UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-22957
RIVERVIEW BANCORP, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1838969
---------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
900 Washington St., Ste. 900,Vancouver, Washington 98660
-------------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 693-6650
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell corporation (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 11,229,980 shares outstanding as of August 1, 2007.
Form 10-Q
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1: Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2007 and
March 31, 2007 1
Consolidated Statements of Income Three Months Ended
June 30, 2007 and 2006 2
Consolidated Statements of Shareholders' Equity
Year Ended March 31, 2007 and the Three Months Ended
June 30, 2007 3
Consolidated Statements of Cash Flows Three Months
Ended June 30, 2007 and 2006 4
Notes to Consolidated Financial Statements 5-14
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-23
Item 3: Quantitative and Qualitative Disclosures About Market Risk 23
Item 4: Controls and Procedures 23
Part II. Other Information 24-25
-----------------
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sale of Equity Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits
SIGNATURES 26
Certifications
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2007 and march 31, 2007
JUNE 30, MARCH 31,
(In thousands, except share and per share data) 2007 2007
(Unaudited) ------------- --------------
ASSETS
Cash (including interest-earning accounts of
$47,085 and $7,818) $ 68,082 $ 31,423
Investment securities available for sale, at
fair value (amortized cost of $13,734 and
$19,258) 13,756 19,267
Mortgage-backed securities held to maturity,
at amortized cost (fair value of $1,150 and
$1,243) 1,135 1,232
Mortgage-backed securities available for sale,
at fair value (amortized cost of $6,405 and
$6,778) 6,201 6,640
Loans receivable (net of allowance for loan losses
of $8,728 and $8,653) 663,430 682,951
Prepaid expenses and other assets 2,878 1,905
Accrued interest receivable 3,686 3,822
Federal Home Loan Bank stock, at cost 7,350 7,350
Premises and equipment, net 21,155 21,402
Deferred income taxes, net 4,126 4,108
Mortgage servicing intangible, net 347 351
Goodwill 25,572 25,572
Core deposit intangible, net 669 711
Bank owned life insurance 13,753 13,614
------- -------
TOTAL ASSETS $ 832,140 $ 820,348
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 692,168 $ 665,405
Accrued expenses and other liabilities 9,675 9,349
Advanced payments by borrowers for taxes and insurance 162 397
Federal Home Loan Bank advances 5,000 35,050
Junior subordinated debentures 22,681 7,217
Capital lease obligations 2,713 2,721
------- -------
Total liabilities 732,399 720,139
COMMITMENTS AND CONTINGENCIES (See Note 15)
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding: none - -
Common stock, $.01 par value; 50,000,000 authorized,
issued and outstanding:
June 30, 2007-11,566,980 issued, 11,566,980
outstanding 115 117
March 31, 2007-11,707,980 issued, 11,707,980
outstanding
Additional paid-in capital 56,450 58,438
Retained earnings 44,379 42,848
Unearned shares issued to employee stock ownership
trust (1,083) (1,108)
Accumulated other comprehensive loss (120) (86)
------- -------
Total shareholders' equity 99,741 100,209
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 832,140 $ 820,348
======= =======
See notes to consolidated financial statements.
1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data) Three Months Ended
(Unaudited) June 30,
2007 2006
INTEREST INCOME: ------ ------
Interest and fees on loans receivable $ 14,880 $ 13,769
Interest on investment securities - taxable 172 221
Interest on investment securities - non-taxable 38 42
Interest on mortgage-backed securities 91 114
Other interest and dividends 243 52
------- -------
Total interest income 15,424 14,198
------- -------
INTEREST EXPENSE:
Interest on deposits 6,190 4,222
Interest on borrowings 406 963
------- -------
Total interest expense 6,596 5,185
------- -------
Net interest income 8,828 9,013
Less provision for loan losses 50 350
------- -------
Net interest income after provision for loan losses 8,778 8,663
------- -------
NON-INTEREST INCOME:
Fees and service charges 1,427 1,331
Asset management fees 548 436
Gain on sale of loans held for sale 91 72
Loan servicing income 39 45
Gain on sale of credit card portfolio - 67
Bank owned life insurance 139 128
Other 58 36
------- -------
Total non-interest income 2,302 2,115
------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,968 3,835
Occupancy and depreciation 1,302 1,074
Data processing 168 335
Amortization of core deposit intangible 42 50
Advertising and marketing expense 282 302
FDIC insurance premium 19 24
State and local taxes 171 155
Telecommunications 104 112
Professional fees 223 178
Other 502 704
------- -------
Total non-interest expense 6,781 6,769
------- -------
INCOME BEFORE INCOME TAXES 4,299 4,009
PROVISION FOR INCOME TAXES 1,460 1,378
------- -------
NET INCOME $ 2,839 $ 2,631
======= =======
Earnings per common share:
Basic $ 0.25 $ 0.23
Diluted 0.25 0.23
Weighted average number of shares outstanding:
Basic 11,391,825 11,265,971
Diluted 11,527,586 11,443,153
Cash dividends per share $ 0.11 $ 0.095
See notes to consolidated financial statements.
2
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
FOR THE YEAR ENDED mARCH 31, 2007
AND THE three months ended june 30, 2007
Unearned
Shares
Issued to
Employee Accumulated
Common Stock Additional Stock Other
Paid-In Retained Ownership Comprehensive
(In thousands, except share data) Shares Amount Capital Earnings Trust Loss Total
-----------------------------------------------------------------------------------------------------------
Balance April 1, 2006 11,545,372 $ 57 $ 57,316 $ 35,776 $ (1,186) $ (276) $ 91,687
Stock split - 58 - (58) - - -
Cash dividends ($0.395 per share) - - - (4,476) - - (4,476)
Exercise of stock options 212,054 2 878 - - - 880
Stock repurchased and retired (49,446) - - - - - -
Earned Employee Stock Ownership
Plan ("ESOP") shares - - 196 - 78 - 274
Tax benefit, stock option - - 48 - - - 48
---------- ---- ------ ------ ------ ------ -------
11,707,980 117 58,438 31,242 (1,108) (276) 88,413
Comprehensive income:
Net income - - - 11,606 - - 11,606
Other comprehensive income:
Unrealized holding gain on
Securities of $190
(net of $99 tax effect) - - - - - 190 190
-------
Total comprehensive income - - - - - - 11,796
---------- ---- ------ ------ ------ ------ -------
Balance March 31, 2007 11,707,980 117 58,438 42,848 (1,108) (86) 100,209
Cash dividends($0.11 per share) - - - (1,243) - - (1,243)
Exercise of stock options 24,000 - 293 - - - 293
Stock repurchased and retired (165,000) (2) (2,342) - - - (2,344)
FIN 48 transition amount - - - (65) - - (65)
Earned ESOP shares - - 61 - 25 - 86
---------- ---- ------ ------ ------ ------ -------
11,566,980 115 56,450 41,540 (1,083) (86) 96,936
Comprehensive income:
Net income - - - 2,839 - - 2,839
Other comprehensive income:
Unrealized holding loss on
securities of $34
(net of $19 tax effect) - - - - - (34) (34)
-------
Total comprehensive income - - - - - - 2,805
---------- ---- ------ ------ ------ ------ -------
Balance June 30, 2007 11,566,980 $ 115 $ 56,450 $ 44,379 $ (1,083) $ (120) $ 99,741
========== ==== ====== ====== ====== ====== =======
See notes to consolidated financial statements.
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands) (Unaudited) 2007 2006
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,839 $ 2,631
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 558 539
Mortgage servicing rights valuation adjustment (13) (14)
Provision for loan losses 50 350
Noncash expense related to ESOP 86 159
Decrease in deferred loan origination fees, net of
amortization (201) (5)
Origination of loans held for sale (3,947) (2,924)
Proceeds from sales of loans held for sale 3,966 2,993
Excess tax benefit from stock based compensation (2) -
Net gain on loans held for sale, sale of real estate
owned, mortgage-backed securities, investment
securities and premises and equipment (91) (24)
Income from bank owned life insurance (139) (128)
Increase in prepaid expenses and other assets (563) (41)
Decrease (increase) in accrued interest receivable 136 (468)
Increase (decrease) in accrued expenses and other
liabilities (228) 217
------- -------
Net cash provided by operating activities 2,451 3,285
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments (originations), net 19,719 (35,917)
Proceeds from call, maturity, or sale of investment
securities available for sale 5,490 1,110
Principal repayments on investment securities available
for sale 37 37
Principal repayments on mortgage-backed securities
available for sale 373 425
Principal repayments on mortgage-backed securities
held to maturity 97 224
Purchase of premises and equipment (249) (393)
Proceeds from sale of real estate owned and premises
and equipment - 2
------- -------
Net cash provided (used) in investing activities 25,467 (34,512)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 26,763 425
Dividends paid (1,144) (956)
Repurchase of common stock (2,344) -
Proceeds from borrowings 32,600 92,000
Repayment of borrowings (62,650) (64,800)
Proceeds from issuance of subordinated debentures 15,464 -
Principal payments under capital lease obligation (8) (8)
Net decrease in advance payments by borrowers (235) (214)
Excess tax benefit from stock based compensation 2 -
Proceeds from exercise of stock options 293 105
------- -------
Net cash provided by financing activities 8,741 26,552
------- -------
NET INCREASE (DECREASE) IN CASH 36,659 (4,675)
CASH, BEGINNING OF PERIOD 31,423 31,346
------- -------
CASH, END OF PERIOD $ 68,082 $ 26,671
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 6,737 $ 4,938
Income taxes 30 400
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other liabilities $ 1,243 $ 1,059
Fair value adjustment to securities available for sale (53) (85)
Income tax effect related to fair value adjustment 19 29
See notes to consolidated financial statements.
