SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of - ----- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 ----------------- 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.) 700 N.E. Fourth Ave. Camas, WA 98607 (Address of principal executive office) Registrant's telephone number, including area code: (360)834-2231 Check whether the registrant: (1) filed all reports required to be filed by Sections 13 or 15(d)of the Exchange Act during the past 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 . --- -- 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---5,578,734 shares as of December 31, 1998.
Form 10-Q RIVERVIEW BANCORP, INC. AND SUBSIDIARY INDEX Part I. Financial Information Page --------------------- ---- Item 1: Financial Statements (Unaudited) Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998 1 Consolidated Statements of Income: Nine and Three Months Ended December 31, 1998 and 1997 2 Consolidated Statements of Shareholders' Equity for the Year ended March 31, 1998 and for the Nine Months Ended December 31, 1998 3 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1997 4 Notes to Consolidated Financial Statements 5-12 (unaudited) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 13-27 Item 3: Quantitative and Qualitative Disclosures About Market Risk 28 Part II. Other Information 29 SIGNATURES 30 EXHIBITS 31-32
RIVERVIEW BANCORP, INC. AND SUBSIDIARY Consolidated Balance Sheets As of December 31, 1998 and March 31, 1998 December 31, March 31, (In thousands, except share data) (Unaudited) 1998 1998 - ------------------------------------------------------------------------------ ASSETS Cash (including interest-earning accounts of $14,692 and $20,504) $20,618 $27,482 Loans held for sale 634 1,430 Investment securities held to maturity, at amortized cost (fair value of $5,167 and $8,394) 5,136 8,336 Investment securities available for sale, at fair value (amortized cost of $14,845 and $9,961) 14,489 9,977 Mortgage-backed securities held to maturity, at amortized cost, (fair value of $14,754 and $20,758) 14,397 20,341 Mortgage-backed securities available for sale, at fair value (amortized cost of $58,797 and $32,526) 58,252 32,690 Loans receivable (net of allowance of $1,139 and $984 for loan losses) 175,838 161,198 Real estate owned 223 - Prepaid expenses and other assets 966 882 Accrued interest receivable 1,734 1,597 Federal Home Loan Bank stock 2,565 1,966 Premises and equipment 5,776 4,802 Land held for development 471 471 Core deposit intangible 1,757 2,002 -------- -------- TOTAL ASSETS $302,856 $273,174 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposit accounts $198,902 $179,825 Accrued expenses and other liabilities 2,049 2,490 Advance payment by borrowers for taxes and insurance 7 84 Deferred income taxes, net 143 143 Federal Home Loan Bank advances 42,550 29,550 -------- -------- Total Liabilities 243,651 212,092 SHAREHOLDERS' EQUITY Serial preferred stock, $.01 par value; 250,000 authorized, issued and outstanding , none Common stock, December 31, 1998- $.01 par value; 50,000,000 authorized; 6,191,774 issued, 5,578,734 outstanding; March 31, 1998 6,154,326 issued, 5,809,456 outstanding 62 62 Additional paid-in capital 53,568 53,399 Unearned shares issued to employee stock ownership trust (2,743) (2,993) Retained earnings 12,861 10,495 Treasury shares at cost- 178,538 shares and no shares at December 31, 1998 and March 31, 1998, respectively (2,399) - Unearned shares issued to MRDP at grant cost-142,830 shares and no shares at December 31, 1998 and March 31, 1998, respectively (1,571) - Net unrealized (loss) gain on securities available for sale, net of tax (573) 119 -------- -------- Total shareholders' equity 59,205 61,082 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $302,856 $273,174 ======== ======== The accompanying notes are an integral part of these unaudited consolidated statements. 1
RIVERVIEW BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Income For Three Months and Nine Months Ended December 31, 1998 and 1997 Three Months Ended Nine Months Ended (In thousands, except share data) December 31, December 31, (Unaudited) 1998 1997 1998 1997 - ------------------------------------------------------------------------------ INTEREST INCOME Interest on loans receivable $4,487 $3,798 $12,890 $11,150 Interest on investment securities 267 273 923 915 Interest on mortgage-backed securities 1,142 849 2,717 2,106 Other interest and dividends 257 368 841 609 ------ ------ ------- ------- Total interest income 6,153 5,288 17,371 14,780 ------ ------ ------- ------- INTEREST EXPENSE Interest on deposits 2,090 1,870 6,078 5,543 Interest on borrowings 544 514 1,236 1,514 ------ ------ ------- ------- Total interest expense 2,634 2,384 7,314 7,057 ------ ------ ------- ------- Net interest income 3,519 2,904 10,057 7,723 Less provision for loan losses 60 45 180 135 ------ ------ ------- ------- Net interest income after provision for loan losses 3,459 2,859 9,877 7,588 ------ ------ ------- ------- NON-INTEREST INCOME Fees and service charges 672 477 1,790 1,263 Gain on sale of loans held for sale 102 18 211 57 Gain on sale of securities - 5 37 38 Loan servicing income 22 62 89 194 Other 22 17 72 87 ------ ------ ------- ------- Total non-interest income 818 579 2,199 1,639 ------ ------ ------- ------- NON-INTEREST EXPENSE Salaries and employee benefits 1,693 1,118 4,040 3,153 Occupancy and depreciation 435 335 1,211 970 FDIC insurance premium 27 26 80 79 Amortization of excess of cost over fair value of deposits acquired 82 82 245 245 Marketing 77 43 231 212 Other 302 202 792 637 ------ ------ ------- ------- Total non-interest expense 2,616 1,806 6,599 5,296 ------ ------ ------- ------- INCOME BEFORE FEDERAL INCOME TAXES 1,661 1,632 5,477 3,931 FEDERAL INCOME TAX EXPENSE 606 559 1,999 1,357 ------ ------ ------- ------- NET INCOME $1,055 $1,073 $ 3,478 $ 2,574 ====== ====== ======= ======= Earnings per common share: Basic $0.19 $0.19 $0.60 $0.43 Diluted 0.18 0.18 0.59 0.42 Weighted average number of shares outstanding: Basic 5,614,967 5,782,415 5,762,212 5,963,767 Diluted 5,730,901 5,949,280 5,893,191 6,113,749 The accompanying notes are an integral part of these unaudited consolidated statements. 2
