,947 10,415 5,250
------ ------ ------ ------
Net interest income 8,543 5,549 23,736 16,869
Less provision for loan losses 400 70 1,300 260
Net interest income after provision for ------ ------ ------ ------
loan losses 8,143 5,479 22,436 16,609
------ ------ ------ ------
NON-INTEREST INCOME:
Fees and service charges 1,460 1,127 4,544 3,439
Asset management fees 378 286 1,084 815
Gain on sale of loans held for sale 81 97 284 409
Gain on sale of real estate owned - - 21 -
Loss on impairment of securities - (1,349) - (1,349)
Loan servicing income 49 11 68 45
Gain on sale of land and fixed assets 2 - - 829
Gain on sale of credit card portfolio 7 - 311 -
Bank owned life insurance 119 124 361 400
Other 47 27 139 73
------ ------ ------ ------
Total non-interest income 2,143 323 6,812 4,661
------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,681 2,796 10,521 8,029
Occupancy and depreciation 954 749 2,640 2,261
Data processing 335 254 1,073 740
Amortization of core deposit intangible 53 33 157 148
Advertising and marketing expense 160 165 697 638
Federal Deposit Insurance Corporation
insurance premium 19 14 51 44
State and local taxes 136 116 419 391
Telecommunications 117 79 279 213
Professional fees 248 143 1,000 395
Other 445 394 1,668 1,330
------ ------ ------ ------
Total non-interest expense 6,148 4,743 18,505 14,189
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 4,138 1,059 10,743 7,081
PROVISION FOR INCOME TAXES 1,390 299 3,612 2,220
------ ------ ------ ------
NET INCOME $ 2,748 $ 760 $ 7,131 $ 4,861
====== ====== ====== ======
Earnings per common share:
Basic $ 0.49 $ 0.16 $ 1.28 $ 1.01
Diluted 0.48 0.16 1.26 1.00
Weighted average number of shares
outstanding:
Basic 5,661,324 4,824,463 5,589,820 4,809,201
Diluted 5,731,472 4,899,840 5,657,012 4,883,538
Cash Dividends Per Share $ 0.17 $ 0.155 $ 0.51 $ 0.465
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 NINE MONTHS ENDED DECEMBER 31, 2005
Unearned Accumu-
Shares lated
Issued to Other
Employee Compre-
Common Stock Additional Stock hensive
(In thousands, except share Paid-In Retained Ownership Income
data)(Unaudited) 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 classification
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 ($0.51 per share) - - - (2,880) - - (2,880)
Exercise of stock options 7,822 - 107 - - - 107
Stock issued in connection with
acquisition 788,365 8 16,706 - - - 16,714
Earned ESOP shares - - 245 - 155 - 400
Tax benefit, stock option 55 55
--------- ---- ------ ------ ------ ----- ------
5,811,936 58 58,225 26,994 (1,237) (122) 83,918
Comprehensive income:
Net income - - - 7,131 - - 7,131
Other comprehensive income:
Unrealized holding loss on
securities of $120 (net of $62
tax effect) - - - - - (120) (120)
-----
Total comprehensive income - - - - - - 7,011
--------- ---- ------ ------ ------ ----- ------
Balance December 31, 2005 5,811,936 $ 58 $58,225 $34,125 $(1,237) $ (242) $90,929
========= ==== ====== ====== ====== ===== ======
See notes to consolidated financial statements.
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Nine Months
Ended Ended
(In thousands) (Unaudited) December 31, September 30,
- -----------------------------------------------------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Net income $ 2,748 $ 760 $ 7,131 $ 4,861
Other comprehensive income:
Change in fair value of
securities available for sale,
net of tax (141) (276) (120) (994)
------ ------ ------ ------
Total comprehensive income $ 2,607 $ 484 $ 7,011 $ 3,867
====== ====== ====== ======
See notes to consolidated financial statements.
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
(In thousands) (Unaudited) 2005 2004
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,131 $ 4,861
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,341 1,171
Mortgage servicing rights valuation adjustment (26) (22)
Provision for loan losses 1,300 260
Provision (benefit) for deferred income taxes 142 (38)
Noncash expense related to ESOP 400 389
Noncash loss on impairment of securities - 1,349
Increase in deferred loan origination fees, net of
amortization 722 172
Federal Home Loan Bank stock dividend - (85)
Origination of loans held for sale (13,563) (18,152)
Proceeds from sales of loans held for sale 14,112 18,478
Net gain on loans held for sale, sale of real estate
owned, mortgage-backed securities, investment
securities and premises and equipment (286) (1,040)
Income from bank owned life insurance (361) -
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and other assets (498) 1,835
Decrease in accrued interest receivable (638) (88)
Increase (decrease) in accrued expenses and other
liabilities 2,178 (880)
------ ------
Net cash provided by operating activities 11,954 8,210
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (489,920) (296,382)
Principal repayments/refinance on loans 437,436 279,532
Proceeds from call, maturity, or sale of investment
securities available for sale 5,250 2,000
Principal repayments on investment securities available
for sale 37 75
Purchase of investment securities available for sale (4,996) -
Purchase of mortgage-backed securities available for sale - (5,000)
Principal repayments on mortgage-backed securities
available for sale 2,712 2,769
Principal repayments on mortgage-backed securities held
to maturity 351 110
Purchase of first mortgage or improvement of REO - (47)
Purchase of premises and equipment (5,870) (348)
Acquisition, net of cash received (14,663) -
Proceeds from sale of real estate owned and
premises and equipment 275 122
------ ------
Net cash used in investing activities (69,388) (17,169)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 55,576 18,534
Dividends paid (2,667) (2,155)
Proceeds from Federal Home Loan Bank advances 32,100 15,100
Repayment of Federal Home Loan Bank advances (62,000) (15,100)
Proceeds from subordinate debenture 7,217
Net decrease in advance payments by borrowers (167) (254)
Proceeds from exercise of stock options 107 350
------ ------
Net cash provided by financing activities 30,166 16,475
------ ------
NET (DECREASE) INCREASE IN CASH (27,268) 7,516
CASH, BEGINNING OF PERIOD 61,719 47,907
------ ------
CASH, END OF PERIOD $ 34,451 $ 55,423
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 10,031 $ 5,290
Income taxes 3,369 2,275
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other liabilities $ 962 $ 748
Receivable from sale and leaseback of premises - 2,391
Financed sale of real estate owned - 578
Fair value adjustment to securities available for sale (181) (159)
Increased construction in process in accounts payable 66 -
Income tax effect related to fair value adjustment 62 54
Noncash loss on impairment of securities - 1,349
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 nine months ended December 31, 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"), a commercial bank located in Portland, Oregon. The cost to
acquire APB's 2,804,618 shares of common stock was a 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. The resulting 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 17,140
Other, net 1,766
-------
Total assets 144,898
Liabilities
-----------
Deposits (79,755)
Borrowings (29,882)
Other liabilities (452)
-------
Total liabilities (110,089)
Net acquisition costs $ 34,809
Less:
Stock issued in acquisition (16,713)
Cash acquired (3,433)
Cash used in acquisition, net -------
of cash acquired $ 14,663
=======
6
Subsequent to the acquisition, certain of these assets were adjusted as part
of the allocation of the purchase price. Additional adjustments may be made
to the purchase price allocation, specifically related to other assets, taxes
and compensation adjustments. At December 31, 2005, the goodwill asset
recorded in connection with the APB acquisition was $16.8 million.
