Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-22957
RIVERVIEW BANCORP, INC.
Washington
91-1838969
900 Washington Street, Suite 900, Vancouver, Washington
98660
Registrant's telephone number, including area code:
(360) 693-6650
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value per share, 10,920,650 shares outstanding as of November 1, 2007.
Form 10-QRIVERVIEW BANCORP, INC. AND SUBSIDIARYINDEX
Part I. Financial InformationItem 1. Financial Statements (Unaudited)RIVERVIEW BANCORP, INC. AND SUBSIDIARYCONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2007 AND MARCH 31, 2007
ASSETS
Cash (including interest-earning accounts of $15,271 and $7,818)
$ 36,877
$ 31,423
Loans held for sale
604
-
8,761
19,267
1,027
1,232
5,943
6,640
Loans receivable (net of allowance for loan losses of $9,062 and $8,653)
687,419
682,951
Real estate owned
74
Prepaid expenses and other assets
2,957
1,905
Accrued interest receivable
3,850
3,822
Federal Home Loan Bank stock, at cost
7,350
Premises and equipment, net
21,336
21,402
Deferred income taxes, net
4,089
4,108
Mortgage servicing intangible, net
332
351
Goodwill
25,572
Core deposit intangible, net
630
711
Bank owned life insurance
13,893
13,614
TOTAL ASSETS
$ 820,714
$ 820,348
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts
$ 659,785
$ 665,405
Accrued expenses and other liabilities
8,982
9,349
Advanced payments by borrowers for taxes and insurance
376
397
Federal Home Loan Bank advances
33,600
35,050
Junior subordinated debentures
22,681
7,217
Capital lease obligations
2,704
2,721
Total liabilities
728,128
720,139
COMMITMENTS AND CONTINGENCIES (See Note 15)
SHAREHOLDERS' EQUITY:
110
117
Additional paid-in capital
47,953
58,438
Retained earnings
45,629
42,848
Unearned shares issued to employee stock ownership trust
(1,057)
(1,108)
Accumulated other comprehensive loss
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
1
(In thousands, except share and per share data) (Unaudited)
2007
2006
INTEREST INCOME:
Interest and fees on loans receivable
$ 14,631
$ 14,834
$ 29,511
$ 28,603
Interest on investment securities - taxable
140
221
312
442
Interest on investment securities - non-taxable
38
42
76
84
Interest on mortgage-backed securities
85
109
176
223
Other interest and dividends
420
96
663
148
Total interest income
15,314
15,302
30,738
29,500
INTEREST EXPENSE:
Interest on deposits
6,033
4,908
12,223
9,130
Interest on borrowings
587
1,267
993
2,230
Total interest expense
6,620
6,175
13,216
11,360
Net interest income
8,694
9,127
17,522
18,140
Less provision for loan losses
400
600
450
950
Net interest income after provision for loan losses
8,294
8,527
17,072
17,190
NON-INTEREST INCOME:
Fees and service charges
1,382
1,449
2,809
2,780
Asset management fees
513
455
1,061
891
Gain on sale of loans held for sale
92
111
183
Loan servicing income
27
36
66
81
Gain on sale of credit card portfolio
133
129
279
257
Other
62
45
120
Total non-interest income
2,216
2,291
4,518
4,406
NON-INTEREST EXPENSE:
Salaries and employee benefits
3,908
3,532
7,876
7,367
Occupancy and depreciation
1,244
1,135
2,546
2,209
Data processing
208
222
557
Amortization of core deposit intangible
46
80
Advertising and marketing expense
370
356
652
658
Federal Deposit Insurance Corporation insurance premium
19
13
37
State and local taxes
178
349
288
Telecommunications
101
196
213
Professional fees
172
198
395
602
536
1,104
1,240
Total non-interest expense
6,831
6,272
13,612
13,041
INCOME BEFORE INCOME TAXES
3,679
4,546
7,978
8,555
PROVISION FOR INCOME TAXES
1,249
1,573
2,709
2,951
NET INCOME
$ 2,430
$ 2,973
$ 5,269
$ 5,604
Earnings per common share:
Basic
$ 0.22
$ 0.26
$ 0.47
$ 0.50
Diluted
0.22
0.26
0.47
0.49
Weighted average number of shares outstanding:
Cash Dividends Per Share
See notes to consolidated financial statements.
2
RIVERVIEW BANCORP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYFOR THE YEAR ENDED MARCH 31, 2007AND THE SIX MONTHS ENDED SEPTEMBER 30, 2007
Balance April 1, 2006
11,545,372
$ 57
$ 57,316
$ 35,776
$ (1,186)
$ (276)
$ 91,687
Stock split
58
(58)
Cash dividends ($0.395 per share)
(4,476)
Exercise of stock options
212,054
878
880
Stock repurchased and retired
(49,446)
Earned Employee Stock Ownership Plan ("ESOP") shares
78
274
Tax benefit, stock option
48
11,707,980
31,242
(276)
88,413
Comprehensive income:
Net income
11,606
Other comprehensive income:
190
Total comprehensive income
11,796
Balance March 31, 2007
(86)
100,209
Cash dividends ($0.22 per share)
(2,423)
63,670
620
621
(775,000)
(8)
(11,230)
(11,238)
FIN 48 transition amount
(65)
Earned ESOP shares
125
51
10,996,650
40,360
87,280
5,269
5,306
Balance September 30, 2007
$110
$47,953
$45,629
$(1,057)
$(49)
$92,586
3
RIVERVIEW BANCORP, INC. AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
1,102
1,121
Mortgage servicing rights valuation adjustment
(14)
(13)
Provision for loan losses
Noncash expense related to ESOP
321
Increase (decrease) in deferred loan origination fees, net of amortization
(34)
52
Origination of loans held for sale
(8,524)
(8,077)
Proceeds from sales of loans held for sale
7,949
7,961
Excess tax benefit from stock based compensation
(7)
(183)
(176)
Income from bank owned life insurance
(279)
(257)
Decrease (increase) in prepaid expenses and other assets
(580)
24
Increase in accrued interest receivable
(28)
(1,059)
Decrease in accrued expenses and other liabilities
(1,056)
(953)
Net cash provided by operating activities
4,241
5,498
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations, net
(4,853)
(68,517)
Proceeds from call, maturity, or sale of investment securities available for sale
10,490
1,110
Principal repayments on investment securities available for sale
Principal repayments on mortgage-backed securities available for sale
735
828
Principal repayments on mortgage-backed securities held to maturity
205
327
Purchase of premises and equipment and capitalized software
(761)
(2,755)
Proceeds from sale of real estate owned and premises and equipment
Net cash provided (used) in investing activities
5,853
(68,968)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts
(5,620)
33,440
Dividends paid
(2,386)
(2,026)
Repurchase of common stock
Proceeds from borrowings
77,200
186,300
Repayment of borrowings
(78,650)
(142,400)
Proceeds from issuance of subordinated debentures
15,464
Principal payments under capital lease obligation
(17)
(16)
Net increase (decrease) in advance payments by borrowers
(21)
7
Proceeds from exercise of stock options
260
Net cash provided (used) by financing activities
(4,640)
75,577
NET INCREASE IN CASH
5,454
12,107
CASH, BEGINNING OF PERIOD
31,423
31,346
CASH, END OF PERIOD
$ 43,453
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
$ 13,139
$ 10,733
Income taxes
2,912
3,491
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared and accrued in other liabilities
1,181
1,118
Fair value adjustment to securities available for sale
56
161
Income tax effect related to fair value adjustment
(19)
(55)
Premises and equipment purchases included in accounts payable
225
Additions to real estate owned
4
RIVERVIEW BANCORP, INC. AND SUBSIDIARYNotes to Consolidated Financial Statements(Unaudited)
1. BASIS OF PRESENTATION
5
The following table presents information on stock options outstanding for the periods shown.
