UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2007 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22957
RIVERVIEW BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1838969
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(State or other jurisdiction of (I.R.S. Employer
I.D. Number)
incorporation or organization)
900 Washington St., Ste. 900,Vancouver, Washington 98660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 693-6650
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Securities registered pursuant to
Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Stock, Par Value $.01 per
Share the Nasdaq Stock Market LLC
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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Indicate by check mark whether the registrant (1) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and disclosure will not be
contained, to the best of the registrant's knowledge, in any definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K X
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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
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act) Yes No X
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sales price of the registrant's Common Stock
as quoted on the Nasdaq Global Market System under the symbol "RVSB" on
September 30, 2006 was approximately $156,268,872 (11,575,472 shares at $13.50
per share). It is assumed for purposes of this calculation that none of the
registrant's officers, directors and 5% stockholders (including the Riverview
Bancorp, Inc. Employee Stock Ownership Plan) are affiliates. As of June 8,
2007, there were issued and outstanding 11,627,980 shares of the registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of registrant's Definitive Proxy Statement for the 2007
Annual Meeting of Shareholders (Part III).
1
PART I
Item 1. Business
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General
Riverview Bancorp, Inc. ("the Company"), a Washington corporation, is the
savings and loan holding company of Riverview Community Bank (the "Bank"). On
July 18, 2003, the Company completed the acquisition of Today's Bancorp, Inc.
("Today's Bancorp"). The acquisition of Today's Bancorp's $122.3 million of
assets and $105.1 million of deposits were accounted for using the purchase
method of accounting. On April 22, 2005, the Company completed the acquisition
of American Pacific Bank ("APB"). The acquisition of APB's $128.5 million of
assets and $80.0 million of deposits were accounted for using the purchase
method of accounting. At March 31, 2007, the Company had total assets of
$820.3 million, total deposit accounts of $665.4 million and shareholders'
equity of $100.2 million. The Company's executive offices are located at 900
Washington Street. All references to the Company herein include the Bank where
applicable.
Substantially all of the Company's business is conducted through the Bank
which is regulated by the Office of Thrift Supervision ("OTS"), its primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Bank's deposits are insured by the FDIC up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") of Seattle
since 1937.
The Company is a progressive, community-oriented financial services company,
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 primarily 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, and commercial and consumer loans.
Commercial and construction loans have grown from 72.42% of the loan portfolio
at March 31, 2003 to 89.38% at March 31, 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
higher portion of commercial and commercial real estate loans. A related goal
is to increase the proportion of personal and business checking account
deposits used to fund these new loans. Significant portions of these new loan
products carry adjustable rates, higher yields or shorter terms and higher
credit risk than traditional fixed-rate mortgages. The strategic plan
stresses increased emphasis on non-interest income, including 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 its strategy of growth without compromising its local,
personal service to its customers and a commitment to asset quality, the
Company has made significant investments in experienced branch, lending, asset
management and support personnel and has incurred significant costs in
facility expansion. The Company's efficiency ratios reflect this investment
and will likely remain relatively high by industry standards for the
foreseeable future because of the emphasis on growth and local, personal
service. Control of non-interest expenses remains a high priority for the
Company's management.
The Company continuously reviews new products and services to give its
customers more financial options. With an emphasis on growth of non-interest
income and control of non-interest expense, all new technology and services
are reviewed for business development and cost saving purposes. The in-house
processing of checks and production of images 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. Customers are able to
2
conduct a full range of services on a real-time basis, including balance
inquiries, transfers and electronic bill paying. This online service has also
enhanced the delivery of cash management services to commercial customers.
The internet banking branch web site is www.riverviewbank.com.
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis and other portions of this Form 10-K
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 such safe harbor with respect to all "forward-looking
statements" contained in the Company's Annual Report. The Company has used
"forward-looking statements' to describe future plans and strategies,
including its expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, deposit flows, demand for mortgages and other loans, real
estate value and vacancy rates, the ability of the Company to efficiently
incorporate acquisitions into its operations, competition, loan delinquency
rates, and changes in federal and state regulation. These factors should be
considered in evaluating the "forward-looking statements," and undue reliance
should not be placed on such statements. The Company does not undertake to
update any forward-looking statement that may be made on behalf of the
Company.
Market Area
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, Wood Village and Aumsville, Oregon. The Company's market area for
lending and deposit taking activities encompasses Clark, Cowlitz, Skamania and
Klickitat counties in Washington, as well as Multnomah, Clackamas and Marion
counties in Oregon, and throughout the Columbia River Gorge area. The Company
operates a trust and financial services company, Riverview Asset Management
Corp., located in downtown Vancouver, Washington. 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
located at the downtown Vancouver headquarters and the Portland lending office
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. Washington has no state income tax and Clark County
operates a public electric utility that provides relatively lower cost
electricity. Companies located in the Vancouver area included Sharp
Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory
and Wafer Tech, as well as several support industries. In addition
to this industrial base, the Columbia River Gorge Scenic Area has been a
source of tourism, which has helped to transform the area from its past
dependence on the timber industry.
Lending Activities
General. At March 31, 2007, the Company's total net loans receivable,
including loans held for sale, amounted to $683.0 million, or 83.3% of total
assets at that date. The principal lending activity of the Company is the
origination of mortgage loans through its mortgage banking activities,
including loans collateralized by commercial properties, land for development,
and residential construction loans. A substantial portion of the Company's
loan portfolio is secured by real estate, either as primary or secondary
collateral, located in its primary market area.
In prior years Riverview reported and disclosed the composition of its loan
portfolio based on collateral with a focus upon residential construction and
permanent financing activities a view that was consistent with Riverview's
background as a thrift organization. However, since 1998 and more pronounced
in recent years, Riverview has strategically migrated its lending focus to one
similar to a commercial bank. This intended strategy is evident not
3
only in the changing mix of the loan portfolio that has occurred organically
but also has been accomplished through the Company's recent acquisitions of
community banks that emphasized commercial lending activities. To align
with the strategic direction of the Company, and to better conform to
established industry practices, we have modified certain loan disclosures to
reflect the increasingly commercial nature of our loan portfolio, and to
classify loan types based on loan purpose, rather than collateral. All
impacted tables and loan disclosures in this Form 10-K reflect these new
disclosure and the related reclassifications.
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
4
At March 31,
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2007 2006 2005 2004 2003
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Commercial and construction:
Commercial $ 91,174 13.18% $ 90,083 14.29% $ 78,280 18.02% $ 57,578 14.92% $ 34,145 11.21%
Other real estate mortgage 360,930 52.19 329,631 52.30 220,813 50.84 206,850 53.59 135,665 44.55
Real estate construction 166,073 24.01 137,598 21.83 58,699 13.51 49,042 12.70 50,753 16.66
Total commercial and ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
construction 618,177 89.38 557,312 88.42 357,792 82.37 313,470 81.21 220,563 72.42
Consumer:
Real estate one-to-four family 69,808 10.10 64,091 10.17 69,455 15.99 67,699 17.53 80,257 26.36
Other installment 3,619 0.52 8,899 1.41 7,107 1.64 4,846 1.26 3,730 1.22
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans 73,427 10.62 72,990 11.58 76,562 17.63 72,545 18.79 83,987 27.58
Total loans and loans held
for sale 691,604 100.00% 630,302 100.00% 434,354 100.00% 386,015 100.00% 304,550 100.00%
Less:
Allowance for loan losses 8,653 7,221 4,395 4,481 2,739
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Total loans receivable, net (1) $682,951 $623,081 $429,959 $381,534 $301,811
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(1) Includes loans held for sale of none, $65,000, $510,000, $407,000 and $1.5
million at March 31, 2007, 2006, 2005, 2004 and 2003, respectively.
5
Loan Portfolio 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.
COMPOSITION OF COMMERCIAL AND CONSTRUCTION LOAN TYPES BASED ON LOAN PURPOSE
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Commercial Other Real
& Construction Real Estate Estate
Total Commercial Mortgage Construction
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March 31, 2007 (Dollars in thousands)
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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
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Total $618,177 $91,174 $360,930 $166,073
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March 31, 2006
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Commercial $90,083 $90,083 $ - $ -
Commercial construction 43,715 - - 43,715
Office buildings 44,538 - 44,538 -
Warehouse/industrial 47,945 - 47,945 -
Retail/shopping centers/
strip malls 75,877 - 75,877 -
Assisted living facilities 11,576 - 11,576 -
Single purpose facilities 41,506 - 41,506 -
Land 77,084 - 77,084 -
Multi-family 31,105 - 31,105 -
One-to-four family 93,883 - - 93,883
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Total $557,312 $90,083 $329,631 $137,598
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Commercial Lending. Commercial loans are generally made to customers who are
well known to the Company and are typically secured by all business assets or
other property. The Company's commercial loans may be structured as term loans
or as lines of credit. Commercial term loans are generally made to finance
the purchase of assets and have maturities of five years or less. Commercial
lines of credit are typically made for the purpose of providing working
capital and usually have a term of one year or less. Lines of credit are made
at variable rates of interest equal to a negotiated margin above an index rate
and term loans are at either a variable or fixed rate. The Company also
generally obtains personal guarantees from financially capable parties
based on a review of personal financial statements.
Commercial lending involves greater risk than residential mortgage lending and
involves risks that are different from those associated with residential and
commercial real estate lending. Real estate lending is generally considered
to be collateral based lending with loan amounts based on predetermined loan
to collateral values and liquidation of the underlying real estate collateral
being viewed as the primary source of repayment in the event of borrower
default. Repayment of commercial business loans is often dependent on cash
flow of the borrower, which may be unpredictable, and collateral securing
these loans may fluctuate in value. Commercial business loans are primarily
made based on the cash flow of the borrower and secondarily on the underlying
collateral provided by the borrower. Most often, this collateral is accounts
receivable, inventory, equipment or real estate. In the case of loans secured
by accounts receivable, the availability of funds for the repayment of these
loans may be substantially dependent on the ability of the borrower to collect
amounts due from
6
its customers. Other collateral securing loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of
the business.
Other Real Estate Mortgage Lending. At March 31, 2007, the other real estate
lending portfolio balance totaled $360.9 million, or 52.19% of total loans.
The Company originates other real estate loans including office buildings,
warehouse/industrial, retail, assisted living facilities, land and multi-
family primarily located in our market area.
The Company actively pursues other real estate loans. Typically, these loans
have higher loan balances, are more difficult to evaluate and monitor, and
involve a higher degree of risk than one-to-four family residential loans.
Often payments on loans secured by commercial properties are dependent on the
successful operation and management of the property securing the loan or
business conducted on the property securing the loan; therefore, repayment of
these loans may be affected by adverse conditions in the real estate market or
the economy. Because our loan portfolio contains a significant number of
commercial and multifamily real estate loans with relatively large balances,
the deterioration of one or a few of these loans may cause a significant
increase in nonperforming loans. An increase in nonperforming loans could
cause an increase in the provision for loan losses and an increase in loan
charge-offs which could adversely impact our results of operations and
financial condition. Compared to one-to-four family first mortgage loans,
land loans may involve larger loan balances to single borrowers, and the
payment experience may be dependent on the successful development of the land
and the sale of the lots. These risks can be significantly impacted by supply
and demand conditions. If the borrower is a corporation, personal guarantees
are generally required and obtained from the corporate principals based upon a
review of their personal financial statements and individual credit reports.
A portion of the commercial real estate loan portfolio is relatively
unseasoned and contains a higher risk of default and loss than one-to-four
family residential loans.
Both fixed and adjustable-rate loans are offered on other real estate loans.
Adjustable-rate other real estate loans are originated with rates that
generally adjust after an initial period ranging from one to five years.
Adjustable-rate other real estate loans are generally priced utilizing the
Federal Home Loan Bank of Seattle's fixed advance rate for an equivalent
period plus a margin ranging from 2.5% to 3.5%, with principal and interest
payments fully amortizing over terms up to 25 years. These loans generally
have a prepayment penalty. Both adjustable-rate mortgages and fixed-rate
mortgages generally allow provisions for assumption of a loan by another
borrower subject to lender approval and a 1% assumption fee.
The maximum loan-to-value ratio for other real estate loans is generally 75%
for both purchases and refinances. Appraisals are required on all properties
securing other real estate loans. Independent appraisers designated by us
perform appraisals. Other real estate loan borrowers with outstanding
balances in excess of $500,000 are required to submit annual financial
statements and tax returns. The subject property is inspected at least every
two years if the loan balance exceeds $500,000. The Company attempts to
minimize this risk by limiting the maximum loan-to-value ratio on land loans
to 65% of the estimated developed value of the secured property. Loans on raw
land may run the risk of adverse zoning changes, environmental or other
restrictions on future use.
Loans originated on a fixed-rate basis generally are originated at fixed terms
up to five years, with amortization terms up to 25 years. Interest rates on
fixed-rate loans are generally established utilizing the Federal Home Loan
Bank of Seattle's fixed advance rate for an equivalent period plus a margin.
Depending on the market conditions at the time the loan was originated,
certain loan agreements may include prepayment penalties.
The average size loan in the other real estate loan portfolios was
approximately $694,000 as of March 31, 2007. The Company targets individual
other real estate loans between $500,000 and $5.0 million; however, the loan
policy allows origination of loans to one borrower up to 15% of the Bank's
capital. The largest other real estate loan as of March 31, 2007 was an
office building with an outstanding principal balance of $8.8 million located
in Vancouver, Washington. This loan is performing according to the loan
payment terms, as were all other real estate loans as of March 31, 2007,
except for two non-accrual loans with a balance of $226,000.
Real Estate Construction. The real estate construction loan portfolio, not
including loan commitments, totaled $166.1 million at March 31, 2007. The
Company actively originates three types of residential construction loans: (i)
speculative construction loans, (ii) custom/presold construction loans and
(iii) construction/permanent loans. Subject to market conditions, the
7
Company intends to increase its residential construction lending activities.
The Company also originates construction loans for the development of
multi-family and commercial properties.
The composition of the Company's construction loan portfolio including loan
commitments at March 31, 2007 and 2006 was as follows:
At March 31,
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2007 2006
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Amount(1) Percent Amount(1) Percent
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(Dollars in thousands)
Speculative construction $119,944 50.59% $111,699 53.06%
Commercial/multi-family construction 82,248 34.69 73,436 34.88
Custom/presold construction 18,818 7.93 3,752 1.78
Construction/permanent 16,096 6.79 21,631 10.28
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Total $237,106 100.00% $210,518 100.00%
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(1)Includes loans in process.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Company or another lender for the finished
home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. At March 31,
2007, the Company had 34 borrowers with aggregate outstanding speculative loan
balances of more than $1.0 million, which totaled $73.5 million and were
performing according to original terms.
Unlike speculative construction loans, presold construction loans are made for
homes that have buyers. Presold construction loans are made to homebuilders
who, at the time of construction, have a signed contract with a home buyer who
has a commitment for permanent financing for the finished home from the
Company or another lender. Custom construction loans are made to the
homeowner. Custom/presold construction loans are generally originated for a
term of 12 months. At March 31, 2007, the largest custom construction loan
and presold construction loan had outstanding balances of $315,000 and
$964,000, respectively, and were performing according to original terms.
Construction/permanent loans are originated to the homeowner rather than the
homebuilder along with a commitment by the Company to originate a permanent
loan to the homeowner to repay the construction loan at the completion of
construction. The construction phase of a construction/permanent loan
generally lasts six to nine months. At the completion of construction,
the Company may either originate a fixed rate mortgage loan or an ARM loan or
use its mortgage brokerage capabilities to obtain permanent financing for the
customer with another lender. At completion of construction, the
Company-originated fixed rate permanent loan's interest rate is set at a
market rate and for adjustable rate loans, the interest rates adjust on their
first adjustment date. See " Mortgage Brokerage," " Loan Originations, Sales
and Purchases" and " Mortgage Loan Servicing." At March 31, 2007, the largest
outstanding construction/permanent loan had an outstanding balance of $510,000
and was performing according to its original terms.
The Company also provides construction financing for non-residential
properties such as multi-family and commercial properties. The Company has
increased its commercial lending resources with the intent of increasing the
amount of other real estate loan balances such as construction commercial and
construction multi-family loans. The commercial construction loans
outstanding at March 31, 2007 were $56.2 million and the loan commitment
amount was $86.3 million. At March 31, 2007, the largest construction
commercial loan had an outstanding balance of $6.2 million and was performing
according to its original repayment terms.
The loan-to-value ratio, maturity and other provisions of the loans generally
have reflected the Bank's policy of making less than the maximum loan
permissible under applicable regulations, in accordance with sound lending
practices, market conditions and the Bank's underwriting standards. The Bank's
current lending policy on residential real estate construction loans generally
limits the maximum loan-to-value ratio to 80% of the appraised value of the
property for loans to
8
individuals and 75% of the appraised market value of the project for loans to
developers, provided that the loan does not exceed 85% of total costs to
complete the project. The minimum cash equity required for an individual
construction loan is 15%. The minimum cash equity required for a developer
loan is 15% of total costs, with up to 50% of appreciated land equity being
considered as cash equity provided certain conditions are met. In addition,
for loans to tract developers, the loan to discounted cash flow or bulk sale
value generally may not exceed 85%. Development plans are required from both
individuals and developers prior to making the loan. The Bank's loan officers
are required to personally visit the proposed site of the development and the
sites of competing developments. The Bank requires that developers maintain
adequate insurance coverage. While maturity dates for residential construction
loans are largely a function of the estimated construction period of the
project, loans to an individual generally do not exceed one year while loans
to developers generally do not exceed 18 months. Substantially all of the
Bank's residential construction loans have adjustable rates of interest based
on the Wall Street Journal Prime Rate and, during the term of construction,
the accumulated interest is added to the principal of the loan through an
interest reserve.
Construction lending affords the Company the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however,
generally involves a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost
proves to be inaccurate, the Company may be required to advance funds beyond
the amount originally committed to permit completion of the project. Projects
may also be jeopardized by disagreements between borrowers and builders and by
the failure of builders to pay subcontractors. The Company addresses these
risks by adhering to strict underwriting policies, disbursement procedures and
monitoring practices. In addition, because the Company's construction lending
is in its primary market area, changes in the local economy and real estate
market could adversely affect the Company's construction loan portfolio and
the Company's ability to continue to originate a significant amount of
construction loans. At March 31, 2007, the Company had no construction loans
on non-accrual status.
Consumer Lending. Consumer loans totaled $73.4 million at March 31, 2007, or
10.62% of total loans. Consumer lending is comprised of one-to-four family
mortgage loans, home equity lines of credit, land loans for the future
construction of one-to-four family homes, totaling $69.8 million, and other
secured and unsecured consumer loans, totaling $3.6 million at March 31, 2007.
One-to-four family residences located in the Company's primary market area
secure the majority of the residential loans. Underwriting standards require
that one-to-four family portfolio loans generally be owner occupied and that
loan amounts not exceed 80% or (95% with private mortgage insurance) of the
lesser of current appraised value or cost of the underlying collateral. Terms
typically range from 15 to 30 years, and the Company also offers balloon
mortgage loans with terms of either five or seven years. The Company
originates both fixed rate mortgages and adjustable rate mortgages ("ARMs")
with repricing based on one-year constant maturity U.S. Treasury index or
other index. The ability to generate volume in ARMs, however, is largely a
function of consumer preference and the interest rate environment. At March
31, 2007, the Company had no one-to-four family residential real estate loans
on non-accrual status.
In addition to originating one-to-four family loans for its portfolio, the
Company is an active mortgage broker for several third party mortgage lenders.
In recent periods, these mortgage brokerage activities have reduced the volume
of fixed rate one-to-four family loans that are originated and sold by the
Company. See " Loan Originations, Sales and Purchases" and " Mortgage
Brokerage."
The Company generally sells fixed-rate mortgage loans with maturities of 15
years or more and balloon mortgages to the Federal Home Loan Mortgage
Corporation ("FHLMC"), servicing retained. See "-Loan Originations, Sales and
Purchases" and "-Mortgage Loan Servicing."
The Company originates a variety of consumer loans, including home equity
lines of credit, home equity term loans, home improvement loans, loans for
debt consolidation and other purposes, automobile loans, boat loans and
savings account loans.
9
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as mobile homes, automobiles,
boats and recreational vehicles. At March 31, 2007, the Company had no
consumer loans non-accrual status.
Loan Maturity. The following table sets forth certain information at March
31, 2007 regarding the dollar amount of loans maturing in the Company's
portfolio based on their contractual terms to maturity, but does not include
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances are reported net of deferred fees.
After After
Within 1-3 3-5 5-10 Beyond
1 Year Years Years Years 10 Years Total
------ ----- ----- ----- -------- -----
Commercial and construction (Dollars in thousands)
Commercial
Adjustable rate $53,823 $ 7,975 $ 7,242 $ 4,819 $ 61 $73,920
Fixed rate 2,541 6,053 7,557 958 145 17,254
Other real estate mortgage
Adjustable rate 73,680 30,142 13,344 162,215 14,391 293,772
Fixed rate 10,919 21,412 18,151 15,770 906 67,158
Real estate construction
Adjustable rate 115,553 16,831 - 9,521 1,372 143,277
Fixed rate 16,316 325 - 5,803 352 22,796
Total commercial & ------- ------ ------ ------- ------ -------
construction 272,832 82,738 46,294 199,086 17,227 618,177
Consumer
Real estate one-to-four family
Adjustable rate 37 1,095 513 513 36,331 38,489
Fixed rate 3,432 5,511 9,975 1,180 11,221 31,319
Other installment
Adjustable rate 303 48 - 375 72 798
Fixed rate 477 724 890 463 267 2,821
------- ------ ------ ------- ------ -------
Total consumer 4,249 7,378 11,378 2,531 47,891 73,427
------- ------ ------ ------- ------ -------
Total net loans $277,081 $90,116 $57,672 $201,617 $65,118 $691,604
======= ====== ====== ======= ====== =======
10
The following table sets forth the dollar amount of all loans due one year
after March 31, 2007, which have fixed interest rates or have floating or
adjustable interest rates.
Fixed- Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)
Commercial $ 14,713 $ 20,097
Other real estate mortgage 56,239 220,092
Real estate construction 6,480 27,724
Real estate one-to-four family 27,887 38,452
Other installment 2,344 495
------ -------
Total $107,663 $306,860
======= =======
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of a loan is substantially less than
its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgage loans are substantially higher than current
mortgage loan market rates. Furthermore, management believes that a
significant number of the Company's residential mortgage loans are outstanding
for a period less than their contractual terms because of the transitory
nature of many of the borrowers who reside in its primary market area.
Loan Solicitation and Processing. The Company's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management.
The customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers. The Company also uses commissioned loan
brokers and print advertising to market its products and services.
The Company's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan, the adequacy of the
value of the property that will secure the loan, if any, and in the case of
commercial and multi-family real estate loans, the cash flow of the project
and the quality of management involved with the project. The Company's
lending policy requires borrowers to obtain certain types of insurance to
protect the Company's interest in any collateral securing the loan. Loans are
approved at various levels of management, depending upon the amount of the
loan.
The Company's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 2007 the Company's lending limit under this restriction was $12.7
million and, at that date, the Company's largest single loan to one borrower
was $11.4 million, which was performing according to its original terms.
Loan Commitments. The Company issues commitments to originate commercial
loans, commercial real estate mortgage loans, commercial construction loans,
residential mortgage loans and consumer loans conditioned upon the occurrence
of certain events. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Commitments to
extend credit are conditional, and are honored for up to 45 days subject to
the Company's usual terms and conditions. Collateral is not required to
support commitments. At March 31, 2007, the Company had outstanding
commitments to originate loans of $14.9 million.
Loan Originations, Sales and Purchases. While the Company originates
adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans in its primary market
area. During the years ended March 31, 2007 and 2006, the Company's total
loan originations, including mortgage loans originated for sale and
participations purchased, were $611.9 million and $677.8 million,
respectively, of which 80.26% and 82.84%, respectively, were subject to
periodic interest rate adjustment and 19.74% and 17.16%, respectively, were
fixed-rate loans.
The Company customarily sells the fixed-rate residential one-to-four family
mortgage loans that it originates with maturities of 15 years or more to
Federal Home Loan Mortgage Corporation ("FHLMC") as part of its asset
liability
11
strategy. Mortgage loans are sold to FHLMC on a non-recourse basis where-by
foreclosure losses are generally the responsibility of FHLMC and not the
Company. Servicing is retained on loans sold to FHLMC. The sale of these loans
allows the Company to continue to make loans during periods when savings flow
declines or funds are not otherwise available for lending purposes; however,
the Company assumes an increased risk if these loans cannot be sold in a
rising interest rate environment. Changes in the level of interest rates and
the condition of the local and national economies affect the amount of loans
originated by the Company and demanded by investors to whom the loans are
sold. Generally, the Company's residential one-to-four family mortgage loan
origination, and sale and mortgage brokerage activity (described below) and,
therefore, its results of operations, may be adversely affected by an
increasing interest rate environment to the extent such environment results in
decreased loan demand by borrowers and/or investors. Accordingly, the volume
of loan originations and the profitability related to the sale or brokerage of
one-to-four family mortgage loans can vary significantly from period to
period. During periods of reduced loan demand, the Company's profitability may
be adversely affected to the extent that we are unable to reduce expenses
commensurate with the decline in loan originations.
Interest rates on residential one-to-four family mortgage loan applications
are typically locked with customers and FHLMC during the application stage for
periods ranging from 30 to 90 days, the most typical period being 45 days.
These loans are locked with FHLMC under a best-efforts delivery program. The
Company makes every effort to deliver these loans before their rate locks
expire. This arrangement requires the Company to deliver the loans to FHLMC
within ten days of funding. Delays in funding the loans can require a lock
extension. The cost of a lock extension at times is borne by the borrower and
at times by the Company. These lock extension costs paid by the Company are
not expected to have a material impact to operations. This activity is
managed daily.
There can be no assurance that the Company will be successful in its efforts
to reduce the risk of interest rate fluctuation between the time of mortgage
loan origination and the time of the ultimate sale of the loan. To the extent
that the Company does not adequately manage its interest rate risk, the
Company may incur significant mark-to-market losses or losses relating to the
sale of such loans, adversely affecting its financial condition and results of
operations.
12
The following table shows total loans originated, sold and repaid during the
periods indicated.
For the Years Ended March 31,
-----------------------------
2007 2006 2005
---- ---- ----
(In thousands)
Total net loans receivable and loans held for
sale at beginning of period $623,081 $429,959 $381,534
------- ------- -------
Loans originated:
Other real estate mortgage 122,365 191,601 98,590
Real estate construction 190,594 153,409 101,801
Commercial 210,753 258,056 163,884
Consumer 54,817 62,219 64,480
------- ------- -------
Total loans originated 578,529 665,285 428,755
Loans purchased:
Other real estate mortgage 5,915 12,526 5,664
Real estate construction 27,311 - -
Commercial 145 - -
------- ------- -------
Total loans purchased 33,371 12,526 5,664
Loans sold:
Other real estate mortgage (11,941) (4,931) -
Real estate construction (5,940) - -
Consumer (one-to-four family) (17,031) (23,402) (22,840)
------- ------- -------
Total loans sold (34,912) (28,333) (22,840)
Repayment of principal (516,347) (573,707) (363,607)
American Pacific Bank acquisition - 120,077 -
Increase (decrease) in other items, net (771) (2,726) 453
------- ------- -------
Net increase in loans 59,870 193,122 48,425
------- ------- -------
Total net loans receivable and loans held for
sale at end of period $682,951 $623,081 $429,959
======= ======= =======
Mortgage Brokerage. In addition to originating mortgage loans for retention
in its portfolio, the Company employs ten commissioned brokers who originate
mortgage loans (including construction loans) for various mortgage companies
predominately in the Portland metropolitan area, as well as for the Company.
The loans brokered to mortgage companies are closed in the name of and funded
by the purchasing mortgage company and are not originated as an asset of the
Company. In return, the Company receives a fee ranging from 1% to 1.5% of the
loan amount that it shares with the commissioned broker. Loans brokered to
the Company are closed on the Company's books as if the Company had originated
them and the commissioned broker receives a fee of approximately 0.55% of the
loan amount. During the year ended March 31, 2007, brokered loans totaled
$250.7 million (including $48.0 million brokered to the Company). Gross fees
of $2.2 million (excluding the portion of fees shared with the commissioned
brokers) were recognized for the year ended March 31, 2007. The interest rate
environment has a strong influence on the loan volume and amount of fees
generated from the mortgage broker activity. In general, during periods of
rising interest rates the volume of loans and the amount of loan fees
generally decrease as a result of slower mortgage loan demand. Conversely,
during periods of falling interest rates, the volume of loans and the amount
of loan fees generally increase as a result of the increased mortgage loan
demand.
Mortgage Loan Servicing. The Company is a qualified servicer for FHLMC. The
Company's general policy is to close its residential loans on the FHLMC
modified loan documents to facilitate future sales to FHLMC. Upon sale, the
Company continues to collect payments on the loans, to supervise foreclosure
proceedings, if necessary, and to otherwise service the loans.
13
The Company generally retains the servicing rights on the fixed-rate mortgage
loans that it sells to FHLMC. At March 31, 2007, total loans serviced for
others was $130.6 million, of which $110.8 million was sold to FHLMC.
The value of mortgage servicing rights is significantly affected by interest
rates. In general, during periods of falling interest rates, mortgage loans
repay at faster rates and the value of the mortgage servicing declines.
Conversely, during periods of rising interest rates, the value of the mortgage
servicing rights generally increases as a result of slower rates of
prepayments. The Company may be required to recognize this decrease in value
by taking a charge against its earnings, which would cause its net income to
decrease. The Company has experienced stable prepayments of mortgages even as
there was a slight increase in interest rates during the past two years, which
has impacted the value of the servicing asset. Accordingly, the Company
recognized a decrease of $25,000 and $24,000 for fiscal years ended March 31,
2007 and 2006, respectively in its valuation allowance for mortgage servicing
rights reflecting the increase in mortgage interest rates and stable
prepayment speeds. The Company believes, based on historical experience that
the amount of prepayments and the related impairment charges should decrease
as interest rates increase.