The following unaudited pro forma financial information for the three and nine
months ended December 31, 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.
Three Months Nine Months
Ended Ended
(In thousands, except per share data) December 31, December 31,
---------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Net interest income $ 8,543 $ 6,825 $23,382 $20,765
Non-interest income 2,143 1,829 6,799 5,621
Non-interest expense 6,148 5,920 19,044 18,847
Net income $ 2,748 $ 912 $ 6,544 $ 4,009
Earnings per common share:
Basic $ 0.49 $ 0.16 $ 1.28 $ 0.72
Diluted 0.48 0.16 1.26 0.71
4. STOCK-BASED COMPENSATION
At December 31, 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 Nine Months
Ended Ended
December 31, December 31,
---------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Net income (in thousands):
As reported $2,748 $760 $7,131 $4,861
Deduct: Total stock based compensation
expense determined under fair value based
method for all options, net of related
tax benefit (5) (23) (111) (70)
------ ------ ------ ------
Pro forma 2,743 737 7,020 4,791
Earnings per common share - basic:
As reported $ 0.49 $ 0.16 $ 1.28 $ 1.01
Pro forma 0.48 0.15 1.26 1.00
Earnings per common share - fully diluted:
As reported $ 0.48 $ 0.16 $ 1.26 $ 1.00
Pro forma 0.48 0.15 1.24 0.98
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.
7
Three Months Nine Months
Ended Ended
December 31, December 31,
------------------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Basic EPS computation:
Numerator-net income $2,748,000 $ 760,000 $7,131,000 $4,861,000
Denominator-weighted average
common shares outstanding 5,661,324 4,824,731 5,589,820 4,809,290
Basic EPS $ 0 .49 $ 0 .16 $ 1.28 $ 1.01
========= ======== ========= =========
Diluted EPS computation:
Numerator-net income $2,748,000 $ 760,000 7,131,000 $4,861,000
Denominator-weighted average
common shares outstanding 5,661,324 4,824,731 5,589,820 4,809,290
Effect of dilutive stock options 70,148 75,377 67,192 74,338
--------- --------- --------- ---------
Weighted average common shares
and common stock equivalents 5,731,472 4,900,108 5,657,012 4,883,628
Diluted EPS $ 0.48 $ 0.16 $ 1.26 $ 1.00
========= ======== ========= =========
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
-------- --------- --------- -------
December 31, 2005
-----------------
Trust Preferred $ 5,000 $ 38 $ - $ 5,038
Agency securities 15,230 - (214) 15,016
Municipal bonds 3,894 63 - 3,957
------- ------- ------- ------
Total $ 24,124 $ 101 $ (214) $24,011
======= ======= ======= ======
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
December 31, 2005 Cost Fair Value
----------------- --------- ----------
Due in one year or less $ 1,443 $ 1,440
Due after one year through five years 15,722 15,550
Due after five years through ten years 274 285
Due after ten years 6,685 6,736
-------- ---------
Total $ 24,124 $ 24,011
======== =========
Investment securities with an amortized cost of $10.2 million and $9.0 million
and a fair value of $10.1 million and $8.9 million at December 31, 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 $1.1 million and a fair value of $1.2
million and $1.2 million at December 31, 2005 and March 31, 2005,
respectively, were pledged as collateral for treasury tax and loan funds held
by the Bank. Investment securities with an amortized cost of $496,000 and a
fair value of $508,000 at December 31, 2005 were pledged as collateral for
governmental public funds held by the Bank. Investment securities with an
amortized cost of $5.0 million and $5.0 million and a fair value of $5.0
million and $5.0 million at December 31, 2005 and March 31, 2005 were pledged
as collateral for borrowings from the discount window at the Federal Reserve
Bank of San Francisco.
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of December
31, 2005 are as follows (in thousands):
Less than 12 months
12 months or longer Total
---------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Agency securities $6,133 $ (45) $8,883 $ (169) $15,016 $ (214)
----- ----- ----- ---- ------ -----
Total temporarily
impaired securities $6,133 $ (45) $8,883 $ (169) $15,016 $ (214)
===== ===== ===== ==== ====== =====
8
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 nine-month periods ended December 31, 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
Cost Gains Losses Value
-------- --------- --------- -------
December 31, 2005
-----------------
Real estate mortgage investment
conduits $ 1,563 $ 13 $ - $ 1,576
FHLMC mortgage-backed securities 143 2 - 145
FNMA mortgage-backed securities 285 7 - 292
-------- --------- --------- -------
Total $ 1,991 $ 22 $ - $ 2,013
======== ========= ========= =======
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):
Estimated
Amortized Fair
Cost Value
--------- ---------
December 31, 2005
-----------------
Due after one year or less $ 9 $ 9
Due after one year through five years 1 1
Due after five years through ten years 24 25
Due after ten years 1,957 1,978
-------- --------
Total $ 1,991 $ 2,013
======== ========
Mortgage-backed securities held to maturity with an amortized cost of $1.6
million and $1.8 million and a fair value of $1.6 million and $1.9 million at
December 31, 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 $201,000 and $248,000 and a fair
value of $205,000 and $255,000 at December 31, 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 ("FHLMC" or "Freddie Mac") and Federal National
Mortgage Association ("FNMA" or "Fannie Mae") securities.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
December 31, 2005
-----------------
Real estate mortgage investment
conduits $ 1,425 $ 18 $ (5) $ 1,438
FHLMC mortgage-backed securities 7,448 1 (270) 7,179
FNMA mortgage-backed securities 171 3 - 174
--------- ---------- ---------- -------
Total $ 9,044 $ 22 $ (275) $ 8,791
========= ========== ========== =======
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
========= ========== ========== =======
9
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Estimated
Amortized Fair
Cost Value
--------- ---------
December 31, 2005
-----------------
Due after one year or less $ - $ -
Due after one year through five years 360 362
Due after five years through ten years 7,316 7,047
Due after ten years 1,368 1,382
-------- --------
Total $ 9,044 $ 8,791
======== ========
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 $8.9
million and $11.5 million and a fair value of $8.6 million and $11.4 million
at December 31, 2005 and March 31, 2005, respectively, were pledged as
collateral for FHLB advances. Mortgage-backed securities available for sale
with an amortized cost of $24,000 and $45,000 and a fair value of $24,000 and
$47,000 at December 31, 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 December
31, 2005 are as follows (in thousands):
Less than 12 months
12 months or longer Total
-------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------ ------ ------ ------ ------ ------
FHLMC mortgage-backed
securities $3,244 $ (120) $3,688 $ (150) $6,932 $ (270)
FNMA mortgage-backed
securities 665 (5) - - 665 (5)
Total temporarily ----- ----- ----- ----- ----- -----
impaired securities $3,909 $ (125) $3,688 $ (150) $7,597 $ (275)
===== ===== ===== ===== ===== =====
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 nine months ended December 31, 2005 and 2004.
8. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
December 31, March 31,
2005 2005
----------- ---------
Residential:
One- to four-family $ 32,350 $ 36,514
Multi-family 2,132 2,568
Construction:
One- to four-family 41,578 44,415
Commercial real estate 71,546 11,138
Commercial 62,221 58,042
Consumer:
Secured 29,915 28,782
Unsecured 1,617 1,668
Land 50,276 29,151
Commercial real estate 319,250 224,691
------- -------
610,885 436,969
Less:
Deferred loan fees, net 4,201 3,125
Allowance for loan losses 7,050 4,395
-------- --------
Loans receivable, net $ 599,634 $ 429,449
======== ========
10
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 December 31, 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 Nine Months
Ended Ended
December 31, December 31,
--------------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Beginning balance $ 6,752 $ 4,424 $ 4,395 $ 4,481
Provision for losses 400 70 1,300 260
Charge-offs (116) (105) (627) (501)
Recoveries 14 2 94 151
Acquisition - - 1,888 -
------ ------ ------ ------
Total allowance for loan losses 7,050 4,391 7,050 4,391
Allowance for unfunded commitments 352 227 352 227
------ ------ ------ ------
Allowance for credit losses $ 7,402 $ 4,618 $ 7,402 $ 4,618
====== ====== ====== ======
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Three Months Nine Months
Ended Ended
December 31, December 31,
--------------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Beginning balance $ 408 $ 207 $ 253 $ 191
Net change in allowance for
unfunded loan commitments
and lines of credit (56) 20 99 36
------ ------ ------ ------
Ending balance $ 352 $ 227 $ 352 $ 227
====== ====== ====== ======
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.
At December 31, 2005 and March 31, 2005, there were no loans classified as
impaired requiring an allowance for loan losses in accordance with SFAS 114
(as amended by SFAS 118). The average investment in impaired loans was $1.0
million, $1.1 million and $1.0 million during the nine months ended December
31, 2005, December 31, 2004, and the year ended March 31, 2005, respectively.
Interest income recognized on impaired loans was $73,000, $4,000 and $9,000
for the nine months ended December 31, 2005, December 31, 2004 and the year
ended March 31, 2005, respectively. There were no loans past due 90 days and
still accruing interest at December 31, 2005, December 31, 2004 and March 31,
2005 respectively. Total loans on nonaccrual at December 31, 2005 and 2004
were $782,000 and at March 31, 2005 $456,000, respectively. The gross amount
of interest income on the nonaccrual loans that would have been recorded
during the nine months ended December 31, 2005 and 2004 if the nonaccrual
loans had been current in accordance with their original terms was $74,000 and
$48,000, 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
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 Nine Months
Ended Ended
December 31, December 31,
--------------------------------------
2005 2004 2005 2004
------ ------ ------ ------
Balance at beginning of period, net $ 414 $ 564 $ 470 $ 624
Additions 29 26 94 97
Amortization (54) (76) (186) (225)
Change in valuation allowance 14 4 25 22
------ ------ ------ ------
Balance at end of period, net $ 403 $ 518 $ 403 $ 518
====== ====== ====== ======
Valuation allowance at beginning of
period $ 73 $ 88 $ 84 $ 106
Change in valuation allowance (14) (4) (25) (22)
------ ------ ------ ------
Valuation allowance at end of period $ 59 $ 84 $ 59 $ 84
====== ====== ====== ======
The Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial assets. At
December 31, 2005 and March 31, 2005, the fair value of MSRs totaled $1.1
million and $1.1 million, respectively. The December 31, 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 152 to 1192.
Amortization expense for the net carrying amount of MSRs at December 31, 2005
is estimated as follows (in thousands):
Year Ending
March 31,
--------------------
2006 $ 44
2007 128
2008 93
2009 74
2010 36
After 2010 28
------
Total $ 403
======
12. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $948,000 at December 31, 2005
and $578,000 at March 31, 2005. Amortization expense related to the core
deposit intangible during the nine months ended December 31, 2005 and 2004
totaled $157,000 and $148,000, respectively.
Amortization expense for the net core deposit intangible at December 31, 2005
is estimated to be as follows (in thousands):
Year Ending
March 31,
--------------------
2006 $ 53
2007 184
2008 155
2009 131
2010 111
After 2010 314
------
Total $ 948
======
13. BORROWINGS
Borrowings are summarized as follows (in thousands):
At December 31, At March 31,
--------------- ------------
2005 2005
---- ----
Federal Home Loan Bank advances $40,071 $40,000
Weighted average interest rate: 4.02% 5.05%
12
Borrowings have the following maturities at December 31, 2005 (in thousands):
Year Ending
March 31,
----------------------------
2006 $ 2,971
2007 32,100
2008 5,000
--------
Total $ 40,071
========
14. JUNIOR SUBORDINATED DEBENTURES
Riverview Bancorp Statutory Trust I issued $7.0 million of Floating Rate
Capital Securities (the "Trust Preferred Securities") in December 2005 with a
liquidation value of $1,000 per share. The securities are due in 30 years,
redeemable at par after five years and pay distributions at a floating rate
based on LIBOR. The securities represent undivided beneficial interests in the
trust, which was established by the Company for the purpose of issuing the
securities. The Trust Preferred Securities were sold in a private transaction
exempt from registration under the Securities Act of 1933, as amended (the
"Act") and have not been registered under the Act. The securities may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Riverview Bancorp Statutory Trust I used the proceeds from the sale of the
$7.0 million of Trust Preferred Securities and the sale of $217,000 of the
trust's common securities to the Company to purchase $7.2 million of Floating
Rate Junior Subordinated Debentures of the Company. The Company intends to use
its net proceeds for working capital and investment in its subsidiary, the
Bank.
15. NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment,
which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R
changes, among other things, the manner in which shared-based compensation,
such as stock options, will be accounted for by both public and non-public
companies, and will be effective as of the beginning of the first annual
reporting period that begins after June 15, 2005. For public companies, the
cost of employee services received in exchange for equity instruments
including options and restricted stock awards generally will be measured at
fair value at the grant date. The grant date fair value will be estimated
using option-pricing models adjusted for the unique characteristics of those
options and instruments, unless observable market prices for the same or
similar options are available. The cost will be recognized over the requisite
service period, often the vesting period, and will be remeasured subsequently
at each reporting date through settlement date. Management is evaluating the
impact of SFAS No. 123R on the Company's financial statements. The financial
effect would be an expense related to the unvested options at the date of
implementation.
The changes in accounting will replace existing requirements under SFAS No.
123, Accounting for Stock-Based Compensation, and will eliminate the ability
to account for share-based compensation transactions using APB Opinion No.
25, Accounting for Stock Issued to Employees, which does not require companies
to expense options if the exercise price is equal to the trading price at the
date of grant. The accounting for similar transactions involving parties other
than employees or the accounting for employee stock ownership plans that are
subject to AICPA SOP 93-6, Employers' Accounting for Employee Stock Ownership
Plans, will remain unchanged.
16. 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 $352,000 at December 31, 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
13
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.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risk as of December 31, 2005 (in thousands):
Contract or
Notional
Amount
-----------
Commitments to originate loans:
Adjustable-rate $ 31,054
Fixed-rate 1,098
Standby letters of credit 1,757
Undisbursed loan funds, and unused lines of credit 170,489
-----------
Total $ 204,398
===========
At December 31, 2005, the Company had no firm commitments to sell residential
loans to FHLMC.
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 December 31, 2005,
loans under warranty totaled $113.1 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.