Balance, beginning of period
526,192
$ 10.41
755,846
$ 9.68
Grants
15,000
14.49
Options exercised
(67,839)
7.65
(212,054)
7.79
Forfeited
(3,600)
10.94
(17,600)
10.65
Balance, end of period
469,753
$ 10.93
The following table presents information on stock options outstanding for the periods shown, less estimated forfeitures.
Intrinsic value of options exercised in the period
$ 468,547
$ 1,722,591
Stock options fully vested and expected to vest:
Number
467,603
523,052
Weighted average exercise price
$ 10.92
Aggregate intrinsic value
$ 1,836,265
$ 2,892,379
Weighted average contractual term of options
6.89 years
7.07 years
Stock options vested and currently exercisable:
446,153
493,192
$ 10.85
$ 10.43
$ 1,786,260
$ 2,717,710
6.57 years
6.65 years
Stock-based compensation expense related to stock options for the six months ended September 30, 2007 and 2006 was approximately $20,000 and $21,000, respectively. As of September 30, 2007, there was approximately $43,000 of unrecognized compensation expense related to unvested stock options, which will be recognized over the remaining vesting periods of the underlying stock options.The Company recognizes compensation expense for stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised), "Share-Based Payment," ("SFAS 123R"). The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. The fair value of all awards is amortized on a straight-line basis over the requisite service periods, which are generally the vesting periods. The Black-Scholes model uses the assumptions listed in the table below. The expected life of options granted represents the period of time that they are expected to be outstanding. The expected life is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules. Expected volatility was estimated at the date of grant based on the historical volatility of the Company's common stock. Expected dividends are based on dividend trends and the market v alue of the Company's common stock at the time of grant. The risk-free interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant. During the six months ended September 30, 2007, the Company granted 15,000 stock options. No options were granted during the six months ended September 30, 2006. The weighted average fair value of stock options granted during the six months ended September 30, 2007 was $2.31 per option.
Fiscal 2008
4.82%
6.25
14.69%
3.11%
6
4. EARNINGS PER SHAREBasic 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.
Basic EPS computation:
Numerator-net income
$ 2,430,000
$ 2,973,000
$ 5,269,000
$ 5,604,000
Denominator-weighted average common shares outstanding
10,904,464
11,302,927
11,146,813
11,289,143
Basic EPS
Diluted EPS computation:
Denominator-weighted average
common shares outstanding
Effect of dilutive stock options
122,134
170,823
128,749
173,982
11,026,598
11,473,750
11,275,562
11,463,125
Diluted EPS
$ 0.49
5. INVESTMENT SECURITIESThe amortized cost and approximate fair value of investment securities available for sale consisted of the following (in thousands):
September 30, 2007
Trust preferred
$ 5,000
$ -
Agency securities
300
Municipal bonds
3,435
26
3,461
Total
$ 8,735
$ 26
$ 8,761
March 31, 2007
$ 19
$ 5,019
10,784
(44)
10,740
3,474
34
3,508
$ 19,258
$ 53
$ (44)
$ 19,267
The contractual maturities of investment securities available for sale are as follows (in thousands):
Due in one year or less
$ 870
Due after one year through five years
1,017
1,028
Due after five years through ten years
619
634
Due after ten years
6,229
Investment securities with an amortized cost of $300,000 and $5.8 million and a fair value of $300,000 and $5.8 million at September 30, 2007 and March 31, 2007, respectively, were pledged as collateral for advances at the Federal Home Loan Bank ("FHLB") of Seattle. Investment securities with an amortized cost of $1.1 million and a fair value of $1.2 million at both September 30, 2007 and March 31, 2007, were pledged as collateral for treasury tax and loan funds held by the Bank. Investment securities with an amortized cost of $487,000 and $490,000 and a fair value of $490,000 and $495,000 at September 30, 2007 and March 31, 2007, respectively, were pledged as collateral for governmental public funds held by the Bank. Investment securities with an amortized cost of $5.0 million and a fair value of $5.0 million at March 31, 2007 were pledged as collateral for borrowings from the discount window at the Federal Reserve Bank of San Fr ancisco.
The fair value of temporarily impaired securities, the amount of unrealized losses and the length of time these unrealized losses existed as of March 31, 2007 are as follows (in thousands):
Less than 12 months
12 months or longer
$ 10,740
The unrealized losses on the above investment securities are primarily due to increases in market interest rates subsequent to their purchase by the Company. The Company expects the fair value of these investment securities to recover as the investment securities approach their maturity dates or sooner if market yields for such investment securities decline. The Company does not believe that any of the investment securities are impaired due to reasons of credit quality or is related to any company or industry specific event. Based on management's evaluation and intent, none of the unrealized losses summarized in this table are considered other than temporary. The Company realized no gains or losses on sales of investment securities available for sale for the six-month periods ended September 30, 2007 and 2006.6. MORTGAGE-BACKED SECURITIESMortgage-backed securities held to maturity consisted of the following (in thousands):
Real estate mortgage investment conduits
$ 747
$ 8
$ 755
FHLMC mortgage-backed securities
112
FNMA mortgage-backed securities
169
$ 1,027
$ 12
$ 1,039
$ 923
$ 6
$ 929
116
193
197
$ 1,232
$ 11
$ 1,243
The contractual maturities of mortgage-backed securities classified as held to maturity are as follows (in thousands):
14
1,014
1,025
Mortgage-backed securities held to maturity with an amortized cost of $756,000 and $931,000 and a fair value of $763,000 and $938,000 at September 30, 2007 and March 31, 2007, respectively, were pledged as collateral for governmental public funds held by the Bank. Mortgage-backed securities held to maturity with an amortized cost of $140,000 and $143,000 and a fair value of $142,000 and $144,000 at September 30, 2007 and March 31, 2007, respectively, were pledged as collateral for treasury tax and loan funds held by the Bank. The real estate mortgage investment conduits consist of Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") and Federal National Mortgage Association ("FNMA" or "Fannie Mae") securities.