<TABLE> RIVERVIEW BANCORP, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity For the Year Ended March 31, 1998 and the Nine Months Ended December 31, 1998 (In thousands, except share data) (Unaudited) - --------------------------------------------------------------------------------------------------------- - --- Net Un- Unearned realized Shares Gain Issued to (Loss) on Addi- Employee Unearned Securities Common Stock tional Stock Shares Avail- --------------- Paid-In Ownership Retained Treasury Issued able for Shares Amount Capital Trust Earnings Stock to MRDP Sale Total ------ ------ ------- --------- -------- ----- ------- -------- ---- - - <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance April 1, 1997 6,043,656 $2,416 $16,043 $ (386) $7,033 $ - $ - $(84) $25,022 Net Income - - - - 3,924 - - - 3,924 Retirement of Mutual Holding Company stock (3,570,270)(1,408) 1,494 - - - - - 86 Issuance and exchange of common stock as a result of conver- sion/reorganization 3,570,750 (948) 35,586 - - - - - 34,638 Retirement of fractional shares (230) - - - - - - - - - Cash dividends - - - - (462) - - - (462) Exercise of stock options 26,578 2 88 - - - - - 90 Shares acquired by ESOP (285,660) - - (2,856) - - - - (2,856) Earned ESOP shares 24,632 - 188 249 - - - - 437 Change in unrealized gain on securities available for sale, net of tax - - - - - - - 203 203 --------- ------ ------- ------- ------- ------- ------- ------ ----- - -- Balance March 31, 1998 5,809,456 $ 62 $53,399 $(2,993) $10,495 $ - $ - $ 119 $61,082 ========= ====== ======= ======= ======= ======= ======= ====== ======= Net Income - - - - 3,478 - - - 3,478 Cash dividends - - - - (1,112) - - - (1,112) Exercise of stock options 37,448 - 132 - - - - - 132 Earned ESOP shares 24,632 52 250 302 Repurchase treasury shares (178,538) - - - - (2,399) - - (2,399) Repurchase MRDP shares (142,830) - (15) - - - (1,964) - (1,979) Earned MRDP shares 28,566 - - - - - 393 - 393 Change in net unrealized loss on securities available for sale, net of tax - - - - - - - (692) (692) --------- ------ ------- ------- ------- ------- ------- ------ ----- - -- Balance December 31, 1998 5,578,734 $ 62 $53,568 $(2,743) $12,861 $(2,399) $(1,571) $ (573) $59,205 ========= ====== ======= ======= ======= ======= ======= ====== ======= The accompanying notes are an integral part of these unaudited consolidated statements. 3 </TABLE>
RIVERVIEW BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended December 31, (In thousands) (Unaudited) 1998 1997 - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $3,478 $2,574 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 900 615 Provision for losses on loans 180 135 Noncash expense related to ESOP benefit 186 373 Noncash expense related to MRDP benefit 491 - Increase in deferred loan origination fees, net of amortization 269 331 Federal Home Loan Bank stock dividend (124) (109) Net gain on sale of real estate owned, mortgage-backed and investment securities and premises and equipment (59) (95) Changes in assets and liabilities: Decrease (increase) in loans held for sale 796 (629) (Increase) decrease in prepaid expenses and other assets (84) 252 Increase in accrued interest receivable (137) (106) Increase (decrease) in accrued expenses and other liabilities 215 (53) ------- ------- Net cash provided by operating activities 6,111 3,288 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Loan originations (115,569) (70,801) Principal repayments on loans 99,704 59,072 Proceeds from call, maturity, or sale of securities available for sale 17,049 5,003 Purchase of investment securities available for sale (21,908) (12,000) Purchase of mortgage-backed securities available for sale (33,377) (33,632) Proceeds from sale of mortgage-backed securities available for sale - 2,280 Principal repayments on mortgage-backed securities held to maturity 5,969 4,434 Principal repayments on mortgage-backed securities available for sale 6,907 498 Purchase of investment securities held to maturity (982) - Proceeds from call or maturity of investment securities held to maturity 4,151 10,978 Purchase of premises and equipment (1,461) (520) Purchase of Federal Home Loan Bank stock (475) (64) Proceeds from sale of real estate 222 135 ------- ------- Net cash used in investing activities (39,770) (34,617) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposit accounts 19,077 1,963 Dividends paid (959) (304) Proceeds from issuance of common stock, net related costs 34,755 Stock acquired for ESOP - (2,856) Treasury stock acquired (2,399) - Stock acquired for MRDP (1,979) - Proceeds from Federal Home Loan Bank advances 30,000 35,800 Repayment of Federal Home Loan Bank advances (17,000) (33,430) Net decrease in advance payments by borrowers (77) (70) Proceeds from exercise of stock options 132 - ------- ------- Net cash provided by financing activities 26,795 35,858 ------- ------- NET (DECREASE) INCREASE IN CASH (6,864) 4,529 CASH, BEGINNING OF PERIOD 27,482 6,951 ------- ------- CASH, END OF PERIOD $20,618 $11,480 ======= ======= SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest $7,237 $7,099 Income taxes 2,104 1,403 NONCASH INVESTING ACTIVITIES: Transfer of loans to real estate owned 498 - Dividends declared and accrued in other liabilities 371 - Fair value adjustment to securities available for sale (1,081) 133 Income tax effect related to fair value adjustment 389 45 The accompanying notes are an integral part of these unaudited consolidated 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 generally accepted accounting principles. However, all adjustments which 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. 1998 Annual Report on Form 10-K. The results of operations for the three months and nine months ended December 31, 1998 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 wholly-owned subsidiaries, Riverview Asset Management, Inc. and Riverview Services, Inc. Significant inter-company balances and transactions have been eliminated in the consolidation. (3) Comprehensive Income -------------------- Effective April 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with the other financial statements and to disclose as a part of shareholders' equity accumulated comprehensive income. Comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. The Company has chosen, for purposes of its interim financial reporting, to present 5
comprehensive income in the notes to financial statements. Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale and gains and losses on sale of securities available for sale. For the three and nine months ended December 31, 1998, the Company's total comprehensive income was $630,000 and $2.8 million, respectively, compared to $1.1 million and $2.6 million for the three and nine months ended December 31, 1997, respectively. Total comprehensive income for the three and nine months ended December 31, 1998 is comprised of net income of $1.1 million and $3.5 million and other comprehensive loss of $425,000 and $715,000, net of tax, respectively. Other comprehensive income for the three and nine months ended December 31, 1998, consists of unrealized securities losses of $425,000 and $692,000, net of tax benefits less gains on securities available for sale included in non-interest income of zero and $23,000, net of tax, respectively. Total comprehensive income for the three and nine months ended December 31, 1997 is comprised of net income of $1.1 million and $2.6 million and other comprehensive income of $75,000 and $63,000, net of tax, respectively. Other comprehensive income for the three and nine months ended December 31, 1997, consists of unrealized securities gains of $78,000 and $88,000, net of tax benefits less gains on securities available for sale included in non-interest income of $3,000 and $25,000, net of tax, respectively. (4) Earnings Per Share ------------------ Basic 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 unassigned MRDP shares. Employee Stock Ownership Plan shares are not considered outstanding for earnings per share purposes until they are committed to be released. 6
