[AMERICAN PACIFIC BANK LOGO]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of Riverview Bancorp, Inc. ("Riverview") and
American Pacific Bank have agreed to a merger of our companies. The aggregate
amount of cash and stock consideration that Riverview will pay American
Pacific Bank shareholders is $16,758,000 and 788,593 shares of Riverview
common stock. These aggregate amounts are fixed and were determined based on
the approximate stock price of Riverview of $21.25 per share and a value of
American Pacific Bank of $11.95 per share, assuming that 50% of the 2,804,618
shares of American Pacific Bank common stock outstanding would be exchanged
for cash and 50% would be exchanged for shares of Riverview's common stock.
The $21.25 per share stock price was the Nasdaq National Market closing price
for Riverview's stock on October 25, 2005, which was used in negotiating the
exchange value. The $11.95 per share value was determined through negotiation
which is not directly based on the price at which American Pacific Bank stock
has traded on the Nasdaq Small Cap Market. For information on the quarterly
high and low trading prices for American Pacific Bank's stock, please refer to
page 23 herein. However, the value of the shares of Riverview common stock
will continue to fluctuate. Therefore, you will not know the precise value of
the Riverview shares you will receive or the exact amount of cash you will
receive in the merger at the time you vote. The actual amount of cash or
stock consideration that you will receive for each share of American Pacific
Bank stock will depend on the price of Riverview common stock as measured
during a 20-day period ending 10 days before the merger. Under this valuation
method, the value you receive in exchange for a share of American Pacific Bank
stock will be the substantially the same as of the closing date regardless of
whether you receive cash or stock.
On March 14, 2005, the last reported sale price of Riverview common stock
was $21.15. If this were the average price over the measurement period, each
share of American Pacific Bank common stock exchanged for cash would be
exchanged for $11.92, and each share of American Pacific Bank common stock
exchanged for stock would be exchanged for 0.5637 shares of Riverview common
stock. Please see the table and examples beginning on page 29 in this proxy
statement to determine the amount of cash or stock that you would receive
based on different values of Riverview common stock.
You may elect to receive cash or shares of Riverview common stock and
your election will be followed to the extent feasible, subject to certain
allocation rules. Regardless of your choice, however, elections will be
limited by the requirement that the aggregate cash consideration in the merger
will be $16,758,000 and the aggregate number of Riverview shares issued will
be 788,593 (subject to certain adjustments). Therefore, the allocation of
cash and Riverview common stock that you will receive will depend on the
elections of other American Pacific Bank shareholders. In addition, no
American Pacific Bank shareholder is permitted to receive Riverview shares in
the merger that would result in that shareholder owning more than 4.9% of the
shares of Riverview common stock outstanding after the merger. As a result of
this ownership limitation, Fai Chan, Chairman of the Board of American Pacific
Bank who currently owns approximately 43.9% of the outstanding shares of
American Pacific Bank, will necessarily receive at least $8,676,442 in cash in
exchange for at least 59% of his American Pacific Bank shares assuming the
Riverview stock price is $21.25. Because the amount of cash that Riverview
will pay in the merger is limited, there will be less cash but more stock
available, to pay to the other shareholders of American Pacific Bank.
Therefore, other shareholders of American Pacific Bank will not receive more
than $8,081,442 in cash. The federal income tax consequences of the merger
will depend on whether you receive cash or stock in exchange for your shares
of American Pacific Bank common stock.
We cannot complete the merger unless we obtain the necessary governmental
approvals and unless shareholders holding at least two-thirds of American
Pacific Bank's outstanding common stock approve the merger agreement.
American Pacific Bank will hold a special meeting of its shareholders on April
21, 2005 at 3:00 p.m., local time at 315 SW Fifth Avenue, Suite 201, Portland,
Oregon 97204 to consider and vote on this merger proposal. Your vote is very
important. Whether or not you plan to attend the meeting, please take the
time to vote by completing and mailing the enclosed proxy card to us. If you
sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote FOR the merger and the transactions
contemplated by the merger agreement. If you do not return your proxy card,
or if you do not instruct your broker how to vote any shares held for you in
"street name," the effect will be a vote against the merger.
This document contains a more complete description of the shareholders'
meeting, the terms of the merger and the procedures for electing to receive
stock or cash. This document also contains information regarding the
business of Riverview and American Pacific Bank. In particular, see "Risk
Factors" beginning on page 13. Please review this entire document carefully.
Your board of directors believes that the merger is in your best
interest, and recommends that you vote in favor of the merger.
/s/David T. Chen
David T. Chen
President and Chief Executive Officer
American Pacific Bank
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under
this proxy statement-prospectus or determined if this proxy statement-
prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense. The securities Riverview is offering through this document
are not savings or deposit accounts or other obligations of any bank or
non-bank subsidiary of either of our companies, and they are not insured by
the Federal Deposit Insurance Corporation, the Savings Association Insurance
Fund, the Bank Insurance Fund or any other governmental agency.
No person has been authorized to give any information or to make any
representations other than those contained herein. All information concerning
Riverview has been furnished by Riverview, and all information concerning
American Pacific Bank has been furnished by American Pacific Bank. Riverview
has represented and warranted to American Pacific Bank, and American Pacific
Bank has represented and warranted to Riverview, that the particular
information each has provided is true and complete.
Proxy Statement-Prospectus dated March 18, 2005
and first mailed to shareholders on or about March 22, 2005
This document incorporates important business and financial information
about Riverview from documents filed with the Securities and Exchange
Commission ("SEC") that have not been included in or delivered with this
document. You may read and copy these documents at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for information about these
facilities. This information is also available on the SEC's website at
http://www.sec.gov. See "Where You Can Find More Information" on page 80.
You also may request copies of these documents from Riverview. Riverview
will provide you with copies of these documents, without charge, upon written
or oral request to:
Riverview Bancorp, Inc.
900 Washington Street, Suite 900
Vancouver, Washington 98660
Attention: Phyllis Kreibich, Corporate Secretary
Telephone: (360) 693-6650
In order to receive timely delivery of the documents in advance of
American Pacific Bank's special meeting of shareholders, you should make your
request no later than April 15, 2005.
American Pacific Bank's common stock is registered under Section 12(g) of
the Securities Exchange Act of 1934. Accordingly, American Pacific Bank is
required to file periodic reports and other information with the Federal
Deposit Insurance Corporation ("FDIC") pursuant to the Securities Exchange Act
of 1934 and the rules thereunder. Copies of filings made by American Pacific
Bank are available from Marcia Fields at the FDIC, (202) 898-8913. Certain
beneficial ownership reports on FDIC Forms 3, 4 and 5 filed since June 2004 by
American Pacific Bank's officers and directors are available electronically on
the FDIC's website at www.fdic.gov.
You may also request copies of these documents from American Pacific Bank
without charge upon written request to:
American Pacific Bank
315 SW Fifth Avenue, Suite 201
Portland, Oregon 97204
Attention: Richard Cheong
(503) 517-3522
AMERICAN PACIFIC BANK
315 SW Fifth Avenue, Suite 201
Portland, Oregon 97204
(503) 221-5301
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On April 21, 2005
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A special meeting of shareholders of American Pacific Bank will be held
at 315 SW Fifth Avenue, Suite 201, Portland, Oregon on April 21, 2005, at 3:00
p.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of November 9, 2004, as amended, by and
among Riverview Bancorp, Inc. ("Riverview"), Riverview Community
Bank and American Pacific Bank, pursuant to which American Pacific
Bank will merge with and into Riverview Community Bank and each
share of common stock of American Pacific Bank will be converted
into the right to receive, at the election of the holder (subject to
the limitations provided in the merger agreement), either shares of
common stock of Riverview or cash, all on and subject to the terms
and conditions contained therein; and
2. To transact any other business as may properly come before the
meeting or any adjournment or postponement.
Only shareholders of record at the close of business on March 21, 2005
will be entitled to notice of and to vote at the meeting and at any
adjournment or postponement.
American Pacific Bank shareholders have the right to dissent from the
merger and obtain payment in cash of the fair value of their shares of
American Pacific Bank common stock under applicable provisions of Oregon law.
In order to perfect dissenters' rights, an American Pacific Bank shareholder
must either file a written objection to the merger with American Pacific Bank
before the merger vote is taken at the special meeting or the shareholder must
vote against the merger. A copy of the applicable Oregon statutory provisions
is included as Appendix C to the accompanying proxy statement-prospectus, and
a summary of the provisions can be found under the caption "The Merger Rights
of Dissenting Shareholders."
By Order of the Board of Directors,
/s/David T. Chen
David T. Chen
President and Chief Executive Officer
Portland, Oregon
March 22, 2005
The board of directors unanimously recommends that you vote "FOR" the
proposal to approve the merger agreement. Whether or not you plan to attend
the meeting, please complete, sign, date and return the enclosed proxy in the
pre-addressed postage-paid envelope.
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Important: The prompt return of proxies will save American Pacific Bank the
expense of further requests for proxies to ensure a quorum at the special
meeting. Please complete, sign and date the enclosed proxy and promptly mail
it in the return envelope provided. You may revoke your proxy in the manner
described in the proxy statement- prospectus at any time before it is
exercised.
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Please do not send in any stock certificates at this time.
TABLE OF CONTENTS
Page
------
Questions and Answers About the Merger 1
Summary 3
Risk Factors 13
Comparative Per Share Data 14
Selected Historical Financial Information 16
Selected Historical Financial Information for Riverview 17
Selected Historical Financial Information for American
Pacific Bank 19
Summary Selected Pro Forma Combined Data 21
Market Price and Dividend Information 22
Special Meeting of American Pacific Bank Shareholders 24
Place, Date and Time 24
Purpose of the Meeting 24
Who Can Vote at the Meeting; Record Date 24
Quorum and Vote Required 24
Shares Held by American Pacific Bank Officers and Directors 24
Voting by Proxy 25
Revocability of Proxies 25
Solicitation of Proxies 25
Ownership of American Pacific Bank Common Stock 26
The Merger 27
The Parties to the Merger 27
Form of the Merger 28
Conversion of American Pacific Bank Common Stock 28
Election Procedures; Surrender of Stock Certificates 32
Material U.S. Federal Income Tax Consequences of the Merger 33
Background and Reasons for the Merger 37
Riverview's Reasons for the Merger 39
American Pacific Bank's Reasons for the Merger 39
American Pacific Bank's Board of Directors Recommendation 41
Opinion of American Pacific Bank's Financial Advisor 41
Rights of Dissenting Shareholders 48
Interests of Our Directors and Officers in the Merger that
Differ From Your Interests 50
Regulatory Approvals Needed to Complete the Merger 51
Accounting Treatment of the Merger 52
Resale of Riverview Common Stock 52
The Merger Agreement 52
Terms of the Merger 52
When Will the Merger Be Completed 53
Conditions to Completing the Merger 53
Conduct of Business Before the Merger 54
Covenants of American Pacific Bank and Riverview in the
Merger Agreement 57
Representations and Warranties Made by Riverview,
Riverview Community Bank and American Pacific Bank in
the Merger Agreement 59
Terminating the Merger Agreement 59
Termination Fee 60
Expenses 61
Changing the Terms of the Merger Agreement 61
Pro Forma Financial Information 62
A Warning About Forward-Looking Statements 72
(i)
Description of Riverview Common Stock 72
General 72
Common Stock 72
Preferred Stock 73
Comparison of Rights of Shareholders 73
Authorized Stock 74
Voting Rights 74
Required Vote for Authorization of Certain Actions 74
Dividends 75
Shareholders' Meetings 75
Action by Shareholders Without a Meeting 76
Board of Directors 76
Amendment of the Bylaws 77
Amendment of the Articles of Incorporation 77
Selected Provisions in the Articles of Incorporation and Bylaws
of Riverview 77
Business Combinations with Related Persons 78
Limitation on Voting Rights 78
Board of Directors 78
Special Meetings of Shareholders 79
Advance Notice Provisions for Shareholder Nominations
and Proposals 79
Preferred Stock 79
Amendment of Articles of Incorporation 79
Shareholder Proposals 80
Legal Matters 80
Experts 80
Where You Can Find More Information 80
APPENDIX A Agreement and Plan of Merger, dated as of November 9, 2004, as
amended, by and among Riverview Bancorp, Inc., Riverview
Community Bank and American Pacific Bank
APPENDIX B Fairness Opinion of Wells Fargo Securities, LLC
APPENDIX C Sections 711.175, 711.180 and 711.185 of the Oregon Bank Act
APPENDIX D American Pacific Bank's Annual Report on Form 10-KSB for the
year ended December 31, 2004
APPENDIX E Riverview Bancorp, Inc. 2004 Annual Report to Shareholders
including Annual Report on Form 10-K, and Quarterly Report on
Form 10-Q for the Quarter Ended December 31, 2004
(ii)
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. What am I being asked to vote on and how does the board of directors
recommend that I vote?
A. You are being asked to vote FOR the approval of the Agreement and Plan of
Merger dated as of November 9, 2004, as amended, providing for the merger
of American Pacific Bank with and into Riverview Community Bank. After
the merger, American Pacific Bank will cease to exist, and Riverview
Community Bank will continue as the surviving bank. The American Pacific
Bank board of directors has determined that the proposed merger is in
your best interests, has approved the merger agreement and recommends
that you vote FOR the approval of the merger agreement.
Q. What vote is required to approve the merger agreement?
A. The approval of the merger agreement requires the affirmative vote of the
holders of two-thirds of the outstanding shares of American Pacific Bank
common stock.
Q. What will I receive in the merger?
A. You will receive either cash or shares of Riverview's common stock in
exchange for your shares of American Pacific Bank stock. Although you
will be given an opportunity to elect whether you wish to receive cash or
stock consideration, the form of consideration you receive will depend,
in part, on the elections of other American Pacific Bank shareholders.
At the date of the merger, Riverview will exchange 788,593 shares of its
common stock and $16.8 million in cash for all the outstanding shares of
American Pacific Bank common stock, subject to the overall proportional
cash limitations imposed by the Internal Revenue Code in order for the
merger to be tax-free. In addition, no American Pacific Bank
shareholder is permitted to receive Riverview shares in the merger that
would result in that shareholder owning more than 4.9% of the shares of
Riverview common stock outstanding after the merger. As a result of this
ownership limitation, Fai Chan, Chairman of the Board of American Pacific
Bank who currently owns approximately 43.9% of the outstanding shares of
American Pacific Bank will receive cash in exchange for at least 59% of
his American Pacific Bank shares assuming the Riverview stock price is
$21.25. Because the amount of cash that Riverview will pay in the merger
is limited, there will be less cash available to pay to other
shareholders of American Pacific Bank.
The number of Riverview shares or the amount of cash that you will
receive for each share of American Pacific Bank common stock that you
hold at the time of the merger will depend on the average market price
of Riverview common stock during a 20 day period ending 10 days
before the effective time of the merger. For example, if the average
price during such period is $21.15 per share, the closing price of
Riverview's common stock on March 14, 2005, you will receive 0.5637
shares for each share of American Pacific Bank common stock that is
exchanged for stock and $11.92 per share of American Pacific Bank common
stock that is exchanged for cash. The value of the shares of Riverview
common stock will continue to fluctuate, and you will not know the
precise value of the Riverview shares or the exact amount of cash that
you will receive in the merger at the time you vote. A fluctuation in
the price of American Pacific Bank's common stock will not have any
effect on the number of Riverview shares or the amount of cash you will
receive for your shares of American Pacific Bank common stock that you
hold at the time of the merger.
The merger agreement provides for a right of American Pacific Bank to
terminate the transaction if the average Riverview per share price is
less than $18.06 and the share price has declined since November 9,
2004 by at least 15% more than the Nasdaq Bank Index during the same
period. The merger agreement also may be terminated by either Riverview
or American Pacific Bank if the merger has not occurred by April 30,
2005. American Pacific Bank will be not be required to pay a termination
fee in either circumstance.
1
Riverview will not issue fractional shares in the merger. Instead, you
will receive a cash payment, without interest, for the value of any
fraction of a share of Riverview common stock that you would otherwise be
entitled to receive.
Q. How do I elect to receive cash or stock for my American Pacific Bank
stock?
A. A form for making an election will be sent to you separately after this
proxy statement-prospectus is mailed. For your election to be effective,
your properly completed election form, along with your American Pacific
Bank stock certificates or an appropriate guarantee of delivery, must be
sent to and received by U.S. Stock Transfer, the exchange agent, on or
before 5:00 p.m., Pacific time, on April 20, 2005. Do not send
your election form together with your proxy card. Instead, use the
separate envelope specifically provided for the election form and your
stock certificates. If you do not make a timely election, you will be
allocated Riverview common stock or cash depending on the elections
made by other shareholders.
Q. How do I exchange my American Pacific Bank stock certificates?
A. If you make an election, you must return your American Pacific Bank stock
certificates or an appropriate guarantee of delivery with your election
form. Shortly after the merger, the exchange agent will allocate
cash and Riverview common stock among American Pacific Bank shareholders,
consistent with their elections and the allocation and proration
procedures in the merger agreement. If you do not submit an election
form, you will receive instructions on where to surrender your American
Pacific Bank stock certificates from the exchange agent after the merger
is completed. In any event, you should not forward your American Pacific
Bank stock certificates with your proxy card.
Q. What should I do now?
A. After you have read this document, please indicate on your proxy card how
you want to vote. Sign and mail the proxy card in the enclosed postage
prepaid envelope as soon as possible, so that your shares will be
represented at the special meeting.
Q. If my shares are held in "street name" by my broker, bank or nominee,
will my shares automatically be voted for me?
A. No. Your broker, bank or nominee will not be able to vote your shares of
American Pacific Bank common stock unless you provide instructions on how
to vote. You should instruct your broker, bank or nominee how to vote
your shares by following the procedures your broker provides. If you do
not provide instructions to your broker, bank or nominee, your shares
will not be voted, and this will have the effect of voting against
adoption of the merger agreement. Please check the voting form used by
your broker, bank or nominee to see if it offers telephone or Internet
voting.
Q. Who can help answer my questions?
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
David T. Chen
President and Chief Executive Officer
American Pacific Bank
315 SW Fifth Avenue, Suite 201
Portland, Oregon 97204
(503) 221-5801
2
SUMMARY
This summary, which does not contain all of the information that is
important to you, highlights selected information from this proxy
statement-prospectus and documents incorporated herein by reference. You
should carefully read this entire document and the other documents, including
the merger agreement, which accompany this document to fully understand the
merger. See "Where You Can Find More Information."
The Companies
Riverview Bancorp, Inc. Riverview is the savings and loan holding
900 Washington Street, Suite 900 company for Riverview Community Bank, a
Vancouver, Washington 98660 federally chartered savings bank.
(360) 693-6650 Riverview Community Bank has 13
full-service offices located in Camas,
Washougal, Stevenson, White Salmon,
Battle Ground, Vancouver, Goldendale and
Longview, Washington. At December 31,
2004, Riverview had assets of $541.9
million, net loans of $398.4 million,
deposits of $427.7 million and
shareholders' equity of $68.5 million.
Riverview's common stock is listed on the
Nasdaq National Market and trades under
the symbol "RVSB."
For financial statements and a discussion
of Riverview's recent results of
operations, see Riverview's 2004 Annual
Report to Shareholders, including its
Annual Report on Form 10-K, and Quarterly
Report on Form 10-Q for the quarter ended
December 31, 2004, all of which accompany
this proxy statement-prospectus in
Appendix E.
American Pacific Bank American Pacific Bank is a state
315 SW Fifth Avenue, Suite 201 chartered commercial bank headquartered
Portland, Oregon 97204 in Portland, Oregon with three
(503) 221-5801 full-service branches located in
Portland, Aumsville and Wood Village,
Oregon. At December 31, 2004,
American Pacific Bank had assets of
$122.6 million, net loans of $107.3
million, deposits of $86.4 million
and shareholders' equity of $18.6
million. American Pacific Bank's common
stock is listed on the Nasdaq SmallCap
Market and trades under the symbol
"AMPB."
See Appendix D for financial statements
and a discussion of American Pacific
Bank's recent results of operations.
The Special Meeting
Place, Date and Time (page 24) A special meeting of shareholders of
American Pacific Bank will be held at 315
SW Fifth Avenue, Suite 201, Portland,
Oregon on April 21, 2005 at 3:00 p.m.,
local time.
3
Purpose of the Meeting (page 24) At the special meeting, American Pacific
Bank shareholders will be asked to
approve the merger agreement with
Riverview and to transact any other
business that may properly come before
the meeting.
Who Can Vote at the Meeting You can vote at the special meeting of
(page 24) American Pacific Bank shareholders if you
owned American Pacific Bank common stock
at the close of business on March 21,
2005. You will be able to cast one
vote for each share of American Pacific
Bank common stock you owned at that time.
As of March 21, 2005, there were
2,804,618 shares of American Pacific
Bank common stock outstanding.
What Vote is Required for Approval In order to approve the merger agreement,
of the Merger Agreement (page 24) the holders of at least two-thirds of the
outstanding shares of American Pacific
Bank common stock must vote in its favor.
Therefore, an abstention will count as a
vote against the merger. You can vote
your shares by attending the special
meeting and voting in person or by
completing and mailing the enclosed proxy
card. As of March 21, 2005,
directors and executive officers of
American Pacific Bank owned 1,392,401
shares, or 49.6%, of the outstanding
common stock of American Pacific Bank.
The directors of American Pacific Bank,
collectively owning 47.6% of the
outstanding American Pacific Bank shares,
have all contractually committed to vote
in favor of the merger.
The Merger
Overview of the Transaction We propose a business combination in
(page 27) which American Pacific Bank will merge
with Riverview Community Bank. Riverview
Community Bank will be the surviving bank
in the merger.
Each American Pacific Bank Share As an American Pacific Bank shareholder,
Will Be Exchanged for Either Shares upon the closing of the merger, each of
of Riverview or Cash (page 28) your shares of American Pacific Bank
common stock will automatically be
converted into the right to receive
either shares of Riverview common stock
or cash. You may elect either of these
options, and your election will be
followed to the extent feasible.
The aggregate cash to be paid to
shareholders in exchange for their shares
of American Pacific Bank common stock is
$16,758,000, and the aggregate number of
Riverview shares of common stock to be
issued in the merger is 788,593. The
merger agreement provides for adjustment
of the consideration amounts if options
to purchase American Pacific Bank common
stock are exercised prior to the merger;
however, all optionholders have agreed
not to exercise
4
their options prior to the merger. The
per share amount of cash to be received
and the number of shares for which each
American Pacific Bank share is to be
exchanged will be determined based on the
average price of Riverview common stock
during the 20-day period ending on the
tenth day prior to the effective time of
the merger and the number of shares of
American Pacific Bank common stock
outstanding as of the effective time.
The value of the shares of Riverview
common stock will continue to fluctuate,
and you will not know the precise value
of the Riverview shares or the exact
amount of cash that you will receive in
the merger at the time you vote. A
fluctuation in the price of American
Pacific Bank's common stock will not have
any effect on the number of Riverview
shares or the amount of cash you will
receive for your shares of American
Pacific Bank common stock that you hold
at the time of the merger.
Additionally, if the average of the daily
closing sales prices of Riverview common
stock for the 20 days ending on the tenth
day prior to the effective time of the
merger is less than $18.06 and the
decline in value of Riverview common
stock since November 9, 2004 relative to
the change in value of the Nasdaq Bank
Index over the same period exceeds 15%,
then American Pacific Bank may terminate
the merger agreement unless Riverview
increases the consideration to be
received by the holders of American
Pacific Bank common stock using the
formula in the merger agreement.
Riverview or American Pacific Bank may
terminate the merger agreement if the
merger has not occurred by April 30,
2005. American Pacific Bank will be
not be required to pay a termination fee
in either circumstance.
On March 14, 2005, Riverview common stock
closed at $21.15 per share on the Nasdaq
National Market. If this were the
average closing price of Riverview common
stock during the measurement period, then
American Pacific Bank shareholders who
receive Riverview common stock would
receive 0.5637 shares of Riverview common
stock for each share of American Pacific
Bank common stock that they own, and
American Pacific Bank shareholders who
receive cash will receive $11.92 per
share.
The amount of cash or stock that you
receive may also differ from the amounts
that you elect as a result of the
allocation and proration procedures in
the merger agreement. The merger
agreement provides that the aggregate
cash consideration to be paid by
Riverview will not exceed $16,758,000,
and the aggregate number
5
of Riverview shares to be issued will not
exceed 788,593 (assuming no options to
purchase shares of American Pacific Bank
common stock are exercised). Because the
tax consequences of receiving cash will
differ from the tax consequences of
receiving stock, you should carefully
read the tax information beginning on
page 33.
Stock Options Holders of stock options exercisable for
shares of American Pacific Bank common
stock that have been issued by American
Pacific Bank and are outstanding on the
closing of the merger will receive the
difference between the per share amount
of cash consideration to be paid and the
exercise price of the stock option.
How to Elect to Receive Cash or The exchange agent or, if your American
Stock and Exchange Your American Pacific Bank common stock is held in
Pacific Bank Certificates (page 32) "street name," your broker, bank or
nominee, will send you a form for making
the election after the date this proxy
statement-prospectus is mailed. The
election form allows you to elect to
receive cash or Riverview common stock,
or to make no election.
For your election to be effective, you
must return your properly completed
election form, along with your American
Pacific Bank stock certificates or an
appropriate guarantee of delivery to:
U.S. Stock Transfer Corporation
1745 Gardena Ave.
Glendale, California 91204
on or before 5:00 p.m., Pacific time, on
April 20, 2005. U.S. Stock Transfer
will act as exchange agent in the merger
and in that role will process the
exchange of American Pacific Bank stock
certificates for either cash or Riverview
common stock. Shortly after the merger,
the exchange agent will allocate cash and
Riverview common stock among American
Pacific Bank shareholders, consistent
with their elections and the allocation
and proration procedures in the merger
agreement. If you do not submit an
election form, you will receive
instructions on where to surrender your
American Pacific Bank stock certificates
from the exchange agent after the merger
is completed. In any event, you should
not forward your American Pacific Bank
stock certificates with your proxy card.
If you have a preference for receiving
either Riverview stock or cash for your
American Pacific Bank stock, you should
complete and return the election form.
If you do not make an election, you will
be allocated
6
Riverview common stock or cash depending
on the elections made by other American
Pacific Bank shareholders.
Please remember, however, that even if
you do make an election, you may not
receive the amount of cash or stock that
you elect as a result of the requirement
that not more than 788,593 shares of
Riverview common stock will be issued and
not more than $16,758,000 will be paid
and the requirements of the Internal
Revenue Code for the receipt of the
shares to be tax free.
We make no recommendation as to whether
you should elect to receive cash or stock
in the merger. You must make your own
decision with respect to your election.
Market Prices and Share Information The following table shows the closing
(page 22) price per share of Riverview common stock
and the equivalent per share price for
American Pacific Bank common stock
assuming a shareholder receives only
Riverview common stock in exchange for
his or her American Pacific Bank common
stock and giving effect to the merger on
(1) November 9, 2004, which is the last
day on which Riverview common stock
traded preceding the public announcement
of the proposed merger; and (2) March 14,
2005, which is the last practicable
trading day before the printing of this
proxy statement-prospectus. The
equivalent per share price of American
Pacific Bank common stock is intended to
show the value that would be received by
an American Pacific Bank shareholder on
various dates and at various prices for
Riverview common stock. A more detailed
table containing the values to be
received based on changes in the
Riverview stock price is contained on
page 29. The equivalent per share price
of American Pacific Bank common stock was
computed based on the sum of (i) the
product of 788,593 (the number of
Riverview shares being issued in the
merger) times the Riverview stock price
as determined in the merger agreement on
the dates indicated, plus (ii)
$16,757,593 (the aggregate cash
consideration being paid to American
Pacific Bank shareholders) divided by
(iii) 2,804,618 (the number of American
Pacific Bank shares outstanding).
7
Equivalent
Price Per
Share of
Riverview American
Common Pacific
Stock Bank Stock
---------- ----------
November 9, 2004 $21.45 $12.01
March 14, 2005 21.15 11.92
Tax Consequences of the Merger Your federal income tax consequences will
(page 33) depend primarily on whether you receive
Riverview common stock or cash in
exchange for your American Pacific Bank
common stock. If you receive Riverview
common stock, you should not recognize
gain or loss except with respect to the
cash you receive instead of a fractional
share. If you receive cash, you should
recognize capital gain or loss on the
exchange. The actual federal income tax
consequences to you of electing to
receive cash or Riverview common stock
will not be ascertainable at the time you
make your election because we will not
know at that time if, or to what extent,
the allocation and proration procedures
will apply.
This tax treatment may not apply to all
American Pacific Bank shareholders.
Determining the actual tax consequences
of the merger to you can be complicated.
You should consult your tax advisor for a
full understanding of the merger's tax
consequences that are particular to your
circumstances.
Board of Directors Recommends That American Pacific Bank's board of
Shareholders Approve the Merger directors believes that the merger is
(page 41) fair and in your best interests, and
unanimously recommends that you vote
"FOR" the proposal to approve the merger
agreement.
For a discussion of the circumstances
surrounding the merger and the factors
considered by American Pacific Bank's
board of directors in approving the
merger agreement, see page 37.
American Pacific Bank's Financial Wells Fargo Securities, LLC has delivered
Advisor Believes the Merger to American Pacific Bank's board of
Consideration Is Fair to directors its opinion that, as of
Shareholders (page 41) March 15, 2004, the merger
consideration is fair to American Pacific
Bank shareholders from a financial point
of view. A copy of this opinion is
provided as Appendix B to this proxy
statement-prospectus. You should read
this opinion and the description of it
herein completely to understand the
procedures followed, assumptions made,
matters considered, and qualifications
and limitations on the review made by
Wells Fargo Securities in providing its
opinion.
8
American Pacific Bank has agreed to pay
Wells Fargo Securities approximately
$381,000 for its services in connection
with the merger.
You Have Dissenters' Rights in the Oregon law provides you with dissenters'
Merger (page 48) appraisal rights in the merger. This
means that if you are not satisfied with
the amount you are receiving in the
merger, you are legally entitled to
receive payment in cash for the fair
value of your shares at the time of the
merger. To exercise your dissenters'
rights you must either deliver written
notice of your intent to demand payment
for your shares to American Pacific Bank
at or before the special meeting of
American Pacific Bank shareholders or you
must vote against the merger. Notices
should be addressed to American Pacific
Bank's Chief Executive Officer and sent
to American Pacific Bank at 315 SW Fifth
Avenue, Suite 201, Portland, Oregon
97204. Failure to follow exactly the
procedures specified under Oregon law
will result in the loss of your
dissenters' rights. A copy of the
dissenters' rights provisions of Oregon
law is provided as Appendix C to this
document.
Interests of American Pacific Some of American Pacific Bank's directors
Bank's Directors and Officers in and officers have interests in the merger
the Merger That Differ From Your that are different from, or in addition
Interests (page 50) to, their interests as shareholders in
American Pacific Bank. The members of
American Pacific Bank's board of
directors knew about these additional
interests and considered them when they
approved the merger. These include:
* a $550,000 severance payment to
David T. Chen, President and Chief
Executive Officer of American Pacific
Bank, and a $300,000 severance payment to
Richard Cheong, Chief Financial Officer
of American Pacific Bank upon the closing
of the merger in connection with the
termination of their employment
agreements. In addition, American
Pacific Bank paid $8,500 of legal
expenses for Messrs. Chen and Cheong in
connection with the negotiation and
preparation of termination agreements on
their behalf;
* consulting agreements between
Riverview and David T. Chen and Richard
Cheong, which become effective upon
completion of the merger pursuant to
which Mr. Chen will be paid $85.00 per
hour and Mr. Cheong will be paid $8,750
per month;
* noncompetition agreements between
Riverview and David T. Chen and Richard
Cheong pursuant to which, for a two-year
period, each agrees to not compete in
exchange for payments of $360,000 and
$200,000, respectively.
9
* provisions in the merger agreement
relating to insurance for directors and
officers of American Pacific Bank for
events occurring before the merger; and
* provisions in the merger agreement
that provide for the cancellation of
stock options. Directors and officers of
American Pacific Bank have, in the
aggregate, stock options to purchase
126,500 shares of American Pacific Bank
common stock. Holders of stock options
will receive the difference between the
per share cash consideration and the
exercise price of the stock options.
Regulatory Approval Needed to We cannot complete the merger unless it
Complete the Merger (page 51) is first approved by the Office of Thrift
Supervision and the Oregon Department of
Consumer and Business Services.
Riverview has filed the required
application with these regulatory
agencies. As of the date of this proxy
statement-prospectus, we have received
approval from the Oregon Department of
Consumer and Business Services, but have
not yet received the approval of the
Office of Thrift Supervision. While we
do not know of any reason why we would
not be able to obtain this approval in a
timely manner, we cannot be certain when
or if we will receive it.
Purchase Accounting Treatment Riverview will account for the merger
(page 52) using the purchase method of accounting.
Under this method of accounting,
Riverview will record the fair market
value of American Pacific Bank's assets
and liabilities on its financial
statements. The difference between the
purchase price paid by Riverview and the
fair market value of American Pacific
Bank's tangible and identifiable
intangible assets net of its liabilities
will be recorded on Riverview's books as
"goodwill."
The Merger Agreement
A copy of the merger agreement is provided as Appendix A to this proxy
statement-prospectus. Please read the entire merger agreement carefully. It
is the legal document that governs the merger.
Conditions to Completing the Merger The completion of the merger depends on a
(page 53) number of conditions being met, including
but not limited to:
* approval of the merger agreement by
American Pacific Bank's shareholders;
* approval of the merger by
regulatory authorities;
10
* receipt of a tax opinion that the
merger qualifies as a tax-free
reorganization; and
* the continued accuracy of certain
representations and warranties made on
the date of the merger agreement.
We cannot be certain when or if the
conditions to the merger will be
satisfied or waived, or that the merger
will be completed.
Terminating the Merger Agreement Riverview and American Pacific Bank's
(page 59) boards of directors can agree at any time
not to complete the merger, even if
American Pacific Bank's shareholders have
approved it. Also, either company can
decide, without the consent of the other,
to terminate the merger agreement if:
* the shareholders of American
Pacific Bank do not approve the merger;
* a required regulatory approval is
denied or a governmental authority blocks
the merger;
* we do not complete the merger by
April 30, 2005; or
* the other party makes a
misrepresentation, breaches a warranty or
fails to satisfy or fulfill a covenant
that would have a material adverse effect
on the party seeking to terminate the
merger agreement.
* Riverview may terminate the merger
agreement if American Pacific Bank enters
any agreement to be acquired; or enters
into a supervisory agreement with any
bank regulatory agency or has any claim
or action concerning federal or state
securities law against it or its officers
and directors for their services as
officers and directors.
Termination Fee (page 60) American Pacific Bank must pay Riverview
a termination fee of $1.2 million if
within 18 months after the merger
agreement is terminated any of the
following occurs:
A. a person acquires over 25% of
American Pacific Bank's outstanding
common stock;
B. American Pacific Bank enters into or
recommends to American Pacific Bank
shareholders a merger agreement with
someone other than Riverview; or
11
C. an acquisition proposal is made to
American Pacific Bank and after the
proposal is made:
* American Pacific Bank breaches
the merger agreement and the breach
entitles Riverview to terminate the
merger agreement;
* American Pacific Bank
shareholders fail to approve the
merger agreement at the special
meeting of American Pacific Bank
shareholders; or
* the special meeting is
cancelled without the fault of
Riverview, or the American Pacific
Bank board of directors withdraws or
modifies in a manner adverse to
Riverview its recommendation to
shareholders to approve the merger
agreement.
American Pacific Bank will not be
required to pay the termination fee if,
prior to the occurrence of any of the
events described above, Riverview
terminates the merger agreement other
than because of a material breach by
American Pacific Bank or American Pacific
Bank validly terminates the merger
agreement.
We May Amend the Terms of the We can agree to amend the merger
Merger and Waive Some Conditions agreement, and each of us can waive our
(page 61) right to require the other party to
adhere to the terms and conditions of the
merger agreement, where the law allows.
However, if the American Pacific Bank
shareholders approve the merger
agreement, they must approve any
amendment or waiver that reduces or
changes the consideration they will
receive in the merger.
12
RISK FACTORS
In addition to the other information included in this proxy
statement-prospectus (including the matters addressed in "A Warning About
Forward-Looking Statements"), you should carefully consider the matters
described below in determining whether to approve the merger agreement.
You may receive a form of consideration different from what you elect.
American Pacific Bank shareholders will be given the right to elect to
receive either cash or Riverview common stock in the merger. However, the
total consideration to be received by American Pacific Bank shareholders in
the merger is fixed at $16,758,000 and 788,593 shares of Riverview common
stock. The merger agreement contains proration and allocation methods to
achieve this result. If you elect all cash and the available cash is
oversubscribed, then you will receive a portion of the merger consideration in
Riverview common stock. If you elect all stock and the available stock is
oversubscribed, then you will receive a portion of the merger consideration in
cash. Therefore, you may not receive exactly the form of consideration that
you elect. Further, if the value of Riverview common stock were to drop
significantly prior to closing, the amount of cash might be reduced and the
number of shares of Riverview common stock increased in order to satisfy the
overall proportional cash limitations imposed by the Internal Revenue Code in
order for the merger to be tax-free.
Because the market price of Riverview common stock may fluctuate, you cannot
be sure of the value of the consideration that you will receive in the merger.
Upon the closing of the merger, each of your shares of American Pacific
Bank common stock will automatically be converted into the right to receive
either shares of Riverview common stock or cash. The number and value of
shares of Riverview common stock and the amount of cash to be exchanged for
each share of American Pacific Bank common stock will be determined in part on
the average closing price of Riverview common stock over a 20-day trading
period ending 10 days prior to the closing of the merger. The price of
Riverview common stock may change from the date of this proxy
statement-prospectus thereby affecting the market value of Riverview common
stock as well as the number of shares and the amount of cash exchanged for
each share of American Pacific Bank common stock. Stock price changes may
result from a variety of factors, including general market and economic
conditions, changes in Riverview's businesses, operations and prospects, and
regulatory considerations. Many of these factors are beyond Riverview's
control.
The price of Riverview common stock might decrease after the merger.
Following the merger, many holders of American Pacific Bank common stock
will become shareholders of Riverview. Riverview common stock could decline
in value after the merger. For example, during the twelve-month period ending
on March 14, 2005 (the most recent practicable date prior to the printing of
this proxy statement-prospectus), the closing price of Riverview common stock
varied from a low of $19.49 to a high of $22.50 and ended that period at
$21.15. In addition, there will be a period between the completion of the
merger and the time when American Pacific Bank shareholders receiving stock
consideration actually receive certificates evidencing Riverview common stock.
Until stock certificates are received, American Pacific Bank shareholders will
not be able to sell their Riverview shares in the open market and, thus, will
not be able to avoid losses resulting from any decline in the trading price of
Riverview common stock during this period.
Directors and officers of American Pacific Bank have potential conflicts of
interest in the merger.
You should be aware that some directors and officers of American Pacific
Bank have interests in the merger that are different from, or in addition to,
the interests of American Pacific Bank shareholders generally. For example,
certain executive officers have entered into agreements that provide for
either severance payments or for them to provide consulting services to
Riverview following the merger. These agreements may create potential
conflicts of interest. These and certain other additional interests of
American Pacific Bank's directors and officers may cause some of these persons
to view the proposed transaction differently than you view it.
13
Riverview may experience difficulties in managing its growth and in
effectively integrating American Pacific Bank.
There can be no assurances that Riverview will be able to adequately and
profitably manage its growth, and effectively integrate the operations of
American Pacific Bank. Acquiring American Pacific Bank will involve risks
commonly associated with acquisitions, including:
* potential exposure to liabilities and expenses of American Pacific
Bank;
* difficulty and expense of integrating the operations and personnel
of American Pacific Bank;
* potential disruption to the business of Riverview;
* potential diversion of the time and attention of the management of
Riverview; and
* impairment of relationships with, and the possible loss of, key
employees and customers of American Pacific Bank.
COMPARATIVE PER SHARE DATA
The following table shows information about our income per common share,
dividends per share and book value per share, and similar information as if
the merger had occurred on the date indicated (which we refer to as "pro
forma" information). In presenting the comparative pro forma information for
certain time periods, we assumed that we had been merged throughout those
periods and made certain other assumptions. See "Pro Forma Financial
Information."
The information listed as "per equivalent American Pacific Bank share"
was obtained by multiplying the pro forma amounts by an exchange ratio of
0.28118. This exchange ratio is used only to calculate the total transaction
value. The actual exchange ratio will be determined based on the Riverview
stock price as provided in the merger agreement. We present this information
to reflect the fact that some American Pacific Bank shareholders will receive
shares of Riverview common stock for each share of American Pacific Bank
common stock exchanged in the merger. We also anticipate that the combined
company will derive financial benefits from the merger that include reduced
operating expenses and the opportunity to earn more revenue. The pro forma
information, while helpful in illustrating the financial characteristics of
the new company under one set of assumptions, does not reflect these benefits
and, accordingly, does not attempt to predict or suggest future results. The
pro forma information also does not necessarily reflect what the historical
results of the combined company would have been had our companies been
combined during these periods.
14
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
this document. See "Pro Forma Financial Information."
At or for the At or for the
Nine Months Ended Twelve Months Ended
December 31, 2004 March 31, 2004
(Riverview) (Riverview)
September 30, 2004 December 31, 2003
(American Pacific) (American Pacific)
------------------ -------------------
Cash dividend per common share:
Riverview $0.47 $ 0.56
American Pacific Bank -- --
Riverview pro forma (1) 0.47 0.56
Per equivalent American Pacific
Bank share (4) 0.13 0.16
Book value per share:
Riverview 14.26 13.64
American Pacific Bank 6.49 6.06
Riverview pro forma (2) 15.18 13.75
Per equivalent American Pacific
Bank share (4) 4.27 3.87
Tangible book value per common share:
Riverview 12.05 11.42
American Pacific Bank 6.49 6.06
Riverview pro forma (2) 10.22 11.84
Per equivalent American Pacific
Bank share (4) 2.87 3.33
Basic earnings per common share:
Riverview 1.01 1.41
American Pacific Bank 0.56 0.85
Riverview pro forma (3) 1.03 1.28
Per equivalent American Pacific
Bank share (4) 0.29 0.36
Diluted earnings per common share:
Riverview 1.00 1.39
American Pacific Bank 0.55 0.78
Riverview pro forma (3) 1.02 1.27
Per equivalent American Pacific
Bank share (4) 0.29 0.36
-------------
(1) Riverview pro forma cash dividends per share represent historical cash
dividends declared by Riverview and assumes no changes in cash dividends
per share.
(2) Riverview's December 31, 2004 pro forma per share amounts of book value
and tangible book value per common share amounts are based on the pro
forma book value and tangible book value divided by the historical number
of Riverview shares outstanding at December 31, 2004 plus the number of
shares issued by Riverview in exchange for the American Pacific Bank
shares outstanding. Riverview's March 31, 2004 pro forma book value and
tangible book value per common share are based on the historical total
shareholders' equity of the combined entity divided by the historical
number of Riverview shares outstanding at March 31, 2004 plus the number
of shares issued by Riverview in exchange for the American Pacific Bank
shares outstanding.
(3) Riverview's pro forma basic and diluted earnings per share amounts are
based on the pro forma net income divided by the Riverview historical
average number of basic and diluted shares outstanding for each respective
time period plus the number of shares issued by Riverview in exchange for
the American Pacific Bank common shares outstanding.
(4) This assumes that 100% of the stock is exchanged at an exchange ratio of
0.28118, and that 50% of the outstanding shares of American Pacific Bank's
common stock is converted into shares of Riverview common stock. The
exchange ratio of 0.28118 is only used to calculate the total transaction
value. The actual exchange ratio will be determined based on the
Riverview stock price as provided in the merger agreement.
15
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables show summarized historical financial data for
Riverview and American Pacific Bank. You should read this summary financial
information in connection with Riverview's and American Pacific Bank's
historical financial information.
The audited financial statements of American Pacific Bank as of and for
the years ended December 31, 2004 and 2003 are included in American Pacific
Bank's Annual Report on Form 10-KSB attached as Appendix D. The audited
financial statements of Riverview for the years ended March 31, 2004 and 2003
are included in Riverview's Annual Report to Shareholders, including its
Annual Report on Form 10-K, and the unaudited financial statements of
Riverview for the nine months ended December 31, 2004 and 2003 are included in
Riverview's Quarterly Report on Form 10-Q, both of which are included in
Appendix E.
Unaudited financial statements for Riverview for the nine months ended
December 31, 2004 and 2003 include normal, recurring adjustments necessary to
fairly present the data for those periods. The unaudited data is not
necessarily indicative of expected results for a full year's operation.
16
SELECTED HISTORICAL FINANCIAL INFORMATION FOR RIVERVIEW
The following tables set forth certain information concerning the consolidated financial position and
results of operations of Riverview at the dates and for the periods indicated.
At March 31,
At December 31, ----------------------------------------------------
2004 2004 2003 2002 2001 2000
--------------- -------- ------- ------- ------- --------
(Unaudited) (In thousands)
FINANCIAL CONDITION DATA:
Total assets $541,887 $520,487 $419,904 $392,101 $431,996 $344,680
Loan receivable, net(1) 398,421 381,534 301,811 288,530 296,861 249,034
Mortgage-backed securities held
to maturity, 2,407 2,517 3,301 4,386 6,405 8,657
at amortized cost
Mortgage-backed securities
available for sale, at fair
value 12,696 10,607 13,069 36,999 43,139 39,378
Cash and interest-bearing
deposits 55,423 47,907 60,858 22,492 38,935 15,786
Investment securities held to
maturity, at amortized cost -- -- -- -- 861 903
Investment securities available
for sale, at fair value 29,438 32,883 20,426 18,275 25,561 12,883
Deposit accounts 427,649 409,115 320,742 259,690 295,523 232,355
FHLB advances 40,000 40,000 40,000 74,500 79,500 60,550
Shareholder's equity 68,518 65,182 54,511 53,677 52,721 48,489
Nine Months Ended
December 31, Year Ended March 31,
------------------ ----------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
------------------ -------- ------- ------- ------- --------
(Unaudited) (In thousands)
OPERATING DATA:
Interest income $22,119 $20,549 $27,584 $26,461 $29,840 $31,343 $25,438
Interest expense 5,250 5,055 6,627 8,417 14,318 16,288 11,073
-------------------- ------------------------------ ------- -------
Net interest income 16,869 15,494 20,957 18,044 15,522 15,055 14,365
Provision for loan losses 260 70 210 727 1,116 949 675
-------------------- ------------------------------ ------- -------
Net interest income after
provision for loan losses 16,609 15,424 20,747 17,317 14,406 14,106 13,690
Gains from sale of loans,
real estate owned and loss
on impairment of securities (940) 838 1,003 (531) 1,964 129 151
Gain on sale of land and fixed
assets 829 -- 3 -- 4 540 --
Other non-interest income 4,772 4,246 5,583 4,469 4,583 3,293 2,746
Non-interest expenses 14,189 13,083 17,572 14,908 13,953 12,867 10,832
-------------------- ------------------------------ ------- -------
Income before federal income
tax provision 7,081 7,425 9,764 6,347 7,004 5,201 5,755
Provision for federal income
taxes 2,220 2,468 3,210 1,988 2,136 1,644 1,878
-------------------- ------------------------------ ------- -------
Net Income $ 4,861 $ 4,957 $ 6,554 $ 4,359 $ 4,868 $ 3,557 $ 3,877
==================== ============================== ======= =======
Earnings per common share
Basic $ 1.01 $ 1.08 $ 1.41 $ 1.00 $ 1.06 $ 0.78 $ 0.76
Diluted 1.00 1.06 1.39 0.99 1.06 0.77 0.74
Dividends per common share 0.465 0.420 0.560 0.500 0.440 0.400 0.360
17
SELECTED HISTORICAL FINANCIAL INFORMATION FOR RIVERVIEW (continued)
At or For the Nine Months
Ended December 31, At or For the Year Ended March 31,
------------------------- --------------------------------------------------
2004 2003 2004 2003 2002 2001 2000
------------- ----------- ------ ------ ------ ------ ------
(Unaudited)
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.24% 1.37% 1.35% 1.07% 1.16% 0.94% 1.22%
Return on average equity 9.53 10.85 10.60 7.99 9.01 7.04 7.15
Dividend payout ratio(2) 46.04 38.89 39.72 50.00 41.51 51.94 48.65
Interest rate spread 4.45 4.36 4.42 4.28 3.29 3.37 3.88
Net interest margin 4.79 4.71 4.76 4.83 4.04 4.27 4.78
Non-interest expense to
average assets 2.72 2.73 3.61 3.66 3.34 3.41 3.41
Efficiency ratio (non-interest
expense divided by the sum of
net interest income and non-
interest income) 65.90 63.58 63.79 67.82 63.21 67.66 62.75
Asset Quality Ratios:
Average interest-earning
assets to interest-bearing
liabilities 122.84 122.95 122.53 124.62 120.49 119.75 124.51
Allowance for loan losses to
total loans at end of period 1.09 1.29 1.16 0.90 0.87 0.64 0.54
Net charge-offs to average
outstanding loans during the
period 0.12 0.20 0.31 0.12 0.14 0.14 0.21
Ratio of nonperforming assets
to total assets 0.14 0.61 0.39 0.18 0.61 0.24 0.39
Capital Ratios:
Average equity to average
assets 12.98 12.63 12.72 13.39 12.93 13.41 17.05
Equity to assets at end of
fiscal year 12.64 12.41 12.52 12.98 13.69 12.20 14.07
----------
(1) Includes loans held for sale.
(2) Dividends paid divided by net income.
18
SELECTED HISTORICAL FINANCIAL INFORMATION FOR AMERICAN PACIFIC BANK
At December 31,
------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(In thousands)
Financial Condition Data:
Total assets $122,593 $108,312 $100,423 $75,749 $78,741
Loans receivable, net 107,301 97,983 86,236 69,977 70,740
Cash and interest-bearing
deposits 11,848 6,451 9,798 1,435 2,232
Investment securities held
to maturity, at amortized
cost -- -- -- -- --
Investment securities
available for sale, at
fair value 1,180 1,501 1,196 1,481 2,329
Deposit accounts 86,352 84,020 79,534 57,577 63,351
FHLB borrowings 17,000 12,600 11,600 11,000 8,800
Shareholders' equity 18,604 11,334 8,577 6,782 6,207
For Year Ended December 31,
------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Operating Data: (In thousands)
Interest income $ 8,795 $ 8,221 $ 7,558 $ 7,377 $ 6,708
Interest expense 1,987 2,154 2,296 3,685 3,119
------- ------- ------- ------- -------
Net interest income 6,808 6,067 5,262 3,692 3,589
Provision for loan losses 207 267 470 173 362
------- ------- ------- ------- -------
Net interest income after
provision for loan losses 6,601 5,800 4,792 3,519 3,227
Other non-interest income 201 217 465 534 341
Non-interest expenses 4,135 3,773 3,480 3,180 2,841
------- ------- ------- ------- -------
Income before income tax 2,667 2,244 1,777 873 727
Provision for income
taxes 1,050 852 675 336 276
------- ------- ------- ------- -------
Net income $ 1,617 $ 1,392 $ 1,102 $ 537 $ 451
======= ======= ======= ======= =======
19
SELECTED HISTORICAL FINANCIAL INFORMATION FOR AMERICAN PACIFIC BANK
(continued)
At or For the Year Ended December 31,
------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Key Financial Ratios:
Performance Ratios:
Return on average
assets (1) 1.37% 1.27% 1.23% 0.68% 0.68%
Return on average
equity (2) 10.77 14.35 14.70 8.30 7.81
Interest rate spread 5.56 5.39 5.81 4.30 5.04
Net interest margin (3) 5.88 5.71 6.09 4.84 5.64
Non-interest expense to
average assets 3.49 3.46 3.88 4.05 4.31
Efficiency ratio (non-
interest expense dividend
by the sum of interest
income and non-interest
income) 58.96 60.04 60.77 75.25 72.29
Asset Quality Ratios:
Average interest-earning
assets to interest-
bearing liabilities 118.43 115.40 110.83 111.12 112.11
Allowance for loan losses
to total loans at end of
period 0.90 0.92 0.97 0.94 0.87
Net charge-off to average
outstanding loans during
the period 0.14 0.21 0.37 0.20 0.36
Ratio of nonperforming
assets to total
assets (4) 0.40 0.30 -- 0.47 0.08
Capital Ratios:
Average equity to average
assets 12.67 8.88 8.34 8.24 8.74
Equity to assets at end
of fiscal year 15.18 10.46 8.54 8.95 7.88
-------------
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Net interest income as a percentage of average interest-earning assets.
(4) Non-performing loans consist of loans accounted for on a nonaccrual
basis, loans greater than 90 days delinquent and restructured loans.
20
SUMMARY SELECTED PRO FORMA COMBINED DATA
The following table shows selected financial information on a pro forma
combined basis giving effect to the merger as if the merger had become
effective at the end of the periods presented, in the case of balance sheet
information, and at the beginning of each period presented, in the case of
income statement information. The pro forma information reflects the purchase
method of accounting.
We anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses and opportunity to
earn more revenue. The pro forma information, while helpful in illustrating
the financial characteristics of the new company under one set of assumptions,
does not reflect these benefits and, accordingly, does not attempt to predict
or suggest future results. It also does not necessarily reflect what the
historical results of the new company would have been had our companies been
combined during these periods.
You should read this summary pro forma information in conjunction with
the information under "Pro Forma Financial Information" and with the
historical information in this document on which it is based.
Nine Months Ended Year Ended
December 31, 2004 March 31, 2004
----------------- --------------
(In thousands, except per share data)
Pro forma combined income statement data:
Interest income $28,060 $35,656
Interest expense 6,780 8,932
------- -------
Net interest income 21,280 26,724
Provision for loan losses 369 477
------- -------
Net interest income after provision for
loan losses 20,911 26,247
Non-interest income 5,152 6,806
Non-interest expense 17,466 22,615
------- -------
Income before income taxes 8,597 10,438
Income tax provision 2,814 3,465
------- -------
Net income $ 5,783 $ 6,973
======= =======
Pro forma per share data:
Basic net income $ 1.03 $ 1.28
Diluted net income 1.02 1.27
At December 31, 2004
--------------------
(In thousands)
Pro forma combined balance sheet data:
Total assets (1) $663,637
Loans receivable, net (2) 505,453
Deposits 513,948
Total shareholders' equity 85,275
----------------
(1) Subsequent to the completion of the merger, Riverview intends to sell
American Pacific Bank's credit card portfolio which totaled $3.6 million
at December 31, 2004.
(2) Includes loans held for sale.
21
MARKET PRICE AND DIVIDEND INFORMATION
Riverview's common stock is listed on the Nasdaq National Market under
the symbol "RVSB." American Pacific Bank's common stock is listed on the
Nasdaq SmallCap Market and trades under the symbol "AMPB."
The table below sets forth, for the calendar quarters indicated, the high
and low sales prices of Riverview common stock as reported on the Nasdaq
National Market and the dividends per share declared on the Riverview common
stock in each such quarter.
Riverview Common Stock
-----------------------------
High Low Dividends
------ ------ ---------
2002
Quarter ended March 31, 2002 $14.00 $11.93 $0.11
Quarter ended June 30, 2002 14.75 13.05 0.125
Quarter ended September 30, 2002 15.71 14.00 0.125
Quarter ended December 31, 2002 15.24 13.63 0.125
2003
Quarter ended March 31, 2003 17.04 14.64 0.125
Quarter ended June 30, 2003 18.30 16.30 0.140
Quarter ended September 30, 2003 20.50 18.08 0.140
Quarter ended December 31, 2003 21.74 19.09 0.140
2004
Quarter ended March 31, 2004 21.43 19.35 0.140
Quarter ended June 30, 2004 21.00 19.49 0.155
Quarter ended September 30, 2004 21.65 19.85 0.155
Quarter ended December 31, 2004 22.50 20.95 0.155
2005
January 1, 2005 through March 14, 2005 22.48 21.01 0.155
As of March 14, 2005, the latest practicable date prior to the printing
of this proxy statement-prospectus, the closing price for Riverview's common
stock was $21.15.
You should obtain current market quotations for Riverview common stock
because the market price of Riverview common stock will fluctuate between the
date of this proxy statement-prospectus and the date on which the merger is
completed, and thereafter. You can get these quotations from a newspaper, on
the Internet or by calling your broker.
As of January 31, 2005, there were approximately 2,000 holders of record
of Riverview common stock. As of January 31, 2005, there were approximately
259 holders of record of American Pacific Bank common stock. These numbers do
not reflect the number of persons or entities who may hold their stock in
nominee or "street" name through brokerage firms.
Following the merger, the declaration of dividends will be at the
discretion of Riverview's board of directors and will be determined after
consideration of various factors, including earnings, cash requirements, the
financial condition of Riverview, applicable state law and governmental
regulations and other factors deemed relevant by the board of directors.
Federal law limits the ability of Riverview Community Bank to pay dividends to
Riverview.
22
The table below sets forth, for the calendar quarters indicated, the
closing bid quotations on the Nasdaq SmallCap Market of American Pacific Bank
common stock for each quarter of 2004, 2003 and 2002. American Pacific Bank
has never paid any cash dividends on its common stock. The merger agreement
prohibits American Pacific Bank from paying cash dividends on American Pacific
Bank common stock pending consummation of the merger. See "The Merger
Agreement Conduct of Business Before the Merger."
American Pacific Bank
Common Stock
---------------------
High Low
-------- ---------
2002
Quarter ended March 31, 2002 $3.98 $2.99
Quarter ended June 30, 2002 5.86 3.90
Quarter ended September 30, 2002 5.95 4.00
Quarter ended December 31, 2002 5.53 4.69
2003
Quarter ended March 31, 2003 6.00 4.90
Quarter ended June 30, 2003 7.57 5.65
Quarter ended September 30, 2003 7.99 6.70
Quarter ended December 31, 2003 8.50 7.05
2004
Quarter ended March 31, 2004 11.75 8.07
Quarter ended June 30, 2004 11.69 8.90
Quarter ended September 30, 2004 9.94 8.25
Quarter ended December 31, 2004 11.91 9.51
2005
January 1, 2005 through March 14, 2005 11.75 11.14
As of March 14, 2005, the latest practicable date prior to the printing
of this proxy statement-prospectus, the closing price for American Pacific
Bank's common stock was $11.60.
23
SPECIAL MEETING OF AMERICAN PACIFIC BANK SHAREHOLDERS
Place, Date and Time
The meeting will be held at 315 SW Fifth Avenue, Suite 201, Portland,
Oregon, 97204 on April 21, 2005, at 3:00 p.m., local time.
Purpose of the Meeting
The American Pacific Bank special meeting is being held to consider and
approve the merger agreement.
The American Pacific Bank shareholders will also consider any other
matters that may properly come before the special meeting. At the time of the
mailing of this proxy statement-prospectus, American Pacific Bank's board of
directors was not aware of any other matters that may be presented for
consideration at the special meeting other than the approval of the merger
agreement.
Who Can Vote at the Meeting; Record Date
You are entitled to vote your American Pacific Bank common stock if the
records of American Pacific Bank showed that you held your shares as of the
close of business on March 21, 2005. As of the close of business on that
date, a total of 2,804,618 shares of American Pacific Bank common stock were
outstanding. Each share of common stock has one vote.
If you are a beneficial owner of American Pacific Bank common stock held
by a broker, bank or other nominee (i.e., in "street name") and you want to
vote your shares of American Pacific Bank common stock in person at the
meeting, you will have to get a written proxy in your name from the broker,
bank or other nominee who holds your shares.
Quorum and Vote Required
Quorum. The special meeting will be held if a majority of the
outstanding shares of common stock entitled to vote is represented in person
or by proxy at the meeting. If you return valid proxy instructions or attend
the meeting in person, your shares will be counted for purposes of determining
whether there is a quorum, even if you abstain from voting. Broker non-votes
also will be counted for purposes for determining the existence of a quorum.
A broker non-vote occurs when a broker, bank or other nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received voting instructions from the beneficial owner. Under
applicable rules, brokers, banks and other nominees may not exercise their
voting discretion on the proposal to approve and adopt the merger agreement
and, for this reason, may not vote shares held for beneficial owners without
specific instructions from the beneficial owners.
Vote Required. Approval and adoption of the merger agreement requires
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of American Pacific Bank common stock. Failure to return a properly
executed proxy card or to vote in person will have the same effect as a vote
against the merger agreement. Abstentions and broker non-votes will have the
same effect as a vote against the merger agreement.
Shares Held by American Pacific Bank Officers and Directors
As of March 21, 2005, directors and executive officers of American
Pacific Bank beneficially owned 1,392,401 shares of American Pacific Bank
outstanding common stock. This equals 49.6% of the outstanding shares of
American Pacific Bank common stock. All six of American Pacific Bank's
directors entered into voting agreements with Riverview under which they have
agreed to vote an aggregate of 1,335,194 shares of American
24
Pacific Bank common stock owned by them in favor of the proposal to approve
the merger agreement. These shares represent 47.6% of the outstanding shares
and 66.7% is needed for shareholder approval of the merger.
Voting by Proxy
The board of directors of American Pacific Bank is sending you this proxy
statement-prospectus for the purpose of requesting that you allow your shares
of American Pacific Bank common stock to be represented at the meeting by the
persons named in the enclosed proxy card. All shares of American Pacific Bank
common stock represented at the meeting by properly executed proxies will be
voted in accordance with the instructions indicated on the proxy card. If you
sign and return a proxy card without giving voting instructions, your shares
will be voted as recommended by American Pacific Bank's board of directors.
American Pacific Bank's board of directors unanimously recommends a vote "FOR"
approval of the merger agreement.
If any matters not described in this document are properly presented at
the meeting, the persons named in the proxy card will use their own judgment
to determine how to vote your shares. This includes a motion to adjourn or
postpone the meeting in order to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger agreement will be voted
in favor of an adjournment or postponement to solicit additional votes in
favor of the merger agreement. American Pacific Bank does not know of any
other matters to be presented at the meeting.
If your American Pacific Bank common stock is held in street name, you
will receive instructions from your broker, bank or other nominee that you
must follow in order to have your shares voted. Please see the instruction
form that accompanies this proxy statement-prospectus.
Revocability of Proxies
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy you must either advise the Secretary of
American Pacific Bank in writing before your common stock has been voted at
the special meeting, deliver proxy instructions with a later date, or attend
the meeting and vote your shares in person. Attendance at the special meeting
will not in itself constitute revocation of your proxy.
Solicitation of Proxies
American Pacific Bank will pay the cost of this proxy solicitation. In
addition to soliciting proxies by mail, directors, officers and employees of
American Pacific Bank may solicit proxies personally and by telephone. None
of these persons will receive additional or special compensation for
soliciting proxies. American Pacific Bank will, upon request, reimburse
brokers, banks and other nominees for their expenses in sending proxy
materials to their customers who are beneficial owners and obtaining their
voting instructions.
25
OWNERSHIP OF AMERICAN PACIFIC BANK COMMON STOCK
The following table sets forth the beneficial ownership information for
the directors and executive officers of American Pacific Bank as of March 21,
2005. American Pacific Bank's common stock is listed on the Nasdaq SmallCap
Market and trades under the symbol "AMPB."
Number of Shares
Name of Beneficial Owner(1) Beneficially Owned(2) Percent of Class(3)
------------------------------------------------------------------------------
Fai H. Chan 1,230,582(4) 43.9%
David T. Chen 134,431(5) 4.8
Tong W. Chan 16,100(6) *
Francis L. Henricks 19,021(7) *
Alexander B. Korelin 15,000(8) *
James M. Mei 20,060(9) *
Richard Y. Cheong 65,656(10) 2.3
Donovan L. Wabs 14,071(11) *
All directors and executive
officers as a group (9 persons) 1,514,921(4-11) 51.6%
---------------
* less than 1.0%
(1) The business address of each of the persons listed is 315 SW Fifth
Avenue, Suite 201, Portland, Oregon 97204.
(2) Shares are shown as beneficially owned if the person, directly or
indirectly, has or shares the power to vote or to direct the voting of,
or the power to dispose or to direct the disposition of, such shares.
Unless noted to the contrary, each person listed in the table above has
sole voting and investment power with regard to the shares appearing
opposite his name. The table also includes shares owned by the person's
spouse and children living at the home of such person.
(3) Denominator in calculation of percentage includes outstanding shares and
options of the individual or group exercisable within 60 days. There
were 2,804,618 shares outstanding as of March 21, 2005.
(4) Includes 73,370 shares held indirectly, which are owned by Heng Fung
Capital Corporation Limited, a subsidiary of Heng Fung Holdings Limited,
a company controlled by Mr. Chan.
(5) Includes options to purchase 40,000 shares at $5.00 per share.
(6) Includes options to purchase 15,000 shares at $5.00 per share.
(7) Includes options to purchase 15,000 shares at $5.00 per share.
(8) Includes options to purchase 15,000 shares at $5.00 per share.
(9) Includes options to purchase 15,000 shares at $5.00 per share.
(10) Includes options to purchase 15,000 shares at $5.00 per share.
(11) Includes options to purchase 7,500 shares at $5.00 per share.
On March 14, 2005, Mr. Chen filed with the FDIC an amendment to his Form
4 (previously Form F-8) filed in March 2002, to reflect an additional 1,920
shares purchased in February 2002, as well as to update his total beneficial
ownership to reflect 5,142 shares acquired in a stock split and 586 shares
contributed by American Pacific Bank to Mr. Chen's 401(k) plan. These shares
were not reflected in the beneficial ownership table in the proxy statement
for last year's annual meeting of American Pacific Bank's shareholders.
American Pacific Bank has recently become aware that Mr. Korelin disposed
of all of his shares of American Pacific Bank's common stock more than five
years ago. On March 15, 2005, Mr. Korelin filed an amended Form 4 to reflect
the balance of his holdings as zero. The disposition of these shares was not
reflected in the beneficial ownership table in the proxy statement for last
year's annual meeting of American Pacific Bank's shareholders.
26
In addition to the ownership of the directors and executive officers
listed above, American Pacific Bank is aware of one shareholder owning in
excess of 5% of the outstanding common stock of American Pacific Bank. The
information set forth below is based solely on the Schedule 13G filed with the
FDIC on February 14, 2005.
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent of Class
------------------------- ------------------ ----------------
Millenco, L.P. 165,989 5.9%
c/o Millennium Management, L.L.C.
666 Fifth Avenue
New York, New York 10103
None of the directors of American Pacific Bank will become directors of
Riverview or Riverview Community Bank. Riverview and Riverview Community
Bank's directors will continue as directors after the merger.
THE MERGER
The following discussion of the merger is qualified by reference to the
merger agreement, which is attached to this proxy statement-prospectus as
Appendix A. You should read the entire merger agreement carefully. It is the
legal document that governs the merger.
The Parties to the Merger
Riverview Bancorp, Inc. Riverview is the savings and loan holding
company for Riverview Community Bank, a federally chartered savings bank.
Riverview Community Bank, which conducts its operations through its 13
locations in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Vancouver, Goldendale and Longview, Washington, is a community-oriented
financial institution offering traditional financial services primarily to
residents of Clark, Cowlitz, Klickitat and Skamania Counties, Washington,
throughout the Columbia River Gorge area. Riverview Community Bank 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 and consumer purposes. These
loans are primarily secured by properties located in Clark, Cowlitz, Klickitat
and Skamania Counties. Riverview Community Bank operates a trust and
financial services company, Riverview Asset Management Corporation, located in
downtown Vancouver, Washington. Riverview Mortgage, a mortgage broker
division of Riverview Community Bank, originates mortgage loans (including
construction loans) for various mortgage companies predominantly in the
Portland metropolitan areas, as well as for Riverview Community Bank. 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, Washington, which is immediately north of Portland,
Oregon.
Certain information relating to executive compensation, benefit plans,
voting securities and the principal holders thereof, certain relationships and
related transactions and other matters related to Riverview is incorporated by
reference or set forth in Riverview's Annual Report on Form 10-K for the year
ended March 31, 2004 and Quarterly Reports on Form 10-Q for the quarters ended
June 30, 2004, September 30, 2004, and December 31, 2004, which are
incorporated herein by reference. American Pacific Bank shareholders who want
copies of these documents may contact Riverview at its address or telephone
number indicated under "Where You Can Find More Information" beginning on page
80.
For financial statements of Riverview and a discussion of Riverview's
recent results of operations, see Riverview's 2004 Annual Report to
Shareholders, including its Annual Report on Form 10-K for the year ended
March 31, 2004 and Quarterly Report on Form 10-Q for the quarter ended
December 31, 2004, all of which accompany this document as Appendix E.
27
American Pacific Bank. American Pacific Bank is a commercial bank
chartered and organized under the laws of Oregon. American Pacific Bank
conducts its business from three full-service branches located in Portland,
Aumsville and Wood Village, Oregon. American Pacific Bank offers banking
services to Salem and Portland area businesses, individuals and professionals
with high service expectations. In addition, American Pacific Bank provides a
full-service real estate lending operation in Portland, Oregon as well as a
nationwide credit card program. American Pacific Bank offers a broad range of
banking services, from traditional services found at larger commercial banks
to specialized, niche-oriented services designed to focus on certain customer
populations. Several personal and business checking account options are made
available by American Pacific Bank. American Pacific Bank operates with
approximately 31 full time equivalent employees and has no subsidiaries.
For information on American Pacific Bank's business and financial
statements and a discussion of American Pacific Bank's recent results of
operations, see American Pacific Bank's Annual Report on Form 10-KSB for the
year ended December 31, 2004 which is attached as Appendix D.
Form of the Merger
The boards of directors of American Pacific Bank and Riverview each have
unanimously approved a merger agreement that provides for the merger of
American Pacific Bank with and into Riverview Community Bank with Riverview
Community Bank surviving the merger. Upon completion of the merger, each
share of American Pacific Bank common stock will be converted into the right
to receive, at the election of the holder (subject to limitations in the
merger agreement), either cash or a number of shares of Riverview common stock
established by a formula in the merger agreement. The common stock of
Riverview will continue to trade on The Nasdaq National Market under the
symbol "RVSB" after completion of the merger.
Conversion of American Pacific Bank Common Stock
American Pacific Bank shareholders will have the opportunity to elect to
receive merger consideration in cash or shares of Riverview common stock.
Riverview has agreed to issue (subject to adjustment) a total of 788,593
shares of common stock and $16,758,000 in cash in exchange for all of the
outstanding shares of American Pacific Bank. The transaction was structured
so that approximately 50% of the merger consideration would be in Riverview
common stock and approximately 50% would be in cash. These percentages and
the actual value of the merger consideration to be received will change based
on the average market value of Riverview common stock during the measurement
period as compared to the market value at the time the transaction was
structured.
The aggregate market value of the Riverview shares to be issued, which is
based on the average closing price of Riverview common stock for the 20 days
ending on the tenth day prior to the effective time of the merger, plus the
aggregate cash consideration, divided by the number of American Pacific Bank
shares to be exchanged, will determine the per share value of the merger
consideration (the "Transaction Value Per Share"). Therefore, whether you
receive Riverview common stock or cash, the value of what you receive will be
the same. A fluctuation in the price of American Pacific Bank's common stock
will not have any effect on the number of Riverview shares or the amount of
cash you will receive for your shares of American Pacific Bank common stock
that you hold at the time of the merger.
Any American Pacific Bank shareholder who does not make a valid election
will receive cash, shares of Riverview common stock or a mixture of cash and
shares of Riverview common stock, based on what is available after giving
effect to the valid elections made by other shareholders, as well as the
proration procedures described below.
Cash Election. The merger agreement provides that each American Pacific
Bank shareholder who makes a valid cash election will have the right to
receive, in exchange for each share of American Pacific Bank common stock,
cash in an amount equal to the Transaction Value Per Share. The total amount
of cash that will be paid in the merger is fixed and as a result, even if you
make a cash election, you may nevertheless receive Riverview common stock for
a portion of your cash election shares. The merger agreement provides that no
American Pacific Bank shareholder may own in excess of 4.9% of the outstanding
Riverview common stock after the merger. As a result of
28
this ownership limitation, Fai Chan, Chairman of the Board of American Pacific
Bank, who currently owns approximately 43.9% of the outstanding shares of
American Pacific Bank, will necessarily receive at least $8,676,442 in cash in
exchange for at least 59% of his American Pacific Bank shares assuming the
Riverview stock price is $21.25. Because the amount of cash that Riverview
will pay in the merger is limited, there will be less cash but more stock
available to pay to other shareholders of American Pacific Bank. Therefore,
other shareholders of American Pacific Bank will not receive more than
$8,081,151 in cash.
Stock Election. The merger agreement provides that each American Pacific
Bank shareholder who makes a valid stock election will have the right to
receive, in exchange for each share of American Pacific Bank common stock, a
number of shares of Riverview common stock determined by dividing the
Transaction Value Per Share by the average closing sales price of Riverview
common stock during the 20 days ending on the tenth day prior to the effective
date of the merger. The total number of shares of Riverview common stock to
be issued in the merger is fixed and as a result, even if you make a stock
election, you may nevertheless receive cash for a portion of your stock
election shares.
Examples of Per Share Amounts. The table below demonstrates the amounts
to be received by American Pacific Bank shareholders and holders of American
Pacific Bank stock options in either cash or shares of Riverview common stock
based on a range of assumed average closing sales prices of Riverview common
stock during the 20 trading days ending on the tenth day prior to the
effective time of the merger. The Transaction Value Per Share listed below
assumes that outstanding options to acquire shares of American Pacific Bank
common stock are not exercised, and that no termination event based on the
price of Riverview's common stock has occurred. The initial pricing for the
transaction was based on an assumed Riverview price of $21.25 as noted in the
following table. As of March 14, 2005, the latest practicable date before the
printing of this proxy statement-prospectus, the closing price of Riverview's
common stock was $21.15.
