RIVERVIEW BANCORP INC - Quarter Report: 2002 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

  X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of
                   THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-22957

Registrant's telephone number, including area code: (360)693-6650

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_.

Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    No X .

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value---4,284,348 shares as of September 30, 2002.

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Form 10-Q

Item 1: Financial Statements (Unaudited)

        Consolidated Balance Sheets
        as of September 30, 2002 and March 31, 2002               1

        Consolidated Statements of Income: Three and Six
        Months Ended September 30, 2002 and 2001                  2

        Consolidated Statements of Shareholders' Equity
        for the Year Ended March 31, 2002 and the
        Six Months Ended September 30, 2002                       3

        Consolidated Statements of Cash Flows for the
        Six Months Ended September 30, 2002 and 2001              4

Item 2: Management's Discussion and Analysis of
        Financial Condition and Results of
        Operations                                            13-23

Item 3: Quantitative and Qualitative Disclosures
        About Market Risk                                        24

Item 4: Controls and Procedures                                  24

SIGNATURES                                                       26

CERTIFICATIONS                                                27-28

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(1) Organization and Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments 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. 2002 Annual Report on Form 10-K. The results of operations for the three and six months ended September 30, 2002 are not necessarily indicative of the results which may be expected for the entire fiscal year.

(2) Principles of Consolidation

The accompanying unaudited consolidated financial statements of Riverview Bancorp, Inc. and Subsidiary (the "Company") include all the accounts of Riverview Bancorp, Inc. and the consolidated accounts of its wholly-owned subsidiary, Riverview Community Bank (the "Community Bank"), and the Community Bank's majority-owned subsidiary, Riverview Asset Management Corporation ("RAMCORP.") and wholly-owned subsidiary, Riverview Services, Inc. All references to the Company herein include the Community Bank where applicable. All inter-company balances and transactions have been eliminated upon consolidation.

Comprehensive income is defined as the change in equity during a period from transactions and other events from nonowner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale.

For the three months and six months ended September 30, 2002, the Company's total comprehensive income was $1.6 million and $2.8 million, respectively, compared to $2.5 million and $3.3 million for the three and six months ended September 30, 2001, respectively.

Total comprehensive income for the three and six months ended September 30, 2002 is comprised of net income of $1.5 million and $2.6 million and other comprehensive income of $77,000 and $203,000, net of tax effect, respectively. Other comprehensive income consists of unrealized securities gains.

Total comprehensive income for the three and six months ended September 30, 2001 is comprised of net income of $1.7 million and $2.5 million and other comprehensive income of $840,000 and $815,000, net of tax effect, respectively. Other comprehensive income for the three months and six months ended September 30, 2001, consists of unrealized securities gains of $1.4 million and $1.4 million, net of tax effect, less gains on securities available for sale included in non-interest income of $570,000 for both periods, net of tax effect.

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Basic Earnings per Share ("EPS") is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding during the period, without considering any dilutive items. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares and common stock equivalents for items that are dilutive, net of shares assumed to be repurchased using the treasury stock method at the average share price for the Company's common stock during the period. Common stock equivalents arise from assumed conversion of outstanding stock options and awarded but not released Management Recognition and Development Plan ("MRDP") shares. Employee Stock Ownership Plan ("ESOP") shares are not considered outstanding for EPS purposes until they are committed to be released.

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There were no sales of investment securities classified as held to maturity during the periods ended September 30, 2002 and 2001.

The amortized cost and approximate fair value of investment securities available for sale consisted of the following (in thousands):

Investment securities with an amortized cost of $15.0 million and $15.0 million and a fair value of $14.2 million and $14.4 million at September 30, 2002 and March 31, 2002, respectively, were pledged as collateral for advances at the Federal Home Loan Bank.

The contractual maturities of securities available for sale are as follows (in thousands):

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The contractual maturities of mortgage-backed securities classified as held to maturity are as follows (in thousands):

Mortgage-backed securities held to maturity with an amortized cost of $2.5 million and $2.8 million and a fair value of $2.6 million and $2.9 million at September 30, 2002 and March 31, 2002, respectively, were pledged as collateral for governmental public funds held by the Company. The real estate mortgage investment conduits ("REMICs") consist of Federal Home Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and privately issued securities.

There were no sales of mortgage-backed securities held to maturity during the periods ended September 30, 2002 and 2001.