Three Months Ended December 31, --------------------- 1998 1997 ---- ---- Basic EPS computation: Numerator-Net Income $1,055,000 $1,073,000 Denominator-Weighted average common shares outstanding 5,614,967 5,782,415 Basic EPS $ 0.19 $ 0.19 ========== ========== Diluted EPS computation: Numerator-Net Income $1,055,000 $1,073,000 Denominator-Weighted average common shares outstanding 5,614,967 5,782,415 Effect of dilutive stock options 115,934 166,865 ---------- ---------- Weighted average common shares and common stock equivalents 5,730,901 5,949,280 Diluted EPS $ 0.18 $ 0.18 ========== ========== Nine Months Ended December 31, --------------------- 1998 1997 ---- ---- Basic EPS computation: Numerator-Net Income $3,478,000 $2,574,000 Denominator-Weighted average common shares outstanding 5,762,212 5,963,767 Basic EPS $ 0.60 $ 0.43 ========== ========== Diluted EPS computation: Numerator-Net Income $3,478,000 $ 2,574,000 Denominator-Weighted average common shares outstanding 5,762,212 5,963,767 Effect of dilutive stock options 124,225 149,982 Effect of dilutive MRDP shares 6,754 - ---------- ---------- Weighted average common shares and common stock equivalents 5,893,191 6,113,749 Diluted EPS $ 0.59 $ 0.42 ========== ========== 7
(5) Investment Securities - --------------------------- The amortized cost and approximate fair value of investment securities held to maturity consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1998 -------- -------- -------- -------- ----------------- Agency securities $ 4,174 $ 31 $ - $ 4,205 Municipal securities 962 - - 962 -------- -------- -------- -------- Total $ 5,136 $ 31 $ - $ 5,167 ======== ======== ======== ======== March 31, 1998 -------------- Agency securities $ 7,336 $ 64 $ (6) $ 7,394 U.S. Treasury securities 1,000 - - 1,000 -------- -------- -------- -------- Total $ 8,336 $ 64 $ (6) $ 8,394 ======== ======== ======== ======== The contractual maturities of investment securities held to maturity were as follows (in thousands): Estimated Amortized Fair December 31, 1998 Cost Value - ------------------ -------- -------- Due in one year or less $ 4,174 $ 4,205 Due after ten years 962 962 ------- ------- Total $ 5,136 $ 5,167 ======= ======= There were no sales of investment securities held to maturity during the nine months ended December 31, 1998 and 1997. The amortized cost and approximate fair value of investment securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1998 -------- -------- -------- -------- ----------------- Agency securities $13,489 $$ 29 $ (33) $13,485 Equity securities 1,356 - (352) 1,004 ------- ------- ------- ------- Total $14,845 $ 29 $ (385) $14,489 ======= ======= ======= ======= March 31, 1998 -------------- Agency securities $ 7,000 $ 13 $ (9) $ 7,004 U.S. Treasury securities 2,961 12 - 2,973 -------- -------- -------- -------- Total $ 9,961 $ 25 $ (9) $ 9,977 ======== ======== ======== ======== The contractual maturities of investment securities available for sale are as follows (in thousands): Estimated Amortized Fair December 31, 1998 Cost Value - ----------------- -------- ------- Due after one year through five years $ 6,000 $ 6,029 Due after five years through ten years 2,500 2,487 Due after ten years 6,345 5,973 ------- ------- Total $14,845 $14,489 ======= ======= Investment securities with an amortized cost of $4.0 million and $1.0 million and a fair value of $4,031,000 and $995,000 at December 31, 1998 and March 31, 1998, respectively, were pledged as collateral for treasury tax and loan funds held by the Community Bank. 8
(6) Mortgage-Backed Securities - ------------------------------ Mortgage-backed securities held to maturity consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1998 -------- ---------- ---------- --------- ----------------- Real estate mortgage investment conduits $ 3,749 $ 223 $ - $ 3,972 FHLMC mortgage-backed securities 3,807 47 (3) 3,851 FNMA mortgage-backed securities 6,841 95 (5) 6,931 ------- ------ ----- ------- Total $14,397 $ 365 $ (8) $14,754 ======= ====== ===== ======= March 31, 1998 -------------- Real estate mortgage investment conduits $ 5,627 $ 195 $ - $ 5,822 FHLMC mortgage-backed securities 5,111 82 (5) 5,188 FNMA mortgage-backed securities 9,603 155 (10) 9,748 ------- ------ ----- ------- Total $20,341 $ 432 $ (15) $20,758 ======= ====== ===== ======= The real estate mortgage investment conduits consist of Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) securities. The contractual maturities of mortgage-backed securities held to maturity were as follows (in thousands): Estimated Amortized Fair December 31, 1998 Cost Value ----------------- -------- -------- Due in one year or less $ 226 $ 227 Due after one year through five years 40 43 Due after five years through ten years 6,594 6,671 Due after ten years 7,537 7,813 ------- ------- $14,397 $14,754 ======= ======= Mortgage-backed securities available for sale consisted of the following (in thousands): Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value December 31, 1998 -------- ---------- ---------- --------- ----------------- Real estate mortgage investment conduits $54,304 $ 43 $(646) $53,701 FHLMC mortgage-backed securities 703 11 - 714 FNMA mortgage-backed securities 3,790 47 - 3,837 ------- ------ ----- ------- Total $58,797 $ 101 $(646) $58,252 ======= ====== ===== ======= March 31, 1998 -------------- Real estate mortgage investment conduits $21,914 $ 148 $ (2) $22,060 FHLMC mortgage-backed securities 1,021 17 - 1,038 FNMA mortgage-backed securities 9,591 16 (15) 9,592 ------- ------ ----- ------- Total $32,526 $ 181 $ (17) $32,690 ======= ====== ===== ======= The contractual maturities of mortgage-backed securities available for sale were as follows (in thousands): Estimated Amortized Fair December 31, 1998 Cost Value ----------------- -------- -------- Due after five years through ten years $ 5,587 $ 5,630 Due after ten years 53,210 52,622 ------- ------- $58,797 $58,252 ======= ======= Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Mortgage-backed securities held to maturity with an amortized cost of $401,000 and $522,000 and a fair value of $403,000 and $523,000 at December 31, 1998 and March 31, 1998, were pledged as collateral for public funds held by the Community Bank. 9