Loan Origination and Other Fees. The Company generally receives loan
origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the loan that is charged to the borrower
for funding the loan. The Company usually charges origination fees of 1.5% to
2.0% on one-to-four family residential real estate loans, long-term commercial
real estate loans and residential construction loans. Commercial loan fees
are based on terms of the individual loan. Current accounting standards
require fees received for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Deferred fees
associated with loans that are sold are recognized as gain on sale of loans.
The Company had $3.7 million of net deferred loan fees at March 31, 2007. The
Company also receives loan servicing fees on the loans it sells and on which
it retains the servicing rights. See Note 9 of the Notes to the Consolidated
Financial Statements contained in Item 8 of this Form 10-K.
Delinquencies. The Company's collection procedures for all loans except other
installment loans provide for a series of contacts with delinquent borrowers.
A late charge delinquency notice is first sent to the borrower when the loan
secured by real estate becomes 17 days past due. A follow-up telephone call,
or letter if the borrower cannot be contacted by telephone, is made when the
loan becomes 22 days past due. A delinquency notice is sent to the borrower
when the loan becomes 30 days past due. When payment becomes 60 days past
due, a notice of default letter is sent to the borrower stating that
foreclosure proceedings will commence unless the delinquency is cured. If a
loan continues in a delinquent status for 90 days or more, the Company
generally initiates foreclosure proceedings. In certain instances, however,
the Company may decide to modify the loan or grant a limited moratorium on
loan payments to enable borrowers to reorganize their financial affairs.
A delinquent installment loan borrower is contacted when the loan is 15 days
past due. A letter of intent to repossess collateral is mailed to the
borrower after the loan becomes 45 days past due and repossession proceedings
are initiated after the loan becomes 90 days delinquent.
Delinquencies in commercial loans are handled on a case-by-case basis.
Generally, notices are sent and personal contact is made with the borrower
when the loan is 15 days past due. Loan officers are responsible for
collecting loans they originate or that are assigned to them. Depending on
the nature of the loan or type of collateral securing the loan, negotiations,
or other actions, are undertaken depending upon the circumstances.
Nonperforming Assets. Loans are reviewed regularly and it is the Company's
general policy that when a loan is 90 days delinquent or when collection of
interest appears doubtful, it is placed on non-accrual status, at which time
the accrual of interest ceases and a reserve for any unrecoverable accrued
interest is established and charged against operations. Typically,
payments received on non-accrual loans are applied to reduce the outstanding
principal balance on a cash-basis method.
The following table sets forth information with respect to the Company's
nonperforming assets. At the dates indicated, the Company had no restructured
loans within the meaning of Statement of Financial Accounting Standards
("SFAS") No. 15 (as amended by SFAS No. 114), Accounting by Debtors and
Creditors for Troubled Debt Restructuring.
14
At March 31,
--------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-
accrual basis:
Commercial $ - $ - $ 97 $ 872 $ -
Other real estate mortgage 226 415 198 340 -
Consumer - - 161 89 323
---- ---- ---- ----- ----
Total 226 415 456 1,301 323
---- ---- ---- ----- ----
Accruing loans which are
contractually past due 90
days or more - - - - -
---- ---- ---- ----- ----
Total of non-accrual and
90 days past due loans 226 415 456 1,301 323
---- ---- ---- ----- ----
Real estate owned - - 270 742 425
---- ---- ---- ----- ----
Total nonperforming assets $ 226 $ 415 $ 726 $2,043 $ 748
==== ==== ==== ===== ====
Total loans delinquent 90 days
or more to net loans 0.03% 0.07% 0.10% 0.34% 0.11%
Total loans delinquent 90 days
or more to total assets 0.03 0.05 0.08 0.25 0.08
Total nonperforming assets to
total assets 0.03 0.05 0.13 0.39 0.18
The gross amount of interest income on the non-accrual loans that would have
been recorded during the year ended March 31, 2007 if the non-accrual loans
had been current in accordance with their original terms was approximately
$12,000. For the year ended March 31, 2007, $85,000 was earned on the
non-accrual loans and included in interest and fees on loans receivable
interest income.
Loans not included in nonperforming or past due categories, but where
information about possible credit problems causes management to be uncertain
about the borrower's ability to comply with existing repayment terms, totaled
$3.9 million at March 31, 2007 and $3.7 million at March 31, 2006.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified
as loss. All or a portion of general loan loss allowances established to
cover possible losses related to assets classified substandard or doubtful can
be included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Company.
15
The aggregate amount of the Company's classified assets, general loss
allowances, specific loss allowances and charge-offs were as follows at the
dates indicated:
At or For the Year
Ended March 31,
--------------------
2007 2006
---- ----
(In thousands)
Substandard assets $4,143 $4,066
Doubtful assets - -
Loss assets - -
General loss allowances 8,623 7,221
Specific loss allowances 30 -
Charge-offs 186 711
The loans classified as substandard assets at March 31, 2007 are made up of
nine real estate secured commercial loans totaling $1.2 million, two
commercial real estate construction loans totaling $2.0 million and ten
commercial loans totaling $967,000.
Real Estate Owned. Real estate properties acquired through foreclosure or by
deed-in-lieu of foreclosure is recorded at the lower of cost or fair value
less estimated costs of disposal. Management periodically performs valuations
and an allowance for loan losses is established by a charge to operations if
the carrying value exceeds the estimated net realizable value. At March 31,
2007 and 2006, the Company owned no real estate properties acquired through
foreclosure.
Allowance for Loan Losses. The Company maintains an allowance for loan losses
to provide for losses inherent in the loan portfolio. The adequacy of the
allowance is evaluated monthly to maintain the allowance at levels sufficient
to provide for inherent losses. A key component to the evaluation is the
Company's internal loan review and loan classification system. The internal
loan review system provides for at least an annual review by the internal
audit department of all loans that meet selected criteria. The Problem Loan
Committee reviews and monitors the risk and quality of the Company's loan
portfolio. The Problem Loan Committee members include the Executive Vice
President Chief Credit Officer, Chairman and Chief Executive Officer,
President and Chief Operating Officer, Senior Vice President and Chief
Financial Officer, Senior Vice President of Credit Administration, and Vice
President of Special Assets. Credit officers are expected to monitor their
portfolios and make recommendations to change loan grades whenever changes are
warranted. At least annually, loans that are delinquent 60 days or more and
with specified outstanding loan balances are subject to review by the internal
audit department. Credit Administration approves any changes to loan grades
and monitors loan grades.
The Company uses the OTS loan classifications of special mention, substandard,
doubtful and loss plus the additional loan classifications of pass and watch
in order to assign a loan grade to be used in the determination of the proper
amount of allowance for loan losses. The definition of a pass classification
represents a level of credit quality, which contains no well-defined
deficiency or weakness. The definition of watch classification is used to
identify a loan that currently contains no well-defined deficiency or
weakness, but management has deemed it desirable to closely monitor the loan.
The Company uses the loan classifications from the internal loan review and
Credit Administration in the following manner to determine the amount of the
allowance for loan losses. The calculation of the allowance for loan losses
must consider loan classification in order to determine the amount of the
allowance for loan losses for the required three separate elements of the
allowance for losses: general allowances, allocated allowances and unallocated
allowances.
The general allowance element relates to assets with no well-defined
deficiency or weakness such as assets classified pass or watch, and takes into
consideration loss that is embedded within the portfolio but has not been
realized. Borrowers are impacted by events that may ultimately result in a
loan default and eventual loss well in advance of a lender's knowledge.
Examples of such loss-causing events in the case of installment or one-to-four
family residential loans would be a borrower job loss, divorce or medical
crisis. Examples in commercial or construction loans may be loss of customers
as a result of competition or changes in the economy. General allowances for
each major loan type are determined by applying loss
16
factors that take into consideration past loss experience, asset duration,
economic conditions and overall portfolio quality to the associated loan
balance.
The allocated allowance element relates to assets with well-defined
deficiencies or weaknesses such as assets classified special mention,
substandard, doubtful or loss. The OTS loss factors are applied against
current classified asset balances to determine the amount of allocated
allowances. Included in these allowances are those amounts associated with
loans where it is probable that the value of the loan has been impaired and
the loss can be reasonably estimated.
The unallocated allowance element is more subjective and is reviewed quarterly
to take into consideration estimation errors and economic trends that are not
necessarily captured in determining the general and allocated allowance.
The change in the balance of the allowance for loan losses at March 31, 2007
reflects the proportionate increase in loan balances, the change in mix of
loan balances and a change in loss rate when compared to March 31, 2006. The
mix of the loan portfolio showed an increase in the loan balances of
commercial, other real estate and real estate construction as well as a slight
increase in consumer at March 31, 2007 as compared to balances at March 31,
2006. Substandard assets and assets classified as doubtful were unchanged at
$4.1 million at March 31, 2007 and 2006.
At March 31, 2007, the Company had an allowance for loan losses of $8.7
million, or 1.25% of total outstanding net loans at that date. The allowance
for loan losses, including unfunded commitments of $380,000, was $9.0 million,
or 1.31% of net loans at March 31, 2007. Based on past experience and
probable losses inherent in the loan portfolio, management believes that loan
loss reserves are adequate.
While the Company believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles" or
"GAAP"), there can be no assurance that regulators, in reviewing the Company's
loan portfolio, will not request the Company to increase significantly its
allowance for loan losses, thereby negatively affecting the Company's
financial condition and results of operations. The following table sets forth
an analysis of the Company's allowance for loan losses for the periods
indicated.
17
Year Ended March 31,
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $7,221 $4,395 $4,481 $2,739 $2,537
----- ----- ----- ----- -----
Provision for loan losses 1,425 1,500 410 210 727
Recoveries:
Commercial and construction
Commercial 165 87 156 74 63
Real estate construction - - - - -
----- ----- ----- ----- -----
Total commercial and construction 165 87 156 74 63
----- ----- ----- ----- -----
Consumer
Residential real estate - 48 - 7 15
Other installment 28 14 17 10 -
----- ----- ----- ----- -----
Total consumer 28 62 17 17 15
----- ----- ----- ----- -----
Total recoveries 193 149 173 91 78
===== ===== ===== ===== =====
Charge-offs:
Commercial and construction
Commercial 172 577 490 882 136
Real estate construction - - - - -
----- ----- ----- ----- -----
Total commercial and construction 172 577 490 882 136
----- ----- ----- ----- -----
Consumer
Residential real estate - 41 149 85 224
Other installment 14 93 30 215 68
----- ----- ----- ----- -----
Total consumer 14 134 179 300 292
----- ----- ----- ----- -----
Total charge-offs 186 711 669 1,182 428
----- ----- ----- ----- -----
Net charge-offs (recoveries) (7) 562 496 1,091 350
===== ===== ===== ===== =====
Allowance acquired from Today's Bank - - - 2,639 -
Allowance acquired from American
Pacific Bank - 1,888 - - -
Net change in allowance for unfunded
loan commitments - - - (16) (175)
----- ----- ----- ----- -----
Balance at end of period $8,653 $7,221 $4,395 $4,481 $2,739
===== ===== ===== ===== =====
Ratio of allowance to total loans
outstanding at end of period 1.25% 1.15% 1.01% 1.16% 0.90%
Ratio of net charge-offs to average
net loans outstanding during period - 0.10 0.13 0.31 0.12
Ratio of allowance to total of non-
accrual and 90 days past due loans 3,829 1,740 964 344 848
18
Changes in the allowance for unfunded loan commitments:
Year Ended March 31,
------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period $ 362 $ 253 $ 191 $ 175 $ -
Net change in allowance for unfunded
loan commitments 18 109 62 16 175
----- ----- ----- ----- -----
Balance at end of period $ 380 $ 362 $ 253 $ 191 $ 175
===== ===== ===== ===== =====
The following table sets forth the breakdown of the allowance for loan losses by loan category and is based on applying a
specific loan loss factor to the outstanding balances of related loan category as of the date of the allocation
for the periods indicated.
At March 31,
----------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-------------- -------------- -------------- -------------- --------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a as a as a as a as a
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Commercial and construction:
Commercial $1,553 13.18% $1,549 14.29% $1,834 18.02% $1,589 14.92% $ 796 11.21%
Other real estate mortgage 4,066 52.19 3,553 52.30 1,863 50.84 2,426 53.59 1,266 44.55
Real estate construction 2,060 24.01 1,365 21.83 276 13.51 155 12.70 219 16.66
Consumer:
Real estate one-to-four family 333 10.10 292 10.17 278 15.99 264 17.53 263 26.36
Other installment 63 0.52 168 1.41 144 1.64 37 1.26 33 1.22
Unallocated 578 - 294 - - - 10 - 162 -
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan losses $8,653 100.00% $7,221 100.00% $4,395 100.00% $4,481 100.00% $2,739 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
19
Investment Activities
OTS regulated institutions have authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the applicable
FHLB, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, OTS
regulated institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds, the assets of which conform
to the investments that federally chartered savings institutions are otherwise
authorized to make directly.
Federal regulations require the Bank to maintain a minimum sufficient
liquidity to ensure its safe and sound operation. Liquid assets include cash,
cash equivalents consisting of short-term interest-earning deposits, certain
other time deposits, and other obligations generally having remaining
maturities of less than five years. It is management's intention to hold
securities with short maturities in the investment portfolio in order to match
more closely the interest rate sensitivities of the Company's assets and
liabilities. At March 31, 2007, the Bank's liquidity ratio, the ratio of cash
and eligible investments to the sum of withdrawable savings and borrowings due
within one year, was 4.98%.
The Investment Committee, composed of the Company's Chairman, President, Chief
Financial Officer, Controller, and one outside Director make investment
decisions. The Company's investment objectives are: (i) to provide and
maintain liquidity within regulatory guidelines; (ii) to maintain a balance of
high quality, diversified investments to minimize risk; (iii) to provide
collateral for pledging requirements; (iv) to serve as a balance to earnings;
and (v) to optimize returns. At March 31, 2007, the Company's investment and
mortgage-backed securities portfolio totaled $27.1 million and consisted
primarily of obligations of federal agencies, and Federal National Mortgage
Association ("FNMA") and FHLMC mortgage-backed securities.
At March 31, 2007, the Company's investment securities portfolio did not
contain any tax-exempt securities of any issuer with an aggregate book value
in excess of 10% of the Company's consolidated shareholders' equity, excluding
those securities issued by the U.S. Government or its agencies.
The Board of Directors sets the investment policy of the Company which
dictates that investments be made based on the safety of the principal amount,
liquidity requirements of the Company and the return on the investments. At
March 31, 2007, no investment securities were held for trading. The policy
does not permit investment in non-investment grade bonds and permits
investment in various types of liquid assets permissible under OTS regulation,
which includes U.S. Treasury obligations, securities of various federal
agencies, "bank qualified" municipal bonds, certain certificates of deposit of
insured banks, repurchase agreements and federal funds.
The Company has adopted SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, which requires the classification of securities at
acquisition into one of three categories: held to maturity, available for
sale or trading. See Note 1 of the Notes to the Consolidated Financial
Statements contained in Item 8 of this Form 10-K.
20
The following table sets forth the investment securities portfolio and carrying values at the dates indicated. The fair value
of the investment and mortgage-backed securities portfolio was $27.2 million, $34.0 million and $37.0 million at March 31,
2007, 2006 and 2005, respectively.
At March 31,
-----------------------------------------------------------------------
2007 2006 2005
--------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in thousands)
Held to maturity (at amortized cost):
Real estate mortgage investment
conduits ("REMICs") $ 923 3.40% $ 1,402 4.13% $ 1,802 4.88%
FHLMC mortgage-backed securities 116 0.43 138 0.41 218 0.59
FNMA mortgage-backed securities 193 0.71 265 0.78 323 0.88
------ ------ ------ ------ ------ ------
1,232 4.54 1,805 5.32 2,343 6.35
------ ------ ------ ------ ------ ------
Available for sale (at fair value):
Agency securities 10,740 39.57 15,028 44.25 13,842 37.51
REMICs 1,083 4.00 1,338 3.94 1,873 5.07
FHLMC mortgage-backed securities 5,439 20.04 6,635 19.54 9,507 25.76
FNMA mortgage-backed securities 118 0.43 161 0.47 239 0.65
Municipal securities 3,508 12.93 3,950 11.63 4,072 11.03
Trust preferred securities 5,019 18.49 5,044 14.85 5,031 13.63
------ ------ ------ ------ ------ ------
25,907 95.46 32,156 94.68 34,564 93.65
------ ------ ------ ------ ------ ------
Total investment securities $27,139 100.00% $33,961 100.00% $36,907 100.00%
====== ====== ====== ====== ====== ======
The following table sets forth the maturities and weighted average yields in the securities portfolio at March 31, 2007.
Less Than One to More Than Five to More Than
One Year Five Years Ten Years Ten Years
---------------- ---------------- ---------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Municipal securities $ 571 4.08% $ 1,033 4.27% $ 637 4.83% $ 1,267 4.38%
Agency securities 10,740 3.78 - - - - - -
REMICs - - 73 6.50 407 5.02 1,526 6.51
FHLMC mortgage-backed securities - - - - 5,439 4.02 116 6.40
FNMA mortgage-backed securities - - - - 98 6.22 213 7.38
Trust preferred securities - - - - - - 5,019 7.17
------ ------ ------ ------
Total $11,311 3.79% $ 1,106 4.42% $ 6,581 4.19% $ 8,141 6.60%
====== ====== ====== ======
(1) For available for sale securities carried at fair value, the weighted average yield is
computed using amortized cost without a tax equivalent adjustment for tax-exempt obligations.
21
In addition to U.S. Government treasury obligations, the Company invests in
mortgage-backed securities and REMIC's. Mortgage-backed securities ("MBS"),
which are also known as mortgage participation certificates or pass-through
certificates, represent a participation interest in a pool of single-family or
multi-family mortgages. Principal and interest payments on mortgage-backed
securities are passed from the mortgage originators, through intermediaries
such as FNMA, FHLMC, the Government National Mortgage Association ("GNMA") or
private issuers that pool and repackage the participation interests in the
form of securities to investors such as the Company. Mortgage-backed
securities generally increase the quality of the Company's assets by virtue of
the guarantees that back them, are more liquid than individual mortgage loans
and may be used to collateralize borrowings or other obligations of the
Company. See Note 5 of the Notes to the Consolidated Financial Statements
contained in Item 8 of this Form 10-K for additional information.
REMICs are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes, or tranches, with different maturity or risk characteristics
designed to meet a variety of investor needs and preferences. Management
believes these securities may represent attractive alternatives relative to
other investments because of the wide variety of maturity, repayment and
interest rate options available. Current investment practices of the Company
prohibit the purchase of high risk REMICs. At March 31, 2007, the Company
held REMICs with a net carrying value of $2.0 million, of which $900,000 were
classified as held-to-maturity and $1.1 million of which were available-
for-sale. REMICs may be sponsored by private issuers, such as mortgage
bankers or money center banks, or by U.S. Government agencies and government-
sponsored entities. At March 31, 2007, the Company owned no privately issued
REMICs. See Note 5 of the Notes to the Consolidated Financial Statements
contained in Item 8 of this Form 10-K for additional information.
Investments in mortgage-backed securities, including REMICs, involve a risk
that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest
rates.
The investment in municipal securities was $3.5 million at March 31, 2007
compared to $4.0 million at March 31, 2006.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and loan sales are the major sources of
the Company's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer-term basis for general business
purposes.
Deposit Accounts. The Company attracts deposits from within its primary
market area by offering a broad selection of deposit instruments, including
demand deposits, negotiable order of withdrawal ("NOW") accounts, money market
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Historically, the Company has focused on retail deposits.
Expansion in commercial lending has led to growth in business deposits
including demand deposit accounts. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on
deposit and the interest rate, among other factors. In determining the terms
of its deposit accounts, the Company considers the rates offered by its
competition, profitability to the Company, matching deposit and loan products
and customer preferences and concerns. The Company generally reviews its
deposit mix and pricing weekly.
22
Deposit Balances
The following table sets forth information concerning the Company's
certificates of deposit, other interest-bearing and non-interest bearing
deposits at March 31, 2007.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- ---- -------- ------ ------- --------
(Dollars in
thousands)
3.193% None Interest checking $ 100 $144,451 21.71%
0.550 None Regular savings 500 29,472 4.43
4.615 None Money market 2,500 205,007 30.81
None None Non-interest checking 100 86,601 13.01
------- -----
Total transaction accounts 465,531 69.96
Certificates of Deposit
-----------------------
4.823 91 Days Fixed-term, Fixed-rate 2,500 22,049 3.32
4.935 182-364 Days Fixed-term, Fixed-rate 2,500 30,825 4.63
4.800 12-17 Months Fixed-term, Fixed-rate 2,500 55,820 8.39
4.470 18 Months Fixed-term, Variable 100 2,410 0.36
rate, Individual
Retirement account("IRA")
4.067 18-23 Months Fixed-term, Fixed-rate 2,500 1,540 0.23
4.499 24-35 Months Fixed-term, Fixed-rate 2,500 42,848 6.44
4.626 36-59 Months Fixed-term, Fixed-rate 2,500 24,076 3.62
4.271 60-83 Months Fixed-term, Fixed-rate 2,500 12,855 1.93
4.680 84-120 Months Fixed-term, Fixed-rate 2,500 7,451 1.12
------- ------
Total certificates of deposit 199,874 30.04
------- ------
Total deposits $665,405 100.00%
======= ======
23
Deposit Flow
The following table sets forth the balances of deposit accounts in the various types offered by the Company at the dates
indicated.
At March 31,
------------------------------------------------------------------------------------------
2007 2006 2005
--------------------------- --------------------------- ----------------------------
Increase/ Increase/ Increase/
Balance Percent (Decrease) Balance Percent (Decrease) Balance(2)Percent (Decrease)
------- ------- -------- ------- ------- -------- ------- ------- --------
(Dollars in thousands)
Non-interest-bearing demand $ 86,601 13.01% $ (7,991) $ 94,592 15.58% $ 15,093 $ 79,499 17.40% $ 17,597
Interest checking 144,451 21.71 14,994 129,457 21.33 13,228 116,229 25.44 843
Regular savings accounts 29,472 4.43 (8,872) 38,344 6.32 2,831 35,513 7.77 6,179
Money market accounts 205,007 30.81 67,556 137,451 22.65 61,120 76,331 16.71 6,347
Certificates of deposit which
mature (1):
Within 12 months 144,210 21.67 14,051 130,159 21.44 53,101 77,058 16.87 (9,214)
12-36 months 46,884 7.05 (18,795) 65,679 10.82 26,573 39,106 8.56 6,684
Beyond 36 months 8,780 1.32 (2,502) 11,282 1.86 (21,860) 33,142 7.25 19,327
------- ------ ------- ------- ------ ------- ------- ------ -------
Total $665,405 100.00% $ 58,441 $606,964 100.00% $150,086 $456,878 100.00% $ 47,763
======= ====== ======= ======= ====== ======= ======= ====== =======
(1) IRAs of $17.9 million, $16.6 million and $15.4 million at March 31, 2007, 2006 and 2005, respectively, are
included in certificates of deposit balances.
(2) The April 22, 2005 acquisition of APB deposits included $38.1 million in transaction accounts and $42.0
million in certificates of deposit.
24
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit classified by rates
as of the dates indicated.
At March 31,
------------------------------
2007 2006 2005
------ ------ ------
(In thousands)
Below 2.00% $ 186 $ 2,257 $ 34,136
2.00 - 2.99% 1,381 22,012 37,157
3.00 - 3.99% 19,636 90,763 36,216
4.00 - 4.99% 120,987 85,746 30,277
5.00 - 5.99% 57,557 6,063 9,670
6.00 - 7.99% 127 279 1,850
------- ------- -------
Total $199,874 $207,120 $149,306
======= ======= =======
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 2007.
Amount Due
-------------------------------------------
After
Less Than 1 to 2 2 to 3 After
One Year Years Years 3 Years Total
------- ----- ----- ------- -----
(In thousands)
Below 2.00% $ 186 $ - $ - $ - $ 186
2.00 - 2.99% 1,273 55 15 38 1,381
3.00 - 3.99% 14,328 2,747 1,663 898 19,636
4.00 - 4.99% 81,428 30,795 2,078 6,686 120,987
5.00 - 5.99% 46,970 9,197 232 1,158 57,557
6.00 - 7.99% 25 102 - - 127
------- ------- ----- ------ -------
Total $144,210 $ 42,896 $3,988 $ 8,780 $199,874
======= ======= ===== ====== =======
The following table presents the amount and weighted average rate of
certificates of deposit equal to or greater than $100,000 at March 31, 2007.
Weighted
Maturity Period Amount Average Rate
------ ------------
(Dollars in thousands)
Three months or less $ 42,620 4.82%
Over three through six months 16,172 4.86
Over six through 12 months 15,685 4.87
Over 12 Months 24,854 4.73
------
Total $ 99,331 4.81%
======
25
Deposit Activities
The following table sets forth the deposit activities of the Company for the
periods indicated.
Year Ended March 31,
2007 2006 2005
------ ------ ------
(Dollars in thousands)
Beginning balance $606,964 $456,878 $409,115
Net increase before interest credited 38,198 137,743 42,342
Interest credited 20,243 12,343 5,421
------- ------- -------
Net increase in savings deposits 58,441 150,086 47,763
------- ------- -------
Ending balance $665,405 $606,964 $456,878
======= ======= =======
Borrowings. Deposits are the primary source of funds for the Company's
lending and investment activities and for its general business purposes. The
Company relies upon advances from the FHLB of Seattle to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. Advances from
the FHLB of Seattle are typically secured by the Bank's commercial real estate
loans, first mortgage loans and investment securities.
The FHLB functions as a central reserve bank providing credit for savings and
loan associations and certain other member financial institutions. As a
member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's assets or on the FHLB's assessment of the institution's
creditworthiness. The FHLB determines specific lines of credit for each member
institution and the Bank has a 30% of total assets line of credit with the
FHLB of Seattle to the extent the Bank provides qualifying collateral and
holds sufficient FHLB stock. At March 31, 2007, the Bank had $35.1 million of
outstanding advances from the FHLB of Seattle under an available credit
facility of $249.9 million, which is limited to available collateral.
The following tables set forth certain information concerning the Company's
FHLB borrowings at the dates and for the periods indicated.
At March 31,
------------------------------
2007 2006 2005
------ ------ ------
Weighted average rate on FHLB advances 5.66% 4.65% 5.05%
Year Ended March 31,
------------------------------
2007 2006 2005
------ ------ ------
(Dollars in thousands)
Maximum amounts of FHLB advances
outstanding at any month end $90,000 $66,400 $43,000
Average FHLB advances outstanding 68,300 51,091 40,274
Weighted average rate on FHLB advances 5.26% 4.44% 5.00%
In addition, the Bank has a Fed Funds borrowing facility with Pacific Coast
Bankers' Bank with a guideline limit of $10 million through June 30, 2007.
The facility may be reduced or withdrawn at any time. As of March 31, 2007,
26
the Bank did not have any outstanding advances on this facility.
In December 2005 a wholly owned subsidiary grantor trust established by the
Company issued $7.0 million of pooled Trust Preferred Securities ("trust
preferred securities"). Trust preferred securities accrue and pay
distributions periodically at specified rates as provided in the amended and
restated declaration of trust. The trust used the net proceeds from the
offering to purchase a like amount of Junior Subordinated Debentures (the
"Debentures") of the Company which pays interest at the same rate as
distribution on the trust preferred securities. 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 mandatory redeemable upon the maturity of the
Debentures, or upon earlier redemption as provided in the indenture. The
Company has the right to redeem the Debentures in whole or in part five years
after issuance on any coupon date, at a redemption price specified in the
indentures plus any accrued but unpaid interest to the redemption date.
The following table is a summary of junior subordinated debentures securities
at March 31, 2007:
Preferred
Issuance Security Initial Rate at Maturing
Date Amount Rate Type Rate 3/31/07 Date
---- ------ --------- ---- ------- ----
Issuance trust (Dollars in thousands)
--------------
Riverview Bancorp, Inc.
Statutory Trust 1 12/2005 $7,000 Variable 5.88% 6.71% 12/2035
The total amount of trust preferred securities outstanding at December 31,
2005 was $7.0 million. The interest rates on the trust preferred securities
reset quarterly and is tied to the London Interbank Offered Rate ("LIBOR").
The Company has the right to redeem the Debentures in December 2010.
The Debentures issued by the Company to the grantor trusts, totaling $7.0
million, are reflected in our consolidated balance sheet in the liabilities
section at December 31, 2005, under the caption "Junior subordinated
debentures." The Company recorded $217,000 in other assets in the
consolidated balance sheet at March 31, 2007, for the common capital
securities issued by the issuer trusts. The Company invested $5.0 million of
the trust preferred securities proceeds in the Bank and retained the remaining
$2.0 million for general corporate purposes.
Taxation
For details regarding the Company's taxes, see Note 14 of the Notes to the
consolidated financial statements contained in Item 8 of this Form 10-K.
Personnel
As of March 31, 2007, the Company had 255 full-time equivalent employees, none
of whom are represented by a collective bargaining unit. The Company believes
its relationship with its employees is good.
27
Corporate Information
The Company's principal executive offices are located at 900 Washington
Street, Vancouver, Washington 98660. Its telephone number is (360) 693-6650.
The Company maintains a website with the address www.riverviewbank.com. The
information contained on the Company's website is not included as a part of,
or incorporated by reference into, this Annual Report on Form 10-K. Other than
an investor's own Internet access charges, the Company makes available free of
charge through its website the Annual Report on Form 10-K, quarterly reports
on Form 10-K and current reports on Form 8-K, and amendments to these reports,
as soon as reasonably practicable after it has electronically filed such
material with, or furnished such material to, the Securities and Exchange
Commission.
Subsidiary Activities
Under OTS regulations, the Bank is authorized to invest up to 3% of its assets
in subsidiary corporations, with amounts in excess of 2% only if primarily for
community purposes. At March 31, 2007, the Bank's investments of $940,000 in
Riverview Services, Inc. ("Riverview Services"), its wholly owned subsidiary,
and $1.1 million in Riverview Asset Management Corp. ("RAMCorp"), an 85% owned
subsidiary were within these limitations.
Riverview Services acts as a trustee for deeds of trust on mortgage loans
granted by the Bank, and receives a reconveyance fee of approximately $70 for
each deed of trust. Riverview Services had net income of $46,800 for
the fiscal year ended March 31, 2007 and total assets of $942,500 at that
date. Riverview Services' operations are included in the Consolidated
Financial Statements of the Company.
RAM Corp is an asset management company providing trust, estate planning and
investment management services. RAM Corp commenced business in December 1998
and had net income of $382,100 for the fiscal year ended March 31, 2007 and
total assets of $1.6 million at that date. RAM Corp earns fees on the
management of assets held in fiduciary or agency capacity. At March 31, 2007,
the fair market value of total assets under management approximated $285.6
million. RAM Corp's operations are included in the Consolidated Financial
Statements of the Company.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age (1) Position
---- ------ --------
Patrick Sheaffer 67 Chairman of the Board and Chief Executive Officer
Ronald A. Wysaske 54 President and Chief Operating Officer
David A. Dahlstrom 56 Executive Vice President and Chief Credit Officer
Ronald L. Dobyns 58 Senior Vice President and Chief Financial Officer
John A. Karas 58 Senior Vice President
James D. Baldovin 48 Senior Vice President Retail Banking
(1) At March 31, 2007
Patrick Sheaffer is Chairman of the Board and Chief Executive Officer of the
Company and Chief Executive Officer of the Bank. Prior to February 2004, Mr.
Sheaffer served as Chairman of the Board, President and Chief Executive
Officer of the Company since inception in 1997. He became Chairman of the
Board of the Bank in 1993. Mr. Sheaffer joined the Bank in 1965. He is
responsible for leadership and management of the Company. Mr. Sheaffer is
active in numerous professional and civic organizations.
Ronald A. Wysaske is President and Chief Operating Officer of the Bank. Prior
to February 2004, Mr. Wysaske served as Executive Vice President, Treasurer
and Chief Financial Officer of the Bank from 1981 to 2004 and of the Company
at inception in 1997. He joined the Bank in 1976. Mr. Wysaske is responsible
for daily operations and management of the Bank. He holds an M.B.A. from
Washington State University and is active in numerous professional and civic
organizations.
28
David A. Dahlstrom, Executive Vice President and Chief Credit Officer, was
hired in May 2002. He is responsible for all Riverview lending divisions
related to its commercial, mortgage and consumer loan activities. Prior to
joining Riverview, Mr. Dahlstrom spent 14 years with First Interstate and
progressed through a number of management positions, including serving as
Senior Vice President of the Business Banking Group in Portland. In 1999, Mr.
Dahlstrom joined a regional bank as Executive Vice President/Community
Banking, responsible for all branch operations and small business banking.
Ronald L. Dobyns is Senior Vice President and Chief Financial Officer of the
Company. Prior to February 2004, Mr. Dobyns served as Controller since 1996.
He is responsible for accounting, SEC reporting as well as treasury functions
for the Bank and the Company. He is a State of Oregon certified public
accountant, holds an M.B.A. from the University of Minnesota and is a graduate
of Pacific Coast Banking School.
John A. Karas, Senior Vice President of the Bank, also serves as Chairman of
the Board, President and CEO of our subsidiary, Riverview Asset Management
Corp. Mr. Karas has been employed by the Company since 1999 with over
20 years of trust experience. He is familiar with all phases of the trust
business and his experience includes trust administration, trust legal
council, investments and real estate. Mr. Karas received his B.A. from
Willamette University and his Juris Doctor degree from Lewis & Clark Law
School's Northwestern School of Law. He is a member of the Oregon, Multnomah
County and American Bar Associations and is a Certified Trust and Financial
Advisor. Mr. Karas is also active in numerous civic organizations.
James D. Baldovin is Senior Vice President of Retail Banking and is
responsible for the Bank's branch banking network, customer service, sales and
community development. Mr. Baldovin has been employed by the Bank since
January 2003 and has over 22 years of banking expertise in developing and
leading sales and service cultures. He holds a Bachelor of Arts degree in
economics from Linfield College and is a graduate of the Pacific Coast Banking
School.
29
REGULATION
The following is a brief description of certain laws and regulations which are
applicable to the Company and the Bank. The description of these laws and
regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress that
may affect the Company's operations. In addition, the regulations governing
us may be amended from time to time by the OTS. Any such legislation or
regulatory changes in the future could adversely affect us. We cannot predict
whether any such changes may occur.
General
As a federally chartered savings institution, the Bank is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the FDIC, as the insurer of its deposits. The Bank is a member
of the FHLB System and its deposit accounts are insured up to applicable
limits by the Deposit Insurance Fund, which is administered by the FDIC. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and,
under certain circumstances, the FDIC to evaluate the Bank's safety and
soundness and compliance with various regulatory requirements. This regulatory
structure is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Company and the
Bank and their operations. The Company, as a savings and loan holding
company, is required to file certain reports with, is subject to examination
by, and otherwise must comply with the rules and regulations of the OTS. The
Company is also subject to the rules and regulations of the SEC under the
federal securities laws. See "-- Savings and Loan Holding Company
Regulations."
Federal Regulation of Savings Institutions
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The OTS also has extensive enforcement
authority over all savings institutions and their holding companies, including
the Bank and the Company. This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease-and-desist or
removal orders and initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
the OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank also
are prescribed by federal laws, which prohibit the Bank from engaging in any
activities not permitted by these laws. For example, no savings institution
may invest in non-investment grade corporate debt securities. In addition,
the permissible level of investment by federal institutions in loans secured
by non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
All savings institutions are required to pay assessments to the OTS to fund
the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2007 was $168,400.
30
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 2007, the Bank's lending limit under this restriction was $12.7
million and, at that date, the Bank's largest loans to one borrower was $11.4
million, which was performing according to its original terms.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Seattle,
which is one of 12 regional FHLBs that administer the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans or advances to members in accordance with policies and
procedures, established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing. See Business - Deposit
Activities and Other Sources of Funds - Borrowings.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Seattle. At March 31, 2007, the Bank had $7.4 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock until such dividends were suspended on
May 18, 2005. As a result, the Bank received no dividends from the FHLB of
Seattle for the year ended March 31, 2006. During the fourth quarter of the
2006 calendar year, the FHLB received approval to resume paying its members
cash dividends on a quarterly basis. As a result, the Bank received $14,700
in dividends from the FHLB of Seattle for the year ended March 31, 2007.
Under federal law, the FHLBs are required to provide funds for the resolution
of troubled savings institutions and to contribute to low- and moderately-
priced housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal Deposit Insurance Corporation. The Bank's deposits are insured up to
applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the fund. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC recently amended its risk-based assessment system for 2007 to
implement authority granted by the Federal Deposit Insurance Reform Act of
2005, which was enacted in 2006 ("Reform Act"). Under the revised system,
insured institutions are assigned to one of four risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors.
An institution's assessment rate depends upon the category to which it is
assigned. Risk Category I, which contains the least risky depository
institutions, is expected to include more than 90% of all institutions. Unlike
the other categories, Risk Category I contains further risk differentiation
based on the FDIC's analysis of financial ratios, examination component
ratings and other information. Assessment rates are determined by the FDIC and
currently range from five to seven basis points for the healthiest
institutions (Risk Category I) to 43 basis points of assessable deposits for
the riskiest (Risk Category IV). The FDIC may adjust rates
31
uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points. No institution may pay a dividend if in default of
the FDIC assessment.
The Reform Act also provided for a one-time credit for eligible institutions
based on their assessment base as of December 31, 1996. Subject to certain
limitations with respect to institutions that are exhibiting weaknesses,
credits can be used to offset assessments until exhausted. The Bank's one-time
credit is expected to be approximately $283,000. The Reform Act also provided
for the possibility that the FDIC may pay dividends to insured institutions
once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of
estimated insured deposits.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize a predecessor deposit insurance fund. This payment
is established quarterly and during the calendar year ending March 31, 2007
averaged 1.22 basis points of assessable deposits. The Financing Corporation
was chartered in 1987, by the Federal Home Loan Bank board solely for the
purpose of functioning as a vehicle for the recapitalization of the Federal
Savings and Loan Insurance Corporation.
The Reform Act provided the FDIC with authority to adjust the Deposit
Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is
viewed by the FDIC as the level that the fund should achieve, was established
by the agency at 1.25% for 2007.
The FDIC has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. There can be no
prediction as to what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS.
Management of the Bank is not aware of any practice, condition or violation
that might lead to termination of the Bank's deposit insurance.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. "Significantly undercapitalized"
and "critically undercapitalized" institutions are subject to more extensive
mandatory regulatory actions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
At March 31, 2007, the Bank was categorized as "well capitalized" under the
prompt corrective action regulations of the OTS.
Qualified Thrift Lender Test. All savings institutions, including the Bank,
are required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings institution to
have at least 65% of its total assets, as defined by regulation, in qualified
thrift investments on a monthly average for nine out of every 12 months on a
rolling basis. As an alternative, the savings institution may maintain 60% of
its assets in those assets specified in Section 7701(a)(19) of the Internal
Revenue Code ("Code"). Under either test, such assets primarily consist
of residential housing related loans and investments.
32
A savings institution that fails to meet the QTL is subject to certain
operating restrictions and may be required to convert to a national bank
charter. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments." As of March 31, 2007, the Bank maintained 65.41% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test.
Capital Requirements. Federally insured savings institutions, such as the
Bank, are required by the OTS to maintain minimum levels of regulatory
capital. Theses minimum capital standards include: a 1.5% tangible capital to
total assets ratio, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS examination rating system) and an 8% risk-based
capital ratio. In addition, the prompt corrective action standards, discussed
below, also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
system) and, together with the risk-based capital standard itself, a 4% Tier I
risk-based capital standard. The OTS regulations also require that, in meeting
the tangible, leverage and risk-based capital standards, institutions must
generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national bank.
The risk-based capital standard requires federal savings institutions to
maintain Tier I (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (Tier I) capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At March 31, 2007, the Bank met each of these capital
requirements. For additional information, see Note 17 of the Notes
to Consolidated Financial Statements included in Item 8 of this Annual Report
on Form 10-K.
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Generally, savings institutions, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for
the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision
by the OTS may have its dividend authority restricted by the OTS. The Bank
may pay dividends to the Company in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Capital Requirements."
Activities of Associations and their Subsidiaries. When a savings institution
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings institution
must
33
notify the FDIC and the OTS 30 days in advance and provide the information
each agency may, by regulation, require. Savings institutions also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.
The OTS may determine that the continuation by a savings institution of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings institution to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the Deposit Insurance Fund. If so, it may require
that no FDIC insured institution engage in that activity directly.
Transactions with Affiliates. The Bank's authority to engage in transactions
with "affiliates" is limited by OTS regulations and by Sections 23A and 23B of
the Federal Reserve Act as implemented by the Federal Reserve Board's
Regulation W. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. The
Company and its non-savings institution subsidiaries would be affiliates of
the Bank. In general, transactions with affiliates must be on terms that are
as favorable to the institution as comparable transactions with non-
affiliates. In addition, certain types of transactions are restricted to an
aggregate percentage of the institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
an institution. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans
to its executive officers and directors. However, that act contains a specific
exception for loans by a depository institution to its executive officers and
directors in compliance with federal banking laws. Under such laws, the Bank's
authority to extend credit to executive officers, directors and 10%
stockholders ("insiders"), as well as entities such person's control is
limited. The law restricts both the individual and aggregate amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position
and requires certain Board approval procedures to be followed. Such loans must
be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional
restrictions applicable to loans to executive officers.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with the examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for
Community Reinvestment Act compliance and received a rating of outstanding in
its latest examination.
Affiliate Transactions. The Company and the Bank are separate and distinct
legal entities. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company, generally limiting any single
transaction to 10% of the Bank's capital and surplus and limiting all such
transactions to 20% of the Bank's capital and surplus. These transactions
also must be on terms and conditions consistent with safe and sound banking
practices that are substantially the same as those prevailing at the time for
transactions with unaffiliated companies.
Federally insured savings institutions are subject, with certain exceptions,
to certain restrictions on extensions of
34
credit to their parent holding companies or other affiliates, on investments
in the stock or other securities of affiliates and on the taking of such stock
or securities as collateral from any borrower. In addition, these
institutions are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the providing of any property or
service.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring action against all "institution-
affiliated parties," including shareholders, and any attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful action likely
to have an adverse effect on an insured institution. Formal enforcement
action may range from the issuance of a capital directive or cease and desist
order to removal of officers or directors, receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide range of
violations and can amount to $25,000 per day, or $1.1 million per day in
especially egregious cases. The FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
If the OTS determines that a savings institution fails to meet any standard
prescribed by the guidelines, the OTS may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Environmental Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), a federal
statute, generally imposes strict liability on all prior and present "owners
and operators" of sites containing hazardous waste. However, Congress asked
to protect secured creditors by providing that the term "owner and operator"
excludes a person whose ownership is limited to protecting its security
interest in the site. Since the enactment of the CERCLA, this "secured
creditor exemption" has been the subject of judicial interpretations which
have left open the possibility that lenders could be liable for cleanup costs
on contaminated property that they hold as collateral for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Privacy Standards. The Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 ("GLBA"), which was enacted in 1999, modernized the financial
services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. The Bank is subject to OTS regulations
implementing the privacy protection provisions of the GLBA. These regulations
require the Bank to disclose its privacy policy, including identifying with
whom it shares "non-public personal information," to customers at the time of
establishing the customer relationship and annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on
October 26, 2001 in response to the terrorist events of September 11, 2001.
The USA Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. In March 2006, Congress re-enacted certain expiring
provisions of the USA Patriot Act.
Savings and Loan Holding Company Regulations
General. The Company is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings
35
institution subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to present a serious risk to the subsidiary
savings institution.
Mergers and Acquisitions. The Company must obtain approval from the OTS before
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. In evaluating an
application for the Company to acquire control of a savings institution, the
OTS would consider the financial and managerial resources and future prospects
of the Company and the target institution, the effect of the acquisition on
the risk to the insurance funds, the convenience and the needs of the
community and competitive factors.
Activities Restrictions. As a unitary savings and loan holding company, the
Company generally is not subject to activity restrictions. The Company and its
non-savings institution subsidiaries are subject to statutory and regulatory
restrictions on their business activities specified by federal regulations,
which include performing services and holding properties used by a savings
institution subsidiary, activities authorized for savings and loan holding
companies as of March 5, 1987, and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
If the Bank fails the QTL test, the Company must, within one year of that
failure, register as, and will become subject to, the restrictions applicable
to bank holding companies. See "- Federal Regulation of Savings Institutions
- Qualified Thrift Lender Test."
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act") was signed into law on July 30, 2002 in response to public concerns
regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state
corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees.
36
Item 1A. Risk Factors
An investment in our common stock is subject to risks inherent in our
business. Before making an investment decision, you should carefully consider
the risks and uncertainties described below together with all of the other
information included in this report. In addition to the risks and
uncertainties described below, other risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially and
adversely affect our business, financial condition and results of operations.
The value or market price of our common stock could decline due to any of
these identified or other risks, and you could lose all or part of your
investment.
Fluctuations in interest rates could reduce our profitability and affect the
value of our assets.
Like other financial institutions, we are subject to interest rate risk. Our
primary source of income is net interest income, which is the difference
between interest earned on loans and investments and the interest paid on
deposits and borrowings. We expect that we will periodically experience
imbalances in the interest rate sensitivities of our assets and liabilities
and the relationships of various interest rates to each other. Over any
period of time, our interest-earning assets may be more sensitive to changes
in market interest rates than our interest-bearing liabilities, or vice versa.
In addition, the individual market interest rates underlying our loan and
deposit products may not change to the same degree over a given time period.
In any event, if market interest rates should move contrary to our position,
our earnings may be negatively affected. In addition, loan volume and quality
and deposit volume and mix can be affected by market interest rates. Changes
in levels of market interest rates could materially adversely affect our net
interest spread, asset quality, origination volume and overall profitability.
Interest rates have recently been at historically low levels. However, since
June 30, 2004, the U.S. Federal Reserve has increased its target for the
federal funds rate seventeen times, from 1.00% to 5.25%. While these short-
term market interest rates (which we use as a guide to price our deposits)
have increased the pricing of our loans have moved in parallel with this
increased funding cost. The inverted/flat interest rate yield curve continues
to exert pressure on the net interest margin. In a sustained rising interest
rate environment the asset yields are expected to closely match rising
funding costs. A sustained falling interest rate environment would negatively
impact margins. Opportunities to reduce non-maturity deposit rates become more
difficult to realize in a protracted decline in rates, while asset yields come
under constant pressure.
We principally manage interest rate risk by managing our volume and mix of our
earning assets and funding liabilities. In a changing interest rate
environment, we may not be able to manage this risk effectively. If we are
unable to manage interest rate risk effectively, our business, financial
condition and results of operations could be materially harmed.
Changes in the level of interest rates also may negatively affect our ability
to originate real estate loans, the value of our assets and our ability to
realize gains from the sale of our assets, all of which ultimately affect our
earnings.
Our business is subject to various lending risks that could adversely impact
our results of operations and financial condition.
Other real estate mortgage loans involve higher principal amounts than other
loans, and repayment of these loans may be dependent on factors outside our
control or the control of our borrowers. At March 31, 2007, we had $360.9
million of other real estate loans, representing 52.2% of our total loans and
loans held for sale portfolio. The income generated from the operation of the
property securing the loan is generally considered by us to be the principal
source of repayment on this type of loan. The other real estate lending in
which we engage typically involves larger loans to a single borrower and is
generally viewed as exposing the lender to a greater risk of loss than
one-four family residential lending because these loans generally are not
fully amortizing over the loan period, but have a balloon payment due at
maturity. A borrower's ability to make a balloon payment typically will depend
on being able to either refinance the loan or timely sell the underlying
property.
37
Repayment of our commercial loans is often dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans
may fluctuate in value. At March 31, 2007, commercial loans totaled $91.2
million, or 13.2%, of our total loan and loans held for sale portfolio. Our
commercial loans are primarily made based on the identified cash flow of the
borrower and secondarily on the underlying collateral provided by the
borrower. Most often, this collateral consists of accounts receivable,
inventory or equipment. Credit support provided by the borrower for most of
these loans and the probability of repayment is based on the liquidation of
the pledged collateral and enforcement of a personal guarantee, if any exists.
As a result, in the case of loans secured by accounts receivable, the
availability of funds for the repayment of these loans may be substantially
dependent on the ability of the borrower to collect amounts due from its
customers. The collateral securing other loans may depreciate over time may be
difficult to appraise and may fluctuate in value based on the success of the
business.
Our real estate construction loans are based upon estimates of costs and value
associated with the complete project. These estimates may be inaccurate. We
originate construction loans for commercial properties, as well as for single-
family home construction. At March 31, 2007, construction loans totaled
$166.1 million, or 24.0% of total loans and loans held for sale. Construction,
land acquisition and development lending involves additional risks because
funds are advanced upon the security of the project, which is of uncertain
value prior to its completion. There are also risks associated with the
timely completion of the construction activities for their allotted costs, as
a number of factors can result in delays and cost overruns, and the time
needed to stabilize income producing properties or to sell residential tract
developments. Because of the uncertainties inherent in estimating
construction costs, as well as the market value of the completed project and
the effects of governmental regulation of real property, it is relatively
difficult to evaluate accurately the total funds required to complete a
project and the related loan-to-value ratio. As a result, construction
loans and land acquisition and development loans often involve the
disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or
lease the property or refinance the indebtedness, rather than the ability of
the borrower or guarantor to repay principal and interest. If our appraisal
of the value of the completed project proves to be overstated, we may have
inadequate security for the repayment of the loan upon completion of
construction of the project and may incur a loss.
Our other installment loans generally have a higher risk of default than our
other loans. At March 31, 2007, other installment loans totaled $3.6 million,
or 0.5%, of our total loan and loans held for sale portfolio. Other consumer
loans typically have shorter terms and lower balances with higher yields as
compared to one-to-four family residential mortgage loans, but generally carry
higher risks of default. Consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on these loans.
An inadequate allowance for loan losses would reduce our earnings.
We are exposed to the risk that our borrowers will be unable to repay their
loans according to their terms and that any collateral securing the payment of
their loans will not be sufficient to assure full repayment. Credit losses are
inherent in the lending business and could have a material adverse effect on
our operating results. Volatility and deterioration in the economy may also
increase our risk for credit losses. We evaluate the collectibility of our
loan portfolio and provide an allowance for loan losses that we believe is
adequate based upon such factors as:
* Cash flow of the borrower and/or the project being financed;
* in the case of a collateralized loan, the changes and uncertainties as to
the future value of the collateral;
* the credit history of a particular borrower;
* changes in economic and industry conditions; and
* the duration of the loan.
38
If our evaluation is incorrect and borrower defaults cause losses exceeding
our allowance for loan losses, our earnings could be materially and adversely
affected. We cannot assure you that our allowance will be adequate to cover
loan losses inherent in our portfolio. We may experience losses in our loan
portfolio or perceive adverse trends that require us to significantly increase
our allowance for loan losses in the future, which would also reduce our
earnings. In addition, the Bank's regulators, as an integral part of their
examination process, may require us to make additional provisions for loan
losses.
The unseasoned nature of many of the commercial real estate loans we
originated may lead to additional provisions for loan losses or charge-offs,
which would hurt our profits.
The diversification of our real estate loan portfolio has led to a significant
increase in the number of commercial real estate loans in our portfolio. Many
of these loans are unseasoned and have not been subjected to unfavorable
economic conditions. We have limited experience in originating these types of
loans and as a result do not have a significant payment history pattern with
which to judge future collectibility. As a result, it is difficult to predict
the future performance of this part of our real estate loan portfolio. These
loans may have delinquency or charge-off levels above our historical
experience, which could adversely affect our profitability.
Our real estate lending also exposes us to the risk of environmental
liabilities.
In the course of our business, we may foreclose and take title to real estate,
and could be subject to environmental liabilities with respect to these
properties. We may be held liable to a governmental entity or to third persons
for property damage, personal injury, investigation and clean-up costs
incurred by these parties in connection with environmental contamination, or
may be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, as the owner or
former owner of a contaminated site, we may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from the property. If we ever become subject to
significant environmental liabilities, our business, financial condition and
results of operations could be materially and adversely affected.
Our profitability depends significantly on economic conditions in the States
of Washington and Oregon.
Our success depends primarily on the general economic conditions of the States
of Washington and Oregon and the specific local markets in which we operate.
Unlike larger national or other regional banks that are more geographically
diversified, we provide banking and financial services to customers located
primarily in seven counties of Washington and Oregon. The local economic
conditions in our market areas have a significant impact on the demand for our
products and services as well as the ability of our customers to repay loans,
the value of the collateral securing loans and the stability of our deposit
funding sources. Adverse economic conditions unique to these Northwest
markets could have a material adverse effect on our financial condition and
results of operations. Further, a significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these state and
local markets and, in turn, also have a material adverse effect on our
financial condition and results of operations.
Our funding sources may prove insufficient to replace deposits and support our
future growth.
We rely on customer deposits and advances from the FHLB and other borrowings
to fund our operations. Although we have historically been able to replace
maturing deposits and advances if desired, no assurance can be given that we
would be able to replace such funds in the future if our financial condition
or the financial condition of the FHLB or market conditions were to change.
Our financial flexibility will be severely constrained if we are unable to
maintain our access to funding or if adequate financing is not available to
accommodate future growth at acceptable interest rates. Finally, if we are
required to rely more heavily on more expensive funding sources to support
future growth, our revenues may not increase proportionately to cover our
costs. In this case, our profitability would be adversely affected.
39
Although we consider such sources of funds adequate for our liquidity needs,
we may seek additional debt in the future to achieve our long-term business
objectives. There can be no assurance additional borrowings, if sought, would
be available to us or, if available, would be on favorable terms. If
additional financing sources are unavailable or are not available on
reasonable terms, our growth and future prospects could be adversely affected.
Competition with other financial institutions could adversely affect our
profitability.
The banking and financial services industry is very competitive. Legal and
regulatory developments have made it easier for new and sometimes unregulated
competitors to compete with us. Consolidation among financial service
providers has resulted in fewer very large national and regional banking and
financial institutions holding a large accumulation of assets. These
institutions generally have significantly greater resources, a wider
geographic presence or greater accessibility. Our competitors sometimes are
also able to offer more services, more favorable pricing or greater customer
convenience than we do. In addition, our competition has grown from new banks
and other financial services providers that target our existing or potential
customers. As consolidation continues among large banks, we expect additional
institutions to try to exploit our market.
Technological developments have allowed competitors including some non-
depository institutions, to compete more effectively in local markets and have
expanded the range of financial products, services and capital available to
our target customers. If we are unable to implement, maintain and use such
technologies effectively, we may not be able to offer products or achieve
cost-efficiencies necessary to compete in our industry. In addition, some of
these competitors have fewer regulatory constraints and lower cost structures.
We rely heavily on the proper functioning of our technology.
We rely heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these systems
could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems. While we have
policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that any such failures, interruptions or security breaches
will not occur or, if they do occur, that they will be adequately addressed.
The occurrence of any failures, interruptions or security breaches of our
information systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.
We rely on third-party service providers for much of our communications,
information, operating and financial control systems technology. If any of our
third-party service providers experience financial, operational or
technological difficulties, or if there is any other disruption in our
relationships with them, we may be required to locate alternative sources of
such services, and we cannot assure that we could negotiate terms that are as
favorable to us, or could obtain services with similar functionality, as found
in our existing systems, without the need to expend substantial resources, if
at all. Any of these circumstances could have an adverse effect on our
business.
We are dependent upon the services of our management team.
We are dependent upon the ability and experience of a number of our key
management personnel who have substantial experience with our operations, the
financial services industry and the markets in which we offer our services. It
is possible that the loss of the services of one or more of our senior
executives or key managers would have an adverse effect on our operations. Our
success also depends on our ability to continue to attract, manage and retain
other qualified personnel as we grow. We cannot assure you that we will
continue to attract or retain such personnel.
40
We may be unable to successfully integrate any acquisition we may make.
We regularly explore opportunities to acquire financial services businesses or
assets and may also consider opportunities to acquire other banks or financial
institutions. We cannot predict the number, size or timing of acquisitions.
Difficulties in integrating an acquired business or company may cause us not
to realize expected revenue increases, cost savings, increases in geographic
or product presence, and/or other projected benefits from the acquisition. The
process of integrating operations could cause an interruption of, or loss of
momentum in, the activities of our business and the loss of deposits,
customers and key personnel. The diversion of management's attention and any
delays or difficulties encountered in connection with any merger could have an
adverse effect on our business and results of operations following the
acquisition or otherwise adversely affect our ability to achieve the
anticipated benefits of the acquisition.
An increase in interest rates may reduce our mortgage revenues, which would
negatively impact our non-interest income, which would negatively impact our
net interest income.
Our mortgage banking operations provide a significant portion of our
non-interest income. We generate mortgage revenues primarily from broker loan
fees on the sale of loans to investors on a servicing released basis. In a
rising or higher interest rate environment, our originations of mortgage loans
may decrease, resulting in fewer loans that are available to be sold to
investors. This would result in a decrease in mortgage revenues and a
corresponding decrease in non-interest income. In addition, our results of
operations are affected by the amount of non-interest expenses associated with
mortgage banking activities, such as salaries and employee benefits,
occupancy, equipment and data processing expense and other operating costs.
During periods of reduced loan demand, our results of operations may be
adversely affected to the extent that we are unable to reduce expenses
commensurate with the decline in loan originations.
Terrorist activities could cause reductions in investor confidence and
substantial volatility in real estate and securities markets.
It is impossible to predict the extent to which terrorist activities may occur
in the United States or other regions, or their effect on a particular
security issue. It is also uncertain what effects any past or future terrorist
activities and/or any consequent actions on the part of the United States
government and others will have on the United States and world financial
markets, local, regional and national economics, and real estate markets
across the United States. Among other things, reduced investor confidence
could result in substantial volatility in securities markets, a decline in
general economic conditions and real estate related investments and an
increase in loan defaults. Such unexpected losses and events could materially
affect our results of operations.
We are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our business.
We are subject to extensive federal and state regulation and supervision,
primarily through the Bank. Banking regulations are primarily intended to
protect depositors' funds, federal deposit insurance funds and the banking
system as a whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices, dividend policy and
growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect us in substantial and unpredictable ways. Such changes
could subject us to additional costs, limit the types of financial services
and products we may offer and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to
comply with laws, regulations or policies could result in sanctions by
regulatory agencies, civil money penalties and/or reputation damage, which
could have a material adverse effect on our business, financial condition and
results of operations. While we have policies and procedures designed to
prevent any such violations, there can be no assurance that such violations
will not occur.
41
We rely on dividends from subsidiaries for most of our revenue.
Riverview Bancorp, Inc is a separate and distinct legal entity from its
subsidiaries. We receive substantially all of our revenue from dividends from
our subsidiaries. These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt. Various
federal and/or state laws and regulations limit the amount of dividends that
the Bank may pay us. Also, our right to participate in a distribution of
assets upon a subsidiary's liquidation or reorganization is subject to the
prior claims of the subsidiary's creditors. In the event the Bank is unable
to pay dividends to us, we may not be able to service our debt, pay
obligations or pay dividends on our common stock. The inability to receive
dividends from the Bank could have a material adverse effect on our business,
financial condition and results of operations
If we fail to maintain an effective system of internal control over financial
reporting, we may not be able to accurately report our financial results or
prevent fraud, and, as a result, investors and depositors could lose
confidence in our financial reporting, which could adversely affect our
business, the trading price of our stock and our ability to attract additional
deposits.
In connection with the enactment of the Sarbanes-Oxley Act of 2002 ("Act") and
the implementation of the rules and regulations promulgated by the SEC, we
document and evaluate our internal control over financial reporting in order
to satisfy the requirements of Section 404 of the Act. This requires us to
prepare an annual management report on our internal control over financial
reporting, including among other matters, management's assessment of the
effectiveness of internal control over financial reporting and an attestation
report by our independent auditors addressing these assessments. If we fail
to identify and correct any significant deficiencies in the design or
operating effectiveness of our internal control over financial reporting or
fail to prevent fraud, current and potential shareholders and depositors could
lose confidence in our internal controls and financial reporting, which could
adversely affect our business, financial condition and results of operations,
the trading price of our stock and our ability to attract additional deposits.
