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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ------- THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission File Number: 0-22957
RIVERVIEW BANCORP, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1838969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Washington, Suite 900 Vancouver, WA 98660
(Address of principal executive offices) (Zip Code)
(360)693-6650
(Registrant's telephone number, including area code)
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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: 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, 4,772,911 shares
outstanding as of January 15, 2004.
Form 10-Q
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets
as of December 31, 2003 and March 31, 2003 1
Consolidated Statements of Income: Three and Nine
Months Ended December 31, 2003 and 2002 2
Consolidated Statements of Shareholders' Equity
for the Year Ended March 31, 2003 and the
Nine Months Ended December 31, 2003 3
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5-16
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-29
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 29-30
Item 4: Controls and Procedures 30
Part II. Other Information 31-32
-----------------
SIGNATURES 33
Part I. Financial Information
Item I. Financial Statements (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND MARCH 31, 2003
DECEMBER 31, MARCH 31,
(In thousands, except share data) (Unaudited) 2003 2003
- ------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of
$22,485 and $42,464) $ 44,778 $ 60,858
Loans held for sale 423 1,501
Investment securities available for sale, at fair
value (amortized cost of $37,269 and $20,265) 37,051 20,426
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $2,739 and $3,403) 2,667 3,301
Mortgage-backed securities available for sale, at
fair value (amortized cost of $11,285 and $12,669) 11,464 13,069
Loans receivable (net of allowance for loan losses
of $4,885 and $2,739) 372,136 300,310
Real estate owned 868 425
Prepaid expenses and other assets 3,859 854
Accrued interest receivable 1,851 1,492
Federal Home Loan Bank stock, at cost 5,986 5,646
Premises and equipment, net 10,164 9,703
Deferred income taxes, net 3,031 1,321
Mortgage servicing rights, net 668 629
Goodwill 9,214 -
Core deposit intangible, net 879 369
Bank-owned life insurance 9,002 -
-------- --------
TOTAL ASSETS $514,041 $419,904
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $405,553 $320,742
Accrued expenses and other liabilities 4,565 4,364
Advance payments by borrowers for taxes and
insurance 108 287
Federal Home Loan Bank advances 40,000 40,000
-------- --------
Total liabilities 450,226 365,393
COMMITMENTS AND CONTINGENCIES (NOTE 14)
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000
authorized
December 31, 2003 - 4,954,479 issued,
4,727,911 outstanding
March 31, 2003 - 4,585,543 issued, 4,358,704
outstanding 50 46
Additional paid-in capital 40,038 33,525
Retained earnings 25,402 22,389
Unearned shares issued to employee stock
ownership trust (1,649) (1,804)
Unearned shares held by the management recognition
and development plan - (15)
Accumulated other comprehensive (loss) income (26) 370
-------- --------
Total shareholders' equity 63,815 54,511
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $514,041 $419,904
======== ========
See notes to consolidated financial statements.
1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
(In thousands, except share data) December 31, December 31,
(Unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans
receivable $ 6,673 $ 5,869 $ 19,069 $ 17,842
Interest on investment securities 146 74 301 132
Interest on mortgage-backed
securities 143 236 478 1,052
Other interest and dividends 229 315 701 1,058
------- ------- -------- --------
Total interest income 7,191 6,494 20,549 20,084
------- ------- -------- --------
INTEREST EXPENSE:
Interest on deposits 1,230 1,293 3,564 4,348
Interest on borrowings 499 642 1,491 2,418
------- ------- -------- --------
Total interest expense 1,729 1,935 5,055 6,766
------- ------- -------- --------
Net interest income 5,462 4,559 15,494 13,318
Less provision for loan losses - 190 70 517
------- ------- -------- --------
Net interest income after
provision for loan losses 5,462 4,369 15,424 12,801
------- ------- -------- --------
NON-INTEREST INCOME:
Fees and service charges 954 1,221 3,372 3,183
Asset management services 229 179 666 549
Gain on sale of loans held for
sale 198 494 789 1,108
Gain on sale of securities - 162 - 162
Gain on sale of other real estate
owned 1 13 49 42
Loan servicing income (expense) (2) (97) 149 (438)
Other 39 22 59 62
------- ------- -------- --------
Total non-interest income 1,419 1,994 5,084 4,668
------- ------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,575 2,095 7,324 6,164
Occupancy and depreciation 782 619 2,137 1,853
Data processing 233 197 675 614
Amortization of core deposit
intangible 121 82 310 245
Marketing expense 183 92 696 502
FDIC insurance premium 24 13 49 35
State and local taxes 110 94 317 285
Telecommunications 64 59 185 157
Professional fees 147 105 341 310
Other 331 339 1,049 939
------- ------- -------- --------
Total non-interest expense 4,570 3,695 13,083 11,104
------- ------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 2,311 2,668 7,425 6,365
PROVISION FOR FEDERAL INCOME TAXES 772 896 2,468 2,027
------- ------- -------- --------
NET INCOME $ 1,539 $ 1,772 $ 4,957 $ 4,338
======= ======= ======== ========
Earnings per common share:
Basic $ 0.32 $ 0.41 $ 1.08 $ 0.99
Diluted 0.32 0.40 1.06 0.98
Weighted average number of shares
outstanding:
Basic 4,757,750 4,331,305 4,594,958 4,372,325
Diluted 4,844,247 4,382,873 4,673,038 4,428,332
Cash dividends per common share $ 0.140 $ 0.125 $ 0.420 $ 0.375
See notes to consolidated financial statements.
2
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2003
AND THE NINE MONTHS ENDED DECEMBER 31, 2003
(Unaudited)
Unearned
Shares Accum-
Issued to ulated
Employee Other
Common Addi- Stock Unearned Compre-
Stock tional Owner- Shares hensive
(In thousands, except ---------------- Paid-in Retained ship Issued to Income
per share data) Shares Amount Capital Earnings Trust MRDP (Loss) Total
- ---------------------------------------------------------------------------------------------------------
Balance, April 1, 2002 4,458,456 $ 47 $ 35,725 $ 20,208 $ (2,010) $ (218) $ (75) $ 53,677
Cash dividends - - - (2,178) - - - (2,178)
Exercise of stock options 46,577 - 417 - - - - 417
Stock repurchased and
retired (196,100) (1) (2,881) - - - - (2,882)
Earned ESOP shares 24,633 - 166 - 206 - - 372
Tax benefit associated
with MRDP - - 98 - - - - 98
Earned MRDP shares 25,138 - - - - 203 - 203
--------- ---- -------- -------- -------- -------- ------- --------
4,358,704 46 33,525 18,030 (1,804) (15) (75) 49,707
Comprehensive income
Net Income - - - 4,359 - - - 4,359
Other Comprehensive Income:
Unrealized holding gain on
securities of $966 (net of
$498 tax effect) less re-
classification adjustment
for net losses included in
net income of $1,411 ( net
of $727 tax effect) - - - - - - 445 445
--------
Total comprehensive income - - - - - - - 4,804
--------- ---- -------- -------- -------- -------- ------- --------
Balance, March 31, 2003 4,358,704 46 33,525 22,389 (1,804) (15) 370 54,511
Cash dividends - - - ( 1,944) - - - (1,944)
Exercise of stock options 35,281 - 422 - - - - 422
Stock repurchased and
retired (81,500) (1) (1,509) - - - - (1,510)
Stock issued in connection
with acquisition (Note 15) 430,655 5 7,343 - - - - 7,348
Earned ESOP shares 24,633 - 198 - 155 - - 353
Tax benefit associated
with MRDP - - 59 - - - - 59
Earned MRDP shares 5,138 - - - - 15 - 15
--------- ---- -------- -------- -------- -------- ------- --------
4,772,911 50 40,038 20,445 (1,649) - 370 59,254
Comprehensive income
Net Income - - - 4,957 - - - 4,957
Other Comprehensive Income:
Unrealized holding loss on
securities of $396 (net of
$204 tax effect) - - - - - - (396) (396)
--------
Total comprehensive income - - - - - - - 4,561
--------- ---- -------- -------- -------- -------- ------- --------
Balance, December 31, 2003 4,772,911 $ 50 $ 40,038 $ 25,402 $ (1,649) $ - $ (26) $ 63,815
See notes to consolidated financial statements.