(7) Loans Receivable ---------------- Loans receivable consisted of the following (in thousands): December 31, March 31, 1998 1998 Residential: ----------- --------- One to four family $82,018 $94,795 Multi-family 7,053 4,790 Construction: One to four family 41,286 35,003 Multi-family 4,013 5,352 Commercial real estate 3,177 - Commercial 4,370 1,992 Consumer: Secured 14,474 13,638 Unsecured 2,616 2,470 Land 26,041 16,431 Non-residential 14,058 9,407 -------- -------- 199,106 183,878 Less: Undisbursed portion of loans 19,518 19,354 Deferred loan fees, net 2,609 2,340 Allowance for possible loan losses 1,139 984 Unearned discounts 2 2 -------- -------- Loans receivable, net $175,838 $161,198 ======== ======== (8) Loans Held for Sale ------------------- The Community Bank sells substantially all long-term fixed rate mortgage loans in the secondary market. All such loans held for sale are identified as held for sale at the time of origination and are carried at the lower of cost or estimated market value on an aggregate portfolio basis. Market values are derived from available market quotations for comparable pools of mortgage loans. Adjustments for unrealized losses, if any, are charged to income. (9) Borrowings ---------- Borrowings are summarized as follows (in thousands): December 31, March 31, 1998 1998 -------- -------- Federal Home Loan Bank Advances $42,550 $29,550 ======= ======= Weighted average interest rate: 4.94% 5.97% ======= ======= Borrowings have the following maturities at December 31, 1998 (in thousands): 1999 $ 7,000 2000 5,550 2003 30,000 ------- $42,550 ======= 10
(10) Stockholders' Equity -------------------- Stock Option Plan On July 23, 1998, shareholders of the Company approved the adoption of the 1998 Stock Option Plan ("1998 Plan") which authorizes the grant of stock options. The 1998 Plan was effective October 1, 1998 and the plan will expire on the tenth anniversary of the effective date, unless terminated sooner by the board. On October 1, 1998 under the 1998 Plan 257,962 shares were granted to executive officers, non-employee directors and employees. Management Recognition and Development Plan On July 23, 1998, shareholders of the Company approved the adoption of the Management Recognition and Development Plan ("MRDP") for the benefit of officers, employees and non-employee directors of the Company and its subsidiaries. The objective of the MRDP is to retain personnel of experience and ability in key positions by providing them with a proprietary interest in the Company. The Company has reserved 142,830 shares of common stock to be issued under the MRDP which may be either authorized but unissued shares, or reacquired shares held by the Company in its treasury. The number of restricted shares to be granted under the MRDP will be 99,980 shares to the executive officers and 42,850 shares to the non-employee directors. The MRDP was effective on October 1, 1998. Awards under the MRDP will be made in the form of restricted shares of common stock that are subject to restrictions on transfer of ownership. Compensation expense in the amount of the fair value of the common stock at the date of the grant to the plan participant will be recognized over a five year vesting period. On October 1, 1998 the number of restricted shares granted under the MRDP were 99,980 shares to executive officers and 42,850 shares to non-employee directors. Compensation expense of $392,783 was recognized using the fair value of the stock at $13.75. Repurchase of Common Stock On September 15, 1998, the Company received regulatory approval to repurchase up to 9% or 321,368 shares of the 11
3,570,570 shares issued during the Conversion and Reorganization. Of the 321,368 shares authorized to be repurchased, up to 142,830 shares will be reissued as awards to be granted to participants in the MRDP. Any such shares not awarded under the MRDP will be held in the Company's treasury. The remaining 178,538 shares to be repurchased will be held in the Company's treasury pending the exercise of stock options to be granted under the 1998 Plan. At December 31, 1998, 321,368 common stock shares had been repurchased at an average cost of $13.62 per share. (11) Recently Issued Accounting Pronouncements ----------------------------------------- In June 1998, the Financial Accounting Standards Board released SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters beginning with the fiscal year 2001 and need not be applied retroactively to financial statements of prior periods. The statement may be adopted early, as of the beginning of any quarter beginning with the third quarter of 1998. The Company does not anticipate that the adoption of SFAS No. 133 would have a material effect on its financial position or results of operations. 12
Item 2. RIVERVIEW BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Clause. This report 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 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, 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. General Riverview Bancorp, Inc., 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 ("Community Bank") effective June 29, 1998. The Community Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the insurer 13
of its deposits. The Community Bank's deposits are insured by the FDIC up to applicable legal limits under the Savings Association Insurance Fund ("SAIF"). The Community Bank has been a member of the Federal Home Loan Bank System since 1937. As a traditional, community-oriented, financial institution, the Community Bank focuses on traditional financial services to residents of its primary market area. The Community Bank considers Clark, Cowlitz, Klickitat and Skamania counties of Washington as its primary market area. The primary business of the Community Bank is attracting deposits from the general public and using such funds to originate fixed-rate mortgage loans and adjustable rate mortgage loans secured by one to four family residential real estate located in its primary market area. The Community Bank is also an active originator of one to four family and multi-family construction loans to both builders and homeowners. The Community Bank is also growing the portfolio of loans for land development and small business financing and consumer loans. Riverview Mortgage, a mortgage broker division of the Community Bank, originates mortgage loans (including construction loans) for various mortgage companies predominantly in the Portland and Seattle metropolitan areas, as well as for the Community Bank. On November 25, 1998 the Community Bank received regulatory approval to offer trust and investment services to its customers. Riverview Asset Management Corporation, a subsidiary of the Community Bank, was established to operate the trust and investment activities. The headquarters of the trust department are in the Community Bank's newest branch, the Vancouver Main branch, which officially opened in October 1998. Assets totaling approximately $2.0 million at December 31, 1998 were held by the Riverview Asset Management Corporation in fiduciary or agency capacity. Year 2000 The "Year 2000 problem" arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19". Systems that calculate, compare or sort using the incorrect date may cause erroneous results, ranging from system malfunctions to incorrect or incomplete processing. If not remedied, potential risks include business disruption or temporary shutdown and financial loss. The Company principally utilizes third-party computer service providers 14