8
Mortgage-backed securities available for sale consisted of the following (in thousands):
$ 970
$ (2)
$ 980
4,976
(111)
4,865
97
98
$ 6,043
$ 13
$ (113)
$ 5,943
$ 1,070
$ 15
$ 1,083
5,592
(153)
5,439
118
$ 6,778
$ 17
$ (155)
$ 6,640
The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands):
$ 70
$ 71
5,405
5,293
568
579
Expected maturities of mortgage-backed securities held to maturity and available for sale will differ from contractual maturities because borrowers may have the right to prepay obligations.Mortgage-backed securities available for sale with an amortized cost of $6.0 million and $6.7 million and a fair value of $5.8 million and $6.5 million at September 30, 2007 and March 31, 2007, respectively, were pledged as collateral for FHLB advances. The fair value of temporarily impaired mortgage-backed securities, the amount of unrealized losses and the length of time these unrealized losses existed as of September 30, 2007 are as follows (in thousands):
$ 356
4,866
$ 5,222
The fair value of temporarily impaired mortgage-backed securities, the amount of unrealized losses and the length of time these unrealized losses existed as of March 31, 2007 are as follows (in thousands):
$ 407
$ 2
$ 5,846
$ 5,848
9
The unrealized losses on the above mortgage-backed securities are primarily due to increases in market interest rates subsequent to their purchase by the Company. The Company expects the fair value of these securities to recover as the securities approach their maturity dates or sooner if market yields for such securities decline. The Company does not believe that any of the securities are impaired due to reasons of credit quality or is related to any company or industry specific event. Based on management's evaluation and intent, none of the unrealized losses summarized in this table are considered other than temporary. The Company realized no gains or losses on sales of mortgage-backed securities available for sale for the six-month periods ended September 30, 2007 and 2006.7. LOANS RECEIVABLELoans receivable, excluding loans held for sale, consisted of the following (in thousands):
Commercial and construction
Commercial
$ 90,515
$ 91,174
Other real estate mortgage
367,380
360,930
Real estate construction
162,429
166,073
Total commercial and construction
620,324
618,177
Consumer
Real estate one-to-four family
71,725
69,808
Other installment
4,432
3,619
Total consumer
76,157
73,427
Total loans
696,481
691,604
Less:
Allowance for loan losses
9,062
8,653
Loans receivable, net
$ 687,419
$ 682,951
Most of the Bank's business activity is with customers located in the states of Washington and Oregon. Loans and extensions of credit outstanding at one time to one borrower are generally limited by federal regulation to 15% of the Bank's shareholders' equity, excluding accumulated other comprehensive income (loss). As of September 30, 2007 and March 31, 2007, the Bank had no loans to any one borrower in excess of the regulatory limit.8. ALLOWANCE FOR LOAN LOSSESA reconciliation of the allowance for loan losses is as follows (in thousands):
Beginning balance
$ 8,728
$ 7,626
$ 8,653
$ 7,221
Provision for losses
Charge-offs
(69)
(74)
(3)
Recoveries
33
95
Total allowance for loan losses
$ 9,062
$ 8,263
Changes in the allowance for unfunded loan commitments were as follows (in thousands):
$ 382
$ 376
$ 380
$ 362
Net change in allowance for unfunded loan commitments
40
23
Ending balance
$ 422
$ 385
The allowance for unfunded loan commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheets. The provision for unfunded commitments is charged to non-interest expense.
10
Loans on which the accrual of interest has been discontinued were $132,000 and $226,000 at September 30, 2007 and March 31, 2007, respectively. Interest income foregone on non-accrual loans was $9,000 and $62,000 during the six months ended September 30, 2007 and 2006, respectively.At September 30, 2007 and March 31, 2007, the Company's recorded investment in certain loans that were considered to be impaired was $1.2 million and $426,000, respectively. At September 30, 2007, $198,000 of these impaired loans had a specific related valuation allowance of $25,000, while $993,000 did not require a specific valuation allowance. At March 31, 2007, $294,000 of these impaired loans had a specific valuation allowance of $30,000, while $132,000 did not require a specific valuation. The balance of the allowance for loan losses in excess of these specific reserves is available to absorb the inherent losses from all loans in the portfolio. The average investment in impaired loans was approximately $681,000 and $959,000 during the six months ended September 30, 2007 and the year ended March 31, 2007, respectively. The related amount of interest income recognized on loans that were impaired was approximately $49,000 and $44,000 and during the six months ended September 30, 2007 and 2006, respect ively. There were no loans past due 90 days or more and still accruing interest at September 30, 2007 and March 31, 2007.9. LOANS HELD FOR SALEThe Company identifies loans held for sale at the time of origination, which are carried at the lower of aggregate cost or net realizable value. Market values are derived from available market quotations for comparable pools of mortgage loans. Adjustments for unrealized losses, if any, are charged to income.10. MORTGAGE SERVICING RIGHTSThe following table is a summary of the activity in mortgage servicing rights ("MSRs") and the related allowance for the periods indicated and other related financial data (in thousands):
Balance at beginning of period, net
$ 347
$ 372
$ 351
$ 384
Additions
35
43
69
68
Amortization
(51)
(46)
(102)
(97)
Change in valuation allowance
(1)
Balance at end of period, net
$ 332
$ 368
Valuation allowance at beginning of period
$ 22
$ 46
$ 35
$ 60
Valuation allowance at end of period
$ 21
$ 47
The Company evaluates MSRs for impairment by stratifying MSRs based on the predominant risk characteristics of the underlying financial assets. At September 30, 2007 and March 31, 2007, the fair value of MSRs totaled $1.0 million. The September 30, 2007 fair value was estimated using various discount rates and a range of Prepayment Standard Assumption (PSA) values (the Bond Market Association's standard prepayment values) that ranged from 124 to 528.11. CORE DEPOSIT INTANGIBLENet unamortized core deposit intangible totaled $630,000 at September 30, 2007 and $711,000 at March 31, 2007. Amortization expense related to the core deposit intangible during the six months ended September 30, 2007 and 2006 totaled $80,000 and $96,000, respectively.
11
12. BORROWINGSBorrowings are summarized as follows (in thousands):
$33,600
$35,050
Weighted average interest rate:
5.50%
5.66%
At September 30, 2007, all of the Company's FHLB advances were scheduled to mature during fiscal year 2008.13. JUNIOR SUBORDINATED DEBENTURESAt September 30, 2007, the Company had established two wholly-owned subsidiary grantor trusts for the purpose of issuing trust preferred securities and common securities. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each indenture. The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the "Debentures") of the Company. The Debentures are the sole assets of the trusts. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon maturity of the Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole or in part on or after specific dates, at a redemption price specified in the indentures plus any accrued but u npaid interest to the redemption date.The Debentures issued by the Company to the grantor trusts, totaling $22.7 million, are reflected in the consolidated balance sheets in the liabilities section at September 30, 2007, under the caption "junior subordinated debentures." The common securities issued by the grantor trusts were purchased by the Company, and the Company's investment in the common securities of $681,000 and $217,000 at September 30, 2007 and 2006, respectively, is included in prepaid expenses and other assets in the Consolidated Balance Sheets. The Company records interest expense on the Debentures in the Consolidated Statements of Income. The following table is a summary of the terms of the current Debentures at September 30, 2007:
(Dollars in thousands)
Riverview Bancorp Statutory Trust I
12/2005
$ 7,217
Variable (1)
5.88%
7.05%
3/2036
Riverview Bancorp Statutory Trust II
6/2007
Fixed (2)
7.03%
9/2037
$22,681
12
14. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition, in the financial statements, of the impact of the tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company adopted FIN 48 at the beginning of fiscal year 2008. The adoption of FIN 48 did not have a material impact on the Company. At the date of adoption, the Company had unrecognized tax benefits related to its state filing positions of approximat ely $90,000 that, if recognized, would affect the Company's effective tax rate by approximately $65,000. The Company recorded an adjustment to retained earnings (net of federal benefits) for these uncertain tax positions totaling $65,000, inclusive of interest and penalties. The Company's policy is to recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. At September 30, 2007, the Company had accrued approximately $11,000 of possible interest and penalties. The tax years 2003 - 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. As of September 30, 2007 no circumstances have changed that would result in a change to the FIN 48 analysis that was originally performed.In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact on the Company's financial position, results of operations and cash flows upon adoption of SFAS No. 157.In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." SFAS No. 159 permits companies to choose, at specified election dates, to measure eligible items at fair value. The standard is designed to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact on the Company's financial position, results of operations and cash flows upon adoption of SFAS No. 159.15. COMMITMENTS AND CONTINGENCIESOff-balance sheet arrangements. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are conditional, and are honored for up to 45 days subject to the Company's usual terms and conditions. Collateral is not required to support commitments.Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies and is required in instances where the Bank deems necessary. The following is a summary of commitments and contingent liabilities with off-balance sheet risk as of September 30, 2007 (in thousands):
Commitments to originate loans:
Adjustable-rate
$ 51,396
Fixed-rate
22,415
Standby letters of credit
2,418
Undisbursed loan funds, and unused lines of credit
180,566
$ 256,795
At September 30, 2007, the Company had firm commitments to sell $604,000 of residential loans to the FHLMC. Typically, these agreements are short term fixed rate commitments and no material gain or loss is likely.