Aggregate
Stock Option Total
Value to be Transaction Transaction
Received by Value Value Per
Assumed Value of American Including Share to
Riverview Riverview Aggregate Pacific Stock American
Per Share Shares Exchange Stock Stock Option Option Pacific
Price Issued Ratio (2) Consideration Cash Paid Holders Value Shareholders (3)
---------- --------- -------- ------------- --------- ------------- --------- ---------------
(Actual) (Dollars in thousands) (Actual)
$16.50 788.6 0.28118 $13,012 $16,758 $ 704 $30,473 $10.61
17.00 788.6 0.28118 13,406 16,758 722 30,885 10.76
17.50 788.6 0.28118 13,800 16,758 739 31,297 10.90
18.06(1) 788.6 0.28118 14,242 16,758 759 31,759 11.05
18.25 788.6 0.28118 14,392 16,758 766 31,916 11.11
18.75 788.6 0.28118 14,786 16,758 784 32,328 11.25
19.25 788.6 0.28118 15,180 16,758 802 32,740 11.39
19.75 788.6 0.28118 15,575 16,758 819 33,152 11.53
20.25 788.6 0.28118 15,969 16,758 837 33,564 11.67
20.75 788.6 0.28118 16,363 16,758 855 33,976 11.81
21.25 788.6 0.28118 16,758 16,758 873 34,388 11.95
21.75 788.6 0.28118 17,152 16,758 891 34,800 12.09
22.25 788.6 0.28118 17,546 16,758 908 35,212 12.23
22.75 788.6 0.28118 17,940 16,758 926 35,624 12.37
23.25 788.6 0.28118 18,335 16,758 944 36,036 12.51
23.75 788.6 0.28118 18,729 16,758 962 36,448 12.65
24.25 788.6 0.28118 19,123 16,758 980 36,861 12.79
24.75 788.6 0.28118 19,518 16,758 997 37,273 12.93
25.25 788.6 0.28118 19,912 16,758 1,015 37,685 13.07
(footnotes on following page)
29
--------------
(1) The merger agreement provides for a potential walk-away by American
Pacific Bank if the Riverview per share price is less than $18.06 and the
share price has declined by at least 15% more than the Nasdaq Bank Index
between November 9, 2004 and the closing date of the merger.
(2) The exchange ratio is computed by dividing 788,593 (the number of
Riverview shares issued in the merger) by 2,804,618 (the number of
American Pacific Bank shares outstanding). This exchange ratio is used
only to calculate the total transaction value.
(3) Represents the value of the cash and stock to be received by American
Pacific Bank shareholders per share and the value option holders will
receive minus their applicable exercise price.
The following examples illustrates the mechanics of the allocation
procedures. The allocation will be determined primarily by (i) a
shareholder's individual allocation election and (ii) how many shares, in the
aggregate, elect for stock, elect for cash, and make no election. It is
important to note also that no fractional shares will be issued as
consideration cash will be substituted for any fractional shares. The
following scenarios assume that the average closing price of Riverview common
stock is $21.25.
Scenario 1 assumes that (i) a shareholder currently owns 100 shares of
American Pacific Bank common stock, (ii) the shareholder elects to receive
cash as consideration for all shares owned, (iii) all shareholders of American
Pacific Bank make an election, and (iv) the shareholders of American Pacific
Bank elected, in the aggregate, for total cash consideration of less than or
equal to $16,758,000 for their shares. In this scenario, the shareholder
would receive $1,195.00 in cash as consideration for his or her shares.
Scenario 2 assumes that (i) a shareholder currently owns 100 shares of
American Pacific Bank common stock, (ii) the shareholder elects to receive
cash as consideration for all shares owned, (iii) all shareholders of American
Pacific Bank make an election, and (iv) the shareholders of American Pacific
Bank elected, in the aggregate, for total cash consideration equal to
$20,000,000 for their shares. In this scenario, the shareholder would receive
$1,003.75 in cash and nine shares of Riverview common stock as consideration
for his or her shares (the Riverview common stock being the shareholder's pro
rata allocation necessary to bring the aggregate transaction consideration to
the agreed upon stock and cash split).
Scenario 3 assumes that (i) a shareholder currently owns 100 shares of
American Pacific Bank common stock, (ii) the shareholder elects to receive
cash as consideration for all shares owned, (iii) shareholders representing
$2,000,000 of the aggregate consideration make no election, but all other
shareholders of American Pacific Bank make an election, and (iv) the
shareholders of American Pacific Bank elected, in the aggregate, for total
cash consideration equal to $20,000,000 for their shares. In this scenario,
the shareholder would receive $1,131.25 in cash and three shares of Riverview
common stock as consideration for their shares (the Riverview common stock
being the shareholder's pro rata allocation, after all unelected shares are
designated stock elections, necessary to bring the aggregate transaction
consideration to the agreed upon stock and cash split).
Therefore, if you have a preference as to the type of consideration you
want to receive, it is important to make a consideration election.
Non-Electing Shares. American Pacific Bank shareholders who make no
election to receive cash or Riverview common stock in the merger and American
Pacific Bank shareholders who do not make a valid election will be deemed not
to have made an "election." Shareholders not making an election may be paid
in cash and/or shares of Riverview common stock depending on the number of
valid cash and stock elections made by other American Pacific Bank
shareholders, subject to the proration adjustment described below.
Adjustments to Preserve Tax Treatment. The number of shares of Riverview
common stock to be issued in the merger to American Pacific Bank shareholders
may be increased, and the aggregate amount of cash that will be paid to
American Pacific Bank shareholders may be decreased, if necessary, to ensure
that the merger qualifies as a "reorganization" for U.S. federal income tax
purposes as described under " Material U.S. Federal Income Tax Consequences of
the Merger." This adjustment will only be made if the aggregate value of the
cash consideration to
30
be paid in the merger exceeds 60% of the total value of the merger
consideration based upon the average of the high and low sales prices of
Riverview common stock on the merger completion date. In this case, the cash
consideration will be reduced so that it represents 60% of the value of the
total merger consideration and the stock consideration will be increased so
that it represents 40% of the value of the total merger consideration on the
completion date. This adjustment will not result in a change in the value of
the merger consideration, whether in cash or in stock, based upon the average
closing sales prices of Riverview common stock during the five consecutive
trading days preceding the last trading day prior to completion of the merger.
Other Adjustments. The total number of shares of Riverview common stock
to be issued and cash to be paid in the merger is fixed at 788,593 shares and
$16,758,000, respectively, subject to adjustment only:
* to preserve the intended tax treatment of the merger, as described
above under " Adjustments to Preserve Tax Treatment;" and
* to prevent termination of the merger agreement, as described below
under "The Merger Agreement Termination of the Merger Agreement."
The cash and stock elections are subject to proration to preserve this
limit on the number of shares of Riverview common stock and cash to be issued
in the merger. As a result, even if you make the cash election or stock
election, you may nevertheless receive a combination of cash and stock.
Proration if Too Much Stock is Elected. Cash may be paid to shareholders
who make stock elections if there is an oversubscription for Riverview common
stock. There will be an oversubscription for Riverview common stock to the
extent that stock elections would result in the issuance more than 788,593
shares of Riverview common stock, subject to adjustment as described above.
In this case:
* cash consideration will be paid for all cash election and no
election shares;
* stock elections will be honored on a pro rata basis for 788,593
shares of Riverview common stock, subject to adjustment as described above;
and
* all remaining stock election shares will receive cash merger
consideration.
Proration if Too Much Cash is Elected. Riverview common stock may be
issued to shareholders who make cash elections if there is an oversubscription
for cash. There will be an oversubscription for cash to the extent that cash
elections would result in the payment of cash in excess of $16,758,000,
subject to adjustment as described above. In this case:
* stock consideration will be issued for all stock election and no
election shares;
* cash elections will be honored on a pro rata basis for $16,758,000,
subject to adjustment as described above (and subject to the limitation that
no American Pacific Bank shareholder shall own more than 4.9% of Riverview's
outstanding common stock after the merger); and
* all remaining cash election shares will receive stock merger
consideration.
Treasury Shares and Shares Held by Riverview or American Pacific Bank or
Any of Their Subsidiaries. Any shares of American Pacific Bank common stock
owned immediately prior to the effective time of the merger by American
Pacific Bank or Riverview will be cancelled and retired and will cease to
exist, and no consideration will be delivered in exchange for those shares.
American Pacific Bank Stock Options. Upon completion of the merger, all
outstanding stock options issued under an American Pacific Bank stock plan
representing a right to receive American Pacific Bank common
31
stock will be cancelled and converted into the right to receive from
Riverview, subject to any required withholding taxes, the Transaction Value
Per Share less the per share exercise price.
Election Procedures; Surrender of Stock Certificates
An election form will be mailed separately from this proxy
statement-prospectus to holders of shares of American Pacific Bank common
stock after this proxy statement-prospectus is mailed. Each election form
entitles the American Pacific Bank shareholder to elect to receive either cash
or Riverview common stock, or to make no election with respect to the merger
consideration to be received.
To make an effective election, you must submit a properly completed
election form, along with your American Pacific Bank stock certificates
representing all shares of American Pacific Bank common stock covered by the
election form (or an appropriate guarantee of delivery) to U.S. Stock Transfer
on or before the date set forth in the election form. U.S. Stock Transfer
will act as exchange agent in the merger and in that role will process the
exchange of American Pacific Bank stock certificates for cash and/or Riverview
common stock. Shortly after the merger, the exchange agent will allocate cash
and stock among American Pacific Bank shareholders, consistent with the
shareholders' elections and the allocation and proration procedures in the
merger agreement. If you do not submit an election form, you will receive
instructions from the exchange agent on where to surrender your American
Pacific Bank stock certificates after the merger is completed. In any event,
do not forward your American Pacific Bank stock certificates with your proxy
card.
You may change your election by written notice accompanied by a properly
completed and signed later-dated election form received by the exchange agent
prior to the election deadline or by withdrawal of your stock certificates by
written notice prior to the election deadline. All elections will be revoked
automatically if the merger agreement is terminated. If you have a preference
for receiving either Riverview stock or cash for your American Pacific Bank
stock, you should complete and return the election form. If you do not make
an election, you will be allocated Riverview common stock and/or cash
depending on the elections made by other shareholders.
We make no recommendation as to whether you should elect to receive cash
or stock in the merger. You must make your own decision with respect to your
election.
If certificates for American Pacific Bank common stock are not
immediately available or you are unable to send the election form and other
required documents to the exchange agent prior to the election deadline,
American Pacific Bank shares may be properly exchanged, and an election will
be effective, if:
* such exchanges are made by or through a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., or by a commercial bank or trust company having an office,
branch or agency in the United States;
* the exchange agent receives, prior to the election deadline, a
properly completed and duly executed notice of guaranteed delivery
substantially in the form provided with the election form (delivered by hand,
mail, telegram, telex or facsimile transmission); and
* the exchange agent receives, within three business days after the
election deadline, the certificates for all exchanged American Pacific Bank
shares, or confirmation of the delivery of all such certificates into the
exchange agent's account with The Depository Trust Company in accordance with
the proper procedures for such transfer, together with a properly completed
and duly executed election form and any other documents required by the
election form.
American Pacific Bank shareholders who do not submit a properly completed
election form or revoke their election form prior to the election deadline,
will have their shares of American Pacific Bank common stock designated as
non-election shares. American Pacific Bank stock certificates represented by
elections that have been
32
revoked will be promptly returned without charge to the American Pacific Bank
shareholder revoking the election upon written request.
After the completion of the merger, the exchange agent will mail to
American Pacific Bank shareholders who do not submit election forms or who
have revoked such forms a letter of transmittal, together with instructions
for the exchange of their American Pacific Bank common stock certificates for
the merger consideration. Until you surrender your American Pacific Bank
stock certificates for exchange after completion of the merger, you will not
be paid dividends or other distributions declared after the merger with
respect to any Riverview common stock into which your American Pacific Bank
shares have been converted. When you surrender your American Pacific Bank
stock certificates, Riverview will pay any unpaid dividends or other
distributions, without interest. After the completion of the merger, there
will be no further transfers of American Pacific Bank common stock. American
Pacific Bank stock certificates presented for transfer after the completion of
the merger will be canceled and exchanged for the merger consideration.
If your American Pacific Bank stock certificates have been either lost,
stolen or destroyed, you will have to prove your ownership of these
certificates and that they were lost, stolen or destroyed before you receive
any consideration for your shares. Upon request, the transfer agent, will
send you instructions on how to provide evidence of ownership.
Material U.S. Federal Income Tax Consequences of The Merger
General. The following discussion sets forth the material U.S. federal
income tax consequences of the merger to U.S. holders (as defined below) of
American Pacific Bank common stock. This discussion does not address any tax
consequences arising under the laws of any state, locality or foreign
jurisdiction. This discussion is based upon the Internal Revenue Code, the
regulations of the U.S. Treasury Department and court and administrative
rulings and decisions in effect on the date of this document. These laws may
change, possibly retroactively, and any change could affect the continuing
validity of this discussion.
For purposes of this discussion, the term "U.S. holder" means:
* a citizen or resident of the United States;
* a corporation created or organized under the laws of the United
States or any of its political subdivisions;
* a trust that (1) is subject to the supervision of a court within
the United States and the control of one or more U.S. persons or (2) has a
valid election in effect under applicable U.S. Treasury regulations to be
treated as a United States person; or
* an estate that is subject to U.S. federal income tax on its income
regardless of its source.
This discussion assumes that you hold your shares of American Pacific
Bank common stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code. Further, the discussion does not address all aspects
of U.S. federal income taxation that may be relevant to you in light of your
particular circumstances or that may be applicable to you if you are subject
to special treatment under the U.S. federal income tax laws, including if you
are:
* a financial institution;
* a tax-exempt organization;
* an S corporation or other pass-through entity;
33
* an insurance company;
* a mutual fund;
* a dealer in securities or foreign currencies;
* a trader in securities who elects the mark-to-market method of
accounting for your securities;
* an American Pacific Bank shareholder whose shares are qualified
small business stock for purposes of Section 1202 of the Internal Revenue Code
or who may otherwise be subject to the alternative minimum tax provisions of
the Internal Revenue Code;
* an American Pacific Bank shareholder who received American Pacific
Bank common stock through the exercise of employee stock options or otherwise
as compensation or through a tax-qualified retirement plan;
* a person that has a functional currency other than the U.S. dollar;
* a holder of options granted under any American Pacific Bank benefit
plan; or
* an American Pacific Bank shareholder who holds American Pacific
Bank common stock as part of a hedge, straddle or a constructive sale or
conversion transaction.
If a partnership (including an entity treated as a partnership for U.S.
federal income tax purposes) holds American Pacific Bank common stock, the tax
treatment of a partner in the partnership will generally depend on the status
of such partner and the activities of the partnership.
Consummation of the merger is conditioned upon (among other things) the
receipt of an opinion of Breyer & Associates PC, special counsel to Riverview.
Neither party currently intends to waive this condition; however, if the
condition is waived, American Pacific Bank will circulate a revised proxy
statement and resolicit proxies to approve the merger.
Based on representations contained in letters provided by Riverview and
American Pacific Bank and on certain customary factual assumptions, all of
which must continue to be true and accurate in all material respects as of the
effective time of the merger, it is the opinion of Breyer & Associates PC,
special counsel to Riverview, that the material U.S. federal income tax
consequences of the merger are as follows:
* the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code or will be treated as part of a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code;
* no gain or loss will be recognized by Riverview or its subsidiaries
or American Pacific Bank by reason of the merger;
* you will not recognize gain or loss if you exchange your American
Pacific Bank common stock solely for Riverview common stock, except to the
extent of any cash received in lieu of a fractional share of Riverview common
stock;
* you will recognize gain or loss if you exchange your American
Pacific Bank common stock solely for cash in the merger (including cash in
lieu of fractional shares) in an amount equal to the difference between the
amount of cash you receive and your tax basis in your shares of American
Pacific Bank common stock;
34
* subject to the following paragraph, you will recognize gain (but
not loss) if you exchange your American Pacific Bank common stock for a
combination of Riverview common stock and cash in an amount equal to the
lesser of:
* the excess, if any, of:
* the sum of the cash (excluding any cash received in
lieu of a fractional share of Riverview common stock)
and the fair market value of the Riverview common
stock you receive (including any fractional share of
Riverview common stock you are deemed to receive and
exchange for cash); over
* your tax basis in the American Pacific Bank common
stock surrendered in the merger; or
* the cash that you receive in the merger.
* your tax basis in the Riverview common stock that you receive in
the merger (including any fractional share interest you are deemed to receive
and exchange for cash), will equal your tax basis in the American Pacific Bank
common stock you exchange in the merger, increased by the amount of taxable
gain, if any, you recognize on the exchange and decreased by the amount of any
cash received by you in the merger; and
* your holding period for the Riverview common stock that you receive
in the merger will include your holding period for the shares of American
Pacific Bank common stock that you exchange in the merger.
If you acquired different blocks of American Pacific Bank common stock at
different times and at different prices, any gain or loss you recognize will
be determined separately with respect to each block of American Pacific Bank
common stock, and the cash and Riverview common stock you receive will be
allocated pro rata to each such block of common stock. In addition, your
basis and holding period in your Riverview common stock may be determined with
reference to each block of American Pacific Bank common stock exchanged.
An opinion of tax counsel represents tax counsel's legal judgment but has
no binding effect or official status of any kind. The Internal Revenue
Service may assert contrary positions, and contrary positions may be adopted
by a court if the positions are litigated.
In order for American Pacific Bank and Riverview to receive the opinion
of special counsel, the cash portion of the merger consideration on the date
of the merger agreement must not exceed 55% of the total value of the merger
consideration on such date based upon the closing price of Riverview common
stock immediately prior to the announcement of the transaction, and the cash
portion of the merger consideration on the date of the completion of the
merger must not exceed 60% of the total value of the merger consideration
based upon the closing price of Riverview common stock on the day the merger
is completed (or if this day is not a trading day, then based upon the closing
trading price on the most recent trading day prior thereto). Special counsel
will require American Pacific Bank and Riverview to provide representations to
it on the date of the completion of the merger that the facts described in the
preceding sentence are true and correct, and special counsel will rely on such
representations, as well as other customary representations in rendering its
opinion.
Additional Considerations Recharacterization of Gain as a Dividend.
All or part of the gain you recognize could be treated as ordinary dividend
income rather than capital gain if (i) you are a significant shareholder of
Riverview or (ii) if taking into account constructive ownership rules, your
percentage ownership in Riverview after the merger is not less than 80% of
what your percentage ownership would have been if you had received Riverview
common stock rather than cash in the merger. This could happen if due to the
allocation rules in the merger agreement you receive stock consideration for
over 80% of your American Pacific Bank shares and cash consideration for the
remainder of your shares. This also could happen, for example, because of
your purchase of additional Riverview common stock, a purchase of Riverview
common stock by a person related to you or a share
35
repurchase by Riverview from other Riverview shareholders. The test for
dividend treatment is made as though you received solely Riverview common
stock in the exchange, and subsequently had a portion of such stock redeemed
for cash. If this redemption (i) does not result in a "meaningful reduction"
in your interest in the company (which should not be the case as long as you
are a minority shareholder, taking into account the attribution rules under
Section 318 of the Internal Revenue Code) or (ii) decreases your stock
ownership in Riverview by 20% or less, dividend treatment could apply.
Because the possibility of dividend treatment depends upon your particular
circumstances, including the application of certain constructive ownership
rules, you should consult your tax advisor regarding the potential tax
consequences of the merger to you.
Cash in Lieu of Fractional Shares. You will generally recognize capital
gain or loss on any cash received in lieu of a fractional share of Riverview
common stock equal to the difference between the amount of cash received and
the basis allocated to such fractional share.
Dissenting Stockholders. Holders of American Pacific Bank common stock
who dissent with respect to the merger as discussed in " Rights of Dissenting
Shareholders," and who receive cash in respect of their shares of American
Pacific Bank common stock will recognize capital gain or loss equal to the
difference between the amount of cash received and their aggregate tax basis
in their shares.
Taxation of Capital Gain. Any gain or loss that you recognize in
connection with the merger will generally constitute capital gain or loss and
will constitute long-term capital gain or loss if your holding period in your
American Pacific Bank common stock is greater than one year as of the date of
the merger. For the rate of tax on capital gains, see below under " Tax Rate
Changes." The deductibility of capital losses is subject to limitations.
Holding Riverview Common Stock. The following discussion describes the
U.S. federal income tax consequences to a holder of Riverview common stock
after the merger. Any cash distribution paid by Riverview out of earnings and
profits, as determined under U.S. federal income tax law, will be subject to
tax as ordinary dividend income and will be includible in your gross income in
accordance with your method of accounting. See below under " Tax Rate
Changes" for information regarding the rate of tax on dividends. Cash
distributions paid by Riverview in excess of its earnings and profits will be
treated as (i) a tax-free return of capital to the extent of your adjusted
basis in your Riverview common stock (reducing such adjusted basis, but not
below zero), and (ii) thereafter as gain from the sale or exchange of a
capital asset.
Upon the sale, exchange or other disposition of Riverview common stock,
you will generally recognize gain or loss equal to the difference between the
amount realized upon the disposition and your adjusted tax basis in the shares
of Riverview common stock surrendered. Any such gain or loss generally will
be long-term capital gain or loss if your holding period with respect to the
Riverview common stock surrendered is more than one year at the time of the
disposition. For the rate of tax on capital gains, see below under " Tax Rate
Changes."
Tax Rate Changes. Under the recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003, the individual tax rates on long-term capital
gains and dividend income have been reduced. The top individual rate for
long-term capital gains from sales or exchanges on or after May 6, 2003 is
15%. The top individual rate for "qualified dividend income" received after
December 31, 2002 is also 15%. To be considered "qualified dividend income"
to a particular holder, the holder must have held the common stock for more
than 60 days during the 120 day period beginning 60 days before the
ex-dividend period as measured under Section 246(a) of the Internal Revenue
Code. Dividend income that is not qualified dividend income will be taxed at
ordinary income rates. You are urged to consult your tax advisor to determine
whether a dividend, if any, would be treated as qualified dividend income.
Information Reporting and Backup Withholding. Unless an exemption
applies, the exchange agent will be required to withhold, and will withhold,
28% of any cash payments to which a holder of American Pacific Bank common
stock or other payee is entitled pursuant to the merger, unless the
shareholder or other payee provides his or her tax identification number
(social security number or employer identification number) and certifies that
the number is correct. Each American Pacific Bank stockholder and, if
applicable, each other payee, is required to
36
complete and sign the Substitute Form W-9 that will be included as part of the
election form and the letter of transmittal to avoid being subject to backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to Riverview and the exchange agent.
Limitations on Tax Opinion and Discussion. As noted earlier, the tax
opinion is subject to certain assumptions, relating to, among other things,
the truth and accuracy of certain representations made by Riverview and
American Pacific Bank, the consummation of the merger in accordance with the
terms of the merger agreement and applicable state law. Furthermore, the tax
opinion will not bind the Internal Revenue Service and, therefore, the
Internal Revenue Service is not precluded from asserting a contrary position.
Each tax opinion and this discussion are based on currently existing
provisions of the Internal Revenue Code, existing and proposed Treasury
regulations, and current administrative rulings and court decisions. There
can be no assurance that future legislative, judicial or administrative
changes or interpretations will not adversely affect the accuracy of the tax
opinion or the statements and conclusions set forth herein. Any such changes
or interpretations could be applied retroactively and could affect the tax
consequences of the merger.
The preceding discussion is intended only as a summary of material United
States federal income tax consequences of the merger. It is not a complete
analysis or discussion of all potential tax effects that may be important to
you. Thus, we urge American Pacific Bank shareholders to consult their own
tax advisors as to the specific tax consequences to them resulting from the
merger, including tax return reporting requirements, the applicability and
effect of federal, state, local, and other applicable tax laws and the effect
of any proposed changes in the tax laws.
Background and Reasons for the Merger
American Pacific Bank's board of directors and management have
periodically reviewed and discussed the strategic direction, performance and
prospects of the bank. In response to the increasing competition in the
Portland market and the trend in bank consolidation, in 2002 the board began
considering the possibilities of either merging with another financial
institution or acquiring other small community banks. In 2003 and 2004, the
board pursued strategies for increasing the bank's capital to grow the bank,
including the formation of a bank holding company through which the bank could
raise capital by selling trust preferred securities, as well as the exercise
of warrants held by the Chairman of the Board. The bank holding company
formation was never completed. In June 2002, American Pacific Bank's board of
directors engaged an investment banker to seek opportunities for the sale of
the bank. The investment banker advised the board on the regional financial
institution marketplace and the merger/acquisition environment, prepared
materials to describe American Pacific Bank to potential acquirers, and
presented the bank to those institutions that it considered feasible merger
partners. During the engagement period, the board of directors considered
three specific proposals, all of which the board rejected due to the
inadequate price and/or incompatibility of the potential acquirer. Management
also met with executives of two other institutions for initial discussions of
potential combinations; however, these banks were not interested in pursuing
further discussions with American Pacific Bank. American Pacific Bank paid
the investment banker a $10,000 retainer and certain out-of-pocket expenses.
This engagement expired after a one-year term.
In July 2004, American Pacific Bank's Chief Executive Officer, David
Chen, met for lunch with a representative of a different investment banking
firm, Wells Fargo Securities, LLC, to discuss the bank's continuing interest
in pursuing a merger opportunity. American Pacific Bank did not engage Wells
Fargo Securities at that time. On its own initiative, aware that Riverview
was interested in entering the Oregon market, Wells Fargo Securities contacted
Riverview's Chief Executive Officer, Patrick Sheaffer and met with him on July
29, 2004 to discuss a potential transaction between Riverview and American
Pacific Bank. Wells Fargo Securities then arranged a meeting with Mr. Chen
and Mr. Sheaffer on August 12, 2004, at which the executives informally
discussed the prospect of a strategic business combination. On August 18,
2004, the senior executives of the two companies, along with their respective
investment banking advisors, again met to discuss the general structure of a
potential merger transaction.
37
On August 19, 2004, Riverview submitted a non-binding indication of
interest for the acquisition of American Pacific Bank, which proposed a
mixture of stock and cash consideration, based on a negotiated value of $12.00
per share of American Pacific Bank common stock, with an exchange value of
$21.00 per share of Riverview common stock. On August 20, 2004, Mr. Chen held
a teleconference with all available board members to discuss Riverview's
proposal and at that time the board approved moving forward. To facilitate
the transaction and to proceed with due diligence, American Pacific Bank and
Riverview negotiated and executed a confidentiality agreement on August 22,
2004. On August 24, 2004, American Pacific Bank formally engaged Wells Fargo
Securities as its financial advisor for the proposed transaction for the
purpose of assessing the potential transaction and rendering an opinion as to
the fairness of the transaction, from a financial point of view, to American
Pacific Bank's shareholders. The board authorized management to proceed with
due diligence at its meeting on August 25, 2004, having had an opportunity to
review the proposal and an initial analysis of the transaction provided by
Wells Fargo Securities.
On August 23, 2004, a management team from Riverview conducted a due
diligence review of American Pacific Bank's accounting records and loan files
and interviewed American Pacific Bank management about financial and
operational matters. On August 27, 2004, American Pacific Bank's management
team conducted a due diligence review of Riverview's accounting records and
loan files and interviewed Riverview's management about financial and
operational matters.
On September 1, 2004, American Pacific Bank's executive officers met with
Wells Fargo Securities and legal counsel to discuss negotiation of the
definitive merger agreement and to discuss internal due diligence matters.
Subsequent to that meeting, American Pacific Bank's legal counsel began a due
diligence review of American Pacific Bank for purposes of preparing disclosure
schedules for the definitive merger agreement. On September 2, 2004, American
Pacific Bank's management provided a report on the due diligence to the board
for its review.
On September 17, 2004, Riverview delivered the initial draft of the
definitive merger agreement to American Pacific Bank's legal counsel.
Throughout the remainder of September and October 2004, legal counsel for
Riverview and American Pacific Bank negotiated revisions to the definitive
agreement. Concurrent with the negotiations of a definitive agreement, legal
counsel for Riverview and American Pacific Bank continued their respective due
diligence reviews. On September 23, 2004, American Pacific Bank's board was
updated on the status of negotiations and the outstanding issues.
As a result of its initial diligence review of American Pacific Bank,
Riverview requested that an environmental assessment be conducted on a parcel
of property in which American Pacific Bank holds approximately one-third
interest. The property was acquired by American Pacific Bank in 1982 upon
default of a loan. On October 15, 2004, American Pacific Bank received the
results of the environmental assessment, which identified petroleum
contamination in the property's soil and groundwater. The assessment
estimated that the environmental clean-up costs of this property could be in
excess of $300,000. As a result of the environmental assessment of this
property, on October 27, 2004, the terms of the stock and cash consideration
initially contained in the written proposal submitted by Riverview were
renegotiated based on a value of $11.95 per share of American Pacific Bank
stock with an exchange value of $21.25 per share of Riverview common stock.
The $21.25 per share stock price was the Nasdaq National Market closing price
for Riverview's stock on October 25, 2005, which was used in negotiating the
exchange value. The $11.95 per share value was determined through negotiation
which is not directly based on the price at which American Pacific Bank stock
has traded on the Nasdaq Small Cap Market. For information on the quarterly
high and low trading prices for American Pacific Bank's stock, please refer to
page 23 herein. In connection with the renegotiation of the price of the
transaction, the terms of American Pacific Bank's engagement of Wells Fargo
Securities were revised and the parties executed a new engagement letter on
October 28, 2004.
On October 28, 2004, Wells Fargo Securities and legal counsel met with
American Pacific Bank's board of directors at a special meeting to review the
proposed merger agreement. In preparation for the meeting, the board members
were provided with the current draft of the merger agreement, as well as a
summary of the terms of the agreement prepared by legal counsel. During the
meeting, legal counsel reviewed the proposed terms of the merger
38
agreement and other relevant documents. Legal counsel briefed the directors
as to their fiduciary duties in considering the merger proposal. Wells Fargo
Securities provided the board with a detailed analysis of the financial terms
of the proposed transaction and delivered its oral opinion to the board, that,
as of that date, the consideration to be paid to American Pacific Bank
shareholders was fair from a financial point of view to American Pacific Bank
shareholders. The board asked questions of, and received answers from Wells
Fargo Securities and American Pacific Bank's legal counsel regarding the
transaction. The board then considered the factors they deemed relevant to
the proposed transaction before voting to unanimously approve the transaction
and submit the proposal to American Pacific Bank's shareholders with a
recommendation that the shareholders approve the merger agreement and the
transactions contemplated by the merger agreement. The directors also agreed
to individually enter into agreements with Riverview to vote their shares in
favor of the transaction. Riverview's board of directors approved the
transaction on November 9, 2004.
In early November, legal counsel representing American Pacific Bank's
executive officers, Mr. Chen and Mr. Cheong, negotiated with Riverview's
counsel the terms of Consulting Agreements and Noncompetition Agreements.
Their counsel also negotiated with American Pacific Bank's counsel the terms
of Termination Agreements, under which the executives agreed to termination of
their positions with American Pacific Bank upon consummation of the merger and
a reduction in their change in control benefits. American Pacific Bank's
board of directors approved the bank's payment of the executives' legal fees
as an appropriate expense incurred by the executives in conjunction with the
merger transaction.
The definitive agreement and certain ancillary agreements were executed
the morning of November 9, 2004 and the parties issued a joint press release
that afternoon announcing the proposed merger.
On December 13, 2004, American Pacific Bank and Riverview amended the
merger agreement to anticipate that the merger transaction may not close until
after March 31, 2005.
Riverview's Reasons for the Merger
Riverview entered into the merger agreement with American Pacific Bank
because, among other things, Riverview believes the merger will provide a
natural extension of its primary market area from Southwest Washington into
Oregon. The merger will also increase Riverview's business and commercial
banking presence in the Portland/Vancouver metropolitan area and therefore
provide expanded lending and deposit opportunities. Riverview believes that
the addition of the American Pacific Bank's commercial real estate loans and
commercial real estate lending department will enable Riverview to continue to
increase its commercial real estate lending activities.
American Pacific Bank's Reasons for the Merger
American Pacific Bank's board of directors considered many factors in
reaching its determination that the merger is in the best interests of
American Pacific Bank and its shareholders. In reaching its conclusion to
adopt the merger agreement, American Pacific Bank's board of directors
considered the following factors:
* the board's understanding of, and the presentations of American
Pacific Bank's management and Wells Fargo Securities regarding, American
Pacific Bank's business, operations, management, financial condition, earnings
and prospects;
* the board's knowledge of the current and prospective environment in
which American Pacific Bank operates, including national and local economic
conditions, the competitive environment, the trend toward consolidation in the
financial services industry and the likely effect of these factors on American
Pacific Bank's potential growth, development, productivity, profitability and
strategic options;
39
* the board's review, with American Pacific Bank's legal and
financial advisors, of the structure of the merger and the financial and other
terms of the merger agreement, including the merger consideration, and the
ancillary agreements to the merger agreement;
* the opinion of Wells Fargo Securities that the exchange ratio was
fair from a financial point of view to American Pacific Bank shareholders;
* the current and historical market prices of American Pacific Bank's
common stock, and the current and historical market prices of Riverview's
common stock relative to those of other industry participants and general
market indices, including the fact that the per share merger consideration to
be received by American Pacific Bank shareholders represents a 19.5% premium
over American Pacific Bank's common stock closing stock price on October 27,
2004, the day prior to the board's approval, and an 83% premium over American
Pacific Bank's stock book value as of September 30, 2004;
* the market value of the Riverview common stock that American
Pacific Bank's shareholders, who receive stock consideration in the merger,
will receive, including the ability to terminate the merger if Riverview's
stock experiences a significant decline in value prior to the merger and
Riverview does not elect to adjust the consideration paid in the transaction;
* the fact that shareholders who receive Riverview stock as
consideration in the merger, given Riverview's past practice, are likely to
receive regular dividends from Riverview;
* the due diligence review of Riverview's business, operations,
financial condition, asset quality and corporate culture, which generally
found Riverview to be well operated, well capitalized and financially sound;
* the fact that the philosophies and cultures of Riverview and
American Pacific Bank are compatible and the management teams of both parties
have similar styles and a shared commitment to teamwork;
* Riverview's and American Pacific Bank's compatibility based on
their complementary strengths, such as the strong asset quality of American
Pacific Bank's loan portfolio and its higher profitability ratios and
Riverview's stronger core deposit base, capital and liquidity;
* Riverview's and American Pacific Bank's compatible interest rate
sensitivity profiles, which will expose the combined institution to minimal
exposure in a changing interest rate environment;
* the potential performance of the combined institution on a
prospective and pro forma basis from which the board determined that the
combined institution would be likely to create greater value to shareholders
than a continuation of American Pacific Bank's independence;
* the fact that American Pacific Bank and Riverview operate in
contiguous geographic markets with no overlap in branches, which the board
believes presents a desirable strategic opportunity for expansion and no
anticipated regulatory concerns;
* the board's belief that Riverview is committed to the Portland and
Aumsville communities;
* the effect of the merger on American Pacific Bank's customers, in
particular the continuation of quality customer service and expanded product
choices and services at more locations;
* potential opportunities for employee growth and advancement;
* the cost savings and resulting efficiencies, and the potential for
revenue enhancements that would result from eliminating the costs of
maintaining separate corporate offices, data processing functions and bank
expenses; and
40
* the greater number of shareholders and the increased market
capitalization of the combined institution, which may result in increased
interest in Riverview common stock from institutional investors and market
professionals which, in turn, may result in improved liquidity for American
Pacific Bank shareholders receiving Riverview stock in the transaction.
The board of directors also considered potential risks relating to the
merger, including the following:
* the challenges associated with seeking the regulatory approvals
required to complete the merger in a timely manner;
* the risks and costs to American Pacific Bank if the merger is not
completed, including the diversion of management and employee attention,
potential employee attrition and the potential effect on business and customer
relationships;
* the fact that some of American Pacific Bank's officers and
directors have interests in the merger described under " Interests of Our
Directors and Officers in the Merger that Differ from Your Interests" that are
in addition to their interests as American Pacific Bank shareholders;
* the requirement that American Pacific Bank conduct its business in
the ordinary course and the other restrictions on the conduct of it's business
prior to completion of the merger, which may delay or prevent American Pacific
Bank from undertaking business opportunities; and
* the fact that a termination fee is payable to Riverview under
certain circumstances.
The discussion of the information and factors considered by the board of
directors is not exhaustive, but includes all material factors considered by
the board. The American Pacific Bank board did not assign relative weights to
these factors or determine that any single factor was of particular
importance. Rather, the board viewed its position and recommendation as being
based on the totality of the information presented to and considered by it.
In addition, it is possible that different members of the board assigned
different weights to the various factors described above. However, the
exchange ratio and increased value available to American Pacific Bank
shareholders was of significant importance to the board in approving the
merger.
American Pacific Bank's Board of Directors Recommendation
The American Pacific Bank board determined that the merger, the merger
agreement and the transactions contemplated by the merger agreement are in the
best interests of American Pacific Bank and its shareholders. The American
Pacific Bank board recommends that you vote "FOR" adoption of the merger
agreement and the approval of the transactions contemplated by the merger
agreement.
Opinion of American Pacific Bank's Financial Advisor
American Pacific Bank retained Wells Fargo Securities, LLC on August 24,
2004, to act as its financial advisor and provide a fairness opinion regarding
the proposed transaction with Riverview. The current terms of the engagement
are set forth in an engagement letter dated October 28, 2004.
At the request of the American Pacific Bank board, representatives of
Wells Fargo Securities attended the October 28, 2004 board meeting at which
the board considered and approved the merger agreement and the transactions
contemplated by the merger agreement. At that meeting, Wells Fargo Securities
delivered its oral opinion to the American Pacific Bank board, confirmed by a
written opinion dated as of October 28, 2004, that, as of that date, the
consideration to be paid to American Pacific Bank shareholders was fair from a
financial point of view to American Pacific Bank shareholders. Wells Fargo
Securities reconfirmed its opinion in writing as of March 15, 2005.
41
The full text of Wells Fargo Securities' opinion, which sets forth the
assumptions made, procedures followed, matters considered and limitations on
the review undertaken, is attached as Appendix B to this proxy
statement/prospectus and is incorporated herein by reference. Wells Fargo
Securities' opinion is directed only to the fairness to the American Pacific
Bank shareholders of the cash and stock consideration to be paid to American
Pacific Bank shareholders from a financial point of view. This opinion does
not constitute a recommendation to any American Pacific Bank shareholder as to
how to vote on the merger. This description of Wells Fargo Securities'
opinion is qualified in its entirety by reference to Appendix B. You are
urged to read the Wells Fargo Securities opinion in its entirety.
About Wells Fargo Securities. Wells Fargo Securities, as part of its
investment banking business, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Wells Fargo Securities provides a full range of
financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of American Pacific Bank or
Riverview for its own account and for the accounts of its customers.
Scope of Review. In connection with providing its opinion, Wells Fargo
Securities:
* reviewed, among other things:
* the merger agreement;
* annual reports to the shareholders and Annual Reports on Form
10-KSB of American Pacific Bank and on Form 10-K of Riverview
Bancorp for the fiscal years ended 2002 and 2003;
* Quarterly Reports on Form 10-QSB of American Pacific Bank and
on Form 10-Q of Riverview for the fiscal quarters ended 2002
through 2004; and
* other communications from American Pacific Bank and Riverview
to their respective shareholders;
* held discussions with members of senior management of American
Pacific Bank and Riverview regarding:
* the current operations, financial condition and expected
future financial performance of the respective companies;
* the strategic rationale of the proposed merger; and
* internal financial analyses and forecasts of American Pacific
Bank and Riverview prepared by their respective managements,
including forecasts of cost savings or synergies, expected to
be achieved as a result of the merger;
* reviewed the reported price and trading activity for American
Pacific Bank common stock and Riverview common stock, compared financial and
stock market information for American Pacific Bank and Riverview with similar
information for other companies, the securities of which are publicly traded,
that it deemed relevant;
* reviewed the financial terms of the proposed merger and compared
them with those of other business combinations in the commercial banking
industry that it deemed relevant; and
* performed other analyses that it deemed relevant.
42
Assumptions. Wells Fargo Securities assumed and relied upon the accuracy
and completeness of all the financial and other information that it reviewed
in rendering its opinion. In that regard, Wells Fargo Securities assumed,
with American Pacific Bank management's consent, that the financial forecasts
(including, without limitation, the expected synergies and projected
restructuring charges) had been reasonably prepared on a basis reflecting the
best currently available judgments and estimates of American Pacific Bank and
Riverview, and that these forecasts will be realized in the amounts and at the
times contemplated thereby. Wells Fargo Securities is not an expert in the
evaluation of loan portfolios for purposes of assessing the adequacy of the
allowances for losses with respect thereto and assumed, with American Pacific
Bank management's consent, that these allowances for each of American Pacific
Bank and Riverview are in the aggregate, adequate to cover all such losses.
In addition, Wells Fargo Securities did not review individual credit files,
nor did it make an independent evaluation or appraisal of the assets and
liabilities of American Pacific Bank or Riverview or any of their
subsidiaries, and it was not furnished with any such evaluation or appraisal.
In addition, Wells Fargo Securities did not conduct any physical inspection of
the properties or facilities of American Pacific Bank or Riverview. Wells
Fargo Securities is not an accounting firm and it therefore relied on the
reports of the independent accountants of American Pacific Bank and Riverview
for the accuracy and completeness of the audited financial statements
furnished to it. American Pacific Bank's board of directors was advised by
Wells Fargo Securities of its assumptions and reliance upon information
provided for its review and analysis.
Wells Fargo Securities' opinion was necessarily based upon market,
economic and other conditions as they existed on, and could be evaluated as
of, the date of its opinion. Wells Fargo Securities assumed, in all respects
material to its analysis, that all of the representations and warranties
contained in the merger agreement and all related agreements are true and
correct, that each party to these agreements will perform all of the covenants
required to be performed by it under these agreements, and that the conditions
precedent to the merger agreement are not waived. Wells Fargo Securities also
assumed that there has been no material change in American Pacific Bank's and
Riverview's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements made available to
them, that American Pacific Bank and Riverview will remain as going concerns
for all periods relevant to its analyses, and that the merger will be
accounted for as a purchase transaction and will qualify as a tax-free
reorganization to the constituent companies for federal income tax purposes.
In rendering its October 28, 2004 opinion, Wells Fargo Securities
performed a variety of financial analyses. The following is a summary of the
material analyses performed by Wells Fargo Securities, but is not a complete
description of all the analyses underlying its opinion. The summary includes
information presented in tabular format. In order to fully understand the
financial analyses, these tables must be read together with the accompanying
text. The tables alone do not constitute a complete description of the
financial analyses. The preparation of a fairness opinion is a complex
process involving subjective judgments as to the most appropriate and relevant
methods of financial analyses and the application of those methods to the
particular circumstances. Wells Fargo Securities believes that its analyses
must be considered as a whole and that selecting portions of its analyses,
without considering the analyses taken as a whole, would create an incomplete
view of the process underlying the analyses set forth in its opinion.
The earnings projections used and relied upon by Wells Fargo Securities
in its analyses were based upon the internal projection of American Pacific
Bank of $1.6 million net income for the year ended December 31, 2004 and the
internal projections of Riverview, which at the time did not differ materially
from publically available projections. With respect to all such financial
projections and estimates and all projections of transaction costs, purchase
accounting adjustments and expected cost savings relating to the merger,
American Pacific Bank's and Riverview's managements confirmed to Wells Fargo
Securities that they reflected the best currently available estimates and
judgments of the future financial performance of American Pacific Bank and
Riverview, respectively, and Wells Fargo Securities assumed for purposes of
its analyses that such performance would be achieved. Wells Fargo Securities
expressed no opinion as to such financial projections or the assumptions on
which they were based. The financial projections furnished to Wells Fargo
Securities by American Pacific Bank and Riverview were prepared for internal
purposes only and not with a view towards public disclosure. These
projections, as well as the other estimates used by Wells Fargo Securities in
its analyses, were based on numerous variables and assumptions which are
inherently uncertain and accordingly, actual results could vary materially
from those set forth in such
43
projections. Any estimates contained in the analyses performed by Wells Fargo
Securities are not necessarily indicative of actual values or future results,
which may be more or less favorable than suggested by these analyses.
The following is a brief summary of the material financial analyses
presented to the American Pacific Bank board of directors on October 28, 2004
by Wells Fargo Securities.
Summary of Proposal. Wells Fargo Securities reviewed the financial terms
of the proposed transaction. Based upon the total consideration equal to
$16,758,000 in cash and 788,593 shares of Riverview common stock (prior to
adjustment for the exercise of any stock options), approximately 2,804,618
shares of American Pacific Bank common stock outstanding as of September 30,
2004 and Riverview's closing stock price of $21.25 on October 25, 2004, Wells
Fargo Securities calculated a per share transaction value of $11.95. The
following table is a summary of key financial data and the implied multiples
and premiums of the transaction assuming a Riverview stock price of $21.25:
American Implied Multiples -
Pacific Bank Riverview Stock
($ in millions except per share) Financials Price @ $21.25
------------ -------------------
2004 Net Income (estimated) $ 1.70 20.23x
Shareholders' Equity (9/30/04) 18.21 1.88x
Normalized Equity using 8% Equity/Assets* 9.60 2.68x
Core Deposits (6/30/04) $66.00 24.43%
Premium to Recent Stock Price (10/25/04) 9.98 19.74%
* In order to consider the impact of excess capital in its valuation analysis,
Wells Fargo Securities looked at Normalized Equity. Normalized Equity was
calculated as 8% of Total Assets as of September 30, 2004 of $122.5 million,
or $9.60 million.
The implied multiples in the above table were used to compare the
proposed transaction with transactions of other community banks.
Exchange Ratio History. Wells Fargo Securities calculated the high, low
and average ratio of the market price per share of American Pacific Bank
common stock to the market price per share of Riverview common stock over a 24
month period ending October 25, 2004.
Exchange Rate History Since
October 28, 2002
---------------------------
High 0.6104
Low 0.3127
Average Price 0.4099
Close October 25, 2004 0.4696
Public Market Comparison. Wells Fargo Securities presented a public
market comparison of American Pacific Bank and Riverview and a selected group
of 19 other publicly traded community-banking organizations in the United
States with assets between $100 million and $200 million ("peer banks").
This comparison was presented on the basis of various financial ratios
and other indicators, including among other things, market price to earnings
per share ("EPS") ratios, historical price to stated book value and tangible
book value ratios, historic price to "adjusted" book value and tangible book
value, and projected 2004 and 2005 earnings per share. The peer banks were
selected for comparison purposes through a review of publicly traded
44
banking institutions with similar asset size. In general, financial data
presented was as of the June 30, 2004 and market data was as of October 19,
2004.
Wells Fargo Securities compared ratios of price to estimated 2004 and
2005 earnings per share, book value and tangible book value for American
Pacific Bank (based on management projections provided by American Pacific
Bank) with the mean averages of the ratios for the peer banks for 2004 and
2005. Additionally, Wells Fargo Securities presented a public market
comparison of American Pacific Bank, Riverview and the peer banks, on the
basis of, among other things, return on average equity ("ROAE"), return on
average assets ("ROAA"), net interest margin, and efficiency ratios. The
following table shows the comparisons.
American
Pacific Bank National Peer
Multiples 9/30/04 Banks 6/30/04
--------------------------------------- ------------- -------------
Price/Book 1.53x 1.73x
Price/Book (8% Equity/Assets) 2.01x 1.99x
Price/Tangible Book 1.53x 1.90x
Price/Tangible Book (8% Equity/Assets) 2.01x 2.18x
Price/2004 EPS (estimated) 16.46x 20.23x
Price/2005 EPS (estimated) 14.97x 14.58x
ROAA - (LTM) 1.47% 0.57%
ROAE (LTM) 13.21% 5.26%
Efficiency Ratio (LTM) 56.74% 73.83%
Net Interest Margin (LTM) 5.82% 4.00%
------------------
LTM = last twelve months
No company used in the peer bank analysis is identical to American
Pacific Bank. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of American Pacific
Bank and other factors that could affect the public trading value of the
companies to which they are being compared.
Discounted Cash Flow Analysis and Terminal Value Analysis. Wells Fargo
Securities estimated the present value of the after-tax cash flows that
American Pacific Bank could produce on a stand-alone basis using management's
projections for the years 2005 to 2010. After-tax cash flows that the company
could produce on a stand-alone basis were estimated using an assumed minimum
6.5% tangible book equity to total average assets ratio. Using a range of
price earnings ("PE") multiples of 10-16 applied to forward earnings for the
terminal value, and using a discount rate of 10-14%, Wells Fargo Securities
calculated implied per share values for American Pacific Bank common stock
ranging from $8.42 to $12.28.
American Pacific Bank - NPV Per Share
PE Multiple
-------------------------------------
Discount Rate 10 12 14 16
------ ------- ------- --------
10.0% $ 9.58 $ 10.48 $ 11.38 $ 12.28
11.0 9.26 10.11 10.96 11.81
12.0 8.96 9.76 10.56 11.36
13.0 8.68 9.44 10.19 10.95
14.0 8.42 9.13 9.84 10.56
Contribution Analysis. Wells Fargo Securities analyzed certain
historical and estimated financial information for American Pacific Bank and
Riverview and the pro forma combined entity resulting from the merger.
45
The following table shows the percentage contributions of each company to the
indicated values to the combined company. On a pro forma basis, American
Pacific Bank shareholders would hold 24.77% of the post merger shares
outstanding assuming the consideration paid was 100% stock in Riverview for
the outstanding shares of American Pacific Bank at the implied exchange ratio.
American Pacific Bank
---------------------------
Financials
9/30/04 % Contribution
----------- --------------
(In thousands)
Assets $ 122,500 18.91%
Deposits 86,654 17.39
Loans & Leases, Net 100,411 20.64
Equity 18,206 21.25
Tangible Equity 18,206 24.00
Net Income
LTM 1,671 20.36
2004 (estimated)(1) 1,700 17.91
--------------
(1) Riverview year-end is March 31, 2005
LTM = last twelve months
Pro Forma Merger Analysis. Wells Fargo Securities performed pro forma
merger analysis that combined projected income statement and balance sheet
information of American Pacific Bank and Riverview. Assumptions regarding the
accounting treatment, acquisition adjustments and cost savings were used to
calculate the financial impact that the merger would have on certain projected
financial results of Riverview. This analysis indicated that the merger is
expected to be accretive to estimated generally accepted accounting principles
earnings per share in 2006, the first full year after the merger is completed.
The analysis also indicated that the merger is expected to be accretive to
Riverview's book value per share and dilutive to Riverview's tangible book
value per share. This analysis was based on internal projections provided by
American Pacific Bank and Riverview management. The actual results achieved
by Riverview following the merger will vary from the projected results, and
the variance may be material.
Additionally, shareholders who receive stock in consideration will
benefit from Riverview's historic practice of paying quarterly cash
dividends.
Premiums Paid Analysis. Wells Fargo Securities also analyzed the
premiums paid over recent closing prices in 41 acquisitions of publicly traded
banks in the United States that were announced within the last six months.
The following table presents the summary data of this analysis:
Premium
1 Day 6 Day 1 Month 3 Month
------ ------ ------- -------
National bank transactions - mean 25.15% 27.86% 29.87% 28.91%
Riverview/American Pacific Bank transaction 19.74 24.09 16.59 43.11
Comparable Transaction Analysis. Wells Fargo Securities also analyzed
selected recent transactions deemed relevant to the proposed transaction in
which certain public companies acquired other companies. For this analysis,
Wells Fargo Securities reviewed 21 transactions that have been announced since
June 2004, involving target banks having assets between $100 million and $250
million with return on average assets ("ROAA") between 1.20% and 1.80%.
* American River Bankshares/ Bank of Amador
* Banknorth Group Inc./ Foxborough Savings Bank
46
* BMO Financial Group/ Lakeland Financial Corp.
* Boston Private Financial/ First State Bancorp
* Cascade Financial Corp./ Issaquah Bancshares Inc.
* Chemical Financial Corp./ Caledonia Financial Corp.
* Colonial BancGroup Inc./ Sarasota Bancorp.
* Columbia Banking System Inc./ Bank of Astoria
* Fidelity Bankshares Inc./ First Community Bancorp Inc.
* First Bank Corp/ Bor Bancshares Inc.
* First Community Corp./ DutchFork Bancshares Inc.
* Franklin Bank Corp./ Cedar Creek Bancshares Inc.
* Happy Bancshares Inc./ Sun Banc Corporation
* Monarch Community Bancorp Inc/ MSB Financial Inc.
* North Valley Bancorp/ Yolo Community Bank
* Northern States Financial Corp/ Round Lake Bankcorp Inc.
* Park National Corp./ First Clermont Bank
* Simmons First National Corp./ Alliance Bancorporation Inc.
* Southern Community Financial/ Community Bank
* Synovus Financial Corp./ Peoples Florida Banking Corp
* Upson Bankshares Incorporated/ First Polk Bankshares Inc.
The following table presents the summary data for merger and for the
comparable transactions:
Riverview/American Comparable
Multiples Pacific - Riverview Stock Transaction Mean
Price @ $21.25 (1) Multiples
-------------------------- ----------------------------- --------------------
Price/Book 1.88x 2.55x
Price/Book (8% Equity
/Assets) 2.68x 2.68x
Price/Tangible Book 1.88x 2.58x
Price/Tangible Book
(8% Equity/Assets) 2.68x 2.73x
Price/LTM Net Income 20.59x 19.27x
One Day Premium to Recent
Price 19.74% 23.72%
Core Deposit Premium 24.43% 20.45%
Target Bank ROAA (LTM) 1.47% 1.43%
Target Bank ROAE (LTM) 13.21% 14.90%
Target Bank Efficiency
Ratio (LTM) 56.74% 59.62%
(1) American Pacific Bank financials and LTM performance ratios as at 9/30/04.
LTM = last twelve months
47
The above table includes a calculation of the core deposit premium paid in
the transaction and compared it to the mean of the comparable transactions.
The core deposit premium is calculated as the premium paid in the transaction
over the acquired company's tangible equity as a percentage of the acquired
company's core deposits. For purposes of this analysis, core deposits are
defined as total deposits less the sum of all certificates of deposits with
balances over $100,000.
In performing its analyses, Wells Fargo Securities made numerous
assumptions with respect to industry performance, general business, economic
and regulatory conditions and other matters, many of which are beyond the
control of American Pacific Bank or Riverview. The analyses performed by
Wells Fargo Securities are not necessarily indicative of actual values,
trading values or actual future results which might be achieved, all of which
may be significantly more or less favorable than suggested by such analyses.
These analyses were prepared solely as part of Wells Fargo Securities'
analysis of the fairness to American Pacific Bank shareholders, from a
financial point of view, of the consideration to be paid to the American
Pacific Bank shareholders. The analyses do not purport to be appraisals or to
reflect the prices at which a company might be sold. In addition, as
described above, the Wells Fargo Securities' opinion was one of many factors
taken into consideration by the American Pacific Bank Board in making its
determination to approve the merger. Consequently, the analyses described
above should not be viewed as determinative of the American Pacific Bank
board's or management's opinion with respect to the value of American Pacific
Bank or a combination of American Pacific Bank and Riverview, or of whether
the American Pacific Bank board or management would have been willing to agree
to a different exchange ratio. American Pacific Bank placed no limits on the
scope of the analysis performed or opinion expressed by Wells Fargo
Securities.
Pursuant to the terms of the engagement letter dated as of October 28,
2004, American Pacific Bank agreed to pay Wells Fargo Securities a cash fee of
$30,000 concurrent with the execution of a definitive agreement, $50,000
concurrent with the delivery of its fairness opinion, and $75,000 concurrent
with the mailing of the merger proxy to shareholders, and at the time of
closing, a cash fee ("contingent fee") of 1.25% of the aggregate value of the
consideration paid to American Pacific Bank Shareholders, less $50,000. All
fees paid prior to the contingent fee will be credited against the contingent
fee. In addition, American Pacific Bank has agreed to reimburse Wells Fargo
Securities for its reasonable expenses, including attorneys' fees, incurred in
connection with its engagement and to indemnify Wells Fargo Securities and
certain related persons against certain liabilities and expenses arising out
of or in conjunction with its rendering of services under its engagement,
including liabilities arising under the federal securities laws.
Rights of Dissenting Shareholders
Under Oregon law, you will have dissenters' rights with respect to the
merger. If you follow the procedures set forth in Sections 711.175, 711.180
and 711.185 of the Oregon Bank Act (Title 53, Chapter 711 of the Oregon
Revised Statutes), these rights will entitle you to receive the fair value of
your shares of American Pacific Bank common stock rather than having your
shares converted into the right to receive the cash payment and/or shares of
Riverview common stock as described above. Accompanying this proxy
statement-prospectus as Appendix C is a copy of the text of Sections 711.175,
711.180 and 711.185 of the Oregon Bank Act, which prescribe the procedures for
the exercise of dissenters' rights and for determining the fair value of
American Pacific Bank common stock. American Pacific Bank shareholders
electing to exercise dissenters' rights must comply with the provisions of
Sections 711.175, 711.180 and 711.185 of the Oregon Bank Act in order to
perfect their rights. American Pacific Bank and Riverview will require strict
compliance with the statutory procedures.
The following is intended as a brief summary of the material provisions
of the Oregon statutory procedures required to be followed by a shareholder in
order to dissent from the merger and perfect the shareholder's dissenters'
rights. This summary, however, is not a complete statement of all applicable
requirements and is qualified in its entirety by reference to Sections
711.175, 711.180 and 711.185 of the Oregon Bank Act, the full text of which
appears in Appendix C of this proxy statement-prospectus.
Under Oregon law, an American Pacific Bank shareholder of record for the
special meeting who desires to assert dissenters' rights must either send or
deliver a notice of dissent prior to or at the special meeting of
48
shareholders or vote against the transaction. Dissenting shareholders may
send their written notice to David T. Chen, President and Chief Executive
Officer, American Pacific Bank, 315 SW Fifth Avenue, Suite 201, Portland,
Oregon 97204.
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the shares the shareholder owns or over which the
shareholder has power to direct the vote. However, if a record shareholder is
a nominee or fiduciary for the benefit of more than one beneficiary, the
shareholder may dissent as to less than all of the shares registered in the
shareholder's name if any dissent as to the shares held for a beneficiary is
made as to all the shares of such beneficiary. The beneficiary's rights shall
be determined as if the shares to which the nominee has dissented and the
other shares registered in such nominee's name are registered in the names of
different shareholders.
A shareholder of American Pacific Bank who does not follow the procedures
set forth in Sections 711.175, 711.180 and 711.185 of the Oregon Bank Act will
lose his or her statutory dissenters' rights.
Any shareholder who dissents to the merger in the manner described above,
must make written demand upon American Pacific Bank or its successor
(Riverview) along with a surrender of properly endorsed share certificates
within 30 days after the shareholders' meeting to approve the merger. Any
shareholder who fails to make demand within such 30 day period will receive
consideration under the terms of the merger agreement. Shareholders who
exercise their dissenters' rights should contact the Secretary of American
Pacific Bank following the special meeting if they wish to obtain the results
of the vote on the merger agreement.
Riverview must, within 30 days of the closing of the merger, provide
written notice to each shareholder who has perfected dissenters' rights. The
notice must contain (1) an offer to pay such shareholder in cash the fair
value of the shares as of the effective date of the merger as determined by
Riverview; (2) a statement of condition of American Pacific Bank as of the
latest available date, but in any event, not more than four months' prior to
the consummation of the merger; and (3) an income statement dated the same
date as the statement of condition.
Shareholders who receive the notice from Riverview with an offer to
receive fair value for their shares of American Pacific Bank and accept the
offer within 30 days of the date of the notice shall be paid in cash within 30
days of the acceptance of the offer.
If the offer is not accepted or if no offer is made, then the fair value
of the American Pacific Bank shares will be determined by an independent
appraiser chosen by the Director of the Department of Consumer and
Business Services of the State of Oregon. The appraiser's determination of
value is generally not appealable. Payment of the fair value of the shares of
American Pacific Bank common stock as of the effective date of the merger as
determined by the appraiser will be made within 30 days of the appraiser's
determination.
The Director of the Oregon Department of Consumer and Business Services
will determine all costs of the appraisal proceeding and will assess the costs
equally to Riverview and to the dissenting shareholders if the amount offered
to dissenting shareholders by Riverview is between 85% and 115% of the
appraised value of the shares. The costs shall be assessed against the
dissenting shareholders if the amount offered by Riverview is 115% or more of
the appraised value of the shares. Riverview will pay the costs of the
proceeding if the amount offered is 85% or less of the appraised value of the
shares.
A shareholder who perfects dissenter's rights may withdraw his or her
demand for payment of the fair value of his or her shares of American Pacific
Bank common stock if American Pacific Bank (or Riverview as its successor)
consents to the withdrawal or if the dissenting shareholder pays his or her
pro rata share of any appraisal proceedings and the reasonable costs and
expenses (including attorneys' fees) of American Pacific Bank. A shareholder
who withdraws his or her demand for payment will have his or her status as a
shareholder of American Pacific Bank restored without prejudice to any
appraisal proceedings and will be entitled to receive the consideration
provided for in the merger agreement.
49
Interests of Our Directors and Officers in the Merger that Differ From Your
Interests
Some members of American Pacific Bank's management and board of directors
may have interests in the merger that are in addition to or different from the
interests of American Pacific Bank shareholders. American Pacific Bank's
board of directors was aware of these interests and considered them in
approving the merger agreement.
Employment and Termination Agreements. In June 2001, American Pacific
Bank entered into revised employment contracts with David T. Chen, President
and Chief Executive Officer and Richard Cheong, Executive Vice President and
Chief Financial and Operations Officer, for a five-year term providing both
with a base salary subject to periodic review and increase, if warranted,
annual bonuses as determined by the board of directors, and providing Mr. Chen
with an automobile and life insurance. In addition, the contracts provide
that in the event of the officer's termination following a change of control,
the officer will receive an amount equal to 299% of his most recent annual
base salary and bonus earned as well as continued coverage under American
Pacific Bank's welfare benefit plans and pension plans for a designated
period. The obligation of American Pacific Bank to continue their
participation in welfare benefit and pension plans was terminated by the
Termination Agreements as discussed below. A change of control is defined as
occurring when either: (1) two-thirds of American Pacific Bank's current board
of directors, or those designated by the current board of directors, are no
longer directors; (2) any person or group becomes beneficial owner of 25% of
American Pacific Bank's then outstanding common stock; (3) a merger,
consolidation, sale of assets, liquidation or dissolution takes place unless,
in the case of a merger or consolidation, two-thirds of current directors, or
those appointed by the current directors, constitute the board of directors of
the surviving corporation; or (4) two-thirds or more of the current directors,
or those appointed by the current directors, determine that an action
constitutes a change of control. Under Mr. Chen's agreement, American Pacific
Bank was obligated to "gross up" any payment to Mr. Chen under these change of
control provisions to the extent it is subject to the special excise tax on
excessive golden parachute awards.
During the year ended December 31, 2004, Messrs. Chen and Cheong received
salary and bonus of $281,708 and $167,223, respectively.
In connection with the merger, American Pacific Bank's Chief Executive
Officer, David Chen, and Chief Financial Officer, Richard Cheong, have entered
into termination agreements with American Pacific Bank. These agreements,
which are effective upon closing of the merger, modify the change in control
benefits that the executive officers will receive upon closing of the merger
from the benefits provided under their existing employment agreements. Mr.
Chen will receive $550,000 and Mr. Cheong will receive $300,000 upon closing.
Mr. Chen will also receive a cash payment for all accrued vacation and sick
time. Pursuant to these agreements, the executive officers will resign upon
closing of the merger.
Consulting Agreements. In connection with the merger, Mr. Chen and Mr.
Cheong have entered into consulting agreements with Riverview effective as of
the closing of the merger pursuant to which each will agree to provide certain
services to Riverview related to the transition of combining the two
businesses. Pursuant to the agreements, Mr. Chen will receive $85.00 per
hour, and Mr. Cheong will receive $8,750.00 per month for their services. Mr.
Chen's agreement does not provide a limit on the number of hours he is
required to work; however, his agreement is limited to a term of 60 days. Mr.
Cheong's agreement is for a 60-day period, unless extended; therefore, it is
expected that he will receive $17,500.00 under this agreement.
Non-competition Agreements. In connection with the merger, Mr. Chen and
Mr. Cheong have entered into non-competition agreements which will be
effective upon the completion of the merger. Each of Mr. Chen and Mr. Cheong
have agreed not to solicit customers of Riverview after the merger or to
participate in (including through ownership) any financial institution that
either competes with Riverview or is located within a 75 mile radius of
Vancouver, Washington. The term of Mr. Cheong's agreement is two years, and
he will receive $200,000 in consideration for his agreement not to compete,
one half of which is payable upon the closing of the merger and the remaining
half of which is payable on the first anniversary of the closing of the
merger. The term of Mr. Chen's agreement is two years, and he will receive
$360,000 in consideration for his agreement not to compete, one half of
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which is payable upon the closing of the merger and the remaining half of
which is payable on the first anniversary of the closing of the merger.
Protection of American Pacific Bank Directors and Officers Against
Claims. Riverview has also agreed that it will maintain a policy of
directors' and officers' liability insurance coverage for the benefit of
American Pacific Bank's directors and officers for three years following
consummation of the merger.
Cash-out of Outstanding Options. Under the terms of the merger
agreement, holders of options as of the completion of the merger will receive,
in cancellation of each such option, an amount equal to the difference between
the Transaction Value Per Share and the exercise price of such option less any
applicable federal and state income and employment tax requirements. At
December 31, 2004, all officers and directors as a group held options to
acquire 126,500 shares of American Pacific Bank common stock, with an average
exercise price of $5.04 per share.
Regulatory Approvals Needed to Complete the Merger
Completion of the merger of American Pacific Bank with Riverview is
subject to prior approval of the Office of Thrift Supervision ("OTS"). In
reviewing applications for transactions of this type, the OTS must consider,
among other factors, the financial and managerial resources and future
prospects of the existing and resulting institutions, and the convenience and
needs of the communities to be served. In addition, the OTS may not approve a
transaction if it will result in a monopoly or otherwise be anticompetitive.
Riverview filed an application with the OTS on December 27, 2004.
The merger of American Pacific Bank with Riverview is also subject to the
prior approval of the Oregon Department of Consumer and Business Services of
the Division of Finance and Corporate Securities. Riverview filed an
application with the Oregon Department on December 27, 2004.
Under the Community Reinvestment Act of 1977, the OTS must take into
account the record of performance of Riverview Community Bank and American
Pacific Bank in meeting the credit needs of the entire community, including
low- and moderate-income neighborhoods, served by each institution. As part
of the review process, bank regulatory agencies frequently receive comments
and protests from community groups and others. Riverview Community Bank
received an "Outstanding" rating during its last federal Community
Reinvestment Act examinations and American Pacific Bank received a
"Satisfactory" rating during its last federal Community Reinvestment Act
examination.
In addition, a period of 15 days must expire following approval by the
OTS before completion of the merger is allowed, within which period the United
States Department of Justice may file objections to the merger under the
federal antitrust laws. While we believe that the likelihood of objection by
the Department of Justice is remote, there can be no assurance that the
Department of Justice will not initiate proceedings to block the merger, or
that the Attorney General of the State of Oregon will not challenge the
merger, or if any proceeding is instituted or challenge is made, as to the
result of the challenge.
The merger cannot proceed in the absence of the requisite regulatory
approvals. See "The Merger Agreement Conditions to Completing the Merger" and
" Terminating the Merger Agreement." There can be no assurance that the
requisite regulatory approvals will be obtained, and if obtained, there can be
no assurance as to the date of any approval. There can also be no assurance
that any regulatory approvals will not contain a condition or requirement that
causes the approvals to fail to satisfy the condition set forth in the merger
agreement and described under "The Merger Agreement Conditions to Completing
the Merger."
The approval of any application merely implies the satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the cash consideration or the exchange
ratio for converting American Pacific Bank common stock to Riverview common
stock. Furthermore, regulatory approvals do not constitute an endorsement or
recommendation of the merger.
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Accounting Treatment of the Merger
Riverview will account for the merger as a purchase, as that term is used
under generally accepted accounting principles, for accounting and financial
reporting purposes. Under the purchase method of accounting, the assets and
liabilities of American Pacific Bank will be recorded on Riverview's
consolidated balance sheet at their estimated fair value at the effective date
of the merger. The amount by which the purchase price paid by Riverview
exceeds the fair value of the net tangible and identifiable intangible assets
acquired by Riverview through the merger will be recorded as goodwill.
Financial statements of Riverview issued after the effective date of the
merger will reflect these values and will not be restated retroactively to
reflect the historical position or results of operations of American Pacific
Bank.
Resale of Riverview Common Stock
The shares of Riverview common stock to be issued to shareholders of
American Pacific Bank in the merger have been registered under the Securities
Act of 1933. Shares of Riverview common stock issued in the merger may be
traded freely and without restriction by those shareholders not deemed to be
"affiliates" of American Pacific Bank, as that term is defined in the rules
under the Securities Act. Riverview common stock received by those
shareholders of American Pacific Bank who are deemed to be "affiliates" of
American Pacific Bank at the time the merger is submitted for vote of the
shareholders of American Pacific Bank may be resold without registration under
the Securities Act only to the extent provided for by Rule 145 promulgated
thereunder, which permits limited sales under certain circumstances, or
pursuant to another exemption from registration. An affiliate of American
Pacific Bank is an individual or entity that controls, is controlled by or is
under common control with, American Pacific Bank, and may include the
executive officers and directors of American Pacific Bank, as well as certain
principal shareholders of American Pacific Bank. The same restrictions apply
to certain relatives or the spouse of those persons and any trusts, estates,
corporations or other entities in which those persons have a 10% or greater
beneficial interest.
American Pacific Bank has agreed in the merger agreement to use its best
efforts to cause each person who is an affiliate of American Pacific Bank for
purposes of Rule 145 under the Securities Act to deliver to Riverview a
written agreement intended to ensure compliance with the Securities Act.
THE MERGER AGREEMENT
The following describes material provisions of the merger agreement.
This description does not purport to be complete and is qualified by reference
to the merger agreement, which is attached as Appendix A and is incorporated
by reference into this proxy statement-prospectus.
Terms of the Merger
The merger agreement provides for a business combination in which
American Pacific Bank will merge with and into Riverview Community Bank.
Riverview Community Bank will be the surviving bank in the merger.
As a result of the merger, except as noted below, each outstanding share
of American Pacific Bank common stock will be converted into the right to
receive either shares of Riverview common stock or cash. See "The
Merger-Conversion of American Pacific Bank Common Stock." Riverview will not
issue fractional shares of Riverview common stock, but instead will pay each
holder of American Pacific Bank common stock who would otherwise be entitled
to a fraction of a share of Riverview common stock an amount in cash
determined by multiplying that fraction by the average closing price of
Riverview common stock over a measurement period prior to the completion of
the merger. If there is a change in the number or classification of shares of
Riverview outstanding as a result of a stock split, stock dividend,
reclassification, recapitalization, or other similar transaction, the exchange
ratio will be equitably adjusted. Holders of shares for which dissenters'
rights have been exercised will be entitled only to the rights granted by
Oregon law.
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When Will the Merger Be Completed
The closing of the merger will take place on a date designated by
Riverview. See " Conditions to Completing the Merger." On the closing date,
Riverview will file articles of merger with the OTS and the Director of the
Department of Consumer and Business Services of the Division of Finance and
Corporate Securities of the State of Oregon, merging American Pacific Bank
into Riverview. The merger will become effective at the time stated in the
articles of merger.
Riverview and American Pacific Bank expect to complete the merger in the
second calendar quarter of 2005. However, we cannot guarantee when or if the
required regulatory approvals will be obtained. See "The Merger Regulatory
Approvals Needed to Complete the Merger." Furthermore, either company may
terminate the merger agreement if, among other reasons, the merger has not
been completed on or before April 30, 2005. See " Terminating the Merger
Agreement."
Conditions to Completing the Merger
Riverview's and American Pacific Bank's obligations to consummate the
merger are conditioned on the following:
* the material completion by each party of its obligations under the
merger agreement;
* the material accuracy of the representations and warranties made by
each party;
* the delivery by each party of a Secretary's and Officer's
certificate certifying to certain items contained in the merger agreement;
* the receipt of an opinion from counsel to each of Riverview and
American Pacific Bank with respect to each of their respective execution and
delivery of the merger agreement and the consummation of the transactions
contemplated therein; and
* that no material adverse change has occurred with respect to the
business and financial condition of Riverview or American Pacific Bank.
* no claim, action, suit, investigation or other proceeding is
pending or threatened before any court or governmental agency which presents a
substantial risk of prohibition of the transactions contemplated by the merger
agreement;
* all applicable government approvals have been received and any
waiting periods related to such approvals have expired;
* the registration statement on Form S-4, of which this proxy
statement-prospectus is a part, has been declared effective, and no stop order
is in effect;
* each of Riverview and American Pacific Bank must have received an
opinion from Breyer & Associates PC to the effect that the merger constitutes
a reorganization under Section 368 of the Internal Revenue Code, neither
Riverview nor American Pacific Bank will recognize any gain or loss as a
result of the merger and no U.S. shareholder of American Pacific Bank will
recognize any gain or loss as a result of the merger to the extent such
shareholder receives shares of Riverview common stock;
* the American Pacific Bank shareholders have approved the
transactions contemplated by the merger agreement by the required vote; and
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* all of the shares of Riverview common stock to be issued in the
merger have been qualified for listing on Nasdaq.
The obligation of Riverview to complete the merger is also conditioned
upon:
* there has been no destruction of real or personal property of
American Pacific Bank that would result in a material adverse effect;
* American Pacific Bank has permitted Riverview to conduct
inspections during normal business hours of the books and records of American
Pacific Bank;
* American Pacific Bank has not entered into an agreement providing
for a business combination;
* American Pacific Bank has not issued or repurchased any debt or
equity securities (other than upon exercise of existing stock options), has
not sold any assets outside of the ordinary course of business and payments
made under certain benefit arrangements have not exceeded the amounts
specified in the agreements covering such benefits;
* holders of no more than 5% of the outstanding shares of American
Pacific Bank have perfected dissenters' rights in accordance with the Oregon
Bank Act;
* non-competition agreements have been executed by those executive
officers and directors of American Pacific Bank not being retained, affiliates
of American Pacific Bank have executed the affiliate agreements, officers and
directors of American Pacific Bank have executed and delivered voting
agreements, the termination agreements executed by David T. Chen and Richard
Y. Cheong have not been terminated, Messrs. Chen and Cheong have entered into
consulting agreements with Riverview and the consent of each option holder has
been received;
* Riverview has received the Phase I and Phase II environmental
reports with respect to certain real property of American Pacific Bank; and
* Riverview has received from each holder of an option to purchase
American Pacific Bank stock his or her consent to the cancellation of the
option.
We cannot guarantee whether all of the conditions to the merger will be
satisfied or waived by the party permitted to do so.