and third-party software for its information technology needs. As a result, the Year 2000 compliance of the Company's information technology assets, such as computer hardware, software and systems, is primarily dependent upon the Year 2000 compliance efforts and results of its third-party vendors. The Year 2000 compliance of the Company's non-information technology assets, which include automated teller machines (ATMS), copiers, fax machines, elevators, microfilmers, and HVAC systems, is also primarily dependent upon Year 2000 compliance efforts and results of third-parties. State of Readiness - ------------------ The Company began developing a plan to address the Year 2000 issues in 1997, and in 1998 appointed a Year 2000 Committee comprised of representatives from all key areas of the Company, including Senior Management. The Year 2000 Committee has developed and is currently implementing a comprehensive project to make all information technology assets and all non-information technology assets Year 2000 compliant. Testing of hardware has been completed and non-compliant information technology hardware has been replaced or ordered. The committee provides periodic reports to the Company's Board of Directors in order to assist them in their Year 2000 readiness oversight role. The Company's non-information technology assets have also been assessed for Year 2000 compliance. Manufacturers, installers, and/or servicers of each have been contacted for certification of Year 2000 readiness. Of the Company's non-information technology assets, only ATM operating systems were determined to be in need of replacement for six ATMs, and these ATM operating systems have been replaced. The Year 2000 Committee's plan to make all Company assets Year 2000 compliant is comprised of the following phases: 1. Awareness - Educational initiatives on Year 2000 issues and concerns. This phase is ongoing, especially as it relates to customers. 2. Assessment - Inventory of all technology assets and identification of third-party vendors and service providers. This phase has been completed. 15
3. Renovation - Review of vendor and service providers' responses to the Company's Year 2000 inquiries and development of a follow-up plan and timeline. This phase has been completed. 4. Validation - The Year 2000 Committee's readiness initiative is currently in this phase. This phase consists of testing all systems as well as testing of third-party vendors and service providers for year 2000 issues. Testing of mission-critical automated systems was substantially completed at the close of 1998. Testing of renovations and new systems will continue throughout 1999. 5. Implementation - This phase has begun with the replacement of all micro-computer hardware which was determined not to be Year 2000 compliant. As previously mentioned, six ATM operating systems have been replaced in connection with this phase. The Company's Year 2000 plan provides for Year 2000 readiness to be completed by mid-1999 consistent with OTS guidelines. As the Company progresses through the validation phase, the Company expects to determine necessary remedial actions and subsequently provide for their implementation, with respect to any third-party vendors or service providers who are ultimately determined to not be Year 2000 compliant. Costs to Address the Year 2000 Issue - ------------------------------------ The total cost of carrying out the Company's plan to address the Year 2000 issue is currently estimated to be approximately $200,000, including estimates of personnel costs, and is comprised primarily of costs for equipment and software that will be acquired and depreciated over its useful life in accordance with Company policy. Any personnel and consulting costs have been and will continue to be expensed as incurred. These currently contemplated Year 2000 compliance costs are expected to be funded primarily through operating cash flows and are not expected to have a material adverse effect on the Company's business, financial condition or results of operations. To date, the costs incurred related to Year 2000, excluding estimates of personnel costs, are approximately $90,000. 16
Risks Presented by the Year 2000 Issue - -------------------------------------- Because the Company is substantially dependent upon the proper functioning of its computer systems and the computer systems and services of third parties, a failure of those computer systems and services to be Year 2000 compliant could have a material adverse effect on the Company's business, financial condition or results of operations. The Company relies heavily on third-party vendors and service providers for its information technology needs. The Company's primary third-party computer service provider is a computer service bureau that provides data processing for virtually all of the Company's savings and checking accounts, lending and loan servicing, general ledger, fixed assets and accounts payable. Some of these functions operate in-house on network micro-computers, but they are all integrated and interfaced with the third- party service bureau system. The third-party's data processing services are mission-critical services for the Company and a failure of this provider's services to be Year 2000 compliant could cause substantial disruption of the Company's business and could have a material adverse financial impact on the Company. Testing of this third-party data processing service bureau started during the fourth quarter of the calendar year 1998 and will continue through the first quarter of the calendar year 1999. If this third-party service provider or other third-party providers with which the Company has material relationships are not Year 2000 compliant, the following problems could result: (i) in the case of vendors, important services upon which the Company depends, such as telecommunications and electrical power, could be interrupted, (ii) in the case of third-party service providers, the Company could receive inaccurate or outdated information, which could impair the Company's ability to perform critical data functions, such as the processing of deposit accounts, loan servicing and internal accounting, and (iii) in the case of governmental agencies, such as the Federal Home Loan Bank, and correspondent banks, such agencies and financial institutions could fail to provide funds to the Company, which could materially impair the Company's liquidity and affect the Company's ability to fund loans and deposit withdrawals. In addition, whether or not the Company is Year 2000 compliant, the Company may experience an outflow of deposits if customers are concerned about the integrity of financial institutions' records regarding customer accounts. 17