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Quarterly Reports on Form 10-Q and, therefore,
do not include all disclosures necessary for a complete presentation of
financial condition, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America (GAAP).
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, 2007 ("2007 Form 10-K").
The results of operations for the three months ended June 30, 2007 are not
necessarily indicative of the results which may be expected for the fiscal year
ending March 31, 2008. The preparation of financial statements in conformity
with GAAP 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.
On August 24, 2006, the Riverview Bancorp Inc. common stock was split 2-for-1 in
the form of a 100% stock dividend. Shareholders received one additional share
for each share owned. The Board of Directors ("Board") declared the stock split
on July 27, 2006 and the record date was August 10, 2006. All share and per
share amounts (including stock options) in the Consolidated Financial Statements
and accompanying notes were restated to reflect the split.
2. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Riverview Bancorp, Inc. ("Bancorp" or the "Company"); its wholly-owned
subsidiary, Riverview Community Bank ("Bank");; the Bank's wholly-owned
subsidiary, Riverview Services, Inc.; and the Bank's majority-owned subsidiary,
Riverview Asset Management Corp. ("RAM Corp.") All inter-company transactions
and balances have been eliminated in consolidation.
3. STOCK PLANS AND STOCK-BASED COMPENSATION
In July 1998, shareholders of the Company approved the adoption of the 1998
Stock Option Plan ("1998 Plan"). The 1998 Plan was effective October 1, 1998 and
will expire on the tenth anniversary of the effective date, unless terminated
sooner by the Board. Under the 1998 Plan, the Company may grant both incentive
and non-qualified stock options up to 714,150 shares of its common stock to
officers, directors and employees. The exercise price of each option granted
under the 1998 Plan equals the fair market value of the Company's stock on the
date of the grant with a maximum term of ten years and a vesting period
from zero to five years. At June 30, 2007, there were options for 41,562 shares
available for future grant under the 1998 Plan.
In July 2003, shareholders of the Company approved the adoption of the 2003
Stock Option Plan ("2003 Plan"). The 2003 Plan was effective July 2003 and will
expire on the tenth anniversary of the effective date, unless terminated sooner
by the Board. Under the 2003 Plan, the Company may grant both incentive and
non-qualified stock options up to 458,554 shares of its common stock to
officers, directors and employees. The exercise price of each option granted
under the 2003 Plan equals the fair market value of the Company's stock on the
date of grant with a maximum term of ten years and a vesting period from zero to
five years. At June 30, 2007, there were options for 148,154 shares available
for future grant under the 2003 Plan.
5
The following table presents information on stock options outstanding for the
periods shown.
Three Months Ended Year Ended
June 30, 2007 March 31, 2007
-------------------------------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Balance, beginning of
period 526,192 $ 10.41 755,846 $ 9.68
Grants 5,000 14.52 - -
Options exercised (24,000) 6.01 (212,054) 7.79
Forfeited (3,600) 10.94 (17,600) 10.65
------- -------
Balance, end of period 503,592 $ 10.65 526,192 $ 10.41
======= ===== ======= =====
The following table presents information on stock options outstanding for the
periods shown, less estimated forfeitures.
Three Months Ended Year Ended
June 30, 2007 March 31, 2007
-----------------------------------
Intrinsic value of options exercised in
the period $ 195,800 $ 1,722,591
Stock options fully vested and expected
to vest:
Number 500,942 523,052
Weighted average exercise price $ 10.65 $ 10.41
Aggregate intrinsic value $ 1,522,733 $ 2,892,379
Weighted average contractual term of options 6.81 years 7.07 years
Stock options vested and currently exercisable:
Number 481,992 493,192
Weighted average exercise price $ 10.63 $ 10.43
Aggregate intrinsic value $ 1,472,915 $ 2,717,710
Weighted average contractual term of options 6.51 years 6.65 years
Stock-based compensation expense related to stock options for the three months
ended June 30, 2007 and 2006 was approximately $11,000. As of June 30, 2007,
there was approximately $35,000 of unrecognized compensation expense related
to nonvested stock options, which will be recognized over the remaining vesting
periods of the underlying stock options.
The Company recognizes compensation expense for stock options in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised),
"Share-Based Payment," ("SFAS 123R"). The fair value of each stock option
granted is estimated on the date of grant using the Black-Scholes based stock
option valuation model. The fair value of all awards is amortized on a straight-
line basis over the requisite service periods, which are generally the vesting
periods. The Black-Scholes model uses the assumptions listed in the table below.
The expected life of options granted represents the period of time that they are
expected to be outstanding. The expected life is determined based on historical
experience with similar options, giving consideration to the contractual terms
and vesting schedules. Expected volatility was estimated at the date of grant
based on the historical volatility of the Company's common stock. Expected
dividends are based on dividend trends and the market value of the Company's
common stock at the time of grant. The risk-free interest rate for periods
within the contractual life of the options is based on the U.S. Treasury yield
curve in effect at the time of the grant. During the three months ended June
30, 2007, the Company granted 5,000 stock options. No options were granted
during the three months ended June 30, 2006. The fair value of stock options
granted during the three months ended June 30, 2007 was $2.27 per option.
Risk Free Expected Expected Expected
Interest Rate Life(years) Volatility Dividends
------------- ---------- ---------- ---------
Fiscal 2008 4.57% 6.25 14.72% 3.03%
6
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that are
dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options.
Three Months Ended
June 30,
-------------------------
2007 2006
--------- ---------
Basic EPS computation:
Numerator-net income $ 2,839,000 $ 2,631,000
Denominator-weighted average common
shares outstanding 11,391,825 11,265,971
Basic EPS $ 0.25 $ 0.23
Diluted EPS computation: ========== ==========
Numerator-net income $ 2,839,000 $ 2,631,000
Denominator-weighted average
common shares outstanding 11,391,825 11,265,971
Effect of dilutive stock options 135,761 177,182
Weighted average common shares ---------- ----------
and common stock equivalents 11,527,586 11,443,153
Diluted EPS $ 0.25 $ 0.23
========== ==========
5. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities available
for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
June 30, 2007
-------------
Trust preferred $ 5,000 $ 13 $ - $ 5,013
Agency securities 5,298 - (13) 5,285
Municipal bonds 3,436 22 - 3,458
------ ------ ------ ------
Total $ 13,734 $ 35 $ (13) $ 13,756
====== ====== ====== ======
March 31, 2007
--------------
Trust preferred $ 5,000 $ 19 $ - $ 5,019
Agency securities 10,784 - (44) 10,740
Municipal bonds 3,474 34 - 3,508
------ ------ ------ ------
Total $ 19,258 $ 53 $ (44) $ 19,267
====== ====== ====== ======
The contractual maturities of investment securities available for sale are as
follows (in thousands):
Amortized Estimated
June 30, 2007 Cost Fair Value
------------- --------- ----------
Due in one year or less $ 5,868 $ 5,856
Due after one year through five years 1,018 1,026
Due after five years through ten years 619 632
Due after ten years 6,229 6,242
------ ------
Total $ 13,734 $ 13,756
====== ======
Investment securities with an amortized cost of $299,000 and $5.8 million and a
fair value of $298,000 and $5.8 million at June 30, 2007 and March 31, 2007,
respectively, were pledged as collateral for advances at the Federal Home Loan
Bank ("FHLB") of Seattle. Investment securities with an amortized cost of $1.1
million and a fair value of $1.2 million at both June 30, 2007 and March 31,
2007, were pledged as collateral for treasury tax and loan funds held by the
Bank. Investment securities with an amortized cost of $488,000 and $490,000 and
a fair value of $491,000 and $495,000 at June 30, 2007 and March 31, 2007,
respectively, were pledged as collateral for governmental public funds held by
the Bank. Investment securities with an amortized cost of $5.0 million and a
fair value of $5.0 million at both June 30, 2007 and March 31, 2007 were pledged
as collateral for borrowings from the discount window at the Federal Reserve
Bank of San Francisco.