In the quarter ended September 30, 2005, the $2.6 million dollar credit card
portfolio acquired from APB was sold for a pre-tax gain of $304,000. The gain
was the result of selling $2.6 million of credit card loans to US Bank
National Association, ND doing business as Elan Financial Services ("Elan").
Elan has recourse on certain delinquent loans for one year from the date
of the sale, August 16, 2005. In the quarter ended September 30, 2005, the
Bank recorded an estimated recourse liability in the amount of $76,000 to
recognize this recourse provision.
At December 31, 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 $118,538 $46,038 $28,763 $ 5,281 $198,620
FHLB advances 30,071 10,000 - - 40,071
Operating leases 1,534 3,234 2,602 5,192 12,562
Total other contractual ------- ------ ------ ------ -------
obligations $150,143 $59,272 $31,365 $10,473 $251,253
======= ====== ====== ====== =======
17. SUBSEQUENT EVENT
In the third quarter of fiscal year 2006, Riverview Bancorp, Inc. repurchased
50,000 shares of its common stock in the open market at $24.55 per share. In
July 2005, the Board of Directors authorized the repurchase of up to 5% of
common stock outstanding, representing approximately 290,248 shares.
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.
14
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 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 December 31, 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 whether impairments are 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
15
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.
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.
Executive Overview
Financial Highlights. Net income for the three months ended December 31, 2005
was $2.7 million, or $0.49 per basic share ($0.48 per diluted share), compared
to net income of $760,000, or $0.16 per basic share ($0.16 per diluted share)
for the three months ended December 31, 2004. Net interest income after
provision for loan losses increased $2.7 million compared to the same quarter
last year. Non-interest income increased in the categories of fees and
service charges, asset management fees, and other. The Company's operating
results also reflect a $1.4 million increase in other non-interest expenses,
which are primarily attributable to the APB acquisition.
In the third quarter a year ago, the Company recorded a non-cash, non-
operating charge of approximately $890,000 after-tax, or $0.18 per diluted
share, related to the valuation of certain Fannie Mae and Freddie Mac
preferred stock which have been subsequently sold.
The annualized return on average assets was 1.50% for the three months ended
December 31, 2005, compared to 0.56% for the three months ended December 31,
2004. Excluding the prior year's impairment charge for the three months ended
December 31, 2004, the return on average assets was 1.22%. For the same
periods, the annualized return on average common equity was 11.90% compared to
4.36% and excluding the impairment charge the annualized return on average
equity for the three months ended December 31, 2004 was 9.47%. The efficiency
ratio (excluding intangible asset amortization), which is defined as the
percentage of non-interest expenses to total revenue, was 56.82% for the third
quarter of fiscal 2006 as compared to 79.27% for the three months ended
December 31, 2004 and excluding the impairment charge was 64.61% for that
period.
Net income for the nine months ended December 31, 2005 was $7.1 million, or
$1.28 per basic share ($1.26 per diluted share), compared to net income of
$4.9 million, or $1.01 per basic share ($1.00 per diluted share) for the nine
months ended December 31, 2004. The Company's improved operating results
reflect growth in average interest earning-assets and interest-bearing
liabilities and improved net interest margin, combined with a $304,000 gain on
the sale of the credit card loan portfolio acquired from APB. Prior year's
earnings were impacted by the non-cash, non-operating charge of approximately
$890,000 after-tax, or $0.18 per diluted share, related to the valuation of
certain Fannie Mae and Freddie Mac preferred stock which have been
subsequently sold.
The annualized return on average assets was 1.34% for the nine months ended
December 31, 2005, compared to 1.24% for the nine months ended December 31,
2004. For the same periods, the annualized return on average
16
common equity was 10.78% compared to 9.53%. The Company's efficiency ratio
(non-interest expense, less intangible asset amortization, divided by net
interest income plus non-interest income) was 60.58% for the nine months ended
December 31, 2005 as compared to 65.90% compared to the same period in the
prior year. Excluding prior year's impact of the securities impairment charge
the efficiency ratio for the nine months ended December 31, 2004 was 60.83%.
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
(including commercial real estate construction loans) and commercial loans
have grown from 18.70% and 7.64% of the loan portfolio, respectively, at March
31, 2001 to 64.0% and 10.2%, respectively, at December 31, 2005. Significant
increase in loans came from the April 2005 APB acquisition. 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, one of the fastest
growing counties in the State of Washington according to the U.S. Census
Bureau. The Company's acquisition of APB positions it for growth in the
vibrant Portland, Oregon 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 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.
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 APB 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 branches.
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.
17
Comparison of Financial Condition at December 31, 2005 and March 31, 2005
At December 31, 2005, the Company had total assets of $739.1 million, compared
with $572.6 million at March 31, 2005. The $166.5 million increase in total
assets was primarily attributable to the $128 million of assets acquired in
the APB transaction. The balance of the increase was due to organic growth in
the loan portfolio and to goodwill recorded in the APB acquisition.
Cash, including interest-earning accounts, totaled $34.5 million at December
31, 2005, compared to $61.7 million at March 31, 2005. The decrease reflects
the $14.7 million of cash used net of cash acquired in the April 2005
acquisition of APB, repayment of Federal Home advances and loan growth.
No loans were held for sale at December 31, 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. The sale of loans also makes additional funds
available 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 $599.6 million at December 31, 2005, compared
to $429.4 million at March 31, 2005, an increase of $170.2 million. This
increase was largely attributable to the acquisition of $119.5 million in
loans in the APB transaction. Commercial real estate loans increased $154.4
million, which was primarily attributable to APB loans and organic growth.
A substantial portion of the loan portfolio is secured by real estate, either
as primary or secondary collateral, located in the Company's primary market
areas.
Investment securities available-for-sale totaled $24.0 million at December 31,
2005, compared to $22.9 million at March 31, 2005. Investments securities of
$1.4 million were acquired as a result of the APB acquisition, which
contributed to the increase.
Mortgage-backed securities available-for-sale totaled $8.8 million at December
31, 2005, compared to $11.6 million at March 31, 2005. The decrease is
attributable to pay downs.
Prepaid expenses and other assets were $2.1 million at December 31, 2005,
compared to $1.5 million at March 31, 2005. The $565,000 increase is
primarily a result of two-year non-compete agreements entered into with
executives of APB.
FHLB stock totaled $7.4 million at December 31, 2005, compared to $6.1 million
at March 31, 2005. This reflects an increase of $1.3 million as a result of
the APB acquisition.
Premises and equipment, net totaled $14.6 million at December 31, 2005
compared to $8.4 million at March 31, 2005. The increase includes fixed
assets of $6.2 million that were acquired from APB and construction costs for
the Bank's new operations center and a branch office. Construction in
progress at December 31, 2005 was $5.1 million which primarily represents the
costs of constructing the new operations center and the new 192nd Avenue
branch in Vancouver, Washington that were completed in the third quarter of
fiscal year 2006.
Goodwill increased $16.9 million to $26.1 million at December 31, 2005 from
$9.2 million at March 31, 2005 as a result of the APB acquisition. As of
December 31, 2005, there have been no events or changes in circumstances that
would indicate a potential impairment.
Core deposit intangible increased $526,000 as result of the APB acquisition,
which was offset by the amortization of $157,000, for a balance of $948,000 at
December 31, 2005.