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
(In thousands) (Unaudited) 2003 2002
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,957 $ 4,338
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 1,641 1,312
Mortgage servicing rights impairment (304) 491
Provision for losses on loans 70 517
Origination of loans held for sale (43,706) (38,177)
Proceeds from sales of loans held for sale 44,888 38,810
Provision (credit) for deferred income taxes 237 (161)
Noncash expense related to ESOP benefit 353 271
Noncash expense related to MRDP benefit 15 194
Decrease in deferred loan origination fees, net
of amortization 669 536
Federal Home Loan Bank stock dividend (182) (246)
Net gain on sale of loans, real estate owned and
premises and equipment (699) (1,119)
Changes in assets and liabilities:
Increase in prepaid expenses and other assets (2,949) (225)
Decrease in accrued interest receivable 195 297
Decrease in accrued expenses and other liabilities (815) (36)
--------- ---------
Net cash provided by operating activities 4,370 6,802
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (232,828) (189,503)
Principal repayments on loans 245,679 168,538
Principal repayments on mortgage-backed securities
held to maturity 632 865
Principal repayments on mortgage-backed securities
available for sale 6,823 18,183
Purchase of mortgage-backed securities available
for sale (4,937) -
Purchase of investment securities available for sale (11,000) (5,000)
Proceeds from call or maturity of investment
securities available for sale 250 1,356
Purchase of premises, equipment and other (380) (120)
Acquisition, net of cash received 7,206 -
Purchase of first mortgage or improvement to REO (159) -
Purchase bank-owned life insurance (9,000) -
Proceeds from sale of real estate 654 1,456
--------- ---------
Net cash provided by (used in) investing activities 2,940 (4,225)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts (20,302) 54,698
Dividends paid (1,821) (1,584)
Repurchase of common stock (1,510) (2,599)
Proceeds from Federal Home Loan Bank advances - 5,000
Repayment of Federal Home Loan Bank advances - (29,500)
Net decrease in advance payments by borrowers (179) (135)
Proceeds from exercise of stock options 422 31
--------- ---------
Net cash (used in) provided by financing activities (23,390) 25,911
--------- ---------
NET (DECREASE) INCREASE IN CASH (16,080) 28,488
CASH, BEGINNING OF PERIOD 60,858 22,492
--------- ---------
CASH, END OF PERIOD $ 44,778 $ 50,980
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 5,158 $ 6,972
Income taxes 2,170 1,912
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned $ 688 $ 1,527
Dividends declared and accrued in other liabilities 668 539
Fair value adjustment to securities available for sale (599) (932)
Income tax effect related to fair value adjustment 204 317
Common stock issued upon business combination 7,347 -
See notes to consolidated financial statements.
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
--------------------------------------
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for 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, 2003. The results of
operations for the three and nine months ended December 31, 2003 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. 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 accompanying unaudited consolidated financial statements of Riverview
Bancorp, Inc. and Subsidiary (the "Company") include all the accounts of
Riverview Bancorp, Inc. and the consolidated accounts of its wholly-owned
subsidiary, Riverview Community Bank (the "Community Bank"), and the Community
Bank's majority-owned subsidiary Riverview Asset Management Corporation ("RAM
CORP.") and wholly-owned subsidiary Riverview Services, Inc. All references
to the Company herein include the Community Bank where applicable. All inter-
company balances and transactions have been eliminated upon consolidation.
(3) Stock Based Compensation
------------------------
In December 2002, Statement of Financial Accounting Standards ("SFAS") No.
148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an
amendment of Financial Accounting Standards Board ("FASB") Statement No. 123,
was issued. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results.
Effective March 31, 2003, and in accordance with Statement No. 148, the
Company elected to continue to account for stock-based awards under the
guidance of Accounting Principles Board ("APB") Opinion No. 25.
5
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value method consistent with Statement No. 123 for
all periods presented, the Company's net income per share would have been
reduced to the pro forma amounts indicated below:
Three Months Ended
December 31,
--------------------------
2003 2002
----------- -----------
Net income
As reported $ 1,539,000 $ 1,772,000
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (16,542) (23,890)
----------- -----------
Pro forma $ 1,522,458 $ 1,748,110
=========== ===========
Earnings per common share - basic:
As reported $ 0.32 $ 0.41
Pro forma 0.32 0.40
Earnings per common share - fully
diluted:
As reported 0.32 0.40
Pro forma 0.32 0.40
Nine Months Ended
December 31,
--------------------------
2003 2002
----------- -----------
Net income
As reported $ 4,957,000 $ 4,338,000
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (49,626) (71,670)
----------- -----------
Pro forma $ 4,907,374 $ 4,266,330
=========== ===========
Earnings per common share - basic:
As reported $ 1.08 $ 0.99
Pro forma 1.07 0.98
Earnings per common share - fully
diluted:
As reported 1.06 0.98
Pro forma 1.05 0.97
6
(4) Comprehensive Income
--------------------
Comprehensive income is defined as the change in equity during a period from
transactions and other events from nonowner sources. Comprehensive income is
the total of net income and other comprehensive income, which for the Company
is comprised of unrealized gains and losses on securities available for sale
adjusted for gains and losses on securities available for sale included in
non-interest income.
For the three and nine months ended December 31, 2003, the Company's total
comprehensive income was $885,000 and $4.6 million, respectively, compared to
$954,000 and $3.7 million for the three and nine months ended December 31,
2002, respectively.
Total comprehensive income for the three and nine months ended December 31,
2003 is comprised of net income of $1.5 million and $5.0 million and other
comprehensive losses of $654,000 and $396,000, net of tax effect,
respectively. Other comprehensive income for the three months and nine months
ended December 31, 2003 consists of unrealized securities losses of $654,000
and $396,000, net of tax effect.
Total comprehensive income for the three and nine months ended December 31,
2002 is comprised of net income of $1.8 million and $4.3 million and other
comprehensive loss of $818,000 and $615,000, net of tax effect, respectively.
Other comprehensive income for the three and nine months ended December 31,
2002, consists of unrealized securities loss of $711,000 and $508,000, net of
tax effect, respectively, less gain on securities available for sale included
in non-interest income of $107,000 for both periods, net of tax effect.
(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 shares of common stock
outstanding during the period, without considering the effect of any dilutive
items. Diluted EPS is computed by dividing net income applicable to common
stock by the weighted average number of shares of common stock and common
stock equivalents for items that are dilutive, net of shares assumed to be
repurchased using the treasury stock method at the average share price for the
Company's common stock during the period. Common stock equivalents arise from
assumed conversion of outstanding stock options and awarded but not released
Management Recognition and Development Plan ("MRDP") shares. Employee Stock
Ownership Plan ("ESOP") shares are not considered outstanding for EPS purposes
until they are committed to be released.
7
Three Months Ended
December 31,
--------------------------
2003 2002
----------- -----------
Basic EPS computation:
Numerator-Net Income $ 1,539,000 $ 1,772,000
Denominator-Weighted average common
shares outstanding 4,757,750 4,322,832
Basic EPS $ 0. 32 $ 0.41
=========== ===========
Diluted EPS computation:
Numerator-Net Income $ 1,539,000 $ 1,772,000
Denominator-Weighted average
common shares outstanding 4,757,750 4,331,305
Effect of dilutive stock options 86,497 49,383
Effect of dilutive MRDP - 2,185
----------- -----------
Weighted average common shares and
common stock equivalents 4,844,247 4,382,873
Diluted EPS $ 0.32 $ 0.40
=========== ===========
Nine Months Ended
December 31,
--------------------------
2003 2002
----------- -----------
Basic EPS computation:
Numerator-Net Income $ 4,957,000 $ 4,338,000
Denominator-Weighted average
common shares outstanding 4,594,958 4,372,325
Basic EPS $ 1.08 $ 0. 99
=========== ===========
Diluted EPS computation:
Numerator-Net Income $ 4,957,000 $ 4,338,000
Denominator-Weighted average
common shares outstanding 4,594,958 4,372,325
Effect of dilutive stock options 75,260 43,579
Effect of dilutive MRDP 2,820 12,428
----------- -----------
Weighted average common shares
and common stock equivalents 4,673,038 4,428,332
Diluted EPS $ 1.06 $ 0.98
=========== ===========
(6) Investment Securities
---------------------
There were no sales of investment securities classified as held to maturity
during the three and nine month periods ended December 31, 2003 and 2002.
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003
Trust preferred securities $ 5,000 $ - $ - $ 5,000
U.S. Treasury securities 4,006 4 - 4,010
Agency securities 13,000 110 - 13,110
Equity securities 12,700 - (525) 12,175
School district bonds 2,563 193 - 2,756
-------- ------ ------- --------
$ 37,269 $ 307 $ (525) $ 37,051
======== ====== ======= ========
8
March 31, 2003
Trust preferred securities $ 5,000 $ - $ (25) $ 4,975
Equity securities 12,700 - - 12,700
School district bonds 2,565 186 - 2,751
-------- ------ ------- --------
$ 20,265 $ 186 $ (25) $ 20,426
======== ====== ======= ========
Investment securities with an amortized cost of $15.0 million and $12.7
million and a fair value of $14.6 million and $12.7 million at December 31,
2003 and March 31, 2003, respectively, were pledged as collateral for advances
at the Federal Home Loan Bank. Investment securities with an amortized cost
of $500,000 and $753,000 and a fair value of $502,000 and $760,000 at December
31, 2003 and March 31, 2003, respectively, were pledged as collateral for
government public funds held by the Community Bank. Investment securities
with an amortized cost of $500,000 and a fair value of $500,000 at December
31, 2003 were pledged as collateral for treasury tax and loan funds held by
the Community Bank.