Changes in accounting standards may affect our performance.
Our accounting policies and methods are fundamental to how we record and
report our financial condition and results of operations. From time to time
there are changes in the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can be
difficult to predict and can materially impact how we report and record our
financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in
restating prior period financial statements.
42
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
-------------------
The following table sets forth certain information relating to the Company's
offices as of March 31, 2007.
Approximate
Location Year Opened Square Footage Deposits
-------- ----------- -------------- --------
(In millions)
Main Office:
900 Washington, Suite 900
Vancouver, Washington (1) 2000 16,000 $98.8
Riverview Center:
17205 SE Mill Plain Boulevard
Vancouver, Washington (1)(2) 2006 50,000
Branch Offices:
700 N.E. Fourth Avenue
Camas, Washington (1)(2) 1975 25,000 55.6
3307 Evergreen Way
Washougal, Washington (1)(2)(3) 1963 3,200 39.1
225 S.W. 2nd Street
Stevenson, Washington (2) 1971 1,700 38.2
330 E. Jewett Boulevard
White Salmon, Washington (2)(4) 1977 3,200 40.8
15 N.W. 13th Avenue
Battle Ground, Washington (2)(5) 1979 2,900 40.8
412 South Columbus
Goldendale, Washington (2) 1983 2,500 20.6
11505-K N.E. Fourth Plain Boulevard
Vancouver, Washington (2) 1994 3,500 31.1
7735 N.E. Highway 99
Vancouver, Washington (1)(6)(2) 1994 4,800 32.2
1011 Washington Way
Longview, Washington (6)(2) 1994 2,000 31.4
900 Washington St., Suite 100
Vancouver, Washington (1)(2) 1998 5,300 74.7
43
1901-E N.E. 162nd Avenue
Vancouver, Washington (1)(2) 1999 3,200 18.7
800 N.E. Tenney Road, Suite D
Vancouver, Washington (2) 2000 3,200 33.7
915 MacArthur Boulevard
Vancouver, Washington (1)(2)(7) 2003 3,000 21.3
320 S.E. 192nd Avenue
Vancouver, Washington (1)(2) 2006 3,200 4.9
315 SW Fifth Avenue
Portland, Oregon (1)(2)(8) 2005 9,304 30.2
23500 NE Sandy Boulevard
Wood Village, Oregon (1)(2)(8) 2005 900 12.8
112 Main Street
Aumsville, Oregon (2)(8) 2005 2,500 33.0
10401 NE Halsey Street
Portland, Oregon (2) 2006 7,800 7.5
(1) Leased.
(2) Location of an automated teller machine.
(3) New facility in 2001.
(4) New facility in 2000.
(5) New facility in 1994.
(6) Former branches of Great American Federal Savings Association, San
Diego, California, that were acquired from the Resolution Trust
Corporation on May 13, 1994. In the acquisition, the Company assumed
all insured deposit liabilities of both branch offices totaling
approximately $42.0 million.
(7) Former location of Today's Bank, Vancouver, Washington, acquired on
July 18, 2003.
(8) Former location of American Pacific Bank, Aumsville, Oregon, acquired
on April 22, 2005.
The Company's main office for administration is located at the downtown
Vancouver, Washington address of 900 Washington Street. The Washougal branch
office was relocated during the first quarter of the fiscal year 2001.
At March 31, 2007, the net book value of the Company's office properties,
furniture, fixtures and equipment was $21.4 million.
Management believes that the facilities are of sound construction and good
operating condition, and are appropriately insured and adequately equipped for
carrying on the business of the Company.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. The Company is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
44
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2007.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
----------------------------------------------------------------------------
At March 31, 2007, there were 11,707,980 shares of Company Common Stock issued
and outstanding, 827 stockholders of record and an estimated 1,500 holders in
nominee or "street name." Under Washington law, the Company is prohibited
from paying a dividend if, as a result of its payment, the Company would be
unable to pay its debts as they become due in the normal course of business,
or if the Company's total liabilities would exceed its total assets. The
principal source of funds for the Company is dividend payments from the Bank.
OTS regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. The OTS imposes certain limitations on the payment of dividends
from the Bank to the Company which utilize a three-tiered approach that
permits various levels of distributions based primarily upon a savings
association's capital level. See "REGULATION - Federal Regulation of Savings
Associations - Limitations on Capital Distributions." In addition, the
Company may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Company below
the amount required for the liquidation account established pursuant to the
Company's Plan of Conversion adopted in connection with the Conversion and
Reorganization. See Note 1 of the Notes to the Consolidated Financial
Statements contained in Item 8 of this Form 10-K.
45
The common stock of the Company is traded on the Nasdaq Global Select Market
under the symbol "RVSB". The following table sets forth the high and low
trading prices, as reported by Nasdaq, and cash dividends paid for each
quarter during 2007 and 2006 fiscal years. At March 31, 2007, there were 15
market makers in the Company's common stock as reported by the Nasdaq Global
Select Market. On August 24, 2006 Riverview Bancorp. Inc. issued 2-for-1 stock
split in the form of a 100% stock dividend. Shareholders received one
additional share for every share owned. The Board of Directors 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.
Cash Dividends
Fiscal Year Ended March 31, 2007 High Low Declared
-------------------------------- ---- ---- - --------------
Quarter ended March 31, 2007 $17.58 $15.29 $0.100
Quarter ended December 31, 2006 15.72 13.47 0.100
Quarter ended September 30, 2006 13.65 12.58 0.100
Quarter ended June 30, 2006 13.53 12.14 0.095
Cash Dividends
Fiscal Year Ended March 31, 2006 High Low Declared
-------------------------------- ---- ---- - --------------
Quarter ended March 31, 2006 $13.75 $11.56 $0.085
Quarter ended December 31, 2005 11.97 10.38 0.085
Quarter ended September 30, 2005 11.05 10.38 0.085
Quarter ended June 30, 2005 10.90 10.17 0.085
Stock Repurchase
The shares are being repurchased from time-to-time in open market
transactions. The timing, volume and price of purchases will be made at our
discretion, and will also be contingent upon our overall financial condition,
as well, as market conditions in general. The following table reflects
activity for the quarter ended March 31, 2007.
Common Stock Repurchased
Maximum
Total Number Number of
Average of Shares Shares That May
Price Purchased as Yet Be
Total Number Paid Part of Publicly Purchased
of Shares per Announced Under the
Purchased (1) Share Plan Program
January 1, -
January 31, 2007 - - - -
---- ---- ---- -------
February 1 -
February 28, 2007 - - - -
---- ---- ---- -------
March 1 -
March 31, 2007 - - - -
---- ---- ---- -------
Balance at
March 31, 2007 - - - 250,000
==== ==== ==== =======
(1) On March 22, 2007 the Company announced a stock repurchase of up to
250,000 shares of its outstanding common stock, representing
approximately 2% of outstanding shares.
(2) During the year ended March 31, 2007, the Company repurchased 49,446
shares of its common stock under a cashless exercise of stock options.
(3) On May 11, 2007, the Company repurchased 80,000 shares of its common
stock under the announced March 22, 2007 common stock repurchases plan.
Securities for Equity Compensation Plans
Please refer to item 12 for a listing of securities authorized for issuance
under equity compensation plans.
46
[PERFORMANCE GRAPH APPEARS HERE]
-------------------------------------------------------------------------
3/02 3/03 3/04 3/05 3/06 3/07
-------------------------------------------------------------------------
Riverview Bancorp, Inc. 100.00 125.34 153.44 166.19 215.54 263.94
S & P 500 100.00 75.24 101.66 108.47 121.19 135.52
NASDAQ Bank 100.00 94.03 131.20 132.73 147.62 152.21
* $100 invested on 3/31/02 in stock or index-including reinvestment of
dividends fiscal year ending March 31.
Copyright 2007, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
47
Item 6. Selected Financial Data
---------------------------------
The following condensed consolidated statements of operations and financial
condition and selected performance ratios as of March 31, 2007, 2006, 2005,
2004 and 2003 and for the years then ended have been derived from the
Company's audited consolidated financial statements. The information below is
qualified in its entirety by the detailed information included elsewhere
herein and should be read along with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statement and Supplementary Data."
At March 31,
------------------------------------------
2007 2006 2005(2) 2004 2003(3)
------ ------ ------ ------ ------
(Dollars in thousands)
FINANCIAL CONDITION DATA:
Total assets $820,348 $763,847 $572,571 $520,487 $419,904
Loans receivable, net (1) 682,951 623,081 429,959 381,534 301,811
Mortgage-backed securities held
to maturity, at amortized cost 1,232 1,805 2,343 2,517 3,301
Mortgage-backed securities
available for sale, at fair value 6,640 8,134 11,619 10,607 13,069
Cash and interest-bearing
deposits 31,423 31,346 61,719 47,907 60,858
Investment securities available
for sale, at fair value 19,267 24,022 22,945 32,883 20,426
Deposit accounts 665,405 606,964 456,878 409,115 320,742
FHLB advances 35,050 46,100 40,000 40,000 40,000
Shareholders' equity 100,209 91,687 69,522 65,182 54,511
Year Ended March 31,
------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in thousands)
OPERATING DATA:
Interest income $ 61,300 $ 47,229 $ 29,968 $ 27,584 $ 26,461
Interest expense 24,782 14,877 7,395 6,627 8,417
------ ------ ------ ------ ------
Net interest income 36,518 32,352 22,573 20,957 18,044
Provision for loan losses 1,425 1,500 410 210 727
Net interest income after ------ ------ ------ ------ ------
provision for loan losses 35,093 30,852 22,163 20,747 17,317
Gains (losses) from sale of
loans, securities and real
estate owned 434 382 (672) 1,003 (531)
Gain on sale of land and fixed
assets 3 2 830 3 -
Other non-interest income 8,597 8,453 6,348 5,583 4,469
Non-interest expenses 26,353 25,374 19,104 17,572 14,908
------ ------ ------ ------ ------
Income before income taxes 17,774 14,315 9,565 9,764 6,347
Provision for income taxes 6,168 4,577 3,036 3,210 1,988
------ ------ ------ ------ ------
Net income $ 11,606 $ 9,738 $ 6,529 $ 6,554 $ 4,359
====== ====== ====== ====== ======
(1) Includes loans held for sale
(2) On April 22, 2005, the company acquired American Pacific Bank.
(3) On July 18, 2003, the Company acquired Today's Bancorp, Inc.
48
At March 31,
------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
OTHER DATA:
Number of:
Real estate loans outstanding 2,978 3,084 3,037 3,141 2,904
Deposit accounts 38,989 39,095 29,341 27,209 25,752
Full service offices 18 17 13 13 12
At or For the Year Ended March 31,
------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.43% 1.36% 1.24% 1.35% 1.07%
Return on average equity 11.88 10.95 9.56 10.60 7.99
Dividend payout ratio (1) 38.35 39.08 45.59 39.72 50.00
Interest rate spread 4.37 4.55 4.38 4.42 4.28
Net interest margin 5.01 5.03 4.74 4.76 4.83
Non-interest expense to
average assets 3.24 3.54 3.62 3.61 3.66
Efficiency ratio (2) 57.85 61.60 65.70 63.79 67.82
Asset Quality Ratios:
Average interest-earning assets
to interest-bearing liabilities 118.96 121.14 123.45 122.53 124.62
Allowance for loan losses to
total net loans at end of period 1.25 1.15 1.01 1.16 0.90
Net charge-offs to average
outstanding loans during the
period - 0.10 0.13 0.31 0.12
Ratio of nonperforming assets
to total assets 0.03 0.05 0.13 0.39 0.18
Capital Ratios:
Average equity to average assets 12.01 12.39 12.92 12.72 13.39
Equity to assets at end of fiscal
year 12.22 12.00 12.14 12.52 12.98
(1) Dividends per share divided by net income per share
(2) Non-interest expense divided by the sum of net interest income and
non-interest income
49
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
-------------------------------------------------------------------------
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto contained in Item 8 of this Form
10-K and the other sections contained in this Form 10-K.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America ("GAAP") in the preparation of the Company's Consolidated Financial
Statements. The Company has identified three policies, that due to judgments,
estimates and assumptions inherent in those policies, are critical to an
understanding of the Company's Consolidated Financial Statements. These
policies relate to the methodology for the determination of the allowance for
loan losses, the valuation of the mortgage servicing rights ("MSR's") and the
impairment of investments. These policies and the judgments, estimates and
assumptions are described in greater detail in subsequent sections of
Management's Discussions and Analysis contained herein and in the Notes to
the Consolidated Financial Statements contained in Item 8 of this Form 10-K.
In particular, Note 1 of the Notes to Consolidated Financial Statements,
"Summary of Significant Accounting Policies," describes generally the
Company's accounting policies and Note 9, "Mortgage Servicing Rights" provides
details used in valuing the Company's MSR's and the effect of changes to
certain assumptions. Management believes that the judgments, estimates and
assumptions used in the preparation of the Company's Consolidated Financial
Statements are appropriate given the factual circumstances at the time.
However, given the sensitivity of the Company's Consolidated Financial
Statements to these critical accounting policies, the use of other judgments,
estimates and assumptions could result in material differences in the
Company's results of operations or financial condition.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level sufficient to provide
for probable loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not be
assured. The detailed analysis includes techniques to estimate the fair value
of loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance level is estimated based upon factors and
trends identified by management at the time the consolidated financial
statements are prepared.
Mortgage Servicing Rights
-------------------------
The Company stratifies its MSR's based on the predominant characteristics of
the underlying financial assets including coupon interest rate and contractual
maturity of the mortgage. An estimated fair value of MSR's is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected prepayments
speeds, discount rate, loan maturity and interest rate. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSR's portfolio.
The Company's methodology for estimating the fair value of MSR's is highly
sensitive to changes in assumptions. For example, the determination of fair
value uses anticipated prepayment speeds. Actual prepayment experience may
differ and any difference may have a material effect on the fair value. Thus,
any measurement of MSR's fair value is limited by the conditions existing and
assumptions made as of the date made. Those assumptions may not be appropriate
if they are applied to a different time.
Future expected net cash flows from servicing a loan in the servicing
portfolio would not be realized if the loan were paid off earlier than
anticipated. Moreover, since most loans within the servicing portfolio do not
contain penalty provisions for early payoff, the Company will not receive a
corresponding economic benefit if the loan pays off earlier
50
than expected. MSR's are the discounted present value of the future net cash
flows projected from the servicing portfolio. Accordingly, prepayment risk
subjects the Company's MSR's to impairment. MSR's impairment is recorded in
the amount that the estimated fair value is less than the MSR's carrying value
on a strata by strata basis.
Investment Valuation
--------------------
The Company's determination of impairment for various types of investments
accounted for in accordance with SFAS No. 115 is predicated on the notion of
other-than-temporary. The key indicator that an investment may be impaired is
that the fair value of the investment is less than its carrying value. Each
reporting period, the Company reviews those investments where the fair value
is less than carrying value. The review includes determining whether certain
indicators indicated the fair value of the investment has been negatively
impacted. These indicators include deteriorating financial condition,
regulatory, economic or technological changes, downgrade by a rating agency
and length of time the fair value has been less than carrying value. If any
indicators of impairment are present, management determines the fair value of
the investment and compares this to its carrying value. If the fair value of
the investment is less than the carrying value of the investment, the
investment is considered impaired and a determination must be made as to
whether the impairment is other-than-temporary.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized in interest income
using the interest method. If the cost basis of these securities is
determined to be other-than-temporary impaired, the amount of the impairment
is charged to operations.
Securities available for sale are carried at fair value. Premiums and
discounts are amortized using the interest method over the remaining period to
contractual maturity. Unrealized holding gains and losses, or valuation
allowances established for net unrealized losses, are excluded from earnings
and reported as a separate component of shareholders' equity as accumulated
other comprehensive income (loss), net of income taxes, unless the security is
deemed other-than-temporary impaired. If the security is determined to be
other-than-temporary impaired, the amount of the impairment is charged to
operations.
The Company's underlying principle in determining whether impairment is
other-than-temporary is an impairment shall be deemed other-than-temporary
unless positive evidence indicating that an investment's carrying value is
recoverable within a reasonable period of time outweighs negative evidence to
the contrary. Evidence that is objectively determinable and verifiable is
given greater weight than evidence that is subjective and or not verifiable.
Evidence based on future events will generally be less objective as it is
based on future expectations and therefore is generally less verifiable or not
verifiable at all. Factors considered in evaluating whether a decline in
value is other-than-temporary include, (a) the length of time and the extent
to which the fair value has been less than amortized cost, (b) the financial
condition and near-term prospects of the issuer and (c) the Company's intent
and ability to retain the investment for a period of time. In situations
in which the security's fair value is below amortized cost but it continues to
be probable that all contractual terms of the security will be satisfied, and
that the decline is solely attributable to changes in interest rates (not
because of increased credit risk), and the Company asserts that it has
positive intent and ability to hold that security to maturity, no other-than-
temporary impairment is recognized.
Operating Strategy
In the fiscal year ended March 31, 1998, the Company began to implement a
growth strategy to broaden its products and services from those of a
traditional thrift to those more closely related to commercial banking. The
growth strategy included four elements: geographic and product expansion, loan
portfolio diversification, development of relationship banking and maintenance
of asset quality.
The April 2005 acquisition of APB added three branches in Oregon: Portland,
Aumsville and Wood Village. Fiscal year 2006 expansion also included opening
in Vancouver the Riverview Center (an operations center) and the Tech Center
Branch. The Riverview Center is a 50,000 square foot office building; over 80
employees from accounting, audit, data processing, human resources,
information technology, loan origination, loan servicing, marketing and
operations are located here. The Tech Center is a full service branch with the
convenience of two drive-up teller windows, drive-up ATM and safe deposit
boxes. During fiscal year 2007 the Company opened a new full service branch
and commercial lending center (Gateway branch) in Portland, Oregon. The number
of automated teller
51
machines increased from six at March 31, 1998 to 20 at March 31, 2007 so that
each branch location now is serviced by at least one automated teller machine.
The Company's growing commercial customer base has enjoyed new products and
the improvements in existing products. These new products include business
checking, internet banking and new loan products. Retail customers have
benefited from expanded choices ranging from additional automated teller
machines, consumer lending products, checking accounts, debit cards, 24 hour
account information service and internet banking.
Fiscal 2007 marked the 84th anniversary since the Bank opened its doors in
1923. The historical emphasis has been on residential real estate lending,
however, the Company began diversifying its loan portfolio through the
expansion of commercial loans in 1998. At March 31, 2003, commercial and
construction loans as a percentage of the loan portfolio were 72.42%, which
has increased to 89.38% of total loans at the end of fiscal year 2007.
Commercial lending including commercial real estate has higher credit risk,
wider interest margins and shorter loan terms than residential lending which
can increase the loan portfolio's profitability.
The Company's relationship banking has been enhanced by the 1998 addition of
Riverview Asset Management Corp, a trust company directed by experienced trust
officers, through expanded loan products serviced by experienced commercial
and consumer lending officers, and an expanded branch network led by
experienced branch managers. Development of relationship banking has been the
key to the Company's growth. The fair market value of assets under management
in Riverview Asset Management Corp. has increased from $232.8 million at March
31, 2006, to $285.6 million at March 31, 2007.
Net Interest Income
The Company's profitability depends primarily on its net interest income,
which is the difference between the income it receives on interest-earning
assets and its cost of funds, which consists of interest paid on deposits and
borrowings. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-
earning assets equal or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. The level of
non-interest income and expenses also affects the Company's profitability.
Non-interest income includes deposit service fees, income associated with the
origination and sale of mortgage loans, brokering loans, loan servicing fees,
income from real estate owned, net gains and losses on sales of interest-
earning assets, bank owned life insurance income and asset management fee
income. Non-interest expenses include compensation and benefits, occupancy
and equipment expenses, deposit insurance premiums, data servicing expenses
and other operating costs. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation, and monetary and fiscal policies.
Comparison of Financial Condition at March 31, 2007 and 2006
At March 31, 2007, the Company had total assets of $820.3 million compared
with $763.8 million at March 31, 2006. The increase in total assets was
primarily as a result of the increase in the balance of loans outstanding.
Loans receivable, net, was $683.0 million at March 31, 2007, compared to
$623.0 million at March 31, 2006, a 9.6% increase. The $60.0 million increase
reflects increases in all loan categories except other installment. The
national and local economy both are experiencing slower growth and this has
reduced the demand for the Bank's loans particularly during the fourth quarter
of fiscal year 2007. In the first quarter of fiscal year 2008 the Bank has
implemented a strategy to increase the amount of resources available to
attract more loans. A substantial portion of the Company's loan portfolio
is secured by real estate, either as primary or secondary collateral located
in its primary market areas.
Cash, including interest-earning accounts, totaled $31.4 million at March 31,
2007, compared to $31.3 million at March 31, 2006, as a result of the
Company's increase in total loans.
Investment securities available-for-sale were $19.3 million at March 31, 2007,
compared to $24.0 million at March 31, 2006. The decrease was attributable to
maturities and scheduled cash flows.
53
Mortgage-backed securities held-to-maturity was $1.2 million at March 31,
2007, compared to $1.8 million at March 31, 2006. The decrease is
attributable to maturities and scheduled cash flows.
Mortgage-backed securities available-for-sale were $6.6 million at March 31,
2007, compared to $8.1 million at March 31, 2006. The $1.5 million decrease
was a result of pay downs.
Deposit accounts totaled $665.4 million at March 31, 2007 compared to $607.0
million at March 31, 2006. The increase in deposits is a result of increase
in money market and NOW accounts. Checking accounts and money market accounts
total average outstanding balance increased 22.3% to $301.2 million at March
31, 2007, compared to $246.2 million at March 31, 2006. Transaction accounts
represented 56.2% and 51.4% of average total outstanding balance of deposits
at March 31, 2007 and March 31, 2006, respectively. The increase in money
market deposits resulted from making available an existing money market
product to all the Bank's branches whereas prior only a select few branches
offered this money market product.
FHLB advances decreased to $35.1 million at March 31, 2007 as compared to
$46.1 million at March 31, 2006. The decrease reflects the growth in
deposits.
Shareholders' equity increased $8.5 million to $100.2 million at March 31,
2007 from $91.7 million at March 31, 2006. The increase was primarily the
result of $11.8 million total comprehensive income, $274,000 earned ESOP
shares and $880,000 received from the exercise of stock options and partially
offset by $4.5 million cash dividends paid to shareholders.
53
Comparison of Operating Results for the Years Ended March 31, 2007 and 2006
Net Income. Net income was $11.6 million, or $1.01 per diluted earning share
for the year ended March 31, 2007, compared to $9.7 million, or $0.86 per
diluted share for the year ended March 31, 2006. The increase resulted from
an increase in interest income and non-interest income partially offset by
increases in interest expense and non-interest expense.
Net Interest Income. Net interest income for fiscal year 2007 was $36.5
million, representing a $4.2 million, or a 12.9% increase, from $32.4 million
in fiscal year 2006. This improvement reflected a 13.3% increase in the
average balance of interest earning assets to $731.1 million, which was offset
by a 15.4% increase in the average balance of interest-bearing liabilities an
increase in all deposit categories except savings accounts, to $536.3 million.
The ratio of average interest earning assets to average interest bearing
liabilities decreased to 118.96% in fiscal 2007 from 121.14% in fiscal 2006
which indicates that the interest-earning asset growth is being funded more by
interest-bearing liabilities as compared to capital and non-interest-bearing
demand deposits.
Interest Income. Interest income was $61.3 million for the fiscal year ended
March 31, 2007 compared to $47.2 million, for the fiscal year ended March 31,
2006. Increased interest income is the result of the increase in the average
balance of interest earning assets and the increased yield on interest earning
assets. Average interest-bearing assets increased $86.0 million to $731.1
million for fiscal 2007 from $645.1 million for fiscal 2006. The yield on
interest-earning assets was 8.40% for fiscal year 2007 compared to 7.34% for
fiscal 2006. The increased yield is primarily the result of the higher
yields on loans, investment securities and other interest earning assets
reflecting the increasing interest rate environment. The increased interest
income is the result of the increase in the average balance of interest
earning assets and the increase in the yield on interest earning assets.
Interest Expense. Interest expense for the fiscal year ended March 31, 2007
totaled $24.8 million, a $9.9 million or 6.66% increase from $14.9 million for
the fiscal year ended March 31, 2006. The increase in interest expense is the
result of higher rates of interest paid on deposits and borrowings that
occurred during fiscal years 2007 and 2006. The weighted average interest rate
of total deposits increased from 2.58% for the year ended March 31, 2006 to
3.82% for the year ended March 31, 2007. The weighted average interest rate
of FHLB borrowings increased from 4.44% for the year ended March 31, 2006 to
5.26% for the year ended March 31, 2007. The mix of deposits has changed as
the interest rates on deposit accounts have increased. There is an increased
demand for higher yielding money market accounts which is reflected in the
growth of total average money market accounts in fiscal year 2007 to $161.6
million compared to $120.2 million in fiscal year 2006. Growth in loans in
fiscal year 2007 was supported by the increased average total FHLB-Seattle
borrowings of $68.3 million for the fiscal year 2007 compared to $51.1 million
for the fiscal year 2006.
Provision for Loan Losses. The provision for loan losses for fiscal year 2007
was $1.4 million, compared to $1.5 million for the same period in the prior
year. Management analyzes the probable loss factors that drive the loan loss
reserve on a quarterly basis. These probable loss factors contemplate
historical loss rates, adjusted for qualitative factors that are
included in our analysis. Such factors include the relative strength of the
local economy, concentrations in certain categories, such as commercial real
estate and construction loans, the impact of an increasing interest rate
environment along with other factors. As part of that ongoing process, the
Company has continued to refine its reserving methodologies with regard to
larger and/or high-risk loans that we consider to be "non-homogeneous", such
as commercial, speculative, and commercial construction loans. These
refinements, which primarily included the improved methodology of calculating
required allowance for loan losses based on loan purpose, have improved the
determination of the required allowance for loan losses. During the fiscal
year ended March 31, 2007, management evaluated known and inherent risks in
the loan portfolio and changes were made in the estimation, assumptions and
allocation of the allowance for loan losses to reflect the changing housing
market. The national and local economy housing market is experiencing a slow
down in housing sales which has impacted land developers' and housing
contractors' ability to sell their products. The estimated loan loss rate was
increased by 0.250% to 1.250% for the loans consisting of land and lots
for development, speculative construction loans and raw land loans. Such
changes resulted in approximately $400,000 of increased provision for the
fiscal year ended March 31, 2007. The stable loan loss provision for the
fiscal year ended March 31, 2007 as compared to the prior year was due to a
combination of increased loan loss rates offset by the decreased loan
charge-offs, smaller loan growth experienced
54
during the year ended March 31, 2007 as well as the refinement in determining
the required allowance for loan loss based on loan purpose. Net recoveries for
the year ended March 31, 2007 were $7,000, compared to net charge-offs of
$562,000 for the same period of last year. Annualized net recoveries to
average net loans for the year ended March 31, 2007 was 0.0% compared to
annualized net charge-offs of 0.10% for the same period in the prior year.
Non-accrual loans continued to decrease from $415,000 at March 31, 2006 to
$226,000 at March 31, 2007. The allowance for loan losses was $8.7 million at
March 31, 2007 compared to $7.2 million at March 31, 2006. The quality of the
loan portfolio continues to be very stable, as the classified substandard loan
balances have increased just $77,000 and non-accrual loans decreased by
$189,000 at March 31, 2007 compared to March 31, 2006. The ratio of allowance
for credit losses and loan commitments to total net loans at March 31, 2007
increased to 1.31% from 1.20% at March 31, 2006 with such increase reflecting
the changing loan balance, mix of the Company's loan portfolio and the
additional risk of these loans as described above.
Non-Interest Income. Non-interest income increased $197,000, or 2.2%, to $9.0
million for the year ended March 31, 2007 from $8.8 million for the same
period in 2006 primarily as a result of a $393,000 increase in asset
management fees. The increase in asset management fees reflects the increase
in assets under management by Riverview Asset Management Corp. from $232.8
million at March 31, 2006 to $285.6 million at March 31, 2007. The $166,000
decrease in fees and service charges reflects the $240,000 decrease in credit
card fees resulting from the sale of the credit card portfolio in the second
quarter of fiscal 2006. The decrease in credit card fees was partially offset
by increases in fees earned on deposit accounts and broker loan fees. The
increase in loan servicing income for fiscal year 2007 includes the $25,000
decrease in servicing amortization as the servicing portfolio has decreased.
Mortgage brokered loan production decreased from $276.6 million during the
year ended March 31, 2006 to $250.7 million during the year ended March 31,
2007. Mortgage broker fees (included in fees and service charges) totaled
$2.2 million for the year ended March 31, 2007 compared to $2.1 million
for the previous year. Mortgage broker commission compensation expense was
$1.3 million for the fiscal year ended March 31, 2007 compared to $1.3 million
for the fiscal year ended March 31, 2006.
Non-Interest Expense. Non-interest expense increased $979,000 million, or
3.9%, to $26.4 million for fiscal year ended March 31, 2007 compared to $25.4
million for fiscal year ended March 31, 2006. The principal component of the
increase in the Company's non-interest expense was salaries and employee
benefits. For the year ended March 31, 2007, salaries and employee benefits,
which includes mortgage broker commission compensation, was $15.0 million, a
3.3% increase over the prior year total of $14.5 million. Salaries increased
as the number of full-time equivalent employees increased to 255 at March 31,
2007 from 239 at March 31, 2006, which was primarily the result of the
expansion related to increased staffing in branches and operations.
One measure of a bank's ability to contain non-interest expense is the
efficiency ratio, which is calculated by dividing total non-interest expense
(less intangible asset amortization) by the sum of net interest income plus
non-interest income (less intangible asset amortization, lower of cost or
market adjustments and securities impairment charge). The Company's efficiency
ratio excluding intangible asset amortization, lower of cost or market
adjustments and securities impairment charge was 57.22% in fiscal 2007
compared to 60.79% in fiscal 2006.
During the third quarter of fiscal year 2007, the current ESOP expiration date
was extended from December 31, 2011 to December 31, 2017. This extension
resulted in the third quarter reduction of ESOP expense of $240,000 reflecting
the release of 24,633 ESOP shares to the ESOP participants at December 31,
2006.
The acquisition of APB and the related acquisition of $80.0 million in deposit
accounts created a $526,000 core deposit intangible ("CDI") representing the
excess of cost over fair market value of the acquired deposits. The CDI is
being amortized over a ten-year life using an accelerated method. The
amortization expense was $86,000 for fiscal 2007, compared to $93,000 in
fiscal 2006.
The acquisition of Today's Bancorp and the related acquisition of $105.1
million in deposit accounts created an $820,000 CDI. The CDI is being
amortized over a ten-year life using an accelerated amortization method. The
amortization expense was $98,000 for fiscal 2007, compared to $117,000 for
fiscal 2006.
55
Provision for Income Taxes. The provision for income taxes was $6.2 million
for the year ended March 31, 2007 compared to $4.6 million for the year ended
March 31, 2006. The primary reason the tax provision is higher in the current
year compared to the prior year is a result of the higher income in the
current year. The effective tax rate for fiscal year 2007 was 34.6% compared
to 31.9% for fiscal 2006. The primary reason for the increase in the effective
tax rate was the entry into a new tax jurisdiction including the state of
Oregon and Multnomah County in Oregon. Reference is made to Note 14 of the
Notes to the Consolidated Financial Statements contained in Item 8 of this
Form 10-K, for further discussion of the Company's income taxes.
Comparison of Operating Results for the Years Ended March 31, 2006 and 2005
Net Income. Net income was $9.7 million, or $0.86 per diluted earning share
for the year ended March 31, 2006, compared to $6.5 million, or $0.67 per
diluted share for the year ended March 31, 2005.
Net Interest Income. Net interest income for fiscal year 2006 was $32.4
million, representing a $9.8 million, or a 43.3% increase, from $22.6 million
in fiscal year 2005. This improvement reflected a 34.5% increase in the
average balance of interest earning assets (primarily as a result of increases
in the average balance of mortgage and non-mortgage loans due primarily to the
APB acquisition, partially offset by a decrease in the average balance of
mortgage-backed and investment securities and daily interest bearing assets)
to $645.1 million, which was offset by a 37.1% increase in the average balance
of interest-bearing liabilities (an increase in all deposit categories
reflecting deposits assumed as part of the APB acquisition and a $13.0 million
increase in average FHLB borrowings) to $532.5 million. The ratio of average
interest earning assets to average interest bearing liabilities decreased to
121.14% in fiscal 2006 from 123.45% in fiscal 2005 which indicates that the
interest-earning asset growth is being funded more by interest-bearing
liabilities as compared to capital and non-interest-bearing demand deposits.
Interest Income. Interest income was $47.2 million for the fiscal year ended
March 31, 2006 compared to $30.0 million, for the fiscal year ended 2005.
Increased interest income is the result of the increase in the average balance
of interest earning assets and the increased yield on interest earning assets.
Average interest-bearing assets increased $165.6 million to $645.1 million for
fiscal 2006 from $479.5 million for fiscal 2005. The yield on interest-
earning assets was 7.34% for fiscal year 2006 compared to 6.28% for fiscal
2005. The increased yield isprimarily the result of the higher yields on
loans, investment securities and other interest earning assets reflecting the
increasing interest rate environment. The increased interest income is the
result of the increase in the average balance of interest earning assets and
the increase in the yield on interest earning assets.
Interest Expense. Interest expense for the year ended March 31, 2006 totaled
$14.9 million, a $7.5 million increase from $7.4 million for the year ended
March 31, 2005. The increase in interest expense is the result of higher
rates of interest that occurred during fiscal years 2005 and 2006. The
weighted average interest rate of total deposits increased from 1.55% for the
year ended March 31, 2005 to 2.58% for the year ended March 31, 2006. The
weighted average interest rate of FHLB borrowings decreased from 5.00% for the
year ended March 31, 2005 to 4.44% for the year ended March 31, 2006.
Provision for Loan Losses. The provision for loan losses for fiscal year 2006
was $1.5 million, compared to $410,000 for the same period in the prior year.
For this time period the loan receivable balance increased $196.4 million to
$630.2 million at March 31, 2006 from $433.8 million at March 31, 2005.
Excluding the impact of the American Pacific Bank acquisition, organic loan
growth during the fiscal year 2006 was $77.4 million, consisting primarily of
commercial and construction loans. Management analyzes the probable loss
factors that drive the loan loss reserve on a quarterly basis. These probable
loss factors contemplate historical loss rates, adjusted for qualitative
factors that are included in the Company's analysis. Such factors include the
relative strength of the local economy, concentrations in certain categories,
such as commercial real estate and construction loans, the impact of an
increasing interest rate environment, as well as the overall impact of
integrating APB's lending business with ours, along with other factors. As
part of that ongoing process, we have continued to refine the Company's
reserving methodologies with regard to larger and/or high-risk loans
that we consider to be "nonhomogeneous", such as commercial, speculative, and
commercial construction loans. Such loans have continued to be an increasing
part of the Company's loan portfolio in recent quarters, which tends to result
in an increased loan loss requirement. For example, as a percentage of total
loans, the Company's other real estate mortgage loans increased from 50.84% to
52.30% and
56
construction loans from 13.51% to 21.83% at March 31, 2006 as compared to
March 31, 2005. Based on the Company's continuing analysis of these loans, we
increased certain loss factors assigned to some of these loan categories
during the current fiscal year. For example, the estimated loan loss rate for
land and lots for development was increased by 0.25% to 1.0%, commercial real
estate loans was increased by 0.125% to 0.875%, commercial construction loans
was increased by 0.125% to 0.875%, speculative construction loans was
increased by 0.50% to 1.00%, multi-family loans was increased by 0.375% to
0.875% and raw land and lots was increased by 0.25% to 1.00% to cover the
probable losses inherent in the loan portfolio. Such changes resulted in
approximately $900,000 of increased provision for the fiscal year of 2006.
The increased loan loss provision during the fiscal year 2006 was due to this
combination of loan growth, as well as the higher percentage of loans falling
into higher risk categories. Net charge-offs to average net loans was 0.10%
for fiscal year 2006 as compared to 0.13% for prior year. Non-accrual loans
continued to decrease from $456,000 at March 31, 2005 to $415,000 at March 31,
2006. The allowance for loan losses was $7.2 million at March 31, 2006
compared to $4.4 million at March 31, 2005. The quality of the loan portfolio
continues to be very good, as the criticized classified loan balances have
increased just $872,000 and non-accrual loans decreased by $41,000 at March
31, 2006 compared to March 31, 2005. Net charge-offs for the twelve months
ended March 31, 2006 were $562,000, compared to $496,000 for the same period
of last year. The ratio of allowance for credit losses and loan commitments to
total net loans at March 31, 2006 increased to 1.20% from 1.07% at March 31,
2005 with such increase reflecting the changing mix of the Company's loan
portfolio and the additional risk of these loans as described above.
Management believes that its allowance for loan losses as of March 31, 2006
was adequate to absorb the known and inherent risks of loss in the loan
portfolio at that date. 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 the Company's
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-Interest Income. Non-interest income increased $2.3 million, or 35.8%, to
$8.8 million for the year ended March 31, 2006 from $6.5 million for the same
period in 2005 primarily as a result of a $1.3 million increase in fees and
service charges, an increase of $361,000 in asset management fees and the
non-recurring $311,000 gain on sale of the credit card portfolio acquired in
the APB acquisition. The $1.3 million increase in fees and service charges was
primarily a result of the $544,000 or 34.6% growth in mortgage broker fees and
the acquisition of APB in fiscal year 2006 as compared to fiscal year 2005.
The increase in loan servicing income for fiscal year 2006 reflects the
$68,000 decrease in servicing amortization as the servicing portfolio has
decreased. For the year ended March 31, 2006, fees and service charges
increased $1.3 million, or 28.9%, when compared to the year ended March 31,
2005. The increase in the number of mortgage brokers from 12 to 13 in fiscal
year 2005 combined with the increasing mortgage interest rates experienced in
fiscal 2006 increased the volume of mortgage refinance activity as compared to
fiscal 2005. The increased mortgage refinance activity resulted in increased
mortgage broker activity. The reduced gains on sale of loans held for sale
reflected the mortgage broker activity having a higher proportion of brokered
loans versus portfolio loans. Mortgage brokered loan production increased
from $194.4 million in 2005 to $276.6 million in 2006. Mortgage broker fees
(included in fees and service charges) totaled $2.1 million for the year ended
March 31, 2006 compared to $1.6 million for the previous year. Mortgage
broker commission compensation expense was $1.3 million for the fiscal ended
March 31, 2006 compared to $1.0 million for the fiscal ended March 31, 2005.
Asset management services income increased $1.5 million reflecting the
increase in assets under management for the fiscal year 2006 compared to $1.1
million for the fiscal year 2005. Riverview Asset Management Corp. had $232.8
million in total assets under management at March 31, 2006 compared to $174.8
million at March 31, 2005
Non-Interest Expense. Non-interest expense increased $6.3 million, or 32.8%,
to $25.4 million for fiscal year 2006 compared to $19.1 million for fiscal
year 2005. One measure of a bank's ability to contain non-interest expense is
the efficiency ratio, which is calculated by dividing total non-interest
expense (less intangible asset amortization) by the sum of net interest income
plus non-interest income (less intangible asset amortization, lower of cost or
market adjustments and securities impairment charge). The Company's efficiency
ratio excluding intangible asset amortization, lower of cost or market
adjustments and securities impairment charge was 60.79% in fiscal 2006
compared to 61.63% in fiscal 2005.
57
The principal component of the increase in the Company's non-interest expense
is salaries and employee benefits. For the year ended March 31, 2006,
salaries and employee benefits, which includes mortgage broker commission
compensation, was $14.5 million, a 34.9% increase over the prior year total of
$10.8 million. Salaries increased as the number of full-time equivalent
employees increased to 239 at March 31, 2006 from 197 at March 31, 2005, which
was primarily the result of the expansion related to increased staffing in
branches and operations.
The acquisition of APB and the related acquisition of $80.0 million in deposit
accounts created a $526,000 core deposit intangible ("CDI") representing the
excess of cost over fair market value of the acquired deposits. The CDI is
being amortized over a ten-year life using an accelerated method. The
amortization expense was $93,000 for fiscal 2006, compared to none in fiscal
2005.
The acquisition of Today's Bancorp and the related acquisition of $105.1
million in deposit accounts created an $820,000 CDI. The CDI is being
amortized over a ten-year life using an accelerated amortization method. The
amortization expense was $117,000 for fiscal 2006, compared to $138,000 for
fiscal 2005.
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation in fiscal 1995 (see Item 2. Properties), and the related
acquisition of $42.0 million in customer deposits created a $3.2 million core
deposit intangible asset, representing the excess of fair value of deposits
over the acquired cost. CDI was $42,000 at March 31, 2005 and was fully
amortized during the fiscal year 2005. The amortization expense of CDI was
$42,000 for the fiscal year 2005.
Provision for Income Taxes. The provision for income taxes was $4.6 million
for the year ended March 31, 2006 compared to $3.0 million for the year ended
March 31, 2004. The primary reason the tax provision is higher in the current
year compared to the prior year is a result of the higher income in the
current year. The effective tax rate for fiscal year 2006 was 31.9% compared
to 31.7% for fiscal 2005. The primary reason for the increase in the effective
tax rate was the entry into a new tax jurisdiction including the state of
Oregon and Multnomah County. Reference is made to Note 14 of the Notes to the
Consolidated Financial Statements contained in Item 8 of this Form 10-K, for
further discussion of the Company's income taxes.
Average Balance Sheet. 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. Average balances for a
period have been calculated using monthly average balances during such period.
Interest income on tax-exempt securities has been adjusted to a taxable-
equivalent basis using the statutory federal income tax rate of 34%. Non-
accruing loans were included in the average loan amounts outstanding. Loan
fees of $3.7 million, $3.1 million and $2.5 million are included in interest
income for the years ended March 31, 2007, 2006 and 2005, respectively.
58
Year Ended March 31,
-------------------------------------------------------------------------------------
2007 2006 2005
------------------------- ------------------------- -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $585,595 $ 50,981 8.71% $485,554 $37,916 7.81% $307,750 $22,345 7.26%
Non-mortgage loans 100,031 8,515 8.51 96,472 7,123 7.38 89,050 5,419 6.09
------- --------- ------- --------- ------- ---------
Total net loans (1) 685,626 59,496 8.68 582,026 45,039 7.74 396,800 27,764 7.00
Mortgage-backed securities(2) 9,077 421 4.64 12,144 530 4.36 15,616 634 4.06
Investment securities (2) 22,260 1,101 4.95 24,101 1,106 4.59 30,021 1,055 3.51
Daily interest-bearing assets 6,559 337 5.14 19,480 649 3.33 30,987 565 1.82
Other earning assets 7,567 29 0.38 7,333 3 0.04 6,088 110 1.81
------- --------- ------- --------- ------- ---------
Total interest-earning assets 731,089 61,384 8.40 645,084 47,327 7.34 479,512 30,128 6.28
Non-interest-earning assets:
Office properties and equipment, net 20,387 12,358 8,778
Other non-interest-earning assets 61,623 60,294 40,038
------- ------- -------
Total assets $813,099 $717,736 $528,328
Interest-bearing liabilities:
Regular savings accounts $ 32,591 $ 179 0.55 $ 38,818 $ 213 0.55 $ 32,420 $ 178 0.55
Interest checking 139,600 4,421 3.17 126,045 2,248 1.78 102,736 923 0.90
Money market accounts 161,590 6,969 4.31 120,188 3,276 2.73 75,063 901 1.20
Certificates of deposit 202,506 8,938 4.41 194,253 6,646 3.42 137,933 3,378 2.45
------- --------- ------- --------- ------- ---------
Total interest-bearing deposits 536,287 20,507 3.82 479,304 12,383 2.58 348,152 5,380 1.55
Other interest-bearing liabilities 78,259 4,275 5.46 53,217 2,494 4.69 40,274 2,015 5.00
------- --------- ------- --------- ------- ---------
Total interest-bearing liabilities 614,546 24,782 4.03 532,521 14,877 2.79 388,426 7,395 1.90
Non-interest-bearing liabilities:
Non-interest-bearing deposits 91,888 87,490 65,415
Other liabilities 8,995 8,777 6,202
------- ------- -------
Total liabilities 715,429 628,788 460,043
Shareholders' equity 97,670 88,948 68,285
Total liabilities and shareholders' ------- ------- -------
equity $813,099 $717,736 $528,328
======= ======= =======
Net interest income $ 36,602 $ 32,450 $ 22,733
====== ====== ======
Interest rate spread 4.37% 4.55% 4.38%
==== ==== ====
Net interest margin 5.01% 5.03% 4.74%
==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 118.96% 121.14% 123.45%
====== ====== ======
Tax Equivalent Adjustment(3) $ 84 $ 98 $ 161
====== ====== ======
(1) Includes non-accrual loans. Includes amortized loan fees of $3.7 million, $3.1 million and $2.5 million for fiscal
year 2007, 2006 and 2005, respectively.
(2) For purposes of the computation of average yield on investments available for sale, historical cost balances were
utilized, therefore, the yield information does not give effect to change in fair value that are reflected as a
component of shareholders' equity.
(3) Tax-equivalent adjustment relates to non-taxable investment interest income and preferred equity securities dividend
income. The federal statutory tax rate was 34% for all years presented.
59
Yields Earned and Rates Paid
The following table sets forth for the periods and at the date indicated the
weighted average yields earned on the Company's assets, the weighted average
interest rates paid on the Company's liabilities, together with the net yield
on interest-earning assets on a tax equivalent basis.
At March 31, Year Ended March 31,
----------- --------------------
2007 2007 2006 2005
---- ---- ---- ----
Weighted average yield earned on:
Total net loans (1) 8.19% 8.14% 7.20% 6.36%
Mortgage-backed securities 4.71 4.64 4.36 4.06
Investment securities 5.18 4.95 4.59 3.51
All interest-earning assets (1) 7.96 7.89 6.85 5.76
Weighted average rate paid on:
Deposits 3.54 3.82 2.58 1.55
FHLB advances and other borrowings 5.66 5.46 4.69 5.00
All interest-bearing liabilities 3.68 4.03 2.79 1.90
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities) (1) 4.28 3.86 4.06 3.86
Net interest margin (net interest
income (expense) as a percentage of
average interest-earning assets)(1) N/A 4.50 4.55 4.22
(1) Weighted average yield on total net loans excludes deferred loan fees.
60
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to:
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total net change.
Year Ended March 31,
------------------------------------------------
2007 vs 2006 2006 vs 2005
--------------------- -----------------------
Increase(Decrease) Increase(Decrease)
Due to Due To
------------ Total -------------- Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- -------- ------ ---- --------
(In thousands)
Interest Income:
Mortgage loans $8,392 $4,673 $13,065 $13,769 $1,802 $15,571
Non-mortgage loans 271 1,121 1,392 481 1,223 1,704
Mortgage-backed securities (141) 32 (109) (149) 45 (104)
Investment securities (1) (88) 83 (5) (233) 284 51
Daily interest-bearing (559) 247 (312) (263) 347 84
Other earning assets - 26 26 19 (126) (107)
------ ------ ------ ------ ------ ------
Total interest income 7,875 6,182 14,057 13,624 3,575 17,199
------ ------ ------ ------ ------ ------
Interest Expense:
Regular savings accounts (34) - (34) 35 - 35
Interest checking 263 1,910 2,173 250 1,075 1,325
Money market accounts 1,378 2,315 3,693 762 1,613 2,375
Certificates of deposit 293 1,999 2,292 1,659 1,609 3,268
Other interest-bearing
liabilities 1,320 461 1,781 611 (132) 479
------ ------ ------ ------ ------ ------
Total interest expense 3,220 6,685 9,905 3,317 4,165 7,482
------ ------ ------ ------ ------ ------
Net interest income (1) $4,655 $ (503) $ 4,152 $10,307 $ (590) $9,717
====== ====== ====== ====== ====== ======
(1) Taxable equivalent
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Company has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the difference
between asset and liability maturities and interest rates. The principal
element in achieving this objective is to increase the interest rate
sensitivity of the Company's interest-earning assets and interest-
bearing liabilities. Interest rate sensitivity increases by retaining
portfolio loans with interest rates subject to periodic adjustment to market
conditions and selling fixed-rate one-to-four family mortgage loans with terms
to maturity of more than 15 years. The Company relies on retail deposits as
its primary source of funds. Management believes retail deposits reduce the
effects of interest rate fluctuations because they generally represent a
stable source of funds. As part of its interest rate risk management strategy,
the Company promotes transaction accounts and certificates of deposit with
terms up to ten years.
The Company has adopted a strategy that is designed to maintain or improve the
interest rate sensitivity of assets relative to its liabilities. The primary
elements of this strategy involve: the origination of adjustable rate loans or
purchase of adjustable rate mortgage-backed securities for its portfolio;
increasing commercial, consumer loans that
61
are adjustable rate and short-term loans and residential construction loans as
a portion of total net loans receivable because of their generally shorter
terms and higher yields than other one-to-four family residential mortgage
loans; matching asset and liability maturities; investing in short term
securities; and the origination of fixed-rate loans for sale in the secondary
market and the retention of the related loan servicing rights. The strategy
for liabilities has been to shorten the maturities for both deposits and
borrowings. This approach has remained consistent throughout the past year, as
the Company has experienced a change in the mix of loans, deposits and FHLB
advances.
At March 31, 2007, adjustable rate loans and adjustable rate mortgage-backed
securities constituted $552.2 million, or 78.9%, of the Company's total
combined loans and securities portfolio. This compares to adjustable rate
loans and adjustable rate mortgage-backed securities at March 31, 2006 that
totaled $524.5 million, or 81.9%, of the Company's total combined loan and
securities portfolio. Although the Company has sought to originate adjustable
rate loans, the ability to originate and purchase such loans depends to a
great extent on market interest rates and borrowers' preferences. Particularly
in lower interest rate environments, borrowers often prefer to obtain fixed
rate loans.
The Company's mortgage servicing activities provide additional protection from
interest rate risk. The Company retains servicing rights on all mortgage
loans sold. As market interest rates rise, the fixed rate loans held in
portfolio diminish in value. However, the value of the servicing portfolio
tends to rise as market interest rates increase because borrowers tend not to
prepay the underlying mortgages, thus providing an interest rate risk hedge
versus the fixed rate loan portfolio. The mortgage loan servicing portfolio
totaled $110.8 million at March 31, 2007, including $1.1 million of purchased
mortgage servicing. The purchase of loan servicing replaced loan servicing
balances extinguished through prepayment of the underlying loans. The average
balance of the servicing portfolio was $112.9 million and produced loan
servicing income of $155,000 for the year ended March 31, 2007. See "Item 1.
Business -- Lending Activities -- Mortgage Loan Servicing."
Consumer loans, such as home equity line of credit and installment, commercial
loans and construction loans typically have shorter terms and higher yields
than permanent residential mortgage loans, and accordingly reduce the
Company's exposure to fluctuations in interest rates. Adjustable interest
rate commercial, construction and consumer loans totaled $550.3 million or
79.6% of total gross loans at March 31, 2007 as compared to $521.9 million or
82.8% at March 31, 2006. See "Item 1. Business -- Lending Activities --
Construction Lending" and " -- Lending Activities -- Consumer Lending."
The Company also invests in short-term to medium-term U.S. Government
securities as well as mortgage-backed securities issued or guaranteed by U.S.
Government agencies. At March 31, 2007, the combined portfolio carried
at $27.1 million had an average term to repricing or maturity of 2.29 years.
See "Item 1. Business -- Investment Activities."
A measure of the Company's exposure to differential changes in interest rates
between assets and liabilities is provided by the test required by OTS Thrift
Bulletin No. 13a, "Interest Rate Risk Management." This test measures the
impact on net interest income and on net portfolio value of an immediate
change in interest rates in 100 basis point increments. Using data compiled by
the OTS, the Company receives a report that measures interest rate risk by
modeling the change in net portfolio value ("NPV") over a variety of interest
rate scenarios. This procedure for measuring interest rate risk was
developed by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period). NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. The
following table provides the estimated impacts of immediate changes in
interest rates at the specified levels based on the latest OTS report dated
December 31, 2006.
62
At December 31, 2006
-----------------------------------------------------
Net Portfolio Value
Net Portfolio Value as a Percent of
-------------------------- Present Value of Assets
Change Dollar Dollar Percent -----------------------
In Rates Amount Change Change NPV Ratio Change
-------- ------ ------ ------ --------- ------
(Dollars in thousands)
300 bp $128,789 $3,021 +2% 15.01% +33 bp
200 bp 126,681 914 +1 14.80 +12 bp
100 bp 126,466 699 +1 14.77 +9 bp
0 bp 125,767 - - 14.68 -
(100) bp 123,380 (2,387) (2) 14.42 (26)bp
(200) bp 120,795 (4,972) (4) 14.14 (54)bp
For example, the above table illustrates that an instantaneous 100 basis point
increase in market interest rates at December 31, 2006 would increase the
Company's NPV by approximately $699,000, or 1%, at that date. At December 31,
2005, an instantaneous 100 basis point increase in market interest rates would
have increased the Company's NPV by approximately $1.6 million, or 1%, at that
date. The $14.8 million increase in the NPV to $125.8 million at December
31, 2006 from $110.9 million at December 31, 2005 is the result of the impact
of more adjustable loan balances in the loan portfolio at December 31, 2006 as
compared to December 31, 2005.
The Company's balance sheet continues to be to a degree asset sensitive in its
balance between interest sensitive assets and liabilities. In the current
inverted/flat interest rate environment there continues to be pressure on the
net interest margin. In a sustained rising interest rate environment the asset
yields are expected to closely match rising funding costs. A sustained falling
interest rate environment would negatively impact net interest rate margins.
Certain assumptions used by the OTS in assessing the interest rate risk of
savings associations within its region were used in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Furthermore, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Company's primary source of cash flows is its operations as a lender,
which generates interest income on loans. This is supplemented by fee income,
service charges, and interest on investment securities, and reduced by
payment of interest expense and non-interest expenses. After payment of
expenses, the Company has significant positive cash flow from operating
activities. The Company's investing activities typically use cash, primarily
for loan originations. For the year ended March 31, 2007 additional cash
flows were provided by the Company's financing activities as a result of a
significant increase in deposit accounts. For the year ended March 31, 2006
the increase in deposit accounts reflects the acquisition of APB $80.0 million
in deposits.
The Company's primary source of funds are customer deposits, proceeds from
principal and interest payments on loans, 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.
63
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At March 31, 2007,
cash totaled $31.4 million, or 3.8%, of total assets. The Bank has a 30% of
total assets line of credit with the FHLB of Seattle to the extent the Bank
provides qualifying collateral and holds sufficient FHLB stock. At March 31,
2007 the Bank had $35.1 million of outstanding advances from the FHLB of
Seattle under an available credit facility of $249.9 million, limited to
available collateral.
Liquidity management is both a short- and long-term responsibility of the
Company's management. The Company adjusts its investments in liquid assets
based upon management's assessment of (i) expected loan demand, (ii) projected
loan sales, (iii) expected deposit flows, (iv) yields available on interest-
bearing deposits and (v) its asset/liability management program objectives.
Excess liquidity is invested generally in interest-bearing overnight deposits
and other short-term government and agency obligations. If the Company
requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for borrowing at
the Federal Reserve Bank discount window. At March 31, 2007, the Bank's ratio
of cash and eligible investments to the sum of withdrawable savings and
borrowings due within one year was 5.23%.
The Company's primary investing activity is the origination of loans. During
the years ended March 31, 2007, 2006 and 2005, the Company originated $578.5
million, $665.3 million and $428.8 million of loans held for investment and
loans held for sale, respectively. At March 31, 2007, the Company had
outstanding real estate one-to-four family loan commitments of $445,000 and
unused lines of credit on real estate one-to-four family loans totaled $22.3
million. Other installment loan commitments totaled $99,000 and unused lines
of credit on other installment loans totaled $1.3 million at March 31, 2007.
Other real estate mortgage loan commitments totaled $2.1 million and the
undisbursed balance of other real estate mortgage loans closed was $16.5
million at March 31, 2007. Commercial loan commitments totaled $3.6 million
and unused commercial lines of credit totaled $55.7 million at March 31, 2007.
Construction loan commitments totaled $8.7 million and unused construction
lines of credit totaled $73.4 million at March 31, 2007. The Company
anticipates that it will have sufficient funds available to meet current loan
commitments. Certificates of deposit that are scheduled to mature in less
than one year from March 31, 2007 totaled $144.2 million. Historically, the
Company has been able to retain a significant amount of its deposits as they
mature.
At March 31, 2007, scheduled maturities of certificates of deposit, FHLB
advance, debentures, commitments to originate loans, undisbursed loan funds,
unused lines of credit, standby letters of credit and future operating minimum
lease commitments were as follows:
Within 1-3 4-5 After Total
1 Year Years Years 5 Years Balance
------ ----- ----- ------- -------
(Dollars in thousands)
Certificates of deposit $144,210 $46,884 $5,701 $3,079 $199,874
FHLB advances 35,050 - - - 35,050
Debentures - - - 7,217 7,217
Commitments to originate loans
Adjustable 9,223 - - - 9,223
Fixed 5,676 - - - 5,676
Undisbursed loan funds, unused
lines of credit and standby
letters of credit 136,967 30,190 - 4,329 171,486
Operating leases 1,698 3,059 1,587 4,348 10,692
Total other contractual ------- ------ ----- ------ -------
obligations $332,824 $80,133 $7,288 $18,973 $439,218
======= ====== ===== ====== =======
The table above does not include interest payments on borrowings, deposit
liabilities or increases in common area charges on operating leases.
The Bank's primary sources of funds are deposits, FHLB borrowings, proceeds
from the principal and interest payments on loans and securities. While
maturities and scheduled amortization of loans and securities are predictable
64
sources of funds, deposit flows, prepayment of mortgage loans and mortgage-
backed securities are greatly influenced by general interest rates, economic
conditions and competition.
The increase in interest rates during the fiscal year ended March 31, 2007 has
created an interest rate environment that caused the demand for fixed rate
one-to-four family loans and repayment of existing one-to-four family mortgage
loans and mortgage-backed securities to be less than in the prior year. The
Company's business plan emphasizes the sale of fixed rate mortgages as part of
its interest rate risk strategy. The decrease in the cash flows from
operating activities of loans sold to $17.1 million for the fiscal 2007
compared to $17.8 million for fiscal 2006 reflects this strategy under the
changing interest rate environment.
The Bank has experienced growth in deposit accounts that is attributable to
organic growth through operations. The information contained in "Item 1,
Business Deposit Activities and Other Sources of Funds -- Deposit Flow"
reflects this net increase in cash flows from deposits of $58.4 million for
fiscal 2007 as compared to a $150.1 million increase in net cash flows for the
same period in the prior year (which included $80.1 million of deposits
acquired in the APB acquisition).
Should the Bank require funds beyond its ability to generate them internally,
additional funds are available through the use of FHLB and Pacific Coast
Banker's Bank borrowings. At March 31, 2007 advances from FHLB totaled $35.1
million and the Bank had additional borrowing capacity available of $214.8
million from the FHLB, subject to collateral limitations. At March 31, 2007
the Bank's available borrowing line subject to collateral limitations was
$121.9 million. The Bank has a $10.0 million fed funds line with Pacific
Coast Banker's Bank at March 31, 2007.
Sources of capital and liquidity for the Company on a stand-alone basis
include distributions from the Bank and the issuance of debt or equity.
Dividends and other capital distributions from the Bank are subject to
regulatory restrictions.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of March 31, 2007, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 9.60%, 9.60% and 11.38%, respectively. For a detailed discussion of
regulatory capital requirements, see "REGULATION - Federal Regulation of
Savings Associations -- Capital Requirements."
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
New Accounting Pronouncements
For a discussion of new accounting pronouncement and their impact on the
Company, see Note 1 of the Notes to the Consolidated Financial Statement
included in Item 8 of this Form 10-K.
Contractual Obligations
The following table shows the contractual obligations by expected period, as
of March 31, 2007. Further discussion of these commitments is included in Note
20 to the Consolidated Financial Statements included in Item 8 of this report.
65
At March 31, 2007, scheduled maturities of certificates of deposit, FHLB
advances, future operating minimum lease commitments and subordinated
Debentures were as follows (in thousands):
Within 1 to 3 4-5 After Total
1 Year Years Years 5 Years Balance
------ ----- ----- ------- -------
Certificates of deposit $144,210 $46,884 $ 5,701 $ 3,079 $199,874
FHLB advances 35,050 - - - 35,050
Operating leases 1,698 3,059 1,587 4,348 10,692
Junior subordinates Debentures - - - 7,217 7,217
Total other contractual ------- ------ ----- ------ -------
obligations $180,958 $49,943 $7,288 $14,644 $252,833
======= ====== ===== ====== =======
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.
The Bank has entered into employment contracts with certain key employees,
which provide for contingent payment subject to future events.
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. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The Company's maximum exposure to credit loss
in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are conditional, and are honored for up to 45
days subject to the Company's usual terms and conditions. Collateral is not
required to support commitments.
At March 31, 2007, the Company had commitments to extend credit of $184.1
million, compared to $188.3 million at March 31, 2006. The $4.2 million
decrease in commitments to extend credit has been experienced in all loan
categories. These decreases reflect the changes in the U.S. economy and are
not due to local economic changes. For additional information regarding future
financial commitments, this discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report including Footnote 20, "Commitments and
Contingencies."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Quantitative Aspects of Market Risk. The Company does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments. Furthermore, the
Company is not subject to foreign currency exchange rate risk or commodity
price risk. For information regarding the sensitivity to interest rate risk
of the Company's interest-earning assets and interest-bearing liabilities, see
the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio
Analysis," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Certificates of Deposit by Rates and Maturities" contained
herein.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while limiting its exposure to
fluctuating market interest rates. The Company intends to reduce risk where
appropriate but accept a degree of risk when warranted by economic
circumstances. The Company has sought to reduce the exposure of its earnings
to changes in market interest rates by attempting to manage the mismatch
between asset and liability maturities and interest rates. The principal
element in achieving this objective is to increase the interest rate
sensitivity of the Company's interest-earning assets. Interest rate
sensitivity will increase by retaining portfolio loans with interest rates
subject to periodic adjustment to market conditions and selling fixed-rate
one-to-four family mortgage loans with terms of more than 15 years. Interest
rates on residential one-to-four family mortgage loan
66
applications are typically locked during the application stage for periods
ranging from 30 to 90 days, the most typical period being 45 days. These
loans are locked with the FHLMC under a best-efforts delivery program. The
Company makes every effort to deliver these loans before their rate locks
expire. This arrangement requires the Company to deliver the loans to the
FHLMC within ten days of funding. Delays in funding the loans can require a
lock extension. The cost of a lock extension at times is borne by the
borrower and at times by the Company. These lock extension costs paid by the
Company are not expected to have a material impact to operations. This
activity is managed daily.
Consumer and commercial loans are originated and held in portfolio as the
short term nature of these portfolio loans match durations more closely with
the short term nature of retail deposits such as interest checking, money
market accounts and savings accounts. The Company relies on retail deposits as
its primary source of funds. Management believes retail deposits reduce the
effects of interest rate fluctuations because they generally represent a more
stable source of funds. As part of its interest rate risk management
strategy, the Company promotes transaction accounts and certificates of
deposit with longer terms to maturity. Except for immediate short-term cash
needs, and depending on the current interest rate environment, FHLB advances
will have maturities of long or short term. For additional information, see
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained herein.
67
The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by
expected maturity, and the instruments' fair values at March 31, 2007. Market risk sensitive instruments are generally
defined as on- and off-balance sheet derivatives and other financial instruments.
After After Beyond
Average Within 1 - 3 3 - 5 5 - 10 10 Fair
Rate 1 Year Years Years Years Years Total Value
---- ------ ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-Sensitive Assets:
Loans receivable (1) 8.19% $277,081 $ 90,116 $ 57,672 $201,617 $65,118 $691,604 $680,861
Mortgage-backed securities 4.71 1,936 5,936 - - - 7,872 7,883
Investments and other
interest-earning assets 5.19 24,147 1,671 - - 1,267 27,085 27,085
FHLB stock 0.20 1,470 2,940 2,940 - - 7,350 7,350
------- ------- ------- ------- ------- ------- -------
Total assets 304,634 100,663 60,612 201,617 66,385 733,911 723,179
======= ======= ======= ======= ======= ======= =======
Interest-Sensitive Liabilities:
Interest checking 3.19 28,891 57,780 57,780 - - 144,451 144,451
Non-interest checking accounts - 17,320 34,640 34,641 - - 86,601 86,601
Savings accounts 0.55 5,894 11,789 11,789 - - 29,472 29,472
Money market accounts 4.62 41,001 82,003 82,003 - - 205,007 205,007
Certificate accounts 4.69 144,210 46,884 5,701 3,079 - 199,874 199,174
FHLB advances 5.66 35,050 - - - - 35,050 34,982
Subordinated debentures 6.71 - - - - 7,217 7,217 7,235
Obligations under capital lease 7.16 32 80 91 423 2,095 2,721 2,753
------- ------- ------- ------- ------- ------- -------
Total liabilities 272,398 233,176 192,005 3,502 9,312 710,393 709,675
------- ------- ------- ------- ------- ------- -------
Interest sensitivity gap 32,236 (132,513) (131,393) 198,115 57,073 23,518 13,504
------- ------- ------- ------- ------- ------- -------
Cumulative interest sensitivity gap $ 32,236 $(100,277) $(231,670) $(33,555) $ 23,518
Off-Balance Sheet Items: ======= ======= ======= ======= =======
Commitments to extend credit - 14,899 - - - - 14,899 -
Unused lines of credit - 169,194 - - - - 169,194 -
(1) Includes loans held for sale
68
Item 8. Financial Statements and Supplementary Data
-----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for the Years Ended March 31, 2007, 2006
and 2005 Independent Auditor's Reports
TABLE OF CONTENTS
------------------------------------------------------------------------------
Page
Report of Independent Registered Public Accounting Firm -
Deloitte & Touche LLP 70
Report of Independent Registered Public Accounting Firm -
McGladrey & Pullen, LLP 71
Consolidated Balance Sheets as of March 31, 2007 and 2006 72
Consolidated Statements of Income for the Years Ended March 31,
2007, 2006 and 2005 73
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 2007, 2006 and 2005 74
Consolidated Statements of Cash Flows for the Years Ended March 31,
2007, 2006 and 2005 75
Notes to Consolidated Financial Statements 76
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Riverview Bancorp, Inc.
Vancouver, Washington
We have audited the accompanying consolidated balance sheets of Riverview
Bancorp, Inc. & Subsidiary (the "Company") as of March 31, 2007 and 2006, and
the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2007
and 2006, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of March 31, 2007, based on the
criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 12, 2007, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/Deloitte & Touche LLP
Portland, Oregon
June 12, 2007
70
McGladrey & Pullen
Certified Public Accountants
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Riverview Bancorp, Inc.
Vancouver, Washington
We have audited Riverview Bancorp, Inc. and Subsidiary' s consolidated
statements of income, shareholders' equity and cash flows for the year ended
March 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, Riverview Bancorp, Inc. and
Subsidiary's results of operations and cash flows for the year ended March 31,
2005, in conformity with U.S. generally accepted accounting principles.
/s/McGladrey & Pullen, LLP
Tacoma, Washington
June 10, 2005
McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.
71
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND 2006
(Dollars in thousands, except share data) 2007 2006
------------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $7,818
and $7,786) $ 31,423 $ 31,346
Loans held for sale - 65
Investment securities available for sale, at fair
value (amortized cost of $19,258 and $24,139) 19,267 24,022
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $1,243 and $1,830) 1,232 1,805
Mortgage-backed securities available for sale, at fair
value (amortized cost of $6,778 and $8,436) 6,640 8,134
Loans receivable (net of allowance for loan losses of
$8,653 and $7,221) 682,951 623,016
Prepaid expenses and other assets 1,905 2,210
Accrued interest receivable 3,822 3,058
Federal Home Loan Bank stock, at cost 7,350 7,350
Premises and equipment, net 21,402 19,127
Deferred income taxes, net 4,108 3,771
Mortgage servicing rights, net 351 384
Goodwill 25,572 25,572
Core deposit intangible, net 711 895
Bank owned life insurance 13,614 13,092
-------- --------
TOTAL ASSETS $820,348 $763,847
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $665,405 $606,964
Accrued expenses and other liabilities 9,349 8,768
Advance payments by borrowers for taxes and insurance 397 358
Federal Home Loan Bank advances 35,050 46,100
Junior subordinated debentures 7,217 7,217
Capital lease obligation 2,721 2,753
-------- --------
Total liabilities 720,139 672,160
COMMITMENTS AND CONTINGENCIES (See Note 20) - -
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:
2007 - 11,707,980 issued, 11,707,980 outstanding 117 57
2006 - 5,772,690 issued, 5,772,686 outstanding on
a pre-split basis
Additional paid-in capital 58,438 57,316
Retained earnings 42,848 35,776
Unearned shares issued to employee stock ownership trust (1,108) (1,186)
Accumulated other comprehensive loss (86) (276)
-------- --------
Total shareholders' equity 100,209 91,687
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $820,348 $763,847
======== ========
See notes to consolidated financial statements.
72
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(Dollars in thousands, except share data) 2007 2006 2005
------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans receivable $ 59,496 $ 45,039 $ 27,764
Interest on investment securities -
taxable 854 809 521
Interest on investment securities -
non taxable 163 170 174
Interest on mortgage-backed securities 421 530 634
Other interest and dividends 366 681 875
----------- ----------- -----------
Total interest and dividend income 61,300 47,229 29,968
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits 20,507 12,383 5,380
Interest on borrowings 4,275 2,494 2,015
----------- ----------- -----------
Total interest expense 24,782 14,877 7,395
----------- ----------- -----------
Net interest income 36,518 32,352 22,573
Less provision for loan losses 1,425 1,500 410
----------- ----------- -----------
Net interest income after provision for
loan losses 35,093 30,852 22,163
----------- ----------- -----------
NON-INTEREST INCOME:
Fees and service charges 5,747 5,913 4,588
Asset management fees 1,874 1,481 1,120
Net gain on sale of loans held for sale 434 361 513
Impairment of securities, net of gain
on sale - - (1,185)
Loan servicing income 155 91 47
Gain on sale of land and fixed assets 3 2 830
Gain of sale of credit card portfolio 133 311 -
Bank owned life insurance 522 485 486
Other 166 193 107
----------- ----------- -----------
Total non-interest income 9,034 8,837 6,506
----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 15,012 14,536 10,773
Occupancy and depreciation 4,687 3,798 2,991
Data processing 988 1,414 991
Amortization of core deposit intangible 184 210 180
Advertising and marketing expense 1,102 853 766
FDIC insurance premium 74 70 58
State and local taxes 644 580 519
Telecommunications 437 395 288
Professional fees 809 1,328 842
Other 2,416 2,190 1,696
----------- ----------- -----------
Total non-interest expense 26,353 25,374 19,104
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 17,774 14,315 9,565
PROVISION FOR INCOME TAXES 6,168 4,577 3,036
----------- ----------- -----------
NET INCOME $ 11,606 $ 9,738 $ 6,529
=========== =========== ===========
Earnings per common share:
Basic $ 1.03 $ 0.87 $ 0.68
Diluted 1.01 0.86 0.67
Weighted average number of shares
outstanding:
Basic 11,312,847 11,204,479 9,633,490
Diluted 11,516,232 11,350,335 9,782,346
See notes to consolidated financial statements.
73
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
Unearned
Shares
Issued to
Employee Accumulated
Common Stock Additional Stock Other
(Dollars in thousands, ----------------- Paid-In Retained Ownership Comprehensive
except share data) Shares Amount Capital Earnings Trust Income(Loss) Total
-----------------------------------------------------------------------------------------------------------
Balance April 1, 2004 9,949,950 $ 50 $40,187 $26,330 $(1,598) $ 213 $ 65,182
Cash dividends ($0.31 per
share) - - - (2,985) - - (2,985)
Exercise of stock options 81,548 - 536 - - - 536
Earned ESOP shares - - 314 - 206 - 520
Tax benefit, stock options - - 75 - - - 75
---------- ---- ------- ------- ------- ----- --------
10,031,498 50 41,112 23,345 (1,392) 213 63,328
Comprehensive income:
Net income - - - 6,529 - - 6,529
Other comprehensive income:
Unrealized holding gain on
securities of $1,120 (net
of $577 tax effect) less
classification adjustment
for net losses included
in net income of $785 (net
of $404 tax effect) - - - - - (335) (335)
--------
Total comprehensive income - - - - - - 6,194
---------- ---- ------- ------- ------- ----- --------
Balance March 31, 2005 10,031,498 50 41,112 29,874 (1,392) (122) 69,522
Cash dividends ($0.34 per
share) - - - (3,836) - - (3,836)
Exercise of stock options 37,144 - 314 - - - 314
Stock repurchased and
retired (100,000) - (1,227) - - - (1,227)
Stock issued in connection
with acquisition 1,576,730 7 16,706 - - - 16,713
Earned ESOP shares - - 352 - 206 - 558
Tax benefit, stock options - - 59 - - - 59
---------- ---- ------- ------- ------- ----- --------
11,545,372 57 57,316 26,038 (1,186) (122) 82,103
Comprehensive income:
Net income - - - 9,738 - - 9,738
Other comprehensive income:
Unrealized holding loss on
securities of $154 (net of
$79 tax effect) - - - - - (154) (154)
--------
Total comprehensive income - - - - - - 9,584
---------- ---- ------- ------- ------- ----- --------
Balance March 31, 2006 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 ESOP shares - - 196 - 78 - 274
Tax benefit, stock options - - 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
========== ==== ======= ======= ======= ===== ========
See notes to consolidated financial statements.
74
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(Dollars in thousands) 2007 2006 2005
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,606 $ 9,738 $ 6,529
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,258 1,907 1,492
Mortgage servicing rights valuation adjustment (25) (24) (22)
Provision for loan losses 1,425 1,500 410
Provision (benefit) for deferred income taxes (436) (704) 285
Noncash expense related to ESOP 274 558 520
Noncash loss on impairment of securities - - 1,349
Noncash interest expense on capital lease
obligation - 49 -
Increase (decrease) in deferred loan
origination fees, net of amortization (407) 933 382
Federal Home Loan Bank stock dividend - - (110)
Origination of loans held for sale (16,966) (17,308) (22,943)
Proceeds from sales of loans held for sale 17,116 17,786 22,919
Excess tax benefit from stock based
compensation (67) - -
Net gain on loans held for sale, sale of
real estate owned, mortgage-backed
securities, investment securities and
premises and equipment (422) (363) (1,310)
Income from bank owned life insurance (522) (485) (486)
Changes in assets and liabilities, net
of acquisition:
Prepaid expenses and other assets 397 (455) (484)
Accrued interest receivable (764) (371) (364)
Accrued expenses and other liabilities 437 2,488 (602)
--------- --------- --------
Net cash provided by operating
activities 13,904 15,249 7,565
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net (60,707) (76,216) (47,869)
Proceeds from call, maturity, or sale of
investment securities available for sale 4,850 5,250 13,515
Principal repayments on investment
securities available for sale 75 37 75
Purchase of investment securities available
for sale - (4,996) (5,014)
Purchase of mortgage-backed securities
available for sale - - (5,000)
Principal repayments on mortgage-backed
securities available for sale 1,658 3,320 3,657
Principal repayments on mortgage-backed
securities held to maturity 572 538 173
Purchase of premises and equipment and
capitalized software (4,334) (8,087) (561)
Acquisition, net of cash received - (14,663) -
Additions to real estate owned - - (621)
Proceeds from sale of real estate owned
and premises and equipment 3 275 2,513
--------- --------- --------
Net cash used by investing activities (57,883) (94,542) (39,132)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposit accounts, net of
deposits acquired 58,441 70,331 47,763
Dividends paid (4,289) (3,631) (2,904)
Repurchase of common stock - (1,228) -
Proceeds from borrowings 559,350 157,100 -
Repayment of borrowings (570,400) (174,000) -
Principal payments under capital lease
obligation (32) (10) -
Net increase (decrease) in advance
payments by borrowers 39 44 (16)
Excess tax benefit from stock based
compensation 67 - -
Proceeds from exercise of stock options 880 314 536
--------- --------- --------
Net cash provided by financing
activities 44,056 48,920 45,379
--------- --------- --------
NET INCREASE (DECREASE) IN CASH 77 (30,373) 13,812
CASH, BEGINNING OF YEAR 31,346 61,719 47,907
--------- --------- --------
CASH, END OF YEAR $ 31,423 $ 31,346 $ 61,719
========= ========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 24,347 $ 14,663 $ 7,418
Income taxes 7,025 5,206 2,675
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned $ - $ - $ 304
Loans to finance the sale of real estate
owned - - 578
Receivable due to sale & leaseback of
branch - - 2,391
Dividends declared and accrued in other
liabilities 1,144 955 749
Fair value adjustment to securities
available for sale 289 (234) (507)
Income tax effect related to fair value
adjustment (99) 79 172
Common stock issued upon business
combination - 16,713 -
Borrowings under capital lease obligation - 2,715 -
Premises and equipment purchases included
in accounts payable 64 - -
See notes to consolidated financial statements.
75
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2007 AND 2006
------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of
Riverview Bancorp, Inc. and Subsidiary (the "Company") include all the
accounts of Riverview Bancorp, Inc. and the consolidated accounts of its
wholly-owned subsidiary, Riverview Community Bank (the "Bank"), the Bank's
wholly-owned subsidiary, Riverview Services, Inc., and the Bank's majority
owned subsidiary, Riverview Asset Management Corp. All inter-company
transactions and balances have been eliminated in consolidation.
The Company has also established a subsidiary grantor trust in connection with
the issuance of trust preferred securities (see Note 13). In accordance with
the requirements of Financial Accounting Standards Board Interpretation No. 46
(revised), Consolidation of Variable Interest Entities (as amended), the
accounts and transactions of the trust are not included in the accompanying
consolidated financial statements.
Nature of Operations - The Bank is an eighteen branch community-oriented
financial institution operating in rural and suburban communities in southwest
Washington State and Multnomah, Clackamas and Marion counties of Oregon. The
Bank is engaged primarily in the business of attracting deposits from the
general public and using such funds, together with other borrowings, to invest
in various other real estate mortgage loans, real estate construction loans,
commercial loans, consumer loans, investment securities and mortgage-backed
securities.
Use of Estimates in the Preparation of Financial Statements The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America ("generally accepted accounting
principles" or "GAAP"), requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of related revenue and expense during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of mortgage servicing rights, goodwill, core deposit intangibles and
deferred tax assets.
Cash and Cash Flows - Cash includes amounts on hand, due from banks and
interest-earning deposits in other banks.
Loans Held for Sale - The Company identifies loans held for sale at the time
of origination and such loans 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.
Gains or losses on sales of loans held for sale are recognized at the time of
the sale and are determined by the difference between the net sales proceeds
and the allocated basis of the loans sold. The Company capitalizes mortgage
servicing rights ("MSR's") acquired through either the purchase of MSR's, the
sale of originated mortgage loans or the securitization of mortgage loans with
servicing rights retained. Upon sale of mortgage loans held for sale the total
cost of the mortgage loans designated for sale is allocated to mortgage loans
with and without MSR's based on their relative fair values. The MSR's are
included as a component of gain on sale of loans. The MSR's are amortized in
proportion to and over the estimated period of the net servicing life. This
amortization is reflected as a component of loan servicing income (expense).
Securities - In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, investment securities are classified as held to maturity when the
Company has the ability and positive intent to hold such securities to
maturity. Investment securities held to maturity are carried at amortized
cost. Unrealized losses due to fluctuations in fair value are recognized when
it is
76
determined that an other than temporary decline in value has occurred.
Investment securities bought and held principally for the purpose of sale in
the near term are classified as trading securities. Securities that the
Company intends to hold for an indefinite period, but not necessarily to
maturity are classified as available for sale. Such securities may be sold to
implement the Bank's asset/liability management strategies and in response to
changes in interest rates and similar factors. Securities available for sale
are reported at fair value. Unrealized gains and losses, net of the related
deferred tax effect, are reported as a net amount in a separate component of
shareholders' equity entitled "accumulated other comprehensive income (loss)."
Realized gains and losses on securities available for sale, determined using
the specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
The Company analyzes investment securities for other than temporary impairment
on a periodic basis. Declines in fair value that are deemed other than
temporary, if any, are reported in non-interest income.
Loans - Loans are stated at the amount of unpaid principal, reduced by
deferred loan origination fees and an allowance for loan losses. Interest on
loans is accrued daily based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when they are past due 90 days as to either principal or
interest, unless they are well secured and in the process of collection. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on non-accrual loans
are applied to reduce the principal balance on a cash-basis method, until the
loans qualify for return to accrual status. Loans are returned to accrual
status when all principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the yield of the related loan.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level sufficient to provide for probable loan losses based on evaluating known
and inherent risks in the loan portfolio. The allowance is provided based upon
management's continuing analysis of the pertinent factors underlying the
quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, delinquency levels, actual loan loss
experience, current economic conditions, and detailed analysis of individual
loans for which full collectibility may not be assured. The detailed analysis
includes techniques to estimate the fair value of loan collateral and the
existence of potential alternative sources of repayment. The allowance
consists of specific, general and unallocated components. The specific
component relates to loans that are considered impaired. For such loans that
are also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's estimate of
probable losses. The unallocated component of the allowance reflects the
margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio. The
appropriate allowance level is estimated based upon factors and trends
identified by management at the time the consolidated financial statements are
prepared.
When available information confirms that specific loans or portions thereof
are uncollectible, identified amounts are charged against the allowance for
loan losses. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not demonstrated the ability or intent to
bring the loan current; the Bank has no recourse to the borrower, or if it
does, the borrower has insufficient assets to pay the debt; the estimated fair
value of the loan collateral is significantly below the current loan balance,
and there is little or no near-term prospect for improvement.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, An amendment of SFAS No. 114, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts (principal and interest) due according to the contractual terms of the
loan agreement. Large
77
groups of smaller balance homogenous loans such as consumer secured loans,
residential mortgage loans and consumer unsecured loans are collectively
evaluated for potential loss. When a loan has been identified as being
impaired, the amount of the impairment is measured by using discounted cash
flows, except when, as a practical expedient, the current fair value of the
collateral, reduced by costs to sell, is used. When the measurement of the
impaired loan is less than the recorded investment in the loan (including
accrued interest, net deferred loan fees or costs, and unamortized premium or
discount), impairment is recognized by creating or adjusting an allocation of
the allowance for loan losses.
A provision for loan losses is charged against income and is added to the
allowance for loan losses based on regular assessments of the loan portfolio.
The allowance for loan losses is allocated to certain loan categories based on
the relative risk characteristics, asset classifications and actual loss
experience of the loan portfolio. While management has allocated the allowance
for loan losses to various loan portfolio segments, the allowance is general
in nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Bank's control. These factors may result in losses or recoveries
differing significantly from those provided in the consolidated financial
statements. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
Allowance for Unfunded Loan Commitments - The allowance for unfunded loan
commitments is maintained at a level believed by management to be sufficient
to absorb estimated probable losses related to these unfunded credit
facilities. The determination of the adequacy of the allowance is based on
periodic evaluations of the unfunded credit facilities including an assessment
of the probability of commitment usage, credit risk factors for loans
outstanding to these same customers, and the terms and expiration dates of the
unfunded credit facilities. The allowance for unfunded loan commitments is
included in other liabilities on the consolidated balance sheets, with changes
to the balance charged against non-interest expense.
Real Estate Owned ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken based upon detailed analysis of
the fair value of collateral on the underlying loans on which the Company is
in the process of foreclosing. Such collateral is transferred into REO at the
lower of recorded cost or fair value less estimated costs of disposal.
Subsequently, the Company performs an evaluation of the properties and writes
down the REO directly and charges operations for any declines in value. The
amounts the Company will ultimately recover from REO may differ from the
amounts used in arriving at the net carrying value of these assets because of
future market factors beyond the Company's control or because of changes in
the Company's strategy for the sale of the property.
Federal Home Bank Loan Bank Stock - The Bank, as a member of Federal Home Loan
Bank of Seattle ("FHLB"), is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. The recorded amount of FHLB stock
equals its fair value because the shares can only be redeemed by the FHLB at
the $100 per share value.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Leasehold improvements are amortized over the term
of the lease or the estimated useful life of the improvements, whichever is
less. Gains or losses on dispositions are reflected in earnings. Depreciation
is generally computed on the straight-line method over the estimated useful
lives as follows:
Buildings and improvements 3 to 45 years
Furniture and equipment 3 to 20 years
Leasehold improvements 15 to 25 years
The assets are reviewed for impairment when events indicate their carrying
value may not be recoverable. If management determines impairment exists the
asset is reduced by an offsetting charge to expense.
78
The capitalized lease, less accumulated amortization is included in premises
and equipment. The capitalized lease is amortized on a straight-line basis
over the lease term and the amortization is included in depreciation expense.
Mortgage Servicing Rights - Fees earned for servicing loans for the Federal
Home Loan Mortgage Corporation ("FHLMC") are reported as income when the
related mortgage loan payments are collected. Loan servicing costs are
charged to expense as incurred.
MSR's are the rights to service loans. Loan servicing includes collecting
payments, remitting funds to investors, insurance companies and tax
authorities, collecting delinquent payments, and foreclosing on properties
when necessary.
The Company records its originated mortgage servicing rights at fair value in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, which requires the Company
to allocate the total cost of all mortgage loans sold to the MSR's and the
loans (without the MSR's) based on their relative fair values if it is
practicable to estimate those fair values. The Company stratifies its MSR's
based on the predominant characteristics of the underlying financial assets
including coupon interest rate and contractual maturity of the mortgage. An
estimated fair value of MSR's is determined quarterly using a discounted cash
flow model. The model estimates the present value of the future net cash
flows of the servicing portfolio based on various factors, such as servicing
costs, servicing income, expected prepayment speeds, discount rate, loan
maturity and interest rate. The effect of changes in market interest rates on
estimated rates of loan prepayments represents the predominant risk
characteristic underlying the MSR's portfolio. The Company is amortizing the
MSR, which totaled $351,000 and $384,000 at March 31, 2007 and 2006,
respectively, in proportion to and over the period of estimated net servicing
income.
The MSR's are periodically reviewed for impairment based on their fair value.
The fair value of the MSR's, for the purposes of impairment, is measured using
a discounted cash flow analysis based on market adjusted discount rates,
anticipated prepayment speeds, mortgage loan term and coupon rate. Market
sources are used to determine prepayment speeds, ancillary income, servicing
cost and pre-tax required yield. Impairment losses are recognized through a
valuation allowance for each impaired stratum, with any associated provision
recorded as a component of loan servicing income (expense).
Goodwill - Goodwill is initially recorded when the purchase price paid for an
acquisition exceeds the estimated fair value of the net identified tangible
and intangible assets acquired. Goodwill is presumed to have an indefinite
useful life and is tested, at least annually, for impairment at the reporting
unit level. The Company performs an annual review in the third quarter of
each year, or more frequently if indicators of potential impairment exist, to
determine if the recorded goodwill is impaired. If the fair value exceeds the
carrying value, goodwill at the subsidiary is not considered impaired and no
additional analysis is necessary. As of March 31, 2007, there have been no
events or changes in circumstances that would indicate a potential impairment.
Core Deposit Intangible - Core deposit intangibles are amortized to
non-interest expense using an accelerated method (based on expected attrition
and cash flows of core deposit accounts purchased) over ten years.
Advertising and Marketing Expense - Costs incurred for advertising,
merchandising, market research, community investment, travel and business
development are classified as marketing expense and are expensed as incurred.
Income Taxes - Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in the Company's income tax
returns. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation allowances
are established to reduce the net carrying amount of deferred tax assets if it
is determined to be more likely than not, that all or some
79
portion of the potential deferred tax asset will not be realized. The Company
files a consolidated federal income tax return. The Bank provides for income
taxes separately and remits to the Company amounts currently due.
Trust Assets - Assets held by Riverview Asset Management Corp. in a fiduciary
or agency capacity for Trust customers are not included in the consolidated
financial statements because such items are not assets of the Company. Assets
totaling $285.6 million and $232.8 million were held in trust as of March 31,
2007 and 2006, respectively.
Earnings Per Share - The Company accounts for earnings per share in accordance
with SFAS No. 128, Earnings Per Share, which requires all companies whose
capital structure includes dilutive potential common shares to make a dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period, excluding restricted stock. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and has been computed after
giving consideration to the weighted average diluted effect of the Company's
stock options and the shares issued under the Company's Management Recognition
and Development Plan ("MRDP").
Stock Split - 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 every 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, except as otherwise noted.
Stock-Based Compensation - Prior to April 1, 2006, the Company accounted for
stock-based compensation arrangements under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Under this method, no
compensation expense was recognized for the years ended March 31, 2006 and
2005, as the exercise price of each stock option which the Company granted was
equal to the market value of the underlying common stock on the date of grant.
Effective April 1, 2006, the Company adopted SFAS No. 123 (Revised)(SFAS
123R), Share-Based Payment. SFAS 123R requires the measurement of
compensation cost for all stock-based awards to be based on the grant-date
fair value and recognition of compensation cost over the service period of
stock-based awards, which is generally the same as the vesting period. The
fair value of stock options is determined using the Black-Scholes valuation
model, which is consistent with the Company's valuation methodology previously
utilized for stock options in the footnote disclosures required under SFAS No.