Bank owned life insurance increased to $13.0 million at December 31, 2005,
from $12.6 million at March 31, 2005, reflecting an increase in the cash
surrender value of the policies.
Deposits totaled $592.2 million at December 31, 2005, compared to $456.9
million at March 31, 2005. The increase is attributed to a combination of
$79.8 million in deposits acquired in the APB transaction, and organic growth.
The average outstanding balance of checking accounts, savings accounts and
money market accounts ("transaction accounts") increased to $383.9 million for
quarter ended December 31, 2005, compared to $289.1 million for the quarter
ended March 31, 2005. Transaction accounts represented 66.0% and 66.9% of
average total outstanding balance of deposits for the quarters ended December
31, 2005 and March 31, 2005, respectively. The average outstanding balance
of certificates of deposit increased $54.7 million to $197.8 million, compared
to $143.1 million for the quarter ended March 31, 2005. All categories of
deposits reflect increases as a result of the APB acquisition.
18
FHLB advances totaled $40.1 million at December 31, 2005 and $40.0 million at
March 31, 2005. The $100,000 increase was the net effect of $30.0 million in
advances acquired in the APB transaction, $32.1 million in Bank advances which
was offset by repayments of $62.0 million.
Liabilities also increased $7.2 million as a result of the Company's issuance
of floating rate junior subordinated debentures in December 2005. For further
information on these securities, see Note 14 of the Notes to Consolidated
Financial Statements contained herein.
Shareholders' Equity and Capital Resources
Shareholders' equity increased $21 million to $90.9 million at December 31,
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 $7.1 million due to earnings for the nine months was
partially offset by cash dividends paid to shareholders of $2.9 million.
Exercise of stock options, earned ESOP shares and the tax effect of SFAS No.
115 adjustment to securities comprised the remaining $530,000 increase.
During the third quarter ended December 31, 2005, the Company issued $7.2
million of Floating Rate Junior Subordinated Debentures. The debentures were
issued in connection with the Trust Preferred Securities issued by Riverview
Bancorp Statutory Trust I. Under the terms of the transaction, the Trust
Preferred Securities have a maturity of 30 years and are redeemable at par
after five years. The securities require quarterly distributions (subject to
certain deferment options) and bear an interest rate tied to three-month
LIBOR, plus 1.36%. The net proceeds raised in the transaction will provide
additional capital for general corporate purposes, including current and
future expansion of the Bank. For further information on this transaction, see
Note 14 of the Notes to Consolidated Financial Statements contained herein.
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 December 31, 2005.
To be categorized as "well capitalized," the Bank must maintain minimum total
capital and Tier I capital to risk-weighted assets, core capital to total
assets and tangible capital to tangible assets (set forth in the table below).
There are no conditions or events since that notification that management
believes have changed the Bank's category.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
Categorized
as "Well
Capitalized"
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2005
Total Capital:
(To Risk-Weighted Assets) $75,145 11.37% $52,873 8.00% $66,091 10.00%
Tier I Capital:
(To Risk-Weighted Assets) 68,096 10.30 26,436 4.00 39,654 6.00
Tier I Capital:
(To Adjusted Tangible
Assets) 68,096 9.59 21,298 3.00 35,497 5.00
Tangible Capital:
(To Tangible Assets) 68,096 9.59 10,649 1.50 N/A N/A
19
Categorized
as "Well
Capitalized"
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2005
Total Capital:
(To Risk Weighted Assets) $57,397 12.37% $37,116 8.00% $46,396 10.00%
Tier I Capital:
(To Risk Weighted Assets) 53,002 11.42 18,558 4.00 27,837 6.00
Tier I Capital:
(To Adjusted Tangible
Assets) 53,002 9.54 16,664 3.00 27,773 5.00
Tangible Capital:
(To Tangible Assets) 53,002 9.54 8,332 1.50 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 December 31, 2005 (in
thousands):
Equity $ 95,040
Net unrealized securities loss 242
Goodwill and other intangibles (27,146)
Servicing asset (40)
--------
Tangible capital 68,096
General valuation allowance 7,050
--------
Total capital $ 75,146
========
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
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 December 31,
2005, cash totaled $34.5 million, or 4.7%, 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 December 31, 2005, the Bank had $40.1 million in outstanding
advances from the FHLB of Seattle under an available credit facility of $221.3
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 December 31,
2005. The Bank had no borrowings outstanding under either of these credit
arrangements at December 31, 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 not subject to cancellation.
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.
20
For further information regarding the Company's off-balance sheet arrangements
and other contractual obligations, see Note 16 of the Notes to Consolidated
Financial Statements contained herein.
Asset Quality
The allowance for loan losses was $7.1 million at December 31, 2005 and $4.4
million at March 31, 2005. Management believes the allowance for loan losses
at December 31, 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 $782,000, or 0.11% of total assets at December 31,
2005, compared with $726,000 or 0.13% of total assets at March 31, 2005. The
$782,000 balance of non-accrual loans is composed of three commercial real
estate loans and three commercial loans. The following table sets forth
information regarding the Company's non-performing assets.
December 31, March 31,
2005 2005
----------- --------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial real estate $ 585 $ 198
Commercial 197 97
Consumer - 161
------ ------
Total 782 456
------ ------
Accruing loans which are contractually
past due 90 days or more - -
------ ------
Total of nonaccrual and 90 days past due loans 782 456
------ ------
Real estate owned (net) - 270
------ ------
Total non-performing assets $ 782 $ 726
====== ======
Total loans delinquent 90 days
or more to net loans 0.13% 0.10%
Total loans delinquent 90 days or
more to total assets 0.11 0.08
Total non-performing assets to total assets 0.11 0.13
Comparison of Operating Results for the Three Months Ended December 31, 2005
and 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.
21
Net interest income for the three months ended December 31, 2005 was $8.5
million, representing a $3.0 million, or 54.0% increase, compared to the same
prior year period. The balance sheet interest rate profile continues to
benefit our net interest margin. The structure of the balance sheet as asset
sensitive supports our net interest margin. The Bank's sizeable floating
rate and shorter-term oriented loan portfolio combined with the strong core
non-maturity deposit base, has minimized the negative impact of the flatness
of the yield curve. Average interest earning assets increased 34.20% as a
result of organic growth and due to the APB acquisition. The increase in
interest-earning assets was accompanied by a 34.5% increase in average
balances of interest-bearing liabilities to $531.2 million for the three
months ended December 31, 2005 from $394.9 million for the comparable period
in 2004. Growth in interest bearing deposits came from natural growth and
deposits acquired from APB. Average interest-earning assets to average
interest-bearing liabilities totaled 122.39% for the three-month period
ended December 31, 2005 compared to 122.62% in the same prior year period.
Interest Income. Interest income increased $4.8 million, or 64.0%, to $12.3
million for the three months ended December 31, 2005 compared to $7.5
million, for the three months ended December 31, 2004. The close of the APB
acquisition in April 2005 resulted in an increase of $121.0 million in
interest-earning assets (see Note 3 of the Notes to Consolidated Financial
Statements). The yield on interest-earning assets was 7.51% for the three
months ended December 31, 2005 compared to 6.18% for the same three months
ended December 31, 2004. During the past year, the Federal Reserve Board has
increased federal funds interest rates eight 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 December 31, 2005 compared to dividends of $31,250 during the
same quarter a year ago. The FHLB of Seattle has been operating under a
regulatory directive since May 2005 and has announced that all future
dividends will be suspended until its financial position and performance
improves.