Conduct of Business Before the Merger
American Pacific Bank has agreed that, until completion of the merger and
unless permitted by Riverview, it will:
General Business
* conduct its business only in the regular, ordinary and usual course
consistent with past practice;
* preserve intact its business organization and assets to maintain
its rights and franchises;
* not take any action that would adversely affect or delay its
ability to perform its obligations under the merger agreement or to consummate
the transactions contemplated by the merger agreement;
* not enter into any new lines of business or any transactions other
than in the ordinary course of business;
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* keep important contracts and adequate insurance in place; and
* cooperate and grant access to Riverview and an environmental
consulting firm chosen by Riverview to real property owned by American Pacific
Bank for the purpose of conducting environmental assessments.
Indebtedness
* not incur any additional indebtedness except in the ordinary course
of business consistent with past practices;
Capital Stock
* not issue any additional shares of capital stock, except pursuant
to the exercise of existing stock options;
* not impose or allow to be imposed any liens or encumbrances on its
capital stock;
* not repurchase or redeem any of its capital stock;
* not effect any splits, stock or cash dividends or make any other
distribution on its capital stock;
Dispositions
* not dispose of any of its assets or earning power, or sell any
asset, other than in the ordinary course of business for reasonable
consideration;
Investments
* not enter into or renew any investment securities or deposits other
than in the ordinary course of business consistent with past practices;
* not buy a substantial part of the assets or earning power of
another entity;
* not make any investment in new service contracts, purchase or sale
agreements or lease agreements that are material;
* not acquire control over any corporation, firm, organization, or
other entity;
* not enter into, renew or purchase any investments in equity
contracts or engage in hedging activity;
Contracts
* except as contemplated by the merger agreement, not enter into,
renew, amend or terminate any materials contract or agreement, or make any
change in or renew any of its materials leases or contracts;
Loans
* except in the ordinary course of business, consistent with past
practices, not renegotiate, renew, increase, extend or purchase any loans,
lease, advances, credit enhancements or other extension of credit or any
commitment concerning the foregoing;
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* not make or amend any loan or extension of credit or commit to make
or increase any such loan or extension of credit to any director or officer of
American Pacific Bank or loans to holders of more than 5% of American Pacific
Bank stock, except for loans or extensions of credit that do not exceed more
the 2% of American Pacific Bank's capital;
Employees
* not grant any increase in the compensation or benefits of any of
its employees or directors;
* not enter into any severance agreements with its officers or
employees;
* not make any change in retirement benefits unless required by law;
* not hire any new employee with an annual compensation of over
$25,000;
* not amend any existing employment agreement, indemnification
agreement or enter into any new employment agreement;
* not adopt or terminate any employee benefit plan except as required
by the merger agreement or by law;
Settling Claims
* not initiate or pursue any existing claims including claims under
its blanket bond policy or settle any claim against it for more than $15,000
or impose or agree to material restrictions on its operations;
Governing Documents
* not amend its articles of incorporation or bylaws;
Sale of Assets
* other than in the ordinary course of business consistent with past
practice, not sell or dispose of any of its properties, leases or assets or
release any indebtedness except in connection with contracts in force on the
date of the merger agreement;
Capital Expenditures
* not make any capital expenditures, except for expenditures
necessary to maintain existing assets in good repair in amounts less than
$5,000 individually or $15,000 in the aggregate except as necessary to make
specified repairs to certain branch locations;
Branches
* not sell, relocate or open or close any branch or other office or
file an application pertaining to such action;
Property
* not develop or sell, pledge, encumber or otherwise transfer its
beneficial interest in certain real estate owned (the "Starlite Property");
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Holding Company
* not complete the formation of a holding company for American
Pacific Bank;
Accounting
* not change its method of accounting, except as required by changes
in generally accepted accounting principles or regulatory requirements;
Merger Agreement
* not agree to any action or take any action or omit to take any
action which would result in any of its representations and warranties under
the merger agreement being or becoming untrue;
Taxes
* not settle or compromise any material tax liability or matters
related thereto except in the ordinary course of business consistent with past
practice;
Other Agreements
* agree not to take, commit to take any or adopt any resolutions in
support of any of the foregoing actions.
Riverview has agreed that, until the completion of the merger, it will
not:
* take any action that would materially adversely affect the ability
of Riverview to obtain any necessary approvals of the regulatory authorities
to complete the merger to adversely affect is ability to perform its covenants
and agreements under the merger agreement.
Covenants of American Pacific Bank and Riverview in the Merger Agreement
American Pacific Bank has agreed not to initiate, solicit, encourage,
facilitate, obtain or endorse any acquisition proposal with a third party. An
acquisition proposal means any offer, agreement, or understanding in which a
person or entity, other than Riverview, would:
* initiate a merger, consolidation, share exchange, consolidation or
business combination, or other similar transaction involving American Pacific
Bank;
* acquire the right vote ten percent or more of the outstanding
American Pacific Bank common stock; or
* acquire a significant portion of the assets or earning power of
American Pacific Bank.
Despite the agreement of American Pacific Bank not to solicit other
acquisition proposals, the board of directors of American Pacific Bank may
generally negotiate or have discussions with, or provide information to, a
third party who makes an unsolicited, written, bona fide acquisition proposal,
provided that the American Pacific Bank board of directors, after consultation
with and receipt of advice from outside legal counsel, deems such action to be
required in order for the board to comply with its fiduciary duties to
American Pacific Bank shareholders under applicable law.
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If American Pacific Bank receives a proposal or information request from
a third party or enters into negotiations with a third party, American Pacific
Bank must notify Riverview and provide Riverview with information about the
third party and its proposal.
Employee Matters. Subject to determination of Riverview's staffing
needs, each person who is an employee of American Pacific Bank as of the
closing of the merger (whose employment is not specifically terminated upon
the closing) will become an at-will employee of Riverview Community Bank.
Riverview will make available employer provided health and other employee
welfare benefit plans to each continuing employee on the same basis that it
provides such coverage to Riverview employees. Former employees of American
Pacific Bank will be eligible to participate in Riverview's benefit plans with
full credit for prior service with American Pacific Bank for purposes of
eligibility and vesting (but not for accrual of benefits) purposes.
Liability Insurance for American Pacific Bank Officers and Directors.
Riverview has agreed that it will maintain a policy of directors' and
officers' liability insurance coverage, or provide a policy providing
comparable coverage and amounts on terms no less favorable than American
Pacific Bank's current policy, for the benefit of American Pacific Bank's
directors and officers who are currently covered by insurance for three years
following consummation of the merger.
Certain Other Covenants. The merger agreement also contains other
agreements relating to our conduct before consummation of the merger,
including the following:
* After all requisite approvals necessary to consummate the merger
are obtained, American Pacific Bank will modify and change its accruals and
reserves so as to be consistent with those of Riverview and Riverview
Community Bank and to establish and maintain a reserve of up to $500,000 for
the remediation of environmental contamination on the Starlite property.
* American Pacific Bank will give Riverview, and Riverview will give
American Pacific Bank, access during normal business hours to each's property,
books, records and personnel and furnish all information either party may
reasonably request. Riverview and American Pacific Bank agree that they will
keep confidential all such information and documents unless the information
was already known, becomes publicly available, is disclosed with prior written
consent from the other party or becomes readily ascertainable from published
information.
* American Pacific Bank will promptly provide Riverview with a copy
of each report filed with its banking regulators.
* Riverview and American Pacific Bank will use their reasonable best
efforts to submit all necessary applications, notices, and other filings with
any governmental entity, the approval of which is required to complete the
merger and related transactions.
* American Pacific Bank will use its reasonable best efforts to
obtain all third party consents necessary to consummate the merger.
* American Pacific Bank will take any necessary action to exempt this
transaction from any anti- takeover provisions contained in American Pacific
Bank's articles of incorporation or bylaws or federal or state law.
* Riverview and American Pacific Bank will use all reasonable efforts
to take all actions necessary to consummate the merger and the transactions
contemplated by the merger agreement.
* Riverview will file a registration statement, of which this proxy
statement-prospectus forms a part, with the Securities and Exchange Commission
registering the shares of Riverview common stock to be issued in the merger to
American Pacific Bank shareholders.
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* American Pacific Bank will take all actions necessary to convene a
meeting of its shareholders to vote on the merger agreement. The American
Pacific Bank board of directors will recommend at the shareholder meeting that
the shareholders vote to approve the merger and will use its reasonable best
efforts to solicit shareholder approval, unless it determines that such
actions would not comply with its fiduciary obligations to American Pacific
Bank shareholders.
* Prior to completion of the merger, Riverview will notify the Nasdaq
Stock Market of the additional shares of Riverview common stock that Riverview
will issue in exchange for shares of American Pacific Bank common stock.
* American Pacific Bank will use its reasonable best efforts to cause
each person who is an affiliate of it under Rule 145 of the Securities Act of
1933 to deliver to Riverview a letter to the effect that such person will
comply with Rule 145.
* American Pacific Bank will notify Riverview of any event necessary
to amend or supplement the representations and warranties to the merger
agreement so that the representations and warranties and schedules remain true
and correct.
Representations and Warranties Made by Riverview, Riverview Community Bank and
American Pacific Bank in the Merger Agreement
Riverview and American Pacific Bank have made certain customary
representations and warranties to each other in the merger agreement relating
to their businesses. For information on these representations and warranties,
please refer to the merger agreement attached as Appendix A. The
representations and warranties must be true in all material respects through
the completion of the merger unless the change does not have a material
negative impact on our business, financial condition or results of operations.
See " Conditions to Completing the Merger."
Terminating the Merger Agreement
The merger agreement may be terminated at any time prior to the
completion of the merger, either before or after approval of the merger
agreement by American Pacific Bank shareholders, as follows:
* with the mutual written consent of Riverview and American Pacific
Bank;
* by Riverview if American Pacific Bank fails to conduct its business
pursuant to the covenants made in the merger agreement;
* by either party if the merger is not consummated by April 30, 2005;
* by either party upon denial of any required regulatory approval;
* by Riverview if its conditions to consummate the merger are not
satisfied as of the closing date or by American Pacific Bank if its conditions
to consummate the Merger are not satisfied as of the closing date;
* by either party if there has been a material adverse change in the
business or financial position of the other party;
* by either party if the other party has committed a material breach
of any obligation of the other party that has not been cured within 30 days
after the giving of written notice of such breach;
* by Riverview if American Pacific Bank enters any agreement with a
view toward being acquired or effecting a business combination with any other
person;
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* by Riverview if American Pacific Bank enters into any supervisory
agreement, cease and desist order, memorandum of understanding or similar
arrangement with any bank regulatory agency or has any claim or action
concerning federal or state securities law against it or its officers and
directors for their services as officers and directors;
* by Riverview if there is any action or proceeding concerning state
or federal securities law matters pending or threatened against American
Pacific Bank or its officers or directors before any court or governmental
agency;
* by Riverview if, except for the Starlite property, any Phase I or
Phase II environmental assessment indicates the existence of any condition or
matter not satisfactory to Riverview with respect to which it is reasonably
likely that the cost of remediation would exceed $100,000; or
Additionally, American Pacific Bank may terminate the merger agreement
if both of the following conditions are satisfied:
* the average of the daily closing sales prices of Riverview common
stock for the 20 trading days ending on the tenth day prior to the effective
time of the merger (the "Riverview market value") is less than $18.06; and
* the number obtained by dividing the Riverview market value by
$21.25 is less than the quotient obtained by dividing (i) the sum of the
average of the daily closing sales prices of the Nasdaq Bank Index for the 20
trading days ending on the day which is ten days prior to the effective time
of the merger of the Nasdaq Bank Index (the "Final Index") , by (ii) the
Nasdaq Bank Index on November 9, 2004 (the "Initial Index"), subtracting 0.15
from the quotient.
If American Pacific Bank elects to exercise its termination right as
described above, it must give notice to Riverview within 48 hours following
the date of the event and at least four business days prior to the date of the
proposed termination. During the three business-day period commencing with
its receipt of such notice, Riverview will have the option to increase the
consideration to be received by the American Pacific Bank shareholders so that
the per share consideration received will at least equal the per share
consideration an American Pacific Bank shareholder would have received for a
stock election had the Riverview market value been equal to the lesser of (i)
$18.06 or (ii) $21.25 times the quotient of the Final Index divided by the
Initial Index less 0.15. If Riverview elects, it will give written notice to
American Pacific Bank of its election and the revised merger consideration,
whereupon no termination will be deemed to have occurred and the merger
agreement will remain in full force and effect in accordance with its terms
(except for the modified merger consideration).
Because the formula depends on the future price of Riverview's common
stock and the Nasdaq Bank Index, it is not possible to determine the amount of
the adjusted merger consideration at this time, but, in general, the merger
consideration would be increased and, consequently, more shares of Riverview
common stock issued, to take into account the extent of the decline in the
value of Riverview's common stock as compared to the changes in the value of
the Nasdaq Bank Index.
Termination Fee
The merger agreement requires American Pacific Bank to pay Riverview a
termination fee of $1.2 million under certain circumstances. The fee may be
demanded by Riverview in the event that the merger is not completed within 18
months of November 9, 2004 and any of the following occurs:
* a person, other than Riverview, acquires 25% or more of the
outstanding American Pacific Bank common stock;
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* American Pacific Bank, without the written consent of Riverview,
enters into or recommends to American Pacific Bank shareholders an agreement
with a third party providing for certain acquisition transactions including a
merger or similar transaction involving American Pacific Bank, the purchase,
acquisition or lease of substantially all of the assets of American Pacific
Bank or the acquisition of 15% or more of American Pacific Bank stock; or
* a valid proposal to engage in an acquisition transaction, as
described above, is made to American Pacific Bank, and after the proposal is
made either:
* American Pacific Bank breaches the merger agreement and the
breach entitles Riverview to terminate the merger agreement;
* American Pacific Bank shareholders fail to approve the merger
agreement at the special meeting of American Pacific Bank
shareholders; or
* the special meeting is cancelled without the fault of
Riverview, or the American Pacific Bank board of directors
withdraws or modifies in a manner adverse to Riverview its
recommendation to shareholders to approve the merger
agreement.
American Pacific Bank will not be required to pay the termination fee if,
prior to the occurrence of any of the events described above, Riverview
terminates the merger agreement other than because of a material breach by
American Pacific Bank or American Pacific Bank validly terminates the merger
agreement.
The termination fee is intended to increase the likelihood that the
merger will be consummated according to the terms set forth in the merger
agreement and may be expected to discourage competing offers to acquire
American Pacific Bank from other parties because the termination fee could
increase the cost of such acquisition. To the best of American Pacific Bank's
knowledge, no event that would permit Riverview to demand payment of the
termination fee has occurred as of the date of this proxy
statement-prospectus.
Expenses
Each of Riverview and American Pacific Bank will pay its own costs and
expenses incurred in connection with the merger.
Changing the Terms of the Merger Agreement
Before the completion of the merger, Riverview and American Pacific Bank
may agree to waive, amend or modify any provision of the merger agreement.
However, after the vote by American Pacific Bank shareholders, Riverview and
American Pacific Bank can make no amendment or modification that would reduce
the amount or alter the kind of consideration to be received by American
Pacific Bank's shareholders under the terms of the merger agreement.
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PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined consolidated balance
sheet as of December 31, 2004 and the unaudited pro forma condensed combined
consolidated statements of operations for the nine months ended December 31,
2004 and the year ended March 31, 2004 for Riverview, and for American Pacific
Bank for the nine months ended September 30, 2004 and the year ended December
31, 2004, give effect to the pending merger, accounted for as a purchase.
The unaudited pro forma condensed combined consolidated financial
information is based on the historical consolidated financial statements of
Riverview and American Pacific Bank under the assumptions and adjustments set
forth in the accompanying notes. The unaudited pro forma condensed combined
consolidated balance sheet gives effect to the merger as if the merger had
been consummated at the end of the earliest period presented. The unaudited
pro forma condensed combined consolidated statements of operations give effect
to the merger as if the merger had been consummated at the beginning of the
earliest period presented. The unaudited pro forma condensed combined
consolidated financial statements do not give effect to the anticipated cost
savings in connection with the merger.
You should read the unaudited pro forma condensed combined consolidated
financial statements in conjunction with the consolidated historical financial
statements of Riverview and American Pacific Bank, including the respective
notes to those statements. The pro forma information is not necessarily
indicative of the combined financial position or the results of operations in
the future or of the combined financial position or the results of operations
which would have been realized had the merger been consummated during the
periods or as of the dates for which the pro forma information is presented.
We anticipate that the merger will provide the combined company with financial
benefits that include reduced operating expenses and opportunity to earn more
revenue. In addition, Riverview will incur costs in acquiring American
Pacific Bank including an analysis of the loans of American Pacific Bank which
could cause an increase in the provision for loan losses. The pro forma
information, while helpful in illustrating the financial characteristics of
the new company under one set of assumptions, does not reflect these benefits
and costs and, accordingly, does not attempt to predict or suggest future
results.
Pro forma per share amounts for the combined company are based on a
0.28118 exchange ratio.
62
RIVERVIEW AND AMERICAN PACIFIC BANK
Unaudited Pro Forma Condensed Consolidated Statements of Financial Condition
As of December 31, 2004
(In thousands)
Riverview
American
Riverview American Pro Forma Pacific
Bancorp, Inc. Pacific Bank Adjustments Pro Forma
------------ ------------ ----------- -----------
ASSETS
Cash and cash
equivalents $55,423 $11,847 $(17,632) (2) $49,029
(329) (2)
(280) (12)
Loans held for
sale 140 -- -- 140
Investment secur-
ities available
for sale, at fair
value 29,438 1,180 - 30,618
Mortgage-backed
securities held
to maturity, at
amortized cost 2,407 - -- 2,407
Mortgage-backed
securities avail-
able for sale,
at fair value 12,696 - - 12,696
Loans receivable,
net 398,421 107,301 (409) (3) 505,313
Prepaid expenses
and other assets 1,262 -- -- 1,262
Accrued interest
receivable 1,874 752 -- 2,626
Federal Home Loan
Bank stock, at
cost 6,119 803 - 6,922
Premises and equip-
ment, net 8,416 710 -- 9,126
Deferred income
taxes, net 2,827 - 294 (3) 3,121
Mortgage servicing
rights, net 518 -- -- 518
Bank owned life
insurance 12,521 - -- 12,521
Noncompetition
agreements - - 560 (12) 560
Core deposit intang-
ible, net 611 -- 360 (3) 971
Goodwill 9,214 16,593 (5) 25,807
-------- -------- -------- --------
TOTAL ASSETS $541,887 $122,593 $ (843) $663,637
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposit accounts $427,649 $ 86,352 $ (53) (3) $513,948
Accrued expenses
and other liabil-
ities 5,645 637 280 (12) 7,482
70 (13)
850 (11)
Advance payments by
borrowers for taxes
and insurance 75 -- -- 75
Federal Home Loan
Bank advances 40,000 17,000 (143) (3) 56,857
-------- -------- -------- --------
Total Liabili-
ties 473,369 103,989 1,004 578,362
SHAREHOLDERS' EQUITY:
Serial preferred
stock - issued and
outstanding, none - -- -- --
Common stock
December 31, 2004 50 12,930 (12,930) (6) 50
Additional paid-
in capital 40,847 1,000 (1,000) (6) 57,604
16,757 (2)
Retained earnings 28,956 4,685 (4,685) (6) 28,956
Unearned shares
issued to employ-
ee stock owner-
ship trust (1,443) - -- (1,443)
Accumulated other
comprehensive
income (loss) 108 (11) 11 (6) 108
-------- -------- -------- --------
Total shareholders'
equity 68,518 18,604 (1,847) 85,275
-------- -------- -------- --------
TOTAL LIABILITIES
AND SHAREHOLDERS'
EQUITY $541,887 $122,593 $ (843) $663,637
======== ======== ======== ========
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
63
RIVERVIEW AND AMERICAN PACIFIC BANK
Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations
(In thousands, except share data)
Nine Months Ended
------------------------------
December 31, September 30,
2004 2004 Riverview
------------ -------------- American
American Pro Forma Pacific
Riverview Pacific Bank Adjustments Pro Forma
----------- ---------------- ----------- ---------
INTEREST INCOME
Interest and fees
on loans receivable $20,506 $5,998 $ 140 (7) $26,644
Interest on invest-
ment securities 498 117 -- 615
Interest on mortgage-
backed securities 482 -- -- 482
Other interest and
dividends 633 - (314) (7) 319
------- ------ ----- -------
Total interest
income 22,119 6,115 (174) 28,060
------- ------ ----- -------
INTEREST EXPENSE
Interest on deposits 3,741 1,142 -- 4,883
Interest on borrowings 1,509 343 45 (7) 1,897
------- ------ ----- -------
Total interest
expense 5,250 1,485 45 6,780
------- ------ ----- -------
Net interest
income 16,869 4,630 (219) 21,280
Less provision for loan
losses 260 109 -- 369
------- ------ ----- -------
Net interest income
after provision for
loan losses 16,609 4,521 (219) 20,911
------- ------ ----- -------
NON-INTEREST INCOME
Fees and service
charges 3,439 491 - 3,930
Asset management fees 815 - -- 815
Gain on sale of loans
held for sale 409 - -- 409
Loss on impairment of
securities (1,349) - -- (1,349)
Loan servicing income,
net 45 - - 45
Gain on sale of premises
and equipment 829 - -- 829
Bank owned life insurance 400 -- -- 400
Other 73 - -- 73
------- ------ ----- -------
Total non-interest
income $ 4,661 $ 491 $ -- $ 5,152
------- ------ ----- -------
(table continued on following page)
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
64
RIVERVIEW AND AMERICAN PACIFIC BANK
Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations
(In thousands, except share data) (Continued)
Nine Months Ended
-----------------------------
December 31, September 30,
2004 2004 Riverview
------------ -------------- American
Riverview American Pro Forma Pacific
Bancorp, Inc. Pacific Bank Adjustments Pro Forma
------------- ------------- ----------- ---------
NON-INTEREST EXPENSE
Salaries and employee
benefits $8,029 $1,527 $ -- $9,556
Occupancy and depreci-
ation 2,261 385 -- 2,646
Data processing 740 -- -- 740
Amortization of core
deposit intangible 148 -- 44 (10) 192
Advertising and marke-
ting expense 638 - -- 638
FDIC insurance premium 44 -- -- 44
State and local taxes 391 - -- 391
Telecommunications 213 - -- 213
Environmental remedia-
tion - 100 -- 100
Professional fees 395 - -- 395
Other 1,330 1,011 210 (12) 2,551
------- ------ ----- ------
Total non-inter-
est expense 14,189 3,023 254 17,466
------- ------ ----- ------
INCOME (LOSS) BEFORE
INCOME TAXES 7,081 1,989 (473) 8,597
PROVISION FOR INCOME
TAXES 2,220 773 (179) (8) 2,814
------- ------ ----- ------
NET INCOME (LOSS) $ 4,861 $1,216 $(294) $5,783
======= ====== ===== ======
Earning per common
share:
Basic $1.01 $ 1.03
Diluted $1.00 $ 1.02
Weighted average number
of shares outstanding:
Basic 4,809,290 788,593 5,597,883
Diluted 4,883,628 788,593 5,672,221
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
65
RIVERVIEW AND AMERICAN PACIFIC BANK
Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations
(In thousands, except share data)
Twelve Months Ended
----------------------------
March 31, December 31,
2004 2003 Riverview
------------ ------------- American
Riverview American Pro Forma Pacific
Bancorp, Inc. Pacific Bank Adjustments Pro Forma
------------- ------------- ----------- ---------
INTEREST INCOME
Interest and fees
on loans receivable $25,634 $8,014 $ 269 (7) $33,917
Interest on investment
securities 478 73 - 551
Interest on mortgage-
backed securities 613 - -- 613
Other interest and
dividends 859 134 (418) (7) 575
------- ------ ------- -------
Total interest
income 27,584 8,221 (149) 35,656
------- ------ ------- -------
INTEREST EXPENSE
Interest on deposits 4,643 2,154 53 (7) 6,523
Interest on borrowings 1,984 -- 98 (7) 2,409
------- ------ ------- -------
Total interest
expense 6,627 2,154 151 8,932
------- ------ ------- -------
Net interest
income 20,957 6,067 (300) 26,724
Less provision for loan
losses 210 267 -- 477
------- ------ ------- -------
Net interest income
after provision for
loan losses 20,747 5,800 (300) 26,247
------- ------ ------- -------
NON-INTEREST INCOME
Fees and service
charges 4,324 198 -- 4,522
Asset management fees 906 -- -- 906
Gain on sale of loans
held for sale 954 9 -- 963
Gain on sale of other
real estate owned 49 -- -- 49
Gain on sale of land
and fixed assets 3 - -- 3
Loan servicing income,
net 158 - -- 158
Bank owned life insurance 121 - -- 121
Other 74 10 -- 84
------- ------ ------- -------
Total non-
interest
income 6,589 217 -- 6,806
------- ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employ-
ee benefits 9,910 1,816 - 11,726
Occupancy and depreci-
ation 2,900 542 - 3,442
Data processing 917 - -- 917
Amortization of core
deposit intangible 430 - 70 (10) 500
Advertising and market-
ing expense 772 -- -- 772
FDIC insurance premium 64 - -- 64
State and local taxes 426 - -- 426
Telecommunications 269 -- -- 269
Professional fees 501 - -- 501
Other 1,383 1,415 280 (12) 3,998
850 (11)
70 (13)
------- ------ ------- -------
Total non-inter-
est expense 17,572 3,773 1,270 22,615
INCOME (LOSS) BEFORE
INCOME TAXES 9,764 2,244 (1,570) 10,438
PROVISION FOR INCOME
TAXES 3,210 852 (597) (8) 3,465
------- ------ ------- -------
NET INCOME (LOSS) $ 6,554 $1,392 $ (973) $ 6,973
======= ====== ======= =======
Earning per common
share:
Basic $ 1.41 $ 1.28
Diluted 1.39 1.27
Weighted average num-
ber of shares outstan-
ding:
Basic 4,640,485 788,593 5,429,078
Diluted 4,714,329 788,593 5,502,922
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
66
RIVERVIEW AND AMERICAN PACIFIC BANK
Pro Forma Combined
Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the combined
Company at the dates and for the periods indicated.
At December 31, 2004
------------------------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $663,637
Loan receivable, net (1) 505,453
Mortgage-backed securities
held to maturity,
at amortized cost 2,407
Mortgage-backed securities
available for sale,
at fair value 12,696
Cash and interest-bearing
deposits 49,029
Investment securities available
for sale, at fair value 30,618
Deposit accounts 513,948
FHLB advances 56,857
Shareholders' equity 85,275
----------
(1) Includes loans held for sale.
Nine Months Ended Year Ended
December 31, 2004 March 31, 2004
---------------------- --------------------
(In thousands, except per share data)
OPERATING DATA:
Interest income $28,060 $35,656
Interest expense 6,780 8,932
------- -------
Net interest income 21,280 26,724
Provision for loan
losses 369 477
------- -------
Net interest income after
provision for loan losses 20,911 26,247
Non-interest income 5,152 6,806
Non-interest expense 17,466 22,615
------- -------
Income before income taxes 8,597 10,438
Income tax provision 2,814 3,465
------- -------
Net income $ 5,783 $ 6,973
======= =======
Pro forma per share data: $ 1.03 $ 1.28
Basic net income 1.02 1.27
Diluted net income
See Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.
67
RIVERVIEW AND AMERICAN PACIFIC BANK
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
1) Basis of Presentation
The Unaudited Pro Forma Condensed Combined Balance Sheet as of December 31,
2004 has been prepared as if the merger had been consummated on that date.
The Unaudited Projected Pro Forma Condensed Combined Statement of Operations
for the twelve months ended March 31, 2004 and December 31, 2003 for Riverview
and American Pacific Bank, respectively, and the Unaudited Pro Forma Condensed
Combined Statement of Operations for the nine months ended December 31, 2004
and September 30, 2004 for Riverview and American Pacific Bank, respectively,
have been prepared as if the merger had been consummated at the beginning of
the earliest period presented.
The Unaudited Pro Forma Condensed Combined Balance Sheet is based on the
historical information from the financial statements of Riverview Bancorp,
Inc. and American Pacific Bank after giving effect to the merger under the
purchase method of accounting and the assumptions and adjustments in the notes
that follow.
Assumptions relating to the pro forma adjustments set forth in the Unaudited
Pro Forma Condensed Combined Consolidated Financial Statements are summarized
as follows:
Estimated fair values - Estimated fair values for securities, loans and
borrowings were obtained from appropriate valuation methodologies and market
information in accordance with SFAS No. 107, Disclosures About Fair Values
= of Financial Instruments. The resulting discount on loans, deposits and
FHLB borrowings for purposes of these pro forma financial statements are being
amortized to interest income and interest expense on a straight line basis
over the weighted average lives of 1.52 years for loans, 0.72 years for
deposits and 1.46 years for FHLB borrowings. The actual discounts will be
amortized to interest income and expense to produce a constant yield to
maturity. Core deposit intangibles created as a result of the merger are
estimated at $360,000 for non-maturity deposits and in the pro forma financial
statements are being amortized to interest expense to produce a constant yield
to maturity.
68
2) Acquisition Cost
The cost to acquire American Pacific Bank assumes that 2,804,618 shares of
common stock of American Pacific Bank are outstanding and that 1,402,309
shares multiplied by a transaction value of $11.95 is paid in cash and the
remaining 1,402,309 shares are exchanged for 788,593 shares of Riverview
common stock at a price of $21.25 per share. All options at a cost of
$874,115 are assumed to be cashed out at the difference between the
transaction value of $11.95 and their respective strike prices prior to
completion of the merger.
Cash consideration $16,758,000 plus American Pacific
Bank options cost of $874,115 $17,632
Stock consideration (assume issuance of Riverview
common stock) 788,593 shares at $21.25 per share 16,757
-------
Acquisition Costs
Riverview Bancorp, Inc. 329
Transaction costs -------
Total Acquisition Costs 329
-------
Total Cost $34,718
=======
3) Purchase accounting adjustments recorded for the merger were as follows
(in thousands):
American Pacific Bank's net assets at pro forma cost
at December 31, 2004 $18,604
Fair Value Adjustments
Securities available-for-sale $ --
Loans receivable (409)
Deposits 53
Borrowings 143
Core deposit intangibles 360
-------
Sub-total net fair value adjustments 147
Severance payments (850)
Environmental assessment liability (70)
Deferred tax asset related to the
purchase accounting adjustments 294
Net assets acquired $18,125
=======
4) Excess of cost over fair value of net assets acquired for the merger was
calculated as follows (in thousands):
Total cost $ 34,718
Net assets acquired (18,125)
--------
Total excess of cost over fair
value of net assets acquired
from the merger $ 16,593
========
69
5) Allocation of excess of cost over fair value of net assets acquired from
the merger (in thousands):
Goodwill 16,593
-------
Total intangible $16,593
=======
Goodwill represents costs in excess of net assets acquired, and will be
evaluated annually for impairment, in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets. In accordance with SFAS No. 142 no periodic
amortization was taken in the pro forma statements.
6) Purchase accounting adjustment to eliminate American Pacific Bank's
stockholders' equity accounts (in thousands).
$18,604
7) Pro forma adjustments to interest income and interest expense were
calculated for the merger as follows (in thousands):
For the Twelve For the Nine
Months Ended Months Ended
March 31, 2004 December 31, 2004
-------------- -----------------
Reduction in interest income for
cash utilized to purchase
American Pacific Bank's common
stock (based on average
annual rate of 2.33%) $ (418) $ (314)
Amortization of discount on loans
(1.52 years) 269 140
------ ------
Total net adjustments to
interest income $ (149) $ (174)
====== ======
Amortization of discount on
deposits (0.72 years) & 53 $ --
Amortization of discount on
FHLB borrowings (1.46
years) 98 45
------ ------
Total net adjustments to
interest expense $ 151 $ 45
====== ======
8) Pro forma tax expense was calculated using an effective tax rate of 38%.
9) Pro forma basic earnings per common share is calculated by dividing net
income by the averagenumber of common shares outstanding. Diluted
earnings per common share is calculated using thesame method as basic
earning per common share, but reflects potential dilution of common share
equivalents. Basic and diluted weighted average number of common stock
and common stock equivalents utilized for the calculation of earnings per
share for the period presented werecalculated using Riverview's
historical weighted average common stock and common stock equivalents
plus 788,593 shares issued to American Pacific Bank's stockholder under
the terms of the merger.
On December 16, 2004, the FASB issued SFAS No. 123R, Share-Based Payment,
which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R
changes, among other things, the manner in which share-based compensation,
such as stock options, will be accounted for by both public and non-public
companies, and will be effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. Under SFAS No. 123R,
stock based compensation expense will be recognized in the financial
statements. SFAS No. 123R was not applied in the pro forma statements.
70
10) The following table summarizes the estimated impact of the amortization
and the accretion of the purchase accounting adjustments made in
connection with the merger on Riverview's results of operations (in
thousands):
Projected Future
Amounts for the Core Deposit Net Net Decrease
Fiscal Years Ended Intangible (Accretion) in Income
March 31, Amortization Amortization Before Taxes
------------------ --------------- -------------- ----------------
2004 $ 70 $118 $188
2005 58 95 153
2006 48 -- 48
2007 40 -- 40
2008 34 -- 34
2010 and thereafter 110 -- 110
---- ---- ----
$360 $213 $573
==== ==== ====
The core deposit intangible created as a result of the merger is estimated to
be $360,000. Core deposit intangible is amortized over 10 years. The merger
created core deposit intangible estimated amortization for the nine months
ended December 31, 2004 is $44,000.
11) Severance payments
Severance payments totaling $850,000 will be paid upon closing by American
Pacific Bank to its executive officers.
12) Non-competitive Agreements
In connection with the merger, Riverview has entered into non-competition
agreements with two American Pacific Bank executives. The terms of the
agreements are for two years with one half payable upon the closing of the
merger and the remaining half of which is payable on the first anniversary of
the closing agreement. The total consideration to be paid is $560,000. These
non-competition agreements will be amortized to non-interest expense over the
twenty-four month terms on a straight line basis. The nine month amortization
amount charged to non- interest expense will be $210,000. The twelve month
amortization non-interest expense amount will be $280,000.
13) Joint venture contingency
American Pacific Bank acquired an un-divided one-third interest in a joint
venture as a result of a loan default in 1984. On October 15, 2004, American
Pacific Bank received the results of the environmental assessment, which
identified petroleum contamination in soil and groundwater. The assessment
estimated that the environmental clean-up cost of the property could be in
excess of $300,000. At December 31, 2004, American Pacific had recorded a
$30,000 reserve to cover potential environmental liability associated with the
property. Upon the closing of the merger, an additional $70,000 will be added
to the reserve to cover potential environmental liability for a total
liability of $100,000.
71
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This proxy statement-prospectus, including information included or
incorporated by reference herein, contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of Riverview and American
Pacific Bank, as well as certain information relating to the merger. These
statements are preceded by, followed by or include the words "believes,"
"expects," "anticipates," "estimates" or similar expressions.
These forward-looking statements involve certain risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to, among others, the following factors:
* expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
* revenues following the merger may be lower than expected;
* competitive pressures among financial services companies may
increase significantly;
* costs or difficulties related to the integration of the business
of Riverview and American Pacific Bank may be greater than expected;
* changes in the interest rate environment may reduce interest
margins;
* general economic conditions, either nationally or in Washington or
Oregon, may be less favorable than expected;
* legislative or regulatory changes may adversely affect the
business in which Riverview or American Pacific Bank is engaged;
* changes may occur in the securities markets; and
* changes may occur in the rate of Riverview's investment securities
portfolio.
Riverview does not intend to update or otherwise revise any
forward-looking statements to reflect circumstances existing since their
preparation or to reflect the occurrence of unanticipated events, even in the
event that any or all of the underlying assumptions are shown to be in error.
Furthermore, Riverview does not intend to update or revise the forward-looking
statements to reflect changes in general economic or industry conditions.
See "Where You Can Find More Information."
DESCRIPTION OF RIVERVIEW COMMON STOCK
General
Riverview is authorized to issue 50,000,000 shares of common stock having
a par value of $.01 per share and 250,000 shares of preferred stock having a
par value of $.01 per share. Each share of Riverview's common stock has the
same relative rights as, and is identical in all respects with, each other
share of common stock.
Common Stock
Dividends. Riverview can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its board of directors.
Riverview's payment of dividends is subject to limitations that are imposed by
law and applicable regulation. The holders of common stock of Riverview are
entitled to receive and share equally in
72
any dividends declared by the board of directors of Riverview out of funds
legally available for the payment of dividends. If Riverview issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock with respect to dividends.
Voting Rights. The holders of common stock of Riverview possess
exclusive voting rights in Riverview. They elect Riverview's board of
directors and act on any other matters as are required to be presented to them
under applicable law or as are otherwise presented to them by the board of
directors. Each holder of common stock is entitled to one vote per share and
does not have any right to cumulate votes in the election of directors. In
addition, Riverview's articles of incorporation provide that a holder of
Riverview common stock who owns, together with certain affiliates or persons
acting in concert, in excess of 10% of the then-outstanding shares of common
stock cannot vote any shares in excess of 10% unless permitted by the board of
directors of Riverview. If Riverview issues preferred stock, holders of
preferred stock may also possess voting rights. Certain matters require the
vote of 80% of the outstanding shares entitled to vote thereon.
Liquidation. In the event of liquidation, dissolution or winding up of
Riverview, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of Riverview available for distribution. If Riverview issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of Riverview are not
entitled to preemptive rights with respect to any shares that may be issued.
The common stock is not subject to redemption.
Preferred Stock
Riverview may issue preferred stock with such designations, powers,
preferences and rights as Riverview's board of directors may from time to time
determine. The board of directors can, without shareholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. None of the shares of the authorized preferred stock will be issued
in connection with the merger with American Pacific Bank and there are no
plans to issue preferred stock.
COMPARISON OF RIGHTS OF SHAREHOLDERS
The rights of Riverview shareholders are currently governed by
Riverview's articles of incorporation, bylaws and applicable provisions of the
Washington Business Corporation Law. The rights of American Pacific Bank
shareholders are currently governed by American Pacific Bank's articles of
incorporation, bylaws and applicable provisions of the Oregon Bank Act. If we
complete the merger, American Pacific Bank shareholders who receive Riverview
common stock will become Riverview shareholders and their rights will likewise
be governed by Riverview's articles of incorporation and bylaws.
This summary is not a complete discussion of the Riverview and American
Pacific Bank articles and bylaws or Washington or Oregon law, and it is
qualified in its entirety by reference to those documents. Copies of
Riverview's articles and bylaws are on file with the SEC. Copies of American
Pacific Bank's articles and bylaws may be requested in writing from David T.
Chen, President and Chief Executive Officer of American Pacific Bank, 315 SW
Fifth Avenue, Suite 201, Portland, Oregon 97204.
73
Authorized Stock
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
Riverview's articles of incorporation American Pacific Bank's articles of
authorize 50,250,000 shares of capital incorporation authorize 200,000,000
stock, consisting of 50,000,000 shares shares of capital stock, consisting
of common stock, $.01 par value per entirely of Class B common stock, no
share, and 250,000 shares of serial par value
preferred stock, $.01 par value per
share.
As of December 31, 2004, there were As of December 31, 2004, there were
5,001,575 shares of Riverview common 2,804,618 shares of American Pacific
stock issued and outstanding. Bank common stock issued and
outstanding.
As of December 31, 2004, there were no American Pacific Bank does not
shares of preferred stock issued or currently have any preferred stock
outstanding. authorized for issuance.
Voting Rights
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
The holders of the common stock Each outstanding share is entitled
exclusively possess all voting power, to one vote on each matter submitted
subject to the authority of the board to vote at a meeting of
of directors to offer voting rights to shareholders.
the holders of preferred stock.
Each share of common stock is entitled Each share of common stock is
to one vote. Beneficial owners of 10% entitled to one vote.
or more of the outstanding shares are
subject to voting limitations.
Holders of common stock may not Same.
cumulate their votes for the election
of directors.
Required Vote for Authorization of Certain Actions
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
At least 80% of the outstanding shares The articles of incorporation do not
of voting stock must approve certain provide for any special vote
business combinations involving a requirement or vote limitation for
"related person." In addition, a authorization of certain actions.
business combination with a related The Oregon Bank Act requires the
person must be approved by at least a affirmative vote of by holders of
majority of outstanding shares of voting two-thirds of the outstanding shares
stock other than shares beneficially to approve a business combination.
owned by the related person. See
"Selected Provisions in the Articles of
Incorporation and Bylaws of Riverview
Business Combinations with Related
Persons." However, if a two-thirds
majority of directors not affiliated
with the related person approves a
business combination, a majority vote
of the outstanding shares is sufficient
to approve the business combination.
74
Dividends
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
Holders of common stock are entitled to Holders of common stock are entitled
receive dividends when declared by the to receive dividends when declared
Riverview board, subject to the rights by the American Pacific Bank board.
of holders of preferred stock.
Shareholders' Meetings
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
Riverview must deliver to each American Pacific Bank must deliver
shareholder entitled to vote notice of to each shareholder entitled to
the meeting and, in the case of a vote, notice of the meeting,
special meeting, a description of its including a description of the
purpose, no fewer than ten nor more purposes of the meeting, no fewer
than 60 days before the meeting. than ten nor more than 45 days
before the meeting.
The annual meeting is required to be
held on the last Tuesday in March.
If the annual meeting is not held at
its designated time, then a majority
of the board of directors must call
the meeting within 120 days after
the close of the fiscal year.
The board shall designate the Neither the articles of
chairman of the board or the incorporation and bylaws of American
president to chair a meeting. Pacific Bank nor the Oregon Bank Act
specify who will chair a meeting.
Only the president or a majority of The Chief Executive Officer, a
the board of directors may call a majority of the board of directors
special meeting. or not fewer than three shareholders
holding in the aggregate one-third
of American Pacific Bank's common
stock are entitled to call a special
meeting of shareholders.
For purposes of determining For purposes of determining
shareholders entitled to vote at a shareholders entitled to vote at
meeting, the board of directors may a meeting, the board of directors
fix a record date that is not less may fix a record date that is not
than ten nor more than 60 days before less than ten or more than 70 days
the meeting. before the meeting.
The board of directors or any Neither the articles of
shareholder entitled to vote in the incorporation and bylaws of American
election of directors may nominate Pacific Bank nor the Oregon Bank Act
directors for election or propose specify the procedure for
new business. nominations; however, the board has
adopted a nominating policy.
To nominate a director or propose There are no prior notice
new business, shareholders must give requirements for making nominations
written notice to the secretary of or proposing new business.
Riverview not less than 30 nor more
than 60 days prior to the meeting.
However, if Riverview gives less than
31 days' notice of the meeting to the
shareholders, written notice of the
shareholder proposal or nomination must
be delivered to the secretary within
ten days of the date notice of the
meeting was mailed to shareholders.
Each notice given by a shareholder
75
with respect to a nomination to the
board of directors or proposal for new
business must include certain
information regarding the nominee or
proposal and the shareholder making
the nomination or proposal.
Action by Shareholders Without a Meeting
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
Any action that requires shareholder Same.
approval may be taken without a meeting
by the unanimous written consent of all
shareholders entitled to vote on the
action.
Board of Directors
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
The articles of incorporation and The articles of incorporation and
bylaws provide that the number of bylaws provide that the number of
directors shall be no fewer than five directors shall consist of not less
nor more than 15 and that the board than five nor more than nine.
of directors shall fix the number of
directors by resolution.
One half of the directors must be
U.S. citizens and either residents
of the State of Oregon or live
within 100 miles of American Pacific
Bank's principal place of business.
Directors cannot be: insolvent,
engaged in or indicted for
fraudulent or illegal practices in
the conduct of business; convicted
of a crime involving fraud; or
participate in activity which would
permit a regulatory authority to
remove a director.
There are currently seven members of There are currently six members of
the Riverview board of directors. the American Pacific Bank board of
directors.
The board of directors is divided into Same.
three classes as equal in number as
possible and approximately one-third
of the directors are elected at each
annual meeting.
Vacancies on the board of directors Vacancies on the board may be filled
may be filled by majority vote of the by a majority vote of the remaining
remaining directors or by the directors. A director elected to
shareholders at the next annual fill a vacancy serves for the
meeting. remainder of the unexpired term of
the predecessor director. Vacancies
occurring as a result of an increase
in the size of the board may be
appointed by the board of directors
subject to the power of the
shareholders to elect directors at
the next annual meeting.
76
Directors may be removed only for cause Directors may be removed for cause
by the vote of at least 80% of the either by a vote of two-thirds of
outstanding shares entitled to vote for the outstanding shares entitled to
directors. Cause is defined as vote or by a written resolution
fraudulent or dishonest acts, gross adopted by two-thirds of the
abuse of authority in discharge of directors.
duties to Riverview or acts that are
detrimental or hostile to Riverview's
interests.
Amendment of the Bylaws
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
The bylaws may be amended or repealed The bylaws may be amended or
with the approval of at least 80% of repealed with the approval of at
the outstanding shares entitled to least a majority of the board of
vote for directors or two-thirds of directors.
the board of directors.
Amendment of the Articles of Incorporation
------------------------------------------------------------------------------
Riverview American Pacific Bank
------------------------------------- ------------------------------------
The articles of incorporation may be The articles of incorporation may be
amended or repealed upon approval of a amended or repealed upon approval
majority of the board of directors and of at least a majority of the board
a majority of shares entitled to vote of directors and by a majority of
on the matter, unless otherwise shares entitled to vote on the
provided in the articles of matter.
incorporation or Washington Business
Corporation Law. However, amendments
to the articles of incorporation that
would revise the provisions relating
to the duration, purpose and powers
of Riverview, the capital stock
structure (other than limited
exceptions), preemptive rights, the
removal of directors, notice for
shareholder nominations and proposals,
approval of certain business
combinations, evaluation of business
combinations, limitation of directors'
liability, indemnification, calling of
special meetings of shareholders,
repurchase of shares, amendment of
bylaws and amendment of the articles
of incorporation require approval by
at least 80% of the votes entitled to
be cast thereon.
SELECTED PROVISIONS IN THE ARTICLES OF INCORPORATION
AND BYLAWS OF RIVERVIEW
Riverview's articles of incorporation and bylaws contain certain
provisions that could make more difficult an acquisition of Riverview by means
of a tender offer, proxy context or otherwise. Certain provisions will also
render the removal of the incumbent board of directors or management of
Riverview more difficult. These provisions may have the effect of deterring
or defeating a future takeover attempt that is not approved by Riverview's
board of directors, but which Riverview shareholders may deem to be in their
best interests or in which shareholders may receive a substantial premium for
their shares over then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have the opportunity
to do so. The following description of these provisions is only a summary and
does not provide all of the information contained in Riverview's articles of
incorporation and bylaws. See "Where You Can Find More Information" as to
where to obtain a copy of these documents.
77
Business Combinations with Related Persons
The articles of incorporation require the approval of the holders of at
least 80% of Riverview's outstanding shares of voting stock to approve certain
business combinations involving a "related person" except in cases where the
proposed transaction has been approved in advance by a two-thirds vote of
those members of Riverview's board of directors who are unaffiliated with the
related person and who were directors prior to the time when the related
person became a related person.
The term "related person" includes any individual or entity that together
with its affiliates owns beneficially or controls, directly or indirectly, 10%
or more of the outstanding shares of voting stock of Riverview.
A "business combination" includes:
* any merger or consolidation of Riverview with or into any related
person, or any merger or consolidation of a relater person with or into
Riverview or any subsidiary;
* any sale, lease, exchange, mortgage, transfer or other disposition
of more than 25% of the assets of Riverview or any subsidiary, or any sale,
lease, exchange, transfer or other disposition of more than 25% of the assets
of a related person to Riverview or any subsidiary;
* the issuance of any securities of Riverview or any subsidiary to a
related person, or the acquisition by Riverview or any subsidiary of any
securities of a related person;
* any reclassification of common stock of Riverview or any
recapitalization involving the common stock of Riverview;
* any liquidation of Riverview; or
* any agreement or other arrangement providing for any of the
foregoing.
Limitation on Voting Rights
Riverview's articles of incorporation provide that no record owner of any
outstanding Riverview common stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the then
outstanding shares of Riverview common stock will be entitled or permitted to
any vote in respect of the shares held in excess of the 10% limit, unless
permitted by a resolution adopted by a majority of the board of directors.
Beneficial ownership is determined pursuant to the federal securities laws and
includes shares beneficially owned by such person or any of his or her
affiliates (as defined in the articles of incorporation), shares which such
person or his or her affiliates have the right to acquire upon the exercise of
conversion rights or options and shares as to which such person and his or her
affiliates have or share investment or voting power, but does not include
shares that are subject to a revocable proxy and that are not otherwise
beneficially, or deemed by Riverview to be beneficially, owned by such person
and his or her affiliates.
Board of Directors
Classified Board. The board of directors of Riverview is divided into
three classes, each of which contains approximately one-third of the number of
directors. The shareholders elect one class of directors each year for a term
of three years. The classified board makes it more difficult and time
consuming for a shareholder group to fully use its voting power to gain
control of the board of directors without the consent of the incumbent
Riverview board of directors.
Filling of Vacancies; Removal. The articles of incorporation provide
that any vacancy occurring in the Riverview board of directors, including a
vacancy created by an increase in the number of directors, may be filled by
78
a vote of a majority of the directors then in office. The articles also
provide that a director may be removed from the board prior to the expiration
of his or her term only for cause and only upon the vote of at least 80% of
the outstanding shares entitled to vote for directors. These provisions make
it more difficult for shareholders to remove directors and replace them with
their own nominees.
Special Meetings of Shareholders
The articles of incorporation provide that only the president or a
majority of the board of directors may call a special meeting of the Riverview
shareholders. Shareholders are not able to call a special meeting or require
the board to do so. This provision prevents shareholders from forcing
consideration of a proposal between annual meetings over the opposition of the
president and the Riverview board by calling a special meeting of the
shareholders.
Advance Notice Provisions for Shareholder Nominations and Proposals
Riverview's articles of incorporation establish an advance notice
procedure for shareholders to nominate directors or bring other business
before a Riverview shareholders meeting. A person may not be nominated for
election as a director unless that person is nominated by or at the direction
of Riverview's board of directors or by a shareholder who has given
appropriate notice to Riverview before the meeting. Similarly, a shareholder
may not bring business before a meeting unless the shareholder has given
Riverview appropriate notice of its intention to bring that business before
the meeting. Riverview's secretary must receive notice of the nomination or
proposal not less than 30 nor more than 60 days prior to the meeting. A
shareholder who desires to raise new business must provide certain information
to Riverview concerning the nature of the new business, the shareholder and
the shareholder's interest in the business matter. Similarly, a shareholder
wishing to nominate any person for election as a director must provide
Riverview with certain information concerning the nominee and the proposing
shareholder.
Advance notice of nominations or proposed business by shareholders gives
Riverview's board of directors time to consider the qualifications of the
proposed nominees, the merits of the proposals and, to the extent deemed
necessary or desirable by the board of directors, to inform shareholders and
make recommendations about those matters.
Preferred Stock
The articles of incorporation authorize Riverview's board of directors to
establish one or more series of preferred stock and, for any series of
preferred stock, to determine the terms and rights of the series, including
voting rights, conversion rates, and liquidation preferences. Although
Riverview's board of directors has no current intention to do so, it could
issue a series of preferred stock that could, depending on its terms, impede a
merger, tender offer or other takeover attempt. Riverview's board of
directors will make any determination to issue shares with those terms based
on its judgment as to the best interests of Riverview and its shareholders.
Amendment of Articles of Incorporation
Riverview's articles of incorporation require the affirmative vote of at
least 80% of the votes entitled to be cast to amend or repeal certain
provisions of the articles of incorporation, including the provisions limiting
voting rights and those relating to approval of business combinations with
related persons, calling special meetings, director and officer
indemnification and amendment of the bylaws and articles of incorporation.
These supermajority voting requirements make it more difficult for the
shareholders to amend these provisions.
79
SHAREHOLDER PROPOSALS
American Pacific Bank will only hold its 2005 Annual Meeting if the
merger is not consummated. If an Annual Meeting is held, the date of the
meeting will be more than 30 days from the date that the 2004 Annual Meeting
was held. Pursuant to Rule 14a-5(e) under the Securities Exchange Act of
1934, if American Pacific Bank is required to hold a 2005 Annual Meeting, it
intends to publish the deadline for submitting shareholder proposals under
Rule 14a-8 as well as the deadline for proposals submitted outside of Rule
14a-8 in its quarterly report on Form 10-QSB.
LEGAL MATTERS
Certain legal matters will be passed on by Foster Pepper Tooze LLP,
Portland, Oregon for American Pacific Bank.
Certain legal matters for Riverview, including the validity of the shares
of Riverview common stock to be issued in connection with the merger will be
passed upon for Riverview by Breyer & Associates PC, McLean, Virginia.
In addition, Breyer & Associates PC will deliver an opinion concerning
federal income tax consequences of the merger.
EXPERTS
The financial statements of Riverview as of March 31, 2003 and 2002, and
for the years then ended, included and incorporated by reference in this
prospectus have been audited by Deloitte & Touch LLP, an independent
registered public accounting firm, as stated in their reports, which are
included and incorporated by reference herein, and have been so included and
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
Riverview's consolidated financial statements as of March 31, 2004 and
for the year ended March 31, 2004, included and incorporated y reference in
this proxy statement-prospectus have been audited by McGladrey & Pullen, LLP,
as stated in their report, which is included and incorporated by reference
herein, and have been so included and incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of American Pacific Bank as of December 31, 2004
and 2003 and for the two fiscal years ended December 31, 2004 have been
included in this proxy statement-prospectus in reliance upon the report of
Moss Adams LLP, independent certified public accountants, with respect to
those financial statements, and upon the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Riverview has filed with the Securities and Exchange Commission a
registration statement under the Securities Act that registers the
distribution to American Pacific Bank shareholders of the shares of Riverview
common stock to be issued in connection with the merger. The registration
statement, including the exhibits, contains additional relevant information
about Riverview and Riverview common stock. The rules and regulations of the
SEC allow Riverview to omit certain information included in the registration
statement from this proxy statement-prospectus.
Riverview files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that Riverview files at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. Please call the
SEC at 1-800-SEC-0330 for further information on the SEC's public reference
rooms. Riverview's public filings are also available to the public from
commercial document retrieval services and at the Internet website maintained
by the SEC at "www.sec.gov."
80
American Pacific Bank's common stock is registered under Section 12(g) of
the Securities Exchange Act of 1934. Accordingly, American Pacific Bank is
required to file periodic reports and other information with the Federal
Deposit Insurance Corporation pursuant to the Securities Exchange Act and the
rules thereunder. Copies of filings made by American Pacific Bank are
available from Marcia Fields at the FDIC, (202) 898-8913. Certain financial
information filed by American Pacific Bank with the FDIC is available
electronically on the FDIC's website at www.fdic.gov.
The SEC allows Riverview to "incorporate by reference" information into
this proxy statement-prospectus. This means that Riverview can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed
to be part of this document, except for any information superseded by
information contained directly in this document. This document incorporates
by reference the other documents that are listed below that Riverview has
previously filed with the SEC. These documents contain important information
about Riverview's financial condition.
Riverview SEC Filings (File No. 0-22957)
* Annual Report on Form 10-K for the year ended March 31, 2004
(accompanying this proxy statement-prospectus in Appendix E)
* Quarterly Reports on Form 10-Q for the quarters ended June 30,
2004, September 30, 2004 and December 31, 2004 (the latter
accompanying this proxy statement-prospectus in Appendix E)
* Current Report on Form 8-K filed on November 10, 2004
Documents incorporated by reference are available from Riverview without
charge (except for exhibits to the documents unless the exhibits are
specifically incorporated in this document by reference). You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone from Riverview at the following address:
Riverview Bancorp, Inc.
900 Washington Street, Suite 900
Vancouver, Washington 98660
Attention: Phyllis Kreibich, Corporate Secretary
Telephone No.: (360) 693-6650
If you would like to request documents from Riverview, please do so by
April 15, 2005 in order to receive them before the special meeting of
shareholders. If you request any incorporated documents, Riverview will mail
them to you by first-class mail, or other equally prompt means, within one
business day of its receipt of your request.
Riverview has supplied all information contained in this proxy
statement-prospectus relating to Riverview, and American Pacific Bank has
supplied all information relating to American Pacific Bank.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the meeting. We have not
authorized anyone to provide you with information that is different from what
is contained or incorporated by reference in this document. This document is
dated March 22, 2005. You should not assume that the information contained in
this document is accurate as of any date other than that date, and neither the
mailing of this document to shareholders nor the issuance of Riverview's
securities in the merger shall create any implication to the contrary.
81
APPENDIX A
AGREEMENT AND PLAN OF MERGER
dated as of November 9, 2004
by and among
RIVERVIEW BANCORP, INC.
and
RIVERVIEW COMMUNITY BANK
and
AMERICAN PACIFIC BANK
TABLE OF CONTENTS
Page
----
AGREEMENT AND PLAN OF MERGER .......................................... A-1
RECITALS .............................................................. A-1
AGREEMENT.............................................................. A-1
ARTICLE 1
DEFINITIONS
1.1 Definitions.................................................... A-1
ARTICLE 2
THE MERGER AND RELATED MATTERS
2.1 Merger......................................................... A-6
(a) Continuing Bank; Name..................................... A-6
(b) Articles of Incorporation and Bylaws;
Officers and Directors.................................. A-7
(c) Effects of the Merger..................................... A-7
(d) Transfer of Assets........................................ A-7
(e) Assumption of Liabilities................................. A-7
2.2 Effective Time................................................. A-7
2.3 Conversion of American Pacific Common Stock.................... A-7
2.4 Riverview Common Stock ........................................ A-8
2.5 Dissenting Shares.............................................. A-8
2.6 Fractional Shares.............................................. A-9
2.7 Anti-Dilution Provisions....................................... A-9
2.8 Options/Warrants............................................... A-9
2.9 Major Shareholder.............................................. A-9
2.10 Election and Exchange Procedures............................... A-9
2.11 Closing........................................................ A-13
2.12 Withholding Rights............................................. A-13
2.13 Reservation of Right to Revise Transaction..................... A-13
2.14 Additional Actions ............................................ A-13
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF RIVERVIEW AND RIVERVIEW COMMUNITY BANK
3.1 Organization and Corporate Authority of Riverview.............. A-14
3.2 Organization and Qualification of Riverview Community Bank..... A-14
3.3 Authorization, Execution and Delivery; Merger Agreement
Not in Breach................................................ A-14
3.4 No Legal Bar................................................... A-15
3.5 Government Approvals........................................... A-15
3.6 Compliance With Law............................................ A-15
3.7 Riverview Financial Statements................................. A-15
3.8 Absence of Certain Changes .................................... A-16
3.9 Capitalization of Riverview.................................... A-16
3.10 Capitalization of Riverview Community Bank..................... A-16
3.11 Litigation .................................................... A-16
3.12 Financial Ability.............................................. A-16
A-(i)
3.13 Statements True and Correct.................................... A-16
3.14 Disclosure..................................................... A-16
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF AMERICAN PACIFIC
4.1 Organization and Qualification of American Pacific............. A-17
4.2 Authorization, Execution and Delivery; Merger Agreement
Not in Breach................................................ A-17
4.3 No Legal Bar................................................... A-17
4.4 Government and Other Approvals................................. A-18
4.5 Compliance With Law............................................ A-18
4.6 Charter Documents.............................................. A-18
4.7 Financial Statements........................................... A-18
4.8 Absence of Certain Changes .................................... A-19
4.9 Deposits....................................................... A-20
4.10 Properties..................................................... A-20
4.11 American Pacific Subsidiaries.................................. A-20
4.12 Condition of Fixed Assets and Equipment........................ A-20
4.13 Tax Matters.................................................... A-20
4.14 Litigation..................................................... A-21
4.15 Hazardous Materials............................................ A-21
4.16 Insurance...................................................... A-23
4.17 Labor and Employment Matters................................... A-23
4.18 Records and Documents.......................................... A-24
4.19 Capitalization of American Pacific............................. A-24
4.20 Sole Agreement................................................. A-24
4.21 Disclosure..................................................... A-24
4.22 Absence of Undisclosed Liabilities............................. A-25
4.23 Allowance for Loan Losses...................................... A-25
4.24 Compliance with Laws........................................... A-25
4.25 Absence of Regulatory Actions.................................. A-25
4.26 Employee Benefit Plans......................................... A-26
4.27 Material Contracts............................................. A-30
4.28 Material Contract Defaults..................................... A-31
4.29 Reports........................................................ A-31
4.30 Statements True and Correct.................................... A-31
4.31 Brokers and Finders............................................ A-31
4.32 Derivatives Contracts; Structured Notes, Etc................... A-31
4.33 Loans.......................................................... A-32
4.34 Investment Securities.......................................... A-32
4.35 Credit Card Receivables........................................ A-32
4.36 Anti-takeover Provisions Inapplicable.......................... A-32
4.37 Expenses....................................................... A-32
ARTICLE 5
COVENANTS OF RIVERVIEW
5.1 Regulatory Approvals .......................................... A-32
5.2 Preparation of Registration Statement.......................... A-33
5.3 Registration Statement Effectiveness .......................... A-33
5.4 Employees and Employee Benefits................................ A-33
5.5 Reasonable Efforts to Close.................................... A-34
A-(ii)
5.6 Insurance. .................................................... A-34
5.7 Access......................................................... A-35
5.8 Conduct of Business............................................ A-35
5.9 Nasdaq......................................................... A-35
ARTICLE 6
COVENANTS OF AMERICAN PACIFIC
6.1 Shareholders' Meeting.......................................... A-35
6.2 Conduct of Business -- Affirmative Covenants................... A-35
6.3 Conduct of Business -- Negative Covenants...................... A-37
6.4 Conduct of Business -- Certain Actions......................... A-40
6.5 Accruals and Reserves.......................................... A-40
6.6 Access; Information............................................ A-40
6.7 Affiliate Agreements........................................... A-41
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to the Obligations of American Pacific.............. A-41
(a) Performance............................................... A-41
(b) Representations and Warranties............................ A-41
(c) Documents................................................. A-41
(d) Opinion of Riverview's and Riverview Community
Bank's Counsel.......................................... A-42
(e) No Material Adverse Change................................ A-42
7.2 Conditions to the Obligations of Riverview and Riverview
Community Bank............................................... A-42
(a) Performance............................................... A-43
(b) Representations and Warranties............................ A-43
(c) Documents................................................. A-43
(d) Destruction of Property................................... A-43
(e) Inspections Permitted..................................... A-43
(f) No Material Adverse Change................................ A-43
(g) Opinion of American Pacific's Counsel..................... A-44
(h) Other Business Combinations, Etc.......................... A-45
(i) Maintenance of Certain Covenants, Etc..................... A-45
(j) Dissenting Shares......................................... A-45
(k) Accruals and Reserves..................................... A-45
(l) Non-competition and Non-Solicitation Agreements........... A-45
(m) Receipt of Affiliate Agreements........................... A-45
(n) Major Shareholders and Directors.......................... A-45
(o) Agreements................................................ A-45
(p) Environmental Assessments................................. A-45
(q) Stock Option Agreements................................... A-46
7.3 Conditions to Obligations of All Parties....................... A-46
(a) No Pending or Threatened Claims........................... A-46
(b) Government Approvals and Acquiescence Obtained............ A-46
(c) Effective Registration Statement.......................... A-46
(d) Tax Opinion............................................... A-46
(e) Shareholder Vote.......................................... A-46
(f) Market Listing............................................ A-46
A-(iii)
ARTICLE 8
TERMINATION
8.1 Termination.................................................... A-46
8.2 Effect of Termination.......................................... A-48
8.3 Riverview Fee.................................................. A-48
ARTICLE 9
GENERAL PROVISIONS
9.1 Notices........................................................ A-49
9.2 Assignability and Parties in Interest.......................... A-50
9.3 Governing Law.................................................. A-50
9.4 Counterparts................................................... A-50
9.5 Publicity...................................................... A-50
9.6 Entire Agreement............................................... A-50
9.7 Severability................................................... A-51
9.8 Modifications, Amendments and Waivers.......................... A-51
9.9 Interpretation................................................. A-51
9.10 Payment of Expenses............................................ A-51
9.11 Equitable Remedies............................................. A-51
9.12 Attorneys' Fees................................................ A-52
9.13 No Waiver...................................................... A-52
9.14 Remedies Cumulative............................................ A-52
9.15 Non-Survival of Representations and Warranties................. A-52
Exhibit A Plan of Merger
Exhibit B Voting Agreement
Exhibit C Affiliate Agreement
Exhibit D Non-competition Agreement
Exhibit E Non-solicitation Agreement
Exhibit F Consulting Agreement
A-(iv)
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is made and
entered into this 9th day of November 2004, by and among RIVERVIEW BANCORP,
INC., a corporation chartered and existing under the laws of the State of
Washington ("Riverview"), RIVERVIEW COMMUNITY BANK, a federally chartered
stock savings bank ("Riverview Community Bank"), and AMERICAN PACIFIC BANK, a
commercial bank chartered and existing under the laws of the State of Oregon
("American Pacific").
RECITALS
A. Riverview, Riverview Community Bank and American Pacific, on the
terms and conditions hereinafter set forth, desire to effect an acquisition
transaction pursuant to which Riverview will acquire all of the shares of
American Pacific Common Stock (as hereinafter defined) outstanding immediately
prior to the Effective Time (as hereinafter defined) at a purchase price per
share equal to the amount set forth in Section 2.3 hereof.
B. To effect the acquisition, American Pacific shall be merged with and
into Riverview Community Bank (the "Merger") pursuant to the Plan of Merger
substantially in the form attached hereto as Exhibit A. Riverview Community
Bank will be the continuing financial institution (the "Continuing Bank").
C. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
D. Concurrently with the execution and delivery of this Merger
Agreement, and as an inducement to Riverview's willingness to enter into this
Merger Agreement, each member of the Board of Directors of American Pacific
and each Major Shareholder of American Pacific (as hereinafter defined) has
entered into a Voting Agreement with Riverview, in the form attached hereto as
Exhibit B, pursuant to which, among other things, each member of the Board of
Directors of American Pacific and each Major Shareholder of American Pacific
has agreed to vote in favor of approval of the Merger Agreement and
transactions contemplated by this Merger Agreement and to vote against
approval or adoption of any action or agreement (other than the Merger
Agreement or transactions contemplated by the Merger Agreement) that would
impede, interfere with, delay, postpone or attempt to discourage the Merger.
E. The respective Boards of Directors of Riverview, Riverview
Community Bank and American Pacific have duly approved this Merger Agreement
and have duly authorized its execution and delivery.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
representations, warranties, covenants and agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Parties (as hereinafter defined) agree as follows:
AGREEMENT
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Merger Agreement, the following
terms have the definitions indicated:
"Acquisition Proposal" shall have the meaning assigned to such term
in Section 6.4(a) of this Merger Agreement.
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"Affiliate" of a party means any person, partnership, corporation,
association or other legal entity directly or indirectly controlling,
controlled by or under common control, with that party.
"Aggregate Cash Consideration" shall have the meaning assigned to
such term in Section 2.3(a) of this Merger Agreement.
"Aggregate Stock Consideration" shall have the meaning assigned to
such term in Section 2.3(a) of this Merger Agreement.
"American Pacific Financial Statements" shall have the meaning
assigned to such term in Section 4.7(a) of this Merger Agreement.
"American Pacific Common Stock" has the meaning assigned to such
terms in Section 2.3(a) of this Merger Agreement.
"American Pacific Dissenting Shares" shall have the meaning assigned
to such term in Section 2.5 of this Merger Agreement.
"American Pacific Option" shall mean an option granted by American
Pacific under the American Pacific's Option Plan, as defined in Section 2.8 of
this Merger Agreement, to purchase shares of American Pacific Common Stock.
"American Pacific Option Plan" shall have the meaning assigned to
such term in Section 2.9 of this Merger Agreement.
"American Pacific Shareholders" shall mean the holders of the
American Pacific Common Stock.
"Applicable Environmental Laws" shall have the meaning assigned to
such term in Section 4.15(a) of this Merger Agreement.
"Balance Sheet Date" shall have the meaning assigned to such term in
Section 4.8 of this Merger Agreement.
"Bank Merger" shall, as described in Section 2.2 of this Merger
Agreement, mean the merger of American Pacific with and into Riverview
Community Bank, which shall survive the Bank Merger as the Continuing Bank.
"Cash Election Shares" shall have the meaning assigned to such term
in Section 2.10(a) of this Merger Agreement.
"CERCLA" shall have the meaning set forth in Section 4.15(a) of this
Merger Agreement.
"CERCLIS" shall have the meaning set forth in Section 4.15(c) of
this Merger Agreement.
"Closing" shall have the meaning assigned to such term in Section
2.11 of this Merger Agreement.
"Closing Date" shall have the meaning assigned to such term in
Section 2.11 of this Merger Agreement.
"Continuing Bank" shall have the meaning assigned to such term in
the Recitals of this Merger Agreement.
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"Continuing Employees" shall have the meaning assigned to such term
in Section 5.4(a) of this Merger Agreement.
"CRA" shall have the meaning assigned to such term in Section
4.24(c) of this Merger Agreement.
"Deposits" shall mean all deposits (including, but not limited to,
certificates of deposit, savings accounts, NOW accounts and checking accounts)
of American Pacific.
"Derivatives Contract" shall have the meaning assigned to such term
in Section 4.32 of this Merger Agreement.
"Dissenting Shareholder" shall mean an American Pacific Shareholder
who makes a demand for dissenters' rights pursuant to Section 2.5 of this
Merger Agreement.
"Effective Date of the Merger" shall mean that date on which the
Effective Time shall have occurred.
"Effective Time" shall have the meaning assigned in Section 2.2 of
this Merger Agreement.
"Election Deadline" shall have the meaning assigned in Section
2.10(b) of this Merger Agreement.
"Election Form" shall have the meaning assigned to such term in
Section 2.10.(a) of this Merger Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ESOP" shall have the meaning assigned to such term in Section
4.26(a) of this Merger Agreement.
"Exchange Agent" shall mean the independent agent selected by
Riverview to effect the exchange of certificates representing American Pacific
Common Stock described in Section 2.10 for the consideration described in
Section 2.3.
"Exchange Ratio" shall have the meaning assigned to such term in
Section 2.3(a) of this Merger Agreement.
"FDIC" means the Federal Deposit Insurance Corporation, or any
successor thereto.
"FRB" shall mean the Board of Governors of the Federal Reserve
System.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"Government Approvals" shall have the meaning assigned to such term
in Section 3.5 of this Merger Agreement.
"Hazardous Substances" shall have the meaning set forth in Section
4.15(a) of this Merger Agreement.
"Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended.
"Knowledge" means, as to a Party, the actual knowledge of the Chief
Executive Officer, President, Chief Financial Officer or any Senior or
Executive Vice President.
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"Loan Property" shall have the meaning assigned to such term in
Section 4.15(a) of this Merger Agreement.
"Major Shareholder" shall have the meaning assigned to such term in
Section 2.9 of this Merger Agreement.
"Material Adverse Change" or "Material Adverse Effect" shall mean,
when used in connection with American Pacific or Riverview or Riverview
Community Bank, any change, effect, event, occurrence or state of facts that
is, or would reasonably be expected to be, materially adverse to the business,
financial condition or results of operations of such Party and its
Subsidiaries taken as a whole, other than (i) any change, effect, event or
occurrence relating to the United States economy or financial or securities
markets in general, (ii) any change, effect, event or occurrence relating to
the banking and financial services industry to the extent not effecting such
Party to a materially greater extent than it affects other persons in the
banking and financial services industry, (iii) any change, effect, event or
occurrence relating to the announcement or performance of this Merger
Agreement and the transactions contemplated hereby, (iv) with respect to
American Pacific, any change, effect, event or occurrence resulting from any
action or omission taken with the prior written consent of Riverview, (v) any
change in banking, savings association or similar laws, rules or regulations
of general applicability or interpretations thereof by courts or governmental
authorities and (vi) any change in GAAP or regulatory accounting requirements
applicable to banks, savings associations or their holding companies
generally.
"Merger Agreement" means this Merger Agreement and all amendments,
exhibits and schedules annexed to, and incorporated by specific reference as a
part of, this Merger Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"No-Election Shares" shall have the meaning assigned in Section
2.10(a) of this Merger Agreement.
"Officer" shall have the meaning set forth in Section 4.8(k) of this
Merger Agreement.
"Option Conversion Amount" shall have the meaning assigned in
Section 2.8 of this Merger Agreement.
"Oregon Bank Act" shall mean the Oregon Revised Statues Chapter
706-716.
"Oregon Department" shall mean the Department of Consumer and
Business Services, acting by and through the Division of Finance and Corporate
Securities of the State of Oregon.
"Oregon Director" shall mean the Director of the Oregon Department.
"OTS" shall mean the Office of Thrift Supervision.
"Parties" shall mean American Pacific, Riverview and Riverview
Community Bank collectively; American Pacific on the one hand, or Riverview
and Riverview Community Bank on the other hand, may sometimes be referred to
as a "Party."
"Pension Plan" shall mean any employee pension benefit plan as such
term is defined in Section 3(2) of ERISA which is maintained by the referenced
Party.
"Per Share Cash Consideration" shall have the meaning assigned to
such term in Section 2.3(a) of this Merger Agreement.
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"Per Share Stock Consideration" shall have the meaning assigned to
such term in Section 2.3(a) of this Merger Agreement.
"Person" shall mean any natural person, fiduciary, corporation,
partnership, joint venture, association, business trust or any other entity of
any kind.
"Plan of Merger" shall mean the Plan of Merger substantially in the
form of Exhibit A hereto to be executed by authorized representatives of
American Pacific and Riverview Community Bank and filed with the OTS and the
Oregon Director providing for the Merger of American Pacific into Riverview
Community Bank as contemplated by Section 2.1 of this Merger Agreement.
"Property" shall have the meaning assigned to such term in Section
4.15(a) of this Merger Agreement.
"Proxy Statement/Prospectus" shall mean the proxy statement to be
used by American Pacific to solicit proxies with a view to securing the
approval of the American Pacific Shareholders of this Merger Agreement and the
Plan of Merger, which shall also serve as the prospectus for the shares of
Riverview Common Stock to be issued to the American Pacific Shareholders.
"Realty" means the real property of American Pacific owned or leased
by American Pacific or any Subsidiary of American Pacific.
"Records" means all available records, minutes of meetings of the
Board of Directors, committees and Shareholders of American Pacific, original
instruments and other documentation, pertaining to American Pacific, and
American Pacific's assets (including plans and specifications relating to the
Realty), and liabilities, the American Pacific Common Stock, the Deposits and
the loans, and all other business and financial records which are necessary or
customary for use in the conduct of American Pacific's business by American
Pacific on and after the Effective Time as it was conducted prior to the
Closing Date.
"Registration Statement" shall have the meaning assigned to such
term in Section 5.2 of this Merger Agreement.
"Regulatory Authorities" shall mean, collectively, the Department of
Justice, the FDIC, the SEC, the OTS, the Oregon Department or any other state
or federal governmental or quasi-governmental entity which has, or may
hereafter have, jurisdiction over any of the transactions described in this
Merger Agreement.
"Release" shall have the meaning assigned to such term in Section
4.15(b)(i) of this Merger Agreement.
"Riverview" shall mean Riverview Bancorp, Inc., a savings and loan
holding company having its principal place of business in Vancouver,
Washington, that is currently incorporated under the laws of the State of
Washington.
"Riverview Common Stock" shall mean the common stock, par value
$0.01 per share, of Riverview.
"Riverview Fee" shall have the meaning assigned to such term in
Section 8.3 of this Merger Agreement.
"Riverview Financial Statements" shall have the meaning assigned to
such term in Section 3.6 of this Merger Agreement.
"Riverview Option" shall mean an option to acquire shares of
Riverview Common Stock.
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"Riverview Stock Price" shall have the meaning assigned to such term
in Section 2.3 of this Merger Agreement.
"SEC" shall mean the Securities and Exchange Commission, or any
successor thereto.
"SEC Documents" shall mean all reports, proxy statements and
registration statements filed, or required to be filed, by a Party or any of
its Subsidiaries pursuant to the Securities Laws, whether filed, or required
to be filed, with the SEC, the OTS, the FDIC, or with any other Regulatory
Authority pursuant to the Securities Laws.
"Securities Laws" shall mean the Securities Act of 1933, as amended
("1933 Act"), the Securities Exchange Act of 1934, as amended ("1934 Act"),
the Investment Company Act of 1940, as amended, the Investment Advisers Act of
1940, as amended, the Trust Indenture Act of 1939, as amended, and the rules
and regulations of the SEC promulgated thereunder, as well as any similar
state securities laws and any similar rules and regulations promulgated by the
applicable federal bank Regulatory Authorities.
"Shareholders' Meeting" shall mean the special meeting of American
Pacific Shareholders to be held pursuant to Section 6.1 of this Merger
Agreement, including any adjournment or adjournments thereof.
"SLHCA" shall mean the Savings and Loan Holding Company Act.
"Starlite Property" shall mean the approximately 4.73 acres located
at 5270 S. Santiam Highway, Lebanon, Oregon 97355.
"Stock Election Shares" shall have meaning assigned to such term in
Section 2.10(a) of this Merger Agreement.
"Subsidiaries" shall mean all of those corporations, or other
entities of which the entity in question owns or controls 5% or more of the
outstanding voting equity securities either directly or through an unbroken
chain of entities as to each of which 5% or more of the outstanding equity
securities is owned directly or indirectly by its parent, and may sometimes be
referred to as a "Subsidiary."
"Transaction Value Per Share" shall have the meaning assigned to
such term in Section 2.3(b) of this Merger Agreement.
"Voting Agreement" shall mean the Voting Agreement substantially in
the form of Exhibit B hereto to be executed by each Major Shareholder and
director of American Pacific simultaneous with the execution and delivery of
this Merger Agreement.
ARTICLE 2
THE MERGER AND RELATED MATTERS
2.1 Merger. Subject to the terms and conditions of this Merger
Agreement, and pursuant to the provisions of the Oregon Bank Act, the Home
Owners Loan Act, as amended ("HOLA"), the Federal Deposit Insurance Act rules
and regulations promulgated thereunder, at the Effective Time (as hereinafter
defined):
(a) Continuing Bank; Name. American Pacific shall be merged
with and into Riverview Community Bank pursuant to the terms and conditions
set forth herein and pursuant to the Plan of Merger attached hereto as Exhibit
A. Upon consummation of the Merger, the separate existence of American
Pacific shall cease and Riverview Community Bank shall continue as the
Continuing Bank. The name of the Continuing Bank, shall by virtue of the
Merger remain "Riverview Community Bank."
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(b) Articles of Incorporation and Bylaws; Officers and
Directors. The Articles of Incorporation and Bylaws of Riverview, in effect
immediately prior to the Effective Time, shall become the Articles of
Incorporation and Bylaws of the Continuing Bank. The directors and officers
of Riverview Community Bank in office immediately prior to the Bank Merger
becoming effective shall be the directors and officers of the Continuing Bank,
who shall hold office until such time as their successors are elected and
qualified.
(c) Effects of the Merger. At the Effective Time, the
separate existence of American Pacific shall cease, and American Pacific shall
be merged with and into Riverview Community Bank which, as the Continuing
Bank, shall thereupon and thereafter possess all of the assets, rights,
privileges, appointments, powers, licenses, permits and franchises of the two
merged corporations, whether of a public or a private nature, and shall be
subject to all of the liabilities, restrictions, disabilities and duties of
both Riverview Community Bank and American Pacific.
(d) Transfer of Assets. All rights, assets, licenses,
permits, franchises and interests of Riverview Community Bank and American
Pacific in and to every type of property, whether real, personal, or mixed,
whether tangible or intangible, shall be deemed to be vested in Riverview
Community Bank as the Continuing Bank by virtue of the Merger becoming
effective and without any deed or other instrument or act of transfer
whatsoever.
(e) Assumption of Liabilities. The Continuing Bank shall
become and be liable for all debts, liabilities, obligations and contracts of
Riverview Community Bank as well as those of American Pacific, whether the
same shall be matured or unmatured; whether accrued, absolute, contingent or
otherwise; and whether or not reflected or reserved against in the balance
sheets, other financial statements, books of account or records of Riverview
Community Bank or American Pacific.
2.2 Effective Time. As soon as practicable after each of the
conditions set forth in Article 7 hereof have been satisfied or waived, the
Parties will file, or cause to be filed, with the OTS and the Oregon Director
such Articles of Merger as they may deem necessary or appropriate for the
Merger which Articles of Merger shall be in the form required by and executed
in accordance with the applicable provisions of the OTS and the Oregon Bank
Act. The Merger shall become effective at such time as may be specified in
such Articles of Merger (the "Effective Time").
2.3 Conversion of American Pacific Common Stock. At the Effective
Time:
(a) Subject to the other provisions in this Section 2.3, and
Sections 2.10(a),(d) and (e), each share of Class B common stock of American
Pacific, no par value per share ("American Pacific Common Stock"), issued and
outstanding immediately prior to the Effective Time (except for American
Pacific Dissenting Shares, as defined herein) shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into
the right to receive from Riverview, at the election of the holder thereof:
(i) The number of shares of Riverview Common Stock equal
to the quotient of: (a) the Transaction Value Per Share (as defined below)
divided by (b) the Riverview Stock Price (as defined below) (the "Per Share
Stock Consideration"). The "Aggregate Stock Consideration" shall equal
788,593 shares plus 0.2812 times the number of shares of American Pacific
Common Stock issued after the date hereof upon exercise of any outstanding
American Pacific Option prior to the Effective Date; or
(ii) A cash amount (rounded to the nearest 0.01) equal to
the Transaction Value Per Share (as defined below) (the "Per Share Cash
Consideration"). The "Aggregate Cash Consideration" shall be $16,758,000 plus
$5.975 for any share of American Pacific Common Stock issued after the date
hereof upon exercise of an outstanding American Pacific Option prior to the
Effective Date.
(b) The "Transaction Value Per Share" shall equal the quotient
of: (a) the sum of (I) the Aggregate Cash Consideration plus (ii) the product
of the Aggregate Stock Consideration multiplied by the
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Riverview Stock Price (as defined below) divided by (b) the number of shares
of American Pacific Common Stock outstanding at the Effective Time.
(c) The "Riverview Stock Price" shall equal the average of the
closing sales price per share of Riverview Common Stock, as quoted on the
Nasdaq National Market, for the 20-day trading period ending on the business
day which is ten (10) trading days prior to the Effective Time. The closing
sales price during the 20-day trading period shall be subject to appropriate
adjustments in the event that Riverview Common Stock shall have been
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities through reorganization, reclassification, stock
dividend, stock split, reverse stock split or other like changes in
Riverview's capitalization.
(d) Notwithstanding any other provision of this Merger
Agreement, any shares of American Pacific Common Stock issued and outstanding
immediately prior to the Effective Time which are then owned beneficially or
of record by Riverview or American Pacific or by any direct or indirect
Subsidiary of either of them or are held in the treasury of American Pacific
shall, by virtue of the Merger, be canceled without payment of any
consideration therefor and without any conversion thereof.
(e) The holders of certificates representing shares of
American Pacific Common Stock shall cease to have any rights as stockholders
of American Pacific, except such rights, if any, as they may have pursuant to
the Oregon Bank Act. Each outstanding certificate which prior to the
Effective Time represented American Pacific Common Stock and that is not
surrendered to the Exchange Agent in accordance with the procedures provided
for in this Merger Agreement shall, except as otherwise herein provided, until
duly surrendered to the Exchange Agent be deemed to evidence ownership of the
number of shares of Riverview Common Stock or the right to receive the amount
of cash into which such American Pacific Common Stock shall have been
converted.
(f) The stock transfer books of American Pacific shall be
closed and no transfer of shares of American Pacific Common Stock shall be
made thereafter.
2.4 Riverview Common Stock. At the Effective Time, the shares of
Riverview Common Stock issued and outstanding immediately prior to the
Effective Time shall, on and after the Effective Time, remain issued and
outstanding as shares of Riverview Common Stock.
2.5 Dissenting Shares. Any shares of American Pacific Common Stock
held by a holder who dissents from the Merger in accordance with the Oregon
Bank Act and becomes entitled to obtain payment for the fair value of such
shares of American Pacific Common Stock pursuant to the applicable provisions
of the Oregon Bank Act shall be herein called "American Pacific Dissenting
Shares." Each outstanding share of American Pacific Common Stock the holder
of which has perfected his right to dissent under the Oregon Bank Act and has
not effectively withdrawn or lost such right as of the Effective Time shall
not be converted into or represent a right to receive shares of Riverview
Common Stock or cash hereunder, and the holder thereof shall be entitled only
to such rights as are granted under Oregon Revised Statutes Section 711.175,
711.180 and 711.185. American Pacific shall give Riverview prompt notice upon
receipt by American Pacific of any such written demands for payment of the
fair value of such shares of American Pacific Common Stock and of withdrawals
of such demands and any other instruments provided pursuant to the Oregon Bank
Act (any shareholder duly making such demand being hereinafter called a
"Dissenting Shareholder"). Any payments made in respect of American Pacific
Dissenting Shares shall be made by Riverview. If any Dissenting Shareholder
shall effectively withdraw or lose (through failure to perfect or otherwise)
his right to such payment at or prior to the Election Deadline, such holder's
shares of American Pacific Common Stock shall be converted into a right to
receive cash or Riverview Common Stock in accordance with the applicable
provisions of this Merger Agreement. If such holder shall effectively withdraw
or lose (through failure to perfect or otherwise) his right to such payment
after the Election Deadline, each share of American Pacific Common Stock of
such holder shall be converted on a share by share basis into the right to
receive cash.
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2.6 Fractional Shares. Notwithstanding any other provision hereof,
no fractional shares of Riverview Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Merger; instead, Riverview shall pay to each American Pacific Shareholder who
would otherwise be entitled to a fractional share an amount in cash determined
by multiplying such fraction by the Riverview Stock Price.
2.7 Anti-Dilution Provisions. In the event Riverview changes the
number of shares of Riverview Common Stock issued and outstanding prior to the
Effective Time as a result of a stock split, stock dividend or
recapitalization with respect to the outstanding Riverview Common Stock and
the record date therefor shall be prior to the Effective Date of the Merger,
the Per Share Stock Consideration shall be proportionately adjusted.
2.8 Options/Warrants.
(a) Options to acquire 126,500 shares of American Pacific
Common Stock (each an "American Pacific Option") have been granted and remain
outstanding pursuant to the American Pacific 2002 Stock Option Plan (the
"American Pacific Option Plan") and no warrants to acquire shares of American
Pacific Common Stock are outstanding. At the Effective Time of the Merger,
each American Pacific Option that is then outstanding and unexercised whether
or not then vested, shall be canceled and in lieu thereof the holders of such
options shall be paid in cash an amount equal to the positive difference by
which the Transaction Value Per Share exceeds the exercise price per share of
such option, net of any cash which must be withheld under federal and state
income and employment tax requirements. The number of shares of American
Pacific Common Stock which are issuable upon exercise of American Pacific
Options and the exercise price of such options as of the date hereof is set
forth on Schedule 2.8. At the Effective Time, the American Pacific Option
Plan shall be terminated.
(b) Prior to the Effective Time, American Pacific shall take
all necessary actions to effect the foregoing Section 2.8(a), including (1)
using its commercially reasonable efforts to obtain prior to ten business days
after the Proxy Statement/Prospectus is mailed to American Pacific
shareholders, a written consent in form and substance satisfactory to
Riverview, in its reasonable discretion, from each American Pacific Option
holder, including consent to the terms of Section 2.8(a) (each, an "Option
Consent "), including employees of American Pacific and each of the directors
on American Pacific's Board of Directors, in each case, in their individual
capacities, and (2) obtaining resolutions of American Pacific's Board of
Directors or of a duly authorized committee there of, as applicable, in form
and substance satisfactory to Riverview, in its reasonable discretion, to
effect the foregoing Section 2.8(a)
2.9 Major Shareholder. As used in this Merger Agreement, the term
"Major Shareholder"shall mean any person who to the knowledge of American
Pacific as of the date hereof owns or controls more than five percent (5%) of
the issued and outstanding shares of American Pacific Common Stock.
Simultaneous with the execution and delivery of this Merger Agreement, each
Major Shareholder and director of American Pacific will execute and deliver to
Riverview a Voting Agreement in the form attached hereto as Exhibit B.
2.10 Election and Exchange Procedures
(a) The parties shall designate an exchange agent to act as
agent (the "Exchange Agent") for purposes of conducting the election procedure
and the exchange procedure as described in this Section 2.10. An election
form ("Election Form") and other appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of
loss and title to the American Pacific Common Stock shall pass, only upon
proper delivery of such American Pacific Common Stock to the Exchange Agent),
in such form as American Pacific and Riverview shall mutually agree, shall be
mailed no more than 40 business days and no less than 20 business days prior
to the anticipated Effective Time or on such earlier date as Riverview and
American Pacific shall mutually agree to each holder of record of American
Pacific common stock as of five business days prior to the Mailing Date. Each
Election Form shall permit the holder (or in the case of nominee record
holders, the beneficial owner through proper instructions and documentation)
(i) to elect to receive Riverview Common Stock with respect to all of such
holder's American Pacific Common Stock as hereinabove provided (the "Stock
Election Shares"), (ii) to elect to receive cash with respect to all of such
holder's American Pacific Common Stock as hereinabove provided (the "Cash
Election Shares"), or (iii) to
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indicate that such holder makes no such election with respect to such holder's
shares of American Pacific Common Stock (the "No-Election Shares"). In no
event will any American Pacific Shareholder, including such shareholder's
Affiliates, receive shares of Riverview Common Stock, in the Merger, in
excess of 4.9% of the of the shares of Riverview Common Stock outstanding
following the Effective Date. Nominee record holders who hold American
Pacific Common Stock on behalf of multiple beneficial owners shall indicate
how many of the shares held by them are Stock Election Shares, Cash Election
Shares and No-Election Shares. Any shares of American Pacific Common Stock
with respect to which the holder thereof shall not, as of the Election
Deadline (as hereinafter defined), have made such an election by submission to
the Exchange Agent of an effective, properly completed Election Form shall be
deemed to be No-Election Shares. Any American Pacific Dissenting Shares shall
be deemed to be Cash Election Shares, and with respect to such shares the
holders thereof shall in no event be classified as Reallocated Stock Shares
(as hereinafter defined). No later than seven (7) business days following the
Effective Time, Riverview shall cause the Exchange Agent to mail or make
available to each holder of record of a certificate or certificates which
immediately prior to the Effective Time represented issued and outstanding
shares of American Pacific Common Stock a notice and letter of transmittal
(which shall specify that delivery shall be effected and risk of loss and
title to the certificates theretofore representing shares of American Pacific
Common Stock shall pass only upon proper delivery of such certificates to the
Exchange Agent) advising such holder of the anticipated effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent such
certificate or certificates which immediately prior to the Effective Time
represented issued and outstanding shares of American Pacific Common Stock in
exchange for the consideration set forth in Section 2.3 hereof deliverable in
respect thereof pursuant to this Merger Agreement.
(b) The term "Election Deadline" shall mean 5:00 p.m., Eastern
Time, on the 20th business day following but not including the date of mailing
of the Election Form or such other date as Riverview and American Pacific
shall mutually agree upon.
(c) Any election to receive Riverview Common Stock or cash
shall have been properly made only if the Exchange Agent shall have actually
received a properly completed Election Form by the Election Deadline. An
Election Form will be properly completed only if accompanied by certificates
representing all shares of American Pacific Common Stock covered thereby (or
an appropriate affidavit of loss and indemnity agreement and for bond as may
be required by the Exchange Agent), subject to the provisions of subsection
(h) below of this Section 2.10. Any Election Form may be revoked or changed by
the person submitting such Election Form to the Exchange Agent by written
notice to the Exchange Agent only if such notice is actually received by the
Exchange Agent at or prior to the Election Deadline. The certificate or
certificates representing American Pacific Common Stock relating to any
revoked Election Form shall be promptly returned without charge to the person
submitting the Election Form to the Exchange Agent. The Exchange Agent shall
have reasonable discretion to determine when any election, modification or
revocation is received and whether any such election, modification or
revocation has been properly made.
(d) Within ten (10) business days after the Election Deadline,
the Exchange Agent shall effect the allocation among American Pacific
Shareholders of rights to receive Riverview Common Stock or cash in the Merger
in accordance with the Election Forms, subject to the limitations set forth in
Section 2.10(a), as follows:
(i) If the product of the number of Cash Election
Shares multiplied by the Per Share Cash Consideration is less than the
Aggregate Cash Consideration, then:
(A) all Cash Election Shares (subject to Section 2.5
with respect to American Pacific Dissenting Shares) shall be
converted into the right to receive cash,
(B) No-Election Shares shall then be deemed to be
Cash Election Shares to the extent necessary to have the total
number of Cash Election Shares times the Per Share Cash Consider-
ation equal the Aggregate Cash Consideration. If less than all of
the No-Election Shares need to be treated as Cash Election Shares,
then the Exchange Agent shall select which No-Election Shares shall
be treated as Cash Election Shares in such manner as the Exchange
Agent shall determine, and all remaining No-Election Shares shall
thereafter be treated as Stock Election Shares,
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(C) If all of the No-Election Shares are treated as
Cash Election Shares under the preceding subsection and the product
of the total number of Cash Election Shares multiplied by the Per
Share Cash Consideration is less than the Aggregate Cash Consider-
ation, then the Exchange Agent shall convert on a pro rata basis as
described below a sufficient number of Stock Election Shares into
Cash Election Shares ("Reallocated Cash Shares") such that the sum
of the number of Cash Election Shares plus the number of Reallocated
Cash Shares times the Per Share Cash Consideration equals the
Aggregate Cash Consideration, and all Reallocated Cash Shares will
be converted into the right to receive cash, and
(D) the Stock Election Shares which are not
Reallocated Cash Shares shall be converted into the right to receive
Riverview Common Stock.
(ii) If the product of the number of Cash Election Shares
multiplied by the Per Share Cash Consideration is greater than the
Aggregate Cash Consideration, then:
(A) all Stock Election Shares and all No-Election
Shares shall be converted into the right to receive Riverview Common
Stock,
(B) the Exchange Agent shall convert on a pro rata
basis as described below a sufficient number of Cash Election Shares
(excluding any American Pacific Dissenting Shares)("Reallocated
Stock Shares") such that the number of remaining Cash Election
Shares (including American Pacific Dissenting Shares) times the Per
Share Cash Consideration equals the Aggregate Cash Consideration,
and all Reallocated Stock Shares shall be converted into the right
to receive Riverview Common Stock, and
(C) the Cash Election Shares (subject to Section 2.5
with respect to American Pacific Dissenting Shares) which are not
Reallocated Stock Shares shall be converted into the right to
receive cash.
(iii) If the product of the number of Cash Election
Shares multiplied by the Per Share Cash Consideration is equal to the
Aggregate Cash Consideration, then subparagraphs (d)(i) and (ii)above
shall not apply and all No-Election Shares and all Stock Election Shares
will be converted into the right to receive Riverview Common Stock.
(e) In the event that the Exchange Agent is required pursuant
to Section 2.10(d)(i)(3) to convert some Stock Election Shares into
Reallocated Cash Shares, each holder of Stock Election Shares shall be
allocated a pro rata portion of the total Reallocated Cash Shares. In the
event the Exchange Agent is required pursuant to Section 2.10(d)(ii)(2) to
convert some Cash Election Shares into Reallocated Stock Shares, each holder
of Cash Election Shares shall be allocated a pro rata portion of the total
Reallocated Stock Shares, subject to the restrictions included in Section
2.10(a).
(f) At the Effective Time, Riverview shall deliver to the
Exchange Agent the number of shares of Riverview Common Stock issuable and the
amount of cash payable in the Merger (which shall be held by the Exchange
Agent in trust for the holders of American Pacific Common Stock and invested
only in deposit accounts of an FDIC-insured institution, direct obligations of
the U.S. Government or obligations issued or guaranteed by an agency thereof
which carry the full faith and credit of the United States). No later than ten
(10) business days after the receipt of a properly completed letter of
transmittal and other required documents after the Effective Date, the
Exchange Agent shall distribute Riverview Common Stock and cash as provided
herein. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the shares of Riverview Common Stock held
by it from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect to such
shares for the account of the persons entitled thereto.
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(g) After the completion of the foregoing allocation, each
holder of an outstanding certificate or certificates which prior thereto
represented shares of American Pacific Common Stock who surrenders such
certificate or certificates to the Exchange Agent will, upon acceptance
thereof by the Exchange Agent, be entitled to a certificate or certificates
representing the number of full shares of Riverview Common Stock and/or the
amount of cash into which the aggregate number of shares of American Pacific
Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to this Merger Agreement and,
if such holder's shares of American Pacific Common Stock have been converted
into Riverview Common Stock, any other distribution theretofore paid with
respect to Riverview Common Stock issuable in the Merger, in each case without
interest. The Exchange Agent shall accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange
practices. Each outstanding certificate which prior to the Effective Time
represented American Pacific Common Stock and which is not surrendered to the
Exchange Agent in accordance with the procedures provided for herein shall,
except as otherwise herein provided, until duly surrendered to the Exchange
Agent be deemed to evidence ownership of the number of shares of Riverview
Common Stock or the right to receive the amount of cash into which such
American Pacific Common Stock shall have been converted. After the Effective
Time, there shall be no further transfer on the records of American Pacific of
certificates representing shares of American Pacific Common Stock and if such
certificates are presented to American Pacific for transfer, they shall be
cancelled against delivery of certificates for Riverview Common Stock or cash
as hereinabove provided. No dividends which have been declared will be
remitted to any person entitled to receive shares of Riverview Common Stock
under this Section 2.10 until such person surrenders the certificate or
certificates representing American Pacific Common Stock, at which time such
dividends shall be remitted to such person, without interest.
(h) Riverview shall not be obligated to deliver cash and/or a
certificate or certificates representing shares of Riverview Common Stock to
which an American Pacific Shareholder would otherwise be entitled as a result
of the Merger until such holder surrenders the certificate or certificates
representing the shares of American Pacific Common Stock for exchange as
provided in this Section 2.10, or, in default thereof, an appropriate
affidavit of loss and indemnity agreement and/or a bond as may be required by
the Exchange Agent. If any certificates evidencing shares of Riverview Common
Stock are to be issued in a name other than that in which the certificate
evidencing American Pacific Common Stock surrendered in exchange therefor is
registered, it shall be a condition of the issuance thereof that the
certificate so surrendered shall be properly endorsed or accompanied by an
executed form of assignment separate from the certificate and otherwise in
proper form for transfer and that the person requesting such exchange pay to
the Exchange Agent any transfer or other tax required by reason of the
issuance of a certificate for shares of Riverview Common Stock in any name
other than that of the registered holder of the certificate surrendered or
otherwise establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not payable.
(i) Any portion of the shares of Riverview Common Stock and
cash delivered to the Exchange Agent by Riverview pursuant to Section 2.10(f)
that remains unclaimed by the American Pacific Shareholders for six (6) months
after the Effective Time (as well as any proceeds from any investment thereof)
shall be delivered by the Exchange Agent to Riverview. Any American Pacific
Shareholders who have not theretofore complied with Section 2.10(g) shall
thereafter look only to Riverview for the consideration deliverable in respect
of each share of American Pacific Common Stock such shareholder holds as
determined pursuant to this Merger Agreement without any interest thereon. If
outstanding certificates for shares of American Pacific Common Stock are not
surrendered or the payment for them is not claimed prior to the date on which
such shares of Riverview Common Stock or cash would otherwise escheat to or
become the property of any governmental unit or agency, the unclaimed items
shall, to the extent permitted by abandoned property and any other applicable
law, become the property of Riverview (and to the extent not in its possession
shall be delivered to it), free and clear of all claims or interest of any
person previously entitled to such property. Neither the Exchange Agent nor
any party to this Merger Agreement shall be liable to any holder of stock
represented by any certificate for any consideration paid to a public official
pursuant to applicable abandoned property, escheat or similar laws. Riverview
and the Exchange Agent shall be entitled to rely upon the stock transfer books
of American Pacific to establish the identity of those persons entitled to
receive consideration specified in this Merger Agreement, which books shall be
conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any certificate, Riverview and the Exchange
Agent shall be entitled to deposit any consideration
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represented thereby in escrow with an independent third party and thereafter
be relieved with respect to any claims thereto.
2.11 Closing. Subject to the provisions of Article 7 hereof, the
closing of the transactions contemplated by this Merger Agreement (the
"Closing") shall take place as soon as practicable after satisfaction or
waiver of all of the conditions to Closing, and shall be on such date, time
and location as is mutually agreed to by Riverview and American Pacific. At
the Closing the Parties shall use their respective commercially reasonable
efforts to deliver the certificates, letters and opinions which constitute
conditions to effecting the Merger and each Party will provide the other
Parties with such proof or indication of satisfaction of the conditions to the
obligations of such other Parties to consummate the Merger as such other
Parties may reasonably require. If all conditions to the obligations of each
of the Parties shall have been satisfied or lawfully waived by the Party
entitled to the benefits thereof, the Parties shall, at the Closing, duly
execute the Plan of Merger for filing with the OTS and Oregon Director and
promptly thereafter shall take all steps necessary or desirable to consummate
the Merger in accordance with all applicable laws, rules and regulations and
the Plan of Merger which is attached hereto as Exhibit A and incorporated by
reference as part of this Merger Agreement. The Parties shall thereupon take
such other and further actions as may be required by law or this Merger
Agreement to consummate the transactions contemplated herein. The date on
which the Closing actually occurs is herein referred to as the "Closing Date."
2.12 Withholding Rights. Riverview (through the Exchange Agent, if
applicable) shall be entitled to deduct and withhold from any amounts
otherwise payable pursuant to this Merger Agreement to any American Pacific
Shareholder such amounts as Riverview is required under the Internal Revenue
Code or any provision of state, local or foreign tax law to deduct and
withhold with respect to the making of such payment. Any amounts so withheld
shall be treated for all purposes of this Merger Agreement as having been paid
to a American Pacific Shareholder in respect of which such deduction and
withholding was made by Riverview.
2.13 Reservation of Right to Revise Transaction. Riverview shall
have the unilateral right to revise the method of effecting either the Merger
in order to achieve tax benefits or for any other reason which Riverview may
deem advisable; provided, however, that Riverview shall not have the right,
without the prior written approval of the Board of Directors of American
Pacific, and, if required, the approval of the American Pacific Shareholders,
to make any revision to the structure of the Merger which changes the amount
or kind of the consideration which the American Pacific Shareholders are
entitled to receive (determined in the manner provided in Section 2.3 of this
Merger Agreement) or adversely affect the tax treatment of American Pacific
Shareholders. Riverview may exercise this right of revision by giving written
notice thereof to American Pacific in the manner provided in Section 9.1 of
this Merger Agreement.
2.14 Additional Actions. If at any time after the Effective Time
Riverview Community Bank shall consider that any further assignments or
assurances in law or any other acts are necessary or desirable to (i) vest,
perfect or confirm, of record or otherwise, in Riverview Community Bank its
rights, title or interest in, to or under any of the rights, properties or
assets of American Pacific acquired or to be acquired by Riverview Community
Bank as a result of, or in connection with, the Merger, or (ii) otherwise
carry out the purposes of this Merger Agreement, American Pacific and its
proper officers and directors shall be deemed to have granted to Riverview
Community Bank an irrevocable power of attorney to execute and deliver all
such proper deeds, assignments and assurances in law and to do all acts
necessary or proper to vest, perfect or confirm title to and possession of
such rights, properties or assets in Riverview Community Bank and otherwise to
carry out the purposes of this Merger Agreement; and the proper officers and
directors of Riverview Community Bank shall be fully authorized in the name of
American Pacific or otherwise to take any and all such action.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF RIVERVIEW AND RIVERVIEW COMMUNITY BANK
Each of Riverview and Riverview Community Bank hereby represents and
warrants to American Pacific as follows:
3.1 Organization and Corporate Authority of Riverview. Riverview
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Washington. Riverview is registered as a savings and
loan holding company with the OTS and engages only in activities permitted by
the HOLA and the rules and regulations promulgated by the OTS thereunder.
Riverview (i) has the requisite corporate power and authority to own, operate
and lease its material properties and carry on its businesses as they are
currently being conducted; (ii) is in good standing and is duly qualified to
do business in each jurisdiction where the character of its properties owned
or held under lease or the nature of its business makes such qualification
necessary and where the failure to so qualify would individually or in the
aggregate have a material adverse effect on the condition (financial or
otherwise), affairs, business, assets or prospects of Riverview and; (iii) has
in effect all federal, state, local and foreign governmental authorizations,
permits and licenses necessary for it to own or lease its properties and
assets and to carry on its businesses as they are currently being conducted.
The Articles of Incorporation and Bylaws of Riverview, as amended to date, are
in full force and effect as of the date of this Merger Agreement.
3.2 Organization and Qualification of Riverview Community Bank.
Riverview Community Bank is a federally-chartered stock savings bank, duly
organized, validly existing and in good standing under the laws of the United
States and engages only in activities (and holds properties only of the types)
permitted by the OTS and the FDIC and the rules and regulations promulgated
thereby for insured depository institutions. Riverview Community Bank (a) has
all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as it is currently being conducted and
(b) is in good standing and is duly qualified to do business in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its business makes such qualification necessary and where the
failure to so qualify would individually or in the aggregate have a material
adverse effect on the condition (financial or otherwise), affairs, business,
assets or prospects of Riverview Community Bank and all Riverview
Subsidiaries, taken as a whole. Riverview Community Bank's deposit accounts
are insured by the FDIC to the fullest extent permitted under applicable law.
3.3 Authorization, Execution and Delivery; Merger Agreement Not in
Breach.
(a) Riverview and Riverview Community Bank have all requisite
corporate power and authority to execute and deliver this Merger Agreement and
to consummate the transactions contemplated hereby. This Merger Agreement,
and all other agreements and instruments contemplated to be executed in
connection herewith by Riverview and Riverview Community Bank, have been (or
upon execution will have been) duly executed and delivered by Riverview and
Riverview Community Bank, have been (or upon execution will have been)
effectively authorized by all necessary action, corporate or otherwise, and no
other corporate proceedings on the part of Riverview and Riverview Community
Bank are (or will be) necessary to authorize such execution and delivery, and,
subject to receipt of any required Government Approvals, constitute (or upon
execution will constitute) legal, valid and enforceable obligations of
Riverview and Riverview Community Bank, subject, as to enforceability, to
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally, and to the
application of equitable principles and judicial discretion.
(b) The execution and delivery of this Merger Agreement, the
consummation of the transactions contemplated hereby and the fulfillment of
the terms hereof will not result in a breach of any of the terms or provisions
of, or constitute a default under (or an event which, with the passage of time
or the giving of notice or both, would constitute a default under), or
conflict with, or permit the acceleration of any obligation under, (i) any
material mortgage, lease, covenant, agreement, indenture or other instrument
to which Riverview and Riverview Community Bank are a party or by which
Riverview or Riverview Community Bank or their respective properties or
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any of their respective assets are bound, (ii) the Articles of Incorporation
or Bylaws of Riverview and Riverview Community Bank, (iii) any material
judgment, decree, order or award of any court, governmental body or arbitrator
by which Riverview and Riverview Community Bank are bound, or (iv) any
material permit, concession, grant, franchise, license, law, statute,
ordinance, rule or regulation applicable to Riverview and Riverview Community
Bank or their respective properties; or result in the creation of any lien,
claim, security interest, encumbrance, charge, restriction or right of any
third party of any kind whatsoever upon the property or assets of Riverview
and Riverview Community Bank, except that the Government Approvals shall be
required in order for Riverview and Riverview Community Bank to consummate the
Merger.
3.4 No Legal Bar. Neither Riverview nor Riverview Community Bank
is a party to, subject to or bound by any agreement, judgment, order, writ,
prohibition, injunction or decree of any court or other governmental body of
competent jurisdiction which would prevent the execution of this Merger
Agreement by Riverview or Riverview Community Bank, its delivery to American
Pacific or (upon receipt of Governmental Approvals) the consummation of the
transactions contemplated hereby, and no action or proceeding is pending or
threatened against Riverview or Riverview Community Bank in which the validity
of this Merger Agreement, any of the transactions contemplated hereby or any
action which has been taken by any of the Parties in connection herewith or in
connection with any of the transactions contemplated hereby is at issue.
3.5 Government Approvals. No consent, approval, order or
authorization of, or registration, declaration or filing with, any federal,
state or local governmental authority is required to be made or obtained by
Riverview or Riverview Community Bank in connection with the execution and
delivery of this Merger Agreement or the consummation of the transactions
contemplated hereby by Riverview or Riverview Community Bank, except for the
prior approval of the FDIC, the OTS, the Oregon Department, the SEC and such
other agencies as may have jurisdiction (collectively, the "Government
Approvals"). Riverview and Riverview Community Bank are not aware of any
facts, circumstances or reasons why such Government Approvals should not be
forthcoming or which would prevent or hinder such approvals from being
obtained.
3.6 Compliance With Law. Riverview and Riverview Community Bank
hold all material licenses, franchises, permits and authorizations necessary
for them to own or lease their properties and assets and for the lawful
conduct of its businesses, as they are presently conducted, and Riverview and
Riverview Community Bank have complied in all material respects with all
applicable statutes, laws, ordinances, rules and regulations of all federal,
state and local governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over Riverview and Riverview Community
Bank's properties or over any other part of Riverview or Riverview Community
Bank's assets, liabilities or operations. The benefits of all of such
licenses, franchises, permits and authorizations are in full force and effect
and, to the best knowledge of Riverview and Riverview Community Bank, may
continue to be enjoyed by Riverview and Riverview Community Bank subsequent to
the Closing without any consent or approval. Riverview or Riverview Community
Bank have not received notice of any proceeding for the suspension or
revocation of any such license, franchise, permit, or authorization and no
such proceeding is pending or has been threatened by any governmental
authority.
3.7 Riverview Financial Statements. The consolidated balance
sheets of Riverview as of March 31, 2004 and 2003, and the related
consolidated statements of income and changes in stockholders' equity and cash
flows of Riverview for the years ended March 31, 2004, 2003 and 2002 which
were included in Riverview's Annual Report on Form 10-K for the fiscal year
ended March 31, 2004 as filed with the SEC and the comparative interim
financial statements for any subsequent quarter ending after March 31, 2004
and prior to the date hereof included in Riverview's Quarterly Reports on Form
10-Q as filed with the SEC (collectively, the "Riverview Financial
Statements") (i) were prepared from the books and records of Riverview, which
are complete and accurate in all material respects and have been maintained in
accordance with good business practices; (ii) were prepared in accordance with
GAAP and comply in all material respects with applicable accounting
requirements and published rules and regulations of the SEC; (iii) accurately
present Riverview's consolidated financial condition and the consolidated
results of its operations, changes in stockholders' equity and cash flows as
stated including any amendments thereto at the relevant dates thereof and for
the periods covered thereby (subject, in the case of financial statements for
interim periods, to normal recurring
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adjustments); and (iv) do contain or reflect all necessary adjustments and
accruals for an accurate presentation of Riverview's consolidated financial
condition and the consolidated results of Riverview's operations and cash
flows for the periods covered by the Riverview Financial Statements.
3.8 Absence of Certain Changes. Since March 31, 2004 there has not
been any material adverse change in the financial condition or results of
operations of Riverview, Riverview Community Bank and their respective
subsidiaries taken as a whole.
3.9 Capitalization of Riverview. The authorized capital stock of
Riverview consists of 50,000,000 shares of Riverview Common Stock and 250,000
shares of preferred stock having a par value of $0.01 per share. As of the
close of business on September 30, 2004, 4,997,300 shares of Riverview Common
Stock were issued and outstanding, no shares of Riverview Common Stock were
held by Riverview as treasury stock and no shares of the preferred stock were
issued and outstanding. As of the close of business on September 30, 2004,
options to acquire 237,948 shares of Riverview Common Stock were outstanding.
On the Effective Date, Riverview shall have sufficient authorized and unissued
shares of Riverview Common Stock to pay the Stock Consideration.
3.10 Capitalization of Riverview Community Bank. The authorized
capital stock of Riverview Community Bank consists of 4,000,000 shares of
common stock having a par value of $1.00 per share and 1,000,000 shares of
preferred stock. As of the date of this Merger Agreement, 1,000 shares of
Riverview Community Bank's common stock were issued and outstanding, no shares
of the common stock were held by Riverview Community Bank as treasury stock
and no shares of preferred stock were issued and outstanding. All of the
outstanding common stock of Riverview Community Bank is held beneficially and
of record by Riverview, free and clear of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever.
3.11 Litigation. Except as set forth in Schedule 3.11 hereto, there
is no action, suit or proceeding pending, or to the best knowledge of
Riverview and Riverview Community Bank, threatened against Riverview or
Riverview Community Bank before any court or arbitrator or any governmental
body, agency or official, including, but not limited to, any action suit or
proceeding that (i) has been brought by or on behalf of any person employed or
formerly employed by Riverview or Riverview Community Bank or (ii) purports or
seeks to enjoin or restrain the transactions contemplated by this Merger
Agreement. Except as set forth on Schedule 3.11, there are no actions, suits,
or proceedings pending or, to the best knowledge of Riverview and Riverview
Community Bank, threatened against any Officers or directors of Riverview or
Riverview Community Bank by any government body or agency or by any
stockholder of Riverview or Riverview Community Bank (or by any former
stockholder of Riverview or Riverview Community Bank) relating to or arising
out of such officer's or director's status with Riverview or Riverview
Community Bank.
3.12 Financial Ability. On the Effective Date, Riverview will have
all funds necessary to pay the Aggregate Cash Consideration to the holders of
American Pacific Common Stock.
3.13 Statements True and Correct. None of the information to be
supplied by Riverview for inclusion in the Proxy Statement/Prospectus, or any
amendment thereof or supplement thereto, will be, at the time such documents
are first mailed to the American Pacific Shareholders or at the time of the
Shareholder's Meeting, false or misleading with respect to any material fact,
or will omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.14 Disclosure. The information concerning, and the
representations or warranties made by Riverview and Riverview Community Bank
as set forth in this Merger Agreement, or in any document, statement,
certificate or other writing furnished or to be furnished by Riverview and
Riverview Community Bank to American Pacific pursuant hereto, do not and will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated herein or therein which is necessary to
make the statements and facts contained herein or therein, in light of the
circumstances under which they were or are made, not false or misleading.
Copies of all
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documents heretofore or hereafter delivered or made available to American
Pacific by Riverview and Riverview Community Bank pursuant hereto were
complete and accurate copies of such documents.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF AMERICAN PACIFIC
American Pacific hereby represents and warrants to Riverview and
Riverview Community Bank as follows:
4.1 Organization and Qualification of American Pacific. American
Pacific is an Oregon-chartered commercial bank, duly organized, validly
existing and in good standing under the laws of the State of Oregon and
engages only in activities (and holds properties only of the types) permitted
by Oregon law and the FDIC and the rules and regulations promulgated thereby
for insured depository institutions. American Pacific (a) has all requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as it is currently being conducted and (b) is in good
standing and is duly qualified to do business in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
business makes such qualification necessary and where the failure to so
qualify would individually or in the aggregate have a Material Adverse Effect
on American Pacific. American Pacific's deposit accounts are insured by the
FDIC to the fullest extent permitted under applicable law.
4.2 Authorization, Execution and Delivery; Merger Agreement Not in
Breach.
(a) American Pacific has all requisite corporate power and
authority to execute and deliver this Merger Agreement and the Plan of Merger
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Merger Agreement and the Plan of Merger and the
consummation of the proposed transaction has been duly authorized by the Board
of Directors of American Pacific and, except for the approval of the American
Pacific Shareholders, no other corporate proceedings on the part of American
Pacific is necessary to authorize the execution and delivery of this Merger
Agreement and the Plan of Merger and the consummation of the transactions
contemplated hereby and thereby. This Merger Agreement and all other
agreements and instruments herein contemplated to be executed and delivered by
American Pacific has been (or upon execution and delivery will have been) duly
executed and delivered by American Pacific and (subject to any requisite
shareholder approval and Government Approvals hereof) constitute (or upon
execution and delivery will constitute) legal, valid and enforceable
obligations of American Pacific, subject, as to enforceability, to applicable
bankruptcy, insolvency, receivership, conservatorship, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and to the application of equitable principles and judicial
discretion.
(b) Except as set forth on Schedule 4.2, the execution and
delivery of this Merger Agreement, the consummation of the transactions
contemplated hereby, and the fulfillment of the terms hereof and thereof will
not result in a violation or breach of any of the terms or provisions of, or
constitute a default under (or an event which, with the passage of time or the
giving of notice, or both, would constitute a default under), or conflict
with, or permit the acceleration of, any obligation under (i) any mortgage,
lease, covenant, agreement, indenture or other instrument to which American
Pacific is a party or by which American Pacific is bound, (ii) the Articles of
Incorporation or Bylaws of American Pacific, (iii) any judgment, decree,
order, regulatory letter of understanding or award of any court, governmental
body, authority or arbitrator or, (iv) (subject to the receipt of the
Government Approvals) any permit, concession, grant, franchise, license, law,
statute, ordinance, rule or regulation applicable to American Pacific or any
of its properties; or result in the creation of any lien, claim, security
interest, encumbrance, charge, restriction or right of any third party of any
kind whatsoever upon the properties or assets of American Pacific.
4.3 No Legal Bar. American Pacific is not a party to, or subject
to, or bound by, any agreement or judgment, order, letter of understanding,
writ, prohibition, injunction or decree of any court or other governmental
authority or body, or any law which would prevent the execution of this Merger
Agreement or the Plan of Merger by American Pacific, the delivery thereof to
Riverview and Riverview Community Bank, or (upon receipt of Government
Approvals) the consummation of the transactions contemplated hereby and
thereby, and no action or proceeding is
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pending against American Pacific in which the validity of this Merger
Agreement, the transactions contemplated hereby or any action which has been
taken by any of the Parties in connection herewith or in connection with the
transactions contemplated hereby is at issue.
4.4 Government and Other Approvals. Except for the Government
Approvals described in Section 3.5 and the approvals and consents listed on
Schedule 4.4 hereto, no consent, approval, order or authorization of, or
registration, declaration or filing with, any federal, state or local
governmental authority is required to be made or obtained by American Pacific
in connection with the execution and delivery of this Merger Agreement or the
consummation of the transactions contemplated by this Merger Agreement nor is
any consent or approval required from any landlord, licensor or other
non-governmental party which has granted rights to American Pacific in order
to avoid forfeiture or impairment of such rights. American Pacific is not
aware of any facts, circumstances or reasons why such Government Approvals
should not be forthcoming or which would prevent or hinder such approvals from
being obtained.
4.5 Compliance With Law. Except as set forth on Schedule 4.5,
American Pacific holds all material licenses, franchises, permits and
authorizations necessary for it to own or lease its properties and assets and
for the lawful conduct of its businesses, as they are presently conducted, and
American Pacific has complied in all material respects with all applicable
statutes, laws, ordinances, rules and regulations of all federal, state and
local governmental bodies, agencies and subdivisions having, asserting or
claiming jurisdiction over American Pacific's properties or over any other
part of American Pacific's assets, liabilities or operations. The benefits of
all of such licenses, franchises, permits and authorizations are in full force
and effect and, to the best knowledge of American Pacific, may continue to be
enjoyed by American Pacific subsequent to the Closing without any consent or
approval. American Pacific has not received notice of any proceeding for the
suspension or revocation of any such license, franchise, permit, or
authorization and no such proceeding is pending or has been threatened by any
governmental authority.
4.6 Charter Documents. Included in Schedule 4.6 hereto are true
and correct copies of the Articles of Incorporation and Bylaws of American
Pacific. The Articles of Incorporation and Bylaws of American Pacific, as
amended to date, are in full force and effect.
4.7 Financial Statements.
(a) Attached as Schedule 4.7(a) hereto are true copies of the
balance sheets of American Pacific as of December 31, 2003 and 2002 and as of
June 30, 2004, and the related statements of income and changes in
stockholders' equity and cash flows of American Pacific for the years ended
December 31, 2003, 2002 and 2001and the six months ended June 30, 2004 and
2003 ("American Pacific Financial Statements"). Such financial statements (i)
were prepared from the books and records of American Pacific, which are
complete and accurate in all material respects and have been maintained in
accordance with good business practices; (ii) were prepared in accordance with
GAAP (except interim statements do not include all schedules and footnotes
otherwise required by GAAP); (iii) accurately present American Pacific's
financial condition and the results of its operations, changes in
stockholders' equity and cash flows as stated including any amendments thereto
at the relevant dates thereof and for the periods covered thereby; and (iv) do
contain or reflect all necessary adjustments and accruals for an accurate
presentation of American Pacific's financial condition and the results of
American Pacific's operations and cash flows for the periods covered by the
American Pacific Financial Statements.
(b) American Pacific has delivered to Riverview (or will
deliver, when available, with respect to periods ended after the date of this
Merger Agreement) true, correct and complete copies of (i) all Call Reports,
including any amendments thereto, filed with any Regulatory Authorities by
American Pacific (ii) all reports, including any amendments thereto filed with
any Regulatory Authorities by American Pacific, each for any quarter ending
after December 31, 2003 and (iii) all other financial reports prepared by
American Pacific or an outside accounting firm concerning American Pacific's
financial condition, results of operations or other financial. Such reports
(i) were (or will be) prepared from the books and records of American Pacific,
which are complete and accurate in all
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material respects and have been maintained in accordance with good business
practices; (ii) were (or will be) prepared in accordance with regulatory or
GAAP, as applicable, consistently applied; (iii) accurately present (or, when
prepared, will present) American Pacific's consolidated financial condition
and the consolidated results of its operations and changes in stockholders'
equity at the relevant dates thereof and for the periods covered thereby; and
(iv) do contain or reflect (or, when prepared, will contain and reflect) all
necessary adjustments and accruals for an accurate presentation of American
Pacific's consolidated financial condition and the consolidated results of
American Pacific's operations for the periods covered thereby.
4.8 Absence of Certain Changes. Except as disclosed in Schedule
4.8 or as provided for or contemplated in this Merger Agreement, since
December 31, 2003 (the "Balance Sheet Date") there has not been:
(a) any material transaction by American Pacific not in the
ordinary course of business and in conformity with past practice;
(b) any Material Adverse Change in American Pacific;
(c) any damage, destruction or loss, whether or not covered by
insurance, which has had or may have a Material Adverse Effect on American
Pacific;
(d) any acquisition or disposition by American Pacific of any
property or asset of American Pacific, whether real or personal, having a fair
market value, singularly or in the aggregate, in an amount greater than Ten
Thousand Dollars ($10,000), except in the ordinary course of business and in
conformity with past practice;
(e) any mortgage, pledge or subjection to lien, charge or
encumbrance of any kind on any of the properties or assets of American
Pacific, except to secure extensions of credit in the ordinary course of
business and in conformity with past practice;
(f) any amendment, modification or termination of any contract
or agreement, relating to American Pacific, to which American Pacific is a
party which would have a Material Adverse Effect on American Pacific;
(g) any increase in, or commitment to increase, the
compensation payable or to become payable to any Officer, director, employee
or agent of American Pacific, or any bonus payment or similar arrangement made
to or with any of such Officers, directors, employees or agents, other than
routine increases made in the ordinary course of business not exceeding the
greater of five percent (5%) per annum or Three Thousand Dollars ($3,000) for
any of them individually;
(h) any incurring of, assumption of, or taking of, by American
Pacific, any property subject to, any liability, except for liabilities
incurred or assumed or property taken subsequent to the Balance Sheet Date in
the ordinary course of business and in conformity with past practice;
(i) any material alteration in the manner of keeping the
books, accounts or Records of American Pacific, or in the accounting policies
or practices therein reflected;
(j) any release or discharge of any material obligation or
liability of any person or entity related to or arising out of any loan made
by American Pacific of any nature whatsoever, except in the ordinary course of
business and in conformity with past practice; or
(k) any loan by American Pacific to any Officer or director of
American Pacific or any Affiliate of American Pacific or Major Shareholder; or
to any member of the immediate family of such Officer, director or Major
Shareholder of American Pacific or any Affiliate of American Pacific; or to
any Person in which such Officer,
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director or Major Shareholder directly or indirectly owns beneficially or of
record ten percent (10%) or more of any class of equity securities in the case
of a corporation, or of any equity interest, in the case of a partnership or
other non-corporate entity; or to any trust or estate in which such Officer,
director or Major Shareholder has a ten percent (10%) or more beneficial
interest; or as to which such Officer, director or Major Shareholder serves as
a trustee or in a similar capacity. As used herein, "Officer" shall refer to
a person who holds the title of chairman, president, executive vice president,
senior vice president, controller, chief financial officer, secretary, cashier
or chief financial officer.
4.9 Deposits. Schedule 4.9 contains a list of each individual
deposit of American Pacific that is $90,000 and greater as of September 30,
2004 including the customer name and deposit balance and except as set forth
in Schedule 4.9, no portion of the Deposits represents a Deposit in excess of
Fifty Thousand Dollars ($50,000) by any, officer, director, Affiliate or
Major Shareholder of American Pacific.
4.10 Properties. Except as described in Schedule 4.10 hereto or
adequately reserved against in the American Pacific Financial Statements,
American Pacific has good and marketable title free and clear of all material
liens, encumbrances, charges, defaults, or equities of whatever character to
all of its properties and assets, tangible or intangible, other than as
reflected in the American Pacific Financial Statements. All buildings, and
all fixtures, equipment, and other property and assets that are material to
the business of American Pacific, taken as a whole, held under leases or
subleases by American Pacific, are held under valid instruments enforceable in
accordance with their respective terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other laws affecting the enforcement of creditors' rights generally, and
except that the availability of the equitable remedy of specific performance
or injunctive relief is subject to the discretion of the court before which
any proceedings may be pending).
4.11 American Pacific Subsidiaries. There is not, nor has there
been since American Pacific's organization, any direct or indirect subsidiary
of American Pacific. Except as set forth on Schedule 4.11, neither American
Pacific nor any American Pacific subsidiary holds any interest in a
partnership or joint venture of any kind.
4.12 Condition of Fixed Assets and Equipment. Except as disclosed
in Schedule 4.12 hereto, all of American Pacific's buildings, structures and
equipment in regular use are in good and serviceable condition, normal wear
and tear excepted. To the best knowledge of American Pacific, none of the
buildings, structures and equipment of American Pacific violates or fails to
comply in any material respect with any applicable health, fire,
environmental, safety, zoning or building laws or ordinances or any
restrictive covenant pertaining thereto.
4.13 Tax Matters. Except as described in Schedule 4.13 hereto:
(a) All federal, state, local, and foreign tax returns and
information returns required to be filed by or on behalf of American Pacific
have been timely filed or requests for extensions have been timely filed,
granted, and have not expired for periods ended on or before the date of this
Merger Agreement, and all returns filed are, and the information contained
therein is, complete and accurate in all material respects. All tax
obligations reflected in such returns have been paid or adequately provided
for. As of the date of this Merger Agreement, there is no audit examination,
deficiency, or refund litigation or matter in controversy with respect to any
taxes that might result in a determination materially adverse to American
Pacific except as fully reserved for in the American Pacific Financial
Statements. All taxes, interest, additions, and penalties due with respect to
completed and settled examinations or concluded tax litigation have been paid.
(b) American Pacific has not executed an extension or waiver
of any statute of limitations on the assessment or collection of any tax due
that is currently in effect.
(c) Adequate provision for any federal, state, local, or
foreign taxes due or to become due for American Pacific for all periods
through and including December 31, 2003, has been made and is reflected on the
December 31, 2003 consolidated financial statements included in the American
Pacific Financial Statements and has been and will continue to be made with
respect to periods ending after December 31, 2003 and subsequent periods.
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(d) Deferred taxes of American Pacific have been and will be
provided for in accordance with GAAP.
(e) To the best knowledge of American Pacific, neither the
Internal Revenue Service nor any foreign, state, local or other taxing
authority is now asserting or threatening to assert against American Pacific
any deficiency or claim for additional taxes, or interest thereon or penalties
in connection therewith. All income, payroll, withholding, property, excise,
sales, use, franchise and transfer taxes, and all other taxes, charges, fees,
levies or other assessments, imposed upon American Pacific by the United
States or by any state, municipality, subdivision or instrumentality of the
United States or by any other taxing authority, including all interest,
penalties or additions attributable thereto, which are due and payable by
American Pacific, either have been paid in full, or have been properly accrued
and reflected in the American Pacific Financial Statements.
4.14 Litigation. Except as set forth in Schedule 4.14 hereto, there
is no action, suit or proceeding pending, or to the best knowledge of
American Pacific, threatened against American Pacific before any court or
arbitrator or any governmental body, agency or official, including, but not
limited to, any action suit or proceeding that (i) has been brought by or on
behalf of any person employed or formerly employed by American Pacific or
(ii) purports or seeks to enjoin or restrain the transactions contemplated by
this Merger Agreement. Except as set forth on Schedule 4.14, there are no
actions, suits, or proceedings pending or, to the best knowledge of American
Pacific, threatened against any Officers or directors of American Pacific by
any government body or agency or by any stockholder of American Pacific (or by
any former stockholder of American Pacific) relating to or arising out of
such Officer's or director's status with American Pacific.
4.15 Hazardous Materials.
(a) To the best knowledge of American Pacific, American
Pacific has obtained all permits, licenses and other authorizations which are
required to be obtained by it with respect to the Property (as defined herein)
under all Applicable Environmental Laws (as defined herein). All Property
controlled, directly or indirectly, by American Pacific is in compliance with
the material terms and conditions of all of such permits, licenses and
authorizations, and, to the best of knowledge of American Pacific, is also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any Applicable Environmental Laws or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except as described in detail in Schedule
4.15 hereto. For purposes hereof, the following terms shall have the
following meanings:
"Applicable Environmental Laws" shall mean all federal,
state, local and municipal environmental laws, rules or regulations to the
extent applicable to the Property, including, but not limited to, (a) the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq. ("CERCLA"); (b) the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq. ("RCRA"); (c) the Federal Water
Pollution Control Act, 33 U.S.C. Section 1251 et seq.; (d) the Clean Air Act,
42 U.S.C. Section 7401 et seq.; (e) the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1471 et seq.; (f) the Toxic Substances Control Act, 15
U.S.C. Section 2601 et seq.; (g) the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Section 11001 et seq.; (h) the National
Environmental Policy Act, 42 U.S.C. Section 4321 et seq.; (i) the Rivers and
Harbours Act of 1899, 33 U.S.C. Section 401 et seq.; (j) the Occupational
Safety and Health Act, 29 U.S.C. Section 651 et seq.; (k) the Safe Drinking
Water Act, 42 U.S.C. Section 300(f) et seq.; (l) the Oil Pollution Act of
1990, 33 U.S.C. Section 2701 et seq.; and (m) any rule, regulation, order,
injunction, judgment, declaration or decree implementing or interpreting any
of the foregoing Acts, as amended.
"Hazardous Substances" shall mean any substance, material,
waste, or pollutant that is now (or prior to the Closing) listed, defined,
characterized or regulated as hazardous, toxic or dangerous under or pursuant
to any statute, law, ordinance, rule or regulation of any federal, state,
regional, county or local governmental authority having jurisdiction over the
Property of American Pacific or its use or operation, including, without
limitation,
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(a) any substance, material, element, compound, mixture, solution, waste,
chemical or pollutant listed, defined, characterized or regulated as
hazardous, toxic or dangerous under any Applicable Environmental Laws, (b)
petroleum, petroleum derivatives or by-products, and other hydrocarbons, (c)
polychlorinated biphenyls (PCBs), asbestos and urea formaldehyde, and (d)
radioactive substances, materials or waste.
"Loan Property" means any property in which American
Pacific holds a security interest.
"Property" means any real property owned, controlled,
leased or held by American Pacific, in whole or in part, solely or in a joint
venture or other business arrangement, either for operational or investment
purposes, and whether assigned, purchased, or obtained through foreclosure (or
similar action) or in satisfaction of debts previously contracted.
(b) In addition, except as set forth in Schedule 4.15(b)
hereto:
(i) No notice, notification, demand, request for
information, citation, summons or order has been received by American
Pacific, no complaint has been filed and served on American Pacific,
no penalty has been assessed and to the best knowledge of American
Pacific no investigation or review is pending by any governmental or
other entity with respect to any alleged failure by American Pacific to
have any permit, license or authorization required in connection with the
conduct of the business of American Pacific or with respect to any
generation, treatment, storage, recycling, transportation, release or
disposal, or any release as defined in 42 U.S.C. Section 9601(22)
("Release"), of any Hazardous Substances at any Property or any Loan
Property;
(ii) To the best knowledge of American Pacific, no
Property or Loan Property has received or held any Hazardous Substances
in such amount and in such manner as to constitute a violation of the
Applicable Environmental Laws, and no Hazardous Substances have been
Released or disposed of on, in or under any of the Property during or
prior to American Pacific's occupancy thereof, or during or prior to
the occupancy thereof by any assignee or sublessee of American Pacific,
except in compliance with all Applicable Environmental Laws;
(iii) To the best knowledge of American Pacific,
there are no Hazardous Substances being stored at any Property or Loan
Property or located in, on or upon, any Property or Loan Property
(including the subsurface thereof) or installed or affixed to structures
or equipment on any Property or Loan Property; except in quantities
normal for ordinary use of such property and in compliance with
Applicable Environmental Laws; and, to the best knowledge of American
Pacific, there are no underground storage tanks for Hazardous Substances,
active or abandoned, at any Property; and
(iv) To the best knowledge of American Pacific, no
Hazardous Substances have been Released in a reportable quantity, where
such a quantity has been established by statute, ordinance, rule,
regulation or order, at, on or under any Property.
(c) American Pacific has not knowingly transported or
arranged for the transportation of any Hazardous Substances to any location
which is listed on the National Priorities List under CERCLA, listed for
possible inclusion on the National Priorities List by the Environmental
Protection Agency in the CERCLA Information System ("CERCLIS") or on any
similar state list or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to claims against
the owner of the Property for cleanup costs, remedial work, damages to natural
resources or for personal injury claims, including, but not limited to, claims
under CERCLA.
(d) No Hazardous Substances have been knowingly generated,
recycled, treated, stored, disposed of or Released by, American Pacific in
violation of Applicable Environmental Laws.
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(e) No oral or written notification of a Release of Hazardous
Substances has been given or filed by or on behalf of American Pacific
relating to any Property and no Property is listed or proposed for listing on
the National Priority List promulgated pursuant to CERCLA, on CERCLIS or on
any similar state list of sites requiring investigation or clean-up.
(f) To the best knowledge of American Pacific, there are no
liens arising under or pursuant to any Applicable Environmental Laws on any
Property, and no government actions have been taken or, to the best knowledge
of American Pacific, threatened, or are in process which could subject any
Property to such liens and none of the Property would be required to place any
notice or restriction relating to the presence of Hazardous Substances at any
Property in any deed to such Property.
(g) There have been no environmental investigations, studies,
audits, tests, reviews or other analyses conducted by or which are in the
possession of American Pacific in relation to any Property, which have not
been made available to Riverview.
(h) American Pacific is not aware of any facts which might
suggest that American Pacific has engaged in any management practice with
respect to any of its past or existing borrowers which could reasonably be
expected to subject American Pacific or any Property or Loan Property to any
liability under any Applicable Environmental Laws.
4.16 Insurance. American Pacific and all of American Pacific's
material assets, businesses, real property and other material properties are
insured against fire, casualty, theft, liability, loss, interruption, title
and such other events against which it is customary in the banking industry to
insure, all such insurance policies being in amounts that are believed by
American Pacific to be adequate and consistent with past practice and
experience. Set forth on Schedule 4.16 is a list of all insurance policies
(excluding policies maintained on one- to four-family residential properties
acquired through foreclosure) maintained by or for the benefit of American
Pacific or its respective directors, Officers, employees or agents in their
capacities as such. All such insurance policies are in full force and effect.
American Pacific has taken or will take all requisite action (including
without limitation the making of claims and the giving of notices) pursuant to
its directors' and Officers' liability insurance policy or policies in order
to preserve all rights thereunder with respect to all matters (other than
matters arising in connection with this Merger Agreement and the transactions
contemplated hereby) occurring prior to the Effective Time that are known to
American Pacific. American Pacific has not had an insurance policy canceled or
been denied insurance coverage for which it has applied. The fidelity bonds
in effect as to which American Pacific is a named insured are believed by
American Pacific to be sufficient.
4.17 Labor and Employment Matters. Except as reflected in Schedule
4.17 hereto, there is no (I) collective bargaining agreement or other labor
agreement to which American Pacific is a party or by which it is bound; (ii)
employment, profit sharing, deferred compensation, bonus, stock option,
purchase, retainer, consulting, retirement, welfare or incentive plan or
contract to which American Pacific is a party or by which it is bound; or
(iii) plan or agreement under which "fringe benefits" (including, but not
limited to, vacation plans or programs, sick leave plans or programs and
related benefits) are afforded any of the employees of American Pacific.
American Pacific has not received any notice that any party to any such
agreement, plan or contract is in default with respect to any material term or
condition thereof, nor has any event occurred which, through the passage of
time or the giving of notice, or both, would constitute a default thereunder
or would cause the acceleration of any obligation of any party thereto.
American Pacific has not received notice from any governmental agency of any
alleged violation of applicable laws that remains unresolved respecting
employment and employment practices, terms and conditions of employment and
wages and hours. American Pacific has complied in all material respects with
all applicable laws, rules and regulations relating to the employment of
labor, including those related to its employment practices, employee
disabilities, wages, hours, collective bargaining and the payment and
withholding of taxes and other sums as required by the appropriate
governmental authorities, and American Pacific has withheld and paid to the
appropriate governmental authorities or are holding for payment not yet due to
such authorities, all amounts required to be withheld from the employees of
American Pacific and is not liable for any arrears of wages, taxes, penalties
or other sums for failure to comply with any
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of the foregoing. Except as set forth in Schedule 4.17, there is no: unfair
labor practice complaint against American Pacific pending before the National
Labor Relations Board or any state or local agency; pending labor strike or,
to the best of knowledge of American Pacific, other labor trouble affecting
American Pacific; labor grievance pending against American Pacific; to the
best knowledge of American Pacific, pending representation question respecting
the employees of American Pacific; pending arbitration proceedings arising out
of or under any collective bargaining agreement to which American Pacific is a
party, or to the best knowledge of American Pacific, any basis for which a
claim may be made under any collective bargaining agreement to which American
Pacific is a party.
4.18 Records and Documents. The Records of American Pacific are and
will be sufficient to enable Riverview and Riverview Community Bank to
continue to conduct the business of American Pacific under similar standards
as American Pacific has heretofore conducted such business.
4.19 Capitalization of American Pacific. The authorized capital
stock of American Pacific consists of 200,000,000 shares of American Pacific
Common Stock, all of which is class B, having no par value per share. As of
the date of this Merger Agreement, 2,804,618 shares of the American Pacific
Common Stock were issued and outstanding, no shares of the American Pacific
Common Stock were held by American Pacific as treasury stock and no shares of
class A common stock were outstanding. Except as described on Schedule 4.19,
all of the outstanding American Pacific Common Stock is validly issued,
fully-paid and nonassessable and has not been issued in violation of any
preemptive rights of any American Pacific Shareholder. Except as described
on Schedule 4.19 hereto, as of the date hereof, there are no outstanding
securities or other obligations which are convertible into American Pacific
Common Stock or into any other equity or debt security of American Pacific,
and there are no outstanding options, warrants, rights, scrip, rights to
subscribe to, calls or other commitments of any nature which would entitle the
holder, upon exercise thereof, to be issued American Pacific Common Stock or
any other equity or debt security of American Pacific. Accordingly,
immediately prior to the Effective Time, there will be not more than 2,804,618
shares of American Pacific Common Stock issued and outstanding excluding any
shares that may be issued and outstanding as a result of the exercise of the
126,500 outstanding American Pacific Options.
4.20 Sole Agreement. With the exception of this Merger Agreement,
American Pacific has not been a party to: any letter of intent or agreement to
merge, to consolidate, to sell or purchase assets (other than in the normal
course of its business) or to any other agreement which contemplates the
involvement of American Pacific (or any of its assets) in any business
combination of any kind; or any agreement obligating American Pacific to
issue or sell or authorize the sale or transfer of American Pacific Common
Stock. Except as described in Schedule 4.20 hereto, there are no (nor will
there be at the Effective Time any) shares of capital stock or other equity
securities of American Pacific outstanding, except for shares of the American
Pacific Common Stock presently issued and outstanding, and there are no (nor
will there be at the Effective Time any) contracts, commitments,
understandings, or arrangements by which American Pacific is or may be bound
to issue additional shares of its capital stock or options, warrants, or
rights to purchase or acquire any additional shares of their capital stock.
There are no (nor will there be at the Effective Time any) contracts,
commitments, understandings, or arrangements by which American Pacific is or
may be bound to transfer or issue to any third party any shares of the capital
stock of American Pacific, and there are no (nor will there be at the
Effective Time any) contracts, agreements, understandings or commitments
relating to the right of American Pacific to vote or to dispose of any such
shares.
4.21 Disclosure. The information concerning, and representations
and warranties made by, American Pacific set forth in this Merger Agreement,
or in the Schedules of American Pacific hereto, or in any document, statement,
certificate or other writing furnished or to be furnished by American Pacific
to Riverview pursuant hereto, does not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated herein or therein which is necessary to make the statements and facts
contained herein or therein, in light of the circumstances in which they were
or are made, not false or misleading. Copies of all documents heretofore or
hereafter delivered or made available to Riverview by American Pacific
pursuant hereto were or will be complete and accurate copies of such
documents.
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4.22 Absence of Undisclosed Liabilities. Except as described in
Schedule 4.22 hereto, American Pacific has no obligation or liability
(contingent or otherwise) that is material to the financial condition or
operations of American Pacific, or that, when combined with all similar
obligations or liabilities, would be material to the financial condition or
operations of American Pacific (i) except as disclosed in the American Pacific
Financial Statements delivered to Riverview prior to the date of this Merger
Agreement or (ii) except obligations or liabilities incurred in the ordinary
course of its business consistent with past practices or (iii) except as
contemplated under this Merger Agreement. Since December 31, 2003, American
Pacific has not incurred or paid any obligation or liability which would be
material to the financial condition or operations of American Pacific, except
for obligations paid by American Pacific under the terms of this Merger
Agreement (all such obligations or payments are fully described by American
Pacific in Schedule 4.22 hereto) or in connection with transactions made by it
in the ordinary course of its business consistent with past practices, laws
and regulations applicable to American Pacific.
4.23 Allowance for Loan Losses. Except as disclosed in Schedule
4.23, the allowance for loan losses shown on the American Pacific Financial
Statements is (with respect to periods ended on or before December 31, 2003)
or will be (with respect to periods ending subsequent to December 31, 2003)
adequate in the opinion of management of American Pacific in all respects to
provide for anticipated losses inherent in loans outstanding or for
commitments to extend credit or similar off-balance sheet items (including
credit card receivables and accrued interest receivable) as of the dates
thereof and is in compliance with the requirements of GAAP. Except as
disclosed in Schedule 4.23 hereto, as of the date thereof, American Pacific
does not have any loan which has been criticized or classified by bank
examiners representing any Regulatory Authority as "Special Mention,"
"Substandard," "Doubtful" or "Loss" or as a "Potential Problem Loan."
4.24 Compliance with Laws. Except as disclosed in Schedule 4.24,
hereto, American Pacific:
(a) Is in compliance with all laws, rules, regulations,
reporting and licensing requirements, and orders applicable to its business or
employees conducting its business (including, but not limited to, those
relating to consumer disclosure and currency transaction reporting) the breach
or violation of which would or could reasonably be expected to have a Material
Adverse Effect on American Pacific, or which would or could reasonably be
expected to subject American Pacific or any of its directors or Officers to
civil money penalties;
(b) Has received no notification or communication from any
agency or department of federal, state, or local government or any of the
Regulatory Authorities, or the staff thereof (i) asserting that American
Pacific is not or may not be in compliance with any of the statutes, rules,
regulations, or ordinances which such governmental authority or Regulatory
Authority enforces, which, as a result of such noncompliance, would result in
a material adverse impact on American Pacific, (ii) threatening to revoke any
license, franchise, permit, or governmental authorization which is material to
the financial condition or operations of American Pacific, or (iii) requiring
American Pacific to enter into a cease and desist order, consent, agreement,
or memorandum of understanding; and
(c) Is in material compliance with the applicable provisions
of the Community Reinvestment Act ("CRA") and the regulations promulgated
thereunder, and American Pacific currently has a CRA rating of satisfactory or
better. To the best knowledge of American Pacific, there is no fact or
circumstance or set of facts or circumstances which would cause American
Pacific to fail to comply with such provisions or cause the CRA rating of
American Pacific to fall below satisfactory.
4.25 Absence of Regulatory Actions. Except as set forth in Schedule
4.25, American Pacific is not a party to any cease and desist order, written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is subject to any order or directive by,
or is a recipient of any extraordinary supervisory letter from, or has adopted
any board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depository institution holding companies or engaged in the
insurance of bank and/or savings and loan deposits nor has it been advised by
any such governmental authority that it is contemplating issuing or requesting
(or is considering the appropriateness of
A-25
issuing or requesting) any such order, directive, written agreement,
memorandum of understanding, extraordinary supervisory letter, commitment
letter, board resolutions or similar undertaking.
4.26 Employee Benefit Plans.
(a) American Pacific has previously provided to Riverview and
Riverview Community Bank true and complete copies of each "employee pension
benefit plan," as defined in Section 3(2) of ERISA that is subject to any
provision of ERISA and covers any employee, whether active or retired, of
American Pacific in the manner defined and further described in Section
414(b), (c), (m) or (o) of the Internal Revenue Code. Such plans are
hereinafter referred to collectively as the "Employee Pension Benefit Plans,"
and each such Employee Pension Benefit Plan is listed in Schedule 4.28(a)
hereto. American Pacific has also provided to Riverview and Riverview
Community Bank true and complete copies of all trust agreements, collective
bargaining agreements, and insurance contracts related to such Employee
Pension Benefit Plans.
To the best knowledge of American Pacific, each Employee
Pension Benefit Plan which is intended to be qualified under Section 401(a) of
the Internal Revenue Code is so qualified and each trust forming a part
thereof is exempt from tax pursuant to Section 501(a) of the Internal Revenue
Code. Copies of the latest determination letters concerning the qualified
status of each Employee Pension Benefit Plan which is intended to be qualified
under Section 401(a) of the Internal Revenue Code have been provided to
Riverview and Riverview Community Bank. Requests for determination letters
relating to any subsequent amendments to such plans which are currently
pending have been provided to Riverview and Riverview Community Bank. All
such requests were timely and properly filed and appropriate notice of any
such filing was timely and properly provided to affected plan participants and
beneficiaries.
Each of the Employee Pension Benefit Plans has been operated in
conformity with the written provisions of the applicable plan documents which
have been delivered to Riverview and Riverview Community Bank and in
compliance with the requirements prescribed by all statutes, orders, rules,
and regulations (or other guidance of general applicability) including, but
not limited to, ERISA and the Internal Revenue Code, which are applicable to
such Employee Pension Benefit Plans. To the extent that the operation of an
Employee Pension Benefit Plan has deviated from the written provisions of the
plan, such operational deviations have been disclosed in Schedule 4.26(a)
hereto. All such deviations have been made in conformity with applicable
laws, including ERISA and the Internal Revenue Code.
With respect to Employee Pension Benefit Plans which are
subject to the annual report requirement of ERISA Section 103 or to the annual
return requirement of Internal Revenue Code Section 6047, all required annual
reports and annual returns, or such other documents as may have been required
as alternative means of compliance with the annual report requirement, have
been timely and correctly filed. Copies of all such annual returns/reports,
including all attachments and Schedules, for the three (3) plan years
immediately preceding the current date have been delivered to Riverview and
Riverview Community Bank. With respect to Employee Pension Benefit Plans
which complied with the annual return requirement by satisfaction of an
alternate compliance method, any documents required to be filed with the
Department of Labor in satisfaction of such requirements have been provided to
Riverview and Riverview Community Bank. American Pacific has provided to
Riverview and Riverview Community Bank copies of the annual actuarial
valuation or allocation report for each Employee Pension Benefit Plan for the
three (3) plan years for such plan immediately preceding the current date.
With regard to Employee Pension Benefit Plans which are not intended to be
qualified under Section 401(a) of the Internal Revenue Code, copies of
financial statements or reports containing information regarding the expense
of maintaining any such Employee Pension Benefit Plan for three (3) plan years
preceding the current date have been delivered to Riverview and Riverview
Community Bank.
With respect to all Employee Pension Benefit Plans which are
subject to the summary plan description requirement of ERISA Section 102, all
such summary plan descriptions as were or will be required to be filed with
the U.S. Department of Labor and distributed to participants and beneficiaries
have been filed and timely distributed. Copies of all such summary plan
descriptions have been delivered to Riverview and Riverview Community
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Bank. No Employee Pension Benefit Plan constitutes a "multi-employer plan" as
defined in Section 4001(a)(3) of ERISA.
No Employee Pension Benefit Plan subject to Part III of
Subtitle B of ERISA or Section 412 of the Internal Revenue Code, or both, has
incurred an "accumulated funding deficiency" within the meaning of Internal
Revenue Code Section 412, whether or not waived. All required contributions
to all Employee Pension Benefit Plans have been timely made (and/or proper
accruals have been established). Any penalties or taxes which have been
incurred by American Pacific or by any Employee Pension Benefit Plan with
respect to the timing or amount of payment of any contribution to an Employee
Pension Benefit Plan have been timely paid. The limitations of Internal
Revenue Code Section 415 have not been exceeded with respect to any Employee
Pension Benefit Plan or combination of such plans to which such limitations
apply.
Except as disclosed in Schedule 4.26(a) hereto, no "reportable
event" (as described in Section 4043(b) of ERISA) has occurred with respect to
any Employee Pension Benefit Plan. No Employee Pension Benefit Plan or any
trust created thereunder, or any "disqualified person" (as defined in Section
4975 of the Internal Revenue Code) or "party in interest" with respect to the
plan (as defined in Section 3(14) of ERISA), has engaged in a "prohibited
transaction," as such term is defined in Section 4975 of the Internal Revenue
Code or Section 406 or ERISA, which could subject such Employee Pension
Benefit Plan, any such trust or any such disqualified person or party in
interest (other than a person for whom neither American Pacific is not
directly or indirectly responsible) to liability under Title I of ERISA or to
the imposition of any tax under Section 4975 of the Internal Revenue Code or
tax or sanction under Section 502(1) of ERISA. Nor has there been a breach of
fiduciary liability by a party in interest under Section 404 of ERISA that
would give rise to a sanction, tax or penalty under ERISA.
No Employee Pension Benefit Plan is subject to Title IV of
ERISA. Any Employee Pension Benefit Plan which is a "defined benefit plan"
(within the meaning of Section 414(i) of the Internal Revenue Code) previously
maintained or sponsored by American Pacific has been terminated and American
Pacific does not have any liability with respect to any previously terminated
defined benefit plan. American Pacific does not participate (or has ever
participated) in or has incurred any liability under Section 4201 of ERISA for
a complete or partial withdrawal from a multi-employer plan (as such term is
defined in ERISA).
No tax has been, will be, or is reasonably anticipated to be
imposed under Internal Revenue Code Section 4978 or 4979A due to the operation
of an Employee Pension Benefit Plan sponsored by American Pacific which is an
employee stock ownership plan ("ESOP").
Except as disclosed in Schedule 4.26(a) hereto, all Employee
Pension Benefit Plans were in effect for substantially all of calendar year
2003. There has been no material amendment of any such plans (other than
amendments required to comply with applicable law) or material increase in the
cost of maintaining such plans or providing benefits thereunder on or after
the last day of the plan year which ended in calendar year 2003 for each such
Employee Pension Benefit Plan.
(b) American Pacific has furnished to Riverview and Riverview
Community Bank true and complete copies of each "Employee Welfare Benefit
Plan" as defined in Section 3(1) of ERISA, which, to the best knowledge of
American Pacific, is subject to any provision of ERISA and covers any
employee, whether active or retired, of American Pacific or members of a
controlled group or entities under common control with American Pacific in the
manner defined and further described in Section 414(b), (c), or (m) of the
Internal Revenue Code. Such plans are hereinafter referred to collectively as
the "Employee Welfare Benefit Plans," and each such Employee Welfare Benefit
Plan is listed in Schedule 4.26(b) hereto.
American Pacific has also provided to Riverview and Riverview
Community Bank true and complete copies of documents establishing all funding
instruments for such Employee Welfare Benefit Plans, including but not limited
to, trust agreements, cafeteria plans (pursuant to Internal Revenue Code
Section 125), and voluntary employee beneficiary associations (pursuant to
Internal Revenue Code Section 501(c)(9)). Each of the Employee
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Welfare Benefit Plans has been operated in conformity with the written
provisions of the plan documents which have been delivered to Riverview and
Riverview Community Bank and in compliance with the requirements prescribed by
all statutes, orders, rules, and regulations (including guidance of general
applicability) including, but not limited to, ERISA and the Internal Revenue
Code, which are applicable to such Employee Welfare Benefit Plans. Any
deviation in the operation of such plans from the requirements of the plan
documents or of applicable laws have been listed in Schedule 4.28(b) hereto.
American Pacific has provided any notification required by law to any
participant covered under any Employee Welfare Benefit Plan which has failed
to comply with the requirements of any Internal Revenue Code section which
results in the imposition of a tax on benefits provided to such participants
under such plan.
With respect to all Employee Welfare Benefit Plans which are
subject to the annual report requirement of ERISA Section 103 or to the annual
return requirement of Internal Revenue Code Section 6039D, all annual reports
and annual returns as were required to be filed pursuant to such sections have
been timely filed. Copies of all such annual returns/reports, including all
attachments and Schedules, for the three (3) plan years immediately preceding
the current date for all plans subject to such requirements have been
delivered to Riverview and Riverview Community Bank. With respect to all
Employee Welfare Benefit Plans which are subject to the summary plan
description requirement of ERISA Section 102, all such summary plan
descriptions as were required to be filed with the Department of Labor and
distributed to participants and beneficiaries have been timely filed and
distributed. Copies of all such summary plan descriptions have been delivered
to Riverview and Riverview Community Bank.
Except as disclosed in Schedule 4.26(b) hereto, all Employee
Welfare Benefit Plans which are in effect were in effect for substantially all
of calendar year 2003. Except as disclosed in Schedule 4.28(b) hereto, there
has been with respect to such Employee Welfare Benefit Plans no material
amendment thereof or material increase in the cost thereof or benefits payable
thereunder on or after January 1, 2003.
No Employee Welfare Benefit Plan or any trust created
thereunder, nor any "party in interest" with respect to the plan (as defined
in Section 3(14) of ERISA), has engaged in a "prohibited transaction," as such
term is defined in Section 406 of ERISA, which could subject such Employee
Welfare Benefit Plan, any such trust, or any party in interest (other than a
person for whom neither American Pacific is not directly or indirectly
responsible) to the imposition of a penalty for such prohibited transaction
under Section 502(i) of ERISA. Nor has there been a breach of fiduciary duty
by a party in interest under Section 404 of ERISA, that would give rise to a
sanction, tax or penalty under ERISA. The Department of Labor has not
assessed any such penalty or served notice to American Pacific that such a
penalty may be imposed upon any Employee Welfare Benefit Plan.
American Pacific has not failed to make any contribution to, or
pay any amount due and owing by American Pacific under the terms of, an
Employee Welfare Benefit Plan. Except as disclosed in Schedule 4.28(b)
hereto, no claims have been incurred with respect to any Employee Welfare
Benefit Plan which may, to the best knowledge of American Pacific, constitute
a liability for American Pacific after the application of any insurance, trust
or other funds which are applicable to the payment of such claims.
Except as disclosed in Schedule 4.26(b) hereto, to the best
knowledge of American Pacific, no condition exists that could subject any
Employee Welfare Benefit Plan or any person (other than a person for whom
American Pacific is not directly or indirectly responsible) to liabilities,
damages, losses, taxes, or sanctions that arise under Section 4980B of the
Internal Revenue Code or Sections 601 through 734 of ERISA for failure to
comply with the continuation health care coverage and HIPAA requirements of
ERISA Sections 601 through 734 and Internal Revenue Code Section 4980B with
respect to any current or former employee of American Pacific, or the
beneficiaries of such employee.
(c) American Pacific has furnished to Riverview and Riverview
Community Bank true and complete copies and/or descriptions of each plan or
arrangement maintained or otherwise contributed to by American Pacific which
is not an Employee Pension Benefit Plan and is not an Employee Welfare Benefit
Plan and which (exclusive of base salary and base wages) provides for any form
of current or deferred compensation, bonus, stock option, profit sharing,
retirement, group health or insurance, welfare benefits, fringe benefits, or
similar plan or
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arrangement for the benefit of any employee or class of employees, whether
active or retired, or independent contractors of American Pacific. Such plans
and arrangements shall collectively be referred to herein as "Benefit
Arrangements" and all such Benefit Arrangements of American Pacific are
listed on Schedule 4.26(c) hereto. Except as disclosed in Schedule 4.26(c)
hereto, there are no other benefit arrangements of American Pacific and all
Benefit Arrangements which are in effect were in effect for substantially all
of calendar year 2003. Except as disclosed in Schedule 4.26(c) hereto, there
has been with respect to Benefit Arrangements no material amendment thereof or
material increase in the cost thereof or benefits payable thereunder on or
after January 1, 2003. Except as disclosed in Schedule 4.26(c) hereto, there
has been no material increase in the base salary and wage levels of American
Pacific and, except in the ordinary course of business, no change in the terms
or conditions of employment (including severance benefits) compared, in each
case, to those prevailing for substantially all of calendar year 2003. Except
as disclosed in Schedule 4.26(c) hereto, there has been no material increase
in the compensation of, or benefits payable to, any senior executive employee
of American Pacific on or after January 1, 2003 nor has any employment,
severance, or similar contract been entered into with any such employee, nor
has any amendment to any such contract been made on or after January 1, 2003.
With respect to all Benefit Arrangements which are subject to
the annual return requirement of Internal Revenue Code Section 6039D, all
annual returns as were required to be filed have been timely filed. Copies of
all such annual returns for the three (3) plan years immediately preceding the
current date have been delivered to Riverview and Riverview Community Bank.
(d) Listed in Schedule 4.26(d) hereto are all Employee Pension
Benefit Plans, Employee Welfare Benefit Plans, and Benefit Arrangements which
provide compensation or benefits to employees or directors which become
effective upon a change in control of American Pacific, including, but not
limited to, additional compensation or benefits, or acceleration in the amount
or timing of payment of compensation or benefits which had become effective
prior to the date of such acceleration. Schedule 4.26(d) also includes in
reasonable detail, to the extent such benefits can be calculated as of the
date of this Merger Agreement and a description of benefits that cannot be so
calculated, the payments and benefits due at Closing under American Pacific
Bank's employment agreements, change in control agreements, directors'
retirement plan and defined benefit plan. Except as disclosed in Schedule
4.26(d) hereto, there is no Employee Pension Benefit Plan, Employee Welfare
Benefit Plan, or Benefit Arrangement covering any employee or director of
American Pacific which individually or collectively could give rise to the
payment of any amount which would constitute an "excess parachute payment," as
such term is defined in Section 280G of the Internal Revenue Code and
Regulations proposed pursuant to that section.
(e) Except as described in Schedule 4.26(e) hereto, each
Employee Pension Benefit Plan, Employee Welfare Benefit Plan, or Benefit
Arrangement and each personal services contract, fringe benefit, consulting
contract or similar arrangement with or for the benefit of any Officer,
director, employee, or other person may be terminated by American Pacific
within a period of no more than thirty (30) days following the Effective Time,
without payment of any amount as a penalty, bonus, premium, severance pay, or
other compensation for such termination. No limitation on the right to
terminate any such plan has been communicated by American Pacific to
employees, former employees, or retirees who are or may be participants in or
beneficiaries of such plans or arrangements.
(f) Except as disclosed in Schedule 4.26(f) hereto, (1)
American Pacific has not received notice from any governmental agency of any
alleged violation of applicable laws or of any prospective audit or other
investigation for the purpose of reviewing compliance with applicable laws
with respect to any Employee Pension Benefit Plan, Employee Welfare Benefit
Plan or Benefit Arrangement, and (2) except as disclosed in Schedule 4.26(f)
hereto, no suits, actions, or claims have been filed in any court of law or
with any governmental agency regarding the operation of any Employee Pension
Benefit Plan, Employee Welfare Benefit Plan, or Benefit Arrangement and no
such additional suits, actions, or claims are, to the best knowledge of
American Pacific, anticipated to be filed (other than routine claims for
benefits).
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4.27 Material Contracts. (a) Except as set forth on Schedule 4.27
(and with a true and correct copy of the document or other item in question
attached to such Schedule), American Pacific is not a party or subject to any
of the following (whether written or oral, express or implied):
(i) any agreement, arrangement or commitment (A) not made
in the ordinary course of business or (B) pursuant to which American
Pacific is or may become obligated to invest in or contribute capital to
any subsidiary or any other entity;
(ii) any agreement, indenture or other instrument not
disclosed in the American Pacific Financial Statements relating to the
borrowing of money by American Pacific or the guarantee by American
Pacific of any such obligation (other than trade payables or instruments
related to transactions entered into in the ordinary course of business
such as deposits, Fed Funds borrowings and repurchase agreements);
(iii) any contract, agreement or understanding with any
labor union or collective bargaining organization;
(iv) any contract containing covenants which limit the
ability of American Pacific to compete in any line of business or with
any person or containing any restriction of the geographical area in
which, or method by which, American Pacific may carry on its business
(other than as may be required by law or any applicable Regulatory
Authority);
(v) any contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K
promulgated by the SEC;
(vi) any lease with annual rental payments aggregating
Ten Thousand Dollars ($10,000) or more;
(vii) consulting agreement (other than data processing,
software programming and licensing contracts entered into in the ordinary
course of business) involving the payment of more than Ten Thousand
Dollars ($10,000) per annum;
(viii) any agreement with any Officer or other key
employee of American Pacific the benefits of which are contingent, or the
terms of which are materially altered or any payments or rights are
accelerated, upon the occurrence of a transaction involving American
Pacific of the nature contemplated by this Merger Agreement;
(ix) any agreement with respect to any Officer of
American Pacific providing any term of employment or compensation
guarantee extending for a period longer than one year and for the
payment of in excess of Ten Thousand Dollars ($10,000) per annum;
(x) except as provided in the articles of incorporation
or bylaws of American Pacific, any agreement with any director or Officer
of American Pacific providing for indemnification of such person; or
(xi) agreement or plan, including any stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of
the benefits of which will be accelerated, by the occurrence of any of
the transactions contemplated by this Merger Agreement or the value of
any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Merger Agreement.
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(b) Except as disclosed on Schedule 4.27, no Officer or
director of American Pacific or any "associate" (as such term is defined in
Rule 12b-2 under the 1934 Act) of any such Officer or director, has any
material interest in any material contract or property (real or personal),
tangible or intangible, used in or pertaining to the business of American
Pacific.
4.28 Material Contract Defaults. American Pacific is not in
default in any respect under any contract, agreement, commitment, arrangement,
lease, insurance policy, or other instrument to which it is a party or by
which its respective assets, business, or operations may be bound or affected
or under which it or its respective assets, business, or operations receives
benefits, and which default is reasonably expected to have either individually
or in the aggregate a Material Adverse Effect on American Pacific, and, to the
best knowledge of American Pacific there has not occurred any event that,
with the lapse of time or the giving of notice or both, would constitute such
a default.
4.29 Reports. Except as set forth in Schedule 4.29, American
Pacific has filed all reports and statements, together with any amendments
required to be made with respect thereto, that it was required to file with
(i) the SEC; (ii) the Oregon Department; (iii) the FDIC; (iv) the FRB and (v)
any other applicable federal or state securities or banking authorities. As
of their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all
material respects with all of the requirements of their respective forms and
all of the statutes, rules, and regulations enforced or promulgated by the
Regulatory Authority with which they were filed. All such reports were true
and complete in all material respects and did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. American Pacific
has previously provided to Riverview and Riverview Community Bank true and
correct copies of all such reports and any amendments thereto filed by
American Pacific.
4.30 Statements True and Correct. None of the information prepared
by, or on behalf of, American Pacific regarding American Pacific included in
the Proxy Statement/Prospectus mailed to the American Pacific Shareholders in
connection with the Shareholders' Meeting, and any other documents filed with
the SEC, the Oregon Department, the FDIC, the OTS, or any other Regulatory
Authority in connection with the transaction contemplated herein (if
applicable), will be, at the respective times such documents are filed, and,
with respect to the Proxy Statement/Prospectus, when first mailed to the
American Pacific Shareholders, false or misleading with respect to any
material fact, or will omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or, in the case of the Proxy Statement/Prospectus or any
amendment thereof or supplement thereto, at the time of the Shareholders'
Meeting, false or misleading with respect to any material fact, or omit to
state any material fact necessary to make any statements therein, in light of
the circumstances under which they were made, not misleading.
4.31 Brokers and Finders. Except as set forth in Schedule 4.31,
neither American Pacific nor any of its Officers, directors or employees has
employed any broker or finder, or agreed to pay any fees to any director or
former director or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder, or
director or former director of American Pacific, has acted directly or
indirectly for American Pacific, in connection with this Merger Agreement or
the transactions contemplated hereby.
4.32 Derivatives Contracts; Structured Notes; Etc. American Pacific
is not a party to or has agreed to enter into an exchange-traded or
over-the-counter equity, interest rate, foreign exchange or other swap,
forward, future, option, cap, floor or collar or any other contract that is
not included on the balance sheet and is a derivative contract (including
various combinations thereof) (each a "Derivatives Contract") or owns
securities that (1) are referred to generically as "structured notes," "high
risk mortgage derivatives," "capped floating rate notes" or "capped floating
rate mortgage derivatives" or (2) are likely to have changes in value as a
result of interest or exchange rate changes that significantly exceed normal
changes in value attributable to interest or exchange rate changes, except for
those Derivatives Contracts, structured notes and other instruments legally
purchased or entered into in the ordinary course of business, consistent with
safe and sound banking practices and regulatory guidance, and listed (as of
the date hereof) on Schedule 4.32.
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4.33 Loans. To the best knowledge of American Pacific, with respect
to each loan owned by American Pacific, in whole or in part: (i) the note and
any related mortgage are each legal, valid and binding obligations of the
maker or obligor thereof, enforceable against such maker or obligor in
accordance with their terms; (ii) neither American Pacific nor any prior
holder of a loan has modified the related documents in any material respect or
satisfied, canceled or subordinated such mortgage or note except as otherwise
disclosed by documents in the applicable loan file; (iii) American Pacific is
the sole holder of legal and beneficial title to each loan (or American
Pacific's applicable participation interest), as applicable and there has not
been any assignment or pledge of any loan; and (iv) the note, mortgage and any
other collateral documents, copies of which are included in the loan files,
are true and correct copies of the documents they purport to be and have not
been superseded, amended, modified, canceled or otherwise changed except as
disclosed by documents in the applicable loan file.
4.34 Investment Securities. Schedule 4.34 sets forth the book and
market value as of the date of this Merger Agreement, of the investment
securities, mortgage-backed securities and securities held for sale by
American Pacific. Schedule 4.34 sets forth the names of all joint ventures in
which American Pacific has an investment (whether or not such joint venture
remains active). Except for pledges to secure public and trust deposits,
Federal Reserve borrowings, repurchase agreements and reverse repurchase
agreements entered into in arm's length transactions pursuant to normal
commercial terms and conditions and other pledges required by law, none of the
investments reflected in American Pacific Financial Statements, and none of
the material investments made by American Pacific since December 31, 2003, is
subject to any restriction) contractual, statutory or otherwise) that would
materially impair the ability of the entity holding such investment freely to
dispose of such investment at any time. American Pacific have (x) properly
reported as such any investment securities which are required under GAAP to be
classified as "available for sale" at the lower of cost or market, and (y)
accounted for any decline in the market value of its securities portfolio in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No 12 and Staff Accounting Bulletin No. 59, including,
without limitation, the recognition of American Pacific's consolidated
statement of operations of any unrealized loss with respect to any individual
security as a realized loss in the accounting period in which a decline in the
market value of such security is determined to be "other than temporary."
4.35 Credit Card Receivables. Schedule 4.35 contains the aggregate
balance of all credit card receivables of American Pacific as of October 31,
2004 and a delinquency schedule listing the number and dollar amount of
delinquent credit card receivables by number of days delinquent as of such
date.
4.36 Anti-takeover Provisions Inapplicable. American Pacific has
taken or prior to the Effective Time, will have taken, all actions required to
exempt Riverview, Riverview Community Bank and the transactions contemplated
hereby, from any provisions of an anti-takeover nature contained in their
organizational documents, and the provisions of any federal or state
"anti-takeover," "fair price," "moratorium," "control share acquisition" or
similar laws or regulations.
4.37 Expenses. Schedule 4.37 contains a list of expenses in
individual amounts expected to the knowledge of American Pacific's management
to exceed Five Thousand Dollars ($5,000), and the aggregate amount of all
expenses expected to be less than Five Thousand Dollars ($5,000), to be
incurred by American Pacific in connection with the completion of the
transactions contemplated by the Merger Agreement.
ARTICLE 5
COVENANTS OF RIVERVIEW
5.1 Regulatory Approvals. Within a reasonable time after execution
of this Merger Agreement, Riverview shall file any and all applications with
the appropriate government Regulatory Authorities in order to obtain the
Government Approvals and shall take such other actions as may be reasonably
required to consummate the transactions contemplated in this Merger Agreement
and the Plan of Merger with reasonable promptness. Riverview shall pay all
fees and expenses arising in connection with such applications for regulatory
approval. Riverview agrees
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to provide the appropriate Regulatory Authorities with the information
required by such authorities in connection with Riverview's applications for
regulatory approval and Riverview agrees to use its commercially reasonable
efforts to obtain such regulatory approvals, and any other approvals and
consents as may be required for the Closing, as promptly as practicable;
provided, however, that nothing in this Section 5.1 shall be construed to
obligate Riverview to take any action to meet any condition required to obtain
prior regulatory approval if any such condition materially differs from
conditions customarily imposed by such Regulatory Authorities in orders
approving acquisitions of the type contemplated by this Merger Agreement,
constitutes a significant impediment upon Riverview's ability to carry on its
business or acquisition programs (as may be determined in the sole discretion
of Riverview) or requires Riverview to increase Riverview Community Bank's
capital ratios to amounts in excess of the OTS's minimum capital ratio
guidelines which may be in effect from time to time.
5.2 Preparation of Registration Statement. Riverview, in
cooperation with American Pacific, shall prepare and file with the SEC a
Registration Statement on Form S-4 with respect to the shares of Riverview
Common Stock to be issued in the Merger ("Registration Statement"). Such
Registration Statement shall contain a Proxy Statement/Prospectus which shall
serve as the proxy statement of American Pacific for the Shareholders' Meeting
and as the prospectus of Riverview for the shares of Riverview Common Stock to
be issued in the Merger. Riverview shall use its commercially reasonable
efforts to cause the Registration Statement to become effective.
5.3 Registration Statement Effectiveness. Riverview will advise
American Pacific, promptly after Riverview receives notice thereof, of the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension
of the qualification of the Riverview Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.4 Employees and Employee Benefits. Upon consummation of the
Merger, all employees of American Pacific shall be deemed to be at-will
employees of Riverview Community Bank except for those employees who are
parties to a written employment agreement.
(a) As of the Effective Time, and subject to Sections 5.4(c)
and (d) hereof, all employee benefit plans (within the meaning of Section 3(3)
of ERISA) sponsored or maintained by American Pacific shall be terminated.
Employees of American Pacific who continue as employees of Riverview or
Riverview Community Bank ("Continuing Employees") shall be entitled to
participate on an equitable basis in the same benefit plans, programs or
policies as are generally available to Riverview's and Riverview Community
Bank's employees of similar rank and status. For purposes of eligibility and
vesting (but not for the accrual of benefits, under such plans, programs or
policies, employees of American Pacific who continue as Riverview's or
Riverview Community Bank's employees will be credited for prior years of
service with American Pacific, and there shall be no exclusion from coverage
under Riverview's or Riverview Community Bank's health insurance plan as a
result of pre-existing conditions to the extent such conditions were covered
under any health insurance plan maintained by American Pacific prior to the
Effective Time.
(b) Continuing Employees shall not be subject to any waiting
periods under the group health plan of Riverview or Riverview Community Bank
to the extent that such periods are longer than the periods imposed under the
applicable group health plan of American Pacific. To the extent that the
initial period of coverage for Continuing Employees under any plan of
Riverview or Riverview Community Bank, whichever is applicable, that is an
"Employee Welfare Benefit Plan" as defined in Section 3(1) of ERISA is not a
full 12-month period of coverage, Continuing Employees shall be given credit
under the applicable welfare plan for any deductibles and co-insurance
payments made by such Continuing Employees under the corresponding welfare
plan of American Pacific during the balance of such 12-month period of
coverage. Nothing contained herein shall obligate Riverview or Riverview
Community Bank to provide or cause to be provided any duplicative benefits.
Nothing herein shall alter the power of Riverview or Riverview Community Bank
to amend or terminate any of its benefit or welfare plans. Moreover, this
Section 5.4(b), shall not confer upon any Continuing Employee any rights or
remedies hereunder and shall not constitute
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a contract of employment or create any rights, to be retained or otherwise, in
employment at Riverview or Riverview Community Bank.
(c) As of or prior to the Effective Time, American Pacific
shall terminate the American Pacific 401(k) Retirement Salary Savings and
Profit Sharing Plan (the "401(k) Plan") by proper action of the Board of
Directors of American Pacific. In connection with such termination, the
401(k) Plan shall be submitted to the Internal Revenue Service for a
determination regarding its qualification upon termination and, upon receipt
of a favorable determination letter, distributions shall be made to
participants in accordance with ERISA, the Internal Revenue Code and the
401(k) Plan as soon as practicable after the receipt of the determination
letter. Neither Riverview nor Riverview Community Bank shall have any
obligation to make contributions to the 401(k) Plan after the Effective Time.
Participants in the 401(k) Plan who become employees of Riverview will be
permitted, subject to the terms of the Riverview 401(k) Plan, to transfer such
distributions to the Riverview 401(k) Plan.
(d) Riverview agrees to honor the terms of the American
Pacific employment agreement set forth in Schedule 4.26 (collectively referred
to as the "Post-Termination Payments") and no other post-termination
agreements, including but not limited to any other employment, severance,
directors retirement or deferred compensation agreement provided, however,
that (1) the aggregate amount of Post-Termination Payments to be paid to all
officers as a group by Riverview and Riverview Community Bank shall not exceed
One Million Four Hundred Thousand Dollars ($1,400,000) and (2) no
Post-Termination Payment or other payment shall be paid that would be
nondeductible under Section 280G of the Internal Revenue Code, or subject to
the excise tax provisions of Section 4999 of the Internal Revenue Code. In the
event that Post-Termination Payments must be reduced to comply with this
Section 5.4(d), the reduction shall be applied only against the
Post-Termination Payments of persons affected by Section 280G limitations of
the Internal Revenue Code.
5.5 Reasonable Efforts to Close. Subject to the terms and
conditions of this Merger Agreement, Riverview agrees to use all its
commercially reasonable efforts and to take, or to cause to be taken, all
actions, and to do, or to cause to be done, all things necessary, proper, or
advisable under applicable laws and regulations to consummate and make
effective, with reasonable promptness after the date of this Merger Agreement,
the transactions contemplated by this Merger Agreement, including, without
limitation, using reasonable efforts to lift or rescind any injunction or
restraining or other order adversely affecting the ability of the Parties to
consummate the transaction contemplated by this Merger Agreement; provided,
however, that such efforts do not impose unreasonable expense or obligations
on Riverview. Riverview shall use, and shall cause each of its Subsidiaries
to use, its commercially reasonable efforts to obtain consents of all third
parties and Regulatory Authorities necessary or desirable for the consummation
of each of the transactions contemplated by this Merger Agreement.
5.6 Insurance.
(a) Riverview, or American Pacific with the consent of
Riverview, shall use its best efforts to cause the persons serving as Officers
and directors of American Pacific immediately prior to the Closing Date to be
covered for a period of three (3) years after the Closing Date by the current
policies of directors' and Officers' liability insurance maintained by
American Pacific with respect to acts or omissions occurring prior to the
Closing Date which were committed to such Officers and directors in their
capacity as such (provided that Riverview may substitute therefor policies of
at least the same coverage and amounts containing the terms and conditions
which are no less advantageous to such Officers and directors).
(b) In the event Riverview or any of its successors or assigns
(i) consolidates with or merges into any other person or entity and shall not
be the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its properties
and assets to any person or entity, then, and in each such case, to the extent
necessary, proper provision shall be made so that the successors and assigns
of Riverview assume the obligations set forth in this Section 5.6.
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5.7 Access. Upon notice of at least 48 hours, Riverview shall
afford American Pacific and its representatives access, during normal business
hours throughout the period up to the Effective Date of the Merger, to all of
the properties, books and records, provided that no investigation pursuant to
this Section 5.7 shall affect or be deemed to modify or waive any
representation or warranty made by Riverview in this Merger Agreement or the
conditions to the obligations of Riverview to consummate the transactions
contemplated by this Merger Agreement.
5.8 Conduct of Business. Riverview will not take any action,
unless otherwise required by law, rules or regulation, that would (A)
materially adversely affect the ability of Riverview to obtain any necessary
approvals of the Regulatory Authorities required to consummate the
transactions contemplated by this Merger Agreement, or (B) adversely affect
its ability to perform its covenants and agreements under this Merger
Agreement;
5.9 Nasdaq. Riverview shall use its commercially reasonable
efforts to have the shares of Riverview Common Stock which are to be issued in
exchange for the Stock Election shares approved for listing on the Nasdaq.
ARTICLE 6
COVENANTS OF AMERICAN PACIFIC
6.1 Shareholders' Meeting. American Pacific shall call a meeting
of the American Pacific Shareholders to be held as soon as practicable for
purposes of voting on the transactions contemplated hereby, and American
Pacific shall use its commercially reasonable efforts to solicit and obtain
the votes of the American Pacific Shareholders in favor of the transactions
contemplated hereby and, subject to the exercise of its fiduciary duties, the
Board of Directors of American Pacific shall recommend approval of such
transactions by such holders. In connection with the Shareholders' Meeting,
Riverview and American Pacific shall cooperate in the preparation of the Proxy
Statement/Prospectus including the financial information to be contained
therein and, with the approval of each of Riverview and American Pacific,
which approvals will not be unreasonably withheld, the Proxy
Statement/Prospectus will be mailed to the American Pacific Shareholders.
6.2 Conduct of Business -- Affirmative Covenants. Unless the prior
written consent of Riverview shall have been obtained, and, except as
otherwise contemplated herein:
(a) American Pacific shall:
(i) Operate its business only in the usual, regular, and
ordinary course;
(ii) Use its commercially reasonable efforts to preserve
intact its business organizations and assets and to maintain its rights
and franchises;
(iii) Take no action, unless otherwise required by law,
rules or regulation, that would (A) materially adversely affect the
ability of any of American Pacific or Riverview to obtain any necessary
approvals of Regulatory Authorities required to consummate the
transactions contemplated by this Merger Agreement, or (B) adversely
affect the ability of such Party to perform its covenants and agreements
under this Merger Agreement;
(iv) Except as they may terminate in accordance with
their terms, keep in full force and effect, and not default in any of
their obligations under, all material contracts;
(v) Keep in full force and effect insurance coverage with
responsible insurance carriers which is reasonably adequate in coverage
and amount for companies the size of the American Pacific and for the
businesses and properties owned by each and in which each is engaged, to
the extent that such insurance is reasonably available;
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(vi) Use its commercially reasonable efforts to retain
American Pacific's present customer base and to facilitate the retention
of such customers after the Effective Time; and
(vii) Use its commercially reasonable efforts to
maintain, renew, keep in full force and effect, and preserve its business
organization and material rights and franchises, permits and licenses,
and to use its best efforts to maintain positive relations with its
present employees so that such employees will continue to perform
effectively and will be available to American Pacific or Riverview and
Riverview's Subsidiaries at and after the Effective Time, and to use its
commercially reasonable efforts to maintain its existing, or
substantially equivalent, credit arrangements with banks and other
financial institutions and to assure the continuance of American
Pacific's customer relationships.
(b) American Pacific agrees to use its commercially
reasonable efforts to assist Riverview and Riverview Community Bank in
obtaining the Government Approvals necessary to complete the transactions
contemplated hereby, and American Pacific shall provide to Riverview and
Riverview Community Bank or to the appropriate governmental authorities all
information reasonably required to be submitted in connection with obtaining
such approvals;
(c) American Pacific, at its own cost and expense, shall use
its commercially reasonable efforts to secure all consents and releases, if
any, of third parties necessary or desirable for the consummation of the
transactions contemplated by this Merger Agreement and shall comply with all
applicable laws, regulations and rulings in connection with this Merger
Agreement and the consummation of the transactions contemplated hereby;
(d) American Pacific shall use its commercially reasonable
efforts to obtain from each of the Officers of American Pacific not retained
by Riverview or Riverview Community Bank and deliver to Riverview an executed
non-competition agreement in the form attached hereto as Exhibit D and from
each director of American Pacific an executed non-solicitation agreement in
the form attached hereto as Exhibit E and the consulting agreements from
Messrs. Chen and Cheong in the form attached hereto as Exhibit F;
(e) At all times prior to and including, and as of, the
Closing, American Pacific shall inform Riverview and Riverview Community Bank
in writing of any and all facts necessary to amend or supplement the
representations and warranties made herein and the Schedules attached hereto
as necessary so that the representations and warranties and information
provided in the schedules remain true and correct in all respects; provided,
however, that any such updates to the schedules shall be required prior to the
Closing only with respect to matters which represent material changes to the
schedules and the information contained therein; and provided further, that
before such amendment, supplement or update may be deemed to be a part of this
Merger Agreement, Riverview and Riverview Community Bank shall have agreed in
writing to each amendment, supplement or update to the schedules made
subsequent to the date of this Merger Agreement as an amendment to this Merger
Agreement;
(f) At all times prior to and including, and as of, the
Closing, American Pacific shall give such further assistance to Riverview and
Riverview Community Bank and shall execute, acknowledge and deliver all such
documents and instruments as Riverview and Riverview Community Bank may
reasonably request and take such further action as may be reasonably necessary
or appropriate effectively to consummate the transactions contemplated by this
Merger Agreement;
(g) Between the date of this Merger Agreement and the Closing
Date, American Pacific shall afford Riverview and Riverview Community Bank and
its authorized agents and representatives reasonable access during normal
business hours to the properties, operations, books, records, contracts,
documents, loan files and other information of, or relating to American
Pacific. American Pacific shall provide reasonable assistance to Riverview
and Riverview Community Bank in its investigation of matters relating to
American Pacific;
(h) American Pacific has taken or will take all steps
necessary to exempt the transactions contemplated by this Merger Agreement
from any applicable state takeover or similar
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law or takeover or similar provision in the charter documents or bylaws of
American Pacific, including without limitation any provisions of the Articles
of Incorporation of American Pacific restricting the ownership or acquisition
of American Pacific's capital stock or imposing any "fair price" or
supermajority director or stockholder vote requirements;
(i) Subject to the terms and conditions of this Merger
Agreement, American Pacific agrees to use all commercially reasonable efforts
and to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper, or advisable under applicable laws and
regulations to consummate and make effective, with reasonable promptness after
the date of this Merger Agreement, the transactions contemplated by this
Merger Agreement, including, without limitation, using commercially reasonable
efforts to lift or rescind any injunction or restraining or other order
adversely affecting the ability of the Parties to consummate the transaction
contemplated by this Merger Agreement; provided, however, that such efforts do
not impose unreasonable expense or obligations on American Pacific;
(j) Upon reasonable notice, American Pacific shall cooperate
with and grant access to an environmental consulting firm selected by
Riverview and reasonably acceptable to American Pacific, during normal
business hours (and at such other times as may be agreed) to real property
owned by American Pacific including but not limited to real property owned
through a partnership interest, for the purpose of conducting:
(x) ASTM 1527 Phase I environmental assessments ("Phase I
Assessments"); and
(y) ASTM 1903 Phase II environmental assessments ("Phase
II Assessments" and together with the Phase I
Assessments, the "Environmental Assessments") on any
owned real property owned directly or through a
partnership interests in respect of which (A) a
Recognized Environmental Condition (as such term is
defined in the ASTM Standard) is identified in a
Phase I Assessment or (B) a Phase I Assessment
indicates conditions that Riverview determines, in
its sole discretion, merit further investigation.
Each Phase II Assessment, if any, shall include an
estimate by the environmental consulting firm
preparing such Environmental Assessment of the costs
of investigation, monitoring, personal injury,
property damage, clean up, remediation, penalties,
fines or other liabilities, as the case may be,
relating to the Recognized Environmental Condition(s)
or other conditions which are the subject of the
Phase II Assessment.
American Pacific shall bear the environmental consulting firm's fees and
expenses. Within 15 days after the date hereof, Riverview shall engage an
environmental consultant reasonably acceptable to American Pacific to perform
the Phase I Assessments. Riverview shall use reasonable efforts to cause its
environmental consultant to complete and provide Riverview with its written
Phase I Assessment(s) within 45 days after such consultant is retained.
Promptly following the receipt of all Phase I Assessments (but not later than
15 days thereafter), Riverview shall order all applicable Phase II
Assessments.
6.3 Conduct of Business -- Negative Covenants. From the date of
this Merger Agreement until the earlier of the Effective Time or the
termination of this Merger Agreement, American Pacific covenants and agrees
it will neither do, nor agree or commit to do, any of the following without
the prior written consent of the chief executive officer, president, or chief
financial officer of Riverview, which consent shall not be unreasonably
withheld, except as expressly contemplated or permitted by this Merger
Agreement or the Plan of Merger:
(a) Amend its Articles of Incorporation or Bylaws;
(b) Impose, or suffer the imposition, on any share of capital
stock held by it any lien, charge, or encumbrance, or permit any such lien,
charge, or encumbrance to exist;
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(c) (i) Repurchase, redeem, or otherwise acquire or exchange,
directly or indirectly, any shares of its capital stock or other equity
securities or any securities or instruments convertible into any shares of its
capital stock, or any rights or options to acquire any shares of its capital
stock or other equity securities; or (ii) split or otherwise subdivide its
capital stock; or (iii) recapitalize in any way; or (iv) declare a stock
dividend on the American Pacific Common Stock; or (v) pay or declare a cash
dividend or make or declare any other type of distribution on the American
Pacific Common Stock;
(d) Acquire direct or indirect control over any corporation,
association, firm, organization or other entity, other than in connection with
(i) mergers, acquisitions, or other transactions approved in writing by
Riverview, (ii) internal reorganizations or consolidations involving existing
Subsidiaries, (iii) foreclosures in the ordinary course of business and not
knowingly exposing it to liability by reason of Hazardous Substances, (iv)
acquisitions of control in its fiduciary capacity, or (v) the creation of new
subsidiaries organized to conduct or continue activities otherwise permitted
by this Merger Agreement;
(e) Except as expressly permitted by this Merger Agreement or
the Plan of Merger, or pursuant to the exercise of American Pacific Options
that are outstanding on the date of the Merger Agreement (i) issue, sell,
agree to sell, or otherwise dispose of or otherwise permit to become
outstanding any additional shares of American Pacific Common Stock or any
other capital stock of American Pacific, or any stock appreciation rights, or
any option, warrant, conversion, call, scrip, or other right to acquire any
such stock, or any security convertible into any such stock, or (ii) sell,
agree to sell, or otherwise dispose of any substantial part of the assets or
earning power of American Pacific; or (iii) sell, agree to sell, or otherwise
dispose of any asset of American Pacific other than in the ordinary course of
business for reasonable and adequate consideration; or (iv) buy, agree to buy
or otherwise acquire a substantial part of the assets or earning power of any
other Person or entity;
(f) Incur any additional debt obligation or other obligation
for borrowed money except in the ordinary course of the business of American
Pacific consistent with past practices;
(g) Grant any increase in compensation or benefits to any of
its employees or Officers; pay any bonus; enter into any severance agreements
with any of its Officers or employees; grant any increase in fees or other
increases in compensation or other benefits to any director of American
Pacific; or effect any change in retirement benefits for any class of its
employees or Officers, unless such change is required by applicable law;
(h) Hire a new employee with an annual compensation in excess
of Twenty-Five Thousand Dollars ($25,000), amend any existing employment
contract between it and any person (unless such amendment is required by law);
enter into or amend any indemnification agreement with any person; or enter
into any new employment contract with any person that American Pacific (or its
successors) does not have the unconditional right to terminate without
liability (other than liability for services already rendered), at any time on
or after the Effective Time;
(i) Adopt any new employee benefit plan or terminate or,
except as contemplated by the Merger Agreement, make any material change in or
to any existing employee benefit plan other than any change that is required
by law or that, in the opinion of counsel, is necessary or advisable to
maintain the tax-qualified status of any such plan (except for a termination
resulting from Riverview's decision not to continue any such plan);
(j) Enter into any new service contracts, purchase or sale
agreements or lease agreements that are material to American Pacific;
(k) Make any capital expenditure, except for ordinary
purchases, repairs, renewals or replacements in an amount less than Five
Thousand Dollars ($5,000) per individual expenditure and Fifteen Thousand
Dollars ($15,000) in the aggregate, except as necessary to complete repairs
identified on Schedule 6.3;
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(l) Other than in the ordinary course of business consistent
with past practice, sell, transfer, mortgage, encumber or otherwise dispose of
any of its properties, leases or assets to any person, or cancel, release or
assign any indebtedness of any person, except pursuant to contracts or
agreements in force at the date of this Merger Agreement;
(m) Enter into, renew or terminate any material contract or
agreement or make any change in or renew any of its material leases or
contracts;
(n) Initiate or pursue any existing claim, including but not
limited to, claims under the blanket bond policy of American Pacific, or
settle any claim, action or proceeding involving any liability of American
Pacific for money damages in excess of Fifteen Thousand Dollars ($15,000) or
agree in connection with any such settlement to material restrictions upon the
operations of American Pacific;
(o) Change its method of accounting in effect at June 30,
2004, except as required by changes in GAAP as concurred in by American
Pacific's independent auditors or as required by regulatory accounting
principles or regulatory requirements;
(p) Enter into any new activities or lines of business, or
cease to conduct any material activities or lines of business that it conducts
on the date hereof, or conduct any material business activity not consistent
with past practice;
(q) Except in the ordinary course of business consistent with
past practices, make, renegotiate, renew, increase, extend or purchase any
loan, lease (credit equivalent), advance, credit enhancement or other
extension of credit, or make any commitment in respect of any of the
foregoing;
(r) Enter into, renew or purchase any investments in equity or
Derivatives Contracts; or engage in any forward commitment, futures
transaction, financial option transaction, hedging or arbitrage transaction or
covered asset trading activities;
(s) Purchase any investment securities or make any deposits
other than in the ordinary course of business consistent with past practices
or make any equity investments;
(t) Enter into any transactions other than in the ordinary
course of business;
(u) Grant or commit to grant any new extension of credit to
any Officer, director or holder of five percent (5%) or more of the
outstanding American Pacific Common Stock, or to any corporation, partnership,
trust or other entity controlled by any such person, if such extension of
credit, together with all other credits then outstanding to the same borrower
and all affiliated persons of such borrower, would exceed two percent (2%) of
the capital of American Pacific or amend the terms of any such credit
outstanding on the date hereof;
(v) Sell, purchase, enter into a lease, relocate, open or
close any office, or file an application pertaining to such action with any
government entity;
(w) Settle or compromise any material tax liability or agree
to an extension of the statute of limitations with respect to the assessment
or determination of any taxes, except in the ordinary course of business,
consistent with past practice;
(x) Develop or sell, pledge, encumber or otherwise transfer
its beneficial ownership in the Starlite Property or conduct any
environmental remediation of the Starlite Property;
(y) Complete the formation of a holding company for American
Pacific; or
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(z) Agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction or take or omit
to take any other act which would make any of the representations and
warranties in Article 4 of this Merger Agreement untrue or incorrect in any
material respect if made anew after engaging in such activity, entering into
such transaction, or taking or omitting such other act.
6.4 Conduct of Business -- Certain Actions.
(a) American Pacific shall not, and shall use its best efforts
to ensure that its directors, Officers, employees, and advisors do not,
directly or indirectly, institute, solicit, or knowingly encourage (including
by way of furnishing any information not legally required to be furnished) any
inquiry, discussion, or proposal, or participate in any discussions or
negotiations with, or, except for actions reasonably considered by the Board
of Directors of American Pacific based upon the advice of outside legal
counsel to be required in order to fulfill its fiduciary obligations, provide
any confidential or non-public information to or negotiate with, any
corporation, partnership, person or other entity or group (other than to
Riverview or any Riverview Subsidiary) concerning any "Acquisition Proposal"
(as defined below). American Pacific shall notify Riverview and Riverview
Community Bank immediately if any Acquisition Proposal has been or should
hereafter be received by American Pacific, such notice to contain, at a
minimum, the identity of such persons, and, subject to disclosure being
consistent with the fiduciary obligations of American Pacific's Board of
Directors, a copy of any written inquiry, the terms of any proposal or
inquiry, any information requested or discussions sought to be initiated, and
the status of any reports, negotiations or expressions of interest. For
purposes of this Section, "Acquisition Proposal" means any tender offer,
agreement, understanding or other proposal of any nature pursuant to which any
corporation, partnership, person or other entity or group, other than
Riverview, Riverview Community Bank or of their respective Subsidiaries, would
directly or indirectly (i) acquire or participate in a merger, share exchange,
consolidation or any other business combination involving American Pacific;
(ii) acquire the right to vote ten percent (10%) or more of the outstanding
American Pacific Common Stock; (iii) acquire a significant portion of the
assets or earning power of American Pacific; or (iv) acquire in excess of ten
percent (10%) of the outstanding American Pacific Common Stock.
(b) American Pacific shall immediately terminate all
negotiations or discussions concerning any Acquisition Proposal with parties
other than Riverview and Riverview Community Bank and enforce the terms of all
confidentiality agreements with such other parties.
6.5 Accruals and Reserves. At the request of Riverview and
Riverview Community Bank, American Pacific shall establish such additional
accruals and reserves as may be necessary (i) to conform American Pacific's
accounting and credit loss reserve practices and methods to those of Riverview
and Riverview Community Bank and (ii) to establish and maintain a reserve of
up to $500,000 for the environmental remediation of the Starlite Property,
such amount to be determined at the sole discretion of Riverview and Riverview
Community Bank; provided, however, that American Pacific shall not be required
to take such action prior to the receipt of all Government Approvals as
contemplated by Section 7.3(b).
6.6 Access; Information. Upon reasonable notice, American Pacific
shall afford Riverview and Riverview Community Bank and each of their
officers, employees, counsel, accountants and other authorized
representatives, access, during normal business hours throughout the period up
to the Effective Date of the Merger, to all of the properties, books,
contracts, commitments and records of American Pacific and, during such
period, American Pacific shall furnish promptly to Riverview and Riverview
Community Bank (i) a copy of each material report, schedule and other document
filed by American Pacific with any Regulatory Authority and (ii) all other
information concerning the business, properties and personnel of American
Pacific as Riverview and Riverview Community Bank may reasonably request
(other than documents or other materials relating to the transaction
contemplated herein), provided that no investigation pursuant to this Section
6.6 shall affect or be deemed to modify or waive any representation or
warranty made by American Pacific in this Merger Agreement or the conditions
to the obligations of American Pacific to consummate the transactions
contemplated by this Merger Agreement.
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6.7 Affiliate Agreements. American Pacific will use its
commercially reasonable efforts to cause each person who is an affiliate of
American Pacific for purposes of Rule 145 under the 1933 Act to execute and
deliver to Riverview and Riverview Community Bank on or before the mailing of
the Proxy Statement/Prospectus for the Shareholders' Meeting an agreement in
the form attached hereto as Exhibit C restricting the disposition of the
shares of Riverview Common Stock to be received by such person in exchange for
such person's shares of American Pacific Common Stock. Schedule 6.7 hereto
lists the affiliates of American Pacific as of the date hereof.
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to the Obligations of American Pacific. Unless
waived in writing by American Pacific, the obligations of American Pacific to
consummate the transaction contemplated by this Merger Agreement are subject
to the satisfaction at or prior to the Closing Date of the following
conditions:
(a) Performance. Each of the material acts and undertakings
of Riverview and Riverview Community Bank to be performed at or prior to the
Closing Date pursuant to this Merger Agreement shall have been duly performed;
(b) Representations and Warranties. The representations and
warranties of Riverview and Riverview Community Bank contained in Article 3 of
this Merger Agreement shall be true and correct, in all material respects, on
and as of the Effective Time with the same effect as though made on and as of
the Effective Time;
(c) Documents. In addition to the other deliveries of
Riverview and Riverview Community Bank described elsewhere in this Merger
Agreement, American Pacific shall have received the following documents and
instruments:
(i) a certificate signed by the Secretary or an assistant
secretary of Riverview and Riverview Community Bank dated as of the
Closing Date certifying that:
(A) Riverview's and Riverview Community Bank's
Boards of Directors have duly adopted resolutions (copies of which
shall be attached to such certificate) approving the substantive
terms of this Merger Agreement (including the Plan of Merger) and
authorizing the consummation of the transactions contemplated by
this Merger Agreement and certifying that such resolutions have not
been amended or modified and remain in full force and effect;
(B) each person executing this Merger Agreement on
behalf of Riverview and Riverview Community Bank is an officer of
Riverview and Riverview Community Bank holding the office or offices
specified therein, with full power and authority to execute this
Merger Agreement and any and all other documents in connection with
the Merger, and that the signature of each person set forth on such
certificate is his or her genuine signature; and
(C) the charter documents of Riverview and Riverview
Community Bank attached to such certificate remain in full force and
effect.
(ii) a certificate signed by the President, Chief
Executive Officer or Executive Vice President of Riverview and Riverview
Community Bank stating that the conditions set forth in Section 7.1(a)
and Section 7.1(b) of this Merger Agreement have been fulfilled;
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(d) Opinion of Riverview's and Riverview Community Bank's
Counsel. American Pacific shall have been furnished with an opinion of
counsel to Riverview and Riverview Community Bank, dated as of the Closing
Date, addressed to and in form and substance satisfactory to American Pacific,
to the effect that:
(i) Riverview is a corporation duly organized, validly
existing and in good standing under the laws of the State of Washington.
(ii) Riverview Community Bank is a federal stock savings
bank duly organized, validly existing and in good standing under the laws
of the United States.
(iii) The execution and delivery of the Merger Agreement
by Riverview, and the consummation by Riverview and Riverview Community
Bank of the transactions provided for therein, have been duly authorized
by all requisite corporate action on the part of Riverview and Riverview
Community Bank.
(iv) The Merger Agreement has been duly executed and
delivered by Riverview and Riverview Community Bank and is a valid and
binding obligation of Riverview and Riverview Community Bank enforceable
in accordance with its terms, except as the enforceability thereof may be
limited by (1) bankruptcy, insolvency, moratorium, reorganization,
receivership, conservatorship or similar laws relating to or affecting
the enforcement of creditors' rights generally and (2) general principles
of equity, whether applied by a court of law or equity.
(v) Except for the filing of Articles of Merger with the
OTS and the Oregon Director, no consent or approval under any statutory
law or regulation applicable to Riverview or Riverview Community Bank,
other than such consents and approvals as have been obtained, is required
for Riverview and Riverview Community Bank to consummate the transactions
provided for in the Merger Agreement.
(vi) The Registration Statement has become effective
under the 1933 Act, and, to the best of our knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or contemplated by the SEC or any state securities or other
regulatory authority.
(vii) The shares of Riverview Common Stock to be issued
in exchange for shares of American Pacific Common Stock in connection
with the consummation of the transactions contemplated in the Merger
Agreement have been duly authorized and, when issued in accordance with
the terms of the Merger Agreement will be validly issued, fully paid and
non-assessable, and conform as to legal matters in all material respects
to the description of such shares contained in the Registration
Statement.
Such opinion may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of Riverview and Riverview
Community Bank or appropriate government officials; (ii) in the case of
matters of law governed by the laws of the states in which they are not
licensed, reasonably rely upon the opinions of legal counsel duly licensed in
such states and may be limited, in any event, to Federal Law and the laws of
the States of Oregon and Washington; and (iii) incorporate, be guided by, and
be interpreted in accordance with, the Legal Opinion Accord of the ABA Section
of Business Law (1991).
(e) No Material Adverse Change. No Material Adverse Change in
Riverview shall have occurred since the date of this Merger Agreement.
7.2 Conditions to the Obligations of Riverview and Riverview
Community Bank. Unless waived in writing by Riverview and Riverview Community
Bank, the obligation of Riverview and Riverview Community Bank to consummate
the transactions contemplated by this Merger Agreement is subject to the
satisfaction at or prior to the Closing Date of the following conditions:
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(a) Performance. Each of the material acts and undertakings
of American Pacific to be performed at or before the Closing Date pursuant to
this Merger Agreement shall have been duly performed;
(b) Representations and Warranties. The representations and
warranties of American Pacific contained in Article 4 of this Merger Agreement
shall be true and correct, in all material respects, on and as of the Closing
Date with the same effect as though made on and as of the Closing Date;
(c) Documents. In addition to the documents described
elsewhere in this Merger Agreement, Riverview and Riverview Community Bank
shall have received the following documents and instruments:
(i) a certificate signed by the Secretary or an assistant
secretary of American Pacific dated as of the Closing Date certifying
that:
(A) American Pacific's Board of Directors and
shareholders have duly adopted resolutions (copies of which shall be
attached to such certificate) approving the substantive terms of
this Merger Agreement (including the Plan of Merger) and authorizing
the consummation of the transactions contemplated by this Merger
Agreement and certifying that such resolutions have not been amended
or modified and remain in full force and effect;
(B) each person executing this Merger Agreement on
behalf of American Pacific, is an Officer of American Pacific, as
the case may be, holding the office or offices specified therein,
with full power and authority to execute this Merger Agreement and
any and all other documents in connection with the Merger, and that
the signature of each person set forth on such certificate is his or
her genuine signature;
(C) the charter document of American Pacific
attached to such certificate remain in full force and effect.
(ii) a certificate signed by the President, Chief
Executive Officer or an Executive Vice President of American Pacific
stating that the conditions set forth in Section 7.2(a), Section
7.2(b) and Section 7.2(f) this Merger Agreement have been satisfied.
(iii) such other opinions, agreements and certificates
as have been agreed to and provided to Riverview in connection with the
signing of the Merger Agreement none of which shall have been withdrawn
or modified, without Riverview's prior written consent.
(d) Destruction of Property. Between the date of this Merger
Agreement and the Closing Date, there shall have been no damage to or
destruction of real property, improvements or personal property of American
Pacific which would have a Material Adverse Effect upon American Pacific;
provided, however, that the availability of insurance coverage shall be taken
into account in determining whether there has been such a Material Adverse
Effect;
(e) Inspections Permitted. Between the date of this Merger
Agreement and the Closing Date, American Pacific shall have afforded
Riverview and Riverview Community Bank and their authorized agents and
representatives reasonable access during normal business hours to the
properties, operations, books, records, contracts, documents, loan files and
other information of or relating to American Pacific. American Pacific shall
have caused all American Pacific personnel to provide reasonable assistance to
Riverview and Riverview Community Bank in its investigation of matters
relating to American Pacific;
(f) No Material Adverse Change. No Material Adverse Change in
American Pacific shall have occurred since the date of this Merger Agreement;
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(g) Opinion of American Pacific's Counsel. Riverview and
Riverview Community Bank shall have been furnished with an opinion of legal
counsel to American Pacific, dated the Closing Date, addressed to and in form
and substance satisfactory to Riverview and Riverview Community Bank, to the
effect that:
(i) American Pacific is a commercial bank duly organized,
validly existing and in good standing under the laws of the State of
Oregon.
(ii) American Pacific is an "insured depository
institution" as defined in the Federal Deposit Insurance Act and
applicable regulations thereunder.
(iii) All of the issued American Pacific Common Stock has
been validly issued except as noted in Schedule 4.19 to the Merger
Agreement.
(iv) The execution and delivery of the Merger Agreement by
American Pacific, and the consummation by American Pacific of the
transactions provided for therein, have been duly authorized by all
requisite corporate action on the part of American Pacific.
(v) The Merger Agreement has been duly executed and
delivered by American Pacific and is a valid and binding obligation of
American Pacific enforceable in accordance with its terms, except as the
enforceability thereof may be limited by (1) bankruptcy, insolvency,
moratorium, reorganization, receivership, conservatorship or similar laws
relating to or affecting the enforcement of creditors' rights generally
or the rights of creditors of depository institutions whose accounts are
insured by the FDIC and (2) general principles of equity, whether applied
by a court of law or equity.
(vi) The execution, delivery and performance of the
Merger Agreement by American Pacific did not, and the consummation of the
transactions contemplated thereby by American Pacific does not and will
not (i) violate any statutory law or regulation applicable to American
Pacific or any judgment, decree or order that specifically names American
Pacific, which violation is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect; (ii) constitute a breach of
or default under any agreement or other arrangement that is listed on
Schedule 4.29 to the Merger Agreement, which breach or default is
reasonably likely, individually or in the aggregate, to have a material
adverse effect on the financial condition or results of operations of
American Pacific; (iii) violate the Articles of Incorporation or Bylaws
of American Pacific; or (iv) require any consent or approval under any
such law or regulation or under any such judgment, decree or order, or
the consent or approval of any other party to any such agreement or other
arrangement, other than such consents and approvals as have been
obtained.
(vii) To the best of such counsel's knowledge: (i) there
is no litigation or proceeding against American Pacific pending before
any court or governmental agency which, individually or in the aggregate,
is reasonably likely to have a material adverse effect on the financial
condition or results of operations of American Pacific or which alleges
claims under any fair lending law or other law relating to
discrimination, including, without limitation, the Equal Credit
Opportunity Act, the Fair Housing Act, the CRA and the Home Mortgage
Disclosure Act, and no such litigation or proceeding has been threatened;
(ii) neither American Pacific nor any of its or their properties,
Officers, directors, or controlling persons is a party to or is subject
to any order, decree, agreement, memorandum of understanding or similar
arrangement with, or a commitment letter or similar submission to, any
Regulatory Authority except as set forth in Schedule 4.25 to the Merger
Agreement; and (iii) American Pacific has not been advised by any such
Regulatory Authority that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of
understanding, commitment letter or similar submission.
(viii) The Merger has been duly approved by the American
Pacific Shareholders.
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Such opinion may (i) expressly rely as to matters of fact upon certificates
furnished by appropriate Officers of American Pacific or appropriate
government officials; (ii) in the case of matters of law governed by the laws
of the states in which they are not licensed, reasonably rely upon the
opinions of legal counsel duly licensed in such states and may be limited, in
any event, to Federal Law and the law of the State of Oregon and (iii)
incorporate, be guided by, and be interpreted in accordance with, the Legal
Opinion Accord of the ABA Section of Business Law (1991);
(h) Other Business Combinations, Etc. Other than as
contemplated hereunder, subsequent to the date of this Merger Agreement,
American Pacific shall not have entered into any agreement, letter of intent,
understanding or other arrangement pursuant to which American Pacific would
merge; consolidate with; effect a business combination with; sell any
substantial part of American Pacific's assets; acquire a significant part of
the shares or assets of any other Person or entity (financial or otherwise);
adopt any "poison pill" or other type of anti-takeover arrangement, any
shareholder rights provision, any "golden parachute" or similar program which
would have the effect of materially decreasing the value of American Pacific
or the benefits of acquiring the American Pacific Common Stock;
(i) Maintenance of Certain Covenants, Etc. At the time of
Closing (i) American Pacific shall not have issued or repurchased from the
date hereof any equity or debt securities, or any rights to purchase or
repurchase such securities (therefore, there shall be not more than 2,937,318
shares of American Pacific Common Stock issued and outstanding at the
Effective Time, excluding shares received subsequent to the date of this
Merger Agreement pursuant to the exercise of American Pacific Options under
the American Pacific Option Plan; (ii) from December 31, 2003, there shall
have been no extraordinary sale of assets; and (iii) the payments to be made
under American Pacific's employment agreements, change in control agreements,
directors' retirement plan, defined benefit plan, and all other benefit plans
shall not exceed the amounts provided by the agreements and plans set forth in
Schedule 4.26(d).
(j) Dissenting Shares. American Pacific holding or
controlling no more than five percent (5%) of the shares of the American
Pacific Common Stock issued and outstanding immediately prior to the Effective
Time shall have perfected and maintained in perfected status their dissenters'
rights in accordance with the Oregon Bank Act;
(k) Accruals and Reserves. American Pacific shall have
established the accruals and reserves described in Section 6.5;
(l) Non-competition and Non-solicitation Agreements. The
Non-competition Agreements between Riverview Community Bank and each of the
Officers of American Pacific not retained by Riverview or Riverview Community
Bank and the Non-competition Agreements between Riverview Community Bank and
each of the directors of American Pacific substantially in the form attached
as Exhibit D and Exhibit E, respectively, shall have been duly executed and
delivered by all parties to such agreements;
(m) Receipt of Affiliate Agreements. Riverview shall have
received from each Affiliate of American Pacific the agreements referred to in
Section 6.7;
(n) Major Shareholders and Directors. Simultaneous with the
execution and delivery of this Merger Agreement, each of the Major
Shareholders and directors of American Pacific shall have executed and
delivered to Riverview a Voting Agreement in the form attached hereto as
Exhibit B;
(o) Agreements. Agreements substantially in the form of
Exhibit F between Riverview and David T. Chen and Richard Y. Cheong shall have
been duly executed and delivered by such employees as of the date of this
Merger Agreement and shall not have been terminated by such employees; and
(p) Environmental Assessments. Riverview shall have received
all Phase I and Phase II Assessments pursuant to Section 6.2(j) of this Merger
Agreement at least fifteen days prior to the Effective Time.
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(q) Stock Option Agreements. Riverview shall have received
the consent of each Option holder pursuant to Section 2.8.
7.3 Conditions to Obligations of All Parties. The obligation of
each party to effect the transactions contemplated hereby shall be subject to
the fulfillment, at or prior to the Closing, of the following conditions:
(a) No Pending or Threatened Claims. That no claim, action,
suit, investigation or other proceeding shall be pending or threatened before
any court or governmental agency which presents a substantial risk of the
restraint or prohibition of the transactions contemplated by this Merger
Agreement or the obtaining of material damages or other relief in connection
therewith; and
(b) Government Approvals and Acquiescence Obtained. The
Parties hereto shall have received all applicable Government Approvals for the
consummation of the transactions contemplated herein and all waiting periods
incidental to such approvals or notices given shall have expired.
(c) Effective Registration Statement. The Registration
Statement shall have become effective and no stop order or other order
suspending the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC or any other Regulatory Authority.
(d) Tax Opinion. Riverview and American Pacific shall have
received an opinion from Breyer & Associates PC to the effect that (i) the
Merger constitutes a reorganization under Section 368 of the Internal Revenue
Code, (ii) neither Riverview nor American Pacific will recognize any gain or
loss as a result of the Merger, and (iii) no gain or loss will be recognized
by American Pacific Shareholders who are United States citizens or residents
(as defined in the opinion) to the extent they receive shares of Riverview
Common Stock in exchange for their shares of American Pacific Common Stock,
provided, however, that in the event such counsel declines to issue such an
opinion, Riverview shall have the right but not the obligation to increase the
number of shares issued as Aggregate Stock Consideration as necessary to cause
the transaction to qualify for such tax treatment. In rendering their
opinion, Breyer & Associates PC may require and rely upon representations
contained in certificates of officers of Riverview, American Pacific and
others.
(e) Shareholder Vote. The American Pacific Shareholders shall
have approved of the transactions contemplated hereby by the requisite vote.
(f) Market Listing. All of the shares of Riverview Common
Stock to be issued in the Merger shall have been qualified for listing on
Nasdaq.
ARTICLE 8
TERMINATION
8.1 Termination. This Merger Agreement and the Plan of Merger may
be terminated at any time prior to the Closing, as follows:
(a) By mutual consent in writing of the Parties;
(b) By Riverview and Riverview Community Bank, should American
Pacific fail to conduct its business pursuant to the covenants made in Article
6 if such failure cannot be or has not been cured within thirty (30) days
after the giving of written notice to American Pacific by Riverview of such
failure;
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(c) By Riverview or American Pacific in the event the Closing
shall not have occurred by March 31, 2005, unless the failure of the Closing
to occur shall be due to the failure of the Party seeking to terminate this
Merger Agreement to perform its obligations hereunder in a timely manner. If
Riverview and Riverview Community Bank shall have filed any and all
applications to obtain the requisite Government Approvals within sixty (60)
days of the date hereof, and if the Closing shall not have occurred solely
because of a delay caused by a government regulatory agency or authority in
its review of the application before it, then American Pacific shall, upon
Riverview's and Riverview Community Bank's written request, extend the Closing
Date until such time as all Government Approvals have been obtained and any
stipulated waiting periods have expired but in no event beyond May 15, 2005;
(d) By either Riverview or American Pacific, upon written
notice to the other Party, upon denial of any Governmental Approval necessary
for the consummation of the Merger or the Bank Merger (or should such approval
be conditioned upon a substantial deviation from the transactions
contemplated); provided, however, that either Riverview or American Pacific
may, upon written notice to the other, extend the term of this Merger
Agreement for only one sixty (60) day period to prosecute diligently and
overturn such denial, provided that such denial has been appealed within ten
(10) business days of the receipt thereof;
(e) By Riverview in the event the conditions set forth in
Section 7.2 or Section 7.3 are not satisfied in all material respects as of
the Closing Date, or by American Pacific if the conditions set forth in
Section 7.1 or Section 7.3 are not satisfied in all material respects as of
the Closing Date, and such failure has not been waived prior to the Closing;
(f) By Riverview or American Pacific in the event that there
shall have been a Material Adverse Change in the other party;
(g) By Riverview or American Pacific in the event that there
shall have been a material breach of any representation, and warrant or
covenant or other obligation of the other Party hereunder and such breach
shall not have been remedied within thirty (30) days after receipt by the
breaching Party of written notice from the other Party specifying the nature
of such breach and requesting that it be remedied;
(h) By Riverview should American Pacific enter into any letter
of intent or agreement with a view to being acquired by or effecting a
business combination with any other Person; or any agreement to merge, to
consolidate, to combine or to sell a material portion of its assets or to be
acquired in any other manner by any other Person or to acquire a material
amount of assets or a material equity position in any other Person, whether
financial or otherwise;
(i) By Riverview should American Pacific enter into any formal
agreement, letter of understanding, supervisory agreement, cease and desist
order, consent agreement, memorandum or other similar arrangement with any
bank regulatory agency; or
(j) By Riverview should there be any claim, action, suit,
investigation or other proceeding concerning state or federal securities law
matters pending or threatened before any court or governmental agency against
American Pacific, or its officers and directors for their service as officers
or directors of American Pacific Bank.
(k) By Riverview if, except for the Starlite Property, any
Phase I or Phase II Assessment indicates the existence of any condition or
matter not satisfactory or acceptable to Riverview with respect to which is
reasonably likely that the cost set forth in the Phase II Assessment(s) of
investigation, monitoring, personal injury, property damage, clean up,
remediation, penalties, fines or other liabilities relating to Recognized
Environmental Condition(s) or other conditions which resulted in the Phase II
Assessment would exceed $100,000 in the case of all property.
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(l) By American Pacific, if (1) there has been a Significant
Decline in the Riverview Stock Price, (2) such decline is not proportionate
relative to the Nasdaq Bank Index (symbol: IXBK) (the "Index), (3) American
Pacific delivers written notice to Riverview of its intention to terminate
this Agreement within forty-eight (48) hours following the date of such event
and at least four business days prior to the proposed date of such termination
and (4) Riverview does not elect to pursue a Decline Adjustment as set forth
below; provided however, that if Riverview effects a stock dividend,
reclassification, recapitalization, stock split, combination, exchange of
shares or similar transaction after the date hereof and prior to the date on
which the Riverview Stock Price is determined, the provisions of this Section
8.1(l) shall be appropriately adjusted so that such event does not in and of
itself trigger a termination right on behalf of American Pacific. For
purposes hereof, the following terms have the following meanings:
(i) "Initial Index" shall mean the closing price of the Nasdaq Bank
Index on the date of this Agreement.
(ii) "Final Index" shall mean the average of the Index for the twenty
consecutive trading days ending on the twenty consecutive trading day ending
on the tenth trading day prior to the Closing Date.
(iii) A "significant decline" shall have been deemed to occur if the
Riverview Stock Price is less than $18.06.
(iv) A decline is not "proportionate relative to the Index" if the
quotient obtained by dividing the Riverview Stock Price by $21.25 is less than
the quotient obtained by dividing the Final Index by the Initial Index and
subtracting 0.15 from the quotient.
Notwithstanding any decline in the price of Riverview Common Stock, as set
forth in this Section 8.1(l), American Pacific shall not be permitted to
terminate this Agreement pursuant to this Section 8.1(l) if Riverview elects
within three business days of receipt of the notice of intent to terminate to
agree to adjust the Per Share Consideration (a "Decline Adjustment) such that
the value of the Per Share Consideration received will at least equal the Per
Share Consideration a holder of American Pacific Common Stock would have
received for a Stock Election had the Riverview Stock Price been equal to the
lesser of (a) $18.06 or (b) $21.25 times the quotient of the Final Index
divided by the Initial Index less 0.15. If Riverview fails to elect to effect
a Decline Adjustment, American Pacific may withdraw its notice of intention to
terminate at least three business days prior to the proposed closing date, or
the Merger Agreement will terminate pursuant to such prior notice.
If a Party should elect to terminate this Merger Agreement pursuant to
subsections (b), (c), (d), (e), (f), (g), (h), (i), (j), (k) or (l) of this
Section 8.1, it shall give notice to the other Party, in writing, of its
election in the manner prescribed in Section 9.1 ("Notices") of this Merger
Agreement.
8.2 Effect of Termination. In the event that this Merger Agreement
should be terminated pursuant to Section 8.1 hereof, all further obligations
of the Parties under this Merger Agreement shall terminate without further
liability of any Party to another, other than pursuant to Section 8.3 hereof;
provided, however, that a termination under Section 8.1 hereof shall not
relieve any Party of any liability for a breach of this Merger Agreement or
for any misstatement or misrepresentation made hereunder prior to such
termination, or be deemed to constitute a waiver of any available remedy for
any such breach, misstatement or misrepresentation.
8.3 Riverview Fee. American Pacific hereby agrees to pay Riverview
on demand (and in no event more than three days after such demand) in
immediately available funds, the greater of One Million Two Hundred Thousand
Dollars ($1,200,000) or Riverview's costs that have been incurred in
connection with this transaction (the "Riverview Fee") if within eighteen (18)
months after the date hereof the Merger has not been completed and there
occurs any of the events set forth in subparagraphs (a), (b) or (c) below.
For purposes of this Section 8.3, Riverview's costs shall include but not be
limited to fees and expenses of its investment advisors, fees and expenses of
its counsel, fees and expenses of its accountants, printing, postage and
mailing of the proxy materials for the American Pacific Shareholders' Meeting
to approve the transaction, and registration and filing fees.
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(a) After any person other than Riverview or an Affiliate of
Riverview acquires beneficial ownership of twenty five percent (25%) or more
of the then-outstanding American Pacific Common Stock provided, however,
excluded from such triggering event is: (i) the formation of a bank holding
company for American Pacific (but in such event such holding company shall be
considered the successor to American Pacific) or (ii) shares that transfer
either testate or intestate upon the death of a shareholder; or
(b) American Pacific, without having received Riverview's and
Riverview Community Bank's prior written consent, enters into an agreement to
engage in an Acquisition Transaction (as defined below) with any person (the
term "person" for purposes of this Section 8.3(b) having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the 1934 Act and the rules and
regulations thereunder) other than Riverview and Riverview Community Bank or
any of their respective Subsidiaries, or American Pacific's Board of Directors
recommends that the American Pacific Shareholders approve or accept any
Acquisition Transaction with any person other than Riverview and Riverview
Community Bank or any of their respective Subsidiaries. For purposes of this
Section, "Acquisition Transaction" shall mean (a) a merger or consolidation,
or any similar transaction, involving American Pacific, (b) a purchase, lease
or other acquisition of all or substantially all of the assets of American
Pacific, or (c) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing fifteen
percent (15%) or more of the voting power of American Pacific; or
(c) A bona fide proposal is made by a third party to American
Pacific to engage in an Acquisition Transaction and after such proposal is
made any of the following events occurs: American Pacific breaches this
Merger Agreement and such breach entitles Riverview and Riverview Community
Bank to terminate this Merger Agreement; the American Pacific Shareholders do
not approve this Merger Agreement at the Shareholders' Meeting; the
Shareholders' Meeting is not held or is canceled prior to termination of this
Merger Agreement for reasons other than the fault of Riverview and Riverview
Community Bank; or American Pacific's Board of Directors modifies in a manner
adverse to Riverview and Riverview Community Bank its recommendation with
respect to this Merger Agreement.
Notwithstanding the foregoing, American Pacific shall not be obligated to
pay to Riverview the Riverview Fee if, prior to the occurrence of any of the
events specified in Section 8.3(a), (b) or (c), either (i) Riverview
terminates the Merger Agreement in accordance with the terms hereof other than
pursuant to Section 8.1(g) hereof as a result of a breach of any obligation of
American Pacific hereunder or (ii) American Pacific validly terminates this
Merger Agreement pursuant to Section 8.1(a), (c), (d), (e), (f), (g) or (l)
(but only pursuant to Section 8.1(g) in the event that Riverview or Riverview
Community Bank materially breaches a representation, warranty or covenant
contained herein and, as a result thereof, American Pacific exercises its
right to terminate this Merger Agreement under Section 8.1(g) at a time when
Riverview and Riverview Community Bank were not entitled to terminate this
Merger Agreement under Section 8.1(g)). The parties further agree that this
Section 8.3 is without prejudice to any other rights that the parties hereto
may have for any failure to perform this Merger Agreement.
ARTICLE 9
GENERAL PROVISIONS
9.1 Notices. Any notice, request, demand and other communication
which either Party hereto may desire or may be required hereunder to give
shall be in writing and shall be deemed to be duly given if delivered
personally or mailed by certified or registered mail (postage prepaid, return
receipt requested), air courier or facsimile transmission, addressed or
transmitted to such other Party as follows:
If to American Pacific: American Pacific Bank
315 SW Fifth Avenue, Suite 201
Portland, Oregon 97204
Fax: (503) 221-6242
Attn: David T. Chen, President and
Chief Executive Officer
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With copies to: Foster, Pepper & Tooze LLP
601 SW Second Avenue
Suite 1800
Portland, Oregon 97204-3171
Fax: (503) 221-1510
Attn: Kenneth E. Roberts, Esq.
If to Riverview and
Riverview Community Bank: Riverview Bancorp, Inc.