Contingency Plans - ----------------- Where it is possible to do so, the Company has scheduled testing with third-party vendors and service providers. Where it is not possible, the Company will rely upon certifications of Year 2000 compliance from vendors and service providers. As of December 31, 1998, certifications of year 2000 compliance have been received from most of the Company's third-party vendors and service providers. Testing with selected mission critical providers has been scheduled for the first quarter of 1999. The Company will supplement its existing business continuity plans to deal with the special circumstances of Year 2000 problems. There can be no assurance that the Company's Year 2000 plans will effectively address the Year 2000 issue, that the Company's estimates of the timing and costs of completing the plan will ultimately be accurate or that the impact of any failure of the Company or its third-party vendors and service providers to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition or results of operations. FINANCIAL CONDITION At December 31, 1998, the Company had total assets of $302.9 million compared with $273.2 million at March 31, 1998. The $29.7 million or 10.9% increase in assets reflects the $30.0 million purchase of mortgage-backed securities to be held as available for sale. Cash, including interest-earning accounts, totaled $20.6 million at December 31, 1998 compared to $27.5 million at March 31, 1998. At December 31, 1998, the Company had $199.1 million in gross loans, an increase of $15.2 million compared to $183.9 million at March 31, 1998. Loans Receivable (Note 7), provides a detailed analysis of the $15.2 million increase in gross loans. Consumer, commercial, and land loans carry higher interest rates and a higher degree of credit risk compared to one-to-four family mortgage loans. Deposits totaled $198.9 million at December 31, 1998, compared to $179.8 million at March 31, 1998. FHLB advances totaled $42.6 million at December 31, 1998 compared to $29.6 million at March 31, 1998. The $13.0 million increase consists of $17.0 million in pay downs and the borrowing of $30.0 million which was used to purchase the $30.0 million in 18
mortgage-backed securities. This arbitrage strategy was entered into to increase net interest income. Capital Resources Total shareholders' equity decreased $1.9 million, or 3.1%, from $61.1 million at March 31, 1998 to $59.2 million at December 31, 1998. The $1.9 decrease in shareholders' equity was the net result of $3.5 million in earnings for the year to date, dividends of $1.1 million, exercise of stock options and earned ESOP of $0.4 million, purchase of 178,538 treasury shares for $2.4 million, purchase of 142,830 shares for $2.0 million to be used under the Management Recognition and Development Plan ("MRDP"), the award of 28,566 MRDP shares for a total of $0.4 million and $0.7 million change in net unrealized loss on securities available for sale, net of tax. The Community Bank paid a $2.0 million dividend to Riverview Bancorp, Inc. in the quarter ended December 31, 1998. The Community Bank is subject to various regulatory capital requirements administered 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 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. Quantitative measures established by regulation to ensure capital adequacy require the Community Bank to maintain amounts and ratios of tangible and core capital to adjusted total assets and of total risk-based capital to risk- weighted assets of 1.5%, 3.0%, and 8.0%, respectively. As of December 31, 1998, the Community Bank meets all capital adequacy requirements to which it is subject. As of March 31, 1998, the most recent notification from the 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 19
ratios of 5.0%, and 10.0%, respectively. At December 31, 1998, the Community Bank's tangible, core and risk-based total capital ratios amounted to 15.6%, 15.6%, and 29.1%, 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 Prompt For Capital Corrective Actual Adequacy Purpose Action Provision ------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1998 Total Capital: (To Risk Weighted Assets) $46,156 29.5% $12,512 8.0% $15,640 10.0% Tier I Capital: (To Risk Weighted Assets) 45,489 29.1 N/A N/A 9,384 6.0 Core Capital: (To Total Assets) 45,489 15.6 8,767 3.0 14,612 5.0 Tangible Capital: (To Tangible Assets) 45,489 15.6 4,384 1.5 N/A N/A Categorized as "Well Capitalized" Under Prompt For Capital Corrective Actual Adequacy Purpose Action Provision ------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of March 31, 1998 Total Capital: (To Risk Weighted Assets) $44,584 32.7% $10,922 8.0% $13,653 10.0% Tier I Capital: (To Risk Weighted Assets) 44,071 32.3 N/A N/A 8,192 6.0 Core Capital: (To Total Assets) 44,071 17.0 7,765 3.0 12,942 5.0 Tangible Capital: (To Tangible Assets) 44,071 17.0 3,883 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 (GAAP), to regulatory tangible and risk-based capital at December 31, 1998 (in thousands): 20
Equity $46,893 Net unrealized loss on securities Available for sale 353 Core deposit intangible asset (1,757) ------- Tangible capital 45,489 Land held for development (471) General valuation allowance 1,138 ------- Total capital $46,156 ======= Bank Liquidity OTS regulations require the Community Bank to maintain an average daily balance of liquid assets as a percentage of average daily net withdrawable deposit accounts plus short-term borrowings of at least 4%. The Community Bank's regulatory liquidity ratio was 58.6% at December 31, 1998 compared to 43.6% at March 31, 1998. The Community Bank anticipates that it will have sufficient funds available to meet current loan commitments and other cash needs. At December 31, 1998, the Community Bank had outstanding commitments to originate $9.0 million mortgage loans, none of which were committed to be sold in the secondary market. Cash, including interest-earning overnight investments, was $20.6 million at December 31, 1998 compared to $27.5 million at March 31, 1998. Investment securities and mortgage-backed securities available for sale at December 31, 1998 were $14.5 million and $58.3 million, respectively, compared to $10.0 million and $32.7 million, respectively, at March 31, 1998. See "Financial Condition." Asset Quality Allowance for loan losses was $1.1 million at December 31, 1998, compared to $984,000 at March 31, 1998. Management deemed the allowance for loan losses at December 31, 1998 to be adequate at that date. No assurances, however, can be given that future additions to the allowance for loan losses will not be necessary. The allowance for loan losses is maintained at a level sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. Pertinent factors considered include size and composition of the portfolio, actual loss experience, current and anticipated economic conditions, and 21
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. Nonperforming assets were $1.0 million or 0.34% of total assets at December 31, 1998 compared with $517,000 or 0.19% of total assets at March 31, 1998. The increase in nonaccrual residential loans presented in the following table is the result of an increase in nonaccrual one to four family permanent and construction loans. The following table sets forth information with respect to the Community Bank's nonperforming assets at the dates indicated: December 31, 1998 March 31, 1998 ----------------- -------------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Real Estate Residential $ 704 $401 Commercial - 105 Land 47 - Consumer 2 - ------ ---- Total 753 506 Accruing loans which are contractually past due 90 days or more 54 11 ------ ---- Total 54 11 ------ ---- Total of nonaccrual and 90 days past due loans 807 517 ------ ---- Real estate owned 223 - ------ ---- Total nonperforming assets $1,030 $517 ====== ==== Total loans delinquent 90 days or more to net loans 0.46% 0.32% Total loans delinquent 90 days or more to total assets 0.27 0.19 Total nonperforming assets to total assets 0.34 0.19 Comparison of Operating Results for the Three Months Ended December 31, 1998 and 1997 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 22