7
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of June 30,
2007 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Agency securities $ - $ - $ 5,298 $ (13) $ 5,298 $ (13)
The fair value of temporarily impaired securities, the amount of
unrealized losses and the length of time these unrealized
losses existed as of March 31, 2007 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Agency securities $ - $ - $ 10,740 $ (44) $ 10,740 $ (44)
The unrealized losses on the above investment securities are primarily due to
increases in market interest rates subsequent to their purchase by the Company.
The Company expects the fair value of these investment securities to recover as
the investment securities approach their maturity dates or sooner if market
yields for such investment securities decline. The Company does not believe
that any of the investment securities are impaired due to reasons of credit
quality or is related to any company or industry specific event. Based on
management's evaluation and intent, none of the unrealized losses summarized in
this table are considered other than temporary. The Company realized no gains
or losses on sales of investment securities available for sale for the
three-month periods ended June 30, 2007 and 2006.
6. 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
--------- ---------- ---------- ---------
June 30, 2007
-------------
Real estate mortgage
investment conduits $ 833 $ 11 $ - $ 844
FHLMC mortgage-backed securities 112 1 - 113
FNMA mortgage-backed securities 190 3 - 193
------ ------ ------ ------
Total $ 1,135 $ 15 $ - $ 1,150
====== ====== ====== ======
March 31, 2007
--------------
Real estate mortgage investment
conduits $ 923 $ 6 $ - $ 929
FHLMC mortgage-backed securities 116 1 - 117
FNMA mortgage-backed securities 193 4 - 197
------ ------ ------ ------
Total $ 1,232 $ 11 $ - $ 1,243
====== ====== ====== ======
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
June 30, 2007 Cost Fair Value
------------- --------- ----------
Due in one year or less $ - $ -
Due after one year through five years - -
Due after five years through ten years 14 14
Due after ten years 1,121 1,136
------- -------
Total $ 1,135 $ 1,150
======= =======
Mortgage-backed securities held to maturity with an amortized cost of $841,000
and $931,000 and a fair value of $852,000 and $938,000 at June 30, 2007 and
March 31, 2007, respectively, were pledged as collateral for governmental public
funds held by the Bank. Mortgage-backed securities held to maturity with an
amortized cost of $141,000 and $143,000 and a fair value of $143,000 and
$144,000 at June 30, 2007 and March 31, 2007, respectively, were pledged as
collateral for treasury tax and loan funds held by the Bank. The real estate
mortgage investment conduits consist of Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac") and Federal National Mortgage Association ("FNMA" or
"Fannie Mae") securities.
8
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
June 30, 2007
-------------
Real estate mortgage investment
conduits $ 1,015 $ 14 $ (8) $ 1,021
FHLMC mortgage-backed securities 5,288 - (210) 5,078
FNMA mortgage-backed securities 102 - - 102
------ ------ ------ ------
Total $ 6,405 $ 14 $ (218) $ 6,201
====== ====== ====== ======
March 31, 2007
--------------
Real estate mortgage investment
conduits $ 1,070 $ 15 $ (2) $ 1,083
FHLMC mortgage-backed securities 5,592 - (153) 5,439
FNMA mortgage-backed securities 116 2 - 118
------ ------ ------ ------
Total $ 6,778 $ 17 $ (155) $ 6,640
====== ====== ====== ======
The contractual maturities of mortgage-backed securities available for sale are
as follows (in thousands):
Amortized Estimated
June 30, 2007 Cost Fair Value
------------- --------- ----------
Due in one year or less $ - $ -
Due after one year through five years 70 71
Due after five years through ten years 5,744 5,525
Due after ten years 591 605
-------- --------
Total $ 6,405 $ 6,201
======== ========
Expected maturities of mortgage-backed securities held to maturity and available
for sale will differ from contractual maturities because borrowers may have the
right to prepay obligations.
Mortgage-backed securities available for sale with an amortized cost of $6.3
million and $6.7 million and a fair value of $6.1 million and $6.5 million at
June 30, 2007 and March 31, 2007, respectively, were pledged as collateral for
FHLB advances.
The fair value of temporarily impaired mortgage-backed securities, the amount of
unrealized losses and the length of time these unrealized losses existed as of
June 30, 2007 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage
investment conduits $ - $ - $ 372 $ (8) $ 372 $ (8)
FHLMC mortgage-backed
securities - - 5,078 (210) 5,078 (210)
FNMA mortgage-backed
securities 76 - - - 76 -
Total temporarily impaired ---- ---- ----- ---- ----- ----
securities $ 76 $ - $ 5,450 $ (218) $ 5,526 $ (218)
==== ==== ===== ==== ===== ====
The fair value of temporarily impaired mortgage-backed securities, the amount of unrealized losses and the length of
time these unrealized losses existed as of March 31, 2007 are as follows (in thousands):
Less than 12 months 12 months or longer Total
-----------------------------------------------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage
investment conduits $ - $ - $ 407 $ (2) $ 407 $ (2)
FHLMC mortgage-backed
securities - - 5,439 (153) 5,439 (153)
FNMA mortgage-backed
securities 2 - - - 2 -
Total temporarily impaired ---- ---- ----- ---- ----- ----
securities $ 2 $ - $ 5,846 $ (155) $ 5,848 $ (155)
==== ==== ===== ==== ===== ====
The unrealized losses on the above mortgage-backed securities are primarily
due to increases in market interest rates subsequent to their purchase by
the Company. The Company expects the fair value of these securities to
recover as the securities approach their maturity dates or sooner if market
yields for such securities decline. The Company does not
9
believe that any of the securities are impaired due to reasons of credit quality
or is related to any company or industry specific event. Based on management's
evaluation and intent, none of the unrealized losses summarized in this table
are considered other than temporary. The Company realized no gains or losses
on sales of mortgage-backed securities available for sale for the three-month
periods ended June 30, 2007 and 2006.
7. LOANS RECEIVABLE
Loans receivable, excluding loans held for sale, consisted of the following (in
thousands):
March 31,
June 30, 2007 2007
------------- ---------
Commercial and construction
Commercial $ 90,896 $ 91,174
Other real estate mortgage 350,219 360,930
Real estate construction 158,598 166,073
-------- --------
Total commercial and construction 599,713 618,177
Consumer
Real estate one-to-four family 67,815 69,808
Other installment 4,630 3,619
-------- --------
Total consumer 72,445 73,427
Total loans 672,158 691,604
Less:
Allowance for loan losses 8,728 8,653
-------- --------
Loans receivable, net $ 663,430 $ 682,951
======== ========
Most of the Bank's business activity is with customers located in the states of
Washington and Oregon. Loans and extensions of credit outstanding at one time to
one borrower are generally limited by federal regulation to 15% of the Bank's
shareholders' equity, excluding accumulated other comprehensive income (loss).
As of June 30, 2007 and March 31, 2007, the Bank had no loans to any one
borrower in excess of the regulatory limit and also had no individual industry
concentrations of credit.
8. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in thousands):
Three Months Ended
June 30,
--------------------
2007 2006
---- ----
Beginning balance $ 8,653 $ 7,221
Provision for losses 50 350
Charge-offs (5) (3)
Recoveries 30 58
----- -----
Total allowance for loan losses $ 8,728 $ 7,626
===== =====
Changes in the allowance for unfunded loan commitments were as follows (in
thousands):
Three Months Ended
June 30,
--------------------
2007 2006
---- ----
Beginning balance $ 380 $ 362
Net change in allowance for unfunded loan
commitments 2 14
----- -----
Ending balance $ 382 $ 376
===== =====
The allowance for unfunded loan commitments is included in accrued expenses and
other liabilities on the Consolidated Balance Sheets. The provision for
unfunded commitments is charged to non-interest expense.
Loans on which the accrual of interest has been discontinued were $226,000 at
June 30, 2007 and March 31, 2007. Interest income foregone on non-accrual loans
was $6,000 and $20,000 during the three months ended June 30, 2007 and 2006,
respectively.
