UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
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.
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(Exact name of registrant as specified in its charter)
Washington 91-1838969
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
900 Washington St., Ste. 900,Vancouver, Washington 98660
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(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, 5,780,086 shares outstanding as of July 28, 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 June 30, 2006 and March 31, 2006 1
Consolidated Statements of Income
Three Months Ended June 30, 2006 and 2005 2
Consolidated Statements of Shareholders' Equity
Year Ended March 31, 2006 and the
Three Months Ended June 30, 2006 3
Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2006 and 2005 4
Consolidated Statements of Cash Flows
Three Months Ended June 30, 2006 and 2005 5
Notes to Consolidated Financial Statements 6-16
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-25
Item 3: Quantitative and Qualitative Disclosures About Market Risk 25
Item 4: Controls and Procedures 25-26
Part II. Other Information 27-28
-----------------
Item 1: Legal Proceedings
Item 1: Risk Factors
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 29
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2006 AND MARCH 31, 2006
(In thousands, except share and JUNE 30, MARCH 31,
per share data)(Unaudited) 2006 2006
------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $6,754
and $7,786) $ 26,671 $ 31,346
Loans held for sale - 65
Investment securities available for sale, at fair
value (amortized cost of $23,005 and $24,139) 22,847 24,022
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $1,603 and $1,830) 1,580 1,805
Mortgage-backed securities available for sale, at
fair value (amortized cost of $8,011 and $8,436) 7,666 8,134
Loans receivable (net of allowance for loan losses
of $7,626 and $7,221) 658,588 623,016
Prepaid expenses and other assets 2,164 2,210
Accrued interest receivable 3,526 3,058
Federal Home Loan Bank stock, at cost 7,350 7,350
Premises and equipment, net 19,125 19,127
Deferred income taxes, net 3,799 3,771
Mortgage servicing intangible, net 372 384
Goodwill 25,572 25,572
Core deposit intangible, net 845 895
Bank owned life insurance 13,220 13,092
-------- --------
TOTAL ASSETS $793,325 $763,847
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits accounts $607,389 $606,964
Accrued expenses and other liabilities 9,062 8,768
Advanced payments by borrowers for taxes and
insurance 144 358
Federal Home Loan Bank advances 73,300 46,100
Junior subordinated debenture 7,217 7,217
Capital lease obligations 2,745 2,753
-------- --------
Total liabilities 699,857 672,160
COMMITMENTS AND CONTINGENCIES (See Note 16) - -
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000
authorized, issued and outstanding:
June 30, 2006 - 5,780,090 issued, 5,780,086
outstanding 57 57
March 31, 2006 - 5,772,690 issued, 5,772,686
outstanding
Additional paid-in capital 57,529 57,316
Retained earnings 37,348 35,776
Unearned shares issued to employee stock ownership
trust (1,134) (1,186)
Accumulated other comprehensive loss (332) (276)
-------- --------
Total shareholders' equity 93,468 91,687
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $793,325 $763,847
======== ========
See notes to consolidated financial statements.
1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(In thousands, except share and June 30,
per share data) (Unaudited) 2006 2005
-----------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 13,769 $ 9,597
Interest on investment securities - taxable 221 186
Interest on investment securities - non-taxable 42 43
Interest on mortgage-backed securities 114 145
Other interest and dividends 52 254
--------- ---------
Total interest income 14,198 10,225
--------- ---------
INTEREST EXPENSE:
Interest on deposits 4,222 2,471
Interest on borrowings 963 656
--------- ---------
Total interest expense 5,185 3,127
--------- ---------
Net interest income 9,013 7,098
Less provision for loan losses 350 450
--------- ---------
Net interest income after provision for loan losses 8,663 6,648
--------- ---------
NON-INTEREST INCOME:
Fees and service charges 1,331 1,486
Asset management fees 436 364
Gain on sale of loans held for sale 72 126
Gain on sale of real estate owned - 21
Loan servicing income 45 27
Gain on sale of credit card portfolio 67 -
Bank owned life insurance 128 120
Other 36 43
--------- ---------
Total non-interest income 2,115 2,187
--------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,835 3,399
Occupancy and depreciation 1,074 803
Data processing 335 365
Amortization of core deposit intangible 50 49
Advertising and marketing expense 302 231
Federal Deposit Insurance Corporation insurance
premium 24 15
State and local taxes 155 135
Telecommunications 112 63
Professional fees 178 363
Other 704 673
--------- ---------
Total non-interest expense 6,769 6,096
--------- ---------
INCOME BEFORE INCOME TAXES 4,009 2,739
PROVISION FOR INCOME TAXES 1,378 918
--------- ---------
NET INCOME $ 2,631 $ 1,821
========= =========
Earnings per common share:
Basic $ 0.47 $ 0.33
Diluted 0.46 0.33
Weighted average number of shares outstanding:
Basic 5,637,604 5,451,976
Diluted 5,726,195 5,519,699
Cash Dividends Per Share $ 0.19 $ 0.17
See notes to consolidated financial statements.
2
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2006
AND THE THREE MONTHS ENDED JUNE 30, 2006
Unearned
Shares Accum-
Issued to ulated
Employee Other
Common Addi- Stock Compre-
Stock tional Owner- hensive
(In thousands, except ---------------- Paid-in Retained ship Income
share data) Shares Amount Capital Earnings Trust (Loss) Total
---------------------------------------------------------------------------------------------------------
Balance April 1, 2005 5,015,749 $50 $41,112 $29,874 $(1,392) $(122) $69,522
Cash dividends ($0.68
per share) - - - (3,836) - - (3,836)
Exercise of stock
options 18,572 - 314 - - - 314
Stock repurchased and
retired (50,000) - (1,227) - - - (1,227)
Stock issued in
connection with
acquisition 788,365 7 16,706 - - - 16,713
Earned ESOP shares - - 352 - 206 - 558
Tax benefit, stock
option - - 59 - - - 59
--------- --- ------- ------- ------- ----- -------
5,772,686 57 57,316 26,038 (1,186) (122) 82,103
Comprehensive income:
Net income - - - 9,738 - - 9,738
Other comprehensive
income:
Unrealized holding
loss on securities
of $154 (net of $79
tax effect) - - - - - (154) (154)
-------
Total comprehensive
income - - - - - - 9,584
--------- --- ------- ------- ------- ----- -------
Balance March 31, 2006 5,772,686 $57 $57,316 $35,776 $(1,186) $(276) $91,687
========= === ======= ======= ======= ===== =======
Cash dividends
($0.19 per share) - - - (1,059) - - (1,059)
Exercise of stock
options 7,400 - 105 - - - 105
Earned ESOP shares - - 108 - 52 - 160
--------- --- ------- ------- ------- ----- -------
5,780,086 57 57,529 34,717 (1,134) (276) 90,893
Comprehensive Income:
Net income - - - 2,631 - - 2,631
Other comprehensive
income:
Unrealized holding
loss on securities
of $56 (net of $29
tax effect) - - - - - (56) (56)
-------
Total comprehensive
income - - - - - - 2,575
--------- --- ------- ------- ------- ----- -------
Balance June 30, 2006 5,780,086 $57 $57,529 $37,348 $(1,134) $(332) $93,468
========= === ======= ======= ======= ===== =======
See notes to consolidated financial statements.