interest-bearing liabilities. Net interest income is determined by (a) the difference between the yield earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and (b) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic and competitive factors that influence rates, loan demand and deposit flows. Net interest margin is calculated by dividing net interest income by the average interest-earning assets. Net interest income and net interest margin are affected by changes in interest rates, volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company's net income is also affected by the generation of non- interest income, which primarily consists of fees and service charges, loan servicing income, gains on sale of securities, gains from sale of loans and other income. In addition, net income is affected by the level of operating expenses and establishment of a provision for loan losses. Net income for the three months ended December 31, 1998 was $1.1 million, $0.19 per basic share ($0.18 per diluted share). This compares to net income of $1.1 million, $0.19 per basic share ($0.18 per diluted share) for the same period in fiscal 1998. The earnings per basic share showed no growth for the three months ending December 31, 1998 as compared to the three months ended December 31, 1997. Net interest income increased $0.6 million or 21% for the three months ended December 31, 1998 from $2.9 million for the three months ended December 31, 1997 due to a 17% increase in interest-earning assets. Non-interest income increased $239,000 or 41% for the three months ended December 31, 1998 from $579,000 for the three months ended December 31, 1997, reflecting increases in fees and service charges as well as gains on sales of loans. These increases were offset by an $810,000 increase in non-interest expense or 45% due primarily to increased salaries and employee benefits. Average interest-earning assets increased to $295.2 million for the three months ending December 31, 1998 from $251.5 million for the three months ending December 31, 1997. The $43.7 million increase is due primarily to the $30.0 million purchase of mortgage-backed securities in the quarter ending September 30, 1998 and a $23.4 million increase in average net loans outstanding. Interest income for the three months ended December 31, 1998 was $6.2 million, an increase of $0.9 million or 17% over 23
$5.3 million for the same period in 1997. Yield on interest-earning assets for the three month 1998 period was 8.27% compared to 8.39% for the three month 1997 period. The lower 1998 yield on interest earning assets resulted primarily from the lower yield received on investments in mortgage-backed and investment securities and overnight funds. The higher interest income resulted from growth in loans, and mortgage-backed securities. Interest expense was $2.6 million and $2.4 million for the quarters ended December 31, 1998 and 1997, respectively. The cost of interest-bearing liabilities for the three month 1998 period was 4.48% compared to 4.87% for the three month 1997 period. Net interest income increased $0.6 million, or 21%, to $3.5 million for the three months ended December 31, 1998, compared to $2.9 million for the three months ended December 31, 1997. The interest rate spread increased from 3.53% for the three month 1997 period to 3.78% for the three month 1998 period. The net interest margin improved to 4.73% during the third quarter ended December 31, 1998 from 4.60% for the third quarter ended December 31, 1997. The improved margin reflects the $43.7 million increase in average interest- earning assets to $295.2 million during the third quarter ended December 31, 1998 from $251.5 million for the third quarter ended December 31, 1997. The $43.7 million increase in average interest-earning assets was partially offset by the $37.3 million increase in average interest-bearing liabilities to $233.1 million during the quarter ended December 31, 1998 from $195.8 million for the quarter ended December 31, 1997. The provision for loan losses was $60,000 and there were $4,000 in net recoveries during the three months ended December 31, 1998 compared to a $45,000 provision and $2,800 in net recoveries during the three months ended December 31, 1997. The loan loss provision was deemed necessary based upon management's analysis of historical and anticipated loss rates, current loan growth, and other factors considered. Non-interest income increased $239,000, or 41%, to $818,000 for the three month ended December 31, 1998 from $579,000 for the three months ended December 31, 1997. The $239,000 increase for the current quarter is primarily due to a $38,000 increase in deposit service charges resulting from an increased number of deposit accounts and the results of one 24
month of a new fee schedule, $107,000 increase in loan origination fees on loans brokered through Riverview Mortgage Brokerage and an $84,000 increase in gains on sale of loans. Non-interest expense increased $810,000, or 45%, from $1.8 million for the quarter ended December 31, 1997 to $2.6 million for the quarter ended December 31, 1998. Salaries and employee benefits increased $575,000 to $1.7 million for the quarter ended December 31, 1998. The 1998 quarter reflects the MRDP cost of $491,000 which consists of the first year award of $393,000 plus three months of the 1999 MRDP award. This was partially offset by reduced ESOP compensation expense of a net $22,000 credit for the 1998 quarter compared to a $173,000 compensation expense in the 1997 quarter. In addition there were 18 more full-time equivalent employees over the 1997 quarter. This resulted from expansion of services offered by adding the new branch Vancouver Main, trust department, commercial lending department and expansion in the mortgage broker division and consumer loans. Provision for federal income taxes for the third quarter of fiscal 1998 was $606,000, resulting in an effective tax rate of 36%, compared to $559,000 and 34% for the like quarter of a year ago. The 2% increase in the effective tax rate for three months ended December 31, 1998 is primarily attributable to the impact of the ESOP market value adjustment. Comparison of Operating Results for the Nine Months Ended December 31, 1998 and 1997 Net income for the nine months ended December 31, 1998 was $3.5 million, $0.60 per basic share ($0.59 per diluted share). This compares to net income of $2.6 million, $0.43 per basic share ($0.42 per diluted share) for the same period in fiscal 1998. The earnings per basic share increase of 40% to $0.60 for the nine months ended December 31, 1998 from $0.43 for the nine months ended December 31, 1997 reflected several factors. Net interest income increased $2.3 million or 30% for the nine months ended December 31, 1998 compared to the same period in fiscal 1998 due to a 19% increase in interest- earning assets. Non-interest income increased $560,000 or 34% reflecting increases in fees and service charges as well as gains on sales of loans in fiscal 1999 as compared to fiscal 1998. 25