10
At June 30, 2007 and March 31, 2007, the Company's recorded investment in
certain loans that were considered to be impaired was $425,000 and $426,000,
respectively. At June 30, 2007, $293,000 of these impaired loans had a specific
related valuation allowance of $30,000, while $132,000 did not require a
specific valuation allowance. At March 31, 2007, $294,000 of these
impaired loans had a specific valuation allowance of $30,000, while $132,000 did
not require a specific valuation. The balance of the allowance for loan losses
in excess of these specific reserves is available to absorb the inherent losses
from all loans in the portfolio. The average investment in impaired loans was
approximately $425,000 and $959,000 during the three months ended June 30, 2007
and the year ended March 31, 2007, respectively. The related amount of interest
income recognized on loans that were impaired was approximately $4,000 and
$42,000 during the three months ended June 30, 2007 and 2006, respectively.
There were no loans past due 90 days or more and still accruing interest at June
30, 2007 and March 31, 2007.
9. LOANS HELD FOR SALE
The Company identifies loans held for sale at the time of origination, which are
carried at the lower of aggregate cost or net realizable value. Market values
are derived from available market quotations for comparable pools of mortgage
loans. Adjustments for unrealized losses, if any, are charged to income.
10. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in mortgage servicing rights
("MSRs") and the related allowance for the periods indicated and other related
financial data (in thousands):
Three Months Ended
June 30,
--------------------
2007 2006
---- ----
Balance at beginning of period, net $ 351 $ 384
Additions 34 25
Amortization (51) (51)
Change in valuation allowance 13 14
----- -----
Balance at end of period, net $ 347 $ 372
===== =====
Valuation allowance at beginning of period $ 35 $ 60
Change in valuation allowance (13) (14)
----- -----
Valuation allowance at end of period $ 22 $ 46
===== =====
The Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial assets. At June
30, 2007 and March 31, 2007, the fair value of MSRs totaled $1.1 million and
$1.0 million, respectively. The June 30, 2007 fair value was estimated using
various discount rates and a range of Prepayment Standard Assumption (PSA)
values (the Bond Market Association's standard prepayment values) that ranged
from 142 to 936.
11. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $669,000 at June 30, 2007 and
$711,000 at March 31, 2007. Amortization expense related to the core deposit
intangible during the three months ended June 30, 2007 and 2006 totaled $42,000
and $50,000, respectively.
11
12. BORROWINGS
Borrowings are summarized as follows (in thousands):
At June 30, 2007 At March 31, 2007
---------------- -----------------
Federal Home Loan Bank advances $ 5,000 $35,050
Weighted average interest rate: 5.46% 5.66%
At June 30, 2007, all of the Company's FHLB advances were scheduled to mature
during fiscal year 2008.
13. JUNIOR SUBORDINATED DEBENTURE
At June 30, 2007, the Company had established two wholly-owned subsidiary
grantor trusts for the purpose of issuing trust preferred securities and common
securities. The trust preferred securities accrue and pay distributions
periodically at specified annual rates as provided in each indenture. The
trusts used the net proceeds from each of the offerings to purchase a like
amount of junior subordinated debentures (the "Debentures") of the Company. The
Debentures are the sole assets of the trusts. The Company's obligations under
the Debentures and related documents, taken together, constitute a full and
unconditional guarantee by the Company of the obligations of the trusts. The
trust preferred securities are mandatorily redeemable upon maturity of the
Debentures, or upon earlier redemption as provided in the indentures. The
Company has the right to redeem the Debentures in whole or in part on or after
specific dates, at a redemption price specified in the indentures plus any
accrued but unpaid interest to the redemption date.
The Debentures issued by the Company to the grantor trusts, totaling $22.7
million, are reflected in the consolidated balance sheets in the liabilities
section at June 30, 2007, under the caption "junior subordinated debentures."
The common securities issued by the grantor trusts were purchased by the
Company, and the Company's investment in the common securities of $681,000 and
$217,000 at June 30, 2007 and 2006, respectively, is included in prepaid
expenses and other assets in the Consolidated Balance Sheets. The Company
records interest expense on the Debentures in the Consolidated Statements of
Income.
The following table is a summary of the terms of the current Debentures at June
30, 2007:
Issuance Amount Initial Rate at Maturing
Issuance Trust Date Outstanding Rate Type Rate 6/30/07 Date
-------------- -------- ----------- --------- ------- ------- --------
(Dollars in thousands)
Riverview Bancorp
Statutory Trust I 12/2005 $ 7,217 Variable (1) 5.88% 6.72% 3/2036
Riverview Bancorp
Statutory Trust II 06/2007 15,464 Fixed (2) 7.03% 7.03% 6/2037
------
Total $ 22,681
======
(1) The trust preferred securities reprice quarterly based on the three-
month LIBOR plus 1.36%
(2) The trust preferred securities bear a fixed quarterly interest rate for
60 quarters, at which time the rate begins to float on a quarterly basis
based on the three-month LIBOR plus 1.35% thereafter until maturity.
12
14. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 requires the recognition, in the financial statements, of
the impact of the tax position, if that position is more likely than not of
being sustained on audit, based on the technical merits of the position. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The Company adopted
FIN 48 at the beginning of fiscal year 2008. The adoption of FIN 48 did not
have a material impact on the Company. At the date of adoption, the Company had
unrecognized tax benefits related to its state filing positions of approximately
$90,000 that, if recognized, would affect the Company's effective tax rate by
approximately $65,000. The Company recorded an adjustment to retained earnings
(net of federal benefits) for these uncertain tax positions totaling $65,000,
inclusive of interest and penalties. The Company's policy is to recognize
potential accrued interest and penalties related to unrecognized tax benefits as
income tax expense. At the date of adoption, the Company had accrued
approximately $10,000 of possible interest and penalties. The tax years 2003 -
2006 remain open to examination by the major taxing jurisdictions to which the
Company is subject. As of June 30, 2007 no circumstances have changed that
would result in a change to the FIN 48 analysis that was originally performed.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact on the
Company's financial position, results of operations and cash flows upon adoption
of SFAS No. 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 permits companies to
choose, at specified election dates, to measure eligible items at fair value.
The standard is designed to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Management is currently
evaluating the impact on the Company's financial position, results of operations
and cash flows upon adoption of SFAS No. 159.
15. COMMITMENTS AND CONTINGENCIES
Off-balance sheet arrangements. The Company is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments generally include
commitments to originate mortgage, commercial and consumer loans. These
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 these 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.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily used to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held varies
and is required in instances where the Bank deems necessary.
The following is a summary of commitments and contingent liabilities with
off-balance sheet risk as of June 30, 2007 (in thousands):
Contract or
Notional
Amount
-----------
Commitments to originate loans:
Adjustable-rate $ 56,627
Fixed-rate 11,589
Standby letters of credit 2,389
Undisbursed loan funds, and unused lines of credit 167,836
--------
Total $ 238,441
========
At June 30, 2007, the Company had no firm commitments to sell residential loans
to the FHLMC. Typically, these agreements are short term fixed rate commitments
and no material gain or loss is likely.
13
Other Contractual Obligations. In connection with certain asset sales, the Bank
typically makes representations and warranties about the underlying assets
conforming to specified guidelines. If the underlying assets do not conform to
the specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss. At June 30, 2007, loans under warranty
totaled $109.4 million, which substantially represents the unpaid principal
balance of the Company's loans serviced for others. The Bank believes that the
potential for loss under these arrangements is remote. Accordingly, no
contingent liability is recorded in the financial statements.
At June 30, 2007, scheduled maturities of certificates of deposit, FHLB
advances, junior subordinated debentures and future minimum operating lease
commitments were as follows (in thousands):
Within 1-3 4-5 After 5 Total
1 year Years Years Years Balance
------ ----- ----- ------- -------
Certificates of deposit $124,657 $48,254 $ 5,854 $ 2,492 $181,257
FHLB advances 5,000 - - - 5,000
Junior subordinated debentures - - - 22,681 22,681
Operating leases 1,489 2,743 1,430 4,178 9,840
Total other contractual ------- ------ ------ ------ -------
obligations $131,146 $50,997 $ 7,284 $ 29,351 $218,778
======= ====== ====== ====== =======
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
liquidity.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
Management's Discussion and Analysis and other portions of this report contain
certain forward-looking statements concerning the future operations of the
Company. Management desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing the Company of the protections of
the safe harbor provisions with respect to all forward-looking statements
contained in this Quarterly Report. The Company has used forward-looking
statements to describe future plans and strategies, including its expectations
of future financial results. Management's ability to predict results or the
effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in the Company's market area and the country as a whole, the ability of
the Company to control costs and expenses, deposit flows, demand for mortgages
and other loans, pricing of products and services, real estate values and
vacancy rates, the ability of the Company to efficiently incorporate
acquisitions into its operations, competition, loan delinquency rates,
technological factors affecting operations and changes in federal and state
regulation. These factors should be considered in evaluating the forward-
looking statements, and undue reliance should not be placed on such statements.