Interest Expense. Interest expense increased to $3.7 million for the three
months ended December 31, 2005, compared to $1.9 million for the same period
in 2004. Average interest-bearing liabilities increased $136.3 million to
$531.2 million for the three months ended December 31, 2005 compared to $394.9
million for the same prior year period. This increase includes the effect
of $72.3 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 attributable to Federal Reserve Board federal funds rate
increases during the last year. The weighted average interest rate on total
deposits increased to 2.67% for the three months ended December 31, 2005
from 1.61% for the same period in the prior year. The weighted average cost
of FHLB borrowings decreased to 4.22% for the three months December 31, 2005
from 5.06% for same period in the prior year.
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 December 31,
---------------------------------------------------
2005 2004
------------------------ ------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $498,510 $ 9,956 7.92% $308,056 $ 5,526 7.12%
Non-mortgage loans 95,418 1,827 7.60 87,950 1,357 6.12
------- ------- ----- ------- ------- -----
Total net loans (1) 593,928 11,783 7.87 396,006 6,883 6.90
Mortgage-backed
securities (2) 11,675 128 4.35 15,415 159 4.09
Investment securities
(2)(3) 24,141 275 4.52 30,684 281 3.63
Daily interest-bearing
assets 13,023 127 3.87 35,977 190 2.10
Other earning assets(4) 7,350 - - 6,119 31 2.01
Total interest-earning ------- ------- ----- ------- ------- -----
assets 650,117 12,313 7.51 484,201 7,544 6.18
Non-interest-earning assets:
Office properties and
equipment, net 12,945 8,500
Other non-interest-
earning assets 63,931 44,236
------- -------
Total assets $726,993 $536,937
======= =======
Interest-bearing liabilities:
Regular savings
accounts $ 40,067 56 0.55% $ 33,499 46 0.54
NOW accounts 123,573 545 1.75 103,036 227 0.87
Money market accounts 125,943 908 2.86 78,438 240 1.21
Certificates of deposit 198,677 1,781 3.56 139,914 925 2.62
------- ------- ----- ------- ------- -----
Total deposits 488,260 3,290 2.67 354,887 1,438 1.61
Other interest-bearing
liabilities 42,945 457 4.22 40,000 510 5.06
Total interest-bearing ------- ------- ----- ------- ------- -----
liabilities 531,205 3,747 2.80 394,887 1,948 1.96
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 94,680 66,570
Other liabilities 9,479 6,390
------- -------
Total liabilities 635,364 467,847
Shareholders' equity 91,629 69,090
------- -------
Total liabilities
and shareholders'
equity $726,993 $536,937
======= =======
Net interest income $ 8,566 $ 5,596
===== =====
Interest rate spread 4.71% 4.22%
====== ======
Net interest margin 5.23% 4.59%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 122.39% 122.62%
====== ======
Tax equivalent adjustment (3) $ 22 $ 48
====== ======
(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 statutory
tax rate was 35% and 34% for the three months ended December 31, 2005
and 2004, respectively.
(4) The FHLB of Seattle has been operating under a regulatory directive since
May 2005 and has announced that all future dividends will be suspended
until its financial position and performance improves.
23
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company for the quarter ended December 31, 2005
compared to the quarter ended December 31, 2004. 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 December 31,
-------------------------------
2005 vs. 2004
-------------------------------
Increase(Decrease)
Due to Total
----------------- Increase
Volume Rate (Decrease)
-------- ------ --------
(In thousands)
Interest Income:
Residential & commercial mortgage loans $ 3,746 $ 684 $ 4,430
Non-mortgage loans 122 348 470
Mortgage-backed securities (41) 10 (31)
Investment securities (1) (67) 61 (6)
Daily interest-bearing (165) 102 (63)
Other earning assets 5 (36) (31)
-------- ------ --------
Total interest income 3,600 1,169 4,769
-------- ------ --------
Interest Expense:
Regular savings accounts 9 1 10
NOW accounts 52 266 318
Money market accounts 206 462 668
Certificates of deposit 461 395 856
Other interest-bearing liabilities 36 (89) (53)
-------- ------ --------
Total interest expense 764 1,035 1,799
-------- ------ --------
Net interest income (1) $ 2,836 $ 134 $ 2,970
======== ====== ========
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the three months
ended December 31, 2005 was $400,000, compared to $70,000 for the same period
in the prior year. Net charge-offs for the current period were $102,000,
compared to $103,000 for the same period last year. The ratio of allowance for
credit losses and loan commitments to total net loans was 1.22% at December
31, 2005, compared to 1.15% at December 31, 2004. Annualized net charge-offs
to average net loans for the three-month period ended December 31, 2005
decreased to 0.07% compared to 0.10% for the same period in the prior year.
During the quarter ended December 31, 2005, management evaluated known and
inherent risks in the loan portfolio and concluded there was increased credit
risk in the commercial real estate loan, commercial construction, speculative
construction, and multifamily loan portfolio. Based on the analysis, changes
were made in the estimation, assumptions and allocation of the allowance for
loan losses. The estimated loan loss rate for land and lots for development
loans was increased by 0.25% to 1.00%, speculative construction loans was
increased by 0.25% to 1.00% and raw land and lots loans was increased by 0.25%
to 1.00% to cover the probable losses inherent in the loan portfolio.
Management considered the allowance for loan losses at December 31, 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 increased $1.8 million to $2.1
million for the quarter ended December 31, 2005 compared to $323,000 for the
quarter ended December 31, 2004. In the third quarter a year ago, the Company
recorded a non-cash, non-operating charge of approximately $890,000 after-tax,
or $0.18 per diluted share, related to the valuation of certain Fannie Mae and
Freddie Mac preferred stock which have been subsequently sold. The increase
from the same period in prior year also reflects organic growth and the APB
acquisition impact on deposit related fees and service charges. The decrease
in fees and service charges is primarily the result of decreased fees received
on brokered mortgage loans. Asset management fees from fiduciary services
increased by $92,000 to $378,000 for the quarter ended December 31, 2005,
compared to $286,000 for the quarter ended December 31, 2004. RAM Corp. had
$219.2 million in total assets under management at December 31, 2005, compared
to $164.7 million at December 31, 2004.
In the current quarter gains on the sale of loans reflects a reduction in the
mortgage refinance activity which resulted in gains on the sale of loans
decreasing $16,000 for the quarter ended December 31, 2005 to $81,000 compared
to $97,000 for the quarter ended December 31, 2004. Loan servicing income for
the quarter ended December 31, 2005 includes a $14,000 write-up to the market
value of mortgage servicing rights as compared to a $4,000 write-up in market
value of
24
mortgage servicing rights for the same prior year period. For the same
periods, loan-servicing income also included amortization of mortgage
servicing rights of $54,000 and $76,000, respectively.
Non-Interest Expense. Non-interest expense increased $1.4 million, or 29.6%,
to $6.1 million for the three-month period ended December 31, 2005, compared
to $4.7 million for the three months ended December 31, 2004. The increase in
non-interest expense reflects the April 2005 acquisition of APB. 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. The Company's efficiency ratio was, 56.82% for the three months ended
December 31, 2005, compared to 79.27% for the same period in the prior year.