Mortgage-backed securities available for sale consisted of the following (in thousands):

The contractual maturities of mortgage-backed securities available for sale are as follows (in thousands):

Expected maturities of mortgage-backed securities held to maturity will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

Mortgage-backed securities available for sale with an amortized cost of $19.9 million and $23.3 million and a fair value of $20.5 million and $23.8 million

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at September 30, 2002 and March 31, 2002, respectively, were pledged as collateral for the discount window at the Federal Home Loan Bank. Mortgage-backed securities with an amortized cost of $4.1 million and $4.9 million and a fair value of $4.1 million and $4.8 million at September 30, 2002 and March 31, 2002, respectively, were pledged as collateral for treasury tax and loan funds held by the Company.

Loans receivable consisted of the following (in thousands):

A reconciliation of the allowances for loan losses is as follows (in thousands):

At September 30, 2002 and March 31, 2002, the Company's recorded investment in loans for which impairment has been recognized under the guidance of Statement of Financial Accounting Standards ("SFAS") No. 114 and SFAS No. 118 was $1.7 million and $1.4 million, respectively. The allowance for loan losses in excess of specific reserves is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's analysis of the allowance. The average investment in impaired loans was approximately $1.7 million and $1.1 million during the six months ended September 30, 2002 and the year ended March 31, 2002, respectively.

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The Company identifies loans held for sale at the time of origination and they are carried at the lower of aggregate cost or net realizable value. Market values are derived from available market quotations for comparable pools of mortgage loans. Adjustments for unrealized losses, if any, are charged to income.

The results for the quarter ended September 30, 2002, include the effect of adopting SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides that goodwill is no longer amortized and the value of an identifiable intangible asset must be amortized over its useful life, unless the asset is determined to have an indefinite life. The Company does not have goodwill, but does have identifiable intangible assets of core deposit intangible and mortgage servicing rights ("MSR") that will continue to be amortized. The Company adopted SFAS No. 142 April 1, 2002.

Intangible asset balances (excluding MSR) consisted of the following (in thousands):

The value of the MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in the servicing portfolio are not realized if the loan pays off earlier than anticipated. If loans payoff earlier than anticipated there is no economic benefit since loans in our servicing portfolio do not contain penalty provisions for early payoff.

An estimated fair value of MSR is determined quarterly using a discounted cash flow model. The model estimates the present value of the future net cash

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flows of the servicing portfolio based on various factors, such as servicing costs, servicing income, expected prepayments speeds, discount rate, loan maturity and interest rate. MSR impairment is recorded in the amount that the estimated fair value is less than the MSR carrying value.

Changes in balance of MSR, net of valuation, were as follows (in thousands):

Amortization expense for the net carrying amount of intangible assets at September 30, 2002 is estimated to be as follows (in thousands):

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Borrowings have the following maturities at September 30, 2002 (in thousands):

In September 2002, the Company announced a stock repurchase of up to 5%, or 214,000 shares, of its outstanding common stock. At September 30, 2002, no shares had been repurchased under this plan.

In July 2001, the Company received regulatory approval to repurchase up to 10% or 465,504 shares of its outstanding shares at June 30, 2001. At September 30, 2002 446,800 shares had been repurchased at an average cost of $12.81 per share. Since the State of Washington treats all treasury stock as retired upon purchase, all purchases of treasury stock reduce stock issued and the cost of treasury stock acquired is charged to par value and paid-in capital.

In September 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This Statement removes acquisitions of financial institutions from the scope of both SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.  As a result, the requirement in SFAS No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this Statement.

In addition, this Statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets.  Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. The Statement required discontinuing the amortization of goodwill and other intangible assets with indefinite useful lives. Instead, these assets will be tested periodically for impairment and written down to their fair market value as necessary. Upon the adoption of the provisions of SFAS No. 142 at April 1, 2002 there was no effect on the Company's financial statements, as the Company does not currently have any goodwill. The Company's current intangible assets consist of core deposit intangibles and mortgage servicing rights.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets. This Statement supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 for the disposal of a segment of a business. SFAS No. 144 became effective for the Company beginning April 1, 2002 and had no impact on the financial statements of the Company.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, consumer and commercial loans. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are conditional, and are honored for up to 45 days subject to the Company's usual terms and conditions. Collateral is not required to support commitments.