The contractual maturities of securities available for sale are as follows (in
thousands):
Amortized Estimated
December 31, 2003 Cost Fair Value
--------- ----------
Due in one year or less $ 4,006 $ 4,010
Due after one year through five years 14,415 14,636
Due after five years through ten years 530 579
Due after ten years 18,318 17,826
-------- --------
$ 37,269 $ 37,051
======== ========
(7) Mortgage-backed Securities
--------------------------
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003
REMICs $ 1,802 $ 48 $ - $ 1,850
FHLMC mortgage-backed securities 362 8 - 370
FNMA mortgage-backed securities 503 16 - 519
------- ------ ------ -------
$ 2,667 $ 72 $ - $ 2,739
======= ====== ====== =======
March 31, 2003
REMICs $ 1,803 $ 57 $ - $ 1,860
FHLMC mortgage-backed securities 589 13 - 602
FNMA mortgage-backed securities 909 32 - 941
------- ------ ------ -------
$ 3,301 $ 102 $ - $ 3,403
======= ====== ====== =======
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
9
Amortized Estimated
December 31, 2003 Cost Fair Value
--------- ----------
Due in one or less $ 79 $ 81
Due after one year through five years 57 60
Due after five years through ten years 9 10
Due after ten years 2,522 2,588
------- -------
$ 2,667 $ 2,739
======= =======
Mortgage-backed securities held to maturity with an amortized cost of $1.9
million and $2.2 million and a fair value of $1.9 million and $2.3 million at
December 31, 2003 and March 31, 2003, respectively, were pledged as collateral
for governmental public funds held by the Community Bank. Mortgage-backed
securities held to maturity with an amortized cost of $355,000 and $385,000
and a fair value of $366,000 and $399,000 at December 31, 2003 and March 31,
2003, respectively, were pledged as collateral for treasury tax and loan funds
held by the Community Bank. The real estate mortgage investment conduits
("REMICs") consist of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and privately issued
securities.
Expected maturities of mortgage-backed securities held to maturity will differ
from contractual maturities because borrowers may have the right to prepay
obligations with or without prepayment penalties.
There were no sales of mortgage-backed securities held to maturity during the
three and nine month periods ended December 31, 2003 and 2002.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 2003
REMICs $ 3,326 $ 73 $ (3) $ 3,396
FHLMC mortgage-backed securities 7,517 94 - 7,611
FNMA mortgage-backed securities 442 15 - 457
-------- ------ ------ --------
$ 11,285 $ 182 $ (3) $ 11,464
======== ====== ====== ========
March 31, 2003
REMICs $ 6,327 $ 100 $ (6) $ 6,421
FHLMC mortgage-backed securities 5,811 286 - 6,097
FNMA mortgage-backed securities 531 20 - 551
-------- ------ ------ --------
$ 12,669 $ 406 $ (6) $ 13,069
======== ====== ====== ========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
December 31, 2003 Cost Fair Value
---------- ----------
Due in one year or less $ 39 $ 39
Due after one year through five years 3,063 3,137
Due after five year through ten years 4,890 4,912
Due after ten years 3,293 3,376
-------- --------
$ 11,285 $ 11,464
======== ========
10
Expected maturities of mortgage-backed securities available for sale will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
Mortgage-backed securities with an amortized cost of $5.9 million and $11.9
million and a fair value of $6.0 million and $12.2 million at December 31,
2003 and March 31, 2003, respectively, were pledged as collateral for advances
at the Federal Home Loan Bank. Mortgage-backed securities with an amortized
cost of $274,000 and a fair value of $283,000 at December 31, 2003 were
pledged as collateral for governmental public funds held by the Community
Bank. Mortgage-backed securities with an amortized cost of $114,000 and
$316,000 and a fair value of $120,000 and $327,000 at December 31, 2003 and
March 31, 2003, respectively, were pledged as collateral for treasury tax and
loan funds held by the Community Bank.
(8) Loans Receivable
----------------
Loans receivable consisted of the following (in thousands):
December 31, March 31,
2003 2003
----------- ---------
Residential:
One- to- four family $ 47,049 $ 58,498
Multi-family 5,529 6,313
Construction:
One- to- four family 72,428 70,397
Multi-family 2,100 2,100
Commercial real estate 1,437 4,531
Commercial 58,633 34,239
Consumer:
Secured 28,280 23,458
Unsecured 1,933 1,334
Land 29,748 34,630
Commercial real estate 164,204 101,672
--------- ---------
411,341 337,172
Less:
Undisbursed portion of loans 31,182 31,222
Deferred loan fees 3,138 2,901
Allowance for loan losses 4,885 2,739
--------- ---------
Loans receivable, net $ 372,136 $ 300,310
========= =========
(9) Allowance for Loan Losses
-------------------------
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -------------------
2003 2002 2003 2002
------- ------- ------- -------
Beginning balance $ 5,205 $ 2,689 $ 2,739 $ 2,537
Provision for losses - 190 70 517
Charge-offs (333) (77) (575) (261)
Recoveries 13 4 51 13
Acquisition - - 2,639 -
Net change in allowance for
unfunded loan commitments and
lines of credit - - (39) -
------- ------- ------- -------
Ending balance $ 4,885 $ 2,806 $ 4,885 $ 2,806
======= ======= ======= =======
11
At December 31, 2003 and March 31, 2003, the Company's recorded investment in
loans for which impairment has been recognized under the guidance of SFAS No.
114 and SFAS No. 118 was $2.0 million and $323,000, respectively. The
allowance for loan losses in excess of specific reserves is available to
absorb losses from all loans, although allocations have been made for certain
loans and loan categories as part of management's analysis of the allowance.
The average investment in impaired loans was approximately $1.0 million, $1.3
million and $1.1 million during the nine months ended December 31, 2003,
December 31, 2002 and the year ended March 31, 2003 respectively.
(10) Loans held for Sale
-------------------
The Company identifies loans held for sale at the time of origination and they
are carried at the lower of aggregate cost or net realizable value. Market
values are derived from available market quotations for comparable pools of
mortgage loans. Adjustments for unrealized losses, if any, are charged to
income.
(11) Intangible Assets
-----------------
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on
April 1, 2002. SFAS No. 142 provides that goodwill is no longer amortized and
the value of an identifiable intangible asset must be amortized over its
useful life, unless the asset is determined to have an indefinite life.
During the quarter ended September 30, 2003, the Company's purchase of Today's
Bancorp, Inc. ("Today's Bancorp") resulted in the recording of $9.2 million of
goodwill (see note 16 for further details). The Company will review this
balance on an annual basis for impairment. The annual test for impairment
will be a two-step process. The first step will be to compare the current fair
value of Riverview Bancorp, Inc. with its book value, including goodwill. If
the current fair value exceeds the book value, goodwill will not be considered
to be impaired and the test is completed. If the book value is greater than
the current fair value, the implied value of the goodwill will be analyzed
against the carrying value of the goodwill. Any noted impairment losses will
be taken at that time.
The Company also has identifiable intangible assets of core deposit intangible
and mortgage servicing rights ("MSR") that will continue to be amortized. As
part of the Today's Bancorp acquisition, core deposit intangibles increased
$820,0000.
Intangible asset balances (excluding MSR) consisted of the following (in
thousands):
December 31, 2003
-----------------------------------
Carrying Accumulated
Amount Amortization Net
-------- ------------ -----
Core deposit intangible $ 4,088 $ 3,209 $ 879
======= ======= =====
March 31, 2003
-----------------------------------
Carrying Accumulated
Amount Amortization Net
-------- ------------ -----
Core deposit intangible $ 3,269 $ 2,900 $ 369
======= ======= =====
12
Amortization Expense
Quarter Ended December 31,
2003 2002
--------------------------
Core deposit intangible $ 121 $ 82
===== ====
Amortization Expense
Nine Months Ended
December 31,
2003 2002
----------------------
Core deposit intangible $ 310 $ 245
===== =====
The value of the MSR asset is subject to prepayment risk. Future expected net
cash flows from servicing a loan in the servicing portfolio are not realized
if the loan pays off earlier than anticipated. If loans payoff earlier than
anticipated there is no economic benefit because loans in our servicing
portfolio do not contain penalty provisions for early payoff.