Excluding prior year's impact of the securities impairment charge the
efficiency ratio for the three months ended December 31, 2004 was 64.61%.
The principal component of the Company's non-interest expense is salaries and
employee benefits. For the three months ended December 31, 2005, salaries and
employee benefits, which include mortgage broker commission compensation, was
$3.7 million, a 31.7% increase over $2.8 million for the three months ended
December 31, 2004. The majority of the increase is a result of the acquisition
of APB, 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 amortization expense of core deposit intangible ("CDI") was $53,000 for
the three months ended December 31, 2005 compared to $33,000 for the prior
year period. The acquisition of APB and its $79.7 million in deposits created
a $526,000 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 is amortized over a ten-year life using an accelerated
amortization method.
Other non-interest expense for the three months ended December 31, 2005 was
$445,000, a 12.9% increase over the $394,000 for the three months ended
December 31, 2004. The majority of the increase over the prior period was
attributable to the APB, including amortization expense related to non-compete
agreements of $70,000. Increases in printing costs, demand account supplies,
postage and courier and bank service charges were also attributable to the
acquisition.
Provision for Income Taxes. Provision for income taxes was $1.4 million for
the three months ended December 31, 2005, compared to $299,000 for the three
months ended December 31, 2004. The effective tax rate for three months ended
December 31, 2005 was 33.6% compared to 28.2% for the three months ended
December 31, 2004. The effective tax rate increased from the prior year's
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
APB. The Company's overall effective tax rate at December 31, 2005 takes into
account the estimated Oregon apportionment factors for property, payroll and
sales.
Comparison of Operating Results for the Nine Months Ended December 31, 2005
and 2004
Net Interest Income. Net interest income for the nine months ended December
31, 2005 was $23.7 million, representing a $6.9 million, or a 40.7% increase,
compared to $16.9 million for the same prior year period. This improvement
reflected a 34.8% increase in the average balance of interest-earning assets
(primarily increases in the average balance of commercial loans and, partially
offset by a decrease in the average balance of residential mortgage loans,
daily interest-bearing assets and mortgage-backed securities) to $637.6
million. The increase in interest-earning assets was partially offset by a
36.9% increase in average balance of interest-bearing liabilities (an increase
in all deposit categories) to $525.2 million. The ratio of average interest-
earning assets to average interest-bearing liabilities decreased to 121.41% in
the nine-month period ended December 31, 2005 from 122.84% in the same prior
year period. The ratio indicates that the interest-earning asset growth is
being funded more by interest-bearing liabilities as compared to capital and
non-interest-bearing demand deposits.
Interest Income. Interest income totaled $34.2 million and $22.1 million, for
the nine months ended December 31, 2005 and 2004, respectively. The increased
interest income of $12.1 million reflects the 34.8% increase in interest
earning assets for the current nine-month period compared to the same period
in the prior year, which is attributable to organic growth and the APB
acquisition. The yield on interest-earning assets was 7.13% for the nine
months ended December 31, 2005 compared to 6.27% for the nine months ended
December 31, 2004. The increased yield in all loan categories reflects the
mixture of interest rate changes during this period in the prime rate and
other indexes used to price loans.
Interest Expense. Interest expense was $10.4 million for the nine months ended
December 31, 2005 an increase of 98.4% from $5.3 million for the same period
in the prior year. Average interest-bearing liabilities increased $141.5
million to $525.2 million for the nine months ended December 31, 2005 from
$383.7 million for the same prior year period. The change in interest
expense reflects the higher rates of interest paid on deposits and the
increased balance of interest-bearing
25
liabilities when comparing average balances at December 31, 2005 and December
31, 2004. The weighted average interest rate on total deposits increased to
2.46% for the nine months ended December 31, 2005 from 1.45% for the same
period in the prior year. The weighted average interest rate of FHLB
borrowings decreased to 4.35% for the nine months ended December 31, 2005 from
4.96% for same period in the prior year. The level of liquidity in the first
nine months of fiscal year 2005 allowed the runoff of high interest rate
deposits acquired in the acquisition of Today's Bancorp and APB and allowed
the pay down of FHLB borrowings.
26
Nine Months Ended December 31,
---------------------------------------------------
2005 2004
------------------------ ------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Residential & commercial
mortgage loans $471,019 $ 27,259 7.68% $302,288 $ 16,494 7.24%
Non-mortgage loans 98,127 5,131 6.94 89,294 4,012 5.96
------- --------- ------ ------- --------- ------
Total net loans (1) 569,146 32,390 7.55 391,582 20,506 6.95
Mortgage-backed
securities (2) 12,654 411 4.31 15,981 482 4.00
Investment securities
(2)(3) 24,092 825 4.55 31,824 837 3.49
Daily interest-bearing
assets 24,454 602 3.27 25,866 316 1.62
Other earning assets (4) 7,253 - - 6,077 117 2.56
------- --------- ------ ------- --------- ------
Total interest-earning
assets 637,599 34,228 7.13 471,330 22,258 6.27
Non-interest-earning assets:
Office properties and
equipment, net 10,562 8,895
Other non-interest-
earning assets 60,190 41,373
------- -------
Total assets $708,351 $521,598
======= =======
Interest-bearing
liabilities:
Regular savings accounts $38,766 160 0.55% $ 31,683 131 0.55
NOW accounts 126,579 1,452 1.52 101,725 613 0.80
Money market accounts 117,556 2,279 2.57 73,684 593 1.07
Certificates of deposit 193,619 4,929 3.38 136,247 2,404 2.34
------- --------- ------ ------- --------- ------
Total deposits 476,520 8,820 2.46 343,339 3,741 1.45
Other interest-bearing
liabilities 48,636 1,595 4.35 40,364 1,509 4.96
------- --------- ------ ------- --------- ------
Total interest-bearing
liabilities 525,156 10,415 2.63 383,703 5,250 1.82
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 87,007 64,144
Other liabilities 8,429 6,056
------- -------
Total liabilities 620,592 453,903
Shareholders' equity 87,759 67,695
------- -------
Total liabilities and
shareholders' equity $708,351 $521,598
======= =======
Net interest income $23,813 $17,008
======= =======
Interest rate spread 4.50% 4.45%
======= =======
Net interest margin 4.96% 4.79%
======= =======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 121.41% 122.84%
======= =======
Tax Equivalent Adjustment (3) $ 76 $ 139
======= =======
(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 change in fair value that are
reflected as a component of shareholders' equity.
(3) Includes tax equivalent adjustment in interest income. The statutory tax
rate was 35% and 34% for the three months ended December 31, 2005 and
2004, respectively.
(4) The FHLB of Seattle has been operating under a regulatory directive since
May 2005 and has announced that all future dividends will be suspended
until its financial position and performance improves.