123 Accounting for Stock-Based Compensation.
The Company has adopted SFAS 123R using a modified version of prospective
application (modified prospective application). Under modified prospective
application, as it is applicable to the Company, SFAS 123R applies to new
awards and to awards modified, repurchased or cancelled after April 1, 2006.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of April 1,
2006, must be recognized as the remaining requisite service is rendered during
the period of and/or the periods after the adoption of SFAS 123R. The
attribution of compensation cost for those earlier awards will be based on the
same method and on the same grant-date fair values previously determined for
the proforma disclosures required for companies that did not adopt the fair
value accounting method for stock-based employee compensation. Modified
prospective application provides for no retroactive application to prior
periods and no cumulative adjustment to equity accounts.
80
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
established in SFAS 123R to stock based compensation awards in the prior
periods (dollars in thousands, except per share amounts):
Year ended March 31,
--------------------
2006 2005
------ ------
Net income:
As reported $9,738 $6,529
Deduct: Total stock based compensation
expense determined under fair value
based method for all options, net of
related tax benefit (1,345) (96)
------ ------
Pro forma $8,393 $6,433
====== ======
Earnings per common share - basic:
As reported $ 0.87 $ 0.68
Pro forma 0.75 0.67
Earnings per common share - fully diluted:
As reported $ 0.86 $ 0.67
Pro forma 0.74 0.66
Employee Stock Ownership Plan ("ESOP") - The Company sponsors a leveraged
ESOP. The ESOP is accounted for in accordance with the AICPA Statement of
Position ("SOP") 93-6, Employer's Accounting for Employee Stock Ownership
Plans. Stock and cash dividends on allocated shares are recorded as a
reduction of additional paid in capital and paid directly to plan participants
or distributed directly to participants' accounts. As shares are released,
compensation expense is recorded equal to the then current market price of the
shares and the shares become available for earnings per share calculations.
The Company records cash dividends on unallocated shares as a reduction of
debt and accrued interest.
Reclassifications - Certain 2006 loan disclosures have been reclassified in
order to conform to the 2007 presentation, with no impact on net income or
shareholders' equity as previously reported (See Note 6).
Business segments - The Company operates a single business segment. The
financial information that is used by the chief operating decision maker in
allocating resources and assessing performance is only provided for one
reportable segment for year ended March 31, 2007, 2006 and 2005.
Acquisitions - Acquisitions are accounted for in accordance with SFAS 141,
Business Combinations under the purchase method of accounting, which allocates
costs to assets purchased and liabilities assumed at their estimated fair
market values. The results of operations subsequent to the date of
acquisition are included in the Consolidated Financial Statements of the
Company.
New Accounting Pronouncements - In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting and disclosure for uncertainty in income taxes recognized in a
company's financial statements. FIN 48 seeks to reduce the diversity in
practice associated with certain aspects of the recognition and measurement
related to accounting for income taxes. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Management does not expect the adoption of
FIN 48 to have a material impact on the Consolidated Financial Statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements. SAB No. 108
provides guidance on quantifying prior year reversals or carryovers of
financial statement misstatements. SAB No. 108 is effective for fiscal years
beginning after November 15, 2006. Management does not expect the adoption of
SAB No. 108 to have a material impact on the Consolidated Financial
Statements.
81
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. The provisions of this standard apply to other accounting
pronouncements that require or permit 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.
2. RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain minimum
reserve balances either on hand or on deposit with the Federal Reserve Bank,
based on a percentage of deposits. The amounts of such balances as of March
31, 2007 and 2006 were approximately $258,000 and $627,000, respectively.
3. ACQUISITION
On April 22, 2005, the Company completed the acquisition of American Pacific
Bank ("APB"), a commercial bank located in Portland, Oregon. The cost to
acquire APB's 2,804,618 shares of common stock was a payment in cash for
1,404,000 shares at a transaction value of $11.94 per share and the issuance
of 1,576,730 shares of the Company's common stock at a price of $10.60 per
share for the remaining 1,400,618 shares. All APB stock options were cashed
out at a cost of $873,240, the difference between the transaction value of
$11.94 per share and the options' respective exercise prices prior to
completion of the merger. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the assets and liabilities of
APB were recorded at their respective fair values. The resulting core deposit
intangible is being amortized using an accelerated method over ten years. The
excess of the purchase price over net fair value of the assets and liabilities
acquired was recorded as goodwill in the amount of $17.1 million. Goodwill is
not tax deductible because the transaction is nontaxable for Internal Revenue
Service purposes. The purchased assets and assumed liabilities were recorded
as follows (dollars in thousands):
Assets
------
Cash $ 3,433
Investments 1,417
Building and equipment 1,080
Loans 119,536
Core deposit intangible 526
Goodwill 16,359
Other, net 2,547
---------
Total assets 144,898
Liabilities
-----------
Deposits (79,755)
Borrowings (29,882)
Other liabilities (452)
---------
Total liabilities (110,089)
Net assets $ 34,809
Less:
Stock issued in acquisition (16,713)
Cash acquired (3,433)
---------
Cash used in acquisition, net of
cash acquired $ 14,663
=========
82
Subsequent to the acquisition, tax amounts were adjusted as part of the
allocation of the purchase price. At March 31, 2006, the goodwill asset
recorded in connection with the APB acquisition was $16.4 million.
4. 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
--------- ---------- ---------- ---------
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
======= ==== ===== =======
March 31, 2006
--------------
Trust Preferred $ 5,000 $ 44 $ - $ 5,044
Agency securities 15,246 - (218) 15,028
Municipal bonds 3,893 57 - 3,950
------- ---- ----- -------
Total $24,139 $101 $(218) $24,022
======= ==== ===== =======
The 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 Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Agency securities $ - $ - $10,740 $(44) $10,740 $(44)
----- ----- ------- ---- ------- ----
Total temporarily
impaired securities $ - $ - $10,740 $(44) $10,740 $(44)
===== ===== ======= ==== ======= ====
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of March 31,
2006 are as follows (in thousands):
Less than 12 months
12 months or longer Total
------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Agency securities $6,124 $ (61) $8,904 $(157) $15,028 $(218)
------ ----- ------ ----- ------- -----
Total temporarily
impaired
securities $6,124 $ (61) $8,904 $(157) $15,028 $(218)
====== ===== ====== ===== ======= =====
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The value of most of our securities fluctuates as
market interest rates change. The Company anticipates full recovery of
amortized cost with respect to these securities at maturity or sooner in the
event of a more favorable market interest rate environment. The Company has
the ability and intent to hold securities with unrealized losses until their
values recover.
83
The contractual maturities of investment securities available for sale are as
follows (in thousands):
Amortized Estimated
Cost Fair Value
--------- ----------
March 31, 2007
--------------
Due in one year or less $11,354 $11,311
Due after one year through five years 1,020 1,033
Due after five years through ten years 618 637
Due after ten years 6,266 6,286
------- -------
Total $19,258 $19,267
======= =======
Investment securities with an amortized cost of $5.8 million and $10.2 million
and a fair value of $5.8 million and $10.1 million at March 31, 2007 and 2006,
respectively, were pledged as collateral for advances at the FHLB. Investment
securities with an amortized cost of $1.1 million and $1.1 million and a fair
value of $1.2 million and $1.2 million at March 31, 2007 and 2006,
respectively, were pledged as collateral for treasury tax and loan funds held
by the Bank. Investment securities with an amortized cost of $490,000 and
$495,000 and a fair value of $495,000 and $504,000 at March 31, 2007 and 2006,
respectively, were pledged as collateral for government public funds held by
the Bank. Investment securities with an amortized cost of $5.0 million and
$5.0 million and a fair value of $5.0 million and 5.0 million at March 31,
2007 and 2006, respectively, were pledged as collateral for borrowings from
the discount window at the Federal Reserve Bank.
In the third quarter of fiscal 2005, the Company recognized a pre-tax
other-than-temporary impairment for investments in Federal Home Loan Mortgage
Corporation ("FHLMC") preferred stock and Federal National Mortgage
Association ("FNMA") preferred stock that totaled $1.3 million. The Company
accounts for these securities in accordance with SFAS No. 115. Under SFAS No.
115, if the decline in fair market value below cost is determined to be
other-than-temporary, the unrealized loss will be realized as expense on the
consolidated statements of income. Based on a number of factors, including
the magnitude of the drop in the market value below the Company's cost and the
length of time the market value had been below cost, management concluded
that the decline in value was other-than-temporary at the end of the third
quarter of fiscal 2005. Accordingly, the pre-tax other-than-temporary
impairment was realized in the statement of income, in the amount of $699,000
for FNMA preferred stock and $650,000 for FHLMC preferred stock. A
corresponding reduction in unrealized losses in shareholders' equity was
realized in fiscal 2005 in the amount of $461,000 for FNMA preferred stock and
$429,000 for FHLMC preferred stock.
The Company realized no gains or losses on sales of investment securities
available for sale in fiscal 2007 and 2006. The Company realized before tax
$164,000 in net gains on sales of investment securities available for sale in
fiscal 2005.
5. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2007 Cost Gains Losses Value
-------------- --------- ---------- ---------- ---------
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
====== ==== ===== ======
March 31, 2006
--------------
Real estate mortgage
investment conduits $1,402 $ 18 $ - $1,420
FHLMC mortgage-backed
securities 138 2 - 140
FNMA mortgage-backed
securities 265 5 - 270
------ ---- ----- ------
Total $1,805 $ 25 $ - $1,830
====== ==== ===== ======
84
Mortgage-backed securities held to maturity with an amortized cost of $931,000
and $1.4 million and a fair value of $938,000 and $1.4 million at March 31,
2007 and 2006, respectively, were pledged as collateral for governmental
public funds held by the Bank. Mortgage-backed securities held to maturity
with an amortized cost of $143,000 and $199,000 and a fair value of $144,000
and $203,000 at March 31, 2007 and 2006, respectively, were pledged as
collateral for treasury tax and loan funds held by the Bank. The real estate
mortgage investment conduits consist of FHLMC and FNMA securities.
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
March 31, 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 15
Due after ten years 1,218 1,228
------ ------
Total $1,232 $1,243
====== ======
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
March 31, 2007 Cost Gains Losses Value
-------------- --------- ---------- ---------- ---------
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
====== ==== ===== ======
March 31, 2006
--------------
Real estate mortgage
investment conduits $1,326 $ 19 $ (7) $1,338
FHLMC mortgage-backed
securities 6,951 - (316) 6,635
FNMA mortgage-backed
securities 159 2 - 161
------ ---- ----- ------
Total $8,436 $ 21 $(323) $8,134
====== ==== ===== ======
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 Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage $ - $ - $ 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)
====== ====== ====== ===== ====== =====
85
The fair value of temporarily impaired mortgage-backed securities, the amount
of unrealized losses and the length of time these unrealized losses existed as
of March 31, 2006 as follows (in thousands):
Less than 12 months
12 months or longer Total
------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Real estate mortgage $ 523 $ (6) $ - $ - $ 523 $ (6)
FHLMC mortgage-backed
securities 66 (1) 6,543 (315) 6,609 (316)
FNMA mortgage-backed
securities 17 (1) - - 17 (1)
------- ---- ------ ----- ------ -----
Total temporarily
impaired
securities $ 606 $ (8) $6,543 $(315) $7,149 $(323)
======= ==== ====== ===== ====== =====
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The value of most of our securities fluctuates as
market interest rates change. The Company anticipates full recovery of
amortized cost with respect to these securities at maturity or sooner in the
event of a more favorable market interest rate environment. The Company has
the ability and intent to hold securities with unrealized losses until their
values recover.
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 2007 Cost Fair Value
-------------- --------- ----------
Due in one year or less $ - $ -
Due after one year through five years 72 73
Due after five years through ten years 6,085 5,930
Due after ten years 621 637
------ ------
Total $6,778 $6,640
====== ======
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 with or without prepayment penalties.
Mortgage-backed securities available for sale with an amortized cost of $6.7
million and $8.3 million and a fair value of $6.5 million and $8.0 million at
March 31, 2007 and 2006, respectively, were pledged as collateral for advances
at the FHLB. Mortgage-backed securities available for sale with an amortized
cost of $17,000 and a fair value of $18,000 at March 31, 2006, respectively,
were pledged as collateral for treasury tax and loan funds held by the Bank.
The Company realized no gains or losses on sale of mortgage-backed securities
available for sale in fiscal 2007, 2006 and 2005.
6. LOANS RECEIVABLE
A summary of the major categories of loans outstanding is shown in the
following table. Outstanding loan balances at March 31, 2007 and 2006, are
net of unearned income, including net deferred loan fees of $3.7 million and
$4.4 million, respectively.
For periods ending prior to March 31, 2007, Riverview reported and disclosed
the composition of its loan portfolio based on collateral with a focus upon
residential construction and permanent financing activities a view that was
consistent with Riverview's background as a thrift organization. However,
since 1998 and more pronounced in recent years, Riverview has strategically
migrated its lending focus to one similar to a commercial bank. This intended
strategy is evident not only in the changing mix of the loan portfolio that
has occurred organically but
86
also has been accomplished through the Company's recent acquisitions of
community banks that emphasized commercial lending activities. In order that
loan disclosures are consistent with the strategic direction of the Company,
and to be more consistent with established industry practices, the following
table reflects this new disclosure categories and related reclassifications
for 2006 based on loan purpose, rather than collateral.
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
March 31,
----------------------
2007 2006
--------- ---------
Commercial and construction
Commercial $ 91,174 $ 90,083
Other real estate mortgage 360,930 329,631
Real estate construction 166,073 137,598
--------- ---------
Total commercial and construction 618,177 557,312
Consumer
Real estate one-to-four family 69,808 64,026
Other installment 3,619 8,899
--------- ---------
Total consumer 73,427 72,925
Total loans 691,604 630,237
Less:
Allowance for loan losses 8,653 7,221
--------- ---------
Loans receivable, net $ 682,951 $ 623,016
========= =========
The Company originates, commercial real estate, multi-family real estate,
commercial, residential real estate loans and consumer loans. Substantially
all of the mortgage loans in the Company's portfolio are secured by properties
located in Washington and Oregon. An economic downturn in these areas would
likely have a negative impact on the Company's results of operations depending
on the severity of such downturn.
Loans receivable including loans held for sale, by maturity or repricing date,
were as follows (in thousands):
March 31,
----------------------
2007 2006
--------- ---------
Adjustable rate loans:
Within one year $243,396 $187,093
After one but within three years 56,091 63,555
After three but within five years 21,099 26,675
After five but within ten years 177,443 184,519
After ten years 52,227 60,014
-------- --------
550,256 521,856
Fixed rate loans:
Within one year 33,685 26,780
After one but within three 34,025 28,845
After three but within five years 36,573 23,831
After five but within ten years 24,174 19,533
After ten years 12,891 9,457
-------- --------
141,348 108,446
-------- --------
$691,604 $630,302
======== ========
Mortgage loans receivable with adjustable rates primarily reprice based on the
one year U.S. Treasury index and reprice a maximum of 2% per year and up to 6%
over the life of the loan. The remaining adjustable rate loans reprice based
on the prime lending rate or the FHLB cost of funds index. Commercial loans
with adjustable rates primarily reprice based on the prime rate.
87
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
Year Ended March 31,
-----------------------
2007 2006 2005
---- ---- ----
Beginning balance $ 7 $ 408 $ 732
Originations 192 5 10
Principal repayments (14) (406) (334)
---- ----- -----
Ending balance $185 $ 7 $ 408
==== ===== =====
7. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Year Ended March 31,
-----------------------
2007 2006 2005
---- ---- ----
Beginning balance $7,221 $4,395 $4,481
Provision for losses 1,425 1,500 410
Charge-offs (186) (711) (669)
Recoveries 193 149 173
Allowance transferred from American
Pacific Bank ("APB") acquisition - 1,888 -
------ ------ ------
Ending balance $8,653 $7,221 $4,395
====== ====== ======
Changes in the allowance for unfunded loan commitments were as follows (in
thousands):
Year Ended March 31,
-----------------------
2007 2006 2005
---- ---- ----
Beginning balance $362 $253 $191
Net change in allowance for
unfunded loan commitments 18 109 62
---- ---- ----
Ending balance $380 $362 $253
==== ==== ====
The allowance for unfunded loan commitments is included in accrued expenses
and other liabilities on the consolidated balance sheets.
Loans, on which the accrual of interest has been discontinued, was $226,000,
$415,000 and $456,000 at March 31, 2007, 2006 and 2005, respectively. Interest
income foregone on non-accrual loans was $12,000, $21,000 and $34,000 during
the years ended March 31, 2007, 2006, and 2005, respectively,
At March 31, 2007, 2006 and 2005, the Company's recorded investment in certain
loans that were considered to be impaired was $426,000, $415,000, and $456,000
respectively. At March 31, 2007, $294,000 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 and 2006, none of
the impaired loans required specific valuation allowances. 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 $959,000, $889,000 and $1.0
million during the years ended March 31, 2007, 2006 and 2005, respectively.
The related amount of interest income recognized on loans that were impaired
was approximately $85,000, $100,000 and $9,000 during the years ended March
31, 2007, 2006 and 2005, respectively. There were no loans past due 90 days or
more and still accruing interest at March 31, 2007, 2006 and 2005,
respectively.
88
8. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following (in thousands):
March 31,
----------------------
2007 2006
------- -------
Land $ 2,847 $ 1,988
Buildings and improvements 11,736 7,802
Leasehold improvements 1,961 1,887
Furniture and equipment 10,401 8,938
Buildings under capitalized leases 2,715 2,715
Construction in progress 1,798 4,436
-------- -------
Total 31,458 27,766
Less accumulated depreciation and
amortization (10,056) (8,639)
-------- -------
Premises and equipment, net $ 21,402 $19,127
======== =======
During fiscal year 2005, the Company sold to a private investor and leased
back the Camas branch and operations center. The net gain on the sale of the
building was $1.6 million, of which $828,000 was recognized in the first
quarter of fiscal year 2005 and the remainder is being amortized over the
six-year life of the lease. Deferred gains of $108,000, $141,000 and $180,000
were recognized in fiscal years 2007, 2006 and 2005, respectively. The lease
of the building is being accounted for as an operating lease and is included
in the future minimum rental payments schedule shown below.
Depreciation expense was $1.8 million, $1.2 million and $1.0 million for years
ended March 31, 2007, 2006 and 2005, respectively. The Company is obligated
under various noncancellable lease agreements for land and buildings that
require future minimum rental payments, exclusive of taxes and other charges.
The Company entered into a capital lease during fiscal year 2006. The capital
lease was for the shell of the building constructed for the new operations
center. The lease period is for twelve years with two six-year lease renewal
options. For the years ended March 31, 2007 and 2006, the Company has
recorded $112,700 and 37,600, respectively, in amortization expense. At March
31, 2007 and 2006, the Company had accumulated amortization of $150,300 and
$37,600, respectively, related to the capital lease.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of net minimum lease payments
as of March 31, 2007 and the future minimum rental payments required under
operating leases that have initial or noncancellable lease terms in excess of
one year as of March 31, 2007 (in thousands):
Operating Capital
Year Ending March 31: Leases Leases
--------- -------
2008 $ 1,698 $ 228
2009 1,592 228
2010 1,467 228
2011 909 228
2012 678 236
After 2012 4,348 4,436
------- -------
Total minimum lease payments $10,692 5,584
=======
Less amount representing interest (2,863)
-------
Present value of net minimum lease
payments $ 2,721
=======
Rent expense was $1.5 million, $1.6 million and $1.2 million for the years
ended March 31, 2007, 2006 and 2005, respectively.
89
9. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in MSR's and the related
valuation allowance for the periods indicated and other related financial data
(in thousands):
March 31,
----------------------
2007 2006 2005
---- ---- ----
Balance at beginning of year, net $ 384 $ 470 $ 624
Additions 148 123 126
Amortization (206) (233) (302)
Change in valuation allowance 25 24 22
----- ----- -----
Balance end of year, net $ 351 $ 384 $ 470
===== ===== =====
Valuation allowance at beginning of year $ 60 $ 84 $ 106
Change in valuation allowance (25) (24) (22)
----- ----- -----
Valuation allowance balance at end of year $ 35 $ 60 $ 84
===== ===== =====
The Company evaluates MSR's for impairment by stratifying MSR's based on the
predominant risk characteristics of the underlying financial assets. At March
31, 2007 and 2006, the MSR's fair value totaled $1.0 and $1.1 million,
respectively. The 2007 fair value was estimated using discount rate and a
range of PSA values (The Bond Market Association's standard prepayment values)
that ranged from 116 to 558.
Amortization expense for the net carrying amount of MSR's at March 31, 2007 is
estimated as follows (in thousands):
Year ending March 31,
---------------------
2008 $133
2009 93
2010 52
2011 34
2012 25
After 2012 14
----
Total $351
====
Mortgage loans serviced for others (in millions):
March 31,
----------------------
2007 2006 2005
---- ---- ----
Total $ 130.6 $ 139.2 $ 129.3
======= ======= =======
The estimated sensitivity of the fair value of the mortgage servicing rights
portfolio to changes in interest rates at March 31, 2007 was as follows (in
thousands):
Down Scenario Up Scenario
------------- -----------
300 bp 200 bp 100 bp 100 bp 200 bp 300 bp
------ ------ ------ ------ ------ ------
Fair Value $ (717) $ (607) $ (293) $ 66 $ 98 $ 129
The fair value of mortgage servicing rights and its sensitivity to changes in
interest rates is influenced by the mix of the servicing portfolio and
characteristics of each segment of the portfolio. The Bank's servicing
portfolio is comprised of conventional fixed rate mortgages that meet FHLMC
guidelines.
10. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $711,000 and $895,000 at March
31, 2007 and 2006, respectively. Amortization expense related to the core
deposit intangible during the years ended March 31, 2007, 2006 and 2005
totaled $184,000, $210,000 and $180,000, respectively. During the year ended
March 31, 2006, the Company had additions to core deposit intangibles totaling
$526,000 in connection with the acquisition of American Pacific
90
Bank.
Amortization expense for the net core deposit intangible at March 31, 2007 is
estimated to be as follows (in thousands):
Year Ending
March 31,
-----------------
2008 $ 155
2009 131
2010 111
2011 95
2012 82
After 2012 137
-----
Total $ 711
=====
11. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands):
Weighted Weighted
Average March 31, Average March 31,
Account Type Rate 2007 Rate 2006
------------ -------- -------- -------- --------
Non-interest-bearing 0.00% $ 86,601 0.00% $ 94,592
Interest checking 3.19 144,451 2.30 129,457
Money market 4.62 205,007 3.45 137,451
Savings accounts 0.55 29,472 0.55 38,344
Certificates of deposit 4.69 199,874 3.85 207,120
-------- --------
Total 3.54% $665,405 2.62% $606,964
==== ======== ==== ========
The weighted average rate is based on interest rates at the end of the period.
Certificates of deposit (which include $20.8 million of brokered certificates
of deposit) as of March 31, 2007, mature as follows (in thousands):
Amount
------
Within one year $144,210
After one but within two years 42,896
After two but within three years 3,988
After three but within four years 2,774
After four but within five years 2,927
After five years 3,079
--------
Total $199,874
========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation ("FDIC"). Deposits with balances in excess of $100,000
totaled $352.9 million and $329.3 million at March 31, 2007 and 2006,
respectively.
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
-------------------------
2007 2006 2005
------- ------- ------
Interest checking $ 4,364 $ 2,248 $ 923
Money market 6,971 3,276 901
Savings accounts 179 213 178
Certificates of deposit 8,993 6,646 3,378
------- ------- ------
Total $20,507 $12,383 $5,380
======= ======= ======
91
12. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2007 and 2006, advances from the FHLB totaled $35.1 million and
$46.1 million with a weighted average interest rate of 5.66% and 4.65%,
respectively. The FHLB borrowings at March 31, 2007 consisted of adjustable
rate advances with interest rates ranging from 5.47% to 5.69%. The rate on the
$30.1 million daily Cash Management Advance (CMA) is set daily by the FHLB.
The rate on the remaining $5.0 million adjustable rate advance is based upon
the three month London Interbank Offered Index (LIBOR) plus 11 basis points as
quoted by the FHLB. The March 31, 2006 fixed rate borrowings of $8.0 million
had fixed interest rates ranging from 2.57% to 3.61%. The remaining $38.1
million in adjustable rate advances at March 31, 2006 had a weighted average
interest rate of 5.02%. The weighted average interest rate for fixed and
adjustable rate advances was 5.26%, 4.44%, and 5.00% for the years ended March
31, 2007, 2006 and 2005, respectively.
The Bank has a credit line with the FHLB equal to 30% of total assets, limited
by available collateral. At March 31, 2007, based on collateral values, the
Bank had additional borrowing commitments available of $124.8 million from the
FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB by certain investment and mortgage-backed
securities, FHLB stock owned by the Bank, deposits with the FHLB, and certain
mortgages on deeds of trust securing such properties as provided in the
agreements with the FHLB. At March 31, 2007, loans carried at $253.8 million
and investments and mortgage-backed securities carried at $12.3 million were
pledged as collateral to the FHLB.
Payments required to service the Bank's FHLB advances during the years ended
March 31 are as follows (in millions):
2008 $35.1
Thereafter -
-----
$35.1
=====
In addition, the Bank has a Fed Funds borrowing facility with Pacific Coast
Bankers' Bank with a guideline limit of $10 million through June 30, 2007.
The facility may be reduced or withdrawn at any time. As of March 31, 2007
the Bank did not have any outstanding advances on this facility.
13. JUNIOR SUBORDINATED DEBENTURES
In December 2005, a wholly-owned subsidiary grantor trusts established by the
Company issued $7.0 million of pooled Trust Preferred Securities ("trust
preferred securities"). Trust preferred securities accrue and pay
distributions periodically at specified annual rates as provided in the
indentures. The trust used the net proceeds from the offering to purchase a
like amount of junior subordinated debentures (the "Debentures") of the
Company. The Debentures are the sole assets of the trust. The Company's
obligations under the Debentures and related documents, taken together,
constitute a full and unconditional guarantee by the Company of the
obligations of the trust. The trust preferred securities are mandatory
redeemable upon the maturity of the Debentures, or upon earlier redemption as
provided in the indentures. The Company has the right to redeem the Debentures
in whole or in part after year five on any coupon date, at a redemption price
specified in the indentures plus any accrued but unpaid interest to the
redemption date.
The following table is a summary of current Debentures at March 31, 2007:
Preferred
Issuance Security Rate Initial Rate at Maturing
Date Amount Type(1) Rate 3/31/07 Date
-------- --------- ------ ------- ------- --------
Issuance trust (Dollars in thousands)
---------------
Riverview Bancorp, Inc.
Statutory Trust 1 12/2005 $ 7,000 Variable 5.88% 6.71% 12/2035
92
The total amount of trust preferred securities outstanding at March 31, 2007
was $7.0 million. The interest rate on the trust preferred securities resets
quarterly and is tied to the LIBOR. The Company has the right to redeem the
debentures in December 2010.
The Debentures issued by the Company to the grantor trusts, totaling $7.0
million, are reflected in our consolidated balance sheet in the liabilities
section at March 31, 2007, under the caption "junior subordinated debentures."
The Company records interest expense on the Debentures in the consolidated
statements of income. The Company recorded $217,000 in other assets in the
consolidated balance sheet at March 31, 2007, for the common capital
securities issued by the issuer trusts. The Company invested $5.0 million of
the trust preferred securities proceeds in the Bank and retained the remaining
$2.0 million to be used for general corporate purposes.
14. INCOME TAXES
Income tax provision for the years ended March 31 consisted of the following
(in thousands):
2007 2006 2005
------- ------- -------
Current $ 6,604 $ 5,281 $ 2,751
Deferred (436) (704) 285
------- ------- -------
Total $ 6,168 $ 4,577 $ 3,036
======= ======= =======
A reconciliation between income taxes computed at the statutory rate and the
effective tax rate for the years ended March 31 is as follows:
2007 2006 2005
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 34.0%
State and local income tax rate 0.9 1.0 -
ESOP market value adjustment 0.5 0.9 1.1
Interest income on municipal securities (0.3) (0.4) (0.6)
Dividend received deduction 0.1 - (0.5)
Bank owned life insurance (1.1) (1.2) (1.7)
Other, net (0.5) (3.4) (0.6)
---- ---- ----
Effective federal income tax rate 34.6% 31.9% 31.7%
==== ==== ====
There were no taxes related to the gains on sales of securities for the years
ended March 31, 2007 and 2006. Taxes related to the gains on sales of
securities for the year ended March 31, 2005 were $56,000.
93
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 2007 and 2006
are as follows (in thousands):
2007 2006
------- -------
Deferred tax assets:
Deferred compensation $ 715 $ 629
Loan loss reserve 3,287 2,720
Core deposit intangible 169 245
Accrued expenses 373 376
Accumulated depreciation 462 508
Net operating loss carry forward 91 493
Net unrealized loss on securities available for sale 44 143
Capital loss carry forward 725 715
REO expense 186 184
Non-compete 169 79
Other 64 42
------- -------
Total deferred tax asset 6,285 6,134
------- -------
Deferred tax liabilities:
FHLB stock dividend (1,093) (1,078)
Deferred gain on sale (157) (116)
Tax qualified loan loss reserve (55) (243)
Purchase accounting (259) (376)
Prepaid expense (139) (82)
Loan fees/costs (474) (468)
------- -------
Total deferred tax liability (2,177) (2,363)
------- -------
Deferred tax asset, net $ 4,108 $ 3,771
======= =======
The Bank's retained earnings at March 31, 2007 and 2006 include base year bad
debt reserves which amounted to approximately $2.2 million, for which no
federal income tax liability has been recognized. The amount of unrecognized
deferred tax liability at March 31, 2007 and 2006 was approximately $800,000
and $760,000, respectively. This represents the balance of bad debt reserves
created for tax purposes as of December 31, 1987. These amounts are subject
to recapture in the unlikely event that the Company's banking subsidiaries (1)
make distributions in excess of current and accumulated earnings and profits,
as calculated for federal tax purposes, (2) redeem their stock, or (3)
liquidate. Management does not expect this temporary difference to reverse in
the foreseeable future.
The Company also has net operating loss carry forwards of approximately
$250,000 for federal tax purposes in connection with the acquisition of
Today's Bancorp, Inc. which begin to expire at various times starting in 2019.