Other Contractual Obligations. In connection with certain asset sales, the Bank typically makes representations and warranties about the underlying assets conforming to specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets or indemnify the purchaser against loss. At September 30, 2007, loans under warranty totaled $109.6 million, which substantially represents the unpaid principal balance of the Company's loans serviced for others. The Bank believes that the potential for loss under these arrangements is remote. Accordingly, no contingent liability is recorded in the financial statements.At September 30, 2007, scheduled maturities of certificates of deposit, FHLB advances, junior subordinated debentures and future minimum operating lease commitments were as follows (in thousands):
Certificates of deposit
$ 127,152
$ 43,845
$ 6,022
$ 2,435
$ 179,454
FHLB advances
Operating leases
1,539
2,757
1,507
3,999
9,802
Total other contractual obligations
$ 162,291
$ 46,602
$ 7,529
$ 29,115
$ 245,537
The Company is party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material adverse effect, if any, on the Company's financial position, results of operations, or liquidity.Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsManagement's Discussion and Analysis and other portions of this report contain certain forward-looking statements concerning the future operations of the Company. Management desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of the protections of the safe harbor provisions with respect to all forward-looking statements contained in this Quarterly Report. The Company has used forward-looking statements to describe future plans and strategies, including its expectations of future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, deposit flows, demand for mortgages and other loans , pricing of products and services, real estate values and vacancy rates, the ability of the Company to efficiently incorporate acquisitions into its operations, competition, loan delinquency rates, technological factors affecting operations and changes in federal and state regulation. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. The Company undertakes no obligation and specifically disclaims any obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results to differ materially from those expressed in any forward-looking statements by, or on behalf of, the Company.Critical Accounting PoliciesCritical accounting policies and estimates are discussed in our 2007 Form 10-K under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies." That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the Company's 2007 Form 10-K.Non-GAAP Financial InformationThis report contains certain financial information determined by methods other than in accordance with GAAP. These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company's performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 34% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. A reconciliation of net interest income as reported to net interest income on a fully tax equivalent basis are contained in the tables under "Net Interest Income."
Executive Overview Financial Highlights. Net income for the three months ended September 30, 2007 was $2.4 million, or $0.22 per basic share ($0.22 per diluted share), compared to net income of $3.0 million, or $0.26 per basic share ($0.26 per diluted share) for the three months ended September 30, 2006. Net interest income after provision for loan losses decreased $233,000 for the three months ended September 30, 2007 compared to the same quarter last year. Non-interest income decreased to $2.2 million for the three months ended September 30, 2007 compared to $2.3 million for the same quarter last year. Non-interest expense increased by $559,000 for the quarter ended September 30, 2007 compared to the same quarter last year.The annualized return on average assets was 1.19% for the three months ended September 30, 2007, compared to 1.45% for the three months ended September 30, 2006. For the same periods, the annualized return on average common equity was 9.98% compared to 12.22%, respectively. The efficiency ratio, which is defined as the percentage of non-interest expenses to total revenue excluding intangible asset amortization, was 61.98% for the second quarter of fiscal 2008 compared to 54.31% for the same period last year.Net income for the six months ended September 30, 2007 was $5.3 million, or $0.47 per basic share ($0.47 per diluted share), compared to net income of $5.6 million, or $0.50 per basic share ($0.49 per diluted share) for the six months ended September 30, 2006.The annualized return on average assets was 1.29% for the six months ended September 30, 2007, compared to 1.41% for the six months ended September 30, 2006. For the same periods, the annualized return on average common equity was 10.58% compared to 11.70%, respectively. The Company's efficiency ratio, net of intangible amortization, was 61.15% for the six months ended September 30, 2007 compared to 57.21% for the same period last year.The Company is a progressive, community-oriented financial institution, which emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington and Multnomah, Clackamas and Marion counties of Oregon as its primary market area. The Company is engaged predominantly in the business of attracting deposits from the general public and using such funds in its primary market area to originate commercial real estate, one- to four- family residential real estate, construction, commercial and consumer loans. Commercial and construction loans have grown from 72.42% of the loan portfolio at March 31, 2003 to 89.07% of the loan portfolio at September 30, 2007. The Company's strategic plan includes targeting the commercial banking customer base in its primary market area, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company emphasizes controlled gro wth and the diversification of its loan portfolio to include a significant amount of commercial and commercial real estate loans. A related goal is to increase the proportion of personal and business checking account deposits used to fund these new loans. Significant portions of these new loan products carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages. The strategic plan stresses increased emphasis on non-interest income, including increased fees for asset management and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. The Company is well positioned to attract new customers and to increase its market share with 18 branches including ten in fast growing Clark County, three in the Portland metropolitan area and three lending centers.In order to support the Company's strategy of growth without compromising local, personal service to customers and its commitment to asset quality, the Company has made significant investments in experienced branch, lending, asset management and support personnel and has incurred significant costs in facility expansion and in its infrastructure. The Company's non-interest expense reflects this investment and will remain relatively high as a percentage of its average assets for the foreseeable future as a result of the emphasis on growth and local, personal service. Controlling its non-interest expenses remains a high priority for the Company's management. The Company continuously reviews new products and services to provide its customers more financial options. With the Company's emphasis on the growth of non-interest income and the control of non-interest expense, all new technology and services are generally reviewed for business development and cost saving purposes. In-house processing of checks and check imaging has supported the Bank's increased service to customers and at the same time has increased efficiency. The Bank has implemented remote check capture at selected branches and is in the process of implementing remote capture of checks on site for selected customers of the Bank. Emphasis on enhancing the Bank's cash management product is in process with the future hire of an experienced cash management team leader. The near future formation of a team consisting of this team leader and existing Bank employees is expected to lead to a more robust cash management product for the Bank's commercial customers. The Company continues to experience growt h in customer use of its online banking services, which allows customers to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying. The Company's online service has also enhanced the delivery of cash management services to commercial customers.