An estimated fair value of MSR is determined quarterly using a discounted cash
flow model. The model estimates the present value of the future net cash
flows of the servicing portfolio based on various factors, such as servicing
costs, servicing income, expected prepayments speeds, discount rate, loan
maturity and interest rate. MSR impairment is recorded in the amount that
the estimated fair value is less than the MSR carrying value.
Changes in balance of MSR, net of valuation, were as follows (in thousands):
Three Months Ended December 31,
2003 2002
-------------------------------
Beginning balance $ 718 $ 636
Additions 36 227
Amortization (87) (75)
Impairment adjustment 1 (108)
----- -----
Total $ 668 $ 680
===== =====
Allowance at beginning of period $ 110 $ 477
Provision for impairment (1) 108
----- -----
Allowance at end of period $ 109 $ 585
===== =====
Nine Months Ended December 31,
2003 2002
------------------------------
Beginning balance $ 629 $ 912
Additions 166 461
Amortization (431) (202)
Impairment adjustment 304 (491)
----- -----
Total $ 668 $ 680
===== =====
Allowance at beginning of period $ 413 $ 94
Provision for impairment (304) 491
----- -----
Allowance at end of period $ 109 $ 585
===== =====
13
Amortization expense for the net carrying amount of intangible assets at
December 31, 2003 is estimated to be as follows (in thousands):
Fiscal year
---------------
2004 $ 189
2005 389
2006 237
2007 192
2008 172
Beyond
5 years 368
------
Total $1,547
======
(12) Borrowings
----------
Borrowings are summarized as follows (in thousands):
December 31, March 31,
------------ ---------
2003 2003
Federal Home Loan Bank advances $40,000 $40,000
======= =======
Weighted average interest rate: 4.88% 5.53%
==== ====
Borrowings have the following maturities at December 31, 2003 (in thousands):
Fiscal Year
2004 $ -
2005 -
2006 15,000
2007 20,000
2008 5,000
--------
$ 40,000
========
(13) Shareholders' Equity
--------------------
Repurchase of Common stock
In September 2002, the Company announced a stock repurchase of up to 5%, or
214,000 shares, of its outstanding common stock. At December 31, 2003, 81,500
shares had been repurchased at an average cost of $18.53 per share.
In July 2001, the Company received regulatory approval to repurchase up to 10%
or 465,504 shares of its outstanding common stock at June 30, 2001. At
December 31, 2003, 465,504 shares had been repurchased at an average cost of
$12.93 per share. Because the Company is a Washington corporation and the
State of Washington treats all treasury stock as retired upon purchase, all
purchases of treasury stock reduce stock issued and the cost of treasury stock
acquired is charged to par value and paid-in capital.
(14) Recently Issued Accounting Pronouncements
-----------------------------------------
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
14
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Such
instruments may have been previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of this standard has not had a
significant effect on the Company's reported equity.
(15) Commitments and Contingencies
-----------------------------
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate
mortgage, consumer and commercial loans. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amount of those applicable instruments. The Company uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. Commitments to extend credit are conditional, and are honored
for up to 45 days subject to the Company's usual terms and conditions.
Collateral is not required to support commitments.
At December 31, 2003, the Company had commitments to originate fixed rate
mortgages of $1.9 million at interest rates ranging from 4.625% to 7.000%. At
December 31, 2003 adjustable rate mortgage loan commitments were $2.7 million
at an average interest rate of 6.051%. The undisbursed balance of mortgage
loans closed was $31.2 million at December 31, 2003. Consumer loan
commitments totaled $53,500 and unused lines of consumer credit totaled $17.9
million at December 31, 2003. Commercial real estate loan commitments totaled
$2.8 million and unused lines of commercial real estate credit totaled $17.9
million at December 31, 2003. Commercial loan commitments totaled $1.1
million and unused commercial lines of credit totaled $27.1 million at
December 31, 2003.
The allowance for unfunded commitments was $214,192 at December 31, 2003.
At December 31, 2003, the Company had firm commitments to sell $423,000 of
residential loans to FHLMC. These agreements are short term fixed rate
commitments and no material gain or loss is likely.
In connection with certain asset sales, the Community 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 Community Bank may have an obligation to repurchase the
assets or indemnify the purchaser against loss. As of December 31, 2003,
loans under warranty totaled $124.7 million, which substantially represents
the unpaid principal balance of the Community Bank's loans serviced for others
portfolio. The Community Bank believes that the potential for loss under
these arrangements is remote. Accordingly, no contingent liability is
recorded in the financial statements.
The Company is a party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a
material effect, if any, on the Company's financial position, results of
operations, or liquidity.
15
(16) ACQUISITION
-----------
On July 18, 2003 the Company completed the acquisition of Today's Bancorp.
Each share of Today's Bancorp common stock was exchanged for 0.826 shares of
the Company's common stock, or $13.64 in cash, or combination thereof
resulting in the issuance of 430,655 additional shares. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
assets and liabilities of Today's Bancorp were recorded at their respective
fair value. Goodwill, the excess of the purchase price over the net fair
value of the assets and liabilities acquired, was recorded at $9.2 million.
The merger of the two community-oriented institutions will give the Company a
stronger presence as a business and retail commercial bank in the growing
Vancouver and Clark County market area.
The following unaudited actual and pro forma financial information for the
three and nine months ended December 31, 2003 and 2002 assumes that the
Today's Bancorp acquisition occurred as of March 31, 2002, 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
Today's Bancorp acquisition been consummated on the date indicated.
Financial Information for the
Three Months Ended December 31,
2003 2002
-------------------------------
Actual Pro Forma
-------------------------------
(in thousands)
Net Interest Income $ 5,462 $ 5,647
Non-interest Income 1,419 2,003
Non-interest Expense 4,570 4,626
Net Income 1,539 417
Pro Forma Financial Information for the
Nine Months Ended December 31,
-------------------------------
2003 2002
-------------------------------
(in thousands)
Net Interest Income $ 16,596 $ 17,157
Non-interest Income 5,182 4,780
Non-interest Expense 14,424 13,591
Net Income 5,138 3,703
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Clause. This report on Form 10-Q contains certain
"forward-looking statements." The Company 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
itself of the protection of such safe harbor with respect to forward-looking
statements. These forward-looking statements, which are included in
Management's Discussion and Analysis, describe future plans or strategies and
include the Company's expectations of future financial results. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements. The Company's ability to
predict results or the effect of future plans or strategies is inherently
uncertain. Factors
16
which could affect actual results include interest rate trends, the economic
climate in the Company's market area and the country as a whole, loan demand,
loan delinquency rates, the Company's ability to integrate the acquisition of
Today's Bancorp, Inc. and efficiently manage expenses, and changes in federal
and state regulation and other risks detailed in the Company's reports filed
with the Securities and Exchange Commission. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America in the preparation of the Company's consolidated financial
statements. The Company has identified three policies that due to judgments,
estimates and assumptions inherent in those policies are critical to an
understanding of the Company's consolidated financial statements. These
policies relate to the methodology for the determination of the allowance for
loan losses, the valuation of mortgage servicing rights and the impairment of
investments. These policies and the judgments, estimates and assumptions are
described in greater detail in Management's Discussion and Analysis and in
Note 1, Note 6 and Note 8 to the Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K for the year nded March 31, 2003.
Management believes that the judgments, estimates and assumptions used in the
preparation of the Company's consolidated financial statements are appropriate
given the factual circumstances at the time. However, given the sensitivity
of the Company's consolidated financial statements to these critical
accounting policies, the use of other judgments, estimates and assumptions
could result in material differences in our results of operations or financial
condition.
The allowance for loan losses is maintained at a level sufficient to provide
for estimated loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current and anticipated economic
conditions, and detailed analysis of individual loans for which full
collectibility may not be assured. The detailed analysis includes techniques
to estimate the fair value of loan collateral and the existence of potential
alternative sources of repayment. The appropriate allowance level is
estimated based upon factors and trends identified by management at the time
the consolidated financial statements are prepared.
The Company stratifies its MSRs based on the predominant characteristics of
the underlying financial assets. An estimated fair value of MSRs is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected prepayments
speeds, discount rate, loan maturity and interest rate. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSRs portfolio.
The Company's methodology for estimating the fair value of MSRs is highly
sensitive to changes in assumptions. For example, the determination of fair
value uses anticipated prepayment speeds. Actual prepayment experience may
differ and any difference may have a material effect on the risk. Thus, any
17
measurement of MSRs fair value is limited by the conditions existing and
assumptions made as of a particular point in time. Those assumptions may not
be appropriate if they are applied to a different point in time.
Future expected net cash flows from servicing a loan in the servicing
portfolio would not be realized if the loan pays off earlier than anticipated.
Moreover, because most loans within the servicing portfolio do not contain
penalty provisions for early payoff, the Company will not receive a
corresponding economic benefit if the loan pays off earlier than expected.
MSRs are the discounted present value of the future net cash flows projected
from the servicing portfolio. Accordingly, prepayment risk subjects our MSRs
to impairment. MSRs impairment is recorded in the amount that the estimated
fair value is less than the MSRs carrying value.
The Company's determination of impairment for various types of investments
accounted for in accordance with SFAS No. 115 is predicated on the notion of
other-than-temporary. The key indicator that an investment may be impaired is
that the fair value of the investment is less than its carrying value. Each
reporting period the Company reviews those investments for which the fair
value is less than their carrying value to determine whether certain
indicators indicated the fair value of the investment has been negatively
impacted. These indicators include deteriorating financial condition,
regulatory, economic or technological changes, downgrade by a rating agency
and length of time the fair value has been less than carrying value. If any
indicators of impairment are present, management determines the fair value of
the investment and compares to its carrying value. If the fair value of the
investment is less than the carrying value of the investment, the investment
is considered impaired and a determination must be made as to whether the
impairment is other-than-temporary.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized in interest income
using the interest method. If the cost basis of these securities is
determined to be other-than-temporary impaired, the amount of the impairment
is charged to operations.
Securities available for sale are carried at fair value. Premiums and
discounts are amortized using the interest method over the remaining period to
contractual maturity. Unrealized holding gains and losses, or valuation
allowances established for net unrealized losses, are excluded from earnings
and reported as a separate component of shareholders' equity as accumulated
other comprehensive income, net of income taxes, unless the security is deemed
other-than-temporary impaired. If the security is determined to be
other-than-temporary impaired, the amount of the impairment is charged to
operations.
The Company will deem an impairment other-than-temporary unless positive
evidence indicating that an investment's carrying value is recoverable within
a reasonable period of time outweighs negative evidence to the contrary.
Evidence that is objectively determinable and verifiable is given greater
weight than evidence that is subjective and/or not verifiable. Evidence based
on future events will generally be less objective as it is based on future
expectations and therefore is generally less verifiable or not verifiable at
all. Factors considered in evaluating whether a decline in value is
other-than-temporary include, (a) the length of time and the extent to which
the fair value has been less than amortized cost, (b) the financial condition
and near-term prospects of the issuer and (c) the Company's intent and ability
to retain the investment for a period of time. In situations in which the
18
security's fair value is below amortized cost but it continues to be probable
that all contractual terms of the security will be satisfied, and that the
decline is due solely to changes in interest rates (not because of increased
credit risk), and the Company asserts that it has positive intent and ability
to hold that security to maturity, no other-than-temporary impairment is
recognized.
General
The Company is a progressive community-oriented, financial institution, which
emphasizes local, personal service to residents of its primary market area.
The Company considers Clark, Cowlitz, Klickitat and Skamania counties of
Washington 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 one- to
four- family residential real estate, one- to four- family residential real
estate construction, commercial real estate and non-mortgage loans providing
financing for business ("commercial") and consumer purposes. Commercial real
estate loans and commercial loans have grown from 5.22% and 0.93% of the loan
portfolio, respectively, at March 31, 1998 to 40.27% and 14.25% respectively,
at December 31, 2003. During the second quarter of fiscal 2004, the Company
completed the acquisition of Today's Bancorp by merger that had been announced
on February 6, 2003. Total gross loans acquired in the acquisition were $87.3
million, consisting of $44.4 million of commercial real estate loans, $35.0
million of commercial loans and $7.9 million of consumer loans. The Company
continues to change the composition of its loan portfolio and deposit base as
part of its migration to commercial banking, subject to market conditions.
The consolidation among financial institutions in the Company's primary market
area has created a significant gap in the ability of the resulting financial
institutions to serve customers. The Company's strategic plan includes
targeting this customer base, specifically small and medium sized businesses,
professionals and wealth building individuals. In pursuit of these goals,
the Company will emphasize controlled growth and the diversification of its
loan portfolio to include a higher portion of commercial and commercial real
estate loans. A related goal is to increase the proportion of personal and
business checking account deposits used to fund these new loans. Significant
portions of these new loan products carry adjustable rates, higher yields, or
shorter terms and higher credit risk than the traditional fixed-rate
mortgages. The strategic plan stresses increased emphasis on non-interest
income, including increased fees for asset management, mortgage banking 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 the customers and 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 thirteen
branches are located in Clark County, the fastest growing county in the State
of Washington according to the U.S. Census Bureau.
In order to support its strategy of growth without compromising its local,
personal service to its customers and a commitment to asset quality, the
Company has made significant investments in experienced branch, lending, asset
management and support personnel and has incurred significant costs in
facility expansion. Control of non-interest expenses remains a high priority
for the management of the Company.
The Company continuously reviews new products and services to give its
customers more financial options. With an emphasis on growth of non-interest
income and control of non-interest expense, all new technology and services
19
are reviewed for business development and cost saving purposes. The Company
continues to experience growth in the customer usage of the online banking
services and its check image services. Customers are able to conduct a full
range of services on a real-time basis, including balance inquiries, transfers
and electronic bill-paying. This online service has also enhanced the
delivery of cash management services to commercial customers. The internet
banking branch web site is www.riverviewbank.com.
The Company conducts operations from its home office in Vancouver and thirteen
branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (six branch offices) and Longview, Washington. The
Company's market area for lending and deposit taking activities encompasses
Clark, Cowlitz, Skamania and Klickitat counties, throughout the Columbia River
Gorge area. The Company operates a trust and financial services company,
RAMCORP., located in downtown Vancouver, Washington. Riverview Mortgage, a
mortgage broker division of the Company originates mortgage loans (including
construction loans) for various mortgage companies predominantly in the
Portland metropolitan area, as well as for the Company. The Business and
Professional Banking Division located at the downtown Vancouver main branch
and at Cascade Park offers commercial and business banking services. Vancouver
is located in Clark County, which is just north of Portland, Oregon.
Several businesses are located in the Vancouver area because of the favorable
tax structure and relatively lower energy costs in Washington as compared to
Oregon. Washington has no state income tax and Clark County operates a public
electric utility that provides relatively lower cost electricity. Located in
the Vancouver area are Sharp Electronics, Hewlett Packard, Georgia Pacific,
Underwriters Laboratory and Wafer Tech, as well as several support industries.
In addition to this industrial base, the Columbia River Gorge Scenic Area has
been a source of tourism, which has transformed the area from its past
dependence on the timber industry.
The Company, a Washington corporation, was organized on June 23, 1997 for the
purpose of becoming the holding company for Riverview Community Bank (formerly
Riverview Savings Bank, FSB) upon Riverview Savings Bank's reorganization as a
wholly owned subsidiary of the Company resulting from the conversion of
Riverview, M.H.C. from a federal mutual holding company to a stock holding
company ("Conversion and Reorganization"). The Conversion and Reorganization
was completed on December 31, 1997. Riverview Savings Bank, FSB changed its
name to Riverview Community Bank effective June 29, 1998.
Financial Condition
At December 31, 2003, the Company had total assets of $514.0 million compared
with $419.9 million at March 31, 2003. The increase in total assets reflects
the acquisition of Today's Bancorp. Late in the third quarter of fiscal year
2004, the Company invested $9.0 million in bank-owned life insurance (BOLI)
and will increase this investment to $12.0 million in the fourth quarter of
fiscal 2004
At December 31, 2003, the Company had $411.3 million in gross loans, an
increase of $74.1 million compared to $337.2 million at March 31, 2003. One-
to four- family residential mortgage loans decreased $11.5 million to $47.0
million at December 31, 2003 from $58.5 million at March 31, 2003 as a result
of management's plan to sell most of the fixed rate mortgage loans to the
FHLMC and retain the loan servicing of these loans. Commercial loans increased
$24.4 million to $58.6 million at December 31, 2003 from $34.2 million at
March 31, 2003, which reflects the $35.0 million of commercial loans acquired
20
in the Today's Bancorp acquisition. Commercial real estate loans increased
$62.5 million to $164.2 million at December 31, 2003 from $101.7 million at
March 31, 2003, reflecting the $44.4 million of commercial real estate loans
acquired in the Today's Bancorp acquisition. Commercial real estate
construction loans decreased $3.1 million to $1.4 million at December 31, 2003
from $4.5 million at March 31, 2003. Land loans decreased $4.9 million to
$29.7 million at December 31, 2003 from $34.6 million at March 31, 2003. Loans
receivable (Note 8) provides a detailed analysis of the gross loan portfolio
at December 31, 2003 as compared to the gross loan portfolio at March 31,
2003. Consumer, commercial, and land loans carry higher interest rates and
generally a higher degree of credit risk compared to one- to four- family
residential mortgage loans.