The Company undertakes no obligation and specifically disclaims any obligation
to publish revised forward-looking statements to reflect the occurrence of
unanticipated events or circumstances after the date hereof. These risks could
cause our actual results to differ materially from those expressed in any
forward-looking statements by, or on behalf of, the Company.
Critical Accounting Policies
Critical accounting policies and estimates are discussed in our 2007 Form 10-K
under Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Critical Accounting Policies." That discussion
highlights estimates the Company makes that involve uncertainty or potential for
substantial change. There have not been any material changes in the Company's
critical accounting policies and estimates as compared to the disclosure
contained in the Company's 2007 Form 10-K.
Non-GAAP Financial Information
This report contains certain financial information determined by methods other
than in accordance with GAAP. These measures include net interest income on a
fully tax equivalent basis and net interest margin on a fully tax equivalent
basis. Management uses these non-GAAP measures in its analysis of the Company's
performance. The tax equivalent adjustment to net interest income recognizes the
income tax savings when comparing taxable and tax-exempt assets and assumes a
34% tax rate. Management believes that it is a standard practice in the banking
industry to present net interest income and net interest margin on a fully tax
equivalent basis, and accordingly believes that providing these measures may be
useful for peer comparison purposes. These disclosures should not be viewed as
substitutes for the results determined to be in accordance with GAAP, nor are
they necessarily comparable to non-GAAP performance measures that may be
presented by other companies. A reconciliation of net interest income as
reported to net interest income on a fully tax equivalent basis are contained in
the tables under "Net Interest Income."
14
Executive Overview
Financial Highlights. Net income for the three months ended June 30, 2007 was
$2.8 million, or $0.25 per basic share ($0.25 per diluted share), compared to
net income of $2.6 million, or $0.23 per basic share ($0.23 per diluted share)
for the three months ended June 30, 2006. Net interest income after provision
for loan losses increased $115,000 for the three months ended June 30, 2007
compared to the same quarter last year. Non-interest income increased in the
categories of fees and service charges, asset management fees, gain on sale of
loans held for sale and bank-owned life insurance. These increases were
partially offset by decreases in loan servicing income, and gain on sale of
credit card portfolio. Non-interest expense remained stable at $6.8 million for
the quarter ended June 30, 2007 compared to the same quarter last year.
The annualized return on average assets was 1.39% for the three months ended
June 30, 2007, compared to 1.36% for the three months ended June 30, 2006. For
the same periods, the annualized return on average common equity was 11.16%
compared to 11.18%, respectively. The efficiency ratio, which is defined as the
percentage of non-interest expenses to total revenue excluding intangible asset
amortization, was 60.34% for the first quarter of fiscal 2007 compared to 60.18%
for the same period last year.
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
and Multnomah, Clackamas and Marion counties of Oregon as its primary market
area. The Company is engaged predominantly in the business of attracting
deposits from the general public and using such funds in its primary market area
to originate commercial real estate, one- to four- family residential real
estate, construction, commercial and consumer loans. Commercial and construction
loans have grown from 72.42% of the loan portfolio at March 31, 2003 to 89.22%
of the loan portfolio at June 30, 2007. The Company's strategic plan includes
targeting the commercial banking customer base in its primary market area,
specifically small and medium size businesses, professionals and wealth building
individuals. In pursuit of these goals, the Company emphasizes controlled
growth and the diversification of its loan portfolio to include a significant
amount of commercial and commercial real estate loans. A related goal is to
increase the proportion of personal and business checking account deposits used
to fund these new loans. Significant portions of these new loan products carry
adjustable rates, higher yields or shorter terms and higher credit risk than
traditional fixed-rate mortgages. The strategic plan stresses increased
emphasis on non-interest income, including increased fees for asset management
and deposit service charges. The strategic plan is designed to enhance
earnings, reduce interest rate risk and provide a more complete range of
financial services to customers and the local communities the Company serves.
The Company is well positioned to attract new customers and to increase its
market share with 18 branches including ten in fast growing Clark County, three
in the Portland metropolitan area and three lending centers.
In order to support the Company's strategy of growth without compromising local,
personal service to customers and its commitment to asset quality, the Company
has made significant investments in experienced branch, lending, asset
management and support personnel and has incurred significant costs in facility
expansion and in our infrastructure. The Company's non-interest expense reflects
this investment and will remain relatively high as a percentage of its average
assets for the foreseeable future as a result of the emphasis on growth and
local, personal service. Controlling its non-interest expenses remains a high
priority for the Company's management.
The Company continuously reviews new products and services to provide its
customers more financial options. With the Company's emphasis on the growth of
non-interest income and the control of non-interest expense, all new technology
and services are generally reviewed for business development and cost saving
purposes. In-house processing of checks and check imaging has supported the
Bank's increased service to customers and at the same time has increased
efficiency. The Company continues to experience growth in customer use of its
online banking services, which allows customers to conduct a full range
of services on a real-time basis, including balance inquiries, transfers and
electronic bill paying. The Company's online service has also enhanced the
delivery of cash management services to commercial customers.
The Company conducts operations from its home office in Vancouver and 18 branch
offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale,
Vancouver (seven branch offices) and Longview, Washington and Portland (two
branch offices), Wood Village and Aumsville, Oregon. The Company operates a
trust and financial services company, RAM Corp., located in downtown Vancouver.
Riverview Mortgage, a mortgage broker division of the Company, originates
mortgage loans for various mortgage companies predominantly in the Vancouver/
Portland metropolitan areas, as well as for the Company. The Business and
Professional Banking Division, with two lending offices in Vancouver and one in
Portland, offers commercial and business banking services.
Vancouver is located in Clark County, Washington, which is just north of
Portland, Oregon. Many businesses are located in the Vancouver area because of
the favorable tax structure and lower energy costs in Washington as compared to
Oregon. Companies located in the Vancouver area include Sharp Microelectronics,
Hewlett Packard, Georgia Pacific, Underwriters Laboratory and Wafer Tech, as
well as several support industries. In addition to this industry base, the
Columbia River Gorge Scenic Area is a source of tourism, which has helped to
transform the area from its past dependence on the timber industry.
15
Loan Composition
The following table sets forth the composition of the Company's commercial and
construction loan portfolio based on loan purpose at the dates indicated.
Commercial &
Construction Other Real Real Estate
Total Commercial Estate Mortgage Construction
------------------------------------------------------
June 30, 2007 (Dollars in thousands)
Commercial $ 90,896 $ 90,896 $ - $ -
Commercial construction 56,547 - - 56,547
Office buildings 61,844 - 61,844 -
Warehouse/industrial 37,755 - 37,755 -
Retail/shopping centers/
strip malls 67,595 - 67,595 -
Assisted living facilities 11,089 - 11,089 -
Single purpose facilities 40,816 - 40,816 -
Land 101,113 - 101,113 -
Multi-family 30,007 - 30,007 -
One-to-four family 102,051 - - 102,051
------------------------------------------------------
Total $599,713 $ 90,896 $ 350,219 $ 158,598
======================================================
Commercial &
Construction Other Real Real Estate
Total Commercial Estate Mortgage Construction
------------------------------------------------------
March 31, 2007 (Dollars in thousands)
Commercial $ 91,174 $ 91,174 $ - $ -
Commercial construction 56,226 - - 56,226
Office buildings 62,310 - 62,310 -
Warehouse/industrial 40,238 - 40,238 -
Retail/shopping centers/
strip malls 70,219 - 70,219 -
Assisted living facilities 11,381 - 11,381 -
Single purpose facilities 41,501 - 41,501 -
Land 103,240 - 103,240 -
Multi-family 32,041 - 32,041 -
One-to-four family 109,847 - - 109,847
------------------------------------------------------
Total $ 618,177 $ 91,174 $ 360,930 $ 166,073
======================================================
Comparison of Financial Condition at June 30, 2007 and March 31, 2007
At June 30, 2007, the Company had total assets of $832.1 million, compared with
$820.3 million at March 31, 2007. The $11.8 million increase in total assets
was primarily attributable to the increase in interest-earning cash accounts.
Cash, including interest-earning accounts, totaled $68.1 million at June 30,
2007, compared to $31.4 million at March 31, 2007. The $36.7 million increase
was attributable to the maturity of investment securities, principal repayments
of loans receivable and the issuance of junior subordinated debentures in June
2007.
At June 30, 2007 and March 31, 2007 there were no loans held for sale. The
balance of loans held for sale can vary significantly from period to period
reflecting the interest rate environment, loan demand by borrowers, and loan
origination for sale by mortgage brokers versus loan origination for the
Company's loan portfolio. The Company originates fixed-rate residential loans
for sale in the secondary market and retains the related loan servicing rights.