At September 30, 2002, the Company had commitments to originate fixed rate mortgages of $3.5 million at interest rates ranging from 5.125% to 7.00%. At September 30, 2002 adjustable rate mortgage loan commitments were $2.5 million at an average interest rate of 6.151%. The undisbursed balance of mortgage loans closed was $32.8 million at September 30, 2002. Consumer loan commitments totaled $800,000 and unused lines of consumer credit totaled $15.9 million at September 30, 2002. Commercial real estate loan commitments totaled $2.2 million and unused lines of commercial real estate credit totaled $6.3 million at September 30, 2002. Commercial loan commitments totaled $650,000 and unused commercial lines of credit totaled $17.6 million at September 30, 2002.

The Company is a party to litigation arising in the ordinary course of business. In the opinion of management, these actions will not have a material effect, if any, on the Company's financial position, results of operations, or liquidity.

Safe Harbor Clause. This report on Form 10-Q contains certain "forward-looking statements." The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing itself of the protection of such safe harbor with 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

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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 and other risks detailed in the Company's reports filed with the Securities and Exchange Commission. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements.

The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's consolidated financial statements. The Company has identified two policies that due to judgments, estimates and assumptions inherent in those policies are critical to an understanding of the Company's consolidated financial statements. These policies relate to the methodology for the determination of the allowance for loan losses and the valuation of mortgage servicing rights. These policies and the judgments, estimates and assumptions are described in greater detail in Management's Discussion and Analysis and in Note 1, Note 6 and Note 8 to the Consolidated Financial Statements included in the Company's 2002 Annual Report on Form 10-K. Management believes that the judgments, estimates and assumptions used in the preparation of the Company's consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of the Company's consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

The Company is a progressive community-oriented, financial institution, which emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington as its primary market area. The Company is engaged primarily in the business of attracting deposits from the general public and using such funds in its primary market area to originate mortgage loans secured by one- to four- family residential real estate, multi-family, commercial construction, commercial real estate and non-mortgage loans providing financing for business commercial ("commercial") and consumer purposes. Commercial real estate loans and commercial loans have grown from 5.22% and 0.93% of the loan portfolio, respectively, in fiscal year 1998 to 27.24% and 9.41% respectively, at September 30, 2002. The Company continues to change the composition of its loan portfolio and the deposit base as part of its migration to commercial banking, subject to market conditions. The consolidation among financial institutions in the Company's primary market area has created a significant gap in the ability of the resulting financial institutions to serve customers. The Company's strategic plan includes targeting this customer base, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will emphasize controlled growth and the diversification of its loan portfolio to include a higher portion of commercial and commercial real estate loans. A related goal is to increase the proportion of personal and business checking account deposits used to fund these new loans. Significant portions of these new loan products carry adjustable rates, higher yields, or shorter terms and higher credit risk than the traditional fixed-rate mortgages. The strategic plan stresses increased emphasis on non-interest income, including increased fees for asset management and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk, and provide a more

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complete range of financial services to customers and the local communities the Company serves. The Company is well positioned to attract new customers and to increase its market share given that the administrative headquarters and eight of its twelve branches are located in Clark County, the fastest growing county in the state of Washington according to the U.S Census Bureau.

In order to support its strategy of growth, without compromising its local, personal service to its customers and a commitment to asset quality, the Company has made significant investments in experienced branch, lending, asset management and support personnel and has incurred significant costs in facility expansion. The Company's efficiency ratios reflect this investment and will remain relatively high by industry standards for the foreseeable future due to the emphasis on growth and local, personal service. Control of non-interest expenses remains a high priority for the management of the Company.

The Company conducts operations from its home office in Vancouver and twelve branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale, Vancouver (five branch offices) and Longview, Washington. The Company's market area for lending and deposit taking activities encompasses Clark, Cowlitz, Skamania and Klickitat counties, throughout the Columbia River Gorge area. The Company operates a trust and financial services company, RAMCORP., located in downtown Vancouver, Washington. Riverview Mortgage, a mortgage broker division of the Company originates mortgage loans (including construction loans) for various mortgage companies predominantly in the Portland metropolitan area, as well as for the Company. The Business and Professional Banking Division located at the downtown Vancouver main branch offers commercial and business banking services. Vancouver is located in Clark County, which is just north of Portland, Oregon.

Several businesses are located in the Vancouver area because of the favorable tax structure and relatively lower energy costs in Washington as compared to Oregon. Washington has no state income tax and Clark County operates a public electric utility that provides relatively lower cost electricity. Located in the Vancouver area are Sharp Electronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory and Wafer Tech, as well as several support industries. In addition to this industrial base, the Columbia River Gorge Scenic Area has been a source of tourism, which has transformed the area from its past dependence on the timber industry.

The Company, a Washington corporation, was organized on June 23, 1997 for the purpose of becoming the holding company for Riverview Community Bank (formerly Riverview Savings Bank, FSB) upon Riverview Savings Bank's reorganization as a wholly owned subsidiary of the Company resulting from the conversion of Riverview, M.H.C. from a federal mutual holding company to a stock holding company ("Conversion and Reorganization"). The Conversion and Reorganization was completed on September 30, 1997. Riverview Savings Bank, FSB changed its name to Riverview Community Bank effective June 29, 1998.

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At September 30, 2002, the Company had total assets of $399.5 million compared with $392.1 million at March 31, 2002. The increase in total assets reflects the growth in loans.

At September 30, 2002, the Company had $332.9 million in gross loans, an increase of $9.7 million compared to $323.2 million at March 31, 2002. One- to- four family residential mortgage loans decreased $3.8 million to $67.9 million at September 30, 2002 from $71.7 million at March 31, 2002 as a result of management's plan to sell most of the fixed mortgage loans to the FHLMC and retain the loan servicing of such loans. Commercial loans increased $8.0 million to $31.3 million at September 30, 2002 from $23.3 million at March 31, 2002. The $8.0 million increase consisted of $5.5 million increase in secured and unsecured lines of credit and $2.5 million increase in term loans. Commercial real estate loans increased $371,000 to $84.5 million at September 30, 2002 from $84.1 million at March 31, 2002. Land loans increased $8.7 million to $36.1 million at September 30, 2002 from $27.4 million at March 31, 2002. The $8.7 million increase reflects the addition of four residential development loans. Loans receivable (Note 7) provides a detailed analysis of the $332.9 million gross loan portfolio at September 30, 2002 as compared to the $323.2 million gross loan portfolio at March 31, 2002. Consumer, commercial, and land loans carry higher interest rates and generally a higher degree of credit risk compared to one- to- four family residential mortgage loans.

Deposits totaled $297.8 million at September 30, 2002 compared to $259.7 million at March 31, 2002. The $38.1 million deposit increase is attributable to an inflow of funds in all categories of deposits, except for certificates of deposit, which experienced a slight decrease. The year to date total average outstanding balance of checking accounts and money market accounts ("transaction accounts") increased 31.3% to $151.9 million at September 30, 2002, compared to $115.7 million at March 31, 2002. Transaction accounts represented 52.6% and 43.0% of the year to date average total outstanding balance of deposits at September 30, 2002 and March 31, 2002, respectively.

FHLB advances totaled $45.0 million at September 30, 2002 and $74.5 million at March 31, 2002. During the first six months of fiscal year 2003, advances from FHLB Seattle totaling $29.5 million were repaid.

Total shareholders' equity decreased $455,000 to $53.2 million at September 30, 2002 compared to $53.7 million at March 31, 2002. The activity in shareholders' equity for the first six months of fiscal year 2003 was $2.6 million in earnings, dividends of $1.1 million, exercise of stock options $31,000, stock repurchased $2.6 million, earned ESOP shares $175,000, earned MRDP shares of $259,000 and $203,000 change in net unrealized gain on securities available for sale, net of tax benefit.

The Company is not subject to any regulatory capital requirements. The Community Bank, however, is subject to various regulatory capital requirements implemented by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, that if undertaken could have a direct material effect on the Company and the Community Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Community Bank must meet specific capital guidelines that involve quantitative measures of the Community Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Community Bank's capital amounts and

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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 required the Community Bank to maintain amounts and ratios of tangible and core capital to adjusted total assets and of total risk-based capital to risk-weighted assets of 1.5%, 3.0%, and 8.0%, respectively. As of September 30, 2002, the Community Bank met all capital adequacy requirements to which it was subject.

As of September 30, 2002, 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 ratios of 5.0% and 10.0%, respectively. At September 30, 2002, the Community Bank's tangible, core and risk-based total capital ratios amounted to 12.69%, 12.69%, and 17.21%, respectively. There are no conditions or events since that notification that management believes have changed the Community Bank's category.

The Community Bank's actual and required minimum capital amounts and ratios are presented in the following table (dollars in thousands):

Categorized as "Well
Capitalized" Under
For Capital           Prompt Corrective