15
The Company conducts operations from its home office in Vancouver and 18 branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, Vancouver (seven branch offices) and Longview, Washington and Portland (two branch offices), Wood Village and Aumsville, Oregon. The Company operates a trust and financial services company, RAM Corp., located in downtown Vancouver. Riverview Mortgage, a mortgage broker division of the Company, originates mortgage loans for various mortgage companies predominantly in the Vancouver/Portland metropolitan areas, as well as for the Company. The Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business banking services. Vancouver is located in Clark County, Washington, which is just north of Portland, Oregon. Many businesses are located in the Vancouver area because of the favorable tax structure and lower energy costs in Washington as compared to Oregon. Companies located in the Vancouver area include Sharp Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory and WaferTech, as well as several support industries. In addition to this industry base, the Columbia River Gorge Scenic Area is a source of tourism, which has helped to transform the area from its past dependence on the timber industry.Loan CompositionThe following table sets forth the composition of the Company's commercial and construction loan portfolio based on loan purpose at the dates indicated.
(In thousands)
Commercial construction
47,829
Office buildings
77,126
Warehouse/industrial
34,892
Retail/shopping centers/strip malls
66,890
Assisted living facilities
11,044
Single purpose facilities
46,248
Land
104,134
Multi-family
27,046
One-to-four family
114,600
$ 620,324
$ 367,380
$ 162,429
56,226
62,310
40,238
70,219
11,381
41,501
103,240
32,041
109,847
$ 618,177
$ 360,930
$ 166,073
16
Comparison of Financial Condition at September 30, 2007 and March 31, 2007At September 30, 2007, the Company had total assets of $820.7 million, compared with $820.3 million at March 31, 2007. Cash, including interest-earning accounts, totaled $36.9 million at September 30, 2007, compared to $31.4 million at March 31, 2007. The $5.5 million increase was attributable to the maturity of investment securities and the issuance of junior subordinated debentures which were partially offset by an increase in loan production.Loans held for sale totaled $604,000 at September 30, 2007. There were no loans held for sale at March 31, 2007. The balance of loans held for sale can vary significantly from period to period reflecting the interest rate environment, loan demand by borrowers, and loan origination for sale by mortgage brokers versus loan origination for the Company's loan portfolio. The Company originates fixed-rate residential loans for sale in the secondary market and retains the related loan servicing rights. Selling fixed interest rate mortgage loans allows the Company to reduce the interest rate risk associated with long term, fixed interest rate products. The sale of loans also makes additional funds available to make new loans and diversify the loan portfolio. The Company continues to service the loans it sells, maintaining the customer relationship and generating ongoing non-interest income.Loans receivable, net, totaled $687.4 million at September 30, 2007, compared to $683.0 million at March 31, 2007, an increase of $4.5 million. Loans receivable increased $24.0 million, or 3.6%, during the quarter ended September 30, 2007 due to continued strong loan growth. A substantial portion of the loan portfolio is secured by real estate, either as primary or secondary collateral, located in the Company's primary market area. The Company has no sub-prime residential real estate loans in portfolio. Investment securities available for sale totaled $8.8 million at September 30, 2007, compared to $19.3 million at March 31, 2007. The decrease was attributable to maturities and scheduled cash flows.Mortgage-backed securities available for sale totaled $5.9 million at September 30, 2007, compared to $6.6 million at March 31, 2007. The decrease is attributable to maturities and scheduled cash flows. The Company has no sub-prime mortgage-backed securities.Goodwill was $25.6 million at September 30, 2007 and March 31, 2007. As of September 30, 2007, there have been no events or changes in circumstances that would indicate a potential impairment.Deposits totaled $659.8 million at September 30, 2007, compared to $665.4 million at March 31, 2007. At September 30, 2007, the balance of interest checking accounts had decreased $12.1 million to $132.3 million from $144.5 million at March 31, 2007. Money market deposit accounts totaled $235.1 million at September 30, 2007, compared to $205.0 million at March 31, 2007. The growth in the higher yielding money market deposit accounts reflects the impact that the inverted/flat yield curve has had on the customers' choice of deposit accounts.Junior subordinated debentures totaled $22.7 million at September 30, 2007 and $7.2 million at March 31, 2007. The $15.5 million increase was the result of the issuance of additional trust preferred securities in June 2007.Shareholders' Equity and Capital ResourcesShareholders' equity decreased $7.6 million to $92.6 million at September 30, 2007 from $100.2 million at March 31, 2007. The decrease in equity from cash dividends declared to shareholders of $2.4 million and stock repurchases of $11.2 million were partially offset by earnings of $5.3 million for the six months ended September 30, 2007. Exercise of stock options, earned ESOP shares, FIN 48 adjustments and the net tax effect of SFAS No. 115 adjustment to securities comprised the remaining $769,000 net increase. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS").Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated in accordance with regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk, weightings and other factors.Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets, Tier I capital to risk-weighted assets, Tier I capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below). Management believes the Bank meets all capital adequacy requirements to which it is subject as of September 30, 2007.
17
As of September 30, 2007, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total capital and Tier I capital to risk-weighted assets, Tier I capital to adjusted tangible assets and tangible capital to tangible assets (set forth in the table below). There are no conditions or events since that notification that management believes have changed the Bank's regulatory capital categorization.The Bank's actual and required minimum capital amounts and ratios are presented in the following table (dollars in thousands):
Amount
Ratio
September30, 2007
Total Capital:
(To Risk-Weighted Assets)
$ 83,846
11.37%
$ 58,983
8.0%
$ 73,729
10.0%
Tier I Capital:
74,809
10.15
29,492
4.0
44,238
6.0
(To Adjusted Tangible Assets)
9.59
23,399
3.0
38,998
5.0
Tangible Capital:
(To Tangible Assets)
11,700
1.5
N/A
$ 84,363
11.38%
$ 59,310
$ 74,137
75,740
10.22
29,655
44,482
9.60
23,662
39,436
11,831
LiquidityThe Bank's primary source of funds are customer deposits, proceeds from principal and interest payments on loans, proceeds from the sale of loans, maturing securities and FHLB advances. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations, deposit withdrawals and continuing operations, satisfy other financial commitments and take advantage of investment opportunities. The Bank generally maintains sufficient cash and short-term investments to meet short-term liquidity needs. At September 30, 2007, cash totaled $36.9 million, or 4.5% of total assets. The Bank has a line of credit with the FHLB of Seattle in the amount of 30% of total assets to the extent the Bank provides qualifying collateral and holds sufficient FHLB stock. At September 30, 2007, the Bank had $33.6 million in outstanding advances from the FHLB of Seattle under an available credit facility of $244.5 million, limited to available collateral. The Bank also had a $10.0 million line of credit available from Pacific Coast Bankers Bank at September 30, 2007. The Bank had no borrowings outstanding under this credit arrangement at September 30, 2007.< BR> Sources of capital and liquidity for the Bancorp include distributions from the Bank and the issuance of debt or equity securities. Dividends and other capital distributions from the Bank are subject to regulatory restrictions.