Selling fixed interest rate mortgage loans allows the Company to reduce the
interest rate risk associated with long term, fixed interest rate products. The
sale of loans also makes additional funds available to make new loans and
diversify the loan portfolio. The Company continues to service the loans it
sells, maintaining the customer relationship and generating ongoing non-interest
income.
Loans receivable, net, totaled $663.4 million at June 30, 2007, compared to
$683.0 million at March 31, 2007, a decrease of $19.5 million. The decrease in
net loans is primarily due to the pay down of several large loans, which was
partially offset by continued strong levels of loan production. A substantial
portion of the loan portfolio is secured by real estate, either as primary or
secondary collateral, located in the Company's primary market areas.
Investment securities available for sale totaled $13.8 million at June 30, 2007,
compared to $19.3 million at March 31, 2007. The decrease was attributable to
maturities and scheduled cash flows.
16
Mortgage-backed securities available for sale totaled $6.2 million at June 30,
2007, compared to $6.6 million at March 31, 2007. The decrease is attributable
to maturities and scheduled cash flows.
Goodwill was $25.6 million at June 30, 2007 and March 31, 2007. As of June 30,
2007, there have been no events or changes in circumstances that would indicate
a potential impairment.
Bank owned life insurance increased to $13.8 million at June 30, 2007, from
$13.6 million at March 31, 2007, reflecting an increase in the cash surrender
value of the policies.
Deposits totaled $692.2 million at June 30, 2007, compared to $665.4 million at
March 31, 2007. As market interest rates have increased customers have moved
funds to higher interest accounts and the balances in the interest checking
accounts and money market deposit accounts have increased. At June 30, 2007, the
balance of interest checking accounts had increased $16.8 million to $161.3
million from $144.5 million at March 31, 2007. Money market deposit accounts
totaled $240.3 million at June 30, 2007 compared to $205.0 million at March 31,
2007.
FHLB advances totaled $5.0 million at June 30, 2007 and $35.1 million at March
31, 2007. The $30.1 million decrease was attributable to the pay down of our
line of credit with FHLB.
Junior subordinated debentures totaled $22.7 million at June 30, 2007 and $7.2
million at March 31, 2007. The $15.5 million increase was the result of the
issuance of additional trust preferred securities during the quarter ended June
30, 2007.
Shareholders' Equity and Capital Resources
Shareholders' equity decreased $468,000 to $99.7 million at June 30, 2007 from
$100.2 million at March 31, 2007. The decrease in equity from cash dividends
declared to shareholders of $1.2 million and stock repurchases of $2.3 million
were partially offset by earnings of $2.8 million for the three months ended
June 30, 2007. Exercise of stock options, earned ESOP shares, FIN 48
adjustments and the net tax effect of SFAS No. 115 adjustment to securities
comprised the remaining $278,000 net increase.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated in
accordance with regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk, weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total capital to
risk-weighted assets, Tier I capital to risk-weighted assets, Tier I capital to
adjusted tangible assets and tangible capital to tangible assets (set forth in
the table below). Management believes the Bank meets all capital adequacy
requirements to which it is subject as of June 30, 2007.
As of June 30, 2007, the most recent notification from the OTS categorized the
Bank as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized," the Bank must maintain minimum
total capital and Tier I capital to risk-weighted assets, Tier I capital to
adjusted tangible assets and tangible capital to tangible assets (set forth in
the table below). There are no conditions or events since that notification that
management believes have changed the Bank's regulatory capital categorization.
17
The Bank's actual and required minimum capital amounts and ratios are presented
in the following table (dollars in thousands):
Categorized as
"Well
Capitalized"
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provision
------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
June 30, 2007 ------ ----- ------ ----- ------ -----
Total Capital:
(To Risk-Weighted Assets) $80,787 11.09% $58,301 8.0% $72,877 10.0%
Tier I Capital:
(To Risk-Weighted Assets) 72,089 9.89 29,151 4.0 43,726 6.0
Tier I Capital:
(To Adjusted Tangible Assets) 72,089 9.15 23,645 3.0 39,409 5.0
Tangible Capital:
(To Tangible Assets) 72,089 9.15 11,823 1.5 N/A N/A
Categorized as
"Well
Capitalized"
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provision
------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
March 31, 2007 ------ ----- ------ ----- ------ -----
Total Capital:
(To Risk-Weighted Assets) $84,363 11.38% $59,310 8.0% $74,137 10.0%
Tier I Capital:
(To Risk-Weighted Assets) 75,740 10.22 29,655 4.0 44,482 6.0
Tier I Capital:
(To Adjusted Tangible Assets) 75,740 9.60 23,662 3.0 39,436 5.0
Tangible Capital:
(To Tangible Assets) 75,740 9.60 11,831 1.5 N/A N/A
Liquidity
The Bank's primary source of funds are customer deposits, proceeds from
principal and interest payments on loans, proceeds from the sale of loans,
maturing securities and FHLB advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to fund loan originations, deposit withdrawals and
continuing operations, satisfy other financial commitments and take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At June 30, 2007,
cash totaled $68.1 million, or 8.2% of total assets. The Bank has a line of
credit with the FHLB of Seattle in the amount of 30% of total assets to the
extent the Bank provides qualifying collateral and holds sufficient FHLB stock.
At June 30, 2007, the Bank had $5.0 million in outstanding advances from the
FHLB of Seattle under an available credit facility of $244.6 million, limited to
available collateral. The Bank also had a $10.0 million line of credit
available from Pacific Coast Bankers Bank and a $5.0 million borrowing
capability at the Federal Reserve discount window at June 30, 2007. The Bank
had no borrowings outstanding under either of these credit arrangements at June
30, 2007.
Sources of capital and liquidity for the Bancorp include distributions from the
Bank and the issuance of debt or equity securities. Dividends and other capital
distributions from the Bank are subject to regulatory restrictions.
18
Asset Quality
The allowance for loan losses was $8.7 million at June 30, 2007 and March 31,
2007. Management believes the allowance for loan losses at June 30, 2007 is
adequate to cover probable credit losses existing in the loan portfolio at that
date. 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, current economic
conditions, industry trends and data, and detailed analysis of individual loans.
The appropriate allowance level is estimated based upon factors and trends
identified by management at the time the consolidated financial statements are
prepared. Commercial loans are considered to involve a higher degree of credit
risk than one-to-four family residential loans, and tend to be more vulnerable
to adverse conditions in the real estate market and deteriorating economic
conditions. While management believes the estimates and assumptions used in its
determination of the adequacy of the allowance are reasonable, there can be no
assurance that such estimates and assumptions will not be proven incorrect in
the future, or that the actual amount of future provisions will not exceed the
amount of past provisions or that any increased provisions that may be required
will not adversely impact our financial condition and results of operations.
In addition, the determination of the amount of the Bank's allowance for loan
losses is subject to review by bank regulators, as part of the routine
examination process, which may result in the establishment of additional
reserves based upon their judgment of information available to them at the time
of their examination.
Non-performing assets were $226,000 or 0.03% of total assets at June 30, 2007
and March 31, 2007. The $226,000 balance of nonaccrual loans is composed of two
commercial real estate loans. The following table sets forth information
regarding the Company's non-performing assets.
June 30, 2007 March 31, 2007
------------- --------------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Other real estate mortgage $ 226 $ 226
Commercial - -
---- ----
Total 226 226
---- ----
Accruing loans which are contractually
past due 90 days or more - -
---- ----
Total of nonaccrual and 90 days past due
loans 226 226
---- ----
Real estate owned (net) - -
---- ----
Total non-performing assets $ 226 $ 226
==== ====
Total loans delinquent 90 days or more
to net loans 0.03% 0.03%
Total loans delinquent 90 days or
more to total assets 0.03% 0.03%
Total non-performing assets to
total assets 0.03% 0.03%
As of June 30, 2007 and March 31, 2007, other loans of concern totaled $3.3
million and $3.9 million, respectively. Other loans of concern consist of loans
which known information concerning possible credit problems with the borrowers
or the cash flows of the collateral securing the respective loans has caused
management to be concerned about these isolated instances of the ability of the
borrowers to comply with present loan repayment terms, which may result
in the future inclusion of such loans in the nonaccrual category.
19
Off-Balance Sheet Arrangements and Other Contractual Obligations
Through the normal course of operations, the Company enters into certain
contractual obligations and other commitments. Obligations generally relate to
funding of operations through deposits and borrowings as well as leases for
premises. Commitments generally relate to lending operations.
The Company has obligations under long-term operating leases, principally for
building space and land. Lease terms generally cover a five-year period, with
options to extend, and are not subject to cancellation.