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months
(In thousands) (Unaudited) Ended June 30,
---------------------------------------------------------------
2006 2005
------ ------
Net income $2,631 $1,821
Other comprehensive income:
Change in fair value of
securities available for sale,
net of tax (56) 74
------ ------
Total comprehensive income $2,575 $1,895
====== ======
See notes to consolidated financial statements.
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
(In thousands) (Unaudited) 2006 2005
----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,631 $ 1,821
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 539 319
Mortgage servicing rights valuation adjustment (14) (10)
Provision for loan losses 350 450
Noncash expense related to ESOP 159 131
Increase (decrease) in deferred loan origination
fees, net of amortization (5) 196
Origination of loans held for sale (2,924) (5,217)
Proceeds from sales of loans held for sale 2,993 5,597
Net gain on loans held for sale, sale of real
estate owned, mortgage-backed securities,
investment securities and premises and equipment (24) (128)
Income from bank owned life insurance (128) (120)
Changes in assets and liabilities:
Prepaid expenses and other assets (41) (705)
Accrued interest receivable (468) 38
Accrued expenses and other liabilities 217 1,896
--------- ---------
Net cash provided by operating activities 3,285 4,268
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (136,862) (146,040)
Principal repayments/refinance on loans 100,945 133,440
Proceeds from call, maturity, or sale of investment
securities available for sale 1,110 250
Principal repayments on investment securities
available for sale 37 37
Principal repayments on mortgage-backed securities
available for sale 425 843
Principal repayments on mortgage-backed securities
held to maturity 224 83
Purchase of premises and equipment (393) (114)
Acquisition, net of cash received - (14,663)
Proceeds from sale of real estate owned and premises
and equipment 2 272
--------- ---------
Net cash used in investing activities (34,512) (25,892)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 425 46,262
Dividends paid (956) (751)
Proceeds from borrowings 92,000 -
Repayment of borrowings (64,800) (11,000)
Principal payments under capital lease obligation (8) -
Net decrease in advance payments by borrowers (214) (215)
Proceeds from exercise of stock options 105 94
--------- ---------
Net cash provided by financing activities 26,552 34,390
--------- ---------
NET (DECREASE) INCREASE IN CASH (4,675) 12,766
CASH, BEGINNING OF PERIOD 31,346 61,719
--------- ---------
CASH, END OF PERIOD $ 26,671 $ 74,485
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,938 $ 3,103
Income taxes 400 -
SUPPLEMENTAL DISCLOSURE OF BANK ACQUISITION
Issuance of common stock - (16,714)
Investments acquired - 1,417
Fair value of loans receivable acquired - 119,536
Other assets acquired - 3,388
Deposits assumed - (79,691)
Borrowings and other liabilities assumed - (30,362)
Goodwill - 17,142
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other
liabilities $ 1,059 $ 750
Fair value adjustment to securities available
for sale (85) 112
Income tax effect related to fair value adjustment 29 (38)
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, 2006. The results of
operations for the three months ended June 30, 2006 are not necessarily
indicative of the results which may be expected for the fiscal year ending
March 31, 2007. 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. ("Bancorp") and
the consolidated accounts of its wholly-owned subsidiary (the "Company"),
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 16,359
Other, net 2,547
----------
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. At June 30, 2006, the goodwill asset
recorded in connection with the APB acquisition was $16.4 million.
The following unaudited pro forma financial information for the three months
ended June, 2006 and 2005 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 Ended
(In thousands, except per share data) June 30,
------------------
2006 2005
------ ------
Net interest income $9,013 $7,335
Non-interest income 2,115 2,174
Non-interest expense 6,769 6,444
Net income $2,631 $1,743
Earnings per common share:
Basic $ 0.47 $ 0.28
Diluted 0.46 0.28
4. STOCK PLANS AND STOCK BASED-COMPENSATION
In July 1998, shareholders of the Company approved the adoption of the 1998
Stock Option Plan ("1998 Plan"). The 1998 Plan was effective October 1, 1998
and will expire on the tenth anniversary of the effective date, unless
terminated sooner by the Company's Board of Directors ("Board"). Under the
1998 Plan, the Company may grant both incentive and non-qualified stock
options up to 357,075 shares of its common stock to officers, directors and
employees. The exercise price of each option granted under the 1998 Plan
equals the fair market value of the Company's stock on the date of the grant
with a maximum term of ten years and options vest over five years. At June 30,
2006, there were options for 18,481 shares available for the grant under the
1998 Plan.
In July 2003, shareholders of the Company approved the adoption of the 2003
Stock Option Plan ("2003 Plan"). The 2003 Plan was effective July 2003 and
will expire on the tenth anniversary of the effective date, unless terminated
sooner by the Board. Under the 2003 Plan, the Company may grant both incentive
and non-qualified stock options up to 229,277 shares of its common stock to
officers, directors and employees. The exercise price of each option granted
under the 2003 Plan equals the fair market value of the Company's stock on the
date of grant with a maximum term of ten years from date of grant and options
vest over zero to five years. At June 30, 2006, there were options for 72,277
shares available for grant under the 2003 Plan.
On March 15, 2006, 157,000 stock options from the 2003 Plan were granted to
officers and directors. Each option was granted at the fair market value of
the Company's stock on the date of grant with a maximum term of 10 years from
date of grant and were fully vested at grant date.
All stock options have an exercise price that is equal to the fair market
value of Bancorp's stock on the date the options were granted. Options granted
under the 2003 Plan generally vest over a zero to five year vesting period.
Stock options granted have a 10-year maximum term. Options previously issued
under the 1998 plan are fully vested.
The following table presents information on stock options outstanding for the
periods shown.
Three Months Ended Year Ended
June 30, 2006 March 31, 2006
---------------------------------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ----------------
Balance, beginning
of period 377,923 $19.35 227,495 $14.36
Grants - - 177,000 25.40
Options Exercised (7,400) 12.74 (26,572) 16.95
Forfeited (7,000) 20.10 - -
------- -------
Balance, end of
period 363,523 $19.47 377,923 $19.35
7
The following table presents information on stock options outstanding for the
periods shown, less estimated forfeitures.