The Company also has a capital loss carry forward of approximately $2.0
million, which will expire in 2010. Utilization of these losses, is subject
to certain limitations under Section 382 of the Internal Revenue Code.
The tax effects of certain tax benefits related to stock options are recorded
directly to shareholders' equity.
No valuation allowance for deferred tax assets was deemed necessary at March
31, 2007 or 2006 based upon the Company's anticipated future ability to
generate taxable income from operations.
15. EMPLOYEE BENEFITS PLANS
Retirement Plan - The Riverview Bancorp, Inc. Employees' Savings and Profit
Sharing Plan (the "Plan") is a defined contribution profit-sharing plan
incorporating the provisions of Section 401(k) of the Internal Revenue Code.
The plan covers all employees with at least six months and 500 hours of
service who are over the age of 18. The Company matches the employee's
elective contribution up to 4% of the employee's compensation. Company
expenses related to the Plan for the years ended March 31, 2007, 2006 and 2005
were $409,000, $359,000 and $154,000, respectively.
94
Directors Deferred Compensation Plan - Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. Chairman, President,
Executive and Senior Vice Presidents of the Company may also defer salary into
this plan. This alternative is made available to them through a nonqualified
deferred compensation plan. The Company accrues annual interest on the
unfunded liability under the Directors Deferred Compensation Plan based upon a
formula relating to gross revenues, which amounted to 7.51%, 6.66%, and 6.04%
for the years ended March 31, 2007, 2006 and 2005, respectively. The estimated
liability under the plan is accrued as earned by the participant. At March 31,
2007 and 2006, the Company's aggregate liability under the plan was $2.0
million and $1.7 million, respectively.
Bonus Programs - The Company maintains a bonus program for senior management
and certain key individuals. The bonus program represents approximately 9.5%
of fiscal year profits, assuming profit goals are attained, and is divided
among participants based on specific individual goals. The Company also has an
incentive program for branch managers that are paid to the managers based on
the attainment of certain goals. The Company expensed $1.3 million, $1.3
million and $564,000 in bonuses and incentives during the years ended March
31, 2007, 2006 and 2005, respectively.
Stock Option Plans - 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 grant with a maximum term
of ten years and a vesting period of zero to five years. At March 31, 2007,
there were options for 42,962 shares available for 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 March 31, 2007, there were options for
148,154 shares available for grant under the 2003 Plan.
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 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
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 grant. There were no options granted during the year ended March 31, 2007.
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- ---------- ---------- ---------
Fiscal 2006 4.67% 10.00 26.32% 3.07%
Fiscal 2005 4.00% 10.00 29.25% 3.01%
The weighted average grant-date fair value of fiscal 2006 and 2005 awards was
$3.80 and $2.97, respectively. As of March 31, 2007, unrecognized
compensation cost related to nonvested stock options totaled approximately
$35,000. For the year ended March 31, 2007, the Company recognized pre-tax
compensation expense related to stock options of approximately $39,000.
95
The following table presents the activity related to options under all plans
for the years ended March 31, 2007, 2006 and 2005.
2007 2006 2005
----------------- ----------------- -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Balance, beginning
of period 755,846 $ 9.68 454,990 $ 7.18 490,538 $ 6.79
Grants - - 354,000 12.70 46,000 10.31
Options
exercised (212,054) 7.79 (53,144) 8.48 (81,548) 6.57
Forfeited (17,600) 10.65 - - - -
------- ------- -------
Balance, end of
period 526,192 $10.41 755,846 $9.68 454,990 $ 7.18
======= ====== ======= ===== ======= ======
Additional information regarding options outstanding as of March 31, 2007 is
as follows:
Options Outstanding Options Exercisable
--------------------- ---------------------
Weighted Avg Weighted Weighted
Remaining Average Average
Range of Contractual Number Exercise Number Exercise
Exercise Price Life(years) Outstanding Price Exercisable Price
-------------- ---------- ----------- -------- ----------- --------
$ 4.03-$ 6.16 3.25 49,996 $ 4.97 49,996 $ 4.97
6.51- 6.88 2.16 109,396 6.86 109,396 6.86
7.49- 9.51 6.14 41,200 8.73 34,000 8.66
10.10- 10.83 7.69 41,600 10.34 15,800 10.37
12.98 8.96 284,000 12.98 284,000 12.98
------- -------
6.69 526,192 $10.41 493,192 $10.43
==== ======= ====== ======= ======
The following table presents information on stock options outstanding for the
periods shown, less estimated forfeitures.
Year ended Year ended
March 31, 2007 March 31, 2006
------------------- -------------------
Stock options fully vested and
expected to vest:
Number 523,052 748,166
Weighted average exercise price $ 10.41 $ 9.67
Aggregate intrinsic value $2,892,379 $2,774,511
Weighted average contractual
term of options 7.07 years 7.25 years
Stock options vested and currently
exercisable:
Number 493,192 690,886
Weighted average exercise price $ 10.43 $ 9.64
Aggregate intrinsic value $2,717,710 $2,584,305
Weighted average contractual term of
options 6.65 years 6.52 years
The total intrinsic value of stock options exercised was $1,723,000, $159,000
and $312,000 for the years ended March 31, 2007, 2006, and 2005, respectively.
16. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP") that covers all
employees with at least one year and 1000 hours of service who are over the
age of 21. Shares are released for allocation at the discretion of the Board
of Directors and allocated to participant accounts on December 31 of each year
until 2017. ESOP compensation expense included in salaries and employee
benefits was $274,000, $558,000 and $520,000 for years ended March 31, 2007,
2006 and 2005, respectively.
96
ESOP share activity is summarized in the following table:
Fair Value Allocated
of Unreleased and
Unreleased ESOP Released
Shares Shares Shares Total
---------- ---------- --------- -------
Balance, March 31, 2004 $4,083,000 394,128 568,456 962,584
Allocation December 31, 2004 (49,266) 49,266 -
------- ------- -------
Balance, March 31, 2005 $3,664,000 344,862 617,722 962,584
Allocation December 31, 2005 (49,266) 49,266 -
------- ------- -------
Balance, March 31, 2006 $3,955,000 295,596 666,988 962,584
Allocation December 31, 2006 (24,633) 24,633 -
------- ------- -------
Balance, March 31, 2007 $4,319,000 270,963 691,621 962,584
======= ======= =======
17. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Company's Board of Directors authorized 250,000 shares of serial preferred
stock as part of the Conversion and Reorganization completed on September 30,
1997. No preferred shares were issued or outstanding at March 31, 2007 or
2006.
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 under 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 and Tier I
capital to risk-weighted assets, of core capital to total assets and tangible
capital to tangible assets (set forth in the table below). Management believes
the Bank meets all capital adequacy requirements to which it is subject as of
March 31, 2007.
As of March 31, 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,
core capital to total assets and tangible capital to tangible assets (set
forth in the table below). There are no conditions or events since that
notification that management believes have changed the Company's category.
97
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
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
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
---------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2006
Total Capital:
(To Risk Weighted
Assets) $78,469 11.48% $54,688 8.0% $68,361 10.0%
Tier I Capital:
(To Risk Weighted Assets) 71,248 10.42 27,344 4.0 41,016 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 71,248 9.70 22,038 3.0 36,730 5.0
Tangible Capital:
(To Tangible Assets) 71,248 9.70 11,019 1.5 N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to GAAP to regulatory tangible and risk-based capital at March 31,
2007 (in thousands):
Equity $102,310
Net unrealized securities loss 86
Core deposit intangible, goodwill and software (26,621)
Servicing asset (35)
--------
Tangible capital 75,740
General valuation allowance 8,623
--------
Total capital $ 84,363
========
At periodic intervals, the OTS and the FDIC routinely examine the Company's
Consolidated Financial Statements as part of their legally prescribed
oversight of the savings and loan industry. Based on their examinations, these
regulators can direct that the Company's consolidated financial statements be
adjusted in accordance with their findings. A future examination by the OTS or
the FDIC could include a review of certain transactions or other amounts
reported in the Company's 2007 consolidated financial statements. In view of
the uncertain regulatory environment in which the Company operates, the
extent, if any, to which a forthcoming regulatory examination may ultimately
result in adjustments to the 2007 consolidated financial statements cannot
presently be determined.
98
The following table summarizes the Company's common stock repurchased in each
of the last three fiscal years (dollars in thousands):
Shares Value
------ -----
2007 - -
2006 100,000 $1,228
2005 - -
18. EARNINGS PER SHARE
Basic earning 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. ESOP shares are not considered outstanding for
earnings per share purposes until they are committed to be released.
Years Ended March 31,
------------------------------------
2007 2006 2005
----------- ----------- ----------
Basic EPS computation:
Numerator-Net income $11,606,000 $ 9,738,000 $6,529,000
Denominator-Weighted average common
shares outstanding 11,312,847 11,204,479 9,633,490
Basic EPS $ 1.03 $ 0.87 $ 0.68
=========== =========== ==========
Diluted EPS computation:
Numerator-Net Income $11,606,000 $ 9,738,000 $6,529,000
Denominator-Weighted average
common shares outstanding 11,312,847 11,204,479 9,633,490
Effect of dilutive stock options 203,385 145,856 148,856
----------- ----------- ----------
Weighted average common shares
and common stock equivalents 11,516,232 11,350,335 9,782,346
Diluted EPS $ 1.01 $ 0.86 $ 0.67
=========== =========== ==========
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The Company, using available market
information and appropriate valuation methodologies, has determined the
estimated fair value amounts. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
99
The estimated fair value of financial instruments is as follows (in
thousands):
March 31,
-----------------------------------------
2007 2006
------------------ -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------ -------- -------
Assets:
Cash $ 31,423 $ 31,423 $ 31,346 $ 31,346
Investment securities available
for sale 19,267 19,267 24,022 24,022
Mortgage-backed securities held
to maturity 1,232 1,243 1,805 1,830
Mortgage-backed securities
available for sale 6,640 6,640 8,134 8,134
Loans receivable, net 682,951 680,861 623,016 620,107
Loans held for sale - - 65 65
Mortgage servicing rights 351 1,032 384 1,080
FHLB stock 7,350 7,350 7,350 7,350
Liabilities:
Demand - savings deposits 465,531 465,531 399,844 399,844
Time deposits 199,874 199,174 207,120 205,718
FHLB advances 35,050 34,982 46,100 45,846
Junior subordinated debentures 7,217 7,235 7,217 7,236
Fair value estimates, methods and assumptions are set forth below.
Cash - Fair value approximates the carrying amount.
Investments and Mortgage-Backed Securities - Fair values were based on quoted
market rates and dealer quotes.
Loans Receivable and Loans Held for Sale - Loans were priced using a
discounted cash flow method. The discount rate used was the rate currently
offered on similar products, risk adjusted for credit concerns or dissimilar
characteristics. For variable rate loans that reprice frequently and have no
significant change in credit, fair values are based on carrying values.
Mortgage Servicing Rights - The fair value of mortgage servicing rights was
determined using the Company's model, which incorporates the expected life of
the loans, estimated cost to service the loans, servicing fees received and
other factors. The Company calculates MSR's fair value by stratifying MSR's
based on the predominant risk characteristics that include the underlying
loan's interest rate, cash flows of the loan, origination date and term. Key
economic assumptions that vary due to changes in market interest rates are
used to determine the fair value of the MSR's and include expected prepayment
speeds, which impact the average life of the portfolio, annual service cost,
annual ancillary income and the discount rate used in valuing the cash flows.
At March 31, 2007, the MSR's fair value totaled $1.0 million, which was
estimated using a range of prepayment speed assumptions (The Bond Market
Association's standard prepayment) values that ranged from 116 to 558.
Federal Home Loan Bank Stock - Fair value approximates the carrying amounts.
Deposits - The fair value of time deposits with no stated maturity such as
non-interest-bearing demand deposits, interest checking, money market and
savings accounts was equal to the amount payable on demand. The fair value of
time deposits with stated maturity was based on the discounted value of
contractual cash flows. The discount rate was estimated using rates currently
available in the local market.
Federal Home Loan Bank Advances - The fair value for FHLB advances was based
on the discounted cash flow method. The discount rate was estimated using
rates currently available from the FHLB.
100
Junior Subordinated Debentures - The fair value of junior subordinated
debentures was based on the discounted cash flow method. The discount rate was
estimated using rates currently available for the junior subordinated
debentures.
Off-Balance Sheet Financial Instruments - The estimated fair value of loan
commitments approximates fees recorded associated with such commitments as of
March 31, 2007 and 2006. Since the majority of the Bank's off-balance-sheet
instruments consist of non-fee producing, variable rate commitments, the Bank
has determined they do not have a distinguishable fair value.
Other - The carrying value of other financial instruments was determined to be
a reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 2007 and 2006.
Although management was not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements on those
dates and, therefore, current estimates of fair value may differ significantly
from the amounts presented herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments.
20. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate
mortgage, commercial and consumer loans. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are conditional, and are honored for up to 45
days subject to the Company's usual terms and conditions. Collateral is not
required to support commitments.
At March 31, 2007, the Company had outstanding real estate one-to-four family
loan commitments of $445,000 and unused lines of credit on real estate
one-to-four family loans totaled $22.3 million. Other installment loan
commitments totaled $99,000 and unused lines of credit on other installment
loans totaled $1.3 million at March 31, 2007. Other real estate mortgage loan
commitments totaled $2.1 million and the undisbursed balance of other real
estate mortgage loans closed was $16.5 million at March 31, 2007. Commercial
loan commitments totaled $3.6 million and unused commercial lines of credit
totaled $55.7 million at March 31, 2007. Construction loan commitments
totaled $8.7 million and unused construction lines of credit totaled $73.4
million at March 31, 2007.
The allowance for unfunded loan commitments was $380,000 at March 31, 2007.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary. At March 31, 2007 and 2006, standby letters of credit totaled $2.3
million and $1.8 million, respectively.
Most of the Bank's business activity is with customers located in the states
of Washington and Oregon. Investments in state and municipal securities
involve government entities primarily within the state of Washington. Loans
are generally limited, by federal and state banking regulation, to 10% of the
Bank's
101
shareholder's equity, excluding accumulated other comprehensive income (loss).
As of March 31, 2007 and 2006, the Bank had no individual industry
concentrations.
At March 31, 2007, the Company had no firm commitments to sell residential
loans to FHLMC. Typically, these agreements are short term fixed rate
commitments and no material gain or loss is likely.
In connection with certain asset sales, the Bank typically makes
representation and warranties about the underlying assets conforming to
specified guidelines. If the underlying assets do not conform to the
specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss. As of March 31, 2007 loans under
warranty totaled $110.8 million, which substantially represents the unpaid
principal balance of the Bank'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 consolidated financial statements.
At March 31, 2007, scheduled maturities of certificates of deposit, FHLB
advances, junior subordinated debentures and future operating minimum lease
commitments were as follows (in thousands):
Within 1-3 4-5 Over Total
1 year Years Years 5 Years Balance
-------- ------- ------- --------- --------
Certificates of deposit $144,210 $46,884 $ 5,701 $ 3,079 $199,874
FHLB advances 35,050 - - - 35,050
Operating leases 1,698 3,059 1,587 4,348 10,692
Junior subordinated
debentures - - - 7,217 7,217
-------- ------- ------- ------- -------
Total other contractual
obligations $180,958 $49,943 $ 7,288 $14,644 $252,833
======== ======= ======= ======= ========
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.
The Bank has entered into employment contracts with certain key employees
which provide for contingent payment subject to future events.
102
21. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
March 31, 2007 AND 2006
(Dollars in thousands) 2007 2006
-----------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of
$4,530 and $1,572) $ 4,907 $ 1,651
Investment in the Bank 102,310 97,595
Other assets 1,401 629
Deferred income taxes 22 35
-------- -------
TOTAL ASSETS $108,640 $99,910
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 71 $ 50
Borrowings 7,217 7,217
Dividend payable 1,143 956
Shareholders' equity 100,209 91,687
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $108,640 $99,910
======== =======
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(Dollars in thousands) 2007 2006 2005
-------------------------------------------------------------------------
INCOME:
Dividend income from Bank $ 7,907 $15,000 $3,813
Interest on investment securities and
other short-term investments 172 73 98
Interest on loan receivable from the Bank 126 149 165
------- ------- ------
Total income 8,205 15,222 4,076
------- ------- ------
EXPENSE:
Management service fees paid to the Bank 143 143 143
Other expenses 815 360 213
------- ------- ------
Total expense 958 503 356
------- ------- ------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF THE BANK 7,247 14,719 3,720
BENEFIT FOR INCOME TAXES (231) (363) (31)
------- ------- ------
INCOME OF PARENT COMPANY 7,478 15,082 3,751
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF
THE BANK 4,128 (5,344) 2,778
------- ------- ------
NET INCOME $11,606 $ 9,738 $6,529
======= ======= ======
103
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2007, 2006 AND 2005
(Dollars in thousands) 2007 2006 2005
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,606 $ 9,738 $ 6,529
Adjustments to reconcile net income
cash provided by operating activities:
Equity in undistributed earnings (loss)
of the Bank (4,128) 5,344 (2,778)
Provision for deferred income taxes 13 (4) 78
Earned ESOP shares 274 558 520
Changes in assets and liabilities, net
of acquisition
Other assets (724) 323 (301)
Accrued expenses and other liabilities (376) (588) (159)
------- ------- -------
Net cash provided by operating
activities 6,665 15,371 3,889
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investment in subsidiary - (5,000) -
Acquisition, net of cash acquired - (18,096) -
------- ------- -------
Net cash used by investing activities - (23,096) -
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (4,289) (3,631) (2,904)
Proceeds from borrowings - 7,000 -
Repurchase of common stock - (1,228) -
Proceeds from exercise of stock options 880 314 536
------- ------- -------
Net cash provided (used) by financing
activities (3,409) 2,455 (2,368)
------- ------- -------
NET INCREASE (DECREASE) IN CASH 3,256 (5,270) 1,521
CASH, BEGINNING OF YEAR 1,651 6,921 5,400
------- ------- -------
CASH, END OF YEAR $ 4,907 $ 1,651 $ 6,921
======= ======= =======
104
RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(Dollars in thousands,
except share data) Three Months Ended
------------------------------------------------------------------------------
March 31 December 31 September 30 June 30
-------- ----------- ------------ -------
Fiscal 2007:
Interest income $15,722 $16,078 $15,302 $14,198
Interest expense 6,662 6,760 6,175 5,185
Net interest income 9,060 9,318 9,127 9,013
Provision for loan losses 100 375 600 350
Non-interest income 2,218 2,410 2,291 2,115
Non-interest expense 6,851 6,461 6,272 6,769
Income before income taxes 4,327 4,892 4,546 4,009
Provision for income taxes 1,563 1,654 1,573 1,378
------- ------- ------- -------
Net income $ 2,764 $ 3,238 $ 2,973 $ 2,631
======= ======= ======= =======
Basic earnings per share (1) $ 0.24 $ 0.29 $ 0.26 $ 0.23
======= ======= ======= =======
Diluted earnings per share $ 0.24 $ 0.28 $ 0.26 $ 0.23
======= ======= ======= =======
Fiscal 2006:
Interest income $13,078 $12,290 $11,636 $10,225
Interest expense 4,462 3,747 3,541 3,127
Net interest income 8,616 8,543 8,095 7,098
Provision for loan losses 200 400 450 450
Non-interest income 2,025 2,143 2,482 2,187
Non-interest expense 6,869 6,148 6,261 6,096
Income before income taxes 3,572 4,138 3,866 2,739
Provision for income taxes 965 1,390 1,304 918
------- ------- ------- -------
Net income $ 2,607 $ 2,748 $ 2,562 $ 1,821
======= ======= ======= =======
Basic earnings per share (1) $ 0.23 $ 0.24 $ 0.23 $ 0.17
======= ======= ======= =======
Diluted earnings per share $ 0.23 $ 0.24 $ 0.22 $ 0.16
======= ======= ======= =======
(1) Quarterly earnings per share may vary from annual earnings per share due
to rounding.
Item 9. Changes in and Disagreements With Accountants on Accounting and
-----------------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable
Item 9A. Controls and Procedures
--------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section 13(a)-
15(e) of the Securities Exchange Act of 1934) was carried out under the
supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management as of the end of the period covered by this report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Securities and Exchange
Act of 1934 is (i) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a
timely manner, and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms as of the end of the
period covered by this report.
The Company does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all
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
105
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
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 also 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 may 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.
(b) Changes in Internal Controls: There was no change in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
(c) Management's Annual Report on Internal Control Over Financial
Reporting: The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Act). As required by Rule 13a-15(c) of the Act,
management has evaluated the effectiveness of the Company's internal control
over financial reporting. Management's Annual Report on Internal Control Over
Financial Reporting appears in Item 9 of this Form 10-K.
106
RIVERVIEW BANCORP, INC
Sarbanes-Oxley 404
FY 04-05 Management's Report on Internal Controls over Financial Reporting
The management of Riverview Bancorp, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. This internal
control system has been designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation and fair
presentation of the company's published financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The management of Riverview Bancorp, Inc. has assessed the effectiveness of
the Company's internal control over financial reporting as of March 31, 2007.
To make the assessment, we used the criteria for effective internal control
over financial reporting described in Internal Control Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment, we believe that, as of March 31, 2007,
the Company's internal control over financial reporting met those criteria.
The Company's independent registered public accounting firm that audits the
Company's consolidated financial statements has issued an audit report on our
assessment of the Company's internal control over financial reporting.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Riverview Bancorp, Inc.
Vancouver, Washington
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Riverview Bancorp, Inc. & Subsidiary (the "Company") maintained effective
internal control over financial reporting as of March 31, 2007, based on
criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing,
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel
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. A company's internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of March 31, 2007, is fairly
stated, in all material respects, based on the criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2007, of the Company and our
report dated June 12, 2007, expressed an unqualified opinion on those
financial statements.
/s/Deloitte & Touche LLP
Portland, Oregon
June 12, 2007
108
Item 9B. Other Information
--------------------------
There was no information to be disclosed by the Company in a report on Form
8-K during the fourth quarter of fiscal 2007 that was not so disclosed.
109
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information contained under the section captioned "Proposal I - Election
of Directors" contained in the Company's Proxy Statement for the 2007 Annual
Meeting of Stockholders, and "Part I -- Business -- Personnel -- Executive
Officers" of this Form 10-K, is incorporated herein by reference. Reference
is made to the cover page of this Form 10-K for information regarding
compliance with Section 16(a) of the Exchange Act.
Code of Ethics
--------------
In December 2003, the Board of Directors adopted the Officer and Director Code
of Ethics. The code is applicable to each of the Company's officers,
including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional
conduct. A copy of the Code of Ethics is available on the Company's website
at www.riverviewbank.com.
Audit Committee Matters and Audit Committee Financial Expert
------------------------------------------------------------
The Company has designated Gary R. Douglass, Audit Committee Chairman as its
financial expert. Mr. Douglass is independent of management, a Certified
Public Accountant in Washington and has been practicing public accounting for
over 39 years.
Nomination Procedures
---------------------
There has been no material changes to the procedures by which shareholders may
recommend nominees to the Company's Board of Directors.
Item 11. Executive Compensation
--------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" under "Proposal I - Election of
Directors" in the Proxy Statement for the 2007 Annual Meeting of Stockholders
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required by this item is incorporated herein by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Executive Compensation" in the Proxy Statement for the 2007
Annual Meeting of Stockholders except for the information contained under the
headings "Compensation Committee Report" and "Report of the Audit Compliance
Committee."
110
Equity Compensation Plan Information. The following table summarizes share
and exercise price information about the Company's equity compensation plan as
of March 31, 2007.
Number of securities
remaining available
Number of for future issuance
securities Weighted- under equity com-
to be issued average price pensation plans
upon exercise of of outstanding excluding securities
Plan category outstanding options options reflected in column
(A)
Equity compensation
plans approved
by security
holders: (A) (B) (C)
2003 Stock Option
Plan 284,000 $12.98 148,154
1998 Stock Option
Plan 242,192 7.39 42,962
Equity compensation
plans not
approved by
security holders: - - -
------- -------
Total 526,192 191,116
======= =======
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information set forth under the section captioned "Proposal I - Election
of Directors - Transactions with Management" in the Proxy Statement for the
2007 Annual Meeting of Stockholders except for the information contained under
the headings "Compensation Committee Report" and "Report of the Audit
Compliance Committee" is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
------------------------------------------------
This information set forth under the section captioned "Independent Auditors"
in the Proxy statement for the 2007 Annual Meeting of Stockholders except for
the information contained under the headings "Compensation Committee Report"
and "Report of the Audit Compliance Committee" is incorporated herein by
reference.
111
PART IV
Item 15. Exhibits, Financial Statement Schedules
-------------------------------------------------
(a) 1. Financial Statements
See "Part II Item 8. Financial Statements and Supplementary
Data."
2. Financial Statement Schedules
All schedules are omitted because they are not required or
applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (2)
4 Form of Certificate of Common Stock of the Registrant (1)
10.1 Employment Agreement with Patrick Sheaffer (3)
10.2 Employment Agreement with Ronald A. Wysaske (3)
10.3 Severance Agreement with Karen Nelson (3)
10.4 Severance Agreement with John A. Karas (4)
10.5 Employee Severance Compensation Plan (3)
10.6 Employee Stock Ownership Plan (5)
10.7 Management Recognition and Development Plan (6)
10.8 1998 Stock Option Plan (6)
10.9 1993 Stock Option and Incentive Plan (6)
10.10 2003 Stock Option Plan (7)
10.11 Form of Incentive Stock Option Award Pursuant to 2003
Stock Option Plan (8)
10.12 Form of Non-qualified Stock Option Award Pursuant to 2003
Stock Option Plan (8)
21 Subsidiaries of Registrant
23 Consent of Independent Registered Public Accounting Firm
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification 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 Current Report on Form 8-K dated
April 20, 2005, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form 10-K for the year ended
March 31, 2002, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Form 10-K for the year ended
March 31, 1998, and incorporated herein by reference.
(6) Filed on October 23, 1998, as an exhibit to the Registrant's Registration
Statement on Form S-8, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Annual Meeting Proxy Statement
dated June 5, 2003 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005, and incorporated herein by
reference.
112
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 8, 2007
By: /s/ Patrick Sheaffer
--------------------
Patrick Sheaffer
Chairman of the Board and
Chief Executive Officer
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Patrick Sheaffer By: /s/ Ronald A. Wysaske
-------------------- ---------------------
Patrick Sheaffer Ronald A. Wysaske
Chairman of the Board and President and Chief Operating
Chief Executive Officer Officer
(Principal Executive Officer) Director
Date: June 8, 2007 Date: June 8, 2007
By: /s/ Ronald L. Dobyns By: /s/ Paul L. Runyan
-------------------- ------------------
Ronald L. Dobyns Paul L. Runyan
Senior Vice President and Vice Chairman of the Board
Chief Financial Officer and Director
(Principal Financial and
Accounting Officer)
Date: June 8, 2007 Date: June 8, 2007
By: /s/ Robert K. Leick By: /s/ Gary R. Douglass
------------------- --------------------
Robert K. Leick Gary R. Douglass
Director Director
Date: June 8, 2007 Date: June 8, 2007
By: /s/ Edward R. Geiger By: /s/ Michael D. Allen
-------------------- --------------------
Edward R. Geiger Michael D. Allen
Director Director
Date: June 8, 2007 Date: June 8, 2007
By: /s/ Jerry C. Olson
------------------
Jerry C. Olson
Director
Date: June 8, 2007
113
EXHIBIT INDEX
Exhibit 21 Subsidiaries of Registrant
Exhibit 23 Consent of Independent Registered Public Accounting Firm
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350 As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 21
Subsidiaries of the Registrant
Parent
------
Riverview Bancorp, Inc.
Percentage
Subsidiaries (a) Owned State of Incorporation
---------------- ---------- ----------------------
Riverview Community Bank 100% Federal
Riverview Services, Inc. (b) 100% Washington
Riverview Asset Management Corp. (b) 85% Washington
(a) The operation of the Registrant's wholly and majority owned subsidiaries
are included in the Registrant's Financial Statements contained in Item 8 of
this Form 10-K.
(b) This corporation is a subsidiary of Riverview Community Bank.
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Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos.
333-66049, 333-38887, and 333-109894 on Form S-8 of our reports dated June 12,
2007, relating to the consolidated financial statements of Riverview Bancorp,
Inc. & Subsidiary and management's report on the effectiveness of internal
control over financial reporting, appearing in this Annual Report on Form 10-K
of Riverview Bancorp, Inc. for the year ended March 31, 2007.
/s/Deloitte & Touche LLP
June 12, 2007
115
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements Nos.
333-66049, 333-38887 and 333-109894 on Form S-8 of Riverview Bancorp, Inc., of
our report dated June 10, 2005 relating to our audit of the consolidated
statements of income, shareholders' equity and cash flows, which appear in
this Annual Report on Form 10-K of Riverview Bancorp, Inc. for the year ended
March 31, 2005.
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
June 12, 2007
116
Exhibit 31.1
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Certification Required
By Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Patrick Sheaffer, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e)-4 and 15d-15(e)-4) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we 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 annual 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;
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 officers 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 weakness 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: June 8, 2007 /S/ Patrick Sheaffer
--------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
117
Exhibit 31.2
------------
Certification Required
By Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Ronald L. Dobyns, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e)-4 and 15d-15(e)-4) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we 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 annual 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;
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 officers 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 weakness 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: June 8, 2007 /S/ Ronald L. Dobyns
--------------------
Ronald L. Dobyns
Chief Financial Officer
118
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned herby certifies in his capacity as an officer of Riverview
Bancorp, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley act of 2002 and in connection with this
Annual Report on Form 10-K that:
1. the report fully complies with the requirements of sections 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all material
respects, the company's financial condition and results of operations as
of the dates and for the periods presented in the financial statements
included in such report.
/S/ Patrick Sheaffer /S/ Ronald L. Dobyns
-------------------- --------------------
Patrick Sheaffer Ronald L. Dobyns
Chief Executive Officer Chief Financial Officer
Dated: June 8, 2007
119