18
Asset QualityThe allowance for loan losses was $9.1 million at September 30, 2007 and $8.7 million at March 31, 2007, respectively. Management believes the allowance for loan losses at September 30, 2007 is adequate to cover probable credit losses existing in the loan portfolio at that date. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. Pertinent factors considered include size and composition of the portfolio, actual loss experience, current economic conditions, industry trends and data, and detailed analysis of individual loans. The appropriate allowance level is estimated based upon factors and trends identified by management at the time the consolidated financial statements are prepared. Commercial loans are considered to involve a higher degree of credit risk than one-to-four family residential loans, and tend to be more vulnerable to adverse conditions in the real estate market and deterior ating economic conditions. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Bank's allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.Non-performing assets were $206,000 or 0.03% of total assets at September 30, 2007, compared with $226,000 or 0.03% of total assets at March 31, 2007. The $132,000 balance of nonaccrual loans is comprised of one commercial real estate loan. The $74,000 balance of real estate owned is comprised of one land loan. The following table sets forth information regarding the Company's non-performing assets.
Loans accounted for on a nonaccrual basis:
$ 132
$ 226
132
226
Accruing loans which are contractually past due 90 days or more
Total of nonaccrual and 90 days past due loans
Real estate owned (net)
Total non-performing assets
$ 206
Total loans delinquent 90 days or more to net loans
0.02%
0.03%
Total loans delinquent 90 days or more to total assets
Total non-performing assets to total assets
As of September 30, 2007 and March 31, 2007, other loans of concern totaled $4.4 million and $3.9 million, respectively. Other loans of concern consist of loans which known information concerning possible credit problems with the borrowers or the cash flows of the collateral securing the respective loans has caused management to be concerned about these isolated instances of the ability of the borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the nonaccrual category.
Off-Balance Sheet Arrangements and Other Contractual ObligationsThrough the normal course of operations, the Company enters into certain contractual obligations and other commitments. Obligations generally relate to funding of operations through deposits and borrowings as well as leases for premises. Commitments generally relate to lending operations.The Company has obligations under long-term operating leases, principally for building space and land. Lease terms generally cover a five-year period, with options to extend, and are not subject to cancellation.The Company has commitments to originate fixed and variable rate mortgage loans to customers. Because some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed, but committed to construction projects and home equity and commercial lines of credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.For further information regarding the Company's off-balance sheet arrangements and other contractual obligations, see Note 15 of the Notes to Consolidated Financial Statements contained herein.Comparison of Operating Results for the Three Months Ended September 30, 2007 and 2006Net Interest Income. The Company's profitability depends primarily on its net interest income, which is the difference between the income it receives on interest-earning assets and its cost of funds, which consists of interest paid on deposits and borrowings. When interest-earning assets equal or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government legislation and regulation, and monetary and fiscal policies.Net interest income for the three months ended September 30, 2007 was $8.7 million, representing a decrease of $433,000, or 4.7%, from $9.1 million during the same prior year period. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 117.73% for the three months ended September 30, 2007, compared to 119.63% in the same prior year period which indicates that the interest-earning asset growth is being funded more by interest-bearing liabilities as compared to capital and non-interest-bearing demand deposits. The net interest margin for the quarter ended September 30, 2007 was 4.72%, compared to 4.97% for the quarter ended September 30, 2006. The growth in the higher yielding money market deposit accounts reflects the impact that the inverted/flat yield curve has had on the customers' choice of deposit accounts. The Company's balance sheet interest rate sensitivity achieves better net interest rate margins in a stable or increasing interest rate environment du e to the balance sheet being slightly asset interest rate sensitive. In a decreasing interest rate environment the Company requires time to recover the decline in the net interest rate margin. The Company's interest-earning asset's interest rates reprice down faster than interest rates on our interest-bearing liabilities. As a result of the Federal Reserve's 50 basis points reduction in short term fed funds rate on September 18, 2007, approximately 40% of the Company's loans immediately repriced down 50 basis points. The Company immediately reduced the interest rate paid on certain interest-bearing deposits. Further reductions will be reflected in our future deposit offering rates. The amount and timing of these reductions is dependent on competitive pricing pressures, yield curve shape and changes in spreads.Interest Income . Interest income remained stable at $15.3 million for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006. Interest income on loans receivable and investment securities decreased for the three months ended September 30, 2007 compared to the same prior year period due to the decrease in loan balances and the maturity and scheduled cash flows of investment securities. These decreases were offset by an increase in interest income from interest-earning cash accounts primarily held at the FHLB of Seattle. The yield on interest-earning assets was 8.31% for the three months ended September 30, 2007, compared to 8.32% for the same three months ended September 30, 2006. Interest Expense. Interest expense increased $445,000 to $6.6 million for the three months ended September 30, 2007, or 7.2%, compared to $6.2 million for the same prior year period. For the same periods, average interest-bearing liabilities were $621.7 million and $610.4 million, respectively. Much of this growth was in the higher yielding money market deposit accounts whose average balance increased 71.0% for the three months ended September 30, 2007 compared to same prior year period. This growth was partially offset by the 60.8% decrease in other interest-bearing liabilities due to the pay down of our line of credit with FHLB. The increase in interest expense was also attributable to the higher rates of interest paid on deposits and other interest-bearing liabilities. The weighted average interest rate on total deposits increased to 4.09% for the three months ended September 30, 2007 from 3.76% for the same period in the prior year. The weighted average cost of FHLB borrowings, junior subordi nated debenture and capital lease obligations increased to 6.45% for the three months ended September 30, 2007 from 5.46% for the same period in the prior year.
20
The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, ratio of interest-earning assets to interest-bearing liabilities and net interest margin.
Interest-earning assets:
Mortgage loans
$571,750
$ 12,453
8.64%
$583,779
$ 12,709
Non-mortgage loans
101,304
2,178
8.53
99,599
2,125
8.46
Total net loans (1)
673,054
14,631
8.62
683,378
14,834
8.61
Mortgage-backed securities (2)
7,313
4.61
9,352
4.62
Investment securities (2)(3)
12,940
6.04
23,009
284
4.90
Daily interest-bearing assets
30,538
5.16
7,002
5.21
Other earning assets (4)
8,031
1.14
7,567
0.21
Total interest-earning assets
731,876
15,333
8.31
730,308
15,323
8.32
Non-interest-earning assets:
Office properties and equipment, net
20,997
19,486
Other non-interest-earning assets
58,643
61,498
Total assets
$811,516
$811,292
Interest-bearing liabilities:
Regular savings accounts
$ 27,738
0.55
$ 34,242
47
Interest checking accounts
137,678
1,148
3.31
148,320
1,221
3.27
Money market deposit accounts
242,822
2,741
4.48
141,966
1,524
4.26
177,286
2,106
4.71
193,854
2,116
4.33
Total interest-bearing deposits
585,524
4.09
518,382
3.76
Other interest-bearing liabilities
36,130
6.45
92,065
5.46
Total interest-bearing liabilities
621,654
4.22
610,447
4.01
Non-interest-bearing liabilities:
Non-interest-bearing deposits
85,092
96,736
Other liabilities
8,206
7,548
714,952
714,731
Shareholders' equity
96,564
96,561
Total liabilities and shareholders' equity
Net interest income (5)
$ 8,713
$ 9,148
Interest rate spread
4.09%
4.31%
Net interest margin
4.72%
4.97%
117.73%
119.63%
21
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006. Variances that were immaterial have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change.