Three Months Ended Year Ended
June 30, 2006 March 31, 2006
-----------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
---------- -------- --------- --------
Intrinsic value of options
exercised in the period $101,250 $159,070
Stock options fully vested and
expected to vest:
Number 361,483 374,083
Weighted average exercise price $19.47 $19.34
Aggregate intrinsic value $2,431,597 $2,774,511
Weighted average contractual
term of options 6.79 years 7.25 years
Stock options vested and
currently exercisable
Number 344,643 345,443
Weighted average exercise price $19.45 $19.28
Aggregate intrinsic value $2,324,945 $2,584,305
Weighted average contractual
term of options 6.41 years 6.52 years
Effective April 1, 2006 the Company began recognizing compensation expense for
stock options with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised), "Share-Based Payment," ("SFAS 123R"), using the
modified prospective method. The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes based stock option
valuation model. The fair value of all awards is amortized on a straight-line
basis over the requisite service periods, which are generally the vesting
periods. The Black-Scholes model uses the assumptions listed in the table
below. The expected options granted represents the period of time they are
expected to be outstanding. The expected life is determined based on
historical experience with similar options, giving consideration to the
contractual terms and vesting schedules. Expected volatility is estimated at
the date of grant based on historical volatility of the Company's stock. The
risk-free for periods within the contractual life of the options is based on
the U.S Treasury yield curve in effect at the time of the grant. There were
no options granted during the quarter ended June 30, 2006.
Risk Free Expected Expected Expected
Interest Rate Life (years) Volatility Dividends
------------- ------------ ---------- ---------
Fiscal 2006 4.67% 10.00 26.32% 3.07%
For the quarter ended June 30, 2006, the Company recognized pre-tax
compensation expense related to stock options of approximately $11,000. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions established in
SFAS 123R to stock-based compensation awards in the prior period.
Three months ended
June 30, 2005
------------------
Net Income:
As reported $1,821
Deduct: Total stock based compensation expense
determined under fair value based method for
all options, net of related tax benefit (88)
------
Pro forma $1,733
======
Earnings per common share - basic:
As reported $ 0.33
Pro forma 0.32
Earnings per common share-fully diluted:
As reported $ 0.33
Pro froma 0.31
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
8
conversion of outstanding stock options. Employee Stock Ownership Plan
("ESOP") shares are not considered outstanding for earnings per share purposes
until they are committed to be released.
Three Months Ended
June 30,
------------------------
2006 2005
---------- ----------
Basic EPS computation:
Numerator-net income $2,631,000 $1,821,000
Denominator-weighted average common shares
outstanding 5,637,604 5,451,976
Basic EPS $ 0 .47 $ 0.33
========== ==========
Diluted EPS computation:
Numerator-net income $2,631,000 $1,821,000
Denominator-weighted average
common shares outstanding 5,637,604 5,451,976
Effect of dilutive stock options 88,591 67,723
---------- ----------
Weighted average common shares
and common stock equivalents 5,726,195 5,519,699
Diluted EPS $ 0.46 $ 0.33
========== ==========
6. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
June 30, 2006
-------------
Trust Preferred $ 5,000 $ 38 $ - $ 5,038
Agency securities 14,150 - (232) 13,918
Municipal bonds 3,855 36 - 3,891
------- ---- ----- -------
Total $23,005 $ 74 $(232) $22,847
======= ==== ===== =======
March 31, 2006
--------------
Trust Preferred $ 5,000 $ 44 $ - $ 5,044
Agency securities 15,246 - (218) 15,028
Municipal bonds 3,893 57 - 3,950
------- ---- ----- -------
Total $24,139 $101 $(218) $24,022
======= ==== ===== =======
The contractual maturities of investment securities available for sale are as
follows (in thousands):
Amortized Estimated
June 30, 2006 Cost Fair Value
------------- --------- ----------
Due in one year or less $ 9,198 $ 9,045
Due after one year through five years 6,886 6,823
Due after five years through ten years 274 283
Due after ten years 6,647 6,696
------- -------
Total $23,005 $22,847
======= =======
Investment securities with an amortized cost of $9.2 million and $10.2 million
and a fair value of $9.0 million and $10.1 million at June 30, 2006 and March
31, 2006, 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 June 30, 2006 and March 31, 2006, respectively, were pledged
as collateral for treasury tax and loan funds held by the Bank. Investment
securities with an amortized cost of $494,000 and $495,000 and a fair value of
$500,000 and $504,000 at June 30, 2006 and March 31, 2006, respectively, 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 June 30, 2006 and March
31, 2006, respectively, 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 June 30,
2006 are as follows (in thousands):
Less Than 12 months
12 months or longer Total
-------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ---------- ----- ---------- ----- ----------
Agency securities $5,213 $(79) $8,705 $(153) $13,918 $(232)
9
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of March 31,
2006 are as follows (in thousands):
Less Than 12 months
12 months or longer Total
-------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ---------- ----- ---------- ----- ----------
Agency securities $6,124 $(61) $8,904 $(157) $15,028 $(218)
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment.
The Company realized no gains or losses on sales of investment securities
available for sale for the three-month periods ended June 30, 2006 and 2005.
7. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
June 30, 2006 Cost Gains Losses Value
------------- --------- ---------- ---------- ---------
Real estate mortgage
investment conduits $1,243 $18 $ - $1,261
FHLMC mortgage-backed
securities 128 1 - 129
FNMA mortgage-backed
securities 209 4 - 213
------ --- ---- ------
Total $1,580 $23 $ - $1,603
====== === ==== ======
March 31, 2006
--------------
Real estate mortgage
investment conduits $1,402 $18 $ - $1,420
FHLMC mortgage-backed
securities 138 2 - 140
FNMA mortgage-backed
securities 265 5 - 270
------ --- ---- ------
Total $1,805 $25 $ - $1,830
====== === ==== ======
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
June 30, 2006 Cost Fair Value
------------- --------- ----------
Due after one year or less $ - $ -
Due after one year through five years - -
Due after five years through ten years 23 24
Due after ten years 1,557 1,579
------ ------
Total $1,580 $1,603
====== ======
Mortgage-backed securities held to maturity with an amortized cost of $1.3
million and $1.4 million and a fair value of $1.3 million and $1.4 million at
June 30, 2006 and March 31, 2006, respectively, were pledged as collateral for
governmental public funds held by the Bank. Mortgage-backed securities held to
maturity with an amortized cost of $146,000 and $199,000 and a fair value of
$149,000 and $203,000 at June 30, 2006 and March 31, 2006, 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
June 30, 2006 Cost Gains Losses Value
------------- --------- ---------- ---------- ---------
Real estate mortgage
investment conduits $1,257 $20 $ (12) $1,265
FHLMC mortgage-backed
securities 6,607 - (353) 6,254
FNMA mortgage-backed
securities 147 1 (1) 147
------ --- ----- ------
Total $8,011 $21 $(366) $7,666
====== === ===== ======
March 31, 2006
--------------
Real estate mortgage
investment conduits $1,326 $19 $ (7) $1,338
FHLMC mortgage-backed
securities 6,951 - (316) 6,635
FNMA mortgage-backed
securities 159 2 - 161
------ --- ----- ------
Total $8,436 $21 $(323) $8,134
====== === ===== ======
10
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
June 30, 2006 Cost Fair Value
------------- --------- ----------
Due after one year or less $ 103 $ 103
Due after one year through five years 81 82
Due after five years through ten years 6,618 6,264
Due after ten years 1,209 1,217
--------- ----------
Total $ 8,011 $ 7,666
========= ==========
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 $7.9
million and $8.3 million and a fair value of $7.5 million and $8.0 million at
June 30, 2006 and March 31, 2006, respectively, were pledged as collateral for
FHLB advances. Mortgage-backed securities available for sale with an
amortized cost of $11,000 and $17,000 and a fair value of $11,000 and $18,000
at June 30, 2006 and March 31, 2006, respectively, were pledged as collateral
for treasury tax and loan funds held by the Bank.
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of June 30,
2006 are as follows (in thousands):
Less than 12 months
12 months or longer Total
-------------------------------------------------
Description of Securities Unreal- Unreal- Unreal-
Fair ized Fair ized Fair lized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage
investment conduits $ 491 $ (11) $ - $ - $ 491 $ (11)
FHLMC mortgage-backed
securities 61 (1) 6,163 (353) 6,224 (354)
FNMA mortgage-backed
securities 129 (1) - - 129 (1)
Total temporarily ------ ------ ------ ----- ------ ------
impaired securities $ 681 $ (13) $6,163 $(353) $6,844 $ (366)
====== ====== ====== ===== ====== ======
The fair value of temporarily impaired mortgage-backed securities, the amount
of unrealized losses and the length of time these unrealized losses existed as
of March 31, 2006 are as follows (in thousands):
Less than 12 months
12 months or longer Total
-------------------------------------------------
Description of Securities Unreal- Unreal- Unreal-
Fair ized Fair ized Fair lized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage
investment conduits $ 523 $ (6) $ - $ - $ 523 $ (6)
FHLMC mortgage-backed
securities 66 (1) 6,543 (315) 6,609 (316)
FNMA mortgage-backed
securities 17 (1) - - 17 (1)
Total temporarily ------ ----- ------ ----- ------ ------
impaired securities $ 606 $ (8) $6,543 $(315) $7,149 $ (323)
====== ===== ====== ===== ====== ======
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment. The Company realized no gains
or losses on sales of mortgage-backed securities available for sale for the
three months ended June 30, 2006 and 2005.
11
8. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
June 30, March 31,
2006 2006
------- --------
Residential:
One-to-four family $ 32,668 $ 32,488
Multi-family 3,226 2,157
Construction:
One-to-four family 87,040 81,572
Commercial real estate 50,387 47,079
Commercial 66,474 59,834
Consumer:
Secured 30,961 29,781
Unsecured 926 1,415
Land 56,705 49,558
Commercial real estate 342,174 330,705
-------- --------
670,561 634,589
Less:
Deferred loan fees, net 4,347 4,352
Allowance for loan losses 7,626 7,221
-------- --------
Loans receivable, net $658,588 $623,016
======== ========
Most of the Bank's business activity is with customers located in the states
of Washington and Oregon. Loans and extensions of credit outstanding at one
time to one borrower are generally limited by federal regulation to 15% of the
Bank's shareholders' equity, excluding accumulated other comprehensive
income(loss). As of June 30, 2006 and March 31, 2006, the Bank had no loans to
one borrower in excess of the regulatory limit and also had no individual
industry concentrations of credit.
9. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Three Months
Ended
June 30,
-------------------
2006 2005
------- -------
Beginning balance $ 7,221 $ 4,395
Provision for losses 350 450
Charge-offs (3) (258)
Recoveries 58 51
Allowance transferred from APB
acquisition - 1,888
------- -------
Total allowance for loan losses 7,626 6,526
Allowance for unfunded commitments 376 329
------- -------
Allowance for credit losses $ 8,002 $ 6,855
======= =======
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Three Months
Ended
June 30,
-------------------
2006 2005
------- -------
Beginning balance $ 362 $ 253
Net change in allowance for
unfunded loan commitments
and lines of credit 14 76
------- -------
Ending balance $ 376 $ 329
======= =======
The allowance for unfunded loan commitments is included in accrued expenses
and other liabilities on the Consolidated Balance Sheets. The provision for
unfunded commitments is charged to non-interest expense.
At June 30, 2006 and March 31, 2006, the Company's recorded investment in
impaired loans was $1.2 million and $415,000 respectively. At June 30, 2006,
an allowance for credit losses of $100,000 was determined in accordance with
the Statement Financial Accounting Standards Board ("SFASB") No. 114,
Accounting by Creditors for Impairment
12
of a Loan. The average investment in impaired loans was $794,000 and $889,000
during the three months ended June 30, 2006 and the year ended March 31, 2006
respectively. Interest income recognized on impaired loans was $42,000 and
$4,000 for the three months ended June 30, 2006 and June 30, 2005,
respectively. There were no loans past due 90 days or more and still accruing
interest at June 30, 2006 and March 31, 2006.
10. LOANS HELD FOR SALE
The Company identifies loans held for sale at the time of origination, which
are carried at the lower of aggregate cost or net realizable value. Market
values are derived from available market quotations for comparable pools of
mortgage loans. Adjustments for unrealized losses, if any, are charged to
income.
11. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in mortgage servicing rights
("MSRs") and the related allowance for the periods indicated and other related
financial data (in thousands):
Three Months
Ended
June 30,
-------------------
2006 2005
------- -------
Balance at beginning of
period, net $ 384 $ 470
Additions 25 39
Amortization (51) (61)
Change in valuation allowance 14 10
------- -------
Balance at end of period, net $ 372 $ 458
======= =======
Valuation allowance at beginning
of period $ 60 $ 84
Change in valuation allowance (14) (10)
Valuation allowance at end of ------- -------
period $ 46 $ 74
======= =======
The Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial assets. At June
30, 2006 and March 31, 2006, the fair value of MSRs totaled $1.2 million and
$1.1 million, respectively. The June 30, 2006, 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 100 to 1290.
Remaining amortization expense for the net carrying amount of MSRs at June 30,
2006 is estimated as follows (in thousands):
Year Ending
March 31,
-----------------
2007 $108
2008 100
2009 79
2010 42
2011 26
After 2011 17
----
Total $372
====
12. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $845,000 at June 30, 2005 and
$895,000 at March 31, 2006. Amortization expense related to the core deposit
intangible during the three months ended June 30, 2006 and 2005 totaled
$50,000 and $49,000, respectively.
Remaining amortization expense for the net core deposit intangible at June 30,
2006 is estimated to be as follows (in thousands):
Year Ending
March 31,
-----------------
2007 $134
2008 155
2009 131
2010 111
2011 95
After 2011 219
----
Total $845
====
13
13. BORROWINGS
Borrowings are summarized as follows (in thousands):
At June 30, 2006 At March 31, 2006
---------------- -----------------
Federal Home Loan Bank advances $73,300 $46,100
Weighted average interest rate: 5.20% 4.65%
Borrowings have the following maturities at June 30, 2006 (in thousands):
2007 68,300
2008 5,000
-------
Total $73,300
=======
14. JUNIOR SUBORDINATED DEBENTURE
Riverview Bancorp Statutory Trust I, a wholly-owned subsidiary trust
established by the Company, 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 London Interbank Offered Rate ("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 ("Debentures") of the Company. The Company
intends to use its net proceeds for working capital and investment in its
subsidiary, the Bank. The Company's obligations under the Debentures and
related documents, taken together, constitute a full and unconditional
guarantee by the Company of the obligations of the trust. The trust preferred
securities are mandatory redeemable upon the maturity of the Debentures, or
upon earlier redemption as provided in the indentures. The Company has the
right to redeem the Debentures in whole or in part after year 5 on any coupon
date, at a redemption price specified in the indentures plus any accrued but
unpaid interest to the redemption date.
The Debentures issued by the Company to the grantor trusts, totaling $7.0
million, are reflected in the Company's Consolidated Balance Sheets in the
liabilities section at June 30, 2006, under the caption "Junior subordinated
debenture." Interest expense on the Debentures is recorded in the interest
expense on borrowings in the Consolidated Statements of Income. The Company
recorded $217,000 in other assets in the Consolidated Balance Sheets at June
30, 2006, for the common capital securities issued by the issuer trusts.
Proceeds from the trust preferred securities totaling $5.0 million were
invested in the Bank and the Company retained the remaining $2.0 million to be
used for general corporate purposes.
The following table is a summary of current Debentures at June 30, 2006:
Preferred
Issuance security Rate Initial Rate at Maturing
Issuance trust date amount Type(1) Rate 6/30/06 Date
--------------- ---- ------ ------- ---- ------- ----
(Dollars in thousands)
Riverview Bancorp, Inc.
Statutory Trust 1 12/2005 $ 7,000 Variable 5.88% 6.69% 12/2035
(1) The variable rate preferred securities reprice quarterly.
The total amount of trust preferred securities outstanding at June 30, 2006
was $7.0 million. The interest rates on the trust preferred securities issued
in December 2005 resets quarterly and is tied to the London Interbank Offered
Rate ("LIBOR"). The Company has the right to redeem the debentures in December
2010.
14
On July 2, 2003, the Federal Reserve Bank ("Federal Reserve") issued
Supervisory Letter SR 03-13 clarifying that Bank Holding Companies should
continue to report trust preferred securities in accordance with current
Federal Reserve Bank instructions which allows trust preferred securities to
be counted in Tier 1 capital subject to certain limitations. The Federal
Reserve has indicated it will review the implications of any accounting
treatment changes and, if necessary or warranted, will provide appropriate
guidance.
15. NEW ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 156"). SFAS No. 156 requires all separately recognized
servicing assets and liabilities to be initially measured at fair value. In
addition, entities are permitted to choose to either subsequently measure
servicing rights at fair value and report changes in fair value in earnings,
or amortize servicing rights in proportion to and over the estimated net
servicing income or loss and assess the rights for impairment. Beginning with
the fiscal year in which an entity adopts SFAS No. 156, it may elect to
subsequently measure a class of servicing assets and liabilities at fair
value. Post adoption, an entity may make this election as of the beginning of
any fiscal year. An entity that elects to subsequently measure a class of
servicing assets and liabilities at fair value should apply that election to
all new and existing recognized servicing assets and liabilities within that
class. The effect of remeasuring an existing class of servicing assets and
liabilities at fair value is to be reported as a cumulative-effect adjustment
to retained earnings as of the beginning of the period of adoption. This
statement is effective for the Company as of April 1, 2007. The Company is
currently evaluating whether to elect to measure servicing assets and
liabilities based on fair value or lower of cost or market ("LOCOM").
Additional information regarding mortgage servicing rights is disclosed in
Note 11 in the Notes to Consolidated Financial Statements.
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 $376,000 at June 30, 2006.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies and is required in instances where the Bank deems necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risk as of June 30, 2006 (in thousands):
Contract or
Notional
Amount
-----------
Commitments to originate loans:
Adjustable-rate $ 32,868
Fixed-rate 6,946
Standby letters of credit 1,892
Undisbursed loan funds, and unused
lines of credit 189,872
---------
Total $ 231,578
=========
At June 30, 2006 the Company had no firm commitments to sell residential loans
to FHLMC.
15
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. At June 30, 2006, loans
under warranty totaled $110.7 million, which substantially represents the
unpaid principal balance of the Company's loans serviced for others portfolio.
The Bank believes that the potential for loss under these arrangements is
remote. Accordingly, no contingent liability is recorded in the financial
statements.
At June 30, 2006 scheduled maturities of certificates of deposit, FHLB
advances and future minimum operating lease commitments were as follows (in
thousands):
Within 1-3 3-5 Over Total
1 year Years Years 5 Years Balance
-------- ------- ------- --------- ---------
Certificates of deposit $131,736 $55,559 $ 6,061 $ 4,396 $ 197,752
FHLB advances 68,300 5,000 - - 73,300
Operating leases 1,622 3,195 2,155 4,861 11,833
-------- ------- ------- -------- --------
Total other contractual
obligations $201,658 $63,754 $ 8,216 $ 9,257 $282,885
======== ======= ======= ======== ========
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
liquidity.
17. SUBSEQUENT EVENT
In July 2006, the Company declared a two-for-one stock split in the form of a
100% stock dividend. The shares will be distributed on August 24, 2006, to
shareholders of record as of August 10, 2006. Shareholders will receive one
additional shares of common stock for every share currently owned as of record
date. Riverview has approximately 5,800,000 shares outstanding, and will have
about 11,600,000 shares outstanding after the stock split. The Consolidated
Financial Statements as of June 30, 2006 do not reflect this stock split.
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, pricing of products and services, real estate
values and vacancy rates, the ability of the Company to efficiently
incorporate acquisitions into its operations, competition, loan delinquency
rates, technological factors affecting operations and changes in federal and
state regulation. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements. The Company undertakes no obligation to publish revised forward-
looking statements to reflect the occurrence of unanticipated events or
circumstances after the date hereof.
Critical Accounting Policies
Critical accounting policies and estimates are discussed in our 2006 10-K
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operation Critical Accounting Policies." That discussion
highlights estimates the Company makes that involve uncertainty or potential
for substantial change. There have not been any material changes in our
critical accounting policies and estimates as compared to that contained in
our disclosure in the Company's 2006 10-K for the fiscal year ended March 31,
2006.