900 Washington Street
Suite 900
Vancouver, Washington 98660
Fax: (360) 693-6275
Attn: Patrick Sheaffer, Chairman of the
Board and Chief Executive Officer
With a copy to: Breyer & Associates PC
8180 Greensboro Drive
Suite 785
McLean, Virginia 22102
Fax: (703) 883-2511
Attn: John F. Breyer, Jr., Esq.
or to such other address as any Party hereto may hereafter designate to the
other Parties in writing. Notice shall be deemed to have been given on the
date reflected in the proof or evidence of delivery, or if none, on the date
actually received.
9.2 Assignability and Parties in Interest. This Merger Agreement
shall not be assignable by any of the Parties hereto; provided, however, that
Riverview and Riverview Community Bank may assign, set over and transfer all,
or any part of their rights and obligations under this Merger Agreement to any
one or more of their present or future Affiliates. This Merger Agreement
shall inure to the benefit of, and be binding only upon the Parties hereto and
their respective successors and permitted assigns and no other Persons.
9.3 Governing Law. This Merger Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws, and not the laws
pertaining to choice or conflicts of laws, of the State of Washington, unless
and to the extent that federal law controls. Any dispute arising between the
Parties in connection with the transactions which are the subject of this
Merger Agreement shall be heard in a court of competent jurisdiction located
in Clark County, Washington.
9.4 Counterparts. This Merger Agreement may be executed
simultaneously in one or more counterparts (any of which may be facsimile
copies), each of which shall be deemed an original, but all of which shall
constitute but one and the same instrument.
9.5 Publicity. The Parties agree that press releases and other
public announcements to be made by any of them with respect to the
transactions contemplated hereby shall be subject to mutual agreement, unless
otherwise required by law or the applicable rules of NASDAQ.
9.6 Entire Agreement. This Merger Agreement, together with the
Confidentiality Agreement dated August 19, 2004 between the Parties and the
Plan of Merger which is attached as Exhibit A hereto, the schedules, exhibits
and certificates required to be delivered hereunder and any amendments or
addenda hereafter executed and delivered in accordance with Section 9.8 hereof
constitute the entire agreement of the Parties hereto pertaining to the
transaction contemplated hereby and supersede all prior written and oral (and
all contemporaneous oral) agreements and understandings of the Parties hereto
concerning the subject matter hereof. The schedules, annexes, exhibits and
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certificates attached hereto or furnished pursuant to this Merger Agreement
are hereby incorporated as integral parts of this Merger Agreement. Except as
provided herein, by specific language and not by mere implication, this Merger
Agreement is not intended to confer upon any other person not a Party to this
Merger Agreement any rights or remedies hereunder.
9.7 Severability. If any portion or provision of this Merger
Agreement should be determined by a court of competent jurisdiction to be
invalid, illegal or unenforceable in any jurisdiction, such portion or
provision shall be ineffective as to that jurisdiction to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
validity or enforceability of the remaining portions or provisions hereof in
such jurisdiction or rendering that or any other portions or provisions of
this Merger Agreement invalid, illegal or unenforceable in any other
jurisdiction.
9.8 Modifications, Amendments and Waivers. At any time prior to
the Closing or termination of this Merger Agreement, the Parties may, solely
by written agreement executed by their duly authorized officers:
(a) extend the time for the performance of any of the
obligations or other acts of the other Party hereto;
(b) waive any inaccuracies in the representations and
warranties made by the other Party contained in this Merger Agreement or in
the schedules or exhibits hereto or any other document delivered pursuant to
this Merger Agreement;
(c) waive compliance with any of the covenants or agreements
of the other Party contained in this Merger Agreement; and
(d) amend or add to any provision of this Merger Agreement or
the Plan of Merger; provided, however, that no provision of this Merger
Agreement may be amended or added to except by an agreement in writing signed
by the Parties hereto or their respective successors in interest and expressly
stating that it is an amendment to this Merger Agreement.
9.9 Interpretation. The headings contained in this Merger
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Merger Agreement.
9.10 Payment of Expenses. Except as set forth herein, Riverview,
Riverview Community Bank and American Pacific shall each pay its own fees and
expenses (including, without limitation, legal fees and expenses) incurred by
it in connection with the transactions contemplated hereunder.
9.11 Equitable Remedies. The Parties hereto agree that, in the
event of a breach of this Merger by the other Party, the non-breaching Party
will be without an adequate remedy at law by reason of the unique nature of
the Merger Agreement. In recognition thereof, in addition to (and not in lieu
of) any remedies at law which may be available to the non-breaching Party, the
non-breaching Party shall be entitled, at its sole discretion, either (i) to
obtain equitable relief, including the remedies of specific performance and
injunction, in the event of a breach of this Merger Agreement by the other
Party or (ii) if applicable, in the case of Riverview to receive the payment
described in Section 8.3 hereof. Each Party covenants that it shall not
contend in any such proceeding that the other Party is not entitled to a
decree of specific performance by reason of having an adequate remedy at law.
Notwithstanding the foregoing, if American Pacific accepts an Acquisition
Proposal from a third party and Riverview and Riverview Community Bank receive
an opinion of counsel from American Pacific that the failure of the Board of
Directors of American Pacific to accept such Acquisition Proposal would
constitute a breach of such directors' fiduciary duty to the American Pacific
Shareholders, Riverview and Riverview Community Bank shall not be entitled to
the equitable remedy of specific performance. No attempt on the part of
Riverview and Riverview Community Bank to obtain such equitable relief shall
be deemed to constitute an election of remedies by Riverview which would
preclude Riverview from obtaining any remedies at law to which they would
otherwise be entitled.
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9.12 Attorneys' Fees. If any Party hereto shall bring an action at
law or in equity to enforce its rights under this Merger Agreement (including
an action based upon a misrepresentation or the breach of any warranty,
covenant, agreement or obligation contained herein), the prevailing Party in
such action shall be entitled to recover from the other Party its reasonable
costs and expenses necessarily incurred in connection with such action
(including fees, disbursements and expenses of attorneys and costs of
investigation).
9.13 No Waiver. No failure, delay or omission of or by any Party
in exercising any right, power or remedy upon any breach or default of any
other Party shall impair any such rights, powers or remedies of the Party not
in breach or default, nor shall it be construed to be a waiver of any such
right, power or remedy, or an acquiescence in any similar breach or default;
nor shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any waiver,
permit, consent or approval of any kind or character on the part of any Party
of any provisions of this Merger Agreement must be in writing and must be
executed by the Parties to this Merger Agreement and shall be effective only
to the extent specifically set forth in such writing.
9.14 Remedies Cumulative. All remedies provided in this Merger
Agreement, by law, equity or otherwise, shall be cumulative and not
alternative.
9.15 Non-Survival of Representations and Warranties. No
representations and warranties made by the Parties hereto or in any instrument
or document furnished in connection herewith shall survive the Closing. This
Section 9.15 shall not apply to covenants and agreements which by their terms
are intended to be performed after the Closing or the termination of this
Merger Agreement. Nothing in this Section 9.15 shall limit American Pacific's
or Riverview's and Riverview Community Bank's rights or remedies for
misrepresentations, breaches of this Merger Agreement or any other improper
action or inaction by the other Party hereto prior to its termination.
* * * * *
A-52
IN WITNESS WHEREOF, each of the Parties hereto has duly executed and
delivered this Merger Agreement or has caused this Merger Agreement to be
executed and delivered in its name and on its behalf by its representative
thereunto duly authorized, all as of the date first written above.
AMERICAN PACIFIC BANK
By: /s/ David T. Chen
------------------------------------
David T. Chen
Its: President and Chief Executive Officer
ATTEST:
/s/Richard Y. Cheong
--------------------------
Richard Y. Cheong
Senior Vice President and
Chief Financial Officer
RIVERVIEW BANCORP, INC.
By: /s/ Patrick Sheaffer
------------------------------------
Patrick Sheaffer
Its: Chairman and Chief Executive Officer
ATTEST:
/s/ Ronald A. Wysaske
---------------------------
Ronald A. Wysaske
President and Chief
Operating Officer
RIVERVIEW COMMUNITY BANK
By: /s/ Patrick Sheaffer
------------------------------------
Patrick Sheaffer
Its: Chairman and Chief Executive Officer
ATTEST:
/s/ Ronald A. Wysaske
---------------------------
Ronald A. Wysaske
President and Chief
Operating Officer
A-53
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1, dated as of December 13, 2004 (this "Amendment"), to the
Agreement and Plan of Merger, dated as of November 9, 2004 (the "Agreement"),
by and among RIVERVIEW BANCORP, INC., a corporation chartered and existing
under the laws of Washington ("Riverview"), RIVERVIEW COMMUNITY BANK, a
federally chartered stock savings bank ("Riverview Community Bank") and
AMERICAN PACIFIC BANK, a commercial bank chartered and existing under the laws
of Oregon ("American Pacific").
RECITALS
--------
A. Riverview, Riverview Community Bank and American Pacific have
previously entered into the Agreement.
B. Riverview, Riverview Community Bank and America Pacific now wish to
amend and modify the agreement between the parties under the Agreement on the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of their mutual promises and
obligations, the parties hereto approve, adopt and make this Amendment and
prescribe the terms and conditions hereof and the manner and mode of carrying
it into effect, which are as follows:
ARTICLE I
Definitions
Section 1.1. Definitions. Capitalized terms used but not defined
herein shall have the respective meanings ascribed to such terms in the
Agreement.
ARTICLE II
Amendment of THE AGREEMENT
Section 2.1. Amendment of Section 8.1 Transaction. Section 8.1(c) of
the Agreement is hereby amended to extend the period by which the Closing
shall occur such that Section 8.1(c) reads as follows:
(c) By Riverview or American Pacific in the event the Closing shall
not have occurred by April 30, 2005, unless the failure of the Closing to
occur shall be due to the failure of the Party seeking to terminate this
Merger Agreement to perform its obligations hereunder in a timely manner. If
Riverview and Riverview Community Bank shall have filed any and all
applications to obtain the requisite Government Approvals within sixty (60)
days of the date hereof, and if the Closing shall not have occurred solely
because of a delay caused by a
A-54
government regulatory agency or authority in its review of the application
before it, then American Pacific shall, upon Riverview's and Riverview
Community Bank's written request, extend the Closing Date until such time as
all Government Approvals have been obtained and any stipulated waiting periods
have expired but in no event beyond May 15, 2005.
ARTICLE III
Miscellaneous
Section 3.1. Effectiveness. This Amendment shall become effective on
the date hereof. Section 3.2.Interpretation; Effect. When a reference is made
in this Amendment to Sections, such reference shall be to a Section of this
Amendment or the Agreement, as applicable, unless otherwise indicated. The
headings contained in this Amendment are for reference purposes only and are
not part of this Amendment.
Section 1.3. Counterparts. This Amendment may be executed
simultaneously in one or more counterparts (any of which may be facsimile
copies), each of which shall be deemed an original, but all of which shall
constitute but one and the same instrument.
Section 3.4. Continuing Effect of Agreement. This Amendment shall not
constitute an amendment or waiver of any other provision of the Agreement not
expressly referred to herein. Except as expressly amended hereby, the
provisions of the Agreement are and shall remain in full force and effect.
Section 3.5. Governing Law. This Amendment shall be governed by, and
construed and enforced in accordance with, the internal laws, and not the laws
pertaining to choice or conflicts of laws, of the State of Washington, unless
and to the extent that federal law controls. Any dispute arising between the
Parties in connection with the transactions which are the subject of this
Amendment shall be heard in a court of competent jurisdiction located in Clark
County, Washington.
Section 3.6. No Third Party Beneficiaries. Nothing contained in this
Amendment, expressed or implied, is intended to confer upon any person or
party, other than the parties hereto, any benefit, right or remedies.
A-55
IN WITNESS WHEREOF, this Amendment has been duly executed and delivered
by the duly authorized officers of the parties hereto as of the date first
above written.
RIVERVIEW BANCORP, INC.
By: /s/ Patrick Sheaffer
------------------------------------------
Name: Patrick Sheaffer
Title: Chairman and Chief Executive Officer
RIVERVIEW COMMUNITY BANK
By: /s/ Patrick Sheaffer
------------------------------------------
Name: Patrick Sheaffer
Title: Chairman and Chief Executive Officer
AMERICAN PACIFIC BANK
By: /s/ David T. Chen
------------------------------------------
Name: David T. Chen
Title: President and Chief Executive Officer
A-56
APPENDIX B
[Wells Fargo Securities, LLC Letterhead]
March 15, 2005
Board of Directors
American Pacific Bank
315 SW 5th Avenue, Suite 201
Portland, OR 97204
Gentlemen:
We understand that American Pacific Bank ("American Pacific") and Riverview
Bancorp ("Riverview") have entered into an Agreement and Plan of Merger
originally dated November 9, 2004 and amended on December 13, 2004) (the
"Agreement"), pursuant to which American Pacific will be merged with and into
Riverview (the "Merger"). Under the terms of the Agreement, upon consummation
of the Merger, each share of Class B American Pacific common stock, no par
value, issued and outstanding immediately prior to the effective time of the
Merger, will be converted into the right to receive the "Transaction Value Per
Share," defined as the quotient of: (a) the Aggregate Consideration, defined
as the sum of (i) the Aggregate Cash Consideration plus (ii) the product of
the Aggregate Stock Consideration multiplied by the Riverview Stock Price (as
defined below) divided by (b) the number of shares of American Pacific Common
Stock outstanding at the Effective Time. The Aggregate Stock Consideration
shall equal 788,593 shares plus 0.2812 times the number of shares of American
Pacific Common Stock issued after November 9, 2004 upon exercise of an
outstanding American Pacific Option prior to the Effective Date and the
Aggregate Cash Consideration shall be $16,758,000 plus $5.975 for any share of
American Pacific Common Stock issued after November 9, 2004 upon exercise of
an outstanding American Pacific Option prior to the Effective Date. The number
of shares issued under the Aggregate Stock Consideration will not be subject
to a collar on the Riverview stock price. The terms and conditions of the
Merger are more fully set forth in the Agreement. You have requested the
opinion of Wells Fargo Securities, LLC ("Wells Fargo Securities") as to the
fairness, from a financial point of view, of the Aggregate Consideration to
the holders of shares of American Pacific common stock.
Wells Fargo Securities, as part of its investment banking business, is
customarily engaged in the valuation of businesses, including financial
institutions, and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, and other corporate transactions. In connection with
rendering this fairness opinion, Wells Fargo Securities reviewed, among other
things: (i) the Agreement and exhibits thereto; (ii) certain publicly
available financial statements of American Pacific and other historical
financial information provided by American Pacific that we deemed relevant;
(iii) certain publicly available financial statements of Riverview and other
historical financial information provided by Riverview that we deemed
relevant; (iv) certain financial analyses and forecasts of American Pacific
prepared by and reviewed with management of American Pacific and the views of
senior management of American Pacific regarding American Pacific's past and
current business operations, results thereof, financial condition and future
prospects; (v) certain financial analyses of Riverview prepared by and
reviewed with management of Riverview and the views of senior management of
Riverview regarding Riverview's past and current business operations, results
thereof, financial condition and future prospects; (vi) the pro forma impact
of the Merger and related synergies discussed with American Pacific and
Riverview management; (vii) the relative contribution of assets, liabilities,
equity and earnings of American Pacific and Riverview to the resulting
institution; (viii) the publicly reported historical price and trading
activity for American Pacific's and Riverview's common stock, including a
comparison of certain financial and stock market information for American
Pacific and Riverview with similar publicly available information for certain
other publicly traded companies; (ix) the financial terms of recent business
combinations in the banking industry deemed relevant to our analysis; (x) the
current market environment generally and the banking environment in
particular; and (xi) such other information, financial studies, analyses and
investigations and financial, economic and market criteria as we considered
relevant.
In preparing its fairness opinion, Wells Fargo Securities has assumed and
relied upon, without independent verification, the accuracy and completeness
of all the financial information, analyses and other information that was
publicly available or otherwise furnished to, reviewed by or discussed with
us, and we do not assume any responsibility or liability therefor. We did not
make an independent evaluation or appraisal of the specific assets, the
collateral securing assets or the liabilities (contingent or otherwise) of
American Pacific or Riverview or any
B-1
Board of Directors
American Pacific Bank
March 15, 2005
Page 2 of 2
of their subsidiaries, or the collectibility of any such assets, nor have we
been furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of
Riverview or American Pacific nor have we reviewed the individual credit files
relating to Riverview or American Pacific. We have assumed, with your consent,
that the respective allowances for loan losses will be adequate on a proforma
basis for the combined entity.
With respect to the financial analyses or projections reviewed with management
and used in our analyses, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective managements of the respective future financial
performances of American Pacific and Riverview and that such performances and
expected cost savings will be achieved, and we express no opinion as to such
financial projections or the assumptions on which they are based. We have also
assumed that there has been no material change in American Pacific or
Riverview's assets, results of operations, financial condition, business or
prospects since the date of the last financial statements made available to
us. We have assumed in all respects material to our analysis that American
Pacific and Riverview will remain as going concerns for all periods relevant
to our analyses, that the Merger will be accounted for using purchase
accounting, that all of the representations and warranties contained in the
Agreement and all related agreements are true and correct, that each party to
such agreements will perform all of the covenants required to be performed by
such party under such agreements and that the conditions precedent in the
Agreement are not waived.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect this opinion.
We have not undertaken to update, revise or reaffirm this opinion or otherwise
comment upon events occurring after the date hereof. We are expressing no
opinion herein as to what the value of American Pacific's common stock will be
when issued to Riverview's shareholders pursuant to the Agreement or the
prices at which American Pacific's or Riverview's common stock will trade at
any time.
We have acted as American Pacific's financial advisor in connection with the
delivery of this opinion and will receive a fee for our services.
In the ordinary course of our business, we may actively trade equity
securities of American Pacific and Riverview for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
This fairness opinion is directed to the Board of Directors of American
Pacific Bank in connection with its consideration of the Merger and does not
constitute a recommendation to any stockholder of American Pacific as to how
such stockholder should vote at any meeting of stockholders called to consider
and vote upon the Merger. Our opinion is directed only to the fairness of the
Aggregate Consideration to American Pacific shareholders from a financial
point of view and does not address the underlying business decision of
American Pacific to engage in the merger, the relative merits of the merger as
compared to any other alternative business strategies that might exist for
American Pacific or the effect of any other transaction in which American
Pacific might engage. Our opinion is not to be quoted or referred to, in whole
or in part, in a registration statement, prospectus, proxy statement or in any
other document, nor shall this opinion be used for any other purposes, without
Wells Fargo Securities' prior written consent; provided, however, that we
hereby consent to the inclusion of this opinion as an appendix to American
Pacific's Proxy Materials and Riverview's Prospectus to be distributed to its
shareholders and to the references to this opinion therein.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the Aggregate Consideration is fair, from a financial point of
view, to the holders of American Pacific Bank common stock.
Very truly yours,
/s/WELLS FARGO SECURITIES, LLC
WELLS FARGO SECURITIES, LLC
B-2
APPENDIX C
TITLE 53. FINANCIAL INSTITUTIONS
CHAPTER 711. MERGER; CONVERSION; SHARE EXCHANGE; ACQUISITION;
LIQUIDATION; INSOLVENCY
MERGER; CONVERSION; SHARE EXCHANGE; ACQUISITION
MERGER, SHARE EXCHANGE AND ACQUISITION
711.175. Stockholder's right to dissent to merger, share exchange or transfer
of assets or liabilities.
(1) A stockholder of an Oregon stock bank may dissent from the following:
(a) A plan of merger pursuant to which the Oregon stock bank is not the
resulting insured institution;
(b) A plan of merger pursuant to which the Oregon stock bank is the
resulting insured stock institution and the number of its voting shares
outstanding immediately after the merger, plus the number of shares issuable
as a result of the merger, either by the conversion of securities issued
pursuant to the merger or the exercise of rights and warrants issued pursuant
to the merger, will exceed by more than 20 percent the total number of voting
shares of the resulting insured stock institution outstanding immediately
before the merger;
(c) A plan of share exchange pursuant to which the Oregon stock bank in
which the stockholder owns shares is acquired; and
(d) An acquisition transaction requiring such stockholder's approval
pursuant to ORS 711.170 (5).
(2) To perfect a stockholder's right to dissent to a transaction described
in subsection (1) of this section, the stockholder must send or deliver a
notice of dissent to the Oregon stock bank prior to or at the meeting of the
stockholders at which the transaction is submitted to a vote, or the
stockholder must vote against such transaction.
(3) A stockholder shall not dissent as to less than all the shares
registered in the name of the stockholder, except a stockholder holding, as a
fiduciary or nominee, shares registered in the stockholder's name for the
benefit of more than one beneficiary, may dissent as to less than all of the
shares registered in the fiduciary or nominee's name if any dissent as to the
shares held for a beneficiary is made as to all the shares held by the
fiduciary for that beneficiary or nominee. The fiduciary's rights shall be
determined as if the shares to which the fiduciary has dissented and the other
shares are registered in the names of different stockholders.
711.180. Rights of stockholder dissenting to merger, share exchange or
transfer of assets or liabilities; demand required; notice and offer to pay
for shares; costs of appraisal of shares; when rights not applicable.
(1) Any stockholder of an Oregon stock bank who dissented to a transaction
listed under ORS 711.175 (1) and who desires to receive the value in cash of
those shares, shall make written demand upon the Oregon stock bank or its
successor and accompany the demand with the surrender of the share
certificates, properly indorsed within 30 days after the stockholders' meeting
at which a vote to approve such transaction involving an Oregon stock bank was
taken. Any stockholder failing to make written demand within the 30-day period
shall be bound by the terms of the proposed plan of merger, plan of share
exchange or acquisition transaction agreement.
(2) Within 30 days after a transaction listed under ORS 711.175 (1) is
effected, the Oregon stock bank or its successor shall give written notice
thereof to each dissenting stockholder who has made demand under this section
at the address of the stockholder on the stock record books of the Oregon
stock bank, and shall make a written offer to each such stockholder to pay for
the shares at a specified price in cash determined by the Oregon stock bank or
its successor to be the fair value of the shares as of the effective date of
the transaction. The notice and offer shall be accompanied by a statement of
condition of the Oregon stock bank, the shares of which the dissenting
stockholder held, as of the latest available date and not more than four
months prior to the consummation of the transaction, and a statement of income
of the Oregon stock bank for the period ending on the date of the statement of
condition.
(3) Any stockholder who accepts the offer of the Oregon stock bank or its
successor within 30 days following the date on which notice of the offer was
mailed or delivered to dissenting stockholders shall be paid the price per
share offered, in cash, within 30 days following the date on which the
stockholder communicates acceptance in
C-1
writing to the Oregon stock bank or its successor. Upon payment, the
dissenting stockholder shall cease to have any interest in the shares
previously held by the stockholder.
(4) If, within 30 days after notice of the offer, one or more dissenting
stockholders do not accept the offer of the Oregon stock bank or its successor
or if no offer is made, then the value of the shares of the dissenting
stockholders who have not accepted the offer shall be ascertained, as of the
effective date of the transaction, by an independent, qualified appraiser
chosen by the Director of the Department of Consumer and Business Services.
The valuation determined by the appraiser shall govern and the appraiser's
valuation of such shares shall not be appealable except for one or more of the
reasons set forth in ORS 36.705 (1)(a) to (d) for vacation of an arbitrator's
award, and for one of the grounds for modification or correction of an
arbitrator's award under ORS 36.710. Any such appeal must be made within 30
days after the date of the appraiser's valuation and is subject to ORS 183.415
to 183.500. The Oregon stock bank or its successor shall pay the dissenting
shareholders the appraised value of the shares within 30 days after the date
the appraiser sends the Oregon stock bank or its successor written notice of
the appraiser's valuation.
(5) The director shall assess the reasonable costs and expenses of the
appraisal proceeding equally to the Oregon stock bank or its successor and to
the dissenting shareholders, as a group, if the amount offered by the Oregon
stock bank or its successor is between 85 percent and 115 percent of the
appraised value of the shares. The director shall assess the reasonable costs
and expenses of the appraisal proceeding and the reasonable costs and
expenses, including attorney fees and costs, of the Oregon stock bank or its
successor to the dissenting stockholders, as a group, if the amount offered by
the Oregon stock bank or its successor is 115 percent or more of the appraised
value of the shares. The director shall assess the reasonable costs and
expenses of the appraisal proceeding and the reasonable costs and expenses,
including attorney fees and costs, of the dissenting shareholders, as a group,
to the Oregon stock bank or its successor if the amount offered by the Oregon
stock bank or its successor is 85 percent or less of the appraised value of
the shares. The director's decision regarding assessment of fees and costs may
be appealed as provided in ORS 183.415 to 183.500.
(6) Amounts required to be paid by the Oregon stock bank or its
successors, or the dissenting shareholders under this section shall be paid
within 30 days after the director's assessment of any fees or costs becomes
final or, if the director's decision is appealed, within 30 days after a final
determination of such fees and costs is made.
(7) The director may require, as a condition of approving a transaction
listed in ORS 711.175 (1), the replacement of all or a portion of the
stockholders' equity of an Oregon stock bank expended in payment to dissenting
stockholders under this section.
(8) A stockholder may not receive the fair value of the stockholder's
shares under this section:
(a) If the plan of merger provides that all stockholders of the resulting
insured stock institution receive common stock of a holding company pursuant
to a merger with an interim Oregon stock bank chartered under ORS 707.025, and
the stockholder's Oregon stock bank and the interim Oregon stock bank are the
only parties to the merger; or (b) If the shares held by the dissenting
stockholder immediately before the effective date of a transaction listed in
ORS 711.175 (1) are listed on any national securities exchange or are included
on the list of over-the-counter margin stocks issued by the Board of Governors
of the Federal Reserve System.
711.185. Stockholder withdrawal of demand for payment for shares made under
ORS 711.180.
(1) A dissenting stockholder making a demand under ORS 711.180 may
withdraw the demand if:
(a) The Oregon stock bank or its successor consents to the withdrawal; or
(b) The dissenting stockholder pays such stockholder's pro rata share of
the appraisal costs and the Oregon stock bank's reasonable costs and expenses,
including attorney fees and costs.
(2) When a dissenting stockholder withdraws the demand under subsection
(1) of this section, the stockholder's status as a stockholder shall be
restored, without prejudice to any corporate proceedings taking place in the
interim.
C-2
APPENDIX D
THE FEDERAL DEPOSIT INSURANCE CORPORATION
550 17th Street, N.W.
Washington, D.C. 20429
Form 10-KSB
(Mark One)
[ X ] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2004.
[ ] Transition Report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to .
------- ------
Commission File No. N/A American Pacific Bank
--- ---------------------
(Name of small business issuer in its charter)
Oregon 93-0737742
------ ----------
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification)
315 SW Fifth Avenue
Portland, Oregon 97204
---------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (503) 221-5801
--------------
Securities registered under Section 12(b) of the Act: None
----
Name of each exchange on which registered: None
----
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock
--------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to the filing requirements for the past 90 days.
Yes No X
----- -----
D-1
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $8,996,350.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $17,012,468 using the average bid and asked
prices from the 30-day period ended January 31, 2005.
As of January 31, 2005, 2,804,618 shares of Class B Common Stock, no par value
per share, were issued and outstanding.
Documents incorporated by reference: NONE
D-2
TABLE OF CONTENTS
PART I
Item 1. Business 4
General 4
Business Description 4
Deposit Services 4
Loan Services 5
Credit Card Program 6
Special Services 6
Markets 7
Competition 7
Employees 8
Supervision and Regulation 8
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 12
Item 6. Management's Discussion and Analysis of Condition
and Results of Operations 14
Overview 14
Forward Looking Statements 14
Selected Financial Data 15
Financial Highlights 16
Critical Accounting Policies and Estimates 16
Results of Operations 18
Financial Condition 21
Item 7. Financial Statements and Supplementary Data 32
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 32
Item 8A Controls and Procedures 32
PART III
Item 9. Directors and Executive Officers 33
Item 10.Executive Compensation 33
Item 11.Security Ownership of Certain Beneficial Owners
and Management 33
Item 12.Certain Relationships and Related Transactions 33
Item 13.Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 33
Item 14.Principal Accountant Fees and Services 34
SIGNATURES 35
FINANCIAL STATEMENTS 39
EXHIBITS 77
D-3
PART I
Item 1. Business
General
American Pacific Bank (the "Bank") is organized and operates under the
laws of the State of Oregon as a commercial bank. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC") and the Bank
is regulated by both the FDIC and the Oregon Division of Finance and Corporate
Securities under the Department of Consumer and Business Services.
The Bank opened for business on December 6, 1979 in Aumsville, Oregon
under the name Santiam Valley Bank. In 1988, the Bank changed it name to
American Pacific Bank. Until 1998, the Bank had its main office in Aumsville,
one branch in Mill City, Oregon and a real estate loan production office
serving the Portland metropolitan areas. In 1998, the Bank moved its
headquarters to Mill City and in May 1999, the Bank relocated to Portland, at
which time it closed its Mill City branch and began serving Mill City
customers from the Aumsville branch. In January 2000, the Bank moved its main
branch and head office to its current ground floor location in Portland's
downtown financial district. In September 2000, the Bank introduced full
Internet banking services, including bill payment through its online delivery
channel called American Online Pacific Bank (www.apbank.com). In March 2001
the Bank opened its eastside branch in Wood Village, Oregon inside a Wal-Mart
store.
At the 2003 annual shareholders' meeting, shareholders approved the
formation of a bank holding company. The Bank never completed the regulatory
process to finalize the holding company formation. On November 9, 2004, the
Bank announced that it had entered into a definitive agreement to merge into
Riverview Community Bank, a wholly-owned subsidiary of Riverview Bancorp Inc.
The merger is conditioned on receipt of regulatory and shareholder approval.
Upon closing of the merger, American Pacific Bank's shareholders will receive
either cash or shares of Riverview Bancorp's common stock in exchange for
their shares of American Pacific Bank common stock. There can be no
assurances that the proposed merger will receive all requisite approvals or
will be consummated.
Business Description
The Bank provides banking services to businesses, individuals, and
professionals in the Portland metropolitan area and the mid-Willamette Valley
area, west of the Cascade Mountain range and east of the suburbs of Salem. In
addition, the Bank provides full service real estate lending operations in
Portland, Oregon, as well as a nationwide credit card program.
The Bank offers a broad range of banking services, from traditional
services found at larger commercial banks to specialized, niche-oriented
services designed to focus on certain customer populations. Several personal
and business checking account options are made available by the Bank.
Deposit Services
The Bank's deposit services include savings accounts, checking accounts,
individual retirement accounts (IRAs), money market accounts, and several
certificate of deposit options, including a step-up certificate that allows
for the interest rate to increase to market rate (if rates rise) once during
the term of the certificate.
D-4
Loan Services
The Bank's loan services include short and medium-term commercial loans,
commercial credit lines, construction and real estate loans with an emphasis
on pre-sold residential construction and long-term financing, permanent
mortgages, personal loans, and secured and unsecured credit cards.
The Bank's policy is to avoid undue concentrations of credit risk. At
December 31, 2004 and 2003, respectively, the loan portfolio consisted of the
following:
As of December 31,
--------------------------------------------------------
Loan Type 2004 2003
------------------------ -------------------------
Amount % of Loans Amount % of Loans
---------- ---------- ---------- ----------
Commercial $ 86,628,120 79.6% $ 80,563,270 81.1%
Real estate -
construction 16,603,763 15.3% 11,739,068 11.8%
Real estate -
permanent 1,876,387 1.7% 3,132,975 3.2%
Credit cards 3,563,127 3.3% 3,845,903 3.9%
Installment 68,417 0.1% 79,424 0.1%
Overdraft Accounts 61,121 0.1% 38,355 0.0%
------------ ----- ------------ -----
TOTAL $108,800,935 100.0% $ 99,398,995 100.0%
============ ===== ============ =====
Over the past four years, the Bank has refocused its lending activities
to concentrate on real estate and small business lending activities to small
and medium sized business, with the goal of providing a more diverse loan
portfolio. In June 2000, the Bank opened its Small Business Lending
Department to pursue small business loans in the Portland market. To further
concentrate its efforts on real estate and small business loans, in January
2003, the Bank closed its Mortgage Department. Currently, only a small
segment of the Bank's loan portfolio is comprised of owner-occupied
residential real estate loans.
Real Estate Loans. The Bank's Real Estate Lending Division provides
interim construction loans, commercial real estate loans, and custom
residential construction loans with an emphasis on pre-sold projects. The Bank
participates with other banks in certain large construction and commercial
real estate loans, many of which the Bank originates.
The Bank has cultivated relationships with several established
residential and commercial builders. During fiscal year 2004, these
relationships resulted in the financing of 49 commercial real estate projects
and residential projects. In the year 2004, the Real Estate Department
originated loans totaling $37,420,050, which is equal to 34.87% of the total
loan portfolio at year-end.
Commercial Loans. The Business Lending Department provides working
capital lines of credit, term financing, and SBA loans to small to medium
sized businesses, along with cash management deposit products and merchant
services. As of December 31, 2004, small business loans totaled $6,046,447,
which comprised 5.6% of the total loan portfolio.
D-5
Consumer Loans. The Bank also provides personal loans for automobiles,
recreational vehicles, boats, and other large consumer goods. The Bank offers
individual secured credit cards, as well as secured business credit cards, in
order to accommodate the credit needs of its customers and expand its asset
base. As of December 31, 2004, consumer loans, including credit card
relationships, totaled $3,631,544, which comprised 3.3% of the total loan
portfolio.
Credit Card Program
General. The Bank's credit card program involves marketing, establishing,
and servicing consumer credit card accounts. The credit cards are fully or
partially secured with deposits in the Bank. As such, the Bank's credit
criteria qualifies applicants who would not otherwise qualify for
conventional, unsecured credit cards.
Security for Credit Card Loans. The Bank's credit card portfolio contains
predominantly three types of credit card loans: secured credit card loans,
partially secured credit card loans (known as "flips") and unsecured credit
card loans. Flips are accounts that have graduated from secured accounts to
become partially unsecured with the passage of time due to the customer's
creditworthiness. Each secured card is partially or fully backed by a time
deposit or a savings account equal to the credit limit for that card. As of
December 31, 2004, the Bank held $4,763,438 in credit card secured deposits
and $1,836,434 in secured and partially secured credit card loans.
Since 1997, the Bank has contracted with Western States Bankcard
Association ("WSBA"), an unaffiliated corporation, to report and process the
Bank's credit card portfolio. The Bank realizes all fees and finance charge
income from the portfolio, and assumes all risk management responsibilities
including collection and due diligence procedures. WSBA provides all other
portfolio processing requirements, including customer service support. WSBA
is compensated on a flat fee per account processed basis.
From time to time, the Bank has purchased credit card portfolios from
other parties. Generally, after the first year of purchase, the Bank pays a
rebate to the seller of 0.5% of net sales on accounts that were acquired. The
Bank also maintains certain co-branded credit card programs with other
institutions. These cards are promoted by both parties, and the Bank pays a
one-time fee for each approved account application referred by the other
party, as well as a percentage of net sales on approved accounts. Co-branded
credit card balances totaled $1,639,662, as of December 31, 2004.
The Bank has an agreement with eBanker (an internet company in which the
Bank's Chairman and controlling shareholder has a controlling interest) to
issue co-branded credit cards. Although the agreement with eBanker was never
formally terminated, there has never been any activity between the two
entities pursuant to the agreement and the parties consider the agreement
inactive.
Riverview Community Bank has indicated that after the merger, it intends
to sell American Pacific's credit card portfolio, which as of December 31,
2004 totaled $3,563,127.
Special Services
The Bank offers a night depository and a 24-hour automated teller machine
(ATM) at its Portland, Aumsville and Wood Village locations, with access
through the Cirrus and Star Systems. Other special services include
personalized checks at account opening, overdraft protection from a savings
account, conventional credit cards, drive-up commercial banking at the
Aumsville branch, automatic
D-6
transfers and payments, night deposit and bank-by-mail. The Bank also offers
internet banking through American Online Pacific Bank (www.apbank.com), a
fully transactional home banking delivery channel that provides account access
and bill paying services. The contents of the Bank's website are not
incorporated by reference within this document.
Markets
The Bank's primary market includes the Portland metropolitan area, and
the agricultural and forest product-based communities in the mid-Willamette
Valley, west of the Cascade Mountain range and east of the suburbs of Salem.
Consequently, the Bank is dependent on the economic health of those
communities. However, the combination of urban and rural market areas permits
the Bank to diversity its economic ties.
Competition
The banking business in Oregon is highly competitive with respect to both
loans and deposits. The Bank has three primary market areas: (1) the Portland
metropolitan area, (2) the east Portland suburbs surrounding Wood Village, and
(3) the section of the mid-Willamette Valley surrounding Aumsville, located
roughly eight miles east of Salem, Oregon. American Pacific is the only bank
serving customers in the Aumsville area. Competition in the Portland
metropolitan area, which impacts the Bank's Portland branch is very
competitive. The Bank's newest branch (inside a Wal-Mart store) in Wood
Village, which is approximately 16 miles east of Portland, is also faced with
keen competition from surrounding banks. The Bank's branches compete with
other commercial banks, savings and loan associations, savings banks, credit
unions, mortgage companies and other financial institutions.
According to the FDIC, as of January 19, 2005, there were 24 FDIC insured
financial institutions, with a total of 162 offices in Portland. The deposit
base in the city of Portland as of June 30, 2004, was $12.8 billion. The
Portland banking market is dominated by the large out-of-state banks, such as
Wells Fargo, U.S. Bank, Key Bank, Washington Mutual, and Bank of America. Due
to their size, these banks offer their customers nearly state-wide banking
facilities, an extensive ATM network, and higher lending capabilities.
Corporate lending in the Portland market is dominated by these substantially
larger banks; however, management believes that the Bank has found niche
markets in which it competes favorably, such as real estate construction.
In the Troutdale, Oregon area, of which Wood Village is in the near
vicinity, there are four FDIC insured banks with a total of five branches.
American Pacific Bank is the only community bank located in that area. The
other banks in the area are large out-of-state banks.
Credit unions present a significant competitive challenge for the Bank's
services and products in the metropolitan area. As credit unions currently
enjoy an exemption from taxes, they are able to offer higher deposit rates and
lower loan rates than the Bank can on a comparable basis. Credit unions are
also not currently subject to certain regulatory constraints, such as the
Community Reinvestment Act, which, among other things, requires the Bank to
implement procedures to make and monitor loans throughout the communities it
serves. Adhering to such regulatory requirements raises the costs associated
with our lending activities, and reduces potential operating profits.
Accordingly, the Bank seeks to compete by focusing on building customer
relations, providing superior service and offering a wide variety of
commercial banking products that do not compete directly with products and
services offered by credit unions, such as commercial real estate loans,
inventory and accounts receivable financing, and SBA loans
D-7
for qualified businesses.
Competition for the Bank's credit card business comes from many banking
and non-banking entities, both in Oregon and nationwide. The level of
competition for the secured credit card business is intense, and it is
expected to remain competitive in the future.
Employees
As of December 31, 2004, the Bank had 31 full-time equivalent employees.
None of these are represented by labor unions and the Bank considers its
employee relations to be excellent. A number of benefit programs are available
to eligible employees including group medical plans, a 401(k) plan, paid sick
leave, and paid vacation.
Supervision and Regulation
General. The Bank is extensively regulated under federal and state law.
These laws and regulations are generally intended to protect depositors and
customers, not shareholders. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory or regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the Bank's
business and prospects. The Bank cannot accurately predict the nature or the
extent of the effects on our business and earnings that fiscal or monetary
policies, or new federal or state legislation may have in the future.
As a state chartered bank with deposits insured by the FDIC, the Bank is
subject to the supervision and regulation of the Oregon Department of Consumer
and Business Services and the FDIC. These agencies may prohibit the Bank from
engaging in what the regulators believe constitute unsafe or unsound banking
practices. The primary state regulator regularly examines the Bank or
participates in joint examinations with the federal regulator. Areas subject
to review by federal authorities include the allowance for credit losses,
investments, loans, mergers, payments of dividends, establishment of stores
and other aspects of operations.
Safety and Soundness Standards. The FDIC has adopted non-capital safety
and soundness standards for institutions under its authority. These standards
cover internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, and standards for asset quality, earnings and
investment securities valuation. An institution that fails to meet these
standards must develop a plan acceptable to the agency, specifying the steps
that it will take to meet the standards. Failure to submit or implement such a
plan may subject the institution to regulatory sanctions. Management believes
that the Bank is in substantial compliance with these standards.
Regulation of Management. Federal law (1) establishes the circumstances
under which officers or directors of a bank may be removed by the
institution's federal supervisory agency, (2) places restraints on lending by
a bank to its executive officers, directors, or principal shareholders, and
(3) prohibits management personnel of a bank from serving as a director or
assuming other management positions with another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal
D-8
Reserve Act on extensions of credit to executive officers, directors,
principal shareholders or any related interest of such persons. Extensions of
credit must be made on substantially the same terms, including interest
rates and collateral as, and follow credit underwriting procedures that are
not less stringent than, those prevailing at the time for comparable
transactions with persons not affiliated with the bank, and must not involve
more than the normal risk of repayment or present other unfavorable features.
Banks are also subject to certain lending limits and restrictions on
overdrafts to such persons. A violation of these restrictions may result in
the assessment of substantial civil monetary penalties on the affected bank or
any officer, director, employee, agent or other person participating in the
conduct of the affairs of that bank, the imposition of a cease and desist
order, and other regulatory sanctions.
Tie-In Arrangements. The Bank cannot engage in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions, the
Bank may not condition an extension of credit to a customer on either (1) a
requirement that the customer obtain additional services provided by it or (2)
an agreement by the customer to refrain from obtaining other services from a
competitor.
Community Reinvestment. The Community Reinvestment Act ("CRA") requires
that, in connection with examinations of financial institutions within its
jurisdiction, the FDIC evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low- and
moderate-income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or new facility. The Bank's
current CRA rating is "Satisfactory."
Deposit Insurance. The Bank's deposits are currently insured to a maximum
of $100,000 per depositor through the Bank Insurance Fund ("BIF"),
administered by the FDIC. The Bank is required to pay semi-annual deposit
insurance premium assessments to the FDIC. Assessments are based on how much
risk a bank is deemed to present to the BIF. Banks with higher levels of
capital and a low degree of supervisory concern are assessed lower premiums
than banks with lower levels of capital or involving a higher degree of
supervisory concern. The Bank qualifies for the lowest premium level, and
currently pays only the statutory minimum rate.
Dividends. Under the Oregon Bank Act, the Bank is subject to restrictions
on the payment of cash dividends. A bank may not pay cash dividends if that
payment would reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. In addition, the amount of
the dividend may not be greater than its net unreserved retained earnings,
after first deducting to the extent not already charged against earnings or
reflected in a reserve, all bad debts, which are debts on which interest is
unpaid and past due at least six months; all other assets charged off as
required by the Oregon Director or state or federal examiner; and all accrued
expenses, interest and taxes. In addition, the appropriate regulatory
authorities are authorized to prohibit banks from paying dividends that would
constitute an unsafe or unsound banking practice. We are not currently subject
to any regulatory restrictions on dividends other than those noted above.
Capital Adequacy. The federal and state bank regulatory agencies use
capital adequacy guidelines in their examination and regulation of banks. If
the capital falls below the minimum levels established by these guidelines, a
bank may be denied approval to acquire or establish additional banks or
non-bank businesses or to open new facilities.
The FDIC has adopted risk-based capital guidelines for banks. The
risk-based capital guidelines
D-9
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among banks, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
capital adequacy guidelines limit the degree to which a holding company or
bank may leverage its equity capital. As of December 31, 2004, the Bank was
"well-capitalized."
Effects of Government Monetary Policy. The Bank's earnings and growth are
affected not only by general economic conditions, but also by the fiscal and
monetary policies of the federal government, particularly the Federal Reserve.
The Federal Reserve can and does implement national monetary policy for such
purposes as curbing inflation and combating recession, by its open market
operations in U.S. Government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of
reserve requirements against certain deposits. These activities influence
growth of bank loans, investments and deposits, and also affect interest rates
charged on loans or paid on deposits. The nature and impact of future changes
in monetary policies and their impact on us cannot be predicted with
certainty.
Regulatory Structure of the Financial Services Industry. Federal laws and
regulations governing banking and financial services underwent significant
changes in recent years and are subject to significant changes in the future.
From time to time, legislation is introduced in the United States Congress
that contains proposals for altering the structure, regulation, and
competitive relationships of the nation's financial institutions. If enacted
into law, these proposals could increase or decrease the cost of doing
business, limit or expand permissible activities, or affect the competitive
balance among banks, savings associations, and other financial institutions.
Whether or in what form any such legislation may be adopted or the extent to
which our business might be affected thereby cannot be predicted.
Financial Services Modernization. Of particular significance, Congress
enacted the Gramm-Leach- Bliley Act (the "GLB Act") in December 1999. The GLB
Act repealed sections of the Banking Act of 1933, commonly referred to as the
Glass-Steagall Act, that prohibited banks from engaging in securities
activities, and prohibited securities firms from engaging in banking. The GLB
Act created a new form of holding company, known as a financial holding
company, that is permitted to acquire subsidiaries that are variously engaged
in banking, securities underwriting and dealing, and insurance underwriting.
The GLB Act also includes provisions to protect consumer privacy by
prohibiting financial services providers from disclosing non-public personal,
financial information to unaffiliated parties without the consent of the
customer, and by requiring annual disclosure of the provider's privacy policy.
Interstate Banking and Branches. Legislation enacted by Congress in 1995
permits interstate banking and branching, which allows banks to expand
nationwide through acquisition, consolidation or merger. Under this law, an
adequately capitalized bank holding company may acquire banks in any state or
merge banks across state lines if permitted by state law. Further, banks may
establish and operate branches in any state subject to the restrictions of
applicable state law. Under Oregon law, an out-of-state bank or bank holding
company may merge with or acquire an Oregon state chartered bank or bank
holding company if the Oregon bank, or in the case of a bank holding company,
the subsidiary bank, has been in existence for a minimum of three years, and
the law of the state in which the acquiring bank is located permits such
merger. Branches may not be acquired or opened separately, but once an
out-of-state bank has acquired branches in Oregon, either through a merger
with or acquisition of substantially all the assets of an Oregon bank, the
acquirer may open additional branches.
D-10
USA Patriot Act of 2001. The Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 ("USA Patriot Act") effects banks by prohibiting banks from providing
correspondent accounts directly to foreign shell banks; imposing due diligence
requirements on banks opening or holding accounts for foreign financial
institutions or wealthy foreign individuals; requiring financial institutions
to establish an anti-money-laundering compliance program, and eliminating
civil liability for persons who file suspicious activity reports.
The USA Patriot Act also increases governmental powers to investigate
terrorism, including expanded government access to account records. The
Department of the Treasury is empowered to administer and make rules to
implement the Act. While the USA Patriot Act has increased the Bank's record
keeping and reporting expenses, management does not believe that the Act has
had a material adverse effect on our business and operations.
Corporate Governance Reform. The Sarbanes-Oxley Act of 2002, (the "SOA")
was enacted in response to public concerns regarding corporate accountability
in connection with the recent accounting scandals at various large publicly
traded companies. The stated goals of the act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The SOA generally applies to all companies, both U.S.
and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission ("SEC"), under the Securities Exchange Act
of 1934 ("Exchange Act").
The SOA includes specific additional disclosure requirements and new
corporate governance rules and requires the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules. The SOA Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors
and its committees.
The SOA addresses, among other matters, (1) board audit committees; (2)
certification of Exchange Act reports by the chief executive officer and the
chief financial officer; (3) the forfeiture of bonuses or other incentive-
based compensation and securities trading profits by directors and executive
officers in the twelve-month period following initial publication of any
financial statements that later require restatement; (4) disclosure of
off-balance sheet transactions; (5) expedited reporting of stock transactions
by insiders; (6) disclosure of a code of ethics, if any, and changes or
waivers of such code; (7) the formation of a Public Accounting Oversight
Board; (8) auditor independence; and (9) increased criminal penalties for
violations of securities laws.
Provisions of the Sarbanes-Oxley Act become effective at various times
during the 18 months beginning July 30, 2002. The SEC has been delegated the
task of adopting rules to implement various provisions, including disclosure
in periodic filings pursuant to the Exchange Act. Also, in response to the
Sarbanes-Oxley Act, the NASD has adopted new standards for listed companies
many of which the Bank, as a small business issuer, will not be subject to
until after July 31, 2005.
D-11
Item 2. Properties
The Aumsville branch and the credit card department are located in a
4,900 square foot building owned by the Bank in downtown Aumsville. The net
book value of the Aumsville branch as of December 31, 2004, was $167,183.
The Portland branch, the construction/commercial real estate loan
department, and credit card department are housed in a 5,221 square foot
office on the ground floor of a high-rise building in Portland's downtown
financial district, while the executive offices and the small business lending
department are located on the second floor of the same building with 4,083
square feet. The lease on the Portland offices expires in January 2009.
Monthly base rent is approximately $15,800 a month.
The eastside Wood Village Bank branch is located in a 528-square-foot
space inside a Wal-Mart store. The monthly rent is $2,150 for a five-year
lease term, which expires January 31, 2006. The lease is renewable for two
subsequent five-year terms.
The Bank also has a 35.71% ownership interest in a 4.73 acre property
located in Lebanon, Oregon, which it acquired upon default of a loan. An
environmental assessment report dated October 15, 2004 confirmed the existence
of petroleum hydrocarbons in the soil and ground water on the property. The
Bank does not record any value for this property on its books and instead has
recorded a $30,000 reserve to cover potential environmental liability
associated with the property. This reserve was reduced from $100,000, as
recorded as of September 30, 2004, due to subsequent clean-up estimate
received by the Bank. The Bank has received two environmental clean-up
estimates, which collectively range from $80,000 to $500,000. Management
believes that the lower-cost is a reasonable assessment of the Bank's share of
the ultimate cost and that other owners of the property will assume
responsibility for and will be capable of paying their share of the clean-up
costs. The reserve amount was based on the Bank's share of the estimated
$80,000 clean-up costs.
Item 3. Legal Proceedings
The Bank normally has pending routine litigation related to collecting on
secured and unsecured credit arrangements. Such litigation may involve claims
or counterclaims against the Bank, including claims for punitive damages in
addition to other specific relief. The Bank is not currently involved in any
litigation which management believes could have a material adverse impact on
the Bank's financial condition or result of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Bank did not submit any matters to a vote of the stockholders during
the final quarter of fiscal year 2004.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Bank's Common Stock has been listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") Small Cap market
since March 26, 1990. Since November 15, 2000 the common stock has been listed
under the symbol AMPB.
D-12
As of January 31, 2005, there were 2,804,618 shares of the common stock
outstanding and there were 259 shareholders of record estimated to represent
approximately 850 beneficial holders. On January 31, 2005, the closing price
was $11.35.
The following table sets forth the high and low closing bid quotations on
NASDAQ for each quarterly period in the two fiscal years ended December 31,
2004, and 2003. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Year Ended December 31,
----------------------------------------------
2004 2003
------------------ ----------------
High Low High Low
---- --- ---- ----
Fourth Quarter $ 11.91 $ 9.51 $ 8.50 $ 7.05
Third Quarter 9.94 8.25 7.99 6.70
Second Quarter 11.69 8.90 7.57 5.65
First Quarter 11.75 8.07 6.00 4.90
The Bank has not paid dividends on its common stock and the Bank does not
expect to pay cash dividends in the foreseeable future. The Bank intends to
invest funds otherwise available for dividends, if any, on funding loan
activity and providing additional liquidity for the Bank operations.
Equity Compensation Plan Information as of December 31, 2004
-------------------------------------------------------------------------
(a) (b) (c)
-------------------------------------------------------------------------
Plan
----
Category
-------- Number of Weighted-average Number of
securities exercise price of securities
to be issued outstanding options, remaining
upon exercise warrants and rights available
of outstanding for future
options, warrants issuance
and rights. under
equity
compensation
plans excluding
securities
reflected in
column (a)
-------------------------------------------------------------------------
Equity
compensation
plans
approved by
security holders
-------------------------------------------------------------------------
2000 Stock
Option Plan 126,500 $5.04 68,500
-------------------------------------------------------------------------
Equity
compensation
plans not
approved by
security holders none none none
-------------------------------------------------------------------------
Total 126,500 $5.04 68,500
-------------------------------------------------------------------------
D-13
Item 6. Management's Discussion and Analysis of Condition and Results of
Operations
Overview
The purpose of this discussion and analysis is to provide the reader with
a description of the Bank's results of operations for the fiscal years ended
December 31, 2004 and December 31, 2003 and financial condition as of the end
of those periods. The following discussion should be read in conjunction with
the Bank's audited financial statements and the notes thereto included
elsewhere in this report.
The Bank conducts a general commercial banking business, gathering
deposits from the general public and applying those funds to the origination
of loans for commercial, real estate, and consumer purposes and to
investments. The Bank's profitability depends primarily on net interest
income, which is the difference between interest income generated by
interest-earning assets (principally loans and investments) and interest
expense incurred on interest-bearing liabilities (principally customer
deposits and borrowed funds). Net interest income is affected by the
difference (the "interest rate spread") between interest rates earned on
interest-earning assets and interest rates paid on interest-bearing
liabilities, and by the relative amounts of interest-earning assets and
interest-bearing liabilities.
To a lesser extent, the Bank's profitability is also affected by such
factors as the level of noninterest income and expenses, the provision for
loan losses, and the provision for income taxes. Noninterest income consists
primarily of service charges and fees on deposit accounts. Noninterest expense
consists primarily of salaries and employee benefits, professional fees,
equipment expenses, occupancy-related expenses, communications, advertising
and other operating expenses.
As of December 31, 2004, the Bank had total assets of $122.6 million,
total deposits of $86.4 million and stockholders' equity of $18.6 million. As
of December 31, 2003 and 2002, total assets were $108.3 million and $100.4
million; total deposits were $84.0 million and $79.5 million, and
stockholders' equity was $11.3 million and $8.6 million, respectively.
American Pacific Bank's net income for years ended December 31, 2004, 2003 and
2002 was $1.6 million, $1.4 million and $1.1 million, respectively. American
Pacific Bank's year 2004 net income represents the fourth consecutive year of
increasing net income. For the year ended December 31, 2004, the Bank's
return on average assets was 1.37% and return on average equity was 10.77%, as
compared to 2003 and 2002, when return on average assets was 1.27% and 1.23%
and return on average equity was 14.35% and 14.70%, respectively.
On November 9, 2004, the Bank entered into a definitive merger agreement
to merge into Riverview Community Bank, a wholly-owned subsidiary of Riverview
Bancorp, Inc. The Bank is currently in the process of seeking regulatory
approval for the merger and will hold a special meeting of shareholders to
seek shareholder approval of the merger. If regulatory and shareholder
approval is obtained, the parties expect the merger to close in late March or
early April 2005.
Forward Looking Statements
In addition to the historical information, this report contains certain
forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA).
Statements that expressly or implicitly predict future results, performance or
events are forward-looking statements. The forward-looking statements
contained in the report are subject to factors,
D-14
risks, and uncertainties that may cause actual results to differ materially
from those projected. Important factors that might cause such a material
difference include, but are not limited to: whether the merger with Riverview
Community Bank closes; general economic conditions; regulatory environment;
new legislation; vendor quality and efficiency; employee retention factors;
rapidly changing technology and evolving banking industry standards;
competitive factors, including increased competition with community, regional,
and national financial institutions; fluctuating interest rate environments;
and other factors described in this and other reports filed by the Bank with
the Federal Deposit Insurance Corporation. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date of the statement. The Bank undertakes no
obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this report.
Selected Financial Data
The following table sets forth certain information concerning the
financial condition, operating results, and key operating ratios for the Bank
at the dates and for the periods indicated. This information does not purport
to be complete, and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Bank's Financial Statements and Notes thereto.
For the Fiscal Years
Ended December 31, % Change
----------------------------- -----------
(Dollars in thousands) 2004 2003 2004 to 2003
---------- ----------
Operating Results
-----------------
Interest Income $ 8,795 $ 8,221 7.0%
Interest Expense 1,987 2,154 (7.8%)
---------- ----------
Net Interest Income 6,808 6,067 12.2%
Provision for Loan Losses 207 267 (22.5%)
Non-interest Income 201 217 (7.4%)
Non-interest Expense 4,135 3,773 9.6%
Net income before taxes 2,667 2,244 18.9%
Income tax 1,050 852 23.1%
---------- ----------
Net income $ 1,617 $ 1,392 16.2%
Per Share Data
--------------
Basic earnings
per share $ 0.78 $ 0.85
Diluted earnings
per share $ 0.76 $ 0.78
Financial Ratios
----------------
Return on average
assets 1.37% 1.27%
Return on average
equity 10.77% 14.35%
Dividend payout ratio 0.00% 0.00%
Average equity to
average assets 12.67% 8.88%
Balance Sheet Data
------------------
Total loans (net) $ 107,301 $ 97,983 9.5%
Allowance for Loan
Losses (983) (919) 7.0%
Allowance as a
percentage of
total loans 0.90% 0.92% (2.4%)
Total Assets 122,593 108,312 13.2%
Total Deposits 86,352 84,020 2.8%
Shareholders' equity 18,604 11,334 64.1%
D-15
Financial Highlights
Net income after taxes for the year ended December 31, 2004 totaled
$1,616,904, or $0.76 per diluted share, an increase in income of $225,360, or
16.2% as compared to $1,391,544, or $0.78 per diluted share, in the year ended
December 31, 2003. The increase is due primarily to an improved mix of
interest bearing liabilities and lower interest expenses as a result of the
lower rate environment continuing in 2004. The exercise of outstanding
warrants to purchase common stock between March and the end of August 2004 in
the total amount of $5,626,500 substantially increased the Bank's
shareholders' equity and contributed to its net income by the investment of
this additional capital.
Net interest income for the year was $6,807,807 compared to $6,067,453,
an increase of $740,354, or 12.2%. The increase in the net interest income was
primarily due to the decrease in interest expense and the continued strong
demand in both construction lending and commercial real estate lending.
Total loans (net of allowance for loan losses) outstanding at December
31, 2004 was $108,800,935. This was an increase of 9,401,940, or 9.5% over
2003. The allowance for loan loss at December 31, 2004 was $982,611 or 0.9% of
outstanding loans.
Total deposits also grew to $86,351,743 at year end 2004 from $84,020,298
at year end 2003, an increase of $2,331,445, or 2.8%.
Critical Accounting Policies and Estimates
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as disclosures included elsewhere in this Form 10-KSB,
are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an ongoing basis, management evaluates
the estimates used, including the adequacy of the allowance for loan and lease
losses, impairment of intangible assets, and contingencies and litigation.
Estimates are based upon historical experience, current economic conditions
and other factors that management considers reasonable under the
circumstances. These estimates result in judgments regarding the carrying
values of assets and liabilities when these values are not readily available
from other sources as well as assessing and identifying the accounting
treatments of commitments and contingencies. Actual results may differ from
these estimates under different assumptions or conditions. The following
critical accounting policies involve the more significant judgments and
assumptions used in the preparation of the financial statements.
Allowance for loan and lease losses. The allowance for loan and lease
losses is established to absorb known and inherent losses attributable to
loans and leases outstanding and related off-balance- sheet commitments. The
adequacy of the allowance is monitored on an ongoing basis and is based on
management's evaluation of numerous factors. These factors include the quality
of the current loan portfolio, the trend in the loan portfolio's risk ratings,
current economic conditions, loan concentrations, loan growth rates, past-due
and non-performing trends, evaluation of specific loss estimates for all
significant problem loans, historical charge-off and recovery experience and
other pertinent information.
Stock Options. The Bank applies Accounting Principles Board Opinion No.
25, "Accounting for
D-16
Stock Issued to Employees," and related interpretations, in accounting for its
stock option plans using the intrinsic value-based method. Accordingly,
compensation costs are recognized as the difference between the exercise price
of each option and the market price the Bank's stock at the date of each
grant. Had compensation cost for the Bank's 2003 grants for stock-based
compensation plans been determined consistent with the fair value-based method
defined in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," its net income and earnings per
common share for year ended December 31, 2003, would approximate the pro forma
amounts shown below. There were no options granted in 2004, and compensation
cost for options vesting in 2004, under the fair value-based method, is not
significant.
Year Ended December 31, 2003
-----------------------------
Net income:
As reported $ 1,391,544
Pro forma $ 1,348,526
Basic earnings
per share:
As reported $ 0.85
Pro forma $ 0.82
Diluted earnings
per share:
As reported $ 0.78
Pro forma $ 0.76
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for
December 31, 2003:
As of December 31, 2003
---------------------------
Dividend yield -
Expected life (years) 5
Expected volatility 15.27%
Risk-free rate 1.50%
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
In December 2004, the Financial Accounting Standards Board (FASB) revised
SFAS No. 123, Accounting for Stock Based Compensation. This statement
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. The Statement requires a public entity
to measure the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award. The cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award the requisite service period
(usually the vesting period). This Statement is effective for public entities
that file as small business issuers as of the beginning of the first interim
or annual reporting period that begins after December 15, 2005. Management
estimates that the effect of adopting this Statement will result in the
recognition of no additional compensation expense during 2005.
D-17
Results of Operations
Average Balances, Interest Rates and Yields
-------------------------------------------
The following table sets forth certain information relating to the Bank's average interest-earning
assets and interest-bearing liabilities and reflects the average yield on assets and average cost of
liabilities for the years indicated. The yields and costs are derived by dividing income or expense by the
average daily balance of assets or liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans, if any, are included in the net loan category. The yields and costs include
fees, premiums and discounts, which are considered adjustments to yield.
Years Ended December 31,
------------------------------------------------------------------------
2004 2003
-------------------------------- -----------------------------------
Average Average
Interest Rates Interest Rates
Average Income or Earned or Average Income or Earned or
Balance Expense Paid Balance Expense Paid
---------- ---------- --------- ---------- ---------- ----------
INTEREST EARNING ASSETS:
Taxable Investments $ 1,952,087 $ 50,457 2.58% $ 2,017,917 $ 72,818 3.61%
Federal Funds Sold 11,081,899 142,190 1.28% 13,970,685 133,780 0.96%
Loans:
Commercial 82,520,778 6,250,714 7.57% 74,068,705 5,889,681 7.95%
Real estate -
construction 13,664,409 1,154,033 8.45% 9,384,711 892,466 9.51%
Real estate -
permanent 2,970,204 232,370 7.82% 3,043,226 232,021 7.62%
Credit Cards 3,486,787 953,960 27.36% 3,730,279 989,763 26.53%
Installment 81,426 6,530 8.02% 92,155 8,070 8.76%
Overdraft lines 67,500 4,933 7.31% 39,949 2,440 6.11%
----------- ----------- ----------- -----------
Total loans 102,791,104 8,602,540 8.37% 90,359,025 8,014,441 8.87%
----------- ----------- ----------- -----------
Total earning assets 115,825,090 106,347,627
Total interest income $ 8,795,187 7.59% $ 8,221,039 7.73%
=========== ===== =========== =====
Allowance for loan losses (940,286) (864,359)
Cash and due from banks 2,375,297 2,240,467
Other assets 1,163,394 1,423,402
------------ ------------
TOTAL ASSETS $118,423,495 $109,147,137
============ ============
INTEREST EARNING LIABILITIES:
Money market and
NOW accounts $ 23,682,686 $ 241,635 1.02% $ 20,618,610 $ 260,347 1.26%
Savings accounts 3,439,418 13,860 0.40% 2,928,396 20,199 0.69%
Other time deposits 53,214,821 1,279,752 2.40% 56,994,348 1,546,242 2.71%
------------ ------------ ------------ ------------
Total interest bearing
deposits 80,336,925 1,535,247 1.91% 80,541,354 1,826,788 2.27%
FHLB long-term borrowings 17,458,470 452,133 2.59% 11,610,959 326,798 2.81%
Total interest-bearing
liabilities 97,795,39 92,152,313
Total interest expense $ 1,987,380 2.03% $ 2,153,586 2.34%
============ ==== ============ ====
Noninterest bearing
deposits 5,057,145 6,803,779
Other liabilities 564,196 497,221
Stockholders' equity 15,006,759 9,693,824
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $118,423,495 $109,147,137
============ ============
D-18
Net interest income $6,807,807 $ 6,067,453
========== ==========
Net interest spread 5.56% 5.39%
==== ====
Net interest income to
earning assets 5.88% 5.71%
==== ====
Rate/Volume Analysis
The following table reflects the extent to which changes in interest income and changes in
interest expense are attributable to changes in volume (changes in volume multiplied by the prior-
year rate) and changes in rate (changes in rate multiplied by prior-year volume). Changes attributable
to the combined impact of volume and rate have been allocated to rate.
For the Year Ended December 31, For the Year Ended December 31,
------------------------------------- ----------------------------------------
2004 Versus 2003 2003 Versus 2002
------------------------------------- ----------------------------------------
Change Due Change Due Change Due Change Due
to Rate To Volume Total Change to Rate to Volume Total Change
---------- ----------- ------------- ---------- ---------- ------------
Increase
(decrease)
in interest
income:
Federal funds
sold $ 36,072 $ (27,662) $ 8,410 $ (67,988) $ 121,729 $ 53,741
Investment
securities (19,985) (2,376) (22,361) (22,017) 5,869 (16,148)
Loans:
Commercial (311,046) 672,079 361,033 (309,187) 1,316,045 1,006,858
Real estate -
construction (145,423) 406,990 261,567 15,184 (362,013) (346,829)
Real estate -
permanent 5,916 (5,567) 349 (90,635) (139,694) (230,329)
Credit cards 28,803 (64,606) (35,803) (94,506) 297,966 203,460
Installment (600) (940) (1,540) (469) (7,707) (8,176)
Overdraft lines 810 1,683 2,493 374 (260) 114
---------- ---------- ---------- ---------- ---------- ----------
Total interest
income $ (405,453) $ 979,601 $ 574,148 $ (569,242) $1,231,933 $ 662,691
---------- ---------- ---------- ---------- ---------- ----------
Increase
(decrease)
in interest
expense:
Money market
and NOW
accounts $ (57,401) $ 38,689 $ (18,712) $ (99,740) $ 94,394 $ (5,346)
Savings accounts (9,864) 3,525 (6,339) (20,690) 9,361 (11,329)
Certificates of
deposit (163,952) (102,538) (266,490) (414,223) 280,923 (133,300)
Other borrowings (39,247) 164,582 125,335 6,470 559 7,029
---------- ---------- ---------- ---------- ---------- ----------
Total interest
expense (270,465) 104,259 (166,206) (528,183) 385,237 (142,946)
---------- ---------- ---------- ---------- ---------- ----------
Change in net
interest income $ (134,988) $ 875,342 $ 740,354 $ (41,059) $ 846,696 $ 805,637
========== =========== ========== ========== ========== ==========
Net Interest Income
-------------------
Net interest income is the difference between total interest income and
total interest expense. Several factors contribute to changes in net interest
income. These include the effects of the changes in average balances, changes
in rates on earning assets and rates paid for interest bearing liabilities,
the level of non-interest bearing deposits, stockholder's equity and the level
of non-accrual loans.
Total net interest income was $6,807,807 for the year ended December 31,
2004, an increase
D-19
of $740,354 or 12.2% over 2003's total of $6,067,453. Of the increase in net
interest income, there was an increase in interest income of $574,148 or 7.0%,
from $8,221,039 in 2003 to $8,795,187 in 2004 and a decrease in interest
expense of $166,206 or 7.7% from $2,153,586 in 2003 to $1,987,380 in 2004. The
improvement in net interest income was primarily accomplished through growth
in the commercial and real estate construction portfolios and a reduction in
both the rates and volume of the Bank's certificate of deposit liabilities.
This was partially offset by additional funding received through FHLB
borrowing.
The Bank's net interest margin (interest income minus interest expense)
expressed as a percentage of average earning assets increased from 5.39% in
2003 to 5.56% in 2004; and the net average interest margin for loans decreased
from 8.87% in 2003 to 8.37% in 2004. Margins and income were benefited by the
exercise of outstanding warrants to purchase common stock in the total amount
of $5,626,500 between March and the end of August 2004.
Provision for Loan Losses
-------------------------
The provision for loan losses is the expense associated with increases in
the allowance for loan losses. On a monthly basis, management reviews the
loan portfolio for growth and credit quality and determines whether an
additional provision is required to cover potential risks associated with the
loan portfolio. The provision may increase as a result of losses incurred,
deterioration of the credit quality, or growth of the loan portfolio.
The total provision for loan losses in 2004 was $206,658, as compared to
$266,917 for 2003. This represents a decrease of $60,259 or 22.6%. This
decrease can largely be attributed to a decrease in credit card net
charge-offs of $58,507 from 2003 to 2004 and lower credit card receivables
outstanding.
Non-interest Income
-------------------
Non-interest income includes income from service charges on deposit
accounts and other fee income. Non-interest income constitutes a less
significant portion of the Bank's income because, as a business-oriented bank,
certain traditional sources of bank non-interest income, such as fees on
mortgage and consumer bank products, are not emphasized. Income on service
charges and fees includes overdraft charges, account service charge fees,
certain loan fees, and other fees and charges.
Service charges and fees, which relate to the Bank's deposit products,
increased $3,125, or 1.6%, from $198,038 in 2003 to $201,163 in 2004. Other
income decreased $19,044, or 100%, from $19,044 in 2003 to none in 2004. This
decrease in other income resulted from no loan and investment security sales
occurring in 2004.
Non-interest Expense
--------------------
Non-interest expense includes the Bank's operating expenses, such as
employee salaries and benefits, leases and equipment costs, data processing,
advertising , professional fees, and other expenses. Non-interest expense for
2004 increased by $361,805, or 9.6%, from $3,773,330 in 2003 to $4,135,135 for
2004. Increases in personnel expense accounted for approximately 38.4% of the
increase, increasing from $1,815,637 in 2003 to $1,954,677 in 2004. Legal
expenses increased to $152,858 in 2004 from $22,971 in 2003. The increase is
attributable to legal services provided in connection with the proposed
D-20
merger with Riverview. Non-interest expense in 2004 also included $81,181 paid
to Wells Fargo Securities, LLP in connection with their advising on the merger
transaction.
Occupancy and equipment expenses decreased by $25,745, or 4.8%, from
$541,822 in 2003 to $516,077 in 2004. The decrease in occupancy and equipment
expenses in 2004 as compared to 2003 was primarily due to the non-renewal of
the phone systems maintenance contract, the disposal of a copy machine
resulting in less depreciation expense, the expensing of loan system software
in 2003, and less mileage expense following the termination of the Chief
Credit Officer in 2004.
Provision for Income Taxes
--------------------------
The Bank's taxable income resulted in an effective tax rate of 39.4% or
$1,050,273 in federal and state income taxes for 2004. This compares to an
effective tax rate of 38.0% for 2003.
Reserve for Potential Environmental Liability
---------------------------------------------
Management has reserved $30,000 for potential environmental liability
associated with real property that the Bank acquired upon default of a loan.
The reserve is based on the Bank's 36% ownership interest in the property and
the lowest amount estimated for the clean-up expense. The actual amount of
environmental liability may be greater than this amount if clean-up costs are
higher than expected and if the other owners do not pay their share of the
expense.
Financial Condition
Investment Portfolio
--------------------
The Bank's investments are determined by its liquidity needs, as well as
profit objectives that are consistent with manageable, lower-risk securities.
As of December 31, 2004 and 2003, the composition of the Bank's portfolio of
investment securities consisted solely of U.S. Government and Federal
obligations. The amortized cost and estimated fair values of investment
securities are as follows:
Investment Portfolio
-----------------------------------------------------
As of December 31,
-----------------------------------------------------
2004 2003
------------------------ ----------------------
(Dollars in Amortized Estimated Amortized Estimated
thousands) Cost Fair Market Cost Fair Market
Value Value
----------- ------------ ---------- ----------
U.S. government and
agency securities $ 1,197 $ 1,180 $ 1,498 $ 1,501
=========== ============ =========== ===========
Securities that have been temporarily impaired less than 12 months as of
December 31, 2004 were comprised of four U.S. government agency securities,
with a weighted average life of 23 months. Temporary impairment of investment
securities is the result of a general increase in market rates of
interest.
The amortized cost and estimated fair value of investment securities
available-for-sale as of December 31, 2004, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. For purpose of this analysis, all weighted
average yields are calculated on
D-21
a pre-tax basis.
Investments Maturity Distribution
------------------------------------------------------------------------------
As of December 31, 2004
------------------------------------------------------------------------------
Due in Due in one Due in five
one year or less through five years through ten years Over ten years
----------------- ------------------ ----------------- -----------------
(Dollars in Estimated Estimated Estimated Estimated
thousands) Amount Fair Value Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- ------ ----------- ------- ---------- ------ ---------
U.S.
government
and
agency
securities $ 599 $ 591 $ 598 $ 589 - - - -
===== ====== ===== ====== ====== ====== ====== ======
As of December 31, 2004 and 2003, investment securities with an amortized
cost of $1,196,541 and $899,653, respectively, were pledged to secure deposits
of public funds. Public funds are deposits from the State of Oregon or
municipalities deposited at the Bank. The Bank may be required to pledge
additional securities to cover deposits that exceed FDIC insurance coverage.
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is
required to maintain an investment in restricted equity securities of the
FHLB. FHLB stock is not actively traded but is redeemable at current book
value. As of December 31, 2004 and 2003, the Bank's investment in FHLB stock
was $802,800 and $635,300, respectively.
Total interest income from investments and fed funds decreased by
$13,951, or 6.8%, from $206,598 in 2003 to $192,647. Federal funds decreased
from an average balance of $13,970,685 in 2003 to $11,081,899, a decrease of
$2,888,786 or 20.7%. The average investment portfolio decreased from
$2,017,917 in 2003 to $1,952,087 in 2004, a decrease of $65,830 or 3.3%. The
Bank's investment portfolio yield decreased from an average yield of 3.61% in
2003 to 2.58% in 2004. The federal funds yield increased from an average yield
of 0.96% in 2003 to 1.28% in 2004.
Loan Portfolio
--------------
The most significant asset on the balance sheet in terms of risk and the
effect on the Bank's earnings is the loan portfolio. On the balance sheet, the
term "net loans" refers to total loans outstanding, at their principal balance
outstanding, net of the allowance for loan losses and deferred loan fees.
The Bank's lending objective is to extend credit, by following prescribed
underwriting criteria, in a profitable manner while meeting the needs of our
marketplace, avoiding unnecessary risk, and complying with all applicable laws
and regulations. The Bank's board of directors is responsible for approving
the loan policy and appointing the Loan Committee. The board delegates the
Bank's legal lending authority to the Loan Committee, the majority of which is
comprised of outside board members. The Loan Committee approves loans where
the combination of the proposed loan and the borrower's existing debt exceeds
$500,000. Loans under $500,000 are delegated to officers for approval, subject
to one-over-one signing authority. All loans to any officer or director of the
Bank must be approved by the full board.
The calculated legal lending limit is monitored by the Loan Committee and
reported monthly to the board. The Bank's unsecured legal lending limit was
approximately $2,950,000 and its real estate secured lending limit was
$4,917,000 at December 31, 2004.
D-22
The table below summarizes the composition of the Bank's loan portfolio
at the years ended December 31, 2004 and 2003.
As of December 31,
----------------------------------------------------------
2004 2003
---------------------- ----------------------------
Amount Percentage Amount Percentage
----------- ---------- ------------- -----------
Commercial $86,628,120 79.6% $ 80,563,270 81.1%
Real estate -
construction 16,603,763 15.3% 11,739,068 11.8%
Real estate -
permanent 1,876,387 1.7% 3,132,975 3.2%
Credit cards 3,563,127 3.3% 3,845,903 3.9%
Installment 68,417 0.1% 79,424 0.1%
Overdraft
accounts 61,121 0.1% 38,355 0.0%
------------ ----- ------------ -----
Total 108,800,935 100.0% 99,398,995 100.0%
===== =====
Less allowance
for possible
loan losses (982,611) (919,305)
Less deferred
loan fees, net (517,644) (496,283)
------------ ------------
Net loans $107,300,680 $ 97,983,407
============ ============
In the single-family residential construction category, the Bank makes
the distinction between pre-sold construction loans and speculation loans to
builders. Pre-sold loans are those in which there is an approved take-out
permanent loan as opposed to a "spec" loan where the builder intends to sell
the house during construction or after completion of the house. The chart
below shows the percentage of pre-sold loans to spec loans as of December 31,
2004 and 2003.
2004 2003
---- ----
Pre-sold loans 32% 58%
Spec loans 68% 42%
The following table sets forth the maturities and interest sensitivities
of the Bank's gross loan portfolio at December 31, 2004.
Loan Maturities & Interest Sensitivities
--------------------------------------------------------
As of December 31, 2004
--------------------------------------------------------
Due
Due in After One
One year through Due After
Or Less five years five years Total
---------- ------------ ------------- ----------
Commercial
and real
estate $ 26,570,732 $ 11,791,926 $ 66,271,147 $ 104,633,805
Credit
card
loans 3,563,102 - - 3,563,102
Installment
loans,
overdrafts,
and ready
reserves 75,685 106,301 - 181,986
------------ ------------ ------------ ------------
$ 30,209,519 $ 11,898,227 $ 66,271,147 108,378,893
============ ============ ============
Nonaccrual loans 422,042
------------
D-23
$ 108,800,935
===============
Fixed
rate
loans $ 7,900,683 $ 6,748,110 $ 66,271,147 $ 80,919,940
Adjustable
rate
loans 22,308,836 5,150,117 - 27,458,953
------------- ------------- ------------ ------------
$ 30,209,519 $ 11,898,227 $ 66,271,147 108,378,893
Nonaccrual
loans 422,042
------------
$108,800,935
============
Non-Performing Loans
--------------------
The following table sets forth information regarding the bank's
non-performing loans on the dates indicated.
Nonaccrual, Past Due and Restructured Loans
--------------------------------------------------------
As of December 31,
--------------------------------------------------------
(Dollars in
thousands) 2004 2003
---------------- -----------------
Loans accounted
for on a
nonaccrual basis $ 422 $ 245
Accruing loans which
are contractually
past due 90 days
or more 68 75
Restructured loans - -
---------- ----------
Total $ 490 $ 320
========== ==========
Nonaccrual loans. Total loans include non-accrual loans. Non-accrual
loans are loans on which interest income is no longer accrued. The accrual of
interest on a loan is discontinued when, in the opinion of management, the
future prospect of collection of principal or interest is in serious doubt or
is expected to be substantially delayed. Typically, the Bank will classify
loans as such after 90 days of non-payment. In many cases, the Bank will
continue to receive late payments on such loans. The Bank's policy is to
reverse and charge against current interest income previously accrued but
uncollected interest on loans which are placed on non-accrual status.
Subsequent interest collected on such loans is credited to loan principal if,
in the opinion of management, full collection of principal is doubtful.
The principal amount of the Bank's loans on non-accrual status as of
December 31, 2004 and December 31, 2003, were $422,042 and $244,516,
respectively. The Bank's average recorded investment in impaired loans for the
years ended December 31, 2004, and 2003 was $333,279 and $230,848,
respectively. Interest income recognized for cash payments received on
impaired loans was insignificant in 2004 and 2003. Had the impaired loans
performed according to their original terms, additional interest income that
would have been recognized during 2004 and 2003 would not have been
significant.
Restructured loans. Restructured loans are loans in which the terms of
repayment or interest rates charged have been modified from the terms at the
inception of the loan. These terms are modified to be more favorable for the
borrower when the borrower is unable to meet the original terms due to their
weakened financial condition. There were no restructured loans as of December
31, 2004 and 2003, respectively.
D-24
Concentrations of credit risk. Most of the Bank's commercial loan
activity is to customers located near its headquarters and branch offices.
These geographical areas are primarily involved in commercial business and
residential development activities. As of December 31, 2004 and 2003,
commercial real estate loans were 73% and 75%, respectively, of the Bank's
loan portfolio.
The Bank's real estate lending department in Portland, Oregon, makes real
estate construction loans to builders and their customers primarily in the
Portland, Oregon, and Vancouver, Washington, metropolitan areas. The
department also occasionally provides real estate mortgage brokerage services
to customers for which it receives fee and interest income. As of December
31, 2004 and 2003, 15% and 12%, respectively, of the Bank's loan portfolio was
comprised of real estate construction loans.
The Bank makes credit card loans to qualified individuals throughout the
United States. As of December 31, 2004 and 2003, 3% and 4%, respectively, of
the Bank's loan portfolio was comprised of outstanding credit card balances.
Allowance for Loan Losses and Loan Loss Provision
-------------------------------------------------
Credit risk is an inherent part of the banking industry. The Bank
operates under a credit principle of "manageable risk." The Bank manages such
risk through its lending policies which management considers to be consistent
with prudent industry practice. Although it is not possible to predict loan
losses with complete accuracy, management reviews the Bank's entire loan
portfolio monthly to determine the risk of loss and to establish the
appropriate allowance for loan losses based upon these reviews.
The allowance is maintained at an amount believed to be sufficient to
absorb losses in the loan portfolio and has two components, one of which
represents a pre-determined percentage of our entire loan portfolio based on
type of loan, and the other representing specifically established reserves for
individual classified loans.
Management normally allocates the allowance for loan losses to specific
groups or categories of loans for the purpose of determining the provision for
loan losses or evaluating the adequacy of the allowance for loan losses. The
following table summarizes the components of the allowance for loan losses by
the types of loans as of December 31, 2004 and 2003.
As of December 31,
---------------------------------------------------
2004 2003
---------------------------------------------------
Amount Percentage Amount Percentage
--------- ---------- --------- ----------
Commercial $ 697,911 71.0% $ 645,405 70.2%
Real Estate -
Construction 128,542 13.1% 88,043 9.6%
Real Estate -
Permanent 14,073 1.4% 30,833 3.4%
Credit Cards 141,693 14.4% 154,638 16.8%
Installment 392 0.0% 386 0.0%
--------- ----- --------- -----
TOTAL $ 982,611 100.0% $ 919,305 100.0%
========= ===== ========= =====
For each classified loan, factors considered in establishing an
appropriate allowance include a careful assessment of the financial condition
of the borrower; a realistic determination of the value and
D-25
adequacy of underlying collateral; the condition of the local economy and the
condition of the specific industry of the borrower; a comprehensive analysis
of the levels and trends of loan categories; an assessment of pending legal
action for collection of loans and related guarantees; and a review of
delinquent and classified loans. The Bank maintains, at a minimum, an
allowance equal to a sum of 50% of the loan portfolio classified as
"doubtful," 15% to 20% of the portfolio classified as "substandard," 3% to 5%
of the portfolio classified as "special mentioned," 1.5% to 3% of the
portfolio classified on the Bank's internal "watch list," and 0.75% (excluding
credit card loans) of the balance of the loan portfolio. Credit Cards are
reserved at 4% to 5% of the total related portfolio.
The allowance is increased by provisions for loan losses charged to
operations and reduced by loans written off against the allowance, net of
recoveries. Anticipated loan losses are charged against the allowance for loan
losses when, in management's opinion, ultimate recovery is unlikely.
The following is a summary of the Bank's loan loss experience and
selected ratios for the periods presented:
Years Ended December 31,
-----------------------------------------------
2004 2003
------------- -------------
Allowance for loan
losses, beginning
of year $ 919,305 $ 844,240
Loans charged off:
Commercial (9,074) (1)
Real estate -
construction (932) -
Real estate -
permanent - -
Credit Cards (148,496) (201,769)
Installment - -
------------- -------------
Total loans
charged off: (158,502) (201,770)
Commercial - -
Real estate -
construction - -
Real estate -
permanent - -
Credit Cards 15,150 9,918
Installment - -
------------- -------------
Total recoveries 15,150 9,918
Net loans charged off (143,352) (191,852)
Provision charged
to income 206,658 266,917
------------- -------------
Allowance for loan
losses, end of year $ 982,611 $ 919,305
============= =============
Loans outstanding at
end of year $ 108,800,935 $ 99,398,995
============= =============
Average loans
outstanding $ 102,791,104 $ 90,359,025
============= =============
Ratio of net loans
charged off to
average
Loans
outstanding 0.14% 0.21%
============= =============
D-26
Ratio of allowance
for loan losses to
Ending total loans 0.90% 0.92%
============= =============
The allowance for loan losses increased to $982,611 as of December 31,
2004, as compared to $919,305 in 2003, a net increase of $63,306 or 6.9%.
Contributing to the net increase were lower net charge-offs in the credit card
operations, which were $133,345 in 2004 as compared to $191,851 in 2003. The
allowance for loan losses at the end of 2004 represented coverage for all loan
of slightly more than 0.9%.
Deposit Liabilities
-------------------
The Bank's primary sources of funds are interest-bearing deposits. The
following table sets forth the Bank's deposit structure at December 31, 2004
and 2003:
Deposit Structure
As of December 31,
------------------------------------------------------------
2004 2003
--------------------------- --------------------------
(Dollars in % Total % Total
thousands) Amount Deposits Amount Deposits
-------- ----------- --------- ------------
Noninterest-
bearing
demand $ 4,639 5.4% $ 5,334 6.3%
Interest-
bearing
demand 13,186 15.3% 8,267 9.8%
Money market 13,059 15.1% 14,566 17.3%
Savings 3,412 4.0% 3,288 3.9%
Certificates
of deposit
less than
$100,000 31,202 36.1% 32,951 39.2%
Certificates
of deposit
$100,000 or
more 20,854 24.1% 19,614 23.3%
-------- ----- -------- -----
Total deposits $ 86,352 100.0% $ 84,020 100.0%
======== ===== ======== =====
The following table presents a breakdown by category of the average
amount of deposits and the weighted average rate paid on deposits for the
periods indicated:
Average Deposits/Rate Paid
------------------------------------------------------------
As of December 31,
------------------------------------------------------------
2004 2003
----------------------------- -------------------------
(Dollars in Average Interest Avg. Rate Average Interest Avg. Rate
thousands) Deposits Expense Paid Deposits Expense Paid
--------- --------- --------- --------- --------- --------
Noninterest-
bearing
demand $ 5,057 $ 0 0.0% $ 6,804 $ 0 0.0%
Interest-
bearing
demand 10,262 51 0.5% 7,905 45 0.6%
Money Market 13,421 191 1.4% 12,714 215 1.7%
Savings 3,439 14 0.4% 2,928 20 0.7%
Certificates
of deposit 53,215 1,280 2.4% 56,994 1,546 2.7%
-------- -------- --- -------- -------- ---
Total $ 85,394 $ 1,536 1.8% $ 87,345 $ 1,826 2.1%
-------- -------- --- -------- -------- ---
As of December 31, 2003, the Bank held $5,005,183 in deposits related to
its secured credit cards. The deposits for secured cards are held in time
certificates of deposit and savings accounts.
D-27
The following table indicates, as of December 31, 2004, time certificates
of deposits by the time remaining until maturity:
Certificate of Deposit Maturities
-------------------------------------------------------------
As of December 31, 2004
(Dollars in -------------------------------------------------------------
thousands) Time Deposits Time Deposits
Under $100,000 $100,000 and more
------------------------ ------------------------
Maturity in: Amount Percentage Amount Percentage
---------- ----------- -------- -----------
Less than
three months $ 5,726 18.4% $ 9,398 45.1%
Over three
months
through twelve
months 16,918 54.2% 6,918 33.2%
Over twelve
months
through five
years 8,558 27.4% 4,538 21.8%
-------- ----- -------- -----
Total $ 31,202 100.0% $ 20,854 100.0%
======== ===== ======== =====
Liquidity and Interest Rate Sensitivity
---------------------------------------
The primary function of asset/liability management is to ensure adequate
liquidity and maintain an appropriate balance between interest earning assets
and interest bearing liabilities. Liquidity management involves the ability to
meet cash flow requirements of customers who may be either depositors wanting
to withdraw funds or borrowers needing assurance that adequate funds will be
available to meet their credit needs.
The Bank's primary sources of liquidity are cash, cash equivalents,
deposits with other institutions, federal funds sold, and investment
securities, which had a combined balance of $13,027,082 as of December 31,
2004. The Bank supports in excess of 75% of its earning assets with core
deposits. Core deposits are total deposits less the sum of public funds
deposits and all certificates of deposits of $100,000 or more. The Bank does
not solicit any brokered deposits. Time certificates of deposits of $100,000
or more totaled approximately $20,853,974 as of December 31, 2004, of which
$4,300,000 was from the State of Oregon. Additionally, the Bank is a member of
the Federal Home Loan Bank and has lines of credit with its correspondent
bank, US Bank, and also with Key Bank. Lines of credit with correspondent
banks allow for borrowings of up to $4.0 million. FHLB credit arrangements
allow the Bank to borrow up to 25% of its total assets. Borrowings outstanding
at year end 2004 and 2003 were $17,000,000 and $12,600,000 respectively.
A portion of the Bank's deposits are obtained pursuant to its credit card
program to secure all or a portion of its credit card loans. As of December
31, 2004, those deposits totaled $4,763,438 or 5.5% of total deposits.
As of December 31, 2004, approximately $13 million or 15.12% of the
Bank's deposits (other than the credit card deposits) were from outside its
market area, which is comprised mostly of deposits from credit unions. Such
deposits can be more volatile than those from inside the Bank's market area,
but are at a much lower rate than the prevailing rates paid by the Bank.
Despite the increased volatility, management does not consider the level of
deposits from outside the Bank's market area to present a liquidity problem
because of its ability, if necessary, to liquidate some investments to fund
any withdrawals or solicit replacement deposits within the Bank's market.
D-28
The Bank's marketable investment securities are primarily pledged to
support public deposits and also serve as additional sources of liquidity,
although the Bank's intention is to hold such investments to maturity. The
investment securities portfolio as of December 31, 2004 was in callable
agencies and highly liquid federal funds.
Interest rate sensitivity is closely related to liquidity because each is
directly affected by the maturity of assets and liabilities. Management
considers any asset or liability that matures, or is subject to re-pricing
within one year, to be interest sensitive. Continual monitoring is performed
and reported monthly to the board of directors. The difference between
interest sensitive assets and liabilities for a defined period of time is
known as the interest sensitivity "gap" and may be either positive or
negative. If positive, more assets re-price before liabilities. If negative,
the reverse is true. The Bank's one-year rate sensitive position, as measured
by traditional "gap" methods as of December 31, 2004 was 33.7%.
Interest Rate Sensitivity - Static Gap Analysis
As of December 31, 2004
--------------------------------------------------------------
By Repricing Interval
(Dollars in thousands) Non-
Interest-
3-12 Over 5 Bearing
0-3 Months Months 1-5 Years Years Funds Total
--------------------------------------------------------------
Assets
Federal
Funds Sold $ 9,620 $ - $ - $ - $ - $ 9,620
Investment
securities
available-
for-sale (1) - - 1,180 - - 1,180
Federal Home
Loan Bank
stock 803 - - - - 803
Loans (2) 7,136 29,367 71,780 - - 108,283
Non-interest-
earning assets
and allowance
for credit losses - - - - 2,707 2,707
-------------------------------------------------------------
Total $ 17,559 $ 29,367 $ 72,960 - $ 2,707 $122,593
=============================================================
Liabilities
and Share-
holders'
Equity
Interest-bear-
ing demand
deposits $ 875 $ 17,497 $ 7,873 $ - $ - $ 26,245
Savings
deposits - 682 2,730 - - 3,412
Time deposits 7,689 31,270 13,097 - - 52,056
Federal Home
Loan Bank
borrowings - 8,000 9,000 - - 17,000
Non-interest-
bearing liabil-
ities and
stockholders'
equity - - - - 23,880 23,880
-------------------------------------------------------------
Total $ 8,564 $ 57,449 $ 32,700 - $ 23,880 $ 122,593
=============================================================
Interest rate
sensitivity
gap $ 8,995 $(28,082) $ 40,260 $ - $(21,173) $ -
Cumulative
gap $ 8,995 $(19,087) $ 21,173 $ 21,173 - $ -
Cumulative
gap
percentage
to total
earning
assets 7.34% (15.57)% 17.27% 17.27% 0.00% -
(1) Investment securities are stated at amortized cost.
(2) Loan balance includes nonaccrual loans of $422,042.
D-29
Inflation
---------
The impact of inflation on financial institutions is difficult to
measure. The predominant part of a financial institution's assets and
liabilities are monetary and will convert into a fixed number of dollars
regardless of changes in prices. Losses from holding monetary assets are
substantially offset by gains from holding monetary liabilities.
Various factors, such as interest rates, have a more significant impact
on a financial institution's performance than general inflation. The
relatively low recent level of inflation makes the effect of interest rates of
even greater importance. Interest rates are affected by inflation, but neither
the timing nor the magnitude of interest rate fluctuations coincides with the
changes in any price index. In addition, when interest rates increase, there
may be delays in increases in interest rates associated with the areas of
business where the rates are regulated.
For these reasons, management believes that the references to other
information regarding interest rates earned and paid, earning assets, and
interest bearing liabilities will be of greater assistance than inflation
adjusted presentations in understanding the Bank's ability to react to
changing interest rates and inflationary trends.
Short-term Borrowings, Long-term Borrowings and Other Contractual Obligations
-----------------------------------------------------------------------------
The Bank does not have any short-term borrowings of federal funds
purchased or securities sold under agreement to repurchase.
The Bank had long-term borrowings outstanding with the Federal Home Loan
Bank of Seattle (FHLB) totaling $17,000,000 and $12,600,000 as of December 31,
2004 and 2003, respectively. These borrowings carry fixed interest rates
ranging from 2.12% to 2.73% and are collateralized by the Bank's FHLB stock as
well as loans or other instruments which may be pledged.
The Bank also rents certain properties and facilities under long-term
operating lease agreements with varying durations. The scheduled repayment of
long-term borrowings and other contractual obligations is as follows:
Payments due by period
as of December 31, 2004
-------------------------------------------------------------
Contractual less than more than
Obligations Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- --------- -----------
Long-term debt $17,000,000 $ 8,000,000 $ 9,000,000 $ - $ -
Operating lease
obligations 1,120,265 234,140 448,130 437,995 -
----------- ----------- ----------- ----------- -----------
Total $18,120,265 $ 8,234,140 $ 9,448,130 $ 437,995 $ 0
=========== =========== =========== =========== ===========
D-30
Off-Balance-Sheet Arrangements
------------------------------
In the normal course of business to meet the financing needs of its
customers, the Bank is a party to financial instruments with off-balance-sheet
risk. These financial instruments include commitments to extend credit and the
issuance of letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the balance sheets. Unless noted otherwise, the Bank requires collateral or
other security to support financial instruments with credit risk.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The following summarizes the Bank's outstanding off-balance-sheet loan
commitments:
Contract Amounts
as of December 31,
--------------------------------------------------
2004 2003
------------------ ---------------------
Financial instruments
whose contract
amounts represent
credit risk:
Credit card
commitments $ 11,331,081 $ 12,609,319
Construction loan
commitments 6,800,060 6,270,242
Line of credit
commitments 5,039,832 2,093,133
Letters of credit 1,398,470 1,498,870
------------- -------------
Total $ 24,569,443 $ 22,471,564
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include depository accounts held by the Bank, accounts receivable,
inventory, property, equipment, and income-producing properties.
Letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
D-31
Capital
-------
The Bank complies with the risk-based capital guidelines promulgated by
the Federal Deposit Insurance Corporation.
The Bank's capital increased to $18,604,064 as of December 31, 2004 as
compared to $11,334,169 as of December 31, 2003, an increase of $7,269,895 or
64%, of which approximately $5,626,500 was from new capital in the exercise of
warrants by the Chairman of the Board.
The Bank's actual capital amounts and ratios are presented in the
following table, as well as the regulatory requirements for minimum capital
adequacy and to be considered "well capitalized."
Minimum Capital
Actual Adequacy Well Capitalized
------ ---------------- ----------------
(Dollars in
thousands) Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- --------- --------- --------
December 31,
2004
Total Capital
to risk-
weighted
assets $ 19,598 18.1% $ 8,666 8.0% $ 10,833 10.0%
Tier I Capital
to risk-
weighted
assets $ 18,615 17.2% $ 4,333 4.0% $ 6,500 6.0%
Tier I Capital
to average
assets $ 18,615 14.9% $ 5,022 4.0% $ 6,277 5.0%
December 31,
2003
Total Capital
to risk-
weighted
assets $ 12,251 12.3% $ 7,952 8.0% $ 9,940 10.0%
Tier I Capital
to risk-
weighted
assets $ 11,332 11.4% $ 3,976 4.0% $ 5,964 6.0%
Tier I Capital
to average
assets $ 11,332 10.4% $ 4,360 4.0% $ 5,450 5.0%
Item 7. Financial Statements
The financial statements called for by this item are included in this
report beginning on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 8A. Controls and Procedures
Our disclosure controls and procedures are designed to ensure that
information that the Bank must disclose in its reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized, and reported on a timely basis. Within 90
days prior to the filing of this report, we carried out an evaluation, under
the supervision and with the participation of our chief executive officer
("CEO") and chief financial officer ("CFO"), of the effectiveness of our
disclosure controls and procedures. Based on that evaluation, the CEO and CFO
have concluded that the Bank's disclosure controls and procedures are
effective in bringing to their attention on a timely basis information
required to be disclosed by the Bank in reports that it files or submits under
the Exchange Act. Also, since the date of their prior evaluation, there have
not been any significant
D-32
changes in the Bank's internal controls or in other factors that could
significantly affect those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses
Item 8B. Other Information
Not applicable.
PART II.
Item 9. Directors and Executive Officers
The response to this item will be included in this Form 10-KSB by
amendment prior to April 30, 2005 if the Bank has not merged with Riverview
Community Bank prior to that date.
Item 10. Executive Compensation
The response to this item will be included in this Form 10-KSB by
amendment prior to April 30, 2005 if the Bank has not merged with Riverview
Community Bank prior to that date.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The response to this item will be included in this Form 10-KSB by
amendment prior to April 30, 2005 if the Bank has not merged with Riverview
Community Bank prior to that date.
Item 12. Certain Relationships and Related Transactions
The response to this item will be included in this Form 10-KSB by
amendment prior to April 30, 2005 if the Bank has not merged with Riverview
Community Bank prior to that date.
Item 13. Exhibits
(a) Financial statements for the fiscal years ended December 31, 2004, 2003,
and 2002 are included in this report beginning on page F-1.
(b) The following exhibits are filed with, and incorporated into, this
report by reference and this list constitutes the exhibit index
Exhibits
--------
2 Agreement and Plan of Merger by and among Riverview Bancorp, Inc.,
Riverview Community
Bank and American Pacific Bank dated November 9, 2004.***
3.1 Articles of Incorporation **
3.2 Bylaws **
10.1 Employment Agreement with David Chen****
10.2 Employment Agreement with Richard Cheong****
10.3 Termination Agreement dated November 9, 2004 between David Chen and
American Pacific Bank. ***
10.4 Termination Agreement dated November 9, 2004 between Richard Cheong
and American Pacific Bank. ***
D-33
10.5 2000 Stock Option Plan(1)
10.6 Form of Stock Option Agreement(1)
10.7 Executive Bonus Plan Resolution dated February 27, 2003(1)
10.8 Lease Agreement between Pacific CrossRoads Properties and
American Pacific Bank dated August 12, 1999.*
10.9 Bankcard Plan Management Services Agreement between Western States
Bankcard Association (WSBA) and American Pacific Bank dated December
14, 1995.**
10.10 Co-Branded Credit Card Agreement between eBanker USA.Com, Inc. and
American Pacific dated September 30, 1999.*
10.11 Agreement between Fiserv Solutions, Inc. and American Pacific Bank
dated November 11, 2002.(1)
10.12 Service Bureau Processing Agreement between Allied Information
Services, Inc. and American Pacific Bank dated September 1, 2001 and
first amendment thereto dated July 14, 2004.(1)
23.1 Consent of Independent Auditor.(1)
31.1 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference from the Bank's Annual Report on Form 10-KSB for
the year ended December 31, 1999.
** Incorporated by reference from the Bank's Annual Report on Form 10-KSB for
the year ended December 31, 1995.
*** Incorporated by reference from the current report on Form 8-K filed on
November 12, 2004.
**** Incorporated by reference from the Form 10-KSB for the year ended
December 31, 2003.
(1) Exhibits filed with the Federal Deposit Insurance Corporation as part of
this Form 10-KSB are excluded. Copies are available upon request.
(b) Reports on Form 8-K
The Bank filed the following reports on Form 8-K during the fourth quarter of
2004:
(1) Report filed October 22, 2004. Items included Item 2.02 Results of
Operations and Financial Condition, announcing earnings for quarter ended
September 30, 2004.
(2) Report filed November 12, 2004. Items included Item 1.01 Entry into
a Material Definitive Agreement, which announced the entry into an agreement
to merge into Riverview Community Bank, a wholly-owned subsidiary of Riverview
Bancorp, Inc.
Item 14. Principal Accountant Fees and Services
The response to this item will be included in this Form 10-KSB by
amendment prior to April 30, 2005 if the Bank has not merged with Riverview
Community Bank prior to that date.
D-34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN PACIFIC BANK
/S/ DAVID T. CHEN
-------------------------------------------------- February 16, 2005
David T. Chen, President & Chief Executive Officer
/S/ RICHARD Y. CHEONG
-------------------------------------------------- February 16, 2005
Richard Y. Cheong, Senior VP & Principal
Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following on behalf of the registrant and in the capacities and on the
dates indicated
/S/ FAI H. CHAN
-------------------------------------------------- February 16, 2005
Fai H. Chan, Chairman of Board of Directors
/S/ DAVID T. CHEN
-------------------------------------------------- February 16, 2005
David T. Chen, C.E.O. & President, Director
/S/ FRANCIS L. HENDRICKS
-------------------------------------------------- February 16, 2005
Francis L. Hendricks, Director
/S/ AL B. KORELIN
-------------------------------------------------- February 16, 2005
Al B. Korelin, Director
/S/ JAMES M. MEI
-------------------------------------------------- February 16, 2005
James M. Mei, Director
/S/ TONY W. CHAN
-------------------------------------------------- February 16, 2005
Tony W.Chan, Director
Proxy materials for a special meeting of shareholders to approve the
merger of the Bank with Riverview Community Bank will be sent to shareholders.
Copies of the definitive version of such materials shall be furnished to the
FDIC when they are sent to security holders. The Bank does not intend to send
proxy materials for annual meeting of shareholders in light of the expected
merger.
D-35
Exhibit 31.1
Certification of Chief Financial Officer under
Section 302 of the Sarbanes - Oxley Act of 2002
I, Richard Cheong, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of American Pacific Bank;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The small issue's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15e and 15d-15(e)) and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting
Date: February 28, 2005 /S/ RICHARD Y. CHEONG
-----------------------------------------------
Richard Y. Cheong
Senior Vice President & Chief Financial Officer
D-36
Exhibit 31.2
Certification of Chief Executive Officer under
Section 302 of the Sarbanes -Oxley Act of 2002
I, David Chen, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-KSB of American Pacific Bank;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The small issue's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15e and 15d-15(e)) and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting
Date: February 28, 2005 /S/ DAVID T. CHEN
-----------------------------------
David T. Chen
President & Chief Executive Officer
D-37
Exhibit 32
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
This certification is given by the undersigned Chief Executive Officer
and Chief Financial Officer of American Pacific Bank (the "Registrant")
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Each of the
undersigned hereby certifies, with respect to the Registrant's annual report
of Form 10-KSB for the period ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/S/ DAVID T. CHEN
---------------------------------
David T. Chen
Chief Executive Officer
American Pacific Bank
/S/ RICHARD Y. CHEONG
---------------------------------
Richard Y. Cheong
Chief Financial Officer
American Pacific Bank
February 28, 2005
D-38
AMERICAN PACIFIC BANK
--------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
AND
FINANCIAL STATEMENTS
--------
DECEMBER 31, 2004, 2003, AND 2002
D-39
CONTENTS
------------------------------------------------------------------------------
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 1
FINANCIAL STATEMENTS
Balance sheets 2
Statements of income and comprehensive income 3-4
Statements of changes in stockholders' equity 5
Statements of cash flows 6-7
Notes to financial statements 8-36
Note: These financial statements have not been reviewed, or confirmed for
accuracy or relevance by the Federal Deposit Insurance Corporation.
------------------------------------------------------------------------------
D-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
American Pacific Bank
We have audited the accompanying balance sheets of American Pacific Bank as of
December 31, 2004 and 2003, and the related statements of income and
comprehensive income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2004. These financial
statements are the responsibility of American Pacific Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Pacific Bank as of
December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2004,
in conformity with United States generally accepted accounting principles.
/s/ Moss Adams LLP
Portland, Oregon
January 21, 2005
D-41
AMERICAN PACIFIC BANK
BALANCE SHEETS
------------------------------------------------------------------------------
December 31,
---------------------------
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 2,227,515 $ 1,155,545
Federal funds sold 9,620,000 5,295,000
------------ ------------
Total cash and cash equivalents 11,847,515 6,450,545
Investment securities available-for-sale 1,179,567 1,501,395
Federal Home Loan Bank stock, at cost 802,800 635,300
Loans, net of allowance for loan losses and
unearned income 107,300,680 97,983,407
Land, buildings, equipment, and leasehold
improvements, net 710,091 780,700
Accrued interest receivable and other assets 752,075 960,991
------------ ------------
TOTAL ASSETS $122,592,728 $108,312,338
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits $ 4,638,813 $ 5,333,569
NOW and money market accounts 26,244,713 22,834,384
Savings and time deposits 55,468,217 55,852,345
------------ ------------
Total deposits 86,351,743 84,020,298
Borrowed funds 17,000,000 12,600,000
Accrued interest payable and other liabilities 636,921 357,871
------------ ------------
Total liabilities 103,988,664 96,978,169
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 17, and 19)
STOCKHOLDERS' EQUITY
Class B common stock, no par value, 200,000,000
shares authorized; 2,804,618 shares issued and
outstanding in 2004, 1,868,935 shares issued and
outstanding in 2003 12,930,050 7,264,235
Surplus 1,000,238 1,000,238
Retained earnings 4,684,300 3,067,396
Accumulated other comprehensive (loss) income,
net of taxes (10,524) 2,300
------------ ------------
Total stockholders' equity 18,604,064 11,334,169
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $122,592,728 $108,312,338
============ ============
See accompanying notes
------------------------------------------------------------------------------
D-42
AMERICAN PACIFIC BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $8,602,540 $8,014,441 $7,389,343
Interest on investment securities:
U.S. government agencies 28,455 38,718 54,441
Other domestic taxable securities 22,002 34,100 34,413
State and municipal subdivisions - - 112
Interest on federal funds sold 142,190 133,780 80,039
---------- ---------- ----------
Total interest income 8,795,187 8,221,039 7,558,348
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 1,535,247 1,826,788 1,976,763
Interest on borrowings 452,133 326,798 319,769
---------- ---------- ----------
Total interest expense 1,987,380 2,153,586 2,296,532
---------- ---------- ----------
Net interest income 6,807,807 6,067,453 5,261,816
PROVISION FOR LOAN LOSSES 206,658 266,917 469,757
---------- ---------- ----------
Net interest income after
provision for loan losses 6,601,149 5,800,536 4,792,059
---------- ---------- ----------
NONINTEREST INCOME
Service charges and fees 201,163 198,038 192,004
Gain on sale of loans - 8,989 267,612
Other noninterest income - 10,055 5,345
---------- ---------- ----------
Total noninterest income 201,163 217,082 464,961
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,954,677 1,815,637 1,641,174
Occupancy and equipment expenses 516,077 541,822 519,466
Real estate commissions, net of fees - 3,890 129,591
Loss on disposition of assets 6,341 - -
Other operating expenses 1,658,040 1,411,981 1,190,101
---------- ---------- ----------
Total noninterest expense 4,135,135 3,773,330 3,480,332
---------- ---------- ----------
Income before provision for
income taxes 2,667,177 2,244,288 1,776,688
PROVISION FOR INCOME TAXES 1,050,273 852,744 675,090
---------- ---------- ----------
NET INCOME 1,616,904 1,391,544 1,101,598
---------- ---------- ----------
------------------------------------------------------------------------------
D-43
AMERICAN PACIFIC BANK
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
OTHER COMPREHENSIVE LOSS
Unrealized holding loss arising during
the period, net of tax $ (12,824) $ (3,388) $ (5,361)
---------- ---------- ----------
Total other comprehensive loss (12,824) (3,388) (5,361)
---------- ---------- ----------
COMPREHENSIVE INCOME $1,604,080 $1,388,156 $1,096,237
========== ========== ==========
BASIC EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.78 $ 0.85 $ 0.73
========== ========== ==========
DILUTED EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.76 $ 0.78 $ 0.73
========== ========== ==========
See accompanying notes.
------------------------------------------------------------------------------
D-44
AMERICAN PACIFIC BANK
STATEMENTS OF CHANGES IN STOCKOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------
Class B Accumulated
Common Stock Other Total
----------------- Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Income (Loss) Equity
------- ------ ------- -------- ------------- -------------
BALANCE, December 31, 2001 1,476,990 $ 5,196,746 $1,000,238 $ 574,254 $ 11,049 $ 6,782,287
Issuance of stock 8,887 27,905 - - - 27,905
Exercise of options 85,150 413,257 - - - 413,257
Exercise of warrants 50,000 257,000 - - - 257,000
Net income and comprehensive --------- ----------- ---------- ---------- -------- -----------
income - - - 1,101,598 (5,361) 1,096,237
--------- ----------- ---------- ---------- -------- -----------
BALANCE, December 31, 2002 1,621,027 5,894,908 1,000,238 1,675,852 5,688 8,576,686
Issuance of stock 13,808 69,869 - - - 69,869
Exercise of options 4,100 13,758 - - - 13,758
Exercise of warrants 230,000 1,285,700 - - - 1,285,700
Net income and comprehensive --------- ----------- ---------- ---------- -------- -----------
income - - - 1,391,544 (3,388) 1,388,156
--------- ----------- ---------- ---------- -------- -----------
BALANCE, December 31, 2003 1,868,935 7,264,235 1,000,238 3,067,396 2,300 11,334,169
Issuance of stock 2,483 21,105 - - - 21,105
Exercise of options 3,200 10,370 - - - 10,370
Tax benefit of options
exercised - 7,840 - - - 7,840
Exercise of warrants 930,000 5,626,500 - - - 5,626,500
Net income and comprehensive --------- ----------- ---------- ---------- -------- -----------
income - - - 1,616,904 (12,824) 1,604,080
--------- ----------- ---------- ---------- -------- -----------
BALANCE, December 31, 2004 2,804,618 $12,930,050 $1,000,238 $4,684,300 $(10,524) $18,604,064
========= =========== ========== ========== ======== ===========
See accompanying notes.
------------------------------------------------------------------------------------------------------------
D-45
AMERICAN PACIFIC BANK
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
Years Ended December
-----------------------------------------
2004 2003 2002
----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,616,904 $ 1,391,544 $ 1,101,598
Adjustments to reconcile net
income to net cash from operating
activities:
Depreciation and amortization 115,757 113,544 115,165
Provision for loan losses 206,658 266,917 469,757
Gain on sale of loans - (8,989) (267,612)
Loss on sale of assets 6,825 - -
Loss on other real estate owned - - 20,650
Amortization of credit card
purchase premium 28,465 38,683 -
Deferred income tax (benefit)
provision (2,922) 16,917 11,838
Net change in loans held-for-sale - 764,731 90,623
Federal Home Loan Bank stock
dividends (21,900) (34,000) (35,200)
Stock contributed to 401(k)
retirement plan 21,105 31,534 27,905
Change in cash due to changes in
certain assets and liabilities:
Accrued interest receivable and
other assets 191,008 12,363 (278,481)
Accrued interest payable and
other liabilities 286,890 (315,152) 321,360
----------- ------------ ------------
Net cash from operating
activities 2,448,790 2,278,092 1,577,603
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities
available-for-sale (896,850) (1,897,664) (1,186,896)
Proceeds from sale of investment
securities available-for-sale - - 70,000
Proceeds from maturity/call of
investment securities available-
for-sale 1,200,000 1,590,000 1,395,218
Purchases of Federal Home Loan
Bank stock (145,600) - (16,100)
Loans originated, net of principal
repayments (9,523,931) (12,158,402) (15,514,256)
Proceeds from the sale of other
real estate owned - 144,000 335,850
Purchase of credit card portfolios - - (1,518,135)
Purchase of buildings, equipment,
and leasehold improvements (53,754) (89,317) (7,869)
----------- ------------ ------------
Net cash from investing
activities (9,420,135) (12,411,383) (16,442,188)
----------- ------------ ------------
------------------------------------------------------------------------------
D-46
AMERICAN PACIFIC BANK
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------
Years Ended December
-----------------------------------------
2004 2003 2002
----------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in noninterest-
bearing demand, NOW, money
market, and savings deposit
accounts $ 2,841,424 $ 6,205,257 $ 6,550,727
Net (decrease) increase in time
deposits (509,979) (1,719,426) 15,407,154
Net decrease in short-term
borrowings - - (9,000,000)
Proceeds from long-term
borrowings 6,000,000 3,000,000 9,600,000
Repayments of long-term
borrowings (1,600,000) (2,000,000) -
Proceeds from options exercised 10,370 13,758 413,257
Proceeds from warrants exercised 5,626,500 1,285,700 257,000
----------- ------------ ------------
Net cash from financing
activities 12,368,315 6,785,289 23,228,138
----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,396,970 (3,348,002) 8,363,553
CASH AND CASH EQUIVALENTS, beginning
of year 6,450,545 9,798,547 1,434,994
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end
of year $11,847,515 $ 6,450,545 $ 9,798,547
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Interest paid in cash $ 1,987,112 $ 2,187,386 $ 2,323,649
=========== ============ ============
Taxes paid in cash $ 1,036,187 $ 1,183,345 $ 332,131
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Unrealized loss on investment
securities available-for-sale,
net of taxes $ (12,824) $ (3,388) $ (5,361)
=========== ============ ============
Tax benefit of stock options
exercised $ 7,840 $ - $ -
=========== ============ ============
Acquired real estate in
settlement of loans $ - $ 144,000 $ 304,000
=========== ============ ============
Stock issued in settlement of
prior year accrued bonus $ - $ 38,335 $ -
=========== ============ ============
See accompanying notes.
------------------------------------------------------------------------------
D-47
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND PLAN OF MERGER
Organization - American Pacific Bank (the Bank), headquartered in Portland,
Oregon, is an Oregon state-chartered financial institution. The Bank provides
commercial banking products and services to the Portland and Salem, Oregon,
metropolitan areas through three branch offices.
The Bank is subject to the regulations of certain federal and state agencies,
and undergoes periodic examinations by those regulatory authorities.
Plan of Merger - In November 2004, the Bank entered into an Agreement and Plan
of Merger with Riverview Bancorp, Inc., a savings and loan holding company
based in Vancouver, Washington, and its wholly-owned subsidiary, Riverview
Community Bank (Riverview). Under the agreement, American Pacific Bank will
merge into Riverview. The Bank's stockholders will be entitled to receive
either cash or shares of Riverview Bancorp Inc.'s common stock in exchange for
their shares of the Bank's common stock.
The merger, which has been approved by the Board of Directors of both
companies, is subject to certain conditions, including the approval of Bank
stockholders, receipt of regulatory approvals, and the registration of the
shares to be issued in the merger with the Securities and Exchange Commission.
The merger is expected to be completed in the second calendar quarter of 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management's estimates and assumptions - In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheets and revenues and expenses for the reporting period. Estimates
and assumptions made by management primarily involve the valuation of the
allowance for loan losses. Actual results could differ significantly from
those estimates.
Cash and cash equivalents - Cash and cash equivalents normally include cash on
hand, amounts due from banks, and federal funds sold. Federal funds sold
represent excess cash funds that are generally invested on a daily basis.
Investment securities - The Bank is required to specifically identify its
investment securities as "available-for-sale," "held-to-maturity," or "trading
accounts." Accordingly, management has determined that all investment
securities held as of December 31, 2004 and 2003, are "available-for- sale."
------------------------------------------------------------------------------
D-48
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Available-for-sale securities consist of bonds, notes, debentures, and certain
equity securities. Securities classified as available-for-sale may be sold in
response to such factors as: (1) changes in market interest rates and related
changes in the security's prepayment risk, (2) needs for liquidity, (3)
changes in the availability of and the yield on alternative instruments, and
(4) changes in funding sources and terms. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of equity
until realized. Fair values for investment securities are based on quoted
market prices. Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary, result in
write-downs of the individual securities to their fair value. Other than
temporary declines result in impairment when factors are evident that the fair
value of the investment security will not be recovered over the period to
maturity. The related write-downs would be included in earnings as realized
losses. Premiums and discounts are recognized as interest income using the
interest method over the period to maturity.
Federal Home Loan Bank stock - The Bank's investment in Federal Home Loan Bank
(FHLB) stock is a restricted investment carried at par value, which
approximates its fair value. As a member of the FHLB system, the Bank is
required to maintain a minimum level of investment in FHLB stock based on
specific percentages of its outstanding FHLB advances. The Bank may request
redemption at par value of any stock in excess of the amount the Bank is
required to hold. Stock redemptions are made at the discretion of the FHLB.
Loans, net of allowance for loan losses and unearned income - Loans are stated
at the amount of unpaid principal, reduced by an allowance for loan losses and
unearned income. Interest on loans is calculated by the simple-interest method
on daily balances of the principal amount outstanding. Loan origination fees
and certain direct origination costs are capitalized and recognized as an
adjustment of the yield of the related loan.
The allowance for loan losses is maintained to provide for losses that can
reasonably be anticipated. The allowance is based on ongoing quarterly
assessments of the probable losses inherent in the loan portfolio. A reserve
for losses on unfunded loan commitments is provided as an other liability to
reflect the Bank's potential exposure to loss from future borrowings under
commitments to extend credit.
------------------------------------------------------------------------------
D-49
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
The allowance for loan losses is increased by provisions charged to operations
during the current period and reduced by loan charge-offs, net of recoveries.
Loans are charged against the allowance when management believes that the
collection of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses, inherent in existing
loans and commitments to extend credit, based on evaluations of the
probability of collection. In evaluating the probability of collection,
management is required to make estimates and assumptions that affect the
reported amounts of loans, allowance for loan losses, and the provision for
credit losses charged to operations. Actual results could differ significantly
from those estimates. These evaluations taken into consideration such factors
as the composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. The Bank's methodology for assessing
the adequacy of the allowance for credit losses consists of several key
elements, which include the formula allowance, specific allowances, and the
unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding
loans and certain unfunded loan commitments. Loss factors are based on the
Bank' historical loss experience and may be adjusted for significant factors
that, in management's judgment, affect the collectibility of the portfolio as
of the evaluation date. The Bank determines the loss factors for problem
graded loans (substandard, doubtful, and loss), special mention loans, and
pass graded loans. The model incorporates the Bank's historical losses and
provides adjustments to recognize and quantify the loss exposure from changes
in market conditions and trends in the loan portfolio. For purposes of this
analysis, loans are grouped by internal risk classifications which are "pass,"
"special mention," "substandard," "doubtful," and "loss." Certain loans are
homogenous in nature and are, therefore, pooled by risk grade. These
homogenous loans include consumer installment and home equity loans. Special
mention loans are currently performing but are potentially weak, as the
borrower has begun to exhibit deteriorating trends, which if not corrected,
could jeopardize repayment of the loan and result in further downgrade.
Substandard loans have well-defined weaknesses which, if not corrected, could
jeopardize the full satisfaction of the debt. A loan classified as "doubtful"
has critical weaknesses that make full collection of the obligation
improbable. Classified loans, as defined by the Bank, include loans
categorized as substandard, doubtful, and loss.
Specific allowances are established based on management's periodic evaluation
of loss exposure inherent in classified loans, impaired loans, and other loans
in which management believes there is a probability that a loss has been
incurred in excess of the amount determined by the application of the formula
allowance.
------------------------------------------------------------------------------
D-50
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
The unallocated portion of the allowance is based upon management's evaluation
of various conditions that are not directly measured in the determination of
the formula and specific allowances. The conditions may include, but are not
limited to, general economic and business conditions affecting the key lending
areas of the Bank, credit quality trends, collateral values, loan volumes and
concentration, and other business conditions.
The allowance analysis also incorporates the results of measuring impaired
loans as provided in Statement of Financial Accounting Standards (SFAS) No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." A loan is considered impaired when management determines that it
is probable that the Bank will be unable to collect all amounts due according
to the original contractual terms of the loan agreement. Impairment is
measured by the difference between the original recorded investment in the
loan and the estimated present value of the total expected cash flows,
discounted at the loan's effective rate, or the fair value of the collateral,
if the loan is collateral dependent. Any differences in the specific allowance
amounts calculated in the impaired loan analysis and the model analysis
described above are reconciled by management and changes are made to the
allowance as deemed necessary.
Loans held-for-sale and loan sales - Mortgage loans originated and intended
for sale in the secondary market are carried at the lower of cost or estimated
market value in the aggregate. Mortgage loan sales are primarily on a
servicing released basis. Gains or losses are recognized to the extent that
the sale proceeds of the mortgage loans sold exceed or are less than the net
book value at the time of sale. The Bank had no loans held-for-sale as of
December 31, 2004 or 2003.
The Bank also sells participations in loans, retaining servicing rights, and
an interest in the sold loans. Gain or loss on the sale of loans depends in
part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interest based on
their relative fair value at the date of transfer. As quoted market prices are
generally not available for retained interests, the Bank generally estimates
fair value based on the present value of future expected cash flows using
management's best estimate of key assumptions credit losses, prepayment
speeds, and discount rates commensurate with the risks involved.
No servicing asset or liability is recorded because the Bank estimates that
the benefits of servicing are just adequate to compensate it for its servicing
responsibilities.
Land, buildings, equipment, and leasehold improvements Land, buildings,
equipment, and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally by the straight-line method over estimated useful lives of the
assets, which range from 3 to 40 years.
------------------------------------------------------------------------------
D-51
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Other real estate owned - Real estate acquired by the Bank in satisfaction of
debt is carried at the lower of cost or estimated net realizable value. When
property is acquired, any excess of the loan balance over its estimated net
realizable value is charged to the allowance for loan losses. Subsequent
write-downs to net realizable value, if any, or any disposition gains or
losses are included in noninterest income and expense. The Bank held no other
real estate owned as of December 31, 2004 or 2003.
Advertising - Advertising costs are charged to expense during the year in
which they are incurred. Advertising expenses were $24,099, $21,498 and
$15,514 in 2004, 2003, and 2002, respectively.
Income taxes - Deferred tax assets and liabilities are determined based on the
tax effects of the differences between the book and tax bases of various
balance sheet assets and liabilities. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Earnings per share - Basic earnings per share is computed by dividing net
income available to stockholders by the weighted average number of common
shares outstanding during the period, after giving retroactive effect to stock
dividends and splits. Diluted earnings per share are computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if
dilutive potential common shares had been issued. Included in the denominator
is the dilutive effect of warrants and stock options computed under the
treasury stock method.
Stock options - The Bank applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plans using the intrinsic value-based method.
Accordingly, compensation costs are recognized as the difference between the
exercise price of each option and the market price of the Bank's stock at the
date of each grant. Had compensation cost for the Bank's 2003 and 2002 grants
for stock-based compensation plans been determined consistent with the fair
value-based method defined
------------------------------------------------------------------------------
D-52
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
in SFAS No. 123, "Accounting for Stock-Based Compensation," its net income and
earnings per common share for December 31, 2003 and 2002, would approximate
the pro forma amounts shown below (in thousands, except per share data).
2003 2002
------- -------
Net income:
As reported $ 1,392 $ 1,102
Pro forma $ 1,348 $ 1,023
Basic earnings per share:
As reported $ 0.85 $ 0.73
Pro forma $ 0.82 $ 0.68
Diluted earnings per share:
As reported $ 0.78 $ 0.73
Pro forma $ 0.76 $ 0.68
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for
December 31:
2003 2002
------- -------
Dividend yield - -
Expected life (years) 5 2
Expected volatility 15.27% 16.16%
Risk-free rate 1.50% 1.75%
There were no options granted in 2004 and compensation cost for options
vesting in 2004 is not significant.
The effect of applying the fair value-based method to stock options granted in
the years ended December 31, 2003 and 2002, resulted in an estimated weighted
average grant date fair value of $1.05 and $0.54, respectively. The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of
future amounts.
Off-balance sheet financial instruments - The Bank holds no derivative
financial instruments. However, in the ordinary course of business the Bank
enters into off-balance sheet financial instruments consisting of commitments
to extend credit, commitments under credit card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments
are recorded in the financial statements when the credits are funded or
related fees are earned.
------------------------------------------------------------------------------
D-53
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Fair value of financial instruments - The following methods and assumptions
were used by the Bank in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents - The carrying amounts of cash and cash equivalents
approximate their fair value.
Available-for-sale securities - Fair values for investment securities are
based on quoted market prices. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Federal Home Loan Bank stock - The carrying value of Federal Home Loan Bank
stock approximates fair value.
Loans receivable - For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for fixed-rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans
are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Loans held-for-sale - Fair value represents the anticipated proceeds from sale
of the loans.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate money
market accounts and variable rate certificates of deposit (CDs) approximate
their fair values at the reporting date. Fair values for fixed-rate CDs are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings from the Federal Home Loan Bank, and other short-term borrowings
maturing within 90 days approximate their fair values.
Long-term borrowings - The fair values of long-term borrowings are estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued interest receivable and payable - The carrying amounts of accrued
interest receivable and payable approximate their fair values.
------------------------------------------------------------------------------
D-54
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Off-balance sheet instruments - The Bank's off-balance sheet instruments
include unfunded commitments to extend credit and standby letters of credit.
The fair value of these instruments is not considered practicable to estimate
because of the lack of quoted market prices and the inability to estimate fair
value without incurring excessive costs.
Recently issued accounting standards:
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" - In March 2004, the Financial Accounting Standards Board (FASB)
ratified the consensuses reached by the Emerging Issues Task Force (EITF)
regarding Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." EITF Issue 03-1 provides guidance on
recognition and measurement of other-than-temporary impairment and its
application to certain investments, including all debt securities and equity
securities that are subject to the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
On September 30, 2004, the FASB issued a proposed Board-directed Staff
Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The proposed FSP will
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF Issue 03-1. The
Board has delayed the effective date to provide further implementation
guidance. This delay does not suspend the requirement to recognize other-than-
temporary impairments as required by existing authoritative literature. The
delay of the effective date for paragraphs 10-20 of EITF Issue 03-1 will be
superseded concurrent with the final issuance of FSB EITF Issue 03-1-a.
Management does not anticipate adoption of EITF Issue 03-1-a will have a
significant impact upon the Bank.
Application of Accounting Principles to Loan Commitments (SAB No. 105) - On
March 9, 2004, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 105 "Application of Accounting Principles to Loan Commitments,"
which specifies that servicing assets embedded in commitments for loans to be
held-for-sale should be recognized only when the servicing asset has been
contractually separated from the associated loans by sale or securitization.
SAB No. 105 is effective for commitments entered into after March 31, 2004.
SAB No. 105 has had no effect on the Bank's results of operations or financial
condition.
------------------------------------------------------------------------------
D-55
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Statement of Financial Accounting Standards No. 123 (revised 2004) - In
December 2004, the FASB revised SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related implementation guidance. The
Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant
date fair value of the award. The cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award the requisite service period (usually the vesting period).
This Statement is effective for public entities that file as small business
issuers, such as the Bank, as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. Management estimates
that the effect of adopting this Statement will result in the recognition of
no additional compensation expense during 2005.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale investment
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
December 31, 2004:
Agency notes and bonds $1,196,541 $ - $(16,974) $1,179,567
========== ====== ======== ==========
December 31, 2003:
Agency notes and bonds $1,497,910 $3,485 $ - $1,501,395
========== ====== ======== ==========
Securities that have been temporarily impaired less than 12 months at December
31, 2004, are comprised of four U.S. government agency securities, with a
weighted average life of 23 months. Temporary impairment of investment
securities is the result of a general increase in market rates of interest.
There are no securities that have been in a continuous, unrealized loss
position for 12 months or more.
------------------------------------------------------------------------------
D-56
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES - (continued)
The amortized cost and estimated fair value of investment securities
available-for-sale as of December 31, 2004, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 598,702 $ 590,814
Due after one year through five years 597,839 588,753
---------- ----------
$1,196,541 $1,179,567
========== ==========
As of December 31, 2004 and 2003, investment securities with an amortized cost
of $1,196,541 and $899,653, respectively, were pledged to secure deposits of
public funds.
The Bank, as a member of the FHLB system, is required to maintain an
investment in restricted equity securities of the FHLB. FHLB stock is not
actively traded but is redeemable at current book value. As of December 31,
2004, the Bank's investment in FHLB stock was $802,800.
NOTE 4 - LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED INCOME
The composition of loan balances is summarized as follows:
2004 2003
------------ -----------
Commercial $ 86,628,120 $80,563,270
Real estate - construction 16,603,763 11,739,068
Real estate - permanent 1,876,387 3,132,975
Credit cards 3,563,127 3,845,903
Installment 68,417 79,424
Overdraft accounts 61,121 38,355
------------ -----------
108,800,935 99,398,995
Allowance for loan losses (982,611) (919,305)
Unearned income (517,644) (496,283)
------------ -----------
Loans, net of allowance for loan
losses and unearned income $107,300,680 $97,983,407
============ ===========
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D-57
AMERICAN PACIFIC BANK
NOES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 4 - LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED
INCOME - (continued)
Changes in the allowance for loan losses were as follows:
2004 2003 2002
-------- -------- --------
BALANCE, beginning of year $919,305 $844,240 $667,806
Provision for loan losses 206,658 266,917 469,757
Loans charged off (158,502) (201,770) (301,875)
Recoveries on loans previously
charged off 15,150 9,918 8,552
-------- -------- --------
BALANCE, end of year $982,611 $919,305 $844,240
======== ======== ========
The Bank has recognized impaired loans having recorded balances of $422,042
and $244,516 on December 31, 2004 and 2003, respectively. The total allowance
for loan losses related to these loans was $21,102 and $7,335 on December 31,
2004 and 2003, respectively. The Bank's average recorded investment in
impaired loans for the years ended December 31, 2004, 2003, and 2002 was
$333,279, $230,848, and $264,602, respectively. Interest income recognized for
cash payments received on impaired loans was insignificant in 2004, 2003, and
2002. Had the impaired loans performed according to their original terms,
additional interest income that would have been recognized during 2004, 2003,
and 2002 would also have been insignificant.
------------------------------------------------------------------------------
D-58
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 4 - LOANS, NET OF ALLOWANCE FOR LOAN LOSSES AND UNEARNED
INCOME - (continued)
The maturity range of the loan portfolio as of December 31, 2004, is as
follows:
Due
Due in After One
One Year Through Due After
or Less Five Years Five Years Total
---------- ---------- ---------- ----------
Commercial and real estate $26,570,732 $11,791,926 $66,271,147 $104,633,805
Credit card loans 3,563,102 - - 3,563,102
Installment loans,
overdrafts, and ready
reserves 75,685 106,301 - 181,986
----------- ----------- ----------- ------------
$30,209,519 $11,898,227 $66,271,147 108,378,893
=========== =========== ===========
Nonaccrual loans 422,042
------------
$108,800,935
============
Fixed rate loans $ 7,900,683 $ 6,748,110 $66,271,147 $ 80,919,940
Adjustable rate loans 22,308,836 5,150,117 - 27,458,953
----------- ----------- ----------- ------------
$30,209,519 $11,898,227 $66,271,147 108,378,893
=========== =========== ===========
Nonaccrual loans 422,042
------------
$108,800,935
============
------------------------------------------------------------------------------
D-59
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 5 - CREDIT CARD PORTFOLIO
Certain of the Bank's consumer credit card accounts were also originally
required to be fully secured with time certificates of deposit or savings
accounts at the Bank. The majority of these accounts have become partially
unsecured with the passage of time due to the customers' creditworthiness.
Unsecured accounts included in the credit card portfolio totaled $1,726,668
and $1,947,993, and secured and partially secured accounts totaled $1,836,434
and $1,897,910 as of December 31, 2004 and 2003, respectively. Credit card
account balances that were more than 30 days past due totaled $144,368 and
$198,199 as of December 31, 2004 and 2003, respectively.
The credit card portfolio is serviced by Western States Bancard Association
(WSBA). The Bank has assumed all risk management responsibilities including
collection and due diligence procedures, while WSBA provides all other
portfolio service requirements.
For the years ending December 31, 2004, 2003, and 2002, the Bank's net
interest margin on credit card accounts was as follows:
2004 2003 2002
-------- -------- --------
Interest and fee income $953,960 $989,763 $786,303
Interest expense (22,015) (61,447) (103,401)
-------- -------- --------
Net interest margin $931,945 $928,316 $682,902
======== ======== ========
From time to time, the Bank has purchased credit card portfolios from other
parties. Generally, after the first year of purchase, the Bank pays a rebate
to the seller of 0.5% of net sales on accounts that were acquired. The Bank
also maintains certain co-branded credit card programs with other
institutions. These cards are promoted by both parties, and the Bank pays a
one-time fee for each approved account application referred by the other
party, as well as a percentage of net sales on approved accounts. Co-branded
credit card balances totaled $1,639,662 and $1,814,287 as of December 31, 2004
and 2003, respectively.
------------------------------------------------------------------------------
D-60
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 6 - LAND, BUILDINGS, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Major classifications of land, buildings, equipment, and leasehold
improvements are summarized as follows:
2004 2003
----------- -----------
Land $ 35,465 $ 35,465
Buildings 316,869 316,869
Equipment 795,673 761,918
Leasehold improvements 692,828 702,578
----------- -----------
Total land, buildings, equipment,
and leasehold improvements 1,840,835 1,816,830
Accumulated depreciation and amortization (1,130,744) (1,036,130)
----------- -----------
Land, buildings, equipment, and
leasehold improvements, net $ 710,091 $ 780,700
=========== ===========
For the years ended December 31, 2004, 2003, and 2002, depreciation expense
totaled $115,757, $113,544, and $115,165, respectively.
NOTE 7 - ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets consist of the following:
2004 2003
----------- -----------
Accrued interest receivable $385,494 $403,836
Deferred income taxes 259,234 256,312
Settlement and other receivables 52,579 211,815
Prepaid expenses 54,768 89,028
-------- --------
Total accrued interest receivable
and other assets $752,075 $960,991
======== ========
NOTE 8 - TIME DEPOSITS
Time certificates of deposit of $100,000 or more aggregated $20,854,059 and
$19,613,794 as of December 31, 2004 and 2003, respectively.
------------------------------------------------------------------------------
D-61
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 8 - TIME DEPOSITS - (continued)
The scheduled maturities for time certificates of deposit of $100,000 or more
and all other time deposits are as follows as of December 31, 2004:
Time
Certificates
of $100,000 All Other
or More Time Deposits
----------- -----------
Maturity in:
Three months or less $ 9,397,792 $ 5,725,633
Three to six months 2,261,589 5,893,627
Six to twelve months 4,656,532 11,024,293
One to three years 4,538,146 8,558,151
----------- -----------
$20,854,059 $31,201,704
=========== ===========
NOTE 9 - LINES OF CREDIT AND BORROWED FUNDS
The Bank is a member of the FHLB of Seattle and has entered into an Advances,
Security and Deposit Agreement which provides a credit arrangement from the
FHLB. Borrowings under the credit arrangement are collateralized by the Bank's
FHLB stock as well as loans or other instruments which may be pledged. As of
December 31, 2004 and 2003, the Bank had borrowings outstanding with the FHLB
of $17,000,000 and $12,600,000, respectively. The promissory notes carry fixed
interest rates ranging from 2.12% to 2.73%.
The maturity of borrowed funds is as follows:
Years ending December 31, 2005 $ 8,000,000
2006 6,000,000
2007 3,000,000
-----------
$17,000,000
===========
The Bank also has line of credit agreements with correspondent banks with
maximum borrowings available of $4,000,000 and an agreement with the FHLB
allowing borrowings up to 25% of the Bank's total assets. As of December 31,
2004 and 2003, there were no borrowings under these arrangements.
------------------------------------------------------------------------------
D-62
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 10 - OTHER OPERATING EXPENSES
Other operating expenses were comprised of the following:
2004 2003 2002
---------- ---------- ----------
Credit card expenses $ 463,314 $ 470,473 $ 315,544
Data processing expenses 236,153 229,317 206,968
Telephone, postage, and wire transfer
expenses 170,952 181,080 161,896
Professional services 382,760 177,100 127,726
Insurance 82,036 71,037 63,505
Automatic teller machine processing fees 76,001 67,919 60,734
Stationery, supplies, and printing
expenses 32,262 33,779 35,852
NSF and other operating losses 1,912 8,429 20,064
Public relations and business
development 20,838 15,282 16,670
Advertising 24,099 21,498 15,514
Miscellaneous other operating expenses 167,713 136,067 165,628
---------- ---------- ----------
Other operating expenses $1,658,040 $1,411,981 $1,190,101
========== ========== ==========
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
2004 2003 2002
---------- ---------- ----------
Current tax expense:
Federal $ 932,449 $ 758,251 $ 600,692
State 120,746 77,576 62,560
---------- ---------- ----------
1,053,195 835,827 663,252
---------- ---------- ----------
Deferred tax (benefit) expense:
Federal (2,587) 15,346 10,739
State (335) 1,571 1,099
---------- ---------- ----------
(2,922) 16,917 11,838
---------- ---------- ----------
Provision for income taxes $1,050,273 $ 852,744 $ 675,090
========== ========== ==========
------------------------------------------------------------------------------
D-63
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES - (continued)
Deferred tax asset and liability accounts consisted of the following:
2004 2003
--------- ---------
Deferred tax assets:
Loan loss reserve $ 279,111 $ 254,829
Net operating loss carryforward 18,765 39,228
Other 72,968 26,675
--------- ---------
370,844 320,732
--------- ---------
Deferred tax liabilities:
Accumulated depreciation (16,192) (21,461)
Other (95,418) (42,959)
--------- ---------
(111,610) (64,420)
--------- ---------
Net deferred tax assets $ 259,234 $ 256,312
========= =========
As of December 31, 2004, the Bank had net operating loss carryforwards of
$48,922 available to offset future income taxes. These carryforwards expire in
2005.
Management believes, based upon the Bank's historical performance, that the
deferred tax assets will be realized in the normal course of operations and,
accordingly, deferred tax assets have not been reduced by a valuation
allowance.
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
2004 2003 2002
---------- --------- ---------
Federal income taxes at statutory
rates $ 906,840 $ 763,057 $ 604,074
State income taxes, net of federal
benefit 112,674 98,059 74,401
Other differences 30,759 (8,372) (3,385)
---------- --------- ---------
$1,050,273 $ 852,744 $ 675,090
========== ========= =========
39.4% 38.0% 38.0%
========== ========= =========
------------------------------------------------------------------------------
D-64
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 12 - CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market areas. The majority
of such customers are also depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding. Commercial and standby letters of credit were granted primarily
to commercial borrowers as of December 31, 2004. The Bank's loan policy does
not allow the extension of credit to any single borrower or group of related
borrowers in excess of $500,000 without approval from the Bank's loan
committee.
Most of the Bank's commercial loan activity is to customers located near its
headquarters and branch offices. These geographical areas are primarily
involved in commercial business and residential development activities. As of
December 31, 2004 and 2003, commercial real estate loans were 73% and 75%,
respectively, of the Bank's loan portfolio.
The Bank's real estate lending department in Portland, Oregon, makes real
estate construction loans to builders and their customers primarily in the
Portland, Oregon, and Vancouver, Washington, metropolitan areas. The
department also occasionally provides real estate mortgage brokerage services
to customers for which it receives fee and interest income. As of December 31,
2004 and 2003, 15% and 12%, respectively, of the Bank's loan portfolio was
comprised of real estate construction loans.
The Bank makes credit card loans to qualified individuals throughout the
United States. As of December 31, 2004 and 2003, 3% and 4%, respectively, of
the Bank's loan portfolio was comprised of outstanding credit card balances.
------------------------------------------------------------------------------
D-65
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal stockholders are
customers of and have had banking transactions with the Bank in the ordinary
course of business, and the Bank expects to have such transactions in the
future. All loans and commitments to loan included in such transactions were
made in compliance with applicable laws on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of the
management of the Bank, do not involve more than the normal risk of
collectibility or present any other unfavorable features. The following table
summarizes loan transactions between the Bank and related parties:
2004 2003
--------- ---------
BALANCE, beginning of year $ 34,332 $ 31,498
Loans made 273,658 240,106
Loans paid (268,697) (237,272)
--------- ---------
BALANCE, end of year $ 39,293 $ 34,332
========= =========
In December 1999, the Bank entered into a Co-Branded Credit Card Agreement
with eBanker USA.Com, Inc. (eBanker), a company for which the Bank's chairman
and chief executive officer serve as members of the Board of Directors. Under
the Agreement, eBanker maintains a web-site for soliciting credit card
customers over the Internet. The program is designed to attract subprime and
business credit card borrowers under a cash secured arrangement. The Bank has
agreed to service the accounts for a monthly fee on a cost-plus basis. eBanker
funds the program and assumes all risks, and is responsible for any losses
from co-branded accounts. The program commenced during 2000; however, as of
December 31, 2004, no activity has occurred.
NOTE 14 - COMMON STOCK TRANSACTIONS
Private placement offering - In June 1999, the Bank's Board of Directors
approved a private placement offering for the sale of 11 units of equity
interest at $46,500 per unit or an aggregate amount of $511,500. In the
private placement offering, each unit consisted of 11,000 shares of common
stock and warrants for 110,000 additional shares. The exercise price for the
warrants was $4.23 per share until September 30, 2000, then increasing to
$4.68 per share through September 30, 2001, to $5.14 per share through
September 30, 2002, to $5.59 per share through September 30, 2003, and to
$6.05 per share through September 30, 2004, when the warrants expired.
------------------------------------------------------------------------------
D-66
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 14 - COMMON STOCK TRANSACTIONS - (continued)
The private placement was fully subscribed by the Bank's chairman, who paid
the subscription price of $511,500. The chairman also received 1,210,000
common stock warrants from the private placement offering. As of December 31,
2004, all shares of common stock pursuant to the private placement offering
have been issued and all common stock warrants had been exercised.
Stock option plans - In September 2000, stockholders of the Bank approved the
2000 Stock Option Plan (the Plan) for the granting of incentive stock options
to employees and the granting of nonstatutory options (NQSOs) to nonemployee
directors.
The Plan provides for the grant of options up to an aggregate of 275,000
shares of stock, all of which may be awarded to employees who do not own 10%
or more of the voting stock of the Bank. No more than 60% of the options may
be awarded as NQSOs.
The Plan became effective upon stockholder approval and terminates ten years
after the effective date of the Plan. The Plan is administered by the Board of
Directors. Options granted under this plan are not exercisable for one year
and have terms not exceeding five years. Options may be exercised only while
the grantee is an employee or within three months following termination. As of
December 31, 2004, options for 126,500 shares were outstanding and exercisable
under the 2000 Stock Option Plan.
In April 1992, stockholders of the Bank approved the 1992 Restated
Nonqualified Stock Option Plan for Employees (Employee Plan) and the Restated
Nondiscretionary Stock Option Plan for Nonemployee Directors (Outside Director
Plan).
The Employee Plan provided for the grant of options to employees up to an
aggregate of 134,750 shares of common stock. All employees of the Bank who met
eligibility requirements could participate in the Employee Plan, which was
administered by the Board of Directors. The Board had the authority to grant
options including determination of the conditions and timing of grants,
designation of the employees to whom options were to be granted, as well as
the number of shares subject to option and selection of the exercise price for
shares optioned. Under the plan, options could be exercised only while the
grantee was an employee or within 12 months following termination of
employment. The plan terminated in 2002. As of December 31, 2004, no options
remained outstanding under the Employee Plan.
------------------------------------------------------------------------------
D-67
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 14 - COMMON STOCK TRANSACTIONS - (continued)
The Outside Director Plan covered all nonemployee directors of the Bank. This
plan provided for the grant of options to directors up to an aggregate of
10,725 shares of common stock. The plan was administered by a committee of the
Board of Directors, which specified the conditions, timing, and exercise price
of grants of options. Under the plan, options could be exercised only while
the grantee serves as a director or within 12 months following termination as
a director. The exercise price for options could not be less than 85% of fair
market value of the stock on the date of grant. Similar to the Employee Plan,
the Outside Director Plan became effective in April 1992 and terminated in
2002. As of December 31, 2004, there were no options outstanding under the
Outside Director Plan.
Both restated plans for employees and directors had two restrictions in the
recipients' exercise rights. First, recipients could not exercise options
until after six months from the grant date. Further, the Bank could require
recipients not to dispose of exercised shares for up to 12 months from the
completion of an underwritten public offering of the Bank's securities.
------------------------------------------------------------------------------
D-68
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------
NOTE 14 - COMMON STOCK TRANSACTIONS - (continued)
The following summarizes options available and outstanding under all plans as of December 31, 2004:
Outside 2000 Stock Combined
Employee Plan Director Plan Option Plan Plans
------------------ ------------------ ------------------- --------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Shares Price Shares Price Shares Price Shares
------ -------- ------ -------- ------ --------- -------
Options outstanding as of
December 31, 2001 11,450 $3.02 10,175 $4.03 - 21,625
Options granted in 2002 1,000 $3.90 - 218,500 $5.00 219,500
Options exercised in 2002 (2,750) $2.05 (2,400) $3.18 (80,000) $5.00 (85,150)
Options cancelled in 2002 - $ - - - -
------ ------ ------- -------
Options outstanding as of
December 31, 2002 9,700 $3.31 7,775 $4.29 138,500 $5.00 155,975
====== ===== ====== ===== ======= ===== =======
Options exercisable as of
December 31, 2002 8,700 $3.31 7,775 $4.29 - $ - 16,475
====== ===== ====== ===== ======= ===== =======
Options reserved as of
December 31, 2002 - - 56,500 56,500
====== ====== ======= =======
Options outstanding as of
December 31, 2002 9,700 $3.31 7,775 $4.29 138,500 $5.00 155,975
Options granted in 2003 - - 6,000 $6.16 6,000
Options exercised in 2003 (1,000) $3.90 (3,100) $3.18 - (4,100)
Options cancelled in 2003 (5,500) $3.41 (4,675) $5.02 (15,000) $5.00 (25,175)
------ ------ ------- -------
Options outstanding as of
December 31, 2003 3,200 $3.24 - $ - 129,500 $5.05 132,700
====== ===== ====== ===== ======= ===== =======
Options exercisable as of
December 31, 2003 3,200 $3.24 - $ - 125,500 $5.00 128,700
====== ===== ====== ===== ======= ===== =======
Options reserved as of
December 31, 2003 - - 65,500 65,500
====== ====== ======= =======
Options outstanding as of
December 31, 2003 3,200 $3.24 - 129,500 $5.05 132,700
Options granted in 2004 - - - -
Options exercised in 2004 (3,200) $3.24 - - (3,200)
Options cancelled in 2004 - - (3,000) $5.76 (3,000)
------ ------ ------- -------
Options outstanding as of
December 31, 2004 - $ - - $ - 126,500 $5.04 126,500
====== ===== ====== ===== ======= ===== =======
Options exercisable as of
December 31, 2004 - $ - - $ - 126,500 $5.04 126,500
====== ===== ====== ===== ======= ===== =======
Options reserved as of
December 31, 2004 - - 68,500 68,500
====== ====== ======= =======
------------------------------------------------------------------------------------------------------------
D-69
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 14 - COMMON STOCK TRANSACTIONS - (continued)
As of December 31, 2004, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $5.00 to $7.15 and
approximately 2.4 years, respectively.
NOTE 15 - EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the year. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to
the exercise of options under the Bank's stock option plans and common stock
warrants issued in a private placement offering. The following table
illustrates the computations of basic and diluted earnings per share for the
years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
---------- ---------- ----------
Basic earnings per share:
Income available to common
stockholders $1,616,904 $1,391,544 $1,101,598
========== ========== ==========
Weighted-average common shares
outstanding 2,063,021 1,642,148 1,500,016
========== ========== ==========
Basic earnings per share $ 0.78 $ 0.85 $ 0.73
========== ========== ==========
Diluted earnings per share:
Income available to common
stockholders $1,616,904 $1,391,544 $1,101,598
========== ========== ==========
Weighted-average common shares
outstanding 2,063,021 1,642,148 1,500,016
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 70,113 141,617 -
---------- ---------- ----------
Weighted-average common shares
outstanding and common stock
equivalents 2,133,134 1,783,765 1,500,016
========== ========== ==========
Diluted earnings per share $ 0.76 $ 0.78 $ 0.73
========== ========== ==========
------------------------------------------------------------------------------
D-70
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Bank maintains a 401(k) Retirement Salary Savings and Profit Sharing Plan.
All permanent employees are eligible once they meet the age and service
requirements. Employer contributions match 50% of all qualified employee
contributions, to a maximum of 3% of annual salary. Employer contributions of
$15,360, $21,105, and $31,534 were made for the years ended December 31, 2004,
2003, and 2002, respectively. The Bank's contributions to the plan have been
made early in the following year in the form of Bank common stock.