Three Months Ended September 30,
2007 vs. 2006
Volume
Rate
Increase (Decrease)
Interest Income:
Mortgage Loans
$ (256)
53
Mortgage-backed securities
(24)
Investment securities (1)
(143)
(87)
Daily interest-bearing
306
305
Other earning assets
(82)
Interest Expense:
(9)
(88)
(73)
83
1,218
(189)
(11)
(879)
199
(680)
(30)
475
445
Net interest income (1)
$ (52)
$ (383)
$ (435)
(1) Interest is presented on a fully tax-equivalent basis under a tax rate of 34%
Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2007 was $400,000, compared to $600,000 for the same period in the prior year. Net charge-offs for the current period were $66,000, compared to $37,000 net recoveries for the same period last year. The ratio of allowance for loan losses and unfunded loan commitments to total net loans was 1.36% at September 30, 2007, compared to 1.24% at September 30, 2006. Annualized net charge-offs to average net loans for the three-month period ended September 30, 2007 was 0.04%, compared to annualized net recoveries of 0.02% for the same period in the prior year. During the quarter ended September 30, 2007, management evaluated known and inherent risks in the loan portfolio and based on this analysis no changes were made in the estimation, assumptions and allocation of the allowance for loan losses. Management considers the allowance for loan losses at September 30, 2007 to be adequate to cover probable losses inh erent in the loan portfolio based on the assessment of various factors affecting the loan portfolio as described above under "Asset Quality."Non-Interest Income. Non-interest income decreased $75,000 to $2.2 million for the quarter ended September 30, 2007 compared to $2.3 million for the quarter ended September 30, 2006. Decreases in mortgage broker loan fees that are reported in fees and service charges, gain on sale of loans held for sale, loan servicing income and gain on sale of credit card portfolio offset the increases in asset management fees and bank owned life insurance. For the three months ended September 30, 2007 broker loan fees decreased by $79,000 compared to the same prior year period. Non-Interest Expense. Non-interest expense increased to $6.8 million for the quarter ended September 30, 2007 compared to $6.3 million for the same prior year period. The principal component of the Company's non-interest expense is salaries and employee benefits. Salaries and employee benefits increased $376,000 to $3.9 million for the three months ended September 30, 2007 compared to $3.5 million for the three months ended September 30, 2006. The majority of the increase is a result of the expansion of our lending team, the opening of a new branch and the increasing costs of employee benefits. Full-time equivalent employees increased to 260 at September 30, 2007 from 256 at September 30, 2006.
22
Provision for Income Taxes. Provision for income taxes was $1.2 million for the three months ended September 30, 2007, compared to $1.6 million for the three months ended September 30, 2006. The effective tax rate for the three months ended September 30, 2007 was 33.9% compared to 34.6% for the three months ended September 30, 2006. The 0.7% decrease in the effective tax rate for the three months ended September 30, 2007 is primarily attributable to the impact of the ESOP market value adjustment. The Company's overall effective tax rate at September 30, 2007 and 2006 takes into account the estimated Oregon apportionment factors for property, payroll and sales. Comparison of Operating Results for the Six Months Ended September 30, 2007 and 2006Net Interest Income. Net interest income for the six months ended September 30, 2007 was $17.5 million, representing a decrease of $618,000, or 3.4%, compared to $18.1 million for the same prior year period. This decline reflected a 4.8% increase in the average balance of interest-bearing liabilities (an increase in both interest checking and money market deposit accounts) to $621.3 million. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 117.98% in the six-month period ended September 30, 2007 from 120.03% in the same prior year period. The ratio indicates that the interest-earning asset growth is being funded more by interest-bearing liabilities as compared to capital and non-interest-bearing demand deposits.Interest Income. Interest income totaled $30.7 million and $29.5 million, for the six months ended September 30, 2007 and 2006, respectively. The increased interest income of $1.2 million reflects the 3.0% increase in the average balance of interest earning assets for the current six month period compared to the same period in the prior year, which was attributable to increased loan originations and interest-earning cash accounts. The yield on interest-earning assets was 8.37% for the six months ended September 30, 2007 compared to 8.28% for the six months ended September 30, 2006. Interest Expense. Interest expense was $13.2 million for the six months ended September 30, 2007 an increase of 16.3% from $11.4 million for the same period in the prior year. The increase in interest expense reflects the higher market rates of interest paid on deposits and FHLB borrowings and the increased balance of interest-bearing liabilities when comparing average balances at September 30, 2007 and September 30, 2006. Average interest-bearing liabilities increased $28.6 million to $621.3 million for the six months ended September 30, 2007 from $592.7 million for the same prior year period. The weighted average interest rate on total deposits increased to 4.13% for the six months ended September 30, 2007 from 3.58% for the same period in the prior year. The weighted average interest rate of FHLB borrowings, junior subordinated debenture and capital lease obligations increased to 6.38% for the six months ended September 30, 2007 from 5.32% for same period in the prior year.