Executive Overview
Financial Highlights. Net income for the three months ended June 30, 2006 was
$2.6 million, or $0.47 per basic share ($0.46 per diluted share), compared to
net income of $1.8 million, or $0.33 per basic share ($0.33 per diluted share)
for the three months ended June 30, 2005. Net interest income after provision
for loan losses increased $2.0 million compared to the same quarter last year.
Non-interest income increased in the categories of asset management fees, loan
servicing income, gain on sale of credit card portfolio and bank-owned life
insurance. These increases were partially offset by
16
decreases in fees and service charges and lower gains on sale of loans held
for sale. The Company's operating results also reflect a $673,000 increase in
other non-interest expenses, which are primarily attributable to the APB
acquisition.
The annualized return on average assets was 1.36% for the three months ended
June 30, 2006, compared to 1.09% for the three months ended June 30, 2005.
For the same periods, the annualized return on average common equity was
11.18% compared to 8.89%. The efficiency ratio, which is defined as the
percentage of non-interest expenses to total revenue excluding intangible
asset amortization, was 60.18% for the first quarter of fiscal 2007 as
compared to 64.77% for the three months ended June 30, 2005.
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 30.0% and 7.98% of the loan portfolio, respectively, at March 31, 2002 to
58.5% and 9.9%, respectively, at June 30, 2006. A 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, Oregon. 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 Bank.
Riverview Services, Inc. acts as trustee for deeds of trust on mortgage loans
granted by the Bank. Commercial and business banking services are offered by
the Business and Professional Banking Division located at both the downtown
Vancouver and Portland branch.
Vancouver, located in Clark County, is north of Portland, Oregon. Several
large employers including Sharp Microelectronics, Hewlett Packard, Georgia
Pacific, Underwriters Laboratory and Wafer Tech are located in Northern Oregon
and Southwestern Washington. Major employers in Portland include Intel Corp.,
Providence Health System, Fred Meyer, Legacy Health System and Kaiser
Permanente. In addition to the expanding industry base, the Columbia River
17
Gorge is a popular tourist destination, generating revenue for all the
communities within the area. As a result, the area's economy has become less
dependent on the timber industry.
Comparison of Financial Condition at June 30, 2006 and March 31, 2006
At June 30, 2006, the Company had total assets of $793.3 million, compared
with $763.8 million at March 31, 2006. The $29.5 million increase in total
assets was primarily attributable to the organic growth in the loan portfolio.
Cash, including interest-earning accounts, totaled $26.7 million at June 30,
2006, compared to $31.3 million at March 31, 2006.
No loans were held for sale at June 30, 2006, compared to $65,000 at March 31,
2006. 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 $658.6 million at June 30, 2006, compared to
$623.0 million at March 31, 2006, an increase of $35.6 million. Increases
were primarily experienced in one-to-four family construction loans of $5.5
million, commercial real estate construction of $3.3 million, commercial of
$6.6 million, land of $7.1 million and commercial real estate of $11.5
million. 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 $22.8 million at June 30,
2006, compared to $24.0 million at March 31, 2006. The decrease is
attributable to maturities and scheduled cash flows.
Mortgage-backed securities available-for-sale totaled $7.7 million at June 30,
2006, compared to $8.1 million at March 31, 2006. The decrease is
attributable to maturities and scheduled cash flows.
Goodwill was $25.6 million at June 30, 2006 and March 31, 2006. As of June
30, 2006, there have been no events or changes in circumstances that would
indicate a potential impairment.
Core deposit intangible decreased $50,000 to $845,000 at June 30, 2006 from
$895,000 at March, 31 2006 due to amortization.
Bank owned life insurance increased to $13.2 million at June 30, 2006, from
$13.1 million at March 31, 2006, reflecting an increase in the cash surrender
value of the policies.
Deposits totaled $607.4 million at June 30, 2006, compared to $607.0 million
at March 31, 2006. As the interest rates have increased, the balances in the
high yield checking accounts have increased with offsetting decreases in the
balance of money market accounts and certificates of deposit. At June 30,
2006 the balance of high yield checking accounts had increased $15.0 million
to $81.5 million from $66.5 million at March 31, 2006. Money market accounts
totaled $134.0 million at June 30, 2006 compared to $137.5 million at March
31, 2006. Certificates of deposit balance at June 30, 2006 was $197.8 million
a $9.3 million decrease from the March 31, 2006 balance of $207.1 million.
FHLB advances totaled $73.3 million at June 30, 2006 and $46.1 million at
March 31, 2006. The $27.2 million increase is the short term borrowing that
was used to fund the growth in loans.
Capital lease obligations decreased to $2.7 million at June 30, 2006 from $2.8
million at March 31, 2006. The decrease reflects the monthly amortization of
the obligation.
Shareholders' Equity and Capital Resources
Shareholders' equity increased $1.8 million to $93.5 million at June 30, 2006
from $91.7 million at March 31, 2006. The increase in equity of $2.6 million
from earnings for the three months was partially offset by cash dividends
declared to shareholders of $1.1 million. Exercise of stock options, earned
ESOP shares and the tax effect of SFAS No. 115 adjustment to securities
comprised the remaining $300,000 increase.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions
18
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated in accordance
with regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk, weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total capital to
risk-weighted assets, Tier I capital to risk-weighted assets, core capital to
total assets and tangible capital to tangible assets (set forth in the table
below). Management believes the Bank meets all capital adequacy requirements
to which it is subject as of June 30, 2006.
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.
19
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
------ ----- ------ ----- ------ -----
June 30, 2006
Total Capital:
(To Risk-Weighted Assets) $76,313 10.64% $57,399 8.0% $71,748 10.0%
Tier I Capital:
(To Risk-Weighted Assets) 68,687 9.57 28,699 4.0 43,049 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 68,687 8.96 22,995 3.0 38,326 5.0
Tangible Capital:
(To Tangible Assets) 68,687 8.96 11,498 1.5 N/A N/A
Categorized
as "Well
Capitalized"
For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2006
Total Capital:
(To Risk-Weighted Assets) $78,469 11.48% $54,688 8.0% $68,361 10.0%
Tier I Capital:
(To Risk-Weighted Assets) 71,248 10.42 27,344 4.0 41,016 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 71,248 9.70 22,038 3.0 36,730 5.0
Tangible Capital:
(To Tangible Assets) 71,248 9.70 11,019 1.5 N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at June 30, 2006 (in thousands):
Equity $ 95,195
Net unrealized securities loss 332
Goodwill and other intangibles (26,803)
Servicing asset (37)
---------
Tangible capital 68,687
General valuation allowance 7,626
---------
Total capital $ 76,313
=========
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 June 30, 2006,
cash totaled $26.7 million, or 3.4%, of total assets. The Bank has a line of
credit with the FHLB of Seattle in the amount of 30% of total assets to the
extent the Bank provides qualifying collateral and holds sufficient FHLB
stock. At June 30, 2006, the Bank had $73.3 million in outstanding advances
from the FHLB of Seattle under an available credit facility of $228.5 million,
limited to available collateral. The Bank also had a $10.0 million line of
credit available from Pacific Coast Bankers Bank and a $5.0 million borrowing
capability at the Federal Reserve discount window at June 30, 2006. The Bank
had no borrowings outstanding under either of these credit arrangements at
June 30, 2006.
20
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.
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 $7.6 million at June 30, 2006 and $7.2
million at March 31, 2006. Management believes the allowance for loan losses
at June 30, 2006 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 $1.2 million, or 0.15% of total assets at June 30,
2006, compared with $415,000 or 0.05% of total assets at March 31, 2006. The
$1.2 million balance of non-accrual loans is composed of one residential real
estate loan and one commercial real estate loan. The following table sets
forth information regarding the Company's non-performing assets.
June 30, 2006 March 31, 2006
------------- --------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial real estate $ 5 $ 415
Commercial 1,168 -
Consumer - -
------ ------
Total 1,173 415
------ ------
Accruing loans which are contractually
past due 90 days or more - -
------ ------
Total of nonaccrual and
90 days past due loans 1,173 415
------ ------
Real estate owned (net) - -
------ ------
Total non-performing assets $1,173 $ 415
====== ======
Total loans delinquent 90 days
or more to net loans 0.18% 0.07%
Total loans delinquent 90 days or
more to total assets 0.15% 0.05%
Total non-performing assets to total assets 0.15% 0.05%
21
Comparison of Operating Results for the Three Months Ended June 30, 2006 and
2005
Net Interest Income. The Company's profitability depends primarily on its net
interest income, which is the difference between the income it receives on
interest-earning assets and its cost of funds, which consists of interest paid
on deposits and borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The level of
non-interest income and expenses also affects the Company's profitability.
Non-interest income includes deposit service fees, income associated with the
origination and sale of mortgage loans, brokering loans, loan servicing fees,
income from real estate owned, net gains on sales of assets, bank-owned life
insurance income and asset management fee income. Non-interest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and regulation, and monetary and fiscal
policies.
Net interest income for the three months ended June 30, 2006 was $9.0 million,
representing a $1.9 million, or 27.0% increase, from $7.1 million during 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 net interest margin for the
quarter's ended at June 30, 2006 was 5.23% compared to 5.24% during the
quarter ended March 31, 2006 and 4.70% during the quarter ended June 30, 2005.
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 13.7% as a result of organic growth when comparing the
current quarter to the same period in the prior year. The increase in
interest-earning assets was accompanied by a 13.7% increase in average
balances of interest-bearing liabilities to $574.7 million for the three
months ended June 30, 2006 from $505.6 million for the comparable period in
2005. Average interest-earning assets to average interest-bearing liabilities
totaled 120.46% for the three-month period ended June 30, 2006 compared to
120.45% in the same prior year period.
Interest Income. Interest income increased $4.0 million, or 38.9%, to $14.2
million for the three months ended June 30, 2006 compared to $10.2 million,
for the three months ended June 30, 2005. 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 8.24% for the three months ended June 30,
2006 compared to 6.76% for the same three months ended June 30, 2005. 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
quarters ended June 30, 2006 and June 30, 2005. 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 improve.
Interest Expense. Interest expense increased $2.1 million to $5.2 million for
the three months ended June 30, 2006, or 65.8% compared to $3.1 million for
the three months ended June 30, 2005. Average interest-bearing liabilities
increased $69.1 million to $574.7 million for the three months ended June 30,
2006 compared to $505.6 million for the same prior year period. This increase
includes the effect of $72.3 million in interest bearing deposits acquired
from APB. The significant increase 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 3.39% for the three
months ended June 30, 2006 from 2.21% for the same period in the prior year.
The weighted average cost of FHLB borrowings increased to 5.15% for the three
months June 30, 2006 from 4.61% 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
Three Months Ended June 30,
---------------------------------------------------
2006 2005
------------------------ ------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Real estate loans $552,521 $11,796 8.56% $434,753 $8,009 7.39%
Non-real estate loans 94,412 1,973 8.38 98,269 1,588 6.48
-------- ------- ---- -------- ------ ----
Total net loans (1) 646,933 13,769 8.54 533,022 9,597 7.22
Mortgage-backed
securities (2) 9,931 114 4.60 13,630 145 4.27
Investment
securities (2)(3) 23,821 285 4.80 23,884 290 4.87
Daily interest-bearing
assets 4,031 49 4.88 31,379 225 2.88
Other earning assets (4) 7,567 3 0.16 7,058 - -
-------- ------ ---- -------- ------ ----
Total interest-earning
assets 692,283 14,220 8.24 608,973 10,257 6.76
Non-interest-earning assets:
Office properties and
equipment, net 19,168 8,691
Other non-interest-earning
assets 62,098 54,500
-------- --------
Total assets $773,549 $672,164
======== ========
Interest-bearing
liabilities:
Regular savings accounts $ 36,333 50 0.55 $ 37,713 51 0.54
NOW accounts 127,148 884 2.79 124,369 402 1.30
Money market accounts 133,948 1,257 3.76 101,139 547 2.17
Certificates of deposit 202,231 2,031 4.03 185,308 1,471 3.18
-------- ------ ---- -------- ----- ----
Total deposits 499,660 4,222 3.39 448,529 2,471 2.21
Other interest-bearing
liabilities 75,054 963 5.15 57,052 656 4.61
-------- ------ ---- -------- ----- ----
Total interest-bearing
liabilities 574,714 5,185 3.62 505,581 3,127 2.48
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 94,542 77,587
Other liabilities 9,869 6,867
-------- --------
Total liabilities 679,125 590,035
Shareholders' equity 94,424 82,129
-------- --------
Total liabilities
and shareholders'
equity $773,549 $672,164
======== ========
Net interest income $9,035 $7,130
====== ======
Interest rate spread 4.62% 4.28%
====== ======
Net interest margin 5.23% 4.70%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 120.46% 120.45%
====== ======
Tax equivalent adjustment (3) $ 22 $ 32
====== =====
(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 June 30, 2006 and 2005,
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 June 30, 2006
compared to the quarter ended June 30, 2005. Variances that were immaterial
have been allocated based upon the percentage relationship of changes in
volume and changes in rate to the total net change.
Three Months Ended June 30,
-------------------------------
2006 vs. 2005
-------------------------------
Increase(Decrease)
Due to Total
----------------- Increase
Volume Rate (Decrease)
-------- ------ --------
(In thousands)
Interest Income:
Real estate loans $ 2,388 $ 1,399 $ 3,787
Non-real estate loans (64) 449 385
Mortgage-backed securities (41) 10 (31)
Investment securities (1) (1) (4) (5)
Daily interest-bearing (272) 96 (176)
Other earning assets - 3 3
------- ------- --------
Total interest income 2,010 1,953 3,963
------- ------- --------
Interest Expense:
Regular savings accounts (2) 1 (1)
NOW accounts 9 473 482
Money market accounts 218 492 710
Certificates of deposit 142 418 560
Other interest-bearing liabilities 224 83 307
------- ------- --------
Total interest expense 591 1,467 2,058
------- ------- --------
Net interest income (1) $ 1,419 $ 486 $ 1,905
======= ======= ========
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the three months
ended June 30, 2006 was $350,000, compared to $450,000 for the same period in
the prior year. Net recoveries for the current period were $55,000, compared
to net charge-offs of $207,000 for the same period last year. The ratio of
allowance for credit losses and unfunded loan commitments to total net loans
was 1.20% at June 30, 2006, compared to 1.21% at June 30, 2005. Annualized net
recoveries to average net loans for the three-month period ended June 30, 2006
was 0.03% compared to annualized net charge-offs of 0.16% for the same period
in the prior year. During the quarter ended June 30, 2006, management
evaluated known and inherent risks in the loan portfolio and based on the
analysis, no changes were made in the estimation, assumptions and allocation
of the allowance for loan losses. Management considered the allowance for
loan losses at June 30, 2006 to be adequate to cover probable losses inherent
in the loan portfolio based on the assessment of various factors affecting the
loan portfolio.
Non-Interest Income. Non-interest income decreased $100,000 to $2.1 million
for the quarter ended June 30, 2006 compared to $2.2 million for the quarter
ended June 30, 2005. Increase in the total asset management fees and the gain
from the credit card portfolio partially offset the lower total fees and
service charges and gains from sale of loans. The decrease of $155,000 in fees
and service charges reflects the fact that during the third quarter of fiscal
year 2006 the credit card portfolio acquired from APB was sold. Sale of this
credit card portfolio reduced the non-interest income received from credit
card fees during the current quarter by approximately $140,000 when compared
to the same period in the prior year. Asset management fees from fiduciary
services increased by $72,000 to $436,000 for the quarter ended June 30, 2006,
compared to $364,000 for the quarter ended June 30, 2005. RAM Corp. had
$250.8 million in total assets under management at June 30, 2006, compared to
$202.0 million at June 30, 2005. As previously mentioned, the APB credit card
portfolio was sold in the third quarter of fiscal year 2006 and during the
first quarter of fiscal year 2007, Riverview Community Bank's credit card
portfolio with a balance of approximately $475,000 was sold for a gain of
$67,000.
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 $54,000 for the quarter ended June 30, 2006 to $72,000 compared to
$126,000 for the quarter ended June 30, 2005.
Non-Interest Expense. Non-interest expense increased $673,000, or 11.0%, to
$6.8 million for the three-month period ended June 30, 2006, compared to $6.1
million for the three months ended June 30, 2005. The principal component of
the Company's non-interest expense is salaries and employee benefits. For the
three months ended June 30, 2006, salaries and
24
employee benefits, which include mortgage broker commission compensation, was
$3.8 million, a 12.8% increase over $3.4 million for the three months ended
June 30, 2005. The majority of the increase is a result of the opening of the
192nd branch in third quarter of fiscal year 2006, the expansion of our
lending team and the rising costs of employee benefits. This expansion has
also contributed to the increases in occupancy and depreciation,
telecommunication and other expense.
The amortization expense of core deposit intangible ("CDI") was $50,000 for
the three months ended June 30, 2006 compared to $49,000 for the prior year
period. The acquisition of APB and its $79.8 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.
Professional fees totaled $178,000 for three months ending June 30, 2006 a
$185,000 decrease compared to the $363,000 total for the three months ending
June 30, 2005. The primary cause for the higher professional fees for the
first quarter of the prior year were the costs related to the implementation
of the Sarbanes-Oxley regulations.
Other non-interest expense for the three months ended June 30, 2006 was
$704,000, a 4.6% increase over the $673,000 for the three months ended June
30, 2005. Expansion of the service network and implementation of new systems
has also contributed to the increases in occupancy and depreciation, data
processing, telecommunication and other expense.
Provision for Income Taxes. Provision for income taxes was $1.4 million for
the three months ended June 30, 2006, compared to $918,000 for the three
months ended June 30, 2005. The effective tax rate for three months ended June
30, 2006 was 34.4% compared to 33.5% for the three months ended June
30, 2005. The effective tax rate increased from the prior year's quarter
primarily as a result of phase in to higher statutory tax rate of 35% and
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 June 30, 2006 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, 2006.
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. As of April 22, 2006, the Company transitioned its financial core
processing systems to new platforms. Implementation of the new systems
necessarily involves changes to our procedures for control over financial
reporting. The new systems were subjected to extensive testing prior to and
after April 22, 2006. We have not experienced any significant difficulties to
date in connection with the implementation or operation of the new system. We
have not fully tested application controls covering this new system, but we
plan to do so during the current year in connection with management's
assessment of internal controls over financial reporting. 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.
25
In the quarter ended June 30, 2006, except as referenced above 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.
26
(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
Item 1A. Risk Factors
There have been no material changes to the risk factors previously
disclosed in the Company's 2006 Form 10-K.
The following table summarizes the Company's share repurchases for the quarter
ended June 30, 2006.
Total Number Maximum
of Shares Number of
Purchased as Shares that
Total Part of May Yet Be
Number of Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased per Share Program Program (1)
April 1 - April 30, 2006 - $ - - -
May 1 - May 30, 2006 - - - -
June 1 - June 30,2006 - - - -
-------- ------- -------- --------
Total - $ - - 290,248
======== ======= ======== ========
(1) On July 21, 2005 the Company announced a stock repurchase program
for 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)
27
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)
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.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERVIEW BANCORP, INC.
By: /S/ Patrick Sheaffer By: /S/ Ron Dobyns
-------------------- --------------
Patrick Sheaffer Ron Dobyns
Chairman of the Board Senior Vice President
Chief Executive Officer Chief Financial and Accounting Officer)
(Principal Executive Officer)
Date: August 7, 2006 Date: August 7, 2006
29
Exhibit Index
Exhibit 31.1 Certifications of the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certifications of the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
Exhibit 32 Certifications of the Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
30
Exhibit 31.1
------------
Section 302 Certification
I, Patrick Sheaffer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13(a)- 15(e) and 15(d)- 15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13(a)-
15(f) and 15(d)- 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting
Date: August 7, 2006
/S/ Patrick Sheaffer
--------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
31
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 information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting
Date: August 7, 2006 /S/ Ron Dobyns
--------------
Ron Dobyns
Chief Financial Officer
32
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, Riverview Bancorp, Inc.'s financial condition and
results of operations.
/S/ Patrick Sheaffer /S/ Ron Dobyns
-------------------- --------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: August 7, 2006 Dated: August 7, 2006
33