Low interest rates continue to cause high prepayments in the Company's REMICs
and mortgage-backed securities portfolio. These high prepayments have
accelerated the decrease in the balance of REMICs and mortgage-backed
securities. Mortgage-backed Securities (Note 7) provides the balance detail.
The Today's Bancorp acquisition increased the available for sale securities
portfolio market value at the date of acquisition by $4.0 million in U.S.
Treasuries and $2.6 million in agencies.
Deposits totaled $405.6 million at December 31, 2003 compared to $320.7
million at March 31, 2003 an increase of $84.9 million. At the acquisition
date, the acquisition of Today's Bancorp increased deposits by $104.5 million
of which $67.4 million were certificates of deposits and $37.1 million were
transaction accounts. The Company continues to experience flow of funds out
of certificates of deposits and flow of funds into checking accounts, Now
accounts and money market accounts ("transaction accounts"). The year to date
total average outstanding balance of transaction accounts increased 32.5% to
$218.0 million at December 31, 2003, compared to $164.5 million at March 31,
2003. Total average transaction account balances compared to average total
deposit balances for the nine months ended December 31, 2003 was 58.0%
compared to 55.4% for the year period ended March 31, 2003.
FHLB advances totaled $40.0 million at both December 31, 2003 and March 31,
2003.
Capital Resources
Total shareholders' equity increased $9.3 million to $63.8 million at December
31, 2003 compared to $54.5 million at March 31, 2003. The activity in
shareholders' equity for the first nine months of fiscal year 2004 was $5.0
million in earnings, dividends of $1.9 million, exercise of stock options
$422,000, stock repurchased of $1.5 million, stock issued in connection with
acquisition of $7.3 million, earned ESOP shares of $353,000, earned MRDP
shares of $15,000, MRDP tax benefit of $59,000 and a $396,000 decrease in net
unrealized gain on securities available for sale, net of tax benefit.
The Company is not subject to any regulatory capital requirements. The
Community Bank, however, is subject to various regulatory capital requirements
implemented by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators, that if undertaken could have a direct
material effect on the Company and the Community Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Community Bank must meet specific capital guidelines
that involve quantitative measures of the Community Bank's assets,
21
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Community Bank's capital amounts and
loan 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 Community Bank to maintain amounts and ratios of tangible and core
capital to adjusted total assets and of total risk-based capital to risk-
weighted assets of 1.5%, 3.0%, and 8.0%, respectively. As of December 31,
2003, the Community Bank met all capital adequacy requirements to which it was
subject.
As of December 31, 2003, the most recent notification from the Office of
Thrift Supervision ("OTS") categorized the Community Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized," the Community Bank must maintain minimum
core and total risk-based capital ratios of 5.0% and 10.0%, respectively. At
December 31, 2003, the Community Bank's tangible, core and risk-based total
capital ratios amounted to 10.18%, 10.18%, and 13.68%, respectively. There
are no conditions or events since that notification that management believes
have changed the Community Bank's categorization as well capitalized.
The Community Bank's actual and required minimum capital amounts and ratios
are presented in the following table (dollars in thousands):
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provision
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31,
2003
Total Capital:
(To Risk Weighted
Assets) $55,940 13.68% $32,721 8.0% $40,901 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 51,055 12.48 N/A N/A 24,541 6.0
Core Capital:
(To Total Assets) 51,055 10.18 15,046 3.0 25,077 5.0
Tangible Capital:
(To Tangible
Assets) 51,055 10.18 7,523 1.5 N/A N/A
As of March 31,
2003
Total Capital:
(To Risk Weighted
Assets) $50,893 15.89% $25,629 8.0% $32,037 10.0%
Tier I Capital:
(To Risk Weighted
Assets) 48,154 15.03 N/A N/A 19,222 6.0
Core Capital:
(To Total Assets) 48,154 11.66 12,389 3.0 20,649 5.0
Tangible Capital:
(To Tangible
Assets) 48,154 11.66 6,195 1.5 N/A N/A
The following table is a reconciliation of the Community Bank's capital,
calculated according to generally accepted accounting principles, to
regulatory tangible and risk-based capital at December 31, 2003 (in
thousands):
22
Equity $61,482
Net unrealized loss on securities
available for sale, net of tax 26
Goodwill (9,214)
Core deposit intangible asset (879)
Computer software, net book (293)
Servicing asset (67)
-------
Tangible capital 51,055
General valuation allowance 4,885
-------
Total capital $55,940
=======
Liquidity
The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed
the statutory liquidity requirement for savings associations, citing the
requirement as unnecessary effective July 18, 2001. In light of this action,
the OTS repealed its liquidity regulations, with some exceptions. These
exceptions provide that savings associations must continue to maintain
sufficient liquidity to ensure safe and sound operation and the appropriate
level of liquidity will vary depending on the activities in which the savings
association engages. Management does not believe this rule change has had any
adverse impact on the Community Bank's operations.
Sources of capital and liquidity for the Company on a stand-alone basis
include distributions from the Community Bank. Dividends and other capital
distributions from the Community Bank are subject to regulatory restrictions.
Cash, including interest-earning overnight investments, was $44.8 million at
December 31, 2003 compared to $60.8 million at March 31, 2003. The $16.0
million decrease in cash and interest-earning overnight investments is
attributable to the increased investment in investment and mortgage-backed
securities and purchase of BOLI. Investment securities and mortgage-backed
securities available for sale at December 31, 2003 were $37.1 million and
$11.5 million, respectively, compared to $20.4 million and $13.1 million,
respectively, at March 31, 2003. See "Financial Condition."
Asset Quality
The allowance for loan losses was $4.9 million at December 31, 2003, compared
to $2.7 million at March 31, 2003. Management believes the allowance for loan
losses at December 31, 2003 is adequate to cover estimated 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 to be more
vulnerable to adverse conditions in the real estate market and deteriorating
economic conditions.
Non-performing assets were $3.2 million, or 0.61% of total assets at December
31, 2003 compared with $748,000, or 0.18% of total assets at March 31, 2003.
23
The increase in non-performing assets reflects $1.7 million of the non-
performing assets acquired in the acquisition of Today's Bancorp. The $2.0
million balance of non-accrual loans is composed of one land loan totaling
$400,000, six commercial real estate loans totaling $759,000, ten commercial
loans totaling $757,000, and one consumer loan of $65,000. The following
table sets forth information regarding the Company's non-performing assets at
the dates indicated:
December 31, 2003 March 31, 2003
----------------- --------------
(Dollars in thousands)
Loans accounted for on
a non-accrual basis:
Real Estate
Residential $ - $ 301
Commercial 759 -
Land 400 -
Commercial 757 -
Consumer 65 22
------- ------
Total 1,981 323
------- ------
Accruing loans which are
contractually past due 90 days
or more 312 -
------- ------
Total of non-accrual and 90 days
past due loans 2,293 323
------- ------
Real estate owned (net) 868 425
------- ------
Total non-performing assets $ 3,161 $ 748
======= ======
Total loans delinquent 90 days
or more to net loans 0.61% 0.11%
Total loans delinquent 90 days
or more to total assets 0.45 0.08
Total non-performing assets to
total assets 0.61 0.18
Comparison of Operating Results for the Three Months Ended
December 31, 2003 and 2002
The Company's net income depends primarily on its net interest income, which
is the difference between interest earned on its loans and investments and the
interest paid on interest-bearing liabilities. Net interest income is
determined by (a) the difference between the yield earned on interest-earning
assets and rates paid on interest-bearing liabilities (interest rate spread)
and (b) the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's interest rate spread is affected by regulatory,
economic and competitive factors that influence rates, loan demand and deposit
flows. Net interest margin is calculated by dividing net interest income by
the average interest-earning assets. Net interest income and net interest
margin are affected by changes in interest rates, volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The Company's net income is also affected by the
generation of non-interest income, which primarily consists of fees and
24
service charges, loan servicing income, gains and losses on sales of
securities, gains and losses from sale of loans and other income. In
addition, net income is affected by the level of operating expenses and
establishment of a provision for loan losses.
Net income for the three months ended December 31, 2003 was $1.5 million, or
$0.32 per basic share ($0.32 per diluted share) compared to net income of $1.8
million, or $0.41 per basic share ($0.40 per diluted share) for the same
period in fiscal 2003. Net interest income increased $903,000, or 19.81%, to
$5.5 million for the current quarter as compared to $4.6 million during the
same prior year period. This increase in net interest income reflects the
increase in average loan balance for the current quarter as compared to the
prior year quarter. Non-interest income decreased $575,000 primarily due to
the reduction in mortgage loan refinance activity.
Included in non-interest-earning assets is the Company's $9.0 million
investment in BOLI that was settled in the last days of the third quarter of
fiscal 2004. The investment is yielding a tax equivalent yield of
approximately 5.4%.
The increase in net interest income was the result of the increased volume of
earning-assets primarily due to the increase in non-mortgage loans. The
increased volume of interest-bearing liabilities partially offset this
increase in net interest income. The impact of the lower interest rates was
similar for both the interest-earning assets and interest-bearing liabilities.
The total quarterly average outstanding balance of transaction accounts
increased $57.3 million, or 32.4%, to $233.9 million at December 31, 2003,
compared to $176.6 million at December 31, 2002. The average outstanding
balance of certificates of deposit increased 38.6% to $146.8 million from
$105.9 million for the quarter at December 31, 2003 from the same quarter a
year ago, reflecting the Today's Bancorp acquisition. The payoff of FHLB
advances in the third quarter of fiscal year 2003 also contributed to the
increase of net interest income.
Net interest income increased $859,000 as a result of the change in volume of
average interest-earning assets and liabilities for the third quarter in
fiscal quarter of 2004 compared to the same fiscal 2003 period. The change in
interest rates for this same period of comparison increased net interest
income $44,000. The interest rate spread on a tax equivalent basis increased
from 4.31% for the quarter ended December 31, 2002 to 4.34% for the quarter
ended December 31, 2003. The net interest margin decreased to 4.63% during
the quarter ended December 31, 2003 from 4.78% for the quarter ended December
31, 2002.
Interest income for the quarter ended December 31, 2003 was $7.2 million, an
increase of $697,000, or 10.7% from the $6.5 million in interest income for
the same period in the prior fiscal year. The yield on interest-earning
assets for the third quarter of fiscal year 2004 was 6.09% compared to 6.79%
for the same quarter in fiscal year 2003. The lower third quarter fiscal 2004
yield reflects the lower interest rate environment. The higher interest
income in the third quarter of fiscal year 2004 as compared to the same period
in fiscal year 2003 reflects the increase in the balance of interest-earning
assets.
Average interest-earning assets increased to $471.1 million for the quarter
ended December 31, 2003 from $383.7 million for the quarter ended December 31,
2002. The increase in the average quarterly balance of interest-earning
assets consisted of decreases in mortgage loans and mortgage-backed securities
25
offset by increases in non-mortgage loans, daily interest bearing investments
and investment securities. Interest income increased $1.1 million as a result
of the increase in the current quarter's volume of average interest-earning
assets as compared to the volume of average interest-earning assets in the
same fiscal 2003 period.
Interest expense decreased $206,000, or 10.6%, to $1.8 million for the quarter
ended December 31, 2003 as compared to $1.9 million for the quarter ended
December 31, 2002. The cost of average interest-bearing liabilities for the
third quarter of fiscal year 2004 was 1.75% compared to 2.48% for the same
quarter in fiscal year 2003. The lower interest expense for the quarter ended
December 31, 2003 is the result of the lower interest rates as well as the
reduction of FHLB borrowings during the quarter compared to the same period in
the prior year. Average interest-bearing liabilities increased to $391.8
million at December 31, 2003, from $309.6 million for the quarter ended
December 31, 2002. The interest expense impact of the $82.2 million increase
in average interest-earning liabilities of $480,000 was more than offset by
the $436,000 interest income impact of the $87.4 million increase in average
interest-bearing assets. The increase in the average balance of
interest-bearing liabilities was the result of an increase in the average
balances of certificates of deposit and growth in transaction accounts
partially offset by a decrease in FHLB borrowings. Growth in NOW accounts was
used to repay $25.0 million in FHLB borrowings in the third quarter of fiscal
year 2003.
The change in interest rates between the periods resulted in $44,000 of the
increase in net interest income. This quarterly comparison of the impact of
the changes in interest rates illustrates how similar the asset sensitivity
and liability sensitivity impact is on the balance sheet for this period of
comparison. The decrease in interest rates increased net interest income as
a result of the more rapid repricing of the liabilities as compared to the
repricing of loans and securities. Floors (minimum interest rates) and fixed
rates in the loans and securities helped to reduce the interest rate
sensitivity of the assets.
The provision for loan losses for the quarter period ended December 31, 2003
was zero compared to $190,000 for the same period in the prior year. There
was $320,000 in net charge-offs during the quarter ended December 31, 2003
compared to $73,000 for the quarter ended December 31, 2002. The lower loan
loss provision in the third quarter of fiscal year 2004 reflects the change in
mix of classified loans resulting from the improvement in loan grades on a
particular borrower during the second quarter of fiscal 2004. There were no
significant changes in estimation, assumptions or reallocations of allowance
for the quarters ended December 31, 2003 and 2002. Based upon management's
analysis of historical and anticipated loss rates, current loan growth, and
other factors considered, the allowance for loan losses at December 31, 2003
is believed to be adequate for the losses inherent in the loan portfolio.
The $575,000 decrease in non-interest income to $1.4 million for the quarter
ended December 31, 2003 compared to $2.0 million for the quarter ended
December 31, 2002, reflects decreases in fee income from mortgage broker fees,
gains on sale of loans held for sale and gains on sale of securities,
partially offset by increased service charge fees and asset management fees.
The recent increase in the long-term interest rates environment has decreased
prepayment on residential mortgages, which has lengthened the duration on
mortgage servicing rights assets. In the third quarter of fiscal year 2003
mortgage servicing rights were written down to market value with a $108,000
charge to non-interest income as compared to a $1,000 write up credit to
non-interest income for the same period in the current year.
26
Non-interest expense increased $875,000 to $4.6 million for the quarter ended
December 31, 2003 from $3.7 million for the quarter ended December 31, 2002.
Salaries and employee benefits increased $480,000 to $2.6 million for the
quarter ended December 31, 2003 from the same quarter in the prior year.
There were 29 more full-time equivalent employees during the fiscal year 2004
third quarter over the fiscal year 2003 third quarter. The increase in
full-time equivalents reflects the Today's Bancorp acquisition and expansion
in the Company's ability to provide loans. The third quarter of fiscal year
2004 salaries and employee benefits also reflect the decreases in mortgage
broker commissions when compared to the same period in the prior year.
The provision for federal income taxes for the third quarter of fiscal year
2004 was $772,000, resulting in an effective tax rate of 33.4%, compared to
$896,000 and 33.6% for the same quarter of fiscal year 2003.
Comparison of Operating Results for the Nine Months Ended
December 31, 2003 and 2002
Net income for the nine months ended December 31, 2003 was $5.0 million, or
$1.08 per basic share ($1.06 per diluted share) compared to net income of $4.3
million, or $0.99 per basic share ($0.98 per diluted share), for the same
period in fiscal year 2003. Net interest income increased $2.1 million to
$15.4 million for the nine months ended December 31, 2003, compared to $13.3
million for the nine months ended December 31, 2002. Non-interest income
includes a $304,000 market write up for mortgage servicing rights for the
first nine months of fiscal year 2004 and a $491,000 market write down for the
same period in 2003.
The increase in net interest income was the result of the increased volume of
earning-assets primarily due to the increase in non-mortgage loans. The
increased volume of interest-bearing liabilities partially offset this
increase in net interest income. The impact of the lower interest rates had
more of an impact in reducing the expense of interest-bearing liabilities as
compared to reducing interest income from interest-earning assets. The
average outstanding balance for transaction accounts increased 36.1% to $218.0
million for the nine month period ended December 31, 2003, compared to $160.2
million for the same period in 2002. The average outstanding balance for
certificates of deposit increased 17.3% to $130.8 million for the nine months
ended December 31, 2003 from $111.5 million for the same period in 2002 at
December 31, 2003 and December 31, 2002. The increase in the average balance
of certificates of deposit reflects Today's Bancorp $67.4 million balance of
certificates of deposit at the date of acquisition. The payoff of FHLB
advances also contributed to the increase of net interest income.
Average interest-earning assets increased to $439.7 million for the nine
months ended December 31, 2003 from $380.9 million for the nine months ended
December 31, 2002. The increase in the nine month average balance of
interest-earning assets consisted of decreases in mortgage loans and
mortgage-backed securities offset by increases in non-mortgage loans, daily
interest bearing investments and investment securities. Interest income
increased $2.1 million as a result of the increase in the current nine month
volume of average interest-earning assets as compared to the volume of average
interest-earning assets in the same fiscal 2003 period.