The Company has commitments to originate fixed and variable rate mortgage loans
to customers. Because some commitments expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Undisbursed loan funds and unused lines of credit include funds not disbursed,
but committed to construction projects and home equity and commercial lines of
credit. Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
For further information regarding the Company's off-balance sheet arrangements
and other contractual obligations, see Note 15 of the Notes to Consolidated
Financial Statements contained herein.
Comparison of Operating Results for the Three Months Ended June 30, 2007 and
2006
Net Interest Income. The Company's profitability depends primarily on its net
interest income, which is the difference between the income it receives on
interest-earning assets and its cost of funds, which consists of interest paid
on deposits and borrowings. When interest-earning assets equal or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. Non-interest income includes deposit service fees, income
associated with the origination and sale of mortgage loans, brokering loans,
loan servicing fees, income from real estate owned, net gains on sales of
assets, bank-owned life insurance income and asset management fees. Non-interest
expenses include compensation and benefits, occupancy and equipment expenses,
deposit insurance premiums, data servicing expenses and other operating costs.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and regulation, and monetary and fiscal policies.
Net interest income for the three months ended June 30, 2007 was $8.8 million,
representing a decrease of $185,000, or 2.1%, from $9.0 million during the same
prior year period. This decline reflects an 8.0% increase in the average balance
of interest-bearing liabilities as a result of increased deposit growth,
partially offset by a 6.0% increase in the average balance of interest-bearing
assets to $734.1 million for the three months ended June 30, 2007 as a result of
the increase in loan originations. Average interest-earning assets to average
interest-bearing liabilities totaled 118.23% for the three-month period ended
June 30, 2007 compared to 120.46% in the same prior year period. The net
interest margin for the quarter ended June 30, 2007 was 4.83% compared to 5.23%
for the quarter ended June 30, 2006. The growth in the higher yielding money
market deposit accounts reflects the impact that the inverted/flat yield curve
has had on the customers' choice of deposit accounts. The Bank's sizeable
adjustable rate loan portfolio and emphasis on consumer, commercial and
construction loans with relatively short-terms to maturity has contributed to
minimizing the negative impact of the currently inverted/flat yield curve.
Interest Income. Interest income increased $1.2 million, or 8.6%, to $15.4
million for the three months ended June 30, 2007 compared to $14.2 million for
the three months ended June 30, 2006. The yield on interest-earning assets was
8.44% for the three months ended June 30, 2007 compared to 8.24% for the same
three months ended June 30, 2006. Previous increases in federal funds interest
rates have led to improved yields on both loans and investments upon repricing
to the higher current interest rates. An increase in the average balance of
interest-earning assets also contributed to the increase in interest income.
Interest Expense. Interest expense increased $1.4 million to $6.6 million for
the three months ended June 30, 2007, or 27.2%, compared to $5.2 million for the
three months ended June 30, 2006. Average interest-bearing liabilities
increased $46.2 million to $620.9 million for the three months ended June 30,
2007 compared to $574.7 million for the same prior year period. Much of this
growth was in the higher yielding money market deposit accounts whose average
balance increased 64.7% for the three months ended June 30, 2007 compared to
same prior year period. The increase in interest expense was also attributable
to the higher rates of interest paid on deposits and other interest-bearing
liabilities. The weighted average interest rate on total deposits increased to
4.17% for the three months ended June 30, 2007 from 3.39% for the same period in
the prior year. The weighted average cost of FHLB borrowings, junior
subordinated debenture and capital lease obligations increased to 6.28% for the
three months ended June 30, 2007 from 5.15% for the same period in the prior
year.
20
The following table sets forth, for the periods indicated, information regarding
average balances of assets and liabilities as well as the total dollar amounts
of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread,
ratio of interest-earning assets to interest-bearing liabilities and net
interest margin.
Three Months Ended June 30,
----------------------------------------------------
2007 2006
------------------------- ------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $582,912 $12,705 8.74% $552,521 $11,796 8.56%
Non-mortgage loans 101,390 2,175 8.60 94,412 1,973 8.38
------- ------ ------- ------
Total net loans(1) 684,302 14,880 8.72 646,933 13,769 8.54
Mortgage-backed
securities (2) 7,783 91 4.69 9,931 114 4.60
Investment securities
(2)(3) 16,848 230 5.48 23,821 285 4.80
Daily interest-bearing
assets 17,579 228 5.20 4,031 49 4.88
Other earning assets (4) 7,623 15 0.79 7,567 3 0.16
Total interest-earning ------- ------ ------- ------
assets 734,135 15,444 8.44 692,283 14,220 8.24
Non-interest-earning assets:
Office properties and
equipment, net 21,252 19,168
Other non-interest-
earning assets 61,081 62,098
------- -------
Total assets $816,468 $773,549
======= =======
Interest-bearing liabilities:
Regular savings accounts $28,238 39 0.55 $36,333 50 0.55
Interest checking
accounts 146,188 1,232 3.38 127,148 884 2.79
Money market deposit
accounts 220,561 2,542 4.62 133,948 1,257 3.76
Certificates of deposit 200,018 2,377 4.77 202,231 2,031 4.03
Total interest-bearing ------- ----- ------- -----
deposits 595,005 6,190 4.17 499,660 4,222 3.39
Other interest-bearing
liabilities 25,925 406 6.28 75,054 963 5.15
Total interest-bearing ------- ----- ------- -----
liabilities 620,930 6,596 4.26 574,714 5,185 3.62
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 83,927 94,542
Other liabilities 9,549 9,869
------- -------
Total liabilities 714,406 679,125
Shareholders' equity 102,062 94,424
Total liabilities and ------- -------
shareholders' equity $816,468 $773,549
======= =======
Net interest income(5) $ 8,848 $ 9,035
======= =======
Interest rate spread 4.18% 4.62%
====== ======
Net interest margin 4.83% 5.23%
====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities 118.23% 120.46%
======= =======
Tax equivalent adjustment(3) $ 20 $ 22
======= =======
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available
for sale, historical cost balances were utilized; therefore, the yield
information does not give effect to changes in fair value that are
reflected as a component of shareholders' equity.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income.
Interest and rates are presented on a fully taxable -equivalent basis under
a tax rate of 34%.
(4) In December 2006, FHLB of Seattle announced that quarterly cash dividends
would resume after having operated under a regulatory directive since
May 2005.
(5) Three Months Ended
June 30,
2007 2006
---- ----
Net interest income as reported $ 8,828 $ 9,013
Tax equivalent effect 20 22
Net interest income on a fully ----- -----
Tax equivalent basis $ 8,848 $ 9,035
===== =====
21
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company for the quarter ended June 30, 2007 compared to
the quarter ended June 30, 2006. Variances that were immaterial have been
allocated based upon the percentage relationship of changes in volume and
changes in rate to the total net change.
Three Months Ended June 30,
---------------------------------
2007 vs. 2006
---------------------------------
Increase (Decrease)
Due to Total
------------------ Increase
Volume Rate (Decrease)
------ ---- --------
(In thousands)
Interest Income:
Mortgage Loans $ 658 $ 251 $ 909
Non-mortgage loans 149 53 202
Mortgage-backed securities (25) 2 (23)
Investment securities (91) 38 (53)
Daily interest-bearing 176 3 179
Other earning assets - 12 12
---- ---- -----
Total interest income 867 359 1,226
---- ---- -----
Interest Expense:
Regular savings accounts (11) - (11)
Interest checking accounts 144 204 348
Money market deposit accounts 949 336 1,285
Certificates of deposit (22) 368 346
Other interest-bearing liabilities (734) 177 (557)
---- ---- -----
Total interest expense 326 1,085 1,411
---- ---- -----
Net interest income $ 541 $ (726) $ (185)
==== ===== =====
Provision for Loan Losses. The provision for loan losses for the three months
ended June 30, 2007 was $50,000, compared to $350,000 for the same period in the
prior year. Net recoveries for the current period were $25,000, compared to
$55,000 for the same period last year. The ratio of allowance for loan losses
and unfunded loan commitments to total net loans was 1.36% at June 30, 2007,
compared to 1.20% at June 30, 2006. Annualized net recoveries to average net
loans for the three-month period ended June 30, 2007 was 0.01% compared to 0.03%
for the same period in the prior year. During the quarter ended June 30, 2007,
management evaluated known and inherent risks in the loan portfolio and based on
this analysis changes were made in the estimation, assumptions and allocation of
the allowance for loan losses. The national and local economy housing market
continues to be experiencing a slow down in housing sales which is impacting
land developers' ability to sell their products. The estimated loan loss rate
was increased by 0.25% to 1.50% for the loans consisting of land and lots for
development and builder lot loans. Management considers the allowance for loan
losses at June 30, 2007 to be adequate to cover probable losses inherent in the
loan portfolio based on the assessment of various factors affecting the loan
portfolio as described above under "Asset Quality."