27
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company for the nine months ended December 31, 2005
compared to the nine months ended December 31, 2004. 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
Nine Months Ended December 31,
-------------------------------------
2005 vs. 2004
----------------------------------
Increase (Decrease)
Due to Total
------------------ Increase
Volume Rate Decrease)
-------- ------ ---------
(In thousands)
Interest Income:
Residential & commercial mortgage
loans $ 9,708 $ 1,057 $ 10,765
Non-mortgage loans 421 698 1,119
Mortgage-backed securities (106) 35 (71)
Investment securities (1) (231) 219 (12)
Daily interest-bearing (18) 304 286
Other earning assets 19 (136) (117)
------ ------ --------
Total interest income 9,793 2,177 11,970
------ ------ --------
Interest Expense:
Regular savings accounts 29 - 29
NOW accounts 179 660 839
Money market accounts 503 1,183 1,686
Certificates of deposit 1,228 1,297 2,525
Other interest-bearing liabilities 286 (200) 86
------ ------ --------
Total interest expense 2,225 2,940 5,165
------ ------ --------
Net interest income (1) $ 7,568 $ (763) $ 6,805
====== ====== ========
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the nine-month
period ended December 31, 2005 was $1.3 million, compared to $260,000 for the
same period in the prior year. Net charge-offs for the nine months ended
December 31, 2005 were $533,000, compared to $350,000 for the same period of
last year. The ratio of allowance for credit losses and loan commitments to
total net loans increased to 1.22% from 1.15% at December 31, 2004. The
acquisition of APB in April 2005 added $1.9 million to the allowance for loan
losses. Net charge-offs to average net loans for the nine-month period ended
December 31, 2005 and December 31, 2004 was 0.12%. During the nine months
ended December 31, 2005, management evaluated known and inherent risks in the
loan portfolio. Based on the analysis, changes were made in the estimation,
assumptions and allocation of the allowance for loan losses. The estimated
loan loss rate for land & lots for development was increased by 0.25% to 1.0%,
commercial real estate loans was increased by 0.125% to 0.875%, commercial
construction loans was increased by 0.125% to 0.875%, speculative construction
loans was increased by 0.50% to 1.00%, multi-family loans was increased by
0.375% to 0.875% and raw land and lots was increased by 0.25% to 1.00% to
cover the probable losses inherent in the loan portfolio. Management
considered the allowance for loan losses at December 31, 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 increased $2.2 million or 46.2%, to
$6.8 million for the nine months ended December 31, 2005 from $4.7 million for
the nine months ended December 31, 2004. The increase reflected the impact of
the APB acquisition, increased asset management fees, increased mortgage
broker fee income and sale of the APB credit card portfolio. For the nine
months ended December 31, 2005, mortgage broker fee income, which is included
in fees and service charges, increased $483,000 to $1.7 million compared to
$1.2 million for the same period in the prior year. The prior year non-
interest income reflects the gain on the sale and leaseback of the Camas
branch and operations center of $828,000 during the first fiscal quarter and
the third quarter charge before tax of approximately $890,000 related to the
valuation of certain Fannie Mae and Freddie Mac preferred stock.
In the nine month period ended December 31, 2005, gains on the sale of loans
reflects a reduction in the mortgage refinance activity which resulted in
gains on the sale of loans decreasing $125,000 for the nine months ended
December 31, 2005 to $284,000 compared to $409,000 for the nine months ended
December 31, 2004. Loan servicing income for the nine months ended December
31, 2005 includes a $26,000 write-up to the market value of mortgage servicing
rights compared to a $22,000 write-up in market value of mortgage servicing
rights for the same prior year period. For the same nine month periods in 2005
and 2004, loan-servicing income also included amortization of mortgage
servicing rights of $186,000 and $225,000, respectively
Asset management services income was $1.1 million for the nine months ended
December 31, 2005, compared to $815,000 for the nine months ended December 31,
2004. RAMCorp. had $219.2 million in total assets under management at
December 31, 2005, compared to $164.7 million at December 31, 2004.
Non-Interest Expense. Non-interest expense increased $4.3 million, or 30.3%,
to $18.5 million for the nine-month period ended December 31, 2005, compared
to $14.2 million for the nine months ended December 31, 2004. The primary
reason for the increase was the April 22, 2005 acquisition of APB.
The principal component of the Company's non-interest expense is salaries and
employee benefits. For the nine months ended December 31, 2005, salaries and
employee benefits, which include mortgage broker commission compensation, was
$10.5 million, an increase of 31.1% from $8.0 million for the nine months
ended December 31, 2004. Full-time equivalent employees increased to 236 at
December 31, 2005 from 196 at December 31, 2004, which is principally
attributable to the APB acquisition. The APB acquisition also contributed to
increases in occupancy, depreciation, data processing, telecommunication and
other expense.
The amortization of CDI was $157,000 for the nine months ended December 31,
2005 compared to $148,000 for the same period in the prior year. The April
2005 acquisition of APB and its $79.7 million in deposits created a $526,000
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.
Other non-interest expense was $1.7 million for the nine months ended December
31, 2005, or a 25.4% increase over $1.3 million, for the nine months ended
December 31, 2004. The majority of the increase over the prior period
resulted from the acquisition of APB, including amortization expense related
to non-compete agreements of $187,000. Increases in printing costs, office
supplies, demand account supplies, postage and courier and bank service
charges were also attributable to the APB acquisition.
Provision for Federal Income Taxes. Provision for federal income taxes was
$3.6 million for the nine months ended December 31, 2005, compared to $2.2
million for the nine months ended December 31, 2004 as a result of higher
income before taxes. The effective tax rate for nine months ended December
31, 2005 was 33.6% compared to 31.4% for the nine months ended December 31,
2004. The Company's overall effective tax rate at December 31, 2005 takes
into account the estimated 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 specified 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 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
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.
In the quarter ended December 31, 2005, the Company did not make any changes
in, its internal control over financial reporting that has materially
affected, or is reasonably likely to 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. The Company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
error and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns in controls or procedures can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control. The design of any control procedure is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-
effective control procedure, misstatements due to error or fraud may occur and
not be detected.
30
(b) 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. Unregistered Sale of Equity Securities and Use of Proceeds
The following table summarizes the Company's share repurchases for the
quarter ended December 31, 2005.
Total Number
of Shares Maximum Number
Purchased as of Shares that
Total Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased per Share Program Program (1)
Oct. 1-Oct. 31, 2005 - $ - - -
Nov. 1-Nov. 30, 2005 - - - -
Dec. 1-Dec. 31, 2005 - - - -
-------- -------- --------- ---------
Total - $ - - 290,248
======== ======== ========= =========
(1) 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)
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)
10.11 Form of Incentive Stock Option Award Pursuant to 2003
Stock Option Plan (7)
10.12 Form of Non-qualified Stock Option Award Pursuant to 2003
Stock Option Plan (7)
31
11. Statement recomputation of per share earnings (See Note 5
of Notes to Consolidated Financial Statements contained
herein.)
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 as an exhibit to the Registrant's Registration Statement on Form
S-8 (Registration No. 333-66049), and incorporated herein by reference.
(6) Filed as Exhibit 99 to the Registration Statement on form S-8
(Registration No. 333-109894), and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005, and incorporated herein by
reference.
32
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: February 3, 2006 Date: February 3, 2006
33
EXHIBIT INDEX
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
34
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: February 3, 2006 /S/ Patrick Sheaffer
------------------------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
35
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: February 3, 2006 /S/ Ron Dobyns
-----------------------
Ron Dobyns
Chief Financial Officer
36
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: February 3, 2006 Dated: February 3, 2006
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