The change in interest rates increased net interest income $266,000 in the
current period as compared to the same fiscal 2003 period. The interest rate
spread increased from 4.19% for the first nine months of fiscal year 2003 to
27
4.36% for the first nine months of fiscal year 2004. The net interest margin
decreased to 4.71% during the first nine months period ended December 31, 2003
from 4.72% for the nine month period ended December 31, 2002. The decreased
margin is the result of the change in the balance sheet mix of assets and
liabilities plus the more rapid repricing in interest-bearing liabilities as
compared to interest earning assets.
Interest income for the nine months ended December 31, 2003 was $20.5 million,
an increase of $465,000, or 2.3%, from $20.1 million for the same period in
2002. Yield on interest-earning assets for the first nine months of fiscal
year 2004 was 6.23% compared to 7.08% for the same period in fiscal year 2003.
The lower fiscal year 2004 yield on interest-earning assets reflects the lower
interest rate environment in the current period as compared to the same period
a year ago. The higher interest income for the nine month period ended
December 31, 2003 as compared to the same period in the prior year resulted
from increased balances more than offsetting lower interest rates of
interest-earning assets.
Interest expense for the nine months ended December 31, 2003 was $5.1 million,
a decrease of $1.7 million, or 25.3% from $6.8 million for the same period in
2002. The cost of interest-bearing liabilities for the first nine months of
fiscal year 2004 was 1.88% compared to 2.89% for the first nine months of
fiscal year 2003. The decreased interest expense reflects the change in mix
of liabilities and the reduced interest rate environment when the current nine
month period is compared to the same period a year ago. The balance sheet mix
of liabilities continues to have growth in transaction accounts and a
resulting a lower cost of funds. The average outstanding balance for
transaction accounts the nine months ended December 31, 2003 increased 36.1%
to $218.0 million compared to $160.2 million for the same period in 2002. The
average outstanding balance for certificates of deposit increased 17.3% to
$130.8 million for the nine months ended December 31, 2003 from $111.5 million
for the same period in 2002 primarily as result of the Today's Bancorp
acquisition. A decrease in long-term mortgage interest rates during the first
nine months of fiscal year 2004 has led to higher prepayment rates on both the
mortgage loan portfolio and the mortgage-backed securities portfolio. The
resultant increase in payments has reduced the Community Bank's utilization of
FHLB advances, which has contributed to the reduction in interest expense.
The provision for loan losses was $70,000 and net charge-offs totaled $524,000
during the nine months ended December 31, 2003 compared to a $517,000
provision for loan losses and net charge-offs of $248,000 during the nine
months ended December 31, 2002. The ratio of the allowance for loan losses to
period end net loans at December 31, 2003, increased to 1.29% from 0.91% at
December 31, 2002 and 0.90% at March 31, 2003. The Today's Bancorp
acquisition was the primary reason for the increase in the allowance. Today's
Bancorp had an allowance for loan losses of $2.6 million which reflected its
higher risk commercial loans. The ratio of total non-performing assets to
total assets increased from 0.30% at December 31, 2002 and 0.18% at March 31,
2003 to 0.61% at December 31, 2003. Non-accrual loans increased from $327,000
at December 31, 2002 to $2.0 million at December 31, 2003. The increase
reflects increased non-accrual loan balances in commercial, commercial real
estate land and land and consumer loans partially offset by decreased
non-accrual loan balances in residential real estate loans. Real estate owned
decreased from $954,000 at December 31, 2002 to $868,000 at December 31, 2003.
The lower loan loss provision in the first nine months of fiscal year 2004
reflects the change in mix in classified loans resulting from the improvement
in loan grades on a particular borrower during the second quarter of fiscal
2004. There were no significant changes in estimation, assumptions or
28
reallocations of the allowance for the nine months ended December 31, 2003 and
2002. Based upon management's analysis of historical and anticipated loss
rates, current loan growth, and other factors considered, the allowance for
loan losses at December 31, 2003 is believed to be adequate for the losses
inherent in the loan portfolio.
Non-interest income increased $416,000 or 8.9% to $5.1 million for the nine
months ended December 31, 2003, compared to $4.7 million for the same period
in 2002. In the first nine months of fiscal year 2004, mortgage servicing
rights were written up to market value with a $304,000 credit to non-interest
income as compared to a $491,000 impairment charge to non-interest income for
the same period in the prior year. Increased non-interest income is the
result of increases in service charge income, trust fee income, fees from
ATMs, and mortgage service rights write up partially offset by the reduction
in gains on loans sales, brokered loan fees and gain on sale of securities.
Non-interest expense increased $2.0 million, or 17.8%, to $13.1 million for
the nine months ended December 31, 2003 from $11.1 million for the nine months
ended December 31, 2002. The $2.0 million increase reflects the addition of
29 full-time equivalent employees, decreased mortgage broker commissions,
increased occupancy expenses, data processing cost and marketing costs which
are required to continue to provide local personal service. Full time
equivalent employees increased to 181 at December 31, 2003 compared to 152 at
December 31, 2002. The increase in full-time equivalents reflects the Today's
Bancorp acquisition and expansion in the Company's ability to provide loans.
The fiscal year 2004 salaries and employee benefits also reflect the decreases
in mortgage broker commissions when compared to the same period in the prior
year. Salaries and employee benefits increased $1.1 million to $7.3 million
for the nine months ended December 31, 2003 as compared to $6.2 million for
the same period in 2002.
The provision for federal income taxes for the nine months ended December 31,
2003 was $2.5 million resulting in an effective tax rate of 33.2%, compared to
$2.0 million and 31.8% for the same period a year ago. The 1.4% increase in
the effective tax rate for nine months ended December 31, 2003 is primarily
attributable to the impact of the ESOP market value adjustment and reduced
dividend exclusion deduction.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Our 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. Our Asset Liability Committee reviews, among other items, economic
conditions, the interest rate outlook, the demand for loans, the availability
of deposits and borrowings, and our 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, our Asset Liability Committee formulates a strategy
that is intended to implement the objectives contained in our business plan
29
without exceeding losses in net interest income and net portfolio value limits
set forth in our interest rate risk policy.
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, 2003.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section 13(a)-
15(e) and 15d 15(e) of the Securities Exchange Act of 1934 was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the
Securities and Exchange Act of 1934 is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
(b) Changes in Internal Controls: There was no change in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
30
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable
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 and Reports on Form 8-K
--------------------------------
(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 Michael C. Yount(2)
10.4 Severance Agreement with Karen Nelson(2)
10.5 Severance Agreement with John A. Karas(3)
10.6 Employee Severance Compensation Plan(2)
10.7 Employee Stock Ownership Plan(4)
10.8 Management Recognition and Development Plan(5)
10.9 1998 Stock Option Plan(5)
10.10 1993 Stock Option and Incentive Plan(5)
10.11 2003 Stock Option Plan (6)
31.1 Certifications of the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
31.2 Certifications of the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act
32 Certifications of the Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K: Form 8-K was filed October 6, 2003
announcing the change in certifying accountants. Form 8-K/A was
filed on November 7, 2003 announcing the subsequent completion
of McGladrey & Pullen due diligence.
- ---------------
(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.
31
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 2002, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 1998, and incorporated herein by reference.
(5) Filed on October 23, 1998, as an exhibit to the Registrant's Registration
Statement on Form S-8, and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Definitive Annual Meeting Proxy
Statement for the 2003 Annual Meeting of Shareholders, and incorporated
herein by reference.
32
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIVERVIEW BANCORP, INC.
DATE: January 29, 2004 BY: /S/ Patrick Sheaffer
-----------------------------------
Patrick Sheaffer
President and Chief Executive Officer
DATE: January 29, 2004 BY: /S/ Ronald Wysaske
-----------------------------------
Ronald Wysaske
Executive Vice President/Treasurer
33
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
34
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 13a-15(e) and 15d-15(e)) 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) 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
(c) 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 fourth
fiscal 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 the
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: January 29, 2004 /S/ Patrick Sheaffer
----------------------------------------
Patrick Sheaffer
President and Chief Executive Officer
35
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
36
I, Ronald Wysaske, 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 13a-15(e) and 15d-15(e)) 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) 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
(c) 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 fourth fiscal 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 the 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: January 29, 2004 /S/ Ronald Wysaske
---------------------------------------
Ronald Wysaske
Chief Financial Officer
37
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
38
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley
act of 2002 and in connection with this 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, the Company's financial condition and results of
operations.
/S/ Patrick Sheaffer /S/ Ronald Wysaske
----------------------------- -----------------------------
Patrick Sheaffer Ronald Wysaske
Chief Executive Officer Chief Financial Officer
Dated: January 29, 2004
39