Non-Interest Income. Non-interest income increased $187,000 to $2.3 million for
the quarter ended June 30, 2007 compared to $2.1 million for the quarter ended
June 30, 2006. Increases in fees and service charges, asset management fees,
gains on sale of loans held for sale and bank owned life insurance offset the
lower loan servicing income and gain on sale of credit card portfolio. The
increase of $96,000 in fees and service charges reflects the increase in fees
and service charges on deposit accounts and increased broker loan fees. Asset
management fees from fiduciary services increased by $112,000 to $548,000
for the quarter ended June 30, 2007, compared to $436,000 for the quarter ended
June 30, 2006. RAM Corp. had $302.1 million in assets under management at June
30, 2007 compared to $250.8 million at June 30, 2006.
Non-Interest Expense. Non-interest expense remained stable at $6.8 million for
the quarter ended June 30, 2007 compared to the same prior year period. The
principal component of the Company's non-interest expense is salaries and
employee benefits. Salaries and employee benefits increased $133,000 to $4.0
million for the three months ended June 30, 2007 compared to $3.8 million for
the three months ended June 30, 2006. The majority of the increase is a result
of the expansion of our lending team, the opening of a new branch and a new
lending center and the increasing costs of employee benefits. Full-time
equivalent employees increased to 264 at June 30, 2007 from 236 at June 30,
2006.
Occupancy and depreciation expense totaled $1.3 million for the three months
ended June 30, 2007, compared to $1.1 million for the three months ended June
30, 2006. The increase in occupancy and depreciation expense is a result of
increases in rent and related costs at several banking facilities and the
opening of the Gateway branch in November 2006. Data processing expense was
$168,000 for the three months ended June 30, 2007 compared to the $335,000 for
the three
22
months ended June 30, 2006. The $167,000 decrease reflects savings from the
April 2006 change in service bureau that performs the Bank's core computer
system processing.
Other non-interest expense decreased $202,000 for the three months ended June
30, 2007 to $502,000, compared to $704,000 for the three months ended June 30,
2006. Costs incurred during the quarter ended June 30, 2006 related to prior
years expansion of our service network and the implementation of new systems
contributed to increases in other expenses compared to the quarter ended June
30, 2007.
Provision for Income Taxes. Provision for income taxes was $1.5 million for the
three months ended June 30, 2007, compared to $1.4 million for the three months
ended June 30, 2006. The effective tax rate for three months ended June 30,
2007 was 34.0% compared to 34.4% for the three months ended June 30, 2006. The
Company's overall effective tax rate at June 30, 2007 and 2006 takes into
account the estimated Oregon apportionment factors for property, payroll and
sales.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's Asset Liability Committee is responsible for implementing the
interest rate risk policy, which sets forth limits established by the Board of
acceptable changes in net interest income, and the portfolio value from
specified changes in interest rates. The OTS defines net portfolio value as the
present value of expected cash flows from existing assets minus the present
value of expected cash flows from existing liabilities plus the present value of
expected cash flows from existing off-balance sheet contracts. The Asset
Liability Committee reviews, among other items, economic conditions, the
interest rate outlook, the demand for loans, the availability of deposits and
borrowings, and the Company's current operating results, liquidity, capital and
interest rate exposure. In addition, the Asset Liability Committee monitors
asset and liability characteristics on a regular basis and performs analyses to
determine the potential impact of various business strategies in controlling
interest rate risk and other potential impact of these strategies upon future
earnings under various interest rate scenarios. Based on these reviews, the
Asset Liability Committee formulates a strategy that is intended to implement
the objectives contained in its business plan without exceeding limits set forth
in the Company's interest rate risk policy for losses in net interest income
and net portfolio value.
There has not been any material change in the market risk disclosures contained
in the 2007 Form 10-K.
Item 4. Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) was carried out as of
June 30, 2007 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 were effective
in ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Securities and Exchange Act of 1934 is (i)
accumulated and communicated to the Company's management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
In the quarter ended June 30, 2007, the Company did not make any changes in its
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect these controls. The Company intends to
continually review and evaluate the design and effectiveness of its disclosure
controls and procedures and to improve its controls and procedures over time and
to correct any deficiencies that it may discover in the future. The goal is to
ensure that senior management has timely access to all material financial and
non-financial information concerning the Company's business. While the Company
believes the present design of its disclosure controls and procedures is
effective to achieve its goal, future events affecting its business may cause
the Company to modify its disclosure controls and procedures. The Company does
not expect that its disclosure controls and procedures and internal control over
financial reporting will prevent all error and fraud. A control procedure, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control procedure are met.
Because of the inherent limitations in all control procedures, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns in controls or procedures can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any control procedure is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.
23
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a material
adverse effect, on the Company's financial position, results of operations, or
liquidity.
Item 1A. Risk Factors
------------
There have been no material changes to the risk factors previously
disclosed in the 2007 Form 10-K.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
----------------------------------------------------------
The following table summarizes the Company's share repurchases for the quarter
ended June 30, 2007.
Total Number Maximum Number
of Shares of Shares that
Average Purchased as May Yet Be
Total Number of Price Paid Part of Publicly Purchased Under
Period Shares Purchased per Share Announced Program the Programs(1)(2)
April 1 - April 30,
2007 - $ - - -
May 1 - May 30,
2007 80,000 14.09 80,000 170,000
June 1 - June 30,
2007 85,000 14.31 85,000 835,000
------- -------
Total 165,000 165,000
======= =======
(1) On March 22, 2007 and June 21, 2007 the Company announced stock
repurchase programs for up to 250,000 and 750,000 shares of its
outstanding common stock, respectively, representing approximately
9% of outstanding shares.
(2) In July 2007, the Company repurchased 345,000 shares of its common
stock under the two outstanding common stock repurchase plans.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits
--------
(a) Exhibits:
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
4 Form of Certificate of Common Stock of the Registrant (1)
10.1 Employment Agreement with Patrick Sheaffer (2)
10.2 Employment Agreement with Ronald A. Wysaske (2)
10.3 Severance Agreement with Karen Nelson (2)
10.4 Severance Agreement with John A. Karas (3)
10.5 Employee Severance Compensation Plan (2)
10.6 Employee Stock Ownership Plan (4)
10.7 Management Recognition and Development Plan (5)
10.8 1998 Stock Option Plan (5)
10.9 1993 Stock Option and Incentive Plan (5)
24
10.10 2003 Stock Option Plan (6)
10.11 Form of Incentive Stock Option Award Pursuant to 2003 Stock
Option Plan (7)
10.12 Form of Non-qualified Stock Option Award Pursuant to 2003 Stock
Option Plan (7)
11 Statement recomputation of per share earnings (See Note 4 of
Notes to Consolidated Financial Statements contained herein.)
31.1 Certifications of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certifications of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certifications of the Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-30203), and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 2002, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended March 31, 1998, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (Registration No. 333-66049), and incorporated herein by reference.
(6) Filed as Exhibit 99 to the Registration Statement on form S-8
(Registration No. 333-109894), and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007, and incorporated herein by reference.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERVIEW BANCORP, INC.
By: /s/Patrick Sheaffer By: /s/Ron Dobyns
------------------- -----------------
Patrick Sheaffer Ron Dobyns
Chairman of the Board Senior Vice President
Chief Executive Officer (Chief Financial and Accounting Officer)
(Principal Executive Officer)
Date: August 5, 2007 Date: August 5, 2007
26
EXHIBIT INDEX
31.1 Certifications of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certifications of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32 Certifications of the Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
27
Exhibit 31.1
------------
Section 302 Certification
I, Patrick Sheaffer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2007 of Riverview Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13(a)- 15(e) and 15(d)- 15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13(a)- 15(f)
and 15(d)- 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fiscal fourth quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting
Date: August 5, 2007
/s/ Patrick Sheaffer
--------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
28
Exhibit 31.2
Section 302 Certification
I, Ron Dobyns, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2007 of Riverview Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13(a) - 15(e) and 15(d) - 15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13(a) - 15(f)
and 15(d) - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fiscal fourth quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting
Date: August 5, 2007 /s/ Ron Dobyns
---------------------
Ron Dobyns
Chief Financial Officer
29
Exhibit 32
----------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies
in his capacity as an officer of Riverview Bancorp, Inc. (the "Company") and in
connection with the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2007 that:
1. the report fully complies with the requirements of sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all material
respects, Riverview Bancorp, Inc.'s financial condition and results of
operations as of the dates and for the periods presented in the financial
statements included in the Report.
/s/ Patrick Sheaffer /s/ Ron Dobyns
-------------------- --------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: August 5, 2007 Dated: August 5, 2007
30