Average interest-earning assets increased to $273.3 million for the nine months ending December 31, 1998 from $230.2 million for the nine months ending December 31, 1997. The $43.1 million increase is due primarily to the $30.0 million purchase of mortgage-backed securities in the quarter ended September 30, 1998 and a $18.5 million increase in average net loans outstanding. Interest income for the nine months ended December 31, 1998 was $17.4 million, an increase of $2.6 million or 18% over $14.8 million for the same period in 1997. Yield on interest-earning assets for the nine month 1998 period was 8.44% compared to 8.56% for the nine month 1997 period. The lower 1998 yield on interest earning assets resulted primarily from the lower yield received on investments in mortgage-backed and investment securities and overnight funds. The higher interest income resulted from growth in loans, mortgage-backed and investment securities and overnight investments. Interest expense for the nine months ended December 31, 1998 was $7.3 million, an increase of $257,000 or 4% over $7.1 million for the same period in 1997. The cost of interest-bearing liabilities for the nine month 1998 period was 4.60% compared to 4.89% for the nine month 1997 period. Net interest income increased $2.4 million, or 31%, to $10.1 million for the nine months ended December 31, 1998, compared to $7.7 million for the nine months ended December 31, 1997. The interest rate spread increased from 3.67% for the nine month 1997 period to 3.85% for the nine month 1998 period. The net interest margin improved to 4.89% during the nine month period ended December 31, 1998 from 4.47% for the nine month period ended December 31, 1997. The improved margin reflects the $43.1 million increase in average interest-earning assets to $273.3 million for the nine months ended December 31, 1998 from $230.2 million for the nine month period ended December 31, 1997. The $43.1 million increase in average interest-earning assets was partially offset by the $18.9 million increase in average interest-bearing liabilities to $211.3 million during the nine months ended December 31, 1998 from $192.4 million for the nine months ended December 31, 1997. The provision for loan losses was $180,000 and there were $26,000 in net charge-offs during the nine months ended December 31, 1998 compared to a $135,000 provision and $8,000 in net charge-offs during the nine months ended December 31, 26
1997. During the quarter ended June 30, 1998 the loan loss provision was increased in response to loan growth and change in loan mix. The loan loss provision was deemed necessary based upon management's analysis of historical and anticipated loss rates, current loan growth, and other factors considered. Non-interest income increased $560,000, or 35%, to $2.2 million for the nine months ended December 31, 1998 from $1.6 million for the nine months ended December 31, 1997. The $560,000 increase for the current nine months is primarily due to a $98,000 increase in deposit service charges primarily resulting from an increased number of deposit accounts, $291,000 increase in loan origination fees on loans brokered through Riverview Mortgage Brokerage and gains on sale of loans and securities. Non-interest expense increased $1.3 million, or 25%, from $5.3 million for the nine months ended December 31, 1997 to $6.6 million for the nine months ended December 31, 1998. Salaries and employee benefits increased $887,000 to $4.0 million for the nine months ended December 31, 1998. The 1999 fiscal year reflects the MRDP cost of $491,000 which consists of the first year award of $393,000 plus three months of the 1999 award. This was partially offset by lower ESOP compensation expense of $186,000 year to date fiscal 1999 as compared to $373,000 ESOP compensation expense year to date fiscal 1998. In addition there were eighteen more full-time equivalent employees in fiscal 1999 compared to the same period a year ago. This resulted from expansion of services offered by adding the new branch Vancouver Main, trust department, commercial lending department and expansion in the mortgage broker division and consumer loans. Provision for federal income taxes for the nine months ended December 31, 1998 was $2.0 million resulting in an effective tax rate of 36%, compared to $1.4 million and 35% for the like period a year ago. The 1.0% increase in the effective tax rate for nine months ended December 31, 1998 is primarily attributable to the impact of the ESOP market value adjustment. 27
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There has not been any material change in the market risk disclosures contained in theCompany's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. 28
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 --------------------------------------------------- Not applicable Item 5. Other Information ----------------- Not applicable Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: 3.1 Articles of Incorporation of the Registrant* 3.2 Bylaws of Registrant* 10.1 Employment Agreement with Patrick Sheaffer** 10.2 Employment Agreement with Ron Wysaske** 10.3 Employment Agreement with Michael C. Yount** 10.4 Employment Agreement with Karen Nelson** 10.5 Riverview Savings Bank, FBS Severance Compensation Agreement** 10.6 Riverview Savings Bank, FSB Employee Stock Ownership Plan*** 10.7 The Riverview Bancorp, Inc. 1998 Stock Option Plan**** 10.8 The Riverview Bancorp, Inc. Management Recognition and Development Plan**** 21 Subsidiaries of Registrant*** 27 Financial Data Schedule (b) Reports on Form 8-K: No Forms 8-K were filed during the quarter ended December 31, 1998. - ------------ * Filed as an exhibit to the registrant's Registration Statement on Form S-1, as amended (333-30203), and incorporated herein by reference. ** Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference. *** Filed as an exhibit to the Registrant's Form 10-K for the year ended March 31, 1998, and incorporated herein by reference. **** Filed as an exhibit to the Registrant's definitive proxy statement dated June 5, 1998, and incorporated herein by reference. 29
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RIVERVIEW BANCORP, INC. DATE: February 11, 1999 BY: /s/ Patrick Sheaffer ----------------- ----------------------------- Patrick Sheaffer President DATE: February 11, 1999 BY: /s/ Ron Wysaske ----------------- ----------------------------- Ron Wysaske Executive Vice President/Treasurer 30