$577,300
$25,158
8.69%
$568,206
$24,505
8.60%
101,346
4,353
8.57
97,023
4,098
8.42
678,646
29,511
8.67
665,229
28,603
8.58
7,547
4.65
9,640
14,884
427
5.72
23,413
569
4.85
24,094
625
5.17
5,523
141
5.09
7,828
0.97
0.18
732,999
30,777
8.37
711,372
29,543
8.28
21,124
19,328
59,855
61,777
$813,978
$792,477
$ 27,987
77
$ 35,283
141,910
2,380
3.35
137,809
2,105
3.05
231,752
5,284
4.55
137,948
2,781
4.02
188,590
4,482
4.74
198,041
4,147
4.18
Total deposits
590,239
4.13
509,081
3.58
31,056
6.38
83,598
5.32
621,295
4.24
592,679
3.82
84,513
95,602
8,871
8,701
714,679
696,982
99,299
95,495
$ 17,561
$ 18,183
4.13%
4.46%
4.78%
5.10%
117.98%
120.03%
$ 39
$ 43
The following table sets forth the effects of changing rates and volumes on net interest income of the Company for the six months ended September 30, 2007 compared to the six months ended September 30, 2006. Variances that were immaterial have been allocated based upon the percentage relationship of changes in volume and changes in rate to the total net change
Six Months Ended September 30,
$ 395
$ 258
$ 653
182
73
255
(49)
(47)
(232)
90
(142)
482
484
31
778
456
1,234
(20)
64
211
275
2,096
407
2,503
(204)
539
335
(1,614)
377
(1,237)
322
1,534
1,856
$ 456
$ (1,078)
$ (622)
Provision for Loan Losses. The provision for loan losses for the six months ended September 30, 2007 was $450,000, compared to $950,000 for the same period in the prior year. Net charge-offs for the six months ended September 30, 2007 were $41,000, compared to $92,000 net recoveries for the same period of last year. The ratio of allowance for loan losses to total net loans increased to 1.30% at September 30, 2007, compared to 1.18% at September 30, 2006. Annualized net charge-offs to average net loans for the six-month period ended September 30, 2007 was 0.01%, compared to annualized net recoveries of 0.03% for the same period in the prior year. During the six months ended September 30, 2007, management evaluated known and inherent risks in the loan portfolio and based on this analysis changes were made in the estimation, assumptions and allocation of the allowance for loan losses. The national and local economy housing market continues to be experiencing a slow down in housing sales w hich is impacting land developers' ability to sell their products. The estimated loan loss rate was increased by 0.25% to 1.50% for the loans consisting of land and lots for development and builder lot loans. Management considers the allowance for loan losses at September 30, 2007 to be adequate to cover probable losses inherent in the loan portfolio based on the assessment of various factors affecting the loan portfolio as described above under "Asset Quality."Non-Interest Income. Non-interest income increased $112,000 or 2.5%, to $4.5 million for the six months ended September 30, 2007 from $4.4 million for the six months ended September 30, 2006. Asset management fees from fiduciary services increased by $170,000 to $1.1 million for the six months ended September 30, 2007, compared to $891,000 for the six months ended September 30, 2006. RAM Corp. had $302.9 million in assets under management at September 30, 2007 compared to $276.3 million at September 30, 2006. Non-Interest Expense. Non-interest expense increased $571,000, or 4.4%, to $13.6 million for the six months ended September 30, 2007, compared to $13.0 million for the same period last year. The principal component of the Company's non-interest expense is salaries and employee benefits. Salaries and employee benefits increased $509,000 to $7.9 million for the six months ended September 30, 2007 compared to $7.4 million for the same period in the prior year. The majority of the increase is a result of the expansion of our lending team, opening a new branch and the increasing costs of employee benefits. Full-time equivalent employees increased to 260 at September 30, 2007 from 256 at September 30, 2006.Occupancy and depreciation expense totaled $2.5 million for the six months ended September 30, 2007, compared to $2.2 million for the same period in prior year. This increase is the result of increases in rent and related costs at several banking facilities, increased software depreciation expense and the opening of the Gateway branch in November 2006.
25
Data processing expense was $376,000 for the six months ended September 30, 2007 compared to the $557,000 for the six months ended September 30, 2006. The $181,000 decrease reflects the savings attributable to the April 2006 change in the service bureau that performs the Bank's core computer system processing.Provision for Income Taxes. Provision for income taxes was $2.7 million for the six months ended September 30, 2007, compared to $3.0 million for the six months ended September 30, 2006 as a result of the decrease in income before taxes. The effective tax rate for the six months ended September 30, 2007 was 34.0% compared to 34.5% for the six months ended September 30, 2006. The 0.5% decrease in the effective tax rate for the six months ended September 30, 2007 is primarily attributable to the impact of the ESOP market value adjustment. The Company's overall effective tax rate at September 30, 2007 takes into account Oregon apportionment factors for property, payroll and sales. Item 3. Quantitative and Qualitative Disclosures About Market RiskThe Company's Asset Liability Committee is responsible for implementing the interest rate risk policy which sets forth limits established by the Board of acceptable changes in net interest income and the portfolio value from specified changes in interest rates. The OTS defines net portfolio value as the present value of expected cash flows from existing assets minus the present value of expected cash flows from existing liabilities plus the present value of expected cash flows from existing off-balance sheet contracts. The Asset Liability Committee reviews, among other items, economic conditions, the interest rate outlook, the demand for loans, the availability of deposits and borrowings, and the Company's current operating results, liquidity, capital and interest rate exposure. In addition, the Asset Liability Committee monitors asset and liability characteristics on a regular basis and performs analyses to determine the potential impact of various business strategies in controlling interest rate risk an d other potential impact of these strategies upon future earnings under various interest rate scenarios. Based on these reviews, the Asset Liability Committee formulates a strategy that is intended to implement the objectives contained in its business plan without exceeding limits set forth in the Company's interest rate risk policy for losses in net interest income and net portfolio value.There has not been any material change in the market risk disclosures contained in the 2007 Form 10-K.Item 4. Controls and ProceduresAn evaluation of the Company's disclosure controls and procedures (as defined in Rule 13(a) - 15(e) of the Securities Exchange Act of 1934) was carried out as of September 30, 2007 under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934 is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.In the quarter ended September 30, 2007, the Company did not make any changes in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect these controls. The Company intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company's business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individua l acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
RIVERVIEW BANCORP, INC. AND SUBSIDIARYPART II. OTHER INFORMATION
Item 1. Legal Proceedings The Company is party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material adverse effect, on the Company's financial position, results of operations, or liquidity.Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the 2007 Form 10-K.Item 2. Unregistered Sale of Equity Securities and Use of ProceedsThe following table summarizes the Company's share repurchases for the quarter ended September 30, 2007.
Period
Total Number ofShares Purchased
AveragePrice Paidper Share
Total Number ofShares Purchased asPart of PubliclyAnnounced Program
Maximum Number ofShares that May Yet BePurchased Under thePrograms (1)(2)
July 1 -July 31, 2007
345,000
$ 14.36
490,000
August 1 -August 31, 2007
200,000
14.79
290,000
September 1 -September 30, 2007
65,000
15.11
225,000
610,000
Item 3. Defaults Upon Senior Securities Not applicableItem 4. Submission of Matters to a Vote of Security HoldersThe Company held its annual meeting of shareholders on July 18, 2007. The following is a brief description and vote count of the proposed voted upon at the annual meeting.Proposal - Election of directors. Votes were as follows:
The following are the names of the directors (and remaining term) whose term in office continued after the annual meeting: Patrick Sheaffer (2008); Edward R. Geiger (2008); Robert K Leick (2009); and Gary R. Douglass (2009).Item 5. Other Information Not applicable
Item 6. Exhibits
(a)
Exhibits:
3.1
Articles of Incorporation of the Registrant (1)
3.2
Bylaws of the Registrant (1)
Form of Certificate of Common Stock of the Registrant (1)
10.1
Form of Employment Agreement between the Bank and each of Patrick Sheaffer, Ronald A. Wysaske, David A. Dahlstrom and John A. Karas (2)
10.2
Form of Change in Control Agreement between the Bank and Ronald I. Dobyns (3)
10.3
Employee Severance Compensation Plan (4)
10.4
Employee Stock Ownership Plan (5)
10.5
Management Recognition and Development Plan (6)
10.6
1998 Stock Option Plan (6)
10.7
1993 Stock Option and Incentive Plan (6)
10.8
2003 Stock Option Plan (7)
10.9
Form of Incentive Stock Option Award Pursuant to 2003 Stock Option Plan (8)
10.10
Form of Non-qualified Stock Option Award Pursuant to 2003 Stock Option Plan (8)
Statement recomputation of per share earnings (See Note 4 of Notes to Consolidated Financial Statements contained herein.)
31.1
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
29
EXHIBIT INDEX
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
30
Exhibit 31.1
Exhibit 31.2
Exhibit 32
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies in his capacity as an officer of Riverview Bancorp, Inc. (the "Company") and in connection with the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 that: