SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of - ------- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File Number: 0-22957 RIVERVIEW BANCORP, INC. (Exact name of registrant as specified in its charter) Washington 91-1838969 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 900 Washington, Suite 900 Vancouver, WA 98660 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (360)693-6650 Indicate by check whether the registrant: (1)has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ---- Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value---4,727,640 shares as of October 15, 2003.
Form 10-Q RIVERVIEW BANCORP, INC. AND SUBSIDIARY INDEX Part I. Financial Information Page --------------------- ---- Item 1: Financial Statements (Unaudited) Consolidated Balance Sheets as of September 30, 2003 and March 31, 2003 1 Consolidated Statements of Income: Three and Six Months Ended September 30, 2003 and 2002 2 Consolidated Statements of Shareholders' Equity for the Year Ended March 31, 2003 and the Six Months Ended September 30, 2003 3 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2003 and 2002 4 Notes to Consolidated Financial Statements 5-16 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 16-29 Item 3: Quantitative and Qualitative Disclosures About Market Risk 30 Item 4: Controls and Procedures 30 Part II. Other Information 31 SIGNATURES 33
Part I. Financial Information Item I. Financial statements (Unaudited) RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2003 AND MARCH 31, 2003 SEPTEMBER 30, MARCH 31, (In thousands, except share data) (Unaudited) 2003 2003 - ------------------------------------------------------------------------------ ASSETS Cash (including interest-earning accounts of $57,641 and $42,464) $ 84,597 $ 60,858 Loans held for sale 1,606 1,501 Investment securities available for sale, at fair value (amortized cost of $31,290 and $20,265) 32,008 20,426 Mortgage-backed securities held to maturity, at amortized cost (fair value of $2,863 and $3,403) 2,799 3,301 Mortgage-backed securities available for sale, at fair value (amortized cost of $8,375 and $12,669) 8,609 13,069 Loans receivable (net of allowance for loan losses of $5,205 and $2,739) 369,668 300,310 Real estate owned 1,077 425 Prepaid expenses and other assets 779 854 Accrued interest receivable 1,856 1,492 Federal Home Loan Bank stock, at cost 5,927 5,646 Premises and equipment, net 10,392 9,703 Deferred income taxes, net 2,908 1,321 Mortgage servicing rights, net 718 629 Goodwill 9,204 - Core deposit intangible, net 999 369 --------- --------- TOTAL ASSETS $ 533,147 $ 419,904 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposit accounts $ 425,498 $ 320,742 Accrued expenses and other liabilities 4,121 4,364 Advance payments by borrowers for taxes and insurance 295 287 Federal Home Loan Bank advances 40,000 40,000 --------- --------- Total liabilities 469,914 365,393 COMMITMENTS AND CONTINGENCIES (NOTE 14) SHAREHOLDERS' EQUITY: Serial preferred stock, $.01 par value; 250,000 authorized, issued and outstanding, none - - Common stock, $.01 par value; 50,000,000 authorized September 30, 2003 - 4,954,479 issued, 4,727,640 outstanding March 31, 2003 - 4,585,543 issued, 4,358,704 outstanding 50 46 Additional paid-in capital 39,725 33,525 Retained earnings 24,531 22,389 Unearned shares issued to employee stock ownership trust (1,701) (1,804) Unearned shares held by the management recognition and development plan - (15) Accumulated other comprehensive income 628 370 --------- --------- Total shareholders' equity 63,233 54,511 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 533,147 $ 419,904 ========= ========= See notes to consolidated financial statements. 1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended (In thousands, except share data) September 30, September 30, (Unaudited) 2003 2002 2003 2002 - ------------------------------------------------------------------------------ INTEREST INCOME: Interest and fees on loans receivable $ 6,727 $ 6,060 $ 12,396 $ 11,973 Interest on investment securities 88 30 155 58 Interest on mortgage-backed securities 154 367 335 816 Other interest and dividends 258 353 472 743 ------- ------- -------- -------- Total interest income 7,227 6,810 13,358 13,590 ------- ------- -------- -------- INTEREST EXPENSE: Interest on deposits 1,325 1,461 2,334 3,055 Interest on borrowings 497 646 992 1,776 ------- ------- -------- -------- Total interest expense 1,822 2,107 3,326 4,831 ------- ------- -------- -------- Net interest income 5,405 4,703 10,032 8,759 Less provision for loan losses - 82 70 327 ------- ------- -------- -------- Net interest income after provision for loan losses 5,405 4,621 9,962 8,432 ------- ------- -------- -------- NON-INTEREST INCOME: Fees and service charges 1,245 1,034 2,418 1,962 Asset management services 214 178 437 370 Gain on sale of loans held for sale 287 265 591 614 Gain on sale of other real estate owned 45 9 48 29 Loan servicing income (expense) 259 (241) 151 (341) Other (1) 19 20 40 ------- ------- -------- -------- Total non-interest income 2,049 1,264 3,665 2,674 ------- ------- -------- -------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,500 2,035 4,749 4,069 Occupancy and depreciation 769 642 1,355 1,234 Data processing 238 207 442 417 Amortization of core deposit intangible 107 81 189 163 Marketing expense 244 221 513 410 FDIC insurance premium 13 11 25 22 State and local taxes 113 101 207 191 Telecommunications 73 54 121 98 Professional fees 105 87 194 205 Other 416 278 718 600 ------- ------- -------- -------- Total non-interest expense 4,578 3,717 8,513 7,409 ------- ------- -------- -------- INCOME BEFORE FEDERAL INCOME TAXES 2,876 2,168 5,114 3,697 PROVISION FOR FEDERAL INCOME TAXES 958 674 1,696 1,131 ------- ------- -------- -------- NET INCOME $ 1,918 $ 1,494 $ 3,418 $ 2,566 ======= ======= ======== ======== Earnings per common share: Basic $ 0.41 $ 0.34 $ 0.76 $ 0.58 Diluted 0.41 0.34 0.75 0.58 Weighted average number of shares outstanding: Basic 4,653,314 4,345,985 4,513,117 4,392,947 Diluted 4,728,250 4,414,320 4,585,921 4,450,357 Cash dividends per share $ 0.140 $ 0.125 $ 0.280 $ 0.250 See notes to consolidated financial statements. 2
<TABLE> RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED MARCH 31, 2003 AND THE SIX MONTHS ENDED SEPTEMBER 30, 2003 (Unaudited) Unearned Shares Accum- Issued to ulated Employee Other Common Addi- Stock Unearned Compre- Stock tional Owner- Shares hensive (In thousands, except ---------------- Paid-in Retained ship Issued to Income per share data) Shares Amount Capital Earnings Trust MRDP (Loss) Total - --------------------------------------------------------------------------------------------------------- <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, April 1, 2002 4,458,456 $ 47 $ 35,725 $ 20,208 $ (2,010) $ (218) $ (75) $ 53,677 Cash dividends - - - (2,178) - - - (2,178) Exercise of stock options 46,577 - 417 - - - - 417 Stock repurchased and retired (196,100) (1) (2,881) - - - - (2,882) Earned ESOP shares 24,633 - 166 - 206 - - 372 Tax benefit associated with MRDP - - 98 - - - - 98 Earned MRDP shares 25,138 - - - - 203 - 203 --------- ---- -------- -------- -------- -------- ------- -------- 4,358,704 46 33,525 18,030 (1,804) (15) (75) 49,707 Comprehensive income Net Income - - - 4,359 - - - 4,359 Other Comprehensive Income: Unrealized holding gain on securities of $966 (net of $498 tax effect) less re- classification adjustment for net losses included in net income of $1,411 ( net of $727 tax effect) - - - - - - 445 445 Total comprehensive income - - - - - - - 4,804 --------- ---- -------- -------- -------- -------- ------- -------- Balance, March 31, 2003 4,358,704 46 33,525 22,389 (1,804) (15) 370 54,511 Cash dividends - - - (1,276) - - - (1,276) Exercise of stock options 19,781 - 220 - - - - 220 Stock repurchased and retired (81,500) (1) (1,509) (1,510) Stock issued in connection with acquisition (Note 15) 430,655 5 7,343 7,348 Earned ESOP shares - - 121 - 103 - - 224 Tax benefit associated with MRDP 25 25 Earned MRDP shares - - - - - 15 - 15 --------- ---- -------- -------- -------- -------- ------- -------- 4,727,640 50 39,725 21,113 (1,701) - 370 59,557 Comprehensive income Net Income - - - 3,418 - - - 3,418 Other Comprehensive Loss: Unrealized holding gains on securities of $258 (net of $133 tax effect) - - - - - - 258 258 Total comprehensive income - - - - - - - 3,676 --------- ---- -------- -------- -------- -------- ------- -------- Balance, September 30, 2003 4,727,640 $ 50 $ 39,725 $ 24,531 $ (1,701) $ - $ 628 $ 63,233 ========= ==== ======== ======== ======== ======== ======= ======== See notes to consolidated financial statements. 3
</TABLE> RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOES FOR THE SIX MONTHS ENDED SEPTEMBER 30, (In thousands) (Unaudited) 2003 2002 - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,418 $ 2,566 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,091 830 Mortgage servicing rights impairment (303) 383 Provision for losses on loans 70 327 Origination of loans held for sale (34,511) (18,541) Proceeds from sales of loans held for sale 34,485 19,803 Provision (credit) for deferred income taxes 35 (57) Noncash expense related to ESOP benefit 224 180 Noncash expense related to MRDP benefit 16 187 Decrease in deferred loan origination fees, net of amortization 460 267 Federal Home Loan Bank stock dividend (123) (161) Net gain on sale of loans, real estate owned and premises and equipment (503) (611) Changes in assets and liabilities: Decrease in prepaid expenses and other assets 132 224 Decrease in accrued interest receivable 213 263 Decrease in accrued expenses and other liabilities (1,313) (775) --------- --------- Net cash provided by operating activities 3,391 4,885 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations (139,348) (120,678) Principal repayments on loans 155,070 112,277 Principal repayments on mortgage-backed securities held to maturity 501 562 Principal repayments on mortgage-backed securities available for sale 4,778 11,133 Purchase of investment securities available for sale (5,000) (5,000) Proceeds from call or maturity of investment securities available for sale 250 - Purchase of premises, equipment and other (250) (103) Acquisition, net of cash received 7,215 - Purchase of first mortgage or improvement to REO (113) - Proceeds from sale of real estate 43 1,173 --------- --------- Net cash provided by (used in) investing activities 23,146 (636) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts (357) 38,157 Dividends paid (1,159) (1,044) Repurchase of common stock (1,510) (2,599) Repayment of Federal Home Loan Bank advances - (29,500) Net increase in advance payments by borrowers 8 24 Proceeds from exercise of stock options 220 31 --------- --------- Net cash (used in) provided by financing activities (2,798) 5,069 --------- --------- NET INCREASE IN CASH 23,739 9,318 CASH, BEGINNING OF PERIOD 60,858 22,492 --------- --------- CASH, END OF PERIOD $ 84,597 $ 31,810 ========= ========= SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $ 3,392 $ 5,033 Income taxes 1,500 1,212 NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of loans to real estate owned $ 308 $ 373 Dividends declared and accrued in other liabilities 663 539 Fair value adjustment to securities available for sale 391 308 Income tax effect related to fair value adjustment (133) (105) Common stock issued upon business combination 7,348 See notes to consolidated financial statements. 4
RIVERVIEW BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) (1) Organization and Basis of Presentation -------------------------------------- The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments that are, in the opinion of management, necessary for a fair presentation of the interim unaudited financial statements have been included. All such adjustments are of a normal recurring nature. The unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Riverview Bancorp, Inc. 2003 Annual Report on Form 10-K. The results of operations for the three and six months ended September 30, 2003 are not necessarily indicative of the results which may be expected for the entire fiscal year. (2) Principles of Consolidation --------------------------- The accompanying unaudited consolidated financial statements of Riverview Bancorp, Inc. and Subsidiary (the "Company") include all the accounts of Riverview Bancorp, Inc. and the consolidated accounts of its wholly-owned subsidiary, Riverview Community Bank (the "Community Bank"), and the Community Bank's majority-owned subsidiary, Riverview Asset Management Corporation ("RAMCORP.") and wholly-owned subsidiary Riverview Services, Inc. All references to the Company herein include the Community Bank where applicable. All inter-company balances and transactions have been eliminated upon consolidation. (3) Stock Based Compensation ------------------------ In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123, was issued. This Statement amends Financial Accounting Standards Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective March 31, 2003, and in accordance with Statement No. 148, the Company elected to continue to account for stock-based awards under the guidance of Accounting Principles Board ("APB") Opinion No. 25. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company's net income per share would have been reduced to the pro forma amounts indicated below: 5
Three Months Ended September 30, ------------------------- 2003 2002 ----------- ----------- Net income: As reported $ 1,918,000 $ 1,494,000 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (54,000) (45,OOO) ----------- ----------- Pro forma $ 1,864,000 $ 1,449,000 =========== =========== Earnings per common share - basic: Earnings per common share - basic $ 0.41 $ 0.34 Pro forma 0.40 0.33 Earnings per common share - fully diluted: As reported 0.41 0.34 Pro forma 0.39 0.33 Six Months Ended September 30, ------------------------- 2003 2002 ----------- ----------- Net income: As reported $ 3,418,000 $ 2,566,000 Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (103,000) (90,000) ----------- ----------- Pro forma $ 3,315,000 $ 2,476,000 =========== =========== Earnings per common share - basic: Earnings per common share - basic $ 0.76 $ 0.58 Pro forma 0.72 0.56 Earnings per common share - fully diluted: As reported 0.75 0.58 Pro forma 0.73 0.56 (4) Comprehensive Income -------------------- Comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company 6
is comprised of unrealized gains and losses on securities available for sale adjusted for gains and losses on securities available for sale included in non-interest income. For the three months and six months ended September 30, 2003, the Company's total comprehensive income was $2.7 million and $3.7 million, respectively, compared to $1.6 million and $2.8 million for the three and nine months ended September 30, 2002, respectively. Total comprehensive income for the three and six months ended September 30, 2003 is comprised of net income of $1.9 million and $3.4 million and other comprehensive gains of $802,000 and $258,000, net of tax effect, respectively. Other comprehensive income for the three months and six months ended September 30, 2003 consists of unrealized securities gain of $802,000 and $258,000, net of tax effect. Total comprehensive income for the three and six months ended September 30, 2002 is comprised of net income of $1.5 million and $2.6 million and other comprehensive income of $77,000 and $203,000, net of tax effect, respectively. Other comprehensive income for the three months and six months ended September 30, 2002 consists of unrealized securities gains of $77,000 and $203,000, net of tax effect. (5) Earnings Per Share ------------------ Basic earnings per share ("EPS") is computed by dividing net income applicable to common stock by the weighted average number of 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 and awarded but not released Management Recognition and Development Plan ("MRDP") shares. Employee Stock Ownership Plan ("ESOP") shares are not considered outstanding for EPS purposes until they are committed to be released. Three Months Ended September 30, ----------------------------- 2003 2002 ----------- ----------- Basic EPS computation: Numerator-Net Income $ 1,918,000 $ 1,494,000 Denominator-Weighted average common shares outstanding 4,653,314 4,345,985 Basic EPS $ 0. 41 $ 0. 34 =========== =========== Diluted EPS computation: Numerator-Net Income $ 1,918,000 $ 1,494,000 Denominator-Weighted average common shares outstanding 4,653,314 4,345,985 Effect of dilutive stock options 71,671 51,744 Effect of dilutive MRDP 3,265 16,591 ----------- ----------- Weighted average common shares and common stock equivalents 4,728,250 4,414,320 Diluted EPS $ 0.41 $ 0.34 =========== =========== 7
Six Months Ended September 30, ----------------------------- 2003 2002 ----------- ----------- Basic EPS computation: Numerator-Net Income $ 3,418,000 $ 2,566,000 Denominator-Weighted average common shares outstanding 4,513,117 4,392,947 Basic EPS $ 0. 76 $ 0. 58 =========== =========== Diluted EPS computation: Numerator-Net Income $ 3,418,000 $ 2,566,000 Denominator-Weighted average common shares outstanding 4,513,117 4,392,947 Effect of dilutive stock options 69,675 43,087 Effect of dilutive MRDP 3,129 14,323 ----------- ----------- Weighted average common shares and common stock equivalents 4,585,921 4,450,357 Diluted EPS $ 0.75 $ 0.58 =========== =========== (6) Investment Securities --------------------- There were no sales of investment securities classified as held to maturity during the periods ended September 30, 2003, and 2002. The amortized cost and approximate fair value of investment securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- September 30, 2003 Trust preferred securities $ 5,000 $ 6 $ - $ 5,006 U.S. Treasury securities 4,025 4 - 4,029 Agency securities 7,002 15 - 7,017 Equity securities 12,700 500 - 13,200 School district bonds 2,563 193 - 2,756 -------- ----- ----- -------- $ 31,290 $ 718 $ - $ 32,008 ======== ===== ===== ======== March 31, 2003 Trust Preferred $ 5,000 $ - $ (25) $ 4,975 Equity securities 12,700 - - 12,700 School district bonds 2,565 186 - 2,751 -------- ----- ----- -------- $ 20,265 $ 186 $ (25) $ 20,426 ======== ===== ===== ======== Investment securities with an amortized cost of $15.0 million and $12.7 million and a fair value of $15.5 million and $12.7 million at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for advances at the Federal Home Loan Bank. Investment securities with an amortized cost of $500,000 and $753,000, and a fair value of $505,000 and $760,000 at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for government public funds held by the Community Bank. 8
The contractual maturities of securities available for sale are as follows (in thousands): Amortized Estimated September 30, 2003 Cost Fair Value --------- ---------- Due in one year or less $ 4,025 $ 4,029 Due after one year through five years 7,910 7,997 Due after five years through ten years 1,038 1,130 Due after ten years 18,317 18,852 -------- -------- $ 31,290 $ 32,008 ======== ======== (7) Mortgage-backed Securities -------------------------- Mortgage-backed securities held to maturity consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- September 30, 2003 REMICs $ 1,802 $ 40 $ - $ 1,842 FHLMC mortgage-backed securities 416 8 - 424 FNMA mortgage-backed securities 581 16 - 597 ------- ----- ----- ------- $ 2,799 $ 64 $ - $ 2,863 ======= ===== ===== ======= March 31, 2003 REMICs $ 1,803 $ 57 $ - $ 1,860 FHLMC mortgage-backed securities 589 13 - 602 FNMA mortgage-backed securities 909 32 - 941 ------- ----- ----- ------- $ 3,301 $ 102 $ - $ 3,403 ======= ===== ===== ======= The contractual maturities of mortgage-backed securities classified as held to maturity are as follows (in thousands): Amortized Estimated September 30, 2003 Cost Fair Value --------- ---------- Due in one or less $ 184 $ 188 Due after one year through five years 62 65 Due after five years through ten years 9 10 Due after ten years 2,544 2,600 ------- ------- $ 2,799 $ 2,863 ======= ======= Mortgage-backed securities held to maturity with an amortized cost of $2.0 million and $2.2 million and a fair value of $2.0 million and $2.3 million at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for governmental public funds held by the Community Bank. Mortgage-backed securities held to maturity with an amortized cost of $358,000 and $385,000 and a fair value of $367,000 and $399,000 at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for treasury tax and loan funds held by the Community Bank. The real estate mortgage investment conduits ("REMICs") consist of Federal Home Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and privately issued securities. 9
Expected maturities of mortgage-backed securities held to maturity will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. There were no sales of mortgage-backed securities held to maturity during the periods ended September 30, 2003 and 2002. Mortgage-backed securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- September 30, 2003 REMICs $ 4,046 $ 95 $ - $ 4,141 FHLMC mortgage-backed securities 3,784 124 - 3,908 FNMA mortgage-backed securities 545 15 - 560 -------- ----- ------ -------- $ 8,375 $ 234 $ - $ 8,609 ======== ===== ====== ======== March 31, 2003 REMICs $ 6,327 $ 100 $ (6) $ 6,421 FHLMC mortgage-backed securities 5,811 286 - 6,097 FNMA mortgage-backed securities 531 20 - 551 -------- ----- ------ -------- $ 12,669 $ 406 $ (6) $ 13,069 ======== ===== ====== ======== The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands): Amortized Estimated September 30, 2003 Cost Fair Value --------- ---------- Due in one year or less $ 78 $ 79 Due after one year through five years 4,369 4,503 Due after ten years 3,928 4,027 $ 8,375 $ 8,609 Expected maturities of mortgage-backed securities available for sale will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Mortgage-backed securities with an amortized cost of $7.7 million and $11.9 million and a fair value of $7.9 million and $12.2 million at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for advances at the Federal Home Loan Bank. Mortgage-backed securities with an amortized cost of $274,000 and a fair value of $283,000 at September 30, 2003 were pledged as collateral for governmental public funds held by the Community Bank. Mortgage-backed securities with an amortized cost of $151,000 and $316,000 and a fair value of $159,000 and $327,000 at September 30, 2003 and March 31, 2003, respectively, were pledged as collateral for treasury tax and loan funds held by the Community Bank. (8) Loans Receivable ---------------- Loans receivable consisted of the following (in thousands): 10
September 30, March 31, 2003 2003 --------- --------- Residential: One- to- four family $ 49,838 $ 58,498 Multi-family 5,615 6,313 Construction: One- to- four family 71,210 70,397 Multi-family 2,100 2,100 Commercial real estate 2,075 4,531 Commercial 62,849 34,239 Consumer: Secured 28,726 23,458 Unsecured 1,960 1,334 Land 30,891 34,630 Commercial real estate 155,000 101,672 --------- --------- 410,264 337,172 Less: Undisbursed portion of loans 32,299 31,222 Deferred loan fees 3,092 2,901 Allowance for loan losses 5,205 2,739 --------- --------- Loans receivable, net $ 369,668 $ 300,310 ========= ========= (9) Allowance for Loan Losses ------------------------- A reconciliation of the allowances for loan losses is as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, ------------------ ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Beginning balance $ 2,793 $ 2,748 $ 2,739 $ 2,537 Provision for losses - 82 70 327 Charge-offs (227) (147) (242) (184) Recoveries 38 6 38 9 Acquisition 2,639 - 2,639 - Net change in allowance for unfunded loan commitments and lines of credit (38) - (39) - -------- -------- -------- -------- Ending balance $ 5,205 $ 2,689 $ 5,205 $ 2,689 ======== ======== ======== ======== At September 30, 2003 and March 31, 2003, the Company's recorded investment in loans for which impairment has been recognized under the guidance of Statement of Financial Accounting Standards ("SFAS") No. 114 and SFAS No. 118 was $1.2 million and $323,000, respectively. The allowance for loan losses in excess of specific reserves is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's analysis of the allowance. The average investment in impaired loans was approximately $716,000, $1.7 million and $323,000 during the six months ended September 30, 2003, September 30, 2002 and the year ended March 31, 2003 respectively. (10) Loans held for Sale ------------------- The Company identifies loans held for sale at the time of origination and they are carried at the lower of aggregate cost or net realizable value. Market values are derived from available market quotations for comparable pools of 11
mortgage loans. Adjustments for unrealized losses, if any, are charged to income. (11) Intangible Assets ----------------- The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on April 1, 2002. SFAS No. 142 provides that goodwill is no longer amortized and the value of an identifiable intangible asset must be amortized over its useful life, unless the asset is determined to have an indefinite life. During the quarter ended September 30, 2003, the Company's purchase of Today's Bancorp, Inc. ("Today's Bancorp") resulted in the recording of $9.2 million of goodwill (see note 16 for further details). The Company will review this balance on an annual basis for impairment. The annual test for impairment will be a two-step process. The first step will be to compare the current fair value of Today's with its fair value on the purchase date. If the current fair value exceeds the purchase fair value, goodwill will not be considered to be impaired and the test is completed. If the purchase fair value is greater than the current fair value, the implied value of the goodwill will be analyzed against the carrying value of the goodwill. Any noted impairment losses will be taken at that time. The Company also has identifiable intangible assets of core deposit intangible and mortgage servicing rights ("MSR") that will continue to be amortized. As part of the Today's acquisition, core deposit intangibles increased $820,0000. Intangible asset balances (excluding MSR) consisted of the following (in thousands): September 30, 2003 ------------------------------------ Carrying Accumulated Amount Amortization Net --------- ------------- ----- Core deposit intangible $ 4,088 $ 3,089 $ 999 ======= ======= ===== March 31, 2003 ------------------------------------ Carrying Accumulated Amount Amortization Net --------- ------------- ----- Core deposit intangible $ 3,269 $ 2,900 $ 369 ======= ======= ===== Amortization Expense Quarter Ended September 30, 2003 2002 ---------------------------- Core deposit intangible $ 107 $ 81 ===== ==== Amortization Expense Six Months Ended September 30, 2003 2002 -------------------------- Core deposit intangible $ 189 $ 163 ===== ===== 12
The value of the MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in the servicing portfolio are not realized if the loan pays off earlier than anticipated. If loans payoff earlier than anticipated there is no economic benefit because loans in our servicing portfolio do not contain penalty provisions for early payoff. An estimated fair value of MSR is determined quarterly using a discounted cash flow model. The model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, loan maturity and interest rate. MSR impairment is recorded in the amount that the estimated fair value is less than the MSR carrying value. Changes in balance of MSR, net of valuation, were as follows (in thousands): Three Months Ended September 30, 2003 2002 -------------------------------- Beginning balance $ 481 $ 867 Additions 60 95 Amortization (165) (67) Impairment adjustment 342 (259) ------ ------ Total $ 718 $ 636 ====== ====== Allowance at beginning of period $ 452 $ 217 Provision for impairment (342) 259 ------ ------ Allowance at end of period $ 110 $ 476 ====== ====== Six Months Ended September 30, 2003 2002 ------------------------------- Beginning balance $ 629 $ 912 Additions 131 234 Amortization (345) (127) Impairment adjustment 303 (383) ------ ------ Total $ 718 $ 636 ====== ====== Allowance at beginning of period $ 413 $ 93 Provision for impairment (303) 383 ------ ------ Allowance at end of period $ 110 $ 476 ====== ====== Amortization expense for the net carrying amount of intangible assets at September 30, 2003 is estimated to be as follows (in thousands): Fiscal year ---------------------- 2004 $ 399 2005 370 2006 227 2007 190 2008 171 Beyond 5 years 360 ------ Total $1,717 ====== 13
(12) Borrowings ---------- Borrowings are summarized as follows (in thousands): September 30, March 31, 2003 2003 ------------ -------- Federal Home Loan Bank advances $40,000 $40,000 ======= ======= Weighted average interest rate: 4.87% 5.53% ==== ==== Borrowings have the following maturities at September 30, 2003 (in thousands): Fiscal Year ----------- 2003 $ - 2004 - 2005 - 2006 15,000 2007 20,000 2008 5,000 -------- $ 40,000 ======== (13) Shareholders' Equity -------------------- Repurchase of Common stock In September 2002, the Company announced a stock repurchase of up to 5%, or 214,000 shares, of its outstanding common stock. At September 30, 2003, 81,500 shares had been repurchased at an average cost of $18.53 per share. In July 2001, the Company received regulatory approval to repurchase up to 10% or 465,504 shares of its outstanding shares at June 30, 2001. At September 30, 2003, 465,504 shares had been repurchased at an average cost of $12.93 per share. Because the Company is a Washington corporation and the State of Washington treats all treasury stock as retired upon purchase, all purchases of treasury stock reduce stock issued and the cost of treasury stock acquired is charged to par value and paid-in capital. (14) Recently Issued Accounting Pronouncements ----------------------------------------- In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this standard has not had a significant effect on the Company's reported equity. 14
(15) Commitments and Contingencies ----------------------------- The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, consumer and commercial loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those 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 September 30, 2003, the Company had commitments to originate fixed ate mortgages of $2.7 million at interest rates ranging from 4.250% to 7.375%. At September 30, 2003 adjustable rate mortgage loan commitments were $2.6 million at an average interest rate of 6.183%. The undisbursed balance of mortgage loans closed was $32.3 million at September 30, 2003. Consumer loan commitments totaled $1.2 million and unused lines of consumer credit totaled $17.5 million at September 30, 2003. Commercial real estate loan commitments totaled $11.3 million and unused lines of commercial real estate credit totaled $16.9 million at September 30, 2003. Commercial loan commitments totaled $440,000 and unused commercial lines of credit totaled $26.4 million at September 30, 2003. The allowance for unfunded commitments was $213,972 at September 30, 003. At September 30, 2003, the Company had firm commitments to sell $1.6 million of residential loans to FHLMC. These agreements are short term fixed rate commitments and no material gain or loss is likely. In connection with certain asset sales, the Community Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Community Bank may have an obligation to repurchase the assets or indemnify the purchaser against loss. As of September 30, 2003, loans under warranty totaled $121.6 million, which substantially represents the unpaid principal balance of the Community Bank's loans serviced for others portfolio. The Community Bank believes that the potential for loss under these arrangements is remote. Accordingly, no contingent liability is recorded in the financial statements. The Company is a party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect, if any, on the Company's financial position, results of operations, or liquidity. (16) ACQUISITION ----------- On July 18, 2003 the Company completed the acquisition of Today's Bancorp. Each share of Today's Bancorp was exchanged for 0.826 shares of the Company's 15
common stock, or $13.64 in cash, or combination thereof resulting in the issuance of 430,655 new shares. The acquisition was accounted for using the purchase method of accounting and, accordingly, the assets and liabilities of Today's Bancorp were recorded at their respective fair value. Goodwill, the excess of the purchase price over the net fair value of the assets and liabilities acquired, was recorded at $9.2 million. The merger of the two community-oriented institutions will give the combined company a stronger presence as a business and retail commercial bank in the growing Vancouver and Clark County market area. The following unaudited pro forma financials for the three and six months ended September 30, 2003 and 2002 assumes that the Today's Bancorp acquisition occurred as of March 31, 2002, after giving effect to certain adjustments. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the Today's Bancorp acquisition been consummated on the date indicated. Pro Forma Financial Information for the Three Months Ended September 30, 2003 2002 -------------------------------- (in thousands) Net Interest Income $ 5,594 $ 5,694 Non-interest Income 2,055 1,320 Non-interest Expense 4,888 4,542 ------- ------- Net Income $ 2,148 $ 1,552 ======= ======= Pro Forma Financial Information for the Six Months Ended September 30, 2003 2002 ------------------------------ (in thousands) Net Interest Income $ 11,157 $ 11,189 Non-interest Income 3,763 2,777 Non-interest Expense 9,822 8,966 Net Income $ 3,636 $ 3,068 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Clause. This report on Form 10-Q contains certain "forward-looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with respect to forward-looking statements. These forward-looking statements, which are included in Management's Discussion and Analysis, describe future plans or strategies and include the Company's expectations of future financial results. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward-looking statements. The Company's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the economic climate in the Company's market area and the country as a whole, loan delinquency rates, the Company's ability to integrate the acquisition of Today's Bancorp, Inc. and efficiently manage expenses, and changes in federal and state regulation and other risks detailed in the Company's reports filed 16
with the Securities and Exchange Commission. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Critical Accounting Policies The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's consolidated financial statements. The Company has identified three policies that due to judgments, estimates and assumptions inherent in those policies are critical to an understanding of the Company's consolidated financial statements. These policies relate to the methodology for the determination of the allowance for loan losses, the valuation of mortgage servicing rights and the impairment of investments. These policies and the judgments, estimates and assumptions are described in greater detail in Management's Discussion and Analysis and in Note 1, Note 6 and Note 8 to the Consolidated Financial Statements included in the Company's 2003 Annual Report on Form 10-K. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company's consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition. The allowance for loan losses is maintained at a level sufficient to provide for 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 and anticipated economic conditions, and detailed analysis of individual loans for which full collectibility may not be assured. The detailed analysis includes techniques to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The appropriate allowance level is estimated based upon factors and trends identified by management at the time the consolidated financial statements are prepared. The Company stratifies its MSRs based on the predominant characteristics of the underlying financial assets. An estimated fair value of MSRs is determined quarterly using a discounted cash flow model. The model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, loan maturity and interest rate. The effect of changes in market interest rates on estimated rates of loan prepayments represents the predominant risk characteristic underlying the MSRs portfolio. The Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, the determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on the risk. Thus, any measurement of MSRs fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Future expected net cash flows from servicing a loan in the servicing portfolio would not be realized if the loan pays off earlier than anticipated. 17
Moreover, because most loans within the servicing portfolio do not contain penalty provisions for early payoff, the Company will not receive a corresponding economic benefit if the loan pays off earlier than expected. MSRs are the discounted present value of the future net cash flows projected from the servicing portfolio. Accordingly, prepayment risk subjects our MSRs to impairment. MSRs impairment is recorded in the amount that the estimated fair value is less than the MSRs carrying value. The Company's determination of impairment for various types of investments accounted for in accordance with SFAS No. 115 is predicated on the notion of other-than-temporary. The key indicator that an investment may be impaired is that the fair value of the investment is less than its carrying value. Each reporting period the Company reviews those investments that the fair value is less than their 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 to its carrying value. If the fair value of the investment is less than the carrying value of the investment, the investment is considered impaired and a determination must be made as to whether the impairment is other-than-temporary. Securities held to maturity are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method. If the cost basis of these securities is determined to be other-than-temporary impaired, the amount of the impairment is charged to operations. Securities available for sale are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to contractual maturity. Unrealized holding gains and losses, or valuation allowances established for net unrealized losses, are excluded from earnings and reported as a separate component of shareholders' equity as accumulated other comprehensive income, net of income taxes, unless the security is deemed other-than-temporary impaired. If the security is determined to be other-than-temporary impaired, the amount of the impairment is charged to operations. The Company'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) our intent and ability to retain the investment for a period of time. In situations in which the security's fair value is below amortized cost but it continues to be probable that all contractual terms of the security will be satisfied, and that the decline is due solely to changes in interest rates (not because of increased credit risk), and the Company asserts that it has positive intent and ability 18
to hold that security to maturity, no other-than-temporary impairment is recognized. General The Company is a progressive community-oriented, financial institution, which emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington as its primary market area. The Company is engaged primarily in the business of attracting deposits from the general public and using such funds in its primary market area to originate mortgage loans secured by one- to four- family residential real estate, one- to four- family residential real estate construction, commercial real estate and non-mortgage loans providing financing for business ("commercial") and consumer purposes. Commercial real estate loans and commercial loans have grown from 5.22% and 0.93% of the loan portfolio, respectively, in fiscal year 1998 to 38.29% and 15.32% respectively, at September 30, 2003. During the current quarter, the Company completed the acquisition of Today's Bancorp by merger that had been announced on February 6, 2003. Total gross loans acquired in the acquisition were $87.3 million, consisting of $44.4 million of commercial real estate loans, $35.0 million of commercial loans and $7.9 million of consumer loans. The Company continues to change the composition of its loan portfolio and deposit base as part of its migration to commercial banking, subject to market conditions. The consolidation among financial institutions in the Company's primary market area has created a significant gap in the ability of the resulting financial institutions to serve customers. The Company's strategic plan includes targeting this customer base, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will emphasize controlled growth and the diversification of its loan portfolio to include a higher portion of commercial and commercial real estate loans. A related goal is to increase the proportion of personal and business checking account deposits used to fund these new loans. Significant portions of these new loan products carry adjustable rates, higher yields, or shorter terms and higher credit risk than the traditional fixed-rate mortgages. The strategic plan stresses increased emphasis on non-interest income, including increased fees for asset management, mortgage banking and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk, and provide a more complete range of financial services to customers and the local communities the Company serves. The Company is well positioned to attract new customers and to increase its market share given that the administrative headquarters and nine of its thirteen branches are located in Clark County, the fastest growing county in the State of Washington according to the U.S Census Bureau. In order to support its strategy of growth, without compromising its local, personal service to its customers and a commitment to asset quality, the Company has made significant investments in experienced branch, lending, asset management and support personnel and has incurred significant costs in facility expansion. Control of non-interest expenses remains a high priority for the management of the Company. The Company continuously reviews new products and services to give its customers more financial options. With an emphasis on growth of non-interest income and control of non-interest expense, all new technology and services are reviewed for business development and cost saving purposes. The Company continues to experience growth in the customer usage of the online banking 19
services and its check image services to its customers. Customers are able to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill-paying. This online service has also enhanced the delivery of cash management services to commercial customers. The internet banking branch web site is www.riverviewbank.com. The Company conducts operations from its home office in Vancouver and thirteen branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, Vancouver (six branch offices) and Longview, Washington. The Company's market area for lending and deposit taking activities encompasses Clark, Cowlitz, Skamania and Klickitat counties, throughout the Columbia River Gorge area. The Company operates a trust and financial services company, RAMCORP., located in downtown Vancouver, Washington. Riverview Mortgage, a mortgage broker division of the Company originates mortgage loans (including construction loans) for various mortgage companies predominantly in the Portland metropolitan area, as well as for the Company. The Business and Professional Banking Division located at the downtown Vancouver main branch and at Cascade Park offers commercial and business banking services. Vancouver is located in Clark County, which is just north of Portland, Oregon. Several businesses are located in the Vancouver area because of the favorable tax structure and relatively lower energy costs in Washington as compared to Oregon. Washington has no state income tax and Clark County operates a public electric utility that provides relatively lower cost electricity. Located in the Vancouver area are Sharp Electronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory and Wafer Tech, as well as several support industries. In addition to this industrial base, the Columbia River Gorge Scenic Area has been a source of tourism, which has transformed the area from its past dependence on the timber industry. The Company, a Washington corporation, was organized on June 23, 1997 for the purpose of becoming the holding company for Riverview Community Bank (formerly Riverview Savings Bank, FSB) upon Riverview Savings Bank's reorganization as a wholly owned subsidiary of the Company resulting from the conversion of Riverview, M.H.C. from a federal mutual holding company to a stock holding company ("Conversion and Reorganization"). The Conversion and Reorganization was completed on September 30, 1997. Riverview Savings Bank, FSB changed its name to Riverview Community Bank effective June 29, 1998. Financial Condition At September 30, 2003, the Company had total assets of $533.1 million compared with $419.9 million at March 31, 2003. The increase in total assets reflects the acquisition of Today's Bancorp. At September 30, 2003, the Company had $410.3 million in gross loans, an increase of $73.1 million compared to $337.2 million at March 31, 2003. One- to four- family residential mortgage loans decreased $8.7 million to $49.8 million at September 30, 2003 from $58.5 million at March 31, 2003 as a result of management's plan to sell most of the fixed mortgage loans to the FHLMC and retain the loan servicing of such loans. Commercial loans increased $28.6 million to $62.8 million at September 30, 2003 from $34.2 million at March 31, 2003. The $28.6 million increase reflects the $35.0 million of commercial loans acquired in the Today's Bancorp acquisition. Commercial real estate loans increased $53.3 to $155.0 million at September 30, 2003 from $101.7 million at March 31, 2003. The $53.3 million increase reflects the $44.4 million of commercial real estate loans acquired in the Today's Bancorp 20
acquisition. Commercial real estate construction loans increased $28.6 million to $62.8 million at September 30, 2003 from $34.2 million at March 31, 2003. Land loans decreased $3.7 million to $30.9 million at September 30, 2003 from $34.6 million at March 31, 2003. Loans receivable (Note 8) provides a detailed analysis of the gross loan portfolio at September 30, 2003 as compared to the gross loan portfolio at March 31, 2003. Consumer, commercial, and land loans carry higher interest rates and generally a higher degree of credit risk compared to one- to four- family residential mortgage loans. Low interest rates continue to cause high prepayments in the Company's REMICs and mortgage-backed securities portfolio. These high prepayments have accelerated the decrease in the balance of REMICs and mortgage-backed securities. Mortgage-backed Securities (Note 7) provides the balance detail. The Today's Bancorp acquisition increased the available for sale portfolio market value by $4.0 million in U.S. Treasuries and $2.6 million in agencies. Deposits totaled $425.5 million at September 30, 2003 compared to $320.7 million at March 31, 2003 an increase of $104.8 million. The acquisition of Today's Bancorp increased deposits by $104.5 million of which $67.4 million were certificates of deposits and $37.1 million were transaction accounts. The Company continues to experience flow of funds out of certificates of deposits and flow of funds into transaction accounts. The year to date total average outstanding balance of checking accounts, Now accounts and money market accounts ("transaction accounts") increased 43.7% to $236.4 million at September 30, 2003, compared to $164.5 million at March 31, 2003. Total average transaction account balances compared to average total deposit balances for the six months ended September 30, 2003 was 65.8% compared to 54.4% for the twelve month period ended March 31, 2003. FHLB advances totaled $40.0 million at both September 30, 2003 and March 31, 2003. Capital Resources Total shareholders' equity increased $8.7 million to $63.2 million at September 30, 2003 compared to $54.5 million at March 31, 2003. The activity in shareholders' equity for the first six months of fiscal year 2004 was $3.4 million in earnings, dividends of $1.3 million, exercise of stock options $220,000, stock repurchased $1.5 million, stock issued in connection with acquisition $7.3 million, earned ESOP shares $224,000, earned MRDP shares of $25,000, MRDP tax benefit $15,000 and $258,000 increase in net unrealized gain on securities available for sale, net of tax benefit. The Company is not subject to any regulatory capital requirements. The Community Bank, however, is subject to various regulatory capital requirements implemented by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, that if undertaken could have a direct material effect on the Company and the Community Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Community Bank must meet specific capital guidelines that involve quantitative measures of the Community Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Community Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 21
Quantitative measures established by regulation to ensure capital adequacy require the Community Bank to maintain amounts and ratios of tangible and core capital to adjusted total assets and of total risk-based capital to risk- weighted assets of 1.5%, 3.0%, and 8.0%, respectively. As of September 30, 2003, the Community Bank met all capital adequacy requirements to which it was subject. As of September 30, 2003, the most recent notification from the Office of Thrift Supervision ("OTS") categorized the Community Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Community Bank must maintain minimum core and total risk-based capital ratios of 5.0% and 10.0%, respectively. At September 30, 2003, the Community Bank's tangible, core and risk-based total capital ratios amounted to 9.81%, 9.81%, and 14.0%, respectively. There are no conditions or events since that notification that management believes have changed the Community Bank's category. The Community Bank's actual and required minimum capital amounts and ratios are presented in the following table (dollars in thousands): Categorized as "Well Capitalized" Under For Capital Prompt Corrective Actual Adequacy Purpose Action Provision ----------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 2003 Total Capital: (To Risk Weighted Assets) $56,342 14.01% $32,177 8.0% $40,221 10.0% Tier I Capital: (To Risk Weighted Assets) 51,087 12.70 N/A N/A 24,133 6.0 Core Capital: (To Total Assets) 51,087 9.81 15,619 3.0 26,032 5.0 Tangible Capital: (To Tangible Assets) 51,087 9.81 7,810 1.5 N/A N/A As of March 31, 2003 Total Capital: (To Risk Weighted Assets) $50,893 15.89% $25,629 8.0% $32,037 10.0% Tier I Capital: (To Risk Weighted Assets) 48,154 15.03 N/A N/A 19,222 6.0 Core Capital: (To Total Assets) 48,154 11.66 12,389 3.0 20,649 5.0 Tangible Capital: (To Tangible Assets) 48,154 11.66 6,195 1.5 N/A N/A The following table is a reconciliation of the Community Bank's capital, calculated according to generally accepted accounting principles, to regulatory tangible and risk-based capital at September 30, 2003 (in thousands): 22
Equity $61,990 Net unrealized gain on securities available for sale, net of tax (628) Goodwill (9,204) Core deposit intangible asset (999) Deferred tax and servicing asset (72) ------- Tangible capital 51,087 45% of unrealized gain on AFS equities 225 General valuation allowance 5,205 Allowance excess (175) ------- Total capital $56,342 ======= Liquidity The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the statutory liquidity requirement for savings associations, citing the requirement as unnecessary effective July 18, 2001. In light of this action, the OTS repealed its liquidity regulations, with some exceptions. These exceptions provide that savings associations must continue to maintain sufficient liquidity to ensure safe and sound operation and the appropriate level of liquidity will vary depending on the activities in which the savings association engages. Management does not believe this rule change has had any adverse impact on the Community Bank's operations. Sources of capital and liquidity for the Company on a stand-alone basis include distributions from the Community Bank. Dividends and other capital distributions from the Community Bank are subject to regulatory restrictions. Cash, including interest-earning overnight investments, was $84.6 million at September 30, 2003 compared to $60.8 million at March 31, 2003. The $23.8 million increase in interest-earning overnight investments is attributable to the increase liquidity caused by the high level of prepayment experienced in the Company's mortgage loan portfolio and mortgage-backed securities portfolio. Investment securities and mortgage-backed securities available for sale at September 30, 2003 were $32.0 million and $8.6 million, respectively, compared to $20.4 million and $13.1 million, respectively, at March 31, 2003. See "Financial Condition." Asset Quality The allowance for loan losses was $5.2 million at September 30, 2003, compared to $2.7 million at March 31, 2003. Management believes the allowance for loan losses at September 30, 2003 is adequate to cover probable credit losses existing in the loan portfolio at that date. No assurances, however, can be given that future additions to the allowance for loan losses will not be necessary. The allowance for loan losses is maintained at a level sufficient to provide for probable loan losses based on evaluating known and inherent risks in the loan portfolio. Pertinent factors considered include size and composition of the portfolio, actual loss experience, industry trends, 23
industry data, current economic conditions, and detailed analysis of individual loans. The appropriate allowance level is estimated based upon factors and trends identified by management at the time the consolidated financial statements are prepared. Commercial loans are considered to involve a higher degree of credit risk than one- to four- family residential loans, and to be more vulnerable to adverse conditions in the real estate market and deteriorating economic conditions. Non-performing assets were $2.9 million, or 0.55% of total assets at September 30, 2003 compared with $748,000, or 0.18% of total assets at March 31, 2003. The $1.6 million balance of non-accrual loans is composed of one land loan totaling $400,000, three commercial real estate loans totaling $332,000 and eight commercial loans totaling $863,000. The following table sets forth information with respect to the Company's non-performing assets at the dates indicated: September 30, March 31, 2003 2003 ------------- --------- (Dollars in thousands) Loans accounted for on a non-accrual basis: Real Estate Residential $ - $ 301 Commercial 332 - Land 400 - Commercial 863 - Consumer - 22 -------- -------- Total 1,595 323 -------- -------- Accruing loans which are contractually past due 90 days or more 265 - -------- -------- Total of non-accrual and 90 days past due loans 1,860 323 -------- -------- Real estate owned (net) 1,077 425 -------- -------- Total non-performing assets $ 2,937 $ 748 ======== ======== Total loans delinquent 90 days or more to net loans 0.50% 0.11% Total loans delinquent 90 days or more to total assets 0.35 0.08 Total non-performing assets to total assets 0.55 0.18 Comparison of Operating Results for the Three Months Ended September 30, 2003 and 2002 The Company's net income depends primarily on its net interest income, which is the difference between interest earned on its loans and investments and the interest paid on interest-bearing liabilities. Net interest income is determined by (a) the difference between the yield earned on interest-earning 24
assets and rates paid on interest-bearing liabilities (interest rate spread) and (b) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic and competitive factors that influence rates, loan demand and deposit flows. Net interest margin is calculated by dividing net interest income by the average interest-earning assets. Net interest income and net interest margin are affected by changes in interest rates, volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net income is also affected by the generation of non-interest income, which primarily consists of fees and service charges, loan servicing income, gains and losses on sales of securities, gains and losses from sale of loans and other income. In addition, net income is affected by the level of operating expenses and establishment of a provision for loan losses. Net income for the three months ended September 30, 2003 was $1.9 million, or $0.41 per basic share ($0.41 per diluted share) compared to net income of $1.5 million, or $0.34 per basic share ($0.34 per diluted share) for the same period in fiscal 2003. Net interest income increased $702,000, or 14.9%, to $5.4 million for the current quarter as compared to $4.7 million during the same prior year period. Non-interest income includes a $342,000 write-up to market value of mortgage servicing reflecting the reduction experienced in prepayments for the second quarter of fiscal year 2004 compared to a $259,000 write down in market value of mortgage servicing in the same prior year period. The increase in net interest income was the result of the increased volume of earning-assets primarily due to the increase in non-mortgage loans. The increased volume of interest-bearing liabilities partially offset this increase in net interest income. The impact of the lower interest rates was similar for both the interest-earning assets and interest-bearing liabilities. The total quarterly average outstanding balance of transaction accounts increased $79.7 million, or 43.9%, to $261.4 million at September 30, 2003, compared to $181.7 million at September 30, 2002. The quarterly average outstanding balance of certificates of deposit increased 27.0% to $146.3 million from $115.7 million at September 30, 2003 and September 30, 2002, respectively, reflecting the Today's Bancorp acquisition. The payoff of FHLB advances in the third quarter of fiscal year 2003 also contributed to the increase of net interest income. Net interest income increased $753,000 as a result of the change in volume of average interest-earning assets and liabilities for the three months in fiscal 2004 compared to the same fiscal 2003 period. The change in interest rates for this same period of comparison decreased net interest income $43,000. The interest rate spread on a tax equivalent basis decreased from 4.58% for the three month period ended September 30, 2002 to 4.35% for the three month period ended September 30, 2003. The net interest margin decreased to 4.65% during the second quarter ended September 30, 2003 from 5.09% for the second quarter ended September 30, 2002. Interest income for the three months ended September 30, 2003 was $7.2 million, an increase of $417,000, or 6.12% from the $6.8 million interest income for the same period in the prior fiscal year. The yield on interest-earning assets for the second quarter of fiscal year 2004 was 6.21% compared to 6.54% for the same three month period in fiscal year 2003. The lower second quarter fiscal 2004 yield reflects the lower interest rate environment. The higher interest income in the second quarter of fiscal year 2004 as 25
compared to the same period in fiscal year 2003 reflects the increase in the balance of interest-earning assets. Average interest-earning assets increased to $469.1 million for the three months ended September 30, 2003 from $372.8 million for the three months ended September 30, 2002. The increase in the average quarterly balance of interest-earning assets consisted of decreases in mortgage loans and mortgage-backed securities offset by increases in non-mortgage loans, daily interest bearing investments and investment securities. Interest income increased $1.1 million as a result of the increase in the current quarter's volume of average interest-earning assets as compared to the volume of average interest-earning assets in the same fiscal 2003 period. Interest expense decreased $285,000, or 13.5%, to $1.8 million for the three months ended September 30, 2003 as compared to $2.1 million for the three months ended September 30, 2002. The cost of average interest-bearing liabilities for the second quarter of year 2004 was 1.86% compared to 2.76% for the same three month period in fiscal year 2003. The lower interest expense for the three-month period ended September 30, 2003 is the result of the previously mentioned change in the deposit mix, lower interest rates as well as the reduction of FHLB borrowings in the third quarter of fiscal year 2003 compared to the same period in the prior year. Average interest-bearing liabilities increased to $393.4 million at September 30, 2003, from $303.8 million for the second quarter ended September 30, 2002. The interest expense impact of the $89.6 million increase in average interest-earning liabilities of $318,000 was more than offset by the $1.1 million interest income impact of the $96.3 million increase in average interest-bearing assets. The increase in the average balance of interest-bearing liabilities was the result of an increase in the average balances of certificates of deposit and growth in transaction accounts partially offset by a decrease in FHLB borrowings. Growth in NOW accounts was used to repay $25.0 million in FHLB borrowings in the third quarter of fiscal 2003. The change in interest rates between the periods resulted in a $43,000 decrease in net interest income. This quarterly comparison of the impact of the changes in interest rates illustrates how similar the asset sensitivity and liability sensitivity impact is on the balance sheet for this period of comparison. The decrease in interest rates increased net interest income as a result of repricing the liabilities, especially money market accounts, certificates of deposit and FHLB borrowings which was similar to the impact of the repricing of loans and securities. Floors (minimum interest rates) and fixed rates in the loans and securities helped to reduce the interest rate sensitivity of the assets. The provision for loan losses for the three-month period ended September 30, 2003 was zero compared to $82,000 for the same period in the prior year. There was $189,000 in net charge-offs during the three months ended September 30, 2003 compared to $141,000 in net charge-offs for the three months ended September 30, 2002. The lower loan loss provision in the second quarter of fiscal year 2004 reflects the change in mix of classified loans resulting from the improvement in loan grades on a particular borrower at September 30, 2003 as compared to September 30, 2002. There were no significant changes in estimation, assumptions or reallocations of allowance for the three months ended September 30, 2003 and 2002. Based upon management's analysis of historical and anticipated loss rates, current loan growth, and other factors considered, the allowance for loan losses at September 30, 2003 is believed to be adequate for the losses inherent in the loan portfolio. 26
The 62.1% increase in non-interest income to $2.0 million for the quarter ended September 30, 2003 compared to $1.3 million for the quarter ended September 30, 2002, reflects increased fee income from deposit service charges, mortgage broker fees, asset management fees, gains on sale of loans held for sale and a write up to market value of mortgage servicing rights assets. The recent increase in long-term interest rates environment has decreased prepayment on residential mortgages, which has lengthened the duration on mortgage servicing rights assets. In the second quarter of fiscal year 2004 mortgage servicing rights were written up to market value with a $342,000 credit to non-interest income as compared to a $259,000 impairment charge to non-interest income for the same period in the prior year. Non-interest expense increased $861,000 to $4.6 million for the three months ended September 30, 2003 from $3.7 million for the three months ended September 30, 2002. Non-capitalizable costs resulting from the Company's merger with Today's Bancorp were not material to the Company in the second quarter of fiscal year 2004. Salaries and employee benefits increased $465,000 to $2.5 million for the quarter ended September 30, 2003 from the same quarter in the prior year. There were 35 more full-time equivalent employees during the fiscal year 2004 second quarter over the fiscal year 2003 second quarter. The increase in full-time equivalents reflects the Today's Bancorp acquisition and expansion in the Company's ability to provide loans. The second quarter of fiscal year 2004 salaries and employee benefits also reflect the increases in mortgage broker commissions when compared to the same period in the prior year. The provision for federal income taxes for the second quarter of fiscal year 2004 was $958,000, resulting in an effective tax rate of 33.3%, compared to $674,000 and 31.1% for the same quarter of fiscal year 2003. The 2.2% increase in the effective tax rate for three months ended September 30, 2003 is primarily attributable to the impact of the ESOP market value adjustment and reduced tax exempt income. Comparison of Operating Results for the Six Months Ended September 30, 2003 and 2002 Net income for the six months ended September 30, 2003 was $3.4 million, or $0.76 per basic share ($0.75 per diluted share) compared to net income of $2.6 million, or $0.58 per basic share ($0.58 per diluted share), for the same period in fiscal year 2003. Net interest income increased $1.2 million to $10.0 million for the six months ended September 30, 2003, compared to $8.8 million for the six months ended September 30, 2002. Non-interest income includes a $303,000 market write up and a $383,000 market write down for mortgage servicing rights for the first six months of fiscal year 2004 and 2003, respectively. The increase in net interest income was the result of the increased volume of earning-assets primarily due to the increase in non-mortgage loans. The increased volume of interest-bearing liabilities partially offset this increase in net interest income. The impact of the lower interest rates had more of an impact in reducing the expense of interest-bearing liabilities as compared to reducing interest income from interest-earning assets. The total six month average outstanding balance for transaction accounts increased 35.7% to $236.4 million at September 30, 2003, compared to $174.2 million at September 30, 2002. The six month average outstanding balance for certificates of deposit increased 7.3% to $122.7 million from $114.3 million, respectively, at September 30, 2003 and September 30, 2002. The increase in 27
the average balance of certificates of deposit reflects the acquisition of Today's Bancorp $67.4 million balance of certificates of deposit. The payoff of FHLB advances also contributed to the increase of net interest income. Average interest-earning assets increased to $423.9 million for the six months ended September 30, 2003 from $379.5 million for the six months ended September 30, 2002. The increase in the six month average balance of interest-earning assets consisted of decreases in mortgage loans and mortgage-backed securities offset by increases in non-mortgage loans, daily interest bearing investments and investment securities. Interest income increased $953,000 as a result of the increase in the current six month volume of average interest-earning assets as compared to the volume of average interest-earning assets in the same fiscal 2003 period. The change in interest rates decreased net interest income $190,000 in the current period as compared to the same fiscal 2003 period. The interest rate spread increased from 4.13% for the six month period in fiscal year 2003 to 4.37% for the six month period in fiscal year 2004. The net interest margin increased to 4.76% during the six month period ended September 30, 2003 from 4.69% for the six month period ended September 30, 2002. The increased margin is the result of the change in the balance sheet mix of assets and liabilities that more than offset the more rapid repricing in interest-bearing liabilities as compared to interest earning assets. Interest income for the six months ended September 30, 2003 was $13.4 million, a decrease of $232,000, or 1.7%, from $13.6 million for the same period in 2002. Yield on interest-earning assets for the first six months of the fiscal year 2004 was 6.32% compared to 7.23% for the same six month period in fiscal year 2003. The lower fiscal year 2004 yield on interest-earning assets reflects the lower interest rate environment in the current period as compared to the same period a year ago. The lower interest income for the six month period ended September 30, 2003 as compared to the same period in the prior year resulted from lower interest rates of interest-earning assets more than offsetting increased balances. Interest expense for the six months ended September 30, 2003 was $3.3 million, a decrease of $1.5 million, or 31.1% from $4.8 million for the same period in 2002. The cost of interest-bearing liabilities for the first six months of fiscal year 2004 was 1.95% compared to 3.10% for the first six months of fiscal year 2003. The decreased interest expense reflects the change in mix of liabilities and the reduced interest rate environment when the current six month period is compared to the same period a year ago. The balance sheet mix of liabilities continues to have growth in transaction accounts and a resulting a lower cost of funds. Transaction accounts total six month average outstanding balance increased 29.9% to $177.7 million at September 30, 2003, compared to $136.8 million at September 30, 2002. The six month average outstanding balance for certificates of deposit increased 7.3% to $122.7 million at September 30, 2003 from $114.3 million at September 30, 2002 primarily as result of the Today's Bancorp acquisition. A decrease in long-term mortgage interest rates during the first six months of fiscal year 2004 has led to higher prepayment rates on both the mortgage loan portfolio and the mortgage-backed securities portfolio. The resultant increase in payments has reduced the Community Bank's utilization of FHLB advances, which has contributed to the reduction in interest expense. The provision for loan losses was $70,000 and net charge-offs was $204,000 during the six months ended September 30, 2003 compared to a $327,000 provision for loan losses and net charge-offs of $175,000 during the six 28
months ended September 30, 2002. The ratio of allowance for loan losses to period end net loans at September 30, 2003, increased to 1.38% from 0.90% at both September 30, 2002 and March 31, 2003. The Today's Bancorp acquisition was the primary reason for the increase in the allowance. Today's Bancorp had an allowance for loan losses of $2.6 million which reflected it's higher risk commercial loans. The ratio of total non-performing assets to total assets increased from 0.46% at September 30, 2002 and 0.18% at March 31, 2003 to 0.55% at September 30, 2003. Non-accrual loans decreased from $1.7 million at September 30, 2002 to $1.6 million at September 30, 2003. The decrease reflects decreased non-accrual loan balances in residential real estate and consumer partially offset by increased non-accrual loan balances in commercial, commercial real estate land and land. Real estate owned increased from $93,000 at September 30, 2002 to $1.1 million at September 30, 2003. The increase reflects the addition of four properties consisting of a single family, land development, land and single family construction loans. The lower loan loss provision in the first six months of fiscal year 2004 reflects the change in mix in classified loans resulting from the improvement in loan grades on a particular borrower at September 30, 2003 as compared to September 30, 2002. There were no significant changes in estimation, assumptions or reallocations of the allowance for the six months ended September 30, 2003 and 2002, respectively. Based upon management's analysis of historical and anticipated loss rates, current loan growth, and other factors considered, the allowance for loan losses at September 30, 2003 is believed to be adequate for the losses inherent in the loan portfolio. Non-interest income increased $991,000 or 37.0% to $3.7 million for the six months ended September 30, 2003, compared to $2.7 million for the same period in 2002. In the first six months of fiscal year 2004, mortgage servicing rights were written up to market value with a $303,000 credit to non-interest income as compared to a $383,000 impairment charge to non-interest income for the same period in the prior year. Increased non-interest income is the result of service charge income, trust fee income, fees from ATMs, brokered loan fees and mortgage service right write up partially offset by the lower gains on loans sales. Non-interest expense increased $1.1 million, or 14.9%, to $8.5 million for the six months ended September 30, 2003 from $7.4 million for the six months ended September 30, 2002. The $1.1 million increase reflects the addition of eight full-time equivalent employees, increased mortgage broker commissions, increased occupancy expenses, data processing cost and marketing costs which are required to continue to provide local personal service. Full time equivalent employees increased to 178 at September 30, 2003 compared to 143 at September 30, 2002. The increase in full-time equivalents reflects the Today's Bancorp acquisition and expansion in the Company's ability to provide loans. The fiscal year 2004 salaries and employee benefits also reflect the increases in mortgage broker commissions when compared to the same period in the prior year. Salaries and employee benefits increased $680,000 to $4.7 million for the six months ended September 30, 2003 as compared to $4.1 million for the same period in 2002. The provision for federal income taxes for the six months ended September 30, 2003 was $1.7 million resulting in an effective tax rate of 33.2%, compared to $1.1 million and 30.6% for the same period a year ago. The 2.6% increase in the effective tax rate for six months ended September 30, 2003 is primarily attributable to the impact of the ESOP market value adjustment and reduced tax exempt income. 29
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Our Asset Liability Committee is responsible for implementing the interest rate risk policy, which sets forth limits established by the Board of Directors of acceptable changes in net interest income, and the portfolio value from specified changes in interest rates. The OTS defines net portfolio value as the present value of expected cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present value of expected cash flows from existing off-balance sheet contracts. Our Asset Liability Committee reviews, among other items, economic conditions, the interest rate outlook, the demand for loans, the availability of deposits and borrowings, and our current operating results, liquidity, capital and interest rate exposure. In addition, the Asset Liability Committee monitors asset and liability characteristics on a regular basis and performs analysis to determine the potential impact of various business strategies in controlling interest rate risk and other potential impact of these strategies upon future earnings under various interest rate scenarios. Based on these reviews, our Asset Liability Committee formulates a strategy that is intended to implement the objectives contained in our business plan without exceeding losses in net interest income and net portfolio value limits set forth in our interest rate risk policy. There has not been any material change in the market risk disclosures contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003. ITEM 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Section 13(a)- 15(e) and 15d 15(e) of the Securities Exchange Act of 1934 was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Changes in Internal Controls: There was no change in the Company's internal control over financial reporting during the Company's most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 30
RIVERVIEW BANCORP, INC. AND SUBSIDIARY PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- Not applicable Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- Not applicable Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Riverview Bancorp, Inc. held its annual meeting of shareholders on July 16, 2003. A brief description of each matter voted on and the results of the shareholder voting are set forth below. 1. The election of two directors set forth below: For Against --------- --------- Robert K. Leick 3,452,136 126,467 Gary R. Douglass 3,568,688 9,915 For Against --------- --------- 2. Approval of the 2003 Stock Option Plan 3,310,695 214,921 Each of the following directors who were not up for re-election at the annual meeting of shareholders will continue to serve as directors: Patrick Sheaffer, Ronald A. Wysaske, Edward R. Geiger, Michael D. Allen, Paul L. Runyan Item 5. Other Information ----------------- Not applicable 31
Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 3.1 Articles of Incorporation of the Registrant(1) 3.2 Bylaws of the Registrant(1) 4 Form of Certificate of Common Stock of the Registrant(1) 10.1 Employment Agreement with Patrick Sheaffer(2) 10.2 Employment Agreement with Ronald A. Wysaske(2) 10.3 Severance Agreement with Michael C. Yount(2) 10.4 Severance Agreement with Karen Nelson(2) 10.5 Severance Agreement with John A. Karas(3) 10.6 Employee Severance Compensation Plan(2) 10.7 Employee Stock Ownership Plan(4) 10.8 Management Recognition and Development Plan(5) 10.9 1998 Stock Option Plan(5) 10.10 1993 Stock Option and Incentive Plan(5) 10.11 2003 Stock Option Plan (6) 21 Subsidiaries of Registrant(4) 31.1 Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certifications of Section 906 of the Sarbanes-Oxley Act (b) Reports on Form 8-K: Forms 8-K and 8-K/A were filed on July 28 and September 12, 2003, respectively announcing the acquisition of Today's Bancorp. The 8-K/A included pro forma financial information and incorporated Today's Bancorp December 31, 2002 and 2001 audited financial information. - --------------- (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 333-30203), and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. (3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2002, and incorporated herein by reference. (4) Filed as an exhibit to the Registrant's Form 10-K for the year ended March 31, 1998, and incorporated herein by reference. (5) Filed on October 23, 1998, as an exhibit to the Registrant's Registration Statement on Form S-8, and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Definitive Annual Meeting Proxy Statement for the 2003 Annual Meeting of Shareholders, and incorporated herein by reference. 32
In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVERVIEW BANCORP, INC. DATE: November 5, 2003 BY: /S/ Patrick Sheaffer Patrick Sheaffer President and Chief Executive Officer DATE: November 5, 2003 BY: /S/ Ronald Wysaske Ronald Wysaske Executive Vice President/Treasurer 33
EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 34
I, Patrick Sheaffer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /S/ Patrick Sheaffer Patrick Sheaffer President and Chief Executive Officer 35
EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 36
I, Ronald Wysaske, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /S/ Ronald Wysaske Ronald Wysaske Chief Financial Officer 37
EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 38
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF RIVERVIEW BANCORP, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley act of 2002 and in connection with this quarterly report on Form 10-Q that: 1. the report fully complies with the requirements of sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations. /S/ Patrick Sheaffer /S/ Ronald Wysaske Patrick Sheaffer Ronald Wysaske Chief Executive Officer Chief Financial Officer Dated: November 5, 2003 39