Accordingly, the Bank contributed 2,483 shares of common stock valued at $8.50
per share in 2004, 6,232 shares of common stock valued at $5.06 per share in
2003, 8,887 shares of common stock valued at $3.14 per share in 2002. The
contribution for 2004 will be made in cash.
The Bank has established an employee incentive compensation program which
provides eligible participants additional compensation based upon the
achievement of certain Bank goals. For the years ending December 31, 2004,
2003, and 2002, additional compensation of $267,884, $382,374, and $279,642,
respectively, was paid to eligible employees pursuant to this program.
The Bank has entered into employment agreements with its chief executive
officer and chief financial officer. In addition to providing customary
salaries and benefits to the executives, the agreements provide for cash
payments at termination of employment, under conditions as defined in the
employment agreements. In the case of the chief executive officer, a Board
resolution provides for incentive compensation in certain circumstances.
Further, upon termination of employment, the Bank is obligated to pay the
chief executive officer for all then accumulated and unused vacation and sick
leave at his then prevailing salary rate. As of December 31, 2004, the Bank
had recognized a liability of $160,238 as its obligation for past services
pursuant to the employment agreement.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business to meet the financing needs of its customers,
the Bank is a party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and the
issuance of letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the balance sheets. The contract amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. Unless noted otherwise, the Bank requires collateral or other
security to support financial instruments with credit risk.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit written is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
------------------------------------------------------------------------------
D-71
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - (continued)
The following summarizes the Bank's outstanding off-balance sheet loan
commitments:
Contract Amount
as of December 31,
---------------------------
2004 2003
----------- -----------
Financial instruments whose contract
amounts represent credit risk:
Credit card commitments $11,331,081 $12,609,319
Construction loan commitments 6,800,060 6,270,242
Line of credit commitments 5,039,832 2,093,133
Letters of credit 1,398,470 1,498,870
----------- -----------
$24,569,443 $22,471,564
=========== ===========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include depository accounts held by the Bank, accounts receivable,
inventory, property, equipment, and income-producing properties.
Letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
------------------------------------------------------------------------------
D-72
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair value and the related carrying amount of
the Bank's financial instruments at December 31:
2004 2003
------------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ---------- ----------
Cash and due from banks $ 2,227,515 $ 2,227,515 $ 1,155,545 $ 1,155,545
Federal funds sold $ 9,620,000 $ 9,620,000 $ 5,295,000 $ 5,295,000
Investment securities
available-for-sale $ 1,179,567 $ 1,179,567 $ 1,501,395 $ 1,501,395
Federal Home Loan Bank
stock $ 802,800 $ 802,800 $ 635,300 $ 635,300
Loans, net of allowance
for loan losses and
unearned income $107,300,680 $106,892,000 $97,983,407 $97,607,000
Accrued interest
receivable $ 385,494 $ 385,494 $ 403,836 $ 403,836
Noninterest-bearing
demand deposits $ 4,638,813 $ 4,638,813 $ 5,333,569 $ 5,333,569
NOW and money market
accounts $ 26,244,713 $ 26,244,713 $22,834,384 $22,834,384
Savings and time deposits $ 55,468,217 $ 55,415,000 $55,852,345 $55,857,000
Borrowed funds $ 17,000,000 $ 16,857,000 $12,600,000 $12,578,000
Accrued interest payable $ 111,589 $ 111,589 $ 111,321 $ 111,321
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Bank to have
disposed of such items as of December 31, 2004 and 2003, the estimated fair
values would necessarily have been achieved at that date, since market values
may differ depending on various circumstances. The estimated fair values as of
December31, 2004 and 2003, should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Bank that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, customer goodwill, and similar items.
------------------------------------------------------------------------------
D-73
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 19 - COMMITMENTS AND CONTINGENCIES
Operating lease commitments As of December 31, 2004, the Bank leased certain
branch facilities and equipment. Rent expense for 2004, 2003, and 2002, was
$290,096, $296,658, and $273,813, respectively. The minimum annual commitment
for future rentals under operating leases is summarized as follows:
Years ending December 31, 2005 $ 234,140
2006 219,610
2007 228,520
2008 228,520
2009 209,475
----------
$1,120,265
==========
Joint Venture contingency - The Bank acquired an undivided one-third interest
in a joint venture as a result of a loan default in 1984. An environmental
assessment report performed in 2004 confirmed the existence of petroleum
hydrocarbons in the soil and ground water on the property. The Bank has
received two environmental clean-up estimates, which collectively range from
$80,000 to $500,000. Management has determined that the lower amount
represents the Bank's exposure for clean-up expenses, and that other owners of
the property will assume responsibility for, and will be capable of, paying
their share of the clean-up costs. The Bank has recorded a $30,000 reserve to
cover potential environmental liability associated with the property, based on
the Bank's share of clean-up costs, estimated to be $80,000 in total.
Legal contingencies - In the ordinary course of business, the Bank may become
involved in various litigation arising from normal banking activities. In the
opinion of management, after consultation with legal counsel, there are no
current matters expected to have a material adverse effect on the Bank's
financial condition or results of operations.
NOTE 20 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal and state 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 a bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
------------------------------------------------------------------------------
D-74
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 20 - REGULATORY MATTERS - (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 2004, that the Bank meets
all capital adequacy requirements to which it is subject by regulation.
The most recent notifications from the Bank's regulatory agencies categorized
the Bank as well-capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes may have changed the Bank's category. To be
categorized as well-capitalized, the Bank must maintain minimum total risk-
based capital, Tier 1 risk-based capital, and Tier 1 leverage capital ratios
as set forth in the table below.
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ------ -------- ------
(in thousands)
As of December 31,
2004:
Total capital to
risk-weighted
assets $19,598 18.1% $8,666 >8.0% $10,833 >10.0%
Tier 1 capital to
risk-weighted
assets $18,615 17.2% $4,333 >4.0% $ 6,500 >6.0%
Tier 1 capital to
average assets $18,615 14.9% $5,022 >4.0% $ 6,277 >5.0%
------------------------------------------------------------------------------
D-75
AMERICAN PACIFIC BANK
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 20 - REGULATORY MATTERS - (continued)
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ------ -------- ------
(in thousands)
As of December 31,
2003:
Total capital to
risk-weighted
assets $12,251 12.3% $7,952 >8.0% $9,940 >10.0%
Tier 1 capital to
risk-weighted
assets $11,332 11.4% $3,976 >4.0% $5,964 >6.0%
Tier 1 capital to
average assets $11,332 10.4% $4,360 >4.0% $5,450 >5.0%
------------------------------------------------------------------------------
D-76
APPENDIX E
RIVERVIEW BANCORP, INC. 2004 ANNUAL REPORT TO SHAREHOLDERS
INCLUDING ANNUAL REPORT ON FORM 10-K
AND
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2004
APPENDIX E
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22957
RIVERVIEW BANCORP, INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1838969
------------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
900 Washington St., Ste. 900,Vancouver, Washington 98660
-------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 693-6650
-----------------------
Securities registered pursuant to Section 12(b)
of the Act: None
-----------------------
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value
$.01 per share
-----------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and disclosure will not be
contained, to the best of the Registrant's knowledge, in any definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. X
-----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes X No
---- ----
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based on the closing sales price of the registrant's Common
Stock as quoted on the Nasdaq National Market System under the symbol "RVSB"
on September 30, 2003 was approximately $89,352,396 (4,727,640 shares at
$18.90 per share). It is assumed for purposes of this calculation that none
of the Registrant's officers, directors and 5% stockholders (including the
Riverview Bancorp, Inc. Employee Stock Ownership Plan) are affiliates. As of
May 11, 2004, there were issued and outstanding 4,777,911 shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Registrant's Definitive Proxy Statement for the 2004
Annual Meeting of Shareholders (Part III).
E-1
PART I
Item 1. Business
-----------------
General
Riverview Bancorp, Inc. ("the Company"), a Washington corporation, was
organized on June 23, 1997 for the purpose of becoming the holding company for
Riverview Savings Bank FSB, upon its reorganization as a wholly-owned
subsidiary of the Company resulting from the conversion of Riverview, M.H.C.,
Camas, Washington, 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 (the "Bank") effective June 29, 1998. On July
18, 2003, the Company completed the acquisition of Today's Bancorp, Inc.
("Today's Bancorp"). The acquisition of Today's Bancorp's $122.3 million of
assets and $105.1 million of deposits were accounted for using the purchase
method of accounting. At March 31, 2004, the Company had total assets of
$520.5 million, total deposits of $409.1 million and shareholders' equity of
$65.2 million. All references to the Company herein include the Bank where
applicable.
The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary
regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), the
insurer of its deposits. The Bank's deposits are insured by the FDIC up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") system since
1937.
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 15.72% and 5.87% of the loan portfolio,
respectively, in fiscal 2000 to 42.29% and 13.73%, respectively, in fiscal
2004. The Company continues to change the composition of its loan portfolio
and the deposit base as part of its transition to commercial banking. The
Company's strategic plan includes targeting the commercial banking customer
base in our primary market area, 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
traditional fixed-rate mortgages. The strategic plan stresses increased
emphasis on non-interest income, including increased fees for asset management
and deposit service charges. The strategic plan is designed to enhance
earnings, reduce interest rate risk and provide a more complete range of
financial services to customers and the local communities the Company serves.
The Company is well positioned to attract new customers and to increase its
market share given that the administrative headquarters and nine of its
thirteen branches are located in Clark County, for most of the 1990s was 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 Company's management.
The Company continuously reviews new products and services to give its
customers more financial options. With an emphasis on growth of non-interest
income and control of non-interest expense, all new technology and services
are
E-2
reviewed for business development and cost saving purposes. The in house
processing of checks and production of images has supported the Bank's
increased service to customers and at the same time has increased efficiency.
The Company continues to experience growth in customer use of the online
banking services. Customers are able to conduct a full range of services on a
real-time basis, including balance inquiries, transfers and electronic
bill-paying. This online service has also enhanced the delivery of cash
management services to commercial customers. The internet banking branch web
site is www.riverviewbank.com.
Market Area
The Company conducts operations from its home office in Vancouver and thirteen
branch offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (six branch offices) and Longview, Washington. The
Company's market area for lending and deposit taking activities encompasses
Clark, Cowlitz, Skamania and Klickitat Counties, throughout the Columbia River
Gorge area. The Company operates a trust and financial services company,
Riverview Asset Management Corporation, 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, Oregon metropolitan areas, as well as
for the Company. The Business and Professional Banking Division located at
the downtown Vancouver main branch and the Cascade Park lending office 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 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 Microelectronics, Hewlett Packard, Georgia Pacific,
Underwriters Laboratory and Wafer Tech, as well as several support industries.
In addition to this industrial base, the Columbia River Gorge Scenic Area has
been a source of tourism, which has transformed the area from its past
dependence on the timber industry.
Lending Activities
General. At March 31, 2004, the Company's total net loans receivable,
including loans held for sale, amounted to $381.5 million, or 73.3% of total
assets at that date. The principal lending activity of the Company is the
origination of mortgage loans through its mortgage banking activities,
including residential, residential construction loans and loans collateralized
by commercial properties. While the Company has historically emphasized real
estate mortgage loans secured by one- to four- residential real estate, it has
been diversifying its loan portfolio by focusing on increasing the number of
originations of commercial, commercial real estate and consumer loans. A
substantial portion of the Company's loan portfolio is secured by real estate,
either as primary or secondary collateral, located in its primary market area.
Loan Portfolio Analysis. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
E-3
At March 31,
-----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------- --------------- --------------- -------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)
Real estate loans:
One- to four-
family (1) $ 44,601 10.61% $ 59,999 17.72% $ 73,536 22.62% $117,152 35.67% $102,542 37.61%
Multi-family 5,074 1.21 6,313 1.86 9,895 3.04 11,073 3.37 10,921 4.01
Construction one- to
four- family 78,094 18.58 70,397 20.79 71,148 21.89 60,041 18.28 49,338 18.10
Construction multi-
family - - 2,100 0.62 4,000 1.23 4,514 1.37 4,669 1.71
Construction commercial 1,453 0.35 4,531 1.34 5,230 1.61 6,806 2.07 3,597 1.32
Land 27,020 6.43 34,630 10.23 27,406 8.43 24,230 7.38 25,475 9.34
Commercial real estate 177,785 42.29 101,672 30.02 84,094 25.87 56,540 17.21 42,871 15.72
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Total real estate
loans 334,027 79.47 279,642 82.58 275,309 84.69 280,356 85.35 239,413 87.81
Commercial 57,702 13.73 34,239 10.11 23,319 7.17 23,099 7.03 15,976 5.87
Consumer loans:
Automobile loans 1,622 0.39 1,458 0.43 2,132 0.66 3,223 0.98 2,875 1.05
Savings account loans 333 0.08 319 0.09 515 0.16 440 0.13 356 0.13
Home equity loans 23,778 5.66 21,088 6.23 21,598 6.65 18,761 5.71 11,148 4.09
Other consumer loans 2,864 0.67 1,927 0.56 2,134 0.67 2,596 0.80 2,864 1.05
-------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Total consumer loans 28,597 6.80 24,792 7.31 26,379 8.14 25,020 7.62 17,243 6.32
Total loans and loans
held for sale 420,326 100.00% 338,673 100.00% 325,007 100.00% 328,475 100.00% 272,632 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed loans in
process 31,204 31,222 30,970 26,223 18,880
Unamortized loan
origination fees, net
of direct cost 3,107 2,901 2,970 3,475 3,355
Unearned discounts - - - - 1
Allowance for loan
losses 4,481 2,739 2,537 1,916 1,362
-------- -------- -------- -------- --------
Total loans receivable,
net (1) $381,534 $301,811 $288,530 $296,861 $249,034
======== ======== ======== ======== ========
--------------
(1) Includes loans held for sale of $407,000, $1.5 million, $1.8 million, $569,000 and none at March 31,
2004, 2003, 2002, 2001 and 2000, respectively.
E-4
One- to Four- Family Real Estate Lending. The majority of the residential
loans are secured by one- to four- family residences located in the Company's
primary market area. Underwriting standards require that one- to four- family
portfolio loans generally be owner occupied and that loan amounts not exceed
80% or (95% with private mortgage insurance) of the lesser of current
appraised value or cost of the underlying collateral. Terms typically range
from 15 to 30 years, and the Company also offers balloon mortgage loans with
terms of either five or seven years. The Company originates both fixed rate
mortgages and adjustable rate mortgages ("ARMs") with repricing based on
Treasury Bill or other index. The ability to generate volume in ARMs, however,
is largely a function of consumer preference and the interest rate
environment.
In addition to originating one- to four- family loans for its portfolio, the
Company is an active mortgage broker for several third party mortgage lenders.
In recent periods, these mortgage brokerage activities have reduced the volume
of fixed rate one- to- four family loans that are originated and sold by the
Company. See "-Loan Originations, Sales and Purchases" and "-Mortgage
Brokerage."
The Company generally sells fixed-rate mortgage loans with maturities of 15
years or more and balloon mortgages to the Federal Home Loan Mortgage
Corporation ("FHLMC"), servicing retained. See "-Loan Originations, Sales and
Purchases" and "-Mortgage Loan Servicing."
The retention of ARM loans in the portfolio helps reduce the Company's
exposure to changes in interest rates. There are; however, unquantifiable
credit risks resulting from the potential of increased costs arising from
changed rates to be paid by the customer. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased costs to the borrower. Another
consideration is that although ARM loans allow the Company to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Company has no
assurance that yields on ARM loans will be sufficient to offset increases in
its cost of funds.
While one- to four- family residential real estate loans typically are
originated with 30-year terms and the Company permits its ARM loans to be
assumed by qualified borrowers, these loans generally remain outstanding for
substantially shorter periods because borrowers often prepay their loans in
full upon sale of the property pledged as security or upon refinancing the
original loan. In addition, substantially all of the fixed interest rate
loans in the Company's loan portfolio contain due-on-sale clauses providing
that the Company may declare the unpaid amount due and payable upon the sale
of the property securing the loan. Thus, average loan maturity is a function
of, among other factors, the level of purchase and sale activity in the real
estate market, prevailing interest rates and the interest rates payable on
outstanding loans.
The Company requires title insurance insuring the status of its lien on all of
the real estate secured loans and also requires that fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance and
the replacement cost of the improvements. Where the value of the unimproved
real estate exceeds the amount of the loan on the real estate, the Company may
make exceptions to its property insurance requirements.
Construction Lending. The Company actively originates three types of
residential construction loans: (i) speculative construction loans, (ii)
custom/presold construction loans and (iii) construction/permanent loans.
Subject to market conditions, the Company intends to increase its residential
construction lending activities. To a lesser extent, the Company also
originates construction loans for the development of multi-family and
commercial properties.
E-5
At March 31, 2004 and 2003, the composition of the Company's construction loan
portfolio was as follows:
At March 31,
--------------------------------------
2004 2003
------------------ ------------------
Amount(1) Percent Amount(1) Percent
-------- ------- -------- -------
(Dollars in thousands)
Speculative construction $37,017 39.80% $32,379 33.24%
Commercial/multi-family construction 1,453 1.56 10,750 11.04
Custom/presold construction 15,949 17.15 7,286 7.48
Construction/permanent 25,128 27.02 26,590 27.30
Construction/land 13,461 14.47 20,412 20.94
------- ------ ------- ------
Total $93,008 100.00% $97,417 100.00%
======= ====== ======= ======
(1) Includes loans in progress.
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Company or another lender for the finished
home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the
completion of construction until the home buyer is identified. At March 31,
2004, the Company had seven borrowers with aggregate outstanding speculative
loan balances of more than $1.0 million, which totaled $10.9 million and were
performing according to original terms.
Unlike speculative construction loans, presold construction loans are made for
homes that have buyers. Presold construction loans are made to home builders
who, at the time of construction, have a signed contract with a home buyer who
has a commitment for permanent financing for the finished home from the
Company or another lender. Custom construction loans are made to the
homeowner. Custom/presold construction loans are generally originated for a
term of 12 months. At March 31, 2004, the largest custom construction loan
and presold construction loan had outstanding balances of $1,920,000 and
$297,000, respectively, and were performing according to original terms.
Construction/permanent loans are originated to the homeowner rather than the
home builder along with a commitment by the Company to originate a permanent
loan to the homeowner to repay the construction loan at the completion of
construction. The construction phase of a construction/permanent loan
generally lasts six to nine months. At the completion of construction, the
Company may either originate a fixed rate mortgage loan or an ARM loan or use
its mortgage brokerage capabilities to obtain permanent financing for the
customer with another lender. At completion of construction, the
Company-originated fixed rate permanent loan's interest rate is set at a
market rate and for adjustable rate loans, the interest rates adjust on their
first adjustment date. See " Mortgage Brokerage," " Loan Originations, Sales
and Purchases" and " Mortgage Loan Servicing." At March 31, 2004, the largest
outstanding construction/permanent loan had an outstanding balance of $1.2
million and was performing according to its original terms.
The Company also provides construction financing for non-residential
properties (i.e., multi-family and commercial properties). The Company has
increased its commercial lending resources with the intent of increasing the
amount of commercial real estate loan balances such as construction commercial
and construction multi-family loans. Construction lending affords the Company
the opportunity to achieve higher interest rates and fees with shorter terms
to maturity than does its single-family permanent mortgage lending.
Construction lending, however, generally involves a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they are
generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, the Company may be confronted with a project whose value is
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the
E-6
failure of builders to pay subcontractors. The Company has sought to address
these risks by adhering to strict underwriting policies, disbursement
procedures and monitoring practices. In addition, because the Company's
construction lending is in its primary market area, changes in the local
economy and real estate market could adversely affect the Company's
construction loan portfolio. Of the $1.5 million commercial construction loans
outstanding at March 31, 2004, the loan commitment amount was $2.1 million. At
March 31, 2004, the outstanding construction commercial loan had an
outstanding balance of $1.5 million and was performing according to its
original terms.
Multi-Family Lending. Multi-family mortgage loans generally have terms up to
25 years with loan-to-value ratio up to 75%. Both fixed and adjustable rate
loans are offered with a variety of terms to meet the multi-family residential
financing needs. At March 31, 2004, the largest multi-family mortgage loan
had an outstanding loan balance of $2.5 million and was performing according
to it's original terms.
Multi-family mortgage lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to four-
family residential lending. However, loans secured by such properties usually
are greater in amount, are more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four- family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on the successful operation and management of
the properties, repayment of such loans may be affected by adverse conditions
in the real estate market or the economy. The Company seeks to minimize these
risks by strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the
loan. The Company also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
Land Lending. The Company originates loans to local real estate developers
with whom it has established relationships for the purpose of developing
residential subdivisions (i.e., installing roads, sewers, water and other
utilities), as well as loans to individuals to purchase building lots. Land
development loans are secured by a lien on the property and made for a period
not to exceed five years with an interest rate that adjusts with the prime
rate, and are made with loan-to-value ratios not exceeding 75%. Monthly
interest payments are required during the term of the loan. Subdivision loans
are structured so that the Company is repaid in full upon the sale by the
borrower of approximately 90% of the subdivision lots. All of the Company's
land loans are secured by property located in its primary market area. In
addition, the Company also generally obtains personal guarantees from
financially capable parties based on a review of personal financial
statements. At March 31, 2004, the largest outstanding land loan was $2.9
million and was performing according to it's original terms.
Loans secured by undeveloped land or improved lots involve greater risks than
one- to four- family residential mortgage loans because these loans are
advanced upon the predicted future value of the developed property. If the
estimate of these future value proves to be inaccurate, in the event of
default and foreclosure, the Company may be confronted with a property the
value of which is insufficient to assure full repayment. The Company attempts
to minimize this risk by limiting the maximum loan-to-value ratio on land
loans to 65% of the estimated developed value of the secured property. Loans
on raw land may run the risk of adverse zoning changes, environmental or other
restrictions on future use.
Commercial Real Estate Lending. The Company originates commercial real estate
loans at both variable and fixed interest rates and secured by properties,
such as office buildings, retail/wholesale facilities and industrial
buildings, located in its primary market area. The principal balance of an
average commercial real estate loan generally ranges between $100,000 and $1.0
million. At March 31, 2004, the largest commercial real estate loan had an
outstanding balance of $7.7 million and is secured by an office building
located in the Company's primary market area. At March 31, 2004, the loan was
performing according to its original terms.
Commercial real estate lending affords the Company an opportunity to receive
interest at rates higher than those generally available from one- to- four
family residential lending. However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one- to- four family residential
mortgage loans. Because payments on loans secured by commercial properties
often depend upon the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real
estate market or the economy. The Company seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. At March 31, 2004, the Company
had no commercial real estate loans accounted for on a
E-7
nonaccrual basis.
Commercial Lending. The Company's commercial loan portfolio has increased to
13.73% of the total loan portfolio at March 31, 2004 from 5.87% at March 31,
2000 and 10.11% at March 31, 2003. The Company has been able to increase the
balance of outstanding commercial loans and commitments due to the local
economy, the consolidation of some local competitors offering commercial loans
and the hiring of several experienced commercial bankers from competitors in
the local market.
Commercial loans are generally made to customers who are well known to the
Company and are typically secured by business equipment or other property. The
Company's commercial loans may be structured as term loans or as lines of
credit. Commercial term loans are generally made to finance the purchase of
assets and have maturities of five years or less. Commercial lines of credit
are typically made for the purpose of providing working capital and usually
have a term of one year or less. Lines of credit are made at variable rates
of interest equal to a negotiated margin above an index rate and term loans
are at a fixed rate. The Company also generally obtains personal guarantees
from financially capable parties based on a review of personal financial
statements.
Commercial lending involves greater risk than residential mortgage lending and
involves risks that are different from those associated with residential and
commercial real estate lending. Real estate lending is generally considered
to be collateral based lending with loan amounts based on predetermined loan
to collateral values and liquidation of the underlying real estate collateral
is viewed as the primary source of repayment in the event of borrower default.
Although commercial loans are often collateralized by equipment, inventory,
accounts receivable or other business assets including real estate, the
liquidation of collateral in the event of a borrower default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment. At March 31, 2004, the Company had twelve commercial loans on
nonaccrual status totaling $851,000.
Consumer Lending. The Company originates a variety of consumer loans,
including home equity lines of credit, home equity term loans, home
improvement loans, loans for debt consolidation and other purposes, automobile
loans, boat loans and savings account loans.
Home equity lines of credit and home equity term loans are typically secured
by a second mortgage on the borrower's primary residence. Home equity lines of
credit are made at loan-to-value ratios of 90% or less, taking into
consideration the outstanding balance on the first mortgage on the property.
Home equity lines of credit have a variable interest rate while home equity
term loans have a fixed rate of interest. The Company's procedures for
underwriting consumer loans include an assessment of the applicant's payment
history on other debts and ability to meet existing obligations and payments
on the proposed loans. Although the applicant's creditworthiness is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as mobile homes, automobiles,
boats and recreational vehicles. In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for
the outstanding loan and the remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by the borrower against
the Company as the holder of the loan, and a borrower may be able to assert
claims and defenses, which it has against the seller of the underlying
collateral. At March 31, 2004, one consumer loan for $65,100 was on
nonaccrual status.
Loan Maturity. The following table sets forth certain information at March
31, 2004 regarding the dollar amount of loans maturing in the Company's
portfolio based on their contractual terms to maturity, but does not include
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are
E-8
reported as due in one year or less. Loan balances do not include unearned
discounts, unearned income and allowance for loan losses.
After
One After 3 After 5
Within Year to Years to Years to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -------
(In thousands)
Residential one- to four-
family:
Adjustable rate $ - $ - $ 539 $ 693 $22,072 $ 23,304
Fixed rate 1,249 7,389 4,086 2,624 5,948 21,296
Construction:
Adjustable rate 48,553 16,602 - - - 65,155
Fixed rate 27,709 144 - - - 27,853
Other real estate:
Adjustable rate 23,198 12,590 9,928 66,686 13,768 126,170
Fixed rate 12,744 21,121 22,729 11,740 1,913 70,247
Commercial:
Adjustable rate 31,034 2,083 3,888 2,884 - 39,889
Fixed rate 6,073 7,036 4,450 348 - 17,907
Consumer:
Adjustable rate 562 293 24 2,573 18,715 22,167
Fixed rate 324 1,516 2,076 1,159 1,263 6,338
-------- ------- ------- ------- ------- --------
Total gross loans $151,446 $68,774 $47,720 $88,707 $63,679 $420,326
======== ======= ======= ======= ======= ========
The following table sets forth the dollar amount of all loans due within one
year of March 31, 2004, which have fixed interest rates or have floating or
adjustable interest rates.
Fixed- Floating or
Rates Adjustable Rates
--------- ----------------
(In thousands)
Residential one- to four- family $ 20,047 $ 23,304
Construction loans 144 16,602
Other real estate loans 57,503 102,972
Commercial 11,834 8,855
Consumer 6,014 21,605
--------- --------
Total $ 95,542 $173,338
========= ========
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of a loan is substantially less than
its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgage loans are substantially higher than current
mortgage loan market rates. Furthermore, management believes that a
significant number of the Company's residential mortgage loans are outstanding
for a period less than their contractual terms because of the transitory
nature of many of the borrowers who reside in its primary market area.
Loan Solicitation and Processing. The Company's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management.
The customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers. The Company also uses commissioned loan
brokers and print advertising to market its products and services.
The Company's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan,
E-9
the adequacy of the value of the property that will secure the loan, if any
and, in the case of commercial and multi-family real estate loans, the cash
flow of the project and the quality of management involved with the project.
The Company's lending policy requires borrowers to obtain certain types of
insurance to protect the Company's interest in any collateral securing the
loan. Loans are approved at various levels of management, depending upon the
amount of the loan.
Loan Commitments. The Company issues commitments to originate residential
mortgage loans, commercial real estate mortgage loans, consumer loans and
commercial loans conditioned upon the occurrence of certain events. The
Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments. Commitments to extend credit are conditional,
and are honored for up to 45 days subject to the Company's usual terms and
conditions. Collateral is not required to support commitments. At March 31,
2004, the Company had outstanding commitments to originate loans in the amount
of $9.0 million.
Loan Originations, Sales and Purchases. While the Company originates
adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans in its primary market
area. During the years ended March 31, 2004 and 2003, the Company's total
loan originations were $375.8 million and $298.4 million, respectively, of
which 70.4% and 63.2%, respectively, were subject to periodic interest rate
adjustment and 29.6% and 36.8%, respectively, were fixed-rate loans.
The Company customarily sells the fixed-rate residential one- to four- family
mortgage loans that it originates with maturities of 15 years or more to the
FHLMC as part of its asset liability strategy. The sale of these loans allows
the Company to continue to make loans during periods when savings flows
decline or funds are not otherwise available for lending purposes; however,
the Company assumes an increased risk if these loans cannot be sold in a
rising interest rate environment. Changes in the level of interest rates and
the condition of the local and national economies affect the amount of loans
originated by the Company and demanded by investors to whom the loans are
sold. Generally, the Company's residential one- to- four family mortgage loan
origination and sale activity and, therefore, its results of operations, may
be adversely affected by an increasing interest rate environment to the extent
such environment results in decreased loan demand by borrowers and/or
investors. Accordingly, the volume of loan originations and the profitability
of this activity can vary significantly from period to period. Mortgage loans
are sold to the FHLMC on a nonrecourse basis whereby foreclosure losses are
generally the responsibility of the FHLMC and not the Company. Servicing is
retained on loans sold to FHLMC.
Interest rates on residential one- to four- family mortgage loan applications
are typically locked with customers and FHLMC during the application stage for
periods ranging from 30 to 90 days, the most typical period being 45 days.
These loans are locked with FHLMC under a best-efforts delivery program. The
Company makes every effort to deliver these loans before their rate locks
expire. This arrangement requires the Company to deliver the loans to FHLMC
within ten days of funding. Delays in funding the loans can require a lock
extension. The cost of a lock extension at times is borne by the borrower and
at times by the Company. These lock extension costs paid by the Company are
not expected to have a material impact to operations. This activity is
managed daily.
There can be no assurance that the Company will be successful in its efforts
to reduce the risk of interest rate fluctuation between the time of
origination of a mortgage loan and the time of the ultimate sale of the loan.
To the extent that the Company does not adequately manage its interest rate
risk, the Company may incur significant mark-to-market losses or losses
relating to the sale of such loans, adversely affecting financial condition
and results of operations.
The Company is not an active purchaser of loans.
E-10
The following table shows total loans originated, sold and repaid during the
periods indicated.
For the Years Ended March 31,
------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Total net loans receivable and loans
held for sale at beginning of period $301,811 $288,530 $296,861
-------- -------- --------
Loans originated:
Mortgage loans:
One- to four- family 35,963 45,004 40,398
Multi-family 2,065 6,936 219
Construction one- to four- family 104,913 87,049 81,809
Construction commercial real estate 482 3,267 14,585
Construction multi-family 341 2,597 -
Land and commercial real estate 99,508 61,671 57,942
Commercial 101,432 68,083 55,213
Consumer 31,135 23,784 23,697
-------- -------- --------
Total loans originated 375,839 298,391 273,863
Residential one- to four- family
loans sold (51,567) (56,097) (35,701)
Repayment of principal (329,443) (227,101) (203,466)
Loans securitized - - (40,347)
Today's Bank acquisition 85,610 - -
Decrease in other items, net (716) (1,912) (2,680)
-------- -------- --------
Net increase (decrease) in loans 79,723 13,281 (8,331)
-------- -------- --------
Total net loans receivable and loans held
for sale at end of period $381,534 $301,811 $288,530
======== ======== ========
Mortgage Brokerage. In addition to originating mortgage loans for retention
in its portfolio, the Company employs nine commissioned brokers who originate
mortgage loans (including construction loans) for various mortgage companies
predominately in the Portland metropolitan area, as well as for the Company.
The loans brokered to mortgage companies are closed in the name of and funded
by the purchasing mortgage company and are not originated as an asset of the
Company. In return, the Company receives a fee ranging from 1% to 1.5% of the
loan amount that it shares with the commissioned broker. Loans brokered to the
Company are closed on the Company's books as if the Company had originated
them and the commissioned broker receives a fee of approximately 0.50% of the
loan amount. During the year ended March 31, 2004, brokered loans totaled
$183.0 million (including $67.6 million brokered to the Company). Gross fees
of $1.5 million (excluding the portion of fees shared with the commissioned
brokers) were recognized for the year ended March 31, 2004. The interest rate
environment has a strong influence on the loan volume and amount of fees
generated from the mortgage broker activity. In general, during periods of
rising interest rates such as we are currently experiencing, the volume of
loans and amount of loan fees generally decreases as a result of slower
mortgage loan demand. Conversely, during periods of falling interest rates,
the volume of loans and amount of loan fees generally increase as a result of
the increased mortgage loan demand.
Mortgage Loan Servicing. The Company is a qualified servicer for the FHLMC.
The Company's general policy is to close its residential loans on the FHLMC
modified loan documents to facilitate future sales to the FHLMC. Upon sale,
the Company continues to collect payments on the loans, to supervise
foreclosure proceedings, if necessary, and otherwise to service the loans.
The Company generally retains the servicing rights on the fixed-rate mortgage
loans that it sells to the FHLMC. At March 31, 2004, total loans serviced for
others were $133.5 million.
E-11
In 1994, the Company purchased the servicing rights to an underlying portfolio
of residential mortgage loans secured by properties predominately located in
the Seattle metropolitan area. At March 31, 2004, the carrying value of these
purchased servicing rights was $20,000 and was being amortized over the life
of the underlying loan servicing.
The value of loans serviced for others is significantly affected by interest
rates. In general, during periods of falling interest rates, mortgage loans
repay at faster rates and the value of the mortgage servicing declines.
Conversely, during periods of rising interest rates, the value of the mortgage
servicing rights generally increases as a result of slower rates of
repayments. The Company may be required to recognize this decrease in value
by taking a charge against its earnings, which would cause its profits to
decrease. The Company has experienced a decrease and an increase in
prepayments of mortgages as interest rates have dramatically changed during
the past two years, which has impacted the value of the servicing asset.
Accordingly, the Company recognized an $307,000 increase in its servicing
portfolio for fiscal year 2004 reflecting the increase in interest rates and
slowing of prepayments and a $320,000 impairment charges for fiscal 2003
reflecting the decrease in mortgage interest rates and the increase in
prepayments. We believe, based on historical experience, that the amount of
prepayments and the related impairment charges should decrease as interest
rates increase.
Loan Origination and Other Fees. The Company generally receives loan
origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the loan that is charged to the borrower
for funding the loan. The Company usually charges origination fees of 1.5% to
2.0% on one- to four- family residential real estate loans, long-term
commercial real estate loans and residential construction loans. Commercial
loan fees are based on terms of the individual loan. Current accounting
standards require fees received for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Deferred
fees associated with loans that are sold are recognized as gain on sale of
loans. The Company had $3.1 million of net deferred loan fees at March 31,
2004. The Company also receives loan servicing fees on the loans it sells and
on which it retains the servicing rights. See Note 10 of Notes to
Consolidated Financial Statements.
Delinquencies. The Company's collection procedures for all loans except
consumer loans provide for a series of contacts with delinquent borrowers. A
late charge delinquency notice is first sent to the borrower when the loan
secured by real estate becomes 17 days past due. A follow-up telephone call,
or letter if the borrower cannot be contacted by telephone, is made when the
loan becomes 22 days past due. A delinquency notice is sent to the borrower
when the loan becomes 30 days past due. When payment becomes 60 days past
due, a notice of default letter is sent to the borrower stating that
foreclosure proceedings will commence unless the delinquency is cured. If a
loan continues in a delinquent status for 90 days or more, the Company
generally initiates foreclosure proceedings. In certain instances, however,
the Company may decide to modify the loan or grant a limited moratorium on
loan payments to enable borrowers to reorganize their financial affairs.
A delinquent consumer loan borrower is contacted on the fifteenth day of
delinquency. A letter of intent to repossess collateral is mailed to the
borrower after the loan becomes 45 days past due and repossession proceedings
are initiated after the loan becomes 90 days delinquent.
Delinquencies in commercial loans are handled on a case-by-case basis.
Generally, notices are sent and personal contact is made with the borrower
when the loan is 15 days past due. Loan officers are responsible for
collecting loans they originate or that are assigned to them. Depending on
the nature of the loan or type of collateral securing the loan, negotiations,
or other actions, are undertaken depending upon the circumstances.
Nonperforming Assets. Loans are reviewed regularly and it is the Company's
general policy that when a loan is 90 days delinquent or when collection of
interest appears doubtful, it is placed on nonaccrual status, at which time
the accrual of interest ceases and the reserve for any unrecoverable accrued
interest is established and charged against operations. Typically, payments
received on a nonaccrual loan are applied to the outstanding principal and
interest as determined at the time of collection of the loan.
Real estate owned is real estate acquired in settlement of loans and consists
of real estate acquired through foreclosure or deeds in lieu of foreclosure.
The acquired real estate is recorded at net realizable value. The Company
periodically reviews the property's net realizable value and a charge to
operations is taken if the property's recorded value exceeds the property's
net realizable value.
E-12
The following table sets forth information with respect to the Company's
nonperforming assets. At the dates indicated, the Company had no restructured
loans within the meaning of Statement of Financial Accounting Standards
("SFAS") No. 15, Accounting for Certain Investments in Debt and Equity
Securities.
At March 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Residential real estate $ 24 $301 $ 830 $ 153 $ 833
Commercial real estate 309 - 297 - -
Land 31 - 180 - 320
Commercial 872 - 54 50 99
Consumer 65 22 39 116 26
------ ---- ------ ------- ------
Total 1,301 323 1,400 319 1,278
------ ---- ------ ------- ------
Accruing loans which are
contractually past due 90
days or more - - 122 226 -
------ ---- ------ ------- ------
Total of nonaccrual and
90 days past due loans 1,301 323 1,522 545 1,278
------ ---- ------ ------- ------
Real estate owned (net) 742 425 853 473 65
------ ---- ------ ------- ------
Total nonperforming
assets $2,043 $748 $2,375 $1,018 $1,343
====== ==== ====== ====== ======
Total loans delinquent
90 days or more to net
loans 0.34% 0.11% 0.53% 0.18% 0.51%
Total loans delinquent
90 days or more to
total assets 0.25 0.08 0.39 0.13 0.37
Total nonperforming assets
to total assets 0.39 0.18 0.61 0.24 0.39
The gross amount of interest income on the nonaccrual loans that would have
been recorded during the year ended March 31, 2004 if the nonaccrual loans had
been current in accordance with their original terms was approximately
$66,000. For the year ended March 31, 2004, no interest was earned on the
nonaccrual loans and included in interest and fees on loans receivable
interest income.
Loans not included in nonperforming or past due categories, but where
information about possible credit problems causes management to be uncertain
about the borrower's ability to comply with existing repayment terms, totaled
$4.9 million at March 31, 2004 and $2.4 million at March 31, 2003.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
E-13
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and
monitored by the Company.
The aggregate amount of the Company's classified assets, general loss
allowances, specific loss allowances and charge-offs were as follows at the
dates indicated:
At or For the Year
Ended March 31,
------------------
2004 2003
------ ------
(In thousands)
Substandard assets $4,932 $2,740
Doubtful assets 803 -
Loss assets - -
General loss allowances 4,481 2,739
Specific loss allowances - -
Charge-offs 1,182 428
The loans classified as substandard assets at March 31, 2004 comprise one land
development loan totaling $97,000, one home equity line of credit totaling
$65,000, 11 real estate secured commercial loans totaling $1.3 million and 49
commercial loans totaling $3.5 million. The acquisition of Today's Bancorp
significantly increased the amount and number of loans classified substandard.
Loans classified as doubtful assets at March 31, 2004 consisted of one real
estate secured loan totaling $475,000, and eight commercial loans totaling
$328,000.
Real Estate Owned. Real estate properties acquired through foreclosure or by
deed-in-lieu of foreclosure are recorded at the lower of cost or fair value
less estimated costs of disposal. Management periodically performs valuations
and an allowance for loan losses is established by a charge to operations if
the carrying value exceeds the estimated net realizable value. At March 31,
2004, the Company owned three properties with a recorded value of $742,000
compared to $425,000 at March 31, 2003. The $742,000 recorded value consists
of two land loans totaling $325,000 and one single family loan of $417,000.
Allowance for Loan Losses. The Company maintains an allowance for loan losses
to provide for losses inherent in the loan portfolio. The adequacy of the
allowance is evaluated monthly to maintain the allowance at levels sufficient
to provide for inherent losses. A key component to the evaluation is the
Company's internal loan review and loan classification system. The internal
loan review system provides for at least an annual review by the internal
audit department of all loans that meet selected criteria. The Internal Loan
Classification Committee reviews and monitors the risk and quality of the
Company's loan portfolio. The Internal Loan Classification Committee members
include the Credit Administrator, Chairman and Chief Executive Officer,
President and Chief Operating Officer, Executive Vice President Credit
Administration and Senior Vice President Business & Professional Banking.
Credit officers are expected to monitor their portfolios and make
recommendations to change loan grades whenever changes are warranted. At
least annually, loans that are delinquent 60 days or more and with specified
outstanding loan balances are subject to review by the internal audit
department. The Internal Loan Classification Committee meets quarterly to
approve any changes to loan grades, monitor loan grades and to recommend any
changes to the loan grades.
The Company uses the OTS loan classifications of special mention, substandard,
doubtful and loss plus the additional loan classifications of pass and watch
in order to assign a loan grade to be used in the determination of the proper
amount of allowance for loan losses. The definition of a pass classification
represents a level of credit quality, which contains no well-defined
deficiency or weakness. The definition of watch classification is used to
identify a loan that currently contains no well-defined deficiency or
weakness, but management has deemed it desirable to closely monitor the loan.
E-14
The Company uses the loan classifications from the internal loan review and
Internal Loan Classification Committee in the following manner to determine
the amount of the allowance for loan losses. The calculation of the allowance
for loan losses must consider loan classification in order to determine the
amount of the allowance for loan losses for the required three separate
elements of the allowance for losses: general allowances, allocated allowances
and unallocated allowances.
The general allowance element relates to assets with no well-defined
deficiency or weakness (i.e., assets classified pass or watch) and takes into
consideration loss that is imbedded within the portfolio but has not been
realized. Borrowers are impacted by events that may ultimately result in a
loan default and eventual loss well in advance of a lender's knowledge.
Examples of such loss-causing events in the case of consumer or one- to four-
family residential loans would be a borrower job loss, divorce or medical
crisis. Examples in commercial or construction loans may be loss of customers
due to competition or changes in the economy. General allowances for each
major loan type are determined by applying loss factors that take into
consideration past loss experience, asset duration, economic conditions and
overall portfolio quality to the associated loan balance.
The allocated allowance element relates to assets with well-defined
deficiencies or weaknesses (i.e., assets classified special mention,
substandard, doubtful or loss). The OTS loss factors are applied against
current classified asset balances to determine the amount of allocated
allowances. Included in these allowances are those amounts associated with
loans where it is probable that the value of the loan has been impaired and
the loss can be reasonably estimated.
The unallocated allowance element is more subjective and is reviewed quarterly
to take into consideration estimation errors and economic trends that are not
necessarily captured in determining the general and allocated allowance.
The increase in the balance of the allowance for loan losses at March 31, 2004
reflects the acquisition of Today's Bancorp, Inc., the proportionate increase
in loan balances, the change in mix of loan balances, the increase in
substandard assets and a change in loss rate when compared to March 31, 2003.
The acquisition of Today's Bancorp, Inc. added $2.6 million to the allowance
for loan losses and approximately $900,000 of the charge-offs was related to
loans acquired in the acquisition. The mix of the loan portfolio showed an
increase in the balances of commercial, commercial real estate loans, and
construction, and consumer loans at March 31, 2004 as compared to balances at
March 31, 2003. Substandard assets increased by $3.0 million to $5.7 million
at March 31, 2004 compared to $2.7 million at March 31, 2003. Substandard
asset balance of $5.7 million at March 31, 2004 is a decrease of $5.2 million
from the $10.9 million balance of substandard assets after the acquisition of
Today's Bancorp, Inc. The loss rate for other mention loans was increased
from 1.5% at March 31, 2003 to 4.0% at March 31, 2004 in order to reflect the
risk of loss.
At March 31, 2004, the Company had an allowance for loan losses of $4.5
million, or 1.16% of total outstanding net loans at that date. Based on past
experience and probable losses inherent in the loan portfolio, management
believes that loan loss reserves are adequate.
While the Company believes it has established its existing allowance for loan
losses in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles" or
"GAAP"), there can be no assurance that regulators, in reviewing the Company's
loan portfolio, will not request the Company to increase significantly its
allowance for loan losses, thereby negatively affecting the Company's
financial condition and results of operations.
E-15
The following table sets forth an analysis of the Company's allowance for loan
losses for the periods indicated.
Year Ended March 31,
---------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of period $2,739 $2,537 $1,916 $1,362 $1,146
------ ------ ------ ------ ------
Provision for loan losses 210 727 1,116 949 675
Recoveries:
Residential real estate - 2 - - -
Land - 63 - - -
Commercial 74 - - - 1
Consumer 17 13 25 18 28
------ ------ ------ ------ ------
Total recoveries 91 78 25 18 29
------ ------ ------ ------ ------
Charge-offs:
Residential real estate 21 140 88 226 48
Land 15 17 - - -
Commercial 882 119 185 27 282
------ ------ ------ ------ ------
Consumer 264 152 166 160 158
------ ------ ------ ------ ------
Total charge-offs 1,182 428 439 413 488
------ ------ ------ ------ ------
Net charge-offs 1,091 350 414 395 459
------ ------ ------ ------ ------
Dispositions (1) - - 81 - -
Allowance acquired from
Today's Bank 2,639
Net change in allowance for
unfunded loan commitments
and lines of credit (16) (175) - - -
------ ------ ------ ------ ------
Balance at end of period $4,481 $2,739 $2,537 $1,916 $1,362
====== ====== ====== ====== ======
Ratio of allowance to total
net loans outstanding
during period 1.16% 0.90% 0.87% 0.64% 0.54%
Ratio of net charge-offs to
average net loans
outstanding during period 0.31 0.12 0.14 0.14 0.21
Ratio of allowance to total
of nonaccrual and 90 days
past due loans 344.43 847.99 166.69 351.56 106.58
(1) Allowance reclassified with securitization of one-to four-family loans
to mortgage-backed securities.
E-16
Changes in the allowance for unfunded loan commitments and lines of credit:
Year Ended March 31,
---------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in thousands)
Beginning Balance $ 175 $ - $ - $ - $ -
Net change in allowance for
unfunded loan commitments and
lines of credit 16 175 - - -
------ ------ ------ ------ ------
Ending Balance $ 191 $ 175 $ - $ - $ -
====== ====== ====== ====== ======
The following table sets forth the breakdown of the allowance for loan losses
by loan category and is based on applying a specific loan loss factor to the
related loan category outstanding loan balances as of the date of the
allocation for the periods indicated.
At March 31,
---------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------- ----------------- ----------------- ----------------- -----------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a Percent as a Percent as a Percent as a Percent as a Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands)
Real estate
loans
One- to
four-family $ 89 11.46% $ 122 19.50% $ 191 24.99% $ 263 38.73% $ 259 40.34%
Multi-family 19 1.30 24 2.05 37 3.36 42 3.66 41 4.30
Construction
one-to four-
family 148 12.39 194 14.24 319 14.77 224 13.57 304 13.50
Construction
multi-family - - 5 0.30 20 1.25 21 0.19 10 1.29
Construction
commercial 7 0.37 20 1.31 26 1.38 34 1.41 17 1.02
Land 148 6.63 196 10.36 192 8.79 206 7.83 223 9.62
Commercial real
estate 2,259 45.68 1,046 33.05 869 28.58 580 18.69 224 16.86
Commercial
loans 1,589 14.82 796 11.13 668 7.92 354 7.64 160 6.28
Consumer loans:
Secured 175 6.92 141 7.63 180 8.47 154 7.65 90 5.70
Unsecured 37 0.43 33 0.43 27 0.49 34 0.63 29 1.09
Unallocated 10 - 162 - 8 - 4 - 5 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses $4,481 100.00% $2,739 100.00% $2,537 100.00% $1,916 100.00% $1,362 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
E-17
Investment Activities
OTS regulated institutions have authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal
agencies and of state and municipal governments, deposits at the applicable
FHLB, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, OTS
regulated institutions may also invest a portion of their assets in commercial
paper, corporate debt securities and mutual funds, the assets of which conform
to the investments that federally chartered savings institutions are otherwise
authorized to make directly.
Federal regulations require the Company to maintain a minimum sufficient
liquidity to ensure its safe and sound operation. Liquid assets include cash,
cash equivalents consisting of short-term interest-earning deposits, certain
other time deposits, and other obligations generally having remaining
maturities of less than five years. See "Regulation." It is the management's
intention of to hold securities with short maturities in the Bank's and
Company's investment portfolio in order to match more closely the interest
rate sensitivities of the Bank's and Company's assets and liabilities. At
March 31, 2004, the Bank's liquidity ratio, the ratio of cash and eligible
investments to the sum of withdrawable savings and borrowings due within one
year, was 15.97%.
The Investment Committee, composed of the Company's Chief Executive Officer,
President and Chief Financial Officer, makes investment decisions. The
Company's investment objectives are: (i) to provide and maintain liquidity
within regulatory guidelines; (ii) to maintain a balance of high quality,
diversified investments to minimize risk; (iii) to provide collateral for
pledging requirements; (iv) to serve as a balance to earnings; and (v) to
optimize returns. At March 31, 2004, the Company's investment and
mortgage-backed securities portfolio totaled $46.0 million and consisted
primarily of obligations of federal agencies, and Federal National Mortgage
Association ("FNMA") and FHLMC mortgage-backed securities.
At March 31, 2004, the Company's investment securities portfolio did not
contain any tax-exempt securities of any issuer with an aggregate book value
in excess of 10% of the Company's consolidated shareholders' equity, excluding
those securities issued by the U.S. Government or its agencies.
The Board of Directors sets the investment policy of the Company which
dictates that investments be made based on the safety of the principal amount,
liquidity requirements of the Company and the return on the investments. At
March 31, 2004, no investment securities were held for trading. The policy
does not permit investment in non-investment grade bonds and permits
investment in various types of liquid assets permissible under OTS regulation,
which includes U.S. Treasury obligations, securities of various federal
agencies, "bank qualified" municipal bonds, certain certificates of deposits
of insured banks, repurchase agreements and federal funds.
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
which requires the classification of securities at acquisition into one of
three categories: held to maturity, available for sale or trading. See Note 1
of Notes to Consolidated Financial Statements.
E-18
The following table sets forth the investment securities portfolio and carrying values at the dates
indicated. The fair value of the investment and mortgage-backed securities portfolio was $46.1 million,
$36.9 million and $59.8 million at March 31, 2004, 2003 and 2002, respectively.
At March 31,
-------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Held to maturity (at
amortized cost):
Real estate mortgage
investment conduits
("REMICs") $ 1,802 3.92% $ 1,803 4.90% $ 1,804 3.02%
FHLMC mortgage-backed
securities 332 0.72 589 1.60 964 1.62
FNMA mortgage-backed
securities 383 0.83 909 2.47 1,618 2.71
------- ------ ------- ------ ------- ------
2,517 5.47 3,301 8.97 4,386 7.35
------- ------ ------- ------ ------- ------
Available for sale (at fair
value):
Agency securities 11,194 24.33 - - - -
REMICs 3,015 6.55 6,421 17.45 25,114 42.10
FHLMC mortgage-backed
securities 7,190 15.63 6,097 16.57 10,972 18.39
FNMA mortgage-backed
securities 402 0.88 551 1.50 913 1.53
Municipal securities 4,270 9.28 2,751 7.48 2,601 4.36
Trust preferred securities 5,019 10.91 4,975 13.52 - -
Equity securities 12,400 26.95 12,700 34.51 15,674 26.27
------- ------ ------- ------ ------- ------
43,490 94.53 33,495 91.03 55,274 92.65
------- ------ ------- ------ ------- ------
Total investment securities $46,007 100.00% $36,796 100.00% $59,660 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth the maturities and weighted average yields in the securities portfolio at
March 31, 2004.
Less Than One to More Than Five to More Than
One Year Five Years Ten Years Ten Years
---------------- ----------------- ----------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield(1) Amount Yield (1) Amount Yield (1) Amount Yield(1)
------ -------- ------ --------- ------ -------- ------ --------
(Dollars in thousands)
Municipal
securities $ - -% $ 1,537 4.12% $ 587 4.30% $ 2,146 4.50%
Agency securities - - 11,194 3.17 - - - -
REMICs - - 271 2.17 - - 4,546 2.97
FHLMC mortgage-
backed securities 1 6.00 2,409 6.15 4,782 4.07 330 3.57
FNMA mortgage-
backed securities 23 7.13 144 6.88 7 11.95 611 4.22
Trust preferred
securities - - - - - - 5,019 2.97
Equity securities - - - - - - 12,400 1.72
---- ---- ------- ---- ------ ----- ------- ----
Total $ 24 7.09% $15,555 3.74% $5,376 4.11% $25,052 2.52%
==== ==== ======= ==== ====== ===== ======= ====
(1) For available for sale securities carried at fair value, the weighted average yield is computed using
amortized cost. Average yield calculations exclude equity securities that have no stated yield or
maturity.
E-19
In addition to U.S. Government treasury obligations, the Company invests in
mortgage-backed securities and real estate mortgage investment conduits
("REMICs"). Mortgage-backed securities ("MBS") (which are also known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages.
Principal and interest payments on mortgage-backed securities are passed from
the mortgage originators, through intermediaries (i.e., FNMA, FHLMC, the
Government National Mortgage Association ("GNMA") or private issuers) that
pool and repackage the participation interests in the form of securities, to
investors such as the Company. Mortgage-backed securities generally increase
the quality of the Company's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of the Company. See Note 6 of
Notes to Consolidated Financial Statements for additional information.
REMICs are created by redirecting the cash flows from the pool of mortgages or
mortgage-backed securities underlying these securities to create two or more
classes (or tranches) with different maturity or risk characteristics designed
to meet a variety of investor needs and preferences. Management believes
these securities may represent attractive alternatives relative to other
investments because of the wide variety of maturity, repayment and interest
rate options available. Current investment practices of the Company prohibit
the purchase of high risk REMICs. At March 31, 2004, the Company held REMICs
with a net carrying value of $4.8 million, of which $1.8 million were
classified as held-to-maturity and $3.0 million of which were
available-for-sale. REMICs may be sponsored by private issuers, such as
mortgage bankers or money center banks, or by U.S. Government agencies and
government sponsored entities. At March 31, 2004, the Company owned no
privately issued REMICs.
Investments in mortgage-backed securities, including REMICs, involve a risk
that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest
rates.
The investment in municipal securities was $4.3 million at March 31, 2004
compared to $2.8 million at March 31, 2003. Total equity securities
investment was $12.4 million at March 31, 2004, compared to $12.7 million at
March 31, 2003.
In the second quarter of fiscal 2003, the Company purchased $5.0 million of
trust preferred securities which are a portion of the mezzanine tranche of
$500.0 million pooled preferred trust securities indexed to the three month
libor interest rate.
In the fourth quarter of fiscal 2003, the Company recognized a $2.3 million
non-cash pre-tax charge to operations for investments in FHLMC preferred stock
and FNMA preferred stock. Under SFAS No. 115, if the decline in fair market
value below cost is determined to be other-than-temporary, the unrealized loss
will be realized as expense on the income statement. Based on a number of
factors, including the magnitude of the drop in the market value below the
Company's cost and the length of time the market value had been below cost,
management concluded that the decline in value was other-than-temporary at the
end of the fourth quarter of fiscal year 2003. Accordingly, the
other-than-temporary impairment was realized in the income statement, in the
amount of $700,000 for FNMA preferred stock and $1.6 million FHLMC preferred
stock. A corresponding reduction in unrealized losses in shareholders' equity
was realized in the amount of $462,000 for FNMA preferred stock and $1.1
million for FHLMC preferred stock.
Deposit Activities and Other Sources of Funds
General. Deposits, loan repayments and loan sales are the major sources of
the Company's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. They may also be used on a longer term basis for general business
purposes.
E-20
Deposit Accounts. The Company's attracts deposits from within it's primary
market area by offering a broad selection of deposit instruments, including
demand deposits, negotiable order of withdrawal ("NOW") accounts, money market
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Historically the Company has focused on retail deposits.
Expansion in commercial lending has led to growth in business deposits
including demand deposit accounts. At the July 18, 2003 acquisition date of
Today's Bancorp, $105.1 million of deposits were acquired. The Bank continues
to see a shift in the customer demand in deposit products from certificates of
deposit to transaction accounts. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. In determining the terms of its
deposit accounts, the Company considers the rates offered by its competition,
profitability to the Company, matching deposit and loan products and its
customer preferences and concerns. The Company generally reviews its deposit
mix and pricing weekly.
E-21
Deposit Balances
The following table sets forth information concerning the Company's
certificates of deposit, other interest-bearing and non-interest bearing
deposits at March 31, 2004.
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
-------- ---- ---------- -------- ------- --------
(In thousands)
0.200% None NOW accounts $ 100 $ 65,718 16.06%
1.300 None High yield checking 25,000 49,668 12.14
0.550 None Regular savings 500 29,334 7.17
0.948 None Money market 2,500 69,984 17.11
None None Non-interest checking 100 61,902 15.13
-------- ------
Total transaction accounts 276,606 67.61
Certificates of Deposit
-----------------------
1.201 91 Days Fixed-term, Fixed-rate 2,500 8,412 2.06
0.819 182-364
Days Fixed-term, Fixed-rate 2,500 14,934 3.65
1.053 12-17
Months Fixed-term, Fixed-rate 2,500 29,987 7.33
1.030 18
Months Fixed-term, Variable rate,
Individual Retirement
account("IRA") 100 1,391 0.34
2.120 18-23
Months Fixed-term, Fixed-rate 2,500 6,923 1.69
2.694 24-35
Months Fixed-term, Fixed-rate 2,500 28,768 7.03
3.786 36-59
Months Fixed-term, Fixed-rate 2,500 21,279 5.20
4.901 60-83
Months Fixed-term, Fixed-rate 2,500 15,526 3.80
4.814 84-120
Months Fixed-term, Fixed-rate 2,500 5,289 1.29
-------- ------
Total certificates of deposit 132,509 32.39%
-------- ------
Total deposits $409,115 100.00%
======== ======
E-22
Deposit Flow
The following table sets forth the balances of deposit accounts in the various types offered by the Company
at the dates indicated.
At March 31,
------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
Increase/ Increase/ Increase/
Balance Percent Decrease) Balance Percent Decrease) Balance Percent Decrease)
------- ------- -------- ------- ------- -------- ------- ------- --------
(Dollars in thousands)
Non-interest-bearing
demand $ 61,902 15.13% $(16,562) $ 78,464 24.46% $ 45,890 $ 32,574 12.54% $ 4,639
NOW accounts 65,718 16.06 38,605 27,113 8.45 (5,597) 32,710 12.60 567
High-yield checking 49,668 12.14 14,131 35,537 11.08 30,183 5,354 2.06 5,354
Regular savings
accounts 29,334 7.17 4,479 24,855 7.75 2,916 21,939 8.45 3,112
Money market deposit
accounts 69,984 17.11 16,267 53,717 16.75 (928) 54,645 21.04 8,921
Certificates of
deposits which
mature (1):
Within 12 months 86,272 21.09 15,117 71,155 22.19 (15,784) 86,939 33.48 (55,084)
Within 12-36 months 32,422 7.92 9,803 22,619 7.05 3,249 19,370 7.46 (4,303)
Beyond 36 months 13,815 3.38 6,533 7,282 2.27 1,123 6,159 2.37 961
-------- ------ -------- -------- ------ -------- -------- ------ --------
Total $409,115 100.00% $ 88,373 $320,742 100.00% $ 61,052 $259,690 100.00% $(35,833)
======== ====== ======== ======== ====== ======== ======== ====== ========
(1) IRAs of $13.9 million, $12.9 million and $12.8 million at March 31, 2004, 2003 and 2002,
respectively, are included in certificate balances.
E-23
Certificates of Deposit by Rates and Maturities
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated.
At March 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
(In thousands)
Below 2.00% $ 63,241 $ 43,969 $ 14,919
2.00 - 2.99% 23,307 17,483 30,028
3.00 - 3.99% 14,221 18,770 24,390
4.00 - 4.99% 17,224 7,452 13,014
5.00 - 5.99% 10,230 7,058 10,717
6.00 - 7.99% 4,286 6,324 19,400
--------- --------- ---------
Total $ 132,509 $ 101,056 $ 112,468
========= ========= =========
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 2004.
Amount Due
-----------------------------------------------------
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
--------- ------- --------- -------- --------
(In thousands)
Below 2.00% $ 55,806 $ 7,117 $ 247 $ 71 $ 63,241
2.00 - 2.99% 11,602 8,818 2,645 242 23,307
3.00 - 3.99% 6,625 3,363 185 4,048 14,221
4.00 - 4.99% 8,945 1,029 1,604 5,646 17,224
5.00 - 5.99% 842 3,831 1,884 3,673 10,230
6.00 - 7.99% 2,452 1,568 131 135 4,286
-------- -------- ------- -------- ---------
Total $ 86,272 $ 25,726 $ 6,696 $ 13,815 $ 132,509
======== ======== ======= ======== =========
The following table presents the amount and weighted average rate of time
deposits equal to or greater than $100,000 at March 31, 2004.
Weighted
Maturity Period Amount Average Rate
--------------- -------- ------------
(Dollars in thousands)
Three months or less $ 14,332 1.76%
Over three through six months 7,859 2.51
Over six through 12 months 10,564 2.69
Over 12 Months 23,105 3.83
--------- ----
Total $ 55,860 2.90%
========= ====
E-24
Deposit Activities
The following table sets forth the deposit activities of the Company for the
periods indicated.
Year Ended March 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
Beginning balance $320,742 $259,690 $295,523
Net (decrease) increase
before interest credited 83,618 55,535 (44,789)
Interest credited 4,755 5,517 8,956
-------- -------- --------
Net increase (decrease) in
savings deposits 88,373 61,052 (35,833)
-------- -------- --------
Ending balance $409,115 $320,742 $259,690
======== ======== ========
In the unlikely event the Bank is liquidated, depositors are entitled to full
payment of their deposit accounts prior to any payment being made to the
shareholders of the Company. Substantially all of the Bank's depositors are
residents of the States of Washington or Oregon.
Borrowings. Savings deposits are the primary source of funds for the
Company's lending and investment activities and for its general business
purposes. The Company relies upon advances from the FHLB-Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB-Seattle are typically secured by the
Bank's first mortgage loans and investment securities.
The FHLB functions as a central reserve bank providing credit for savings and
loan associations and certain other member financial institutions. As a
member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's assets or on the FHLB's assessment of the institution's
creditworthiness. The FHLB determines specific lines of credit for each member
institution and the Bank has a 35% of total assets line of credit with the
FHLB-Seattle to the extent the Bank provides qualifying collateral and holds
sufficient FHLB stock. At March 31, 2004, the Bank had $40.0 million of
outstanding advances from the FHLB-Seattle under an available credit facility
of $180.3 million, limited to available collateral.
The following tables set forth certain information concerning the Company's
borrowings at the dates and for the periods indicated.
At March 31,
---------------------------
2004 2003 2002
------ ------ ------
Weighted average rate on
FHLB advances 4.88% 4.90% 6.10%
E-25
Year Ended March 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Maximum amounts of FHLB
advances outstanding
at any month end $40,000 $74,500 $99,500
Average FHLB
advances outstanding 40,000 53,174 89,499
Weighted average rate on
FHLB advances 4.96% 5.53% 6.25%
REGULATION
General
The Bank, as a federally-chartered savings institution, is subject to federal
regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the
FDIC, which insures the deposits of the Bank to the maximum extent permitted
by law, and requirements established by the Federal Reserve Board.
Federally-chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and the FDIC.
The investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and these institutions are prohibited from
engaging in any activities not permitted by the laws and regulations. This
regulation and supervision primarily is intended for the protection of
depositors and not for the purpose of protecting shareholders.
The OTS regularly examines the Bank and prepares reports for the consideration
of the Bank's Board of Directors on any deficiencies that it may find in the
Bank's operations. The FDIC also has the authority to examine the Bank in its
roles as the administrator of the SAIF. The Bank's relationship with its
depositors and borrowers also is regulated to a great extent by both federal
and state laws, especially in matters such as the ownership of savings
accounts and the form and content of the Bank's mortgage requirements. Any
change in these regulations, whether by the FDIC, the OTS or Congress, could
have a material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Institutions
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. When these examinations are conducted
by the OTS and the FDIC, the examiners may require the Bank to provide for
higher general or specific loan loss reserves. All savings institutions are
subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OTS. The OTS also has extensive
enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
issue cease-and-desist or removal orders and initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For example, no savings institution
may invest in non-investment grade corporate debt securities. In addition,
the permissible level of investment by federal institutions in loans secured
by non-residential real property may not exceed 400% of total capital, except
with approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the noted
restrictions.
All savings institutions are required to pay assessments to the OTS to fund
the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2004 was $98,160.
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Federal Home Loan Bank System. The Bank is a member of the FHLB of Seattle,
which is one of 12 regional FHLBs that administer the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans or advances to members in accordance with policies and
procedures, established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances
from the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB
of Seattle. At March 31, 2004, the Bank had $6.0 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Over the past two fiscal years such
dividends have averaged 3.93% and 6.05% for the fiscal years ended March 31,
2004 and 2003, respectively.
Under federal law, the FHLBs are required to provide funds for the resolution
of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed
statutory limits, of federally-insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank is a member of
the SAIF, which is administered by the FDIC. Deposits are insured up to the
applicable limits by the FDIC and this insurance is backed by the full faith
and credit of the United States government.
As insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the SAIF or the BIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that the institution has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital
and supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. The FDIC makes risk
classification of all insured institutions for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
Since January 1, 1997, the premium schedule for BIF and SAIF insured
institutions has ranged from 0 to 27 basis points. However, SAIF- and
BIF-insured institutions are required to pay a Financing Corporation
assessment in
E-27
order to fund the interest on bonds issued to resolve thrift failures in the
1980s equal to approximately 1.50 points for each $100 in domestic deposits
annually. These assessments, which may be revised based upon the level of BIF
and SAIF deposits, will continue until the bonds mature.
Under the Federal Deposit Insurance Act ("FDIA"), the FDIC may terminate
deposit insurance upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. Management of the Bank does not know of any
practice, condition or violation that might lead to termination of deposit
insurance.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company in an amount of up to the lesser of 5% of the institution's
assets or the amount which would bring the institution into compliance with
all capital standards. In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including,
but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The OTS also could take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors. At March 31, 2004, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the OTS may
require the Bank to submit an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review
of such safety and soundness compliance plans. Management of the Bank is not
aware of any conditions relating to these safety and soundness standards which
would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings institutions, including the Bank,
are required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings institution to
have at least 65% of its total assets less (i) specified liquid assets up to
20% of total assets, (ii) intangibles, including goodwill and (iii) the value
of property used to conduct business in certain "qualified thrift investments"
in at least nine out of each 12 month period on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code ("Code").
Under either test, such assets primarily consist of residential housing
related loans and investments. At March 31, 2004, the Bank met the test and
its QTL percentage was 75.50%.
Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for
E-28
both a savings institution and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after
the failure to meet the QTL test, it must divest of all investments and cease
all activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "- Savings and Loan Holding Company
Regulations."
Capital Requirements. Federally-insured savings institutions, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). At March 31, 2004, the Bank had
tangible capital of $49.4 million, or 9.81% of adjusted tangible assets, which
is approximately $41.9 million above the minimum requirement of 1.5% of
adjusted tangible assets in effect on that date. At March 31, 2004, the Bank
had $758,000 in core deposit intangible, $624,000 in servicing assets and $9.2
million in goodwill. The capital standards also require core capital equal to
at least 3% to 4% of adjusted total assets, depending on an institution's
supervisory rating. Core capital generally consists of tangible capital. At
March 31, 2004, the Bank had core capital equal to $49.4 million, or 9.81% of
adjusted tangible assets, which is $34.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS also requires savings institutions to have core capital equal to 4% of
risk-weighted assets ("Tier 1 risk-based"). At March 31, 2004, the Bank had
Tier 1 risk-based capital of $49.4 million or 11.72% of risk-weighted assets,
which is approximately $32.6 million above the minimum on that date. The OTS
risk-based requirement requires savings institutions to have total capital of
at least 8% of risk-weighted assets. Total capital consists of core capital,
as defined above, and supplementary capital. Supplementary capital consists
of certain permanent and maturing capital instruments that do not qualify as
core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet items, are
multiplied by a risk weight, ranging from 0% to 100%, based on the risk
inherent in the type of asset. For example, the OTS has assigned a risk
weight of 50% for prudently underwritten permanent one- to four-family first
lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by Fannie Mae or Freddie Mac.
On March 31, 2004, the Bank had total risk-based capital of approximately
$54.0 million, including $49.4 million in core capital and $4.6 million in
qualifying supplementary capital, and risk-weighted assets of $422.0 million,
or total capital of 12.78% of risk-weighted assets. This amount was $20.2
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances, required
to take certain actions against savings institutions that fail to meet their
capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized institution," which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risked-based capital ratio or an 8.0% risk-based capital ratio. Any such
institution must submit a capital restoration plan and until the plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
institutions. As a condition to the approval of the capital restoration plan,
any company controlling
E-29
an undercapitalized institution must agree that it will enter into a limited
capital maintenance guarantee with respect to the institution's achievement of
its capital requirements.
Any savings institution that fails to comply with its capital plan or has Tier
1 risk-based or core capital ratios of less than 3.0% or a risk-based capital
ratio of less than 6.0% and is considered "significantly undercapitalized"
will be made subject to one or more additional specified actions and operating
restrictions which may cover all aspects of its operations and may include a
forced merger or acquisition of the institution. An institution that becomes
"critically undercapitalized" because it has a tangible capital ratio of 2.0%
or less is subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized institutions.
In addition, the OTS must appoint a receiver, or conservator with the
concurrence of the FDIC, for a savings institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator
or a receiver.
The OTS is also generally authorized to reclassify an institution into a lower
capital category and impose the restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition. The imposition by the OTS or the FDIC of any of these
measures on the Bank may have a substantial adverse effect on its operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account. The OTS also
prohibits a savings institution from declaring or paying any dividends or from
repurchasing any of its stock if, as a result of such action, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with the
association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided that
the Bank notify the OTS 30 days before it declares the capital distribution
and that the following requirements are met: (i) the Bank has a regulatory
rating in one of the two top examination categories; (ii) the Bank is not of
supervisory concern, and will remain adequately or well capitalized, as
defined in the OTS prompt corrective action regulations, following the
proposed distribution; and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does not meet these stated requirements, it must obtain the prior approval of
the OTS before declaring any proposed distributions.
If the Bank's capital falls below its regulatory requirements or the OTS
notifies it that it is in need of more than normal supervision, the Bank's
ability to make capital distributions will be restricted. In addition, no
distribution will be made if OTS notifies the Bank that a proposed capital
distribution would constitute an unsafe and unsound practice, which would
otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2004, the Bank's regulatory limit on loans to one borrower is $8.1
million. At March 31, 2004, the Bank's largest single loan to one borrower
was $8.1 million, which was performing according to its original terms.
Activities of Associations and their Subsidiaries. When a savings institution
establishes or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings institution
must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings institutions
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
E-30
The OTS may determine that the continuation by a savings institution of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings institution to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings institutions must comply with Sections
23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
institution were a Federal Reserve member bank. Generally, transactions
between a savings institution or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the institution's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings institution may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a
case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which comprehensively
amends sections 23A and 23B of the Federal Reserve Act, became effective. The
Federal Reserve Act and Regulation W are applicable to savings institutions
such as the Bank. The Regulation unifies and updates staff interpretations
issued over the years, incorporates several new interpretative proposals (such
as to clarify when transactions with an unrelated third party will be
attributed to an affiliate) and addresses new issues arising as a result of
the expanded scope of nonbanking activities engaged in by banks and bank
holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Financial Services Modernization Act of
1999.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with the examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its
latest examination.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
shareholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1.1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
E-31
Environmental Issues Associated with Real Estate Lending. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), a federal
statute, generally imposes strict liability on all prior and present "owners
and operators" of sites containing hazardous waste. However, Congress asked
to protect secured creditors by providing that the term "owner and operator"
excludes a person whose ownership is limited to protecting its security
interest in the site. Since the enactment of the CERCLA, this "secured
creditor exemption" has been the subject of judicial interpretations which
have left open the possibility that lenders could be liable for cleanup costs
on contaminated property that they hold as collateral for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Savings and Loan Holding Company Regulations
General. The Company is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings institution subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to present a
serious risk to the subsidiary savings institution.
Financial Services Modernization. On November 12, 1999, the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") was
signed into law. The purpose of this legislation is to modernize the
financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms and other financial service providers. Generally, the GLBA:
* repealed the historical restrictions and eliminates many federal and state
law barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers;
* provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
* broadened the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
* provided an enhanced framework for protecting the privacy of consumer
information; and
* addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial institutions.
The GLBA also imposes certain obligations on financial institutions to develop
privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions were
implemented by regulations that were effective on November 12, 2000.
Compliance with the privacy provisions was required by July 1, 2001.
Acquisitions. Federal law and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings institution or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
institution not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings institution as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the
E-32
Bank and any other subsidiaries (other than the Bank or any other SAIF-insured
savings institution) would generally become subject to additional
restrictions. There generally are more restrictions on the activities of a
multiple savings and loan holding company than on those of a unitary savings
and loan holding company. Federal law provides that, among other things, no
multiple savings and loan holding company or subsidiary thereof which is not
an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution;
(iv) holding or managing properties used or occupied by a subsidiary insured
institution; (v) acting as trustee under deeds of trust; (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies; or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple savings and loan
holding company.
The USA Patriot Act. In response to the terrorist events of September 11,
2001, the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot
Act") was signed into law on October 26, 2001. The USA Patriot Act gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. Title
III of the USA Patriot Act takes measures intended to encourage information
sharing among bank regulatory agencies and law enforcement bodies. Further,
certain provisions of Title III impose affirmative obligations on a broad
range of financial institutions.
Among other requirements, Title III of the USA Patriot Act imposes the
following requirements:
Financial institutions must establish anti-money laundering programs that
include (i) internal policies, procedures and controls, (ii) specific
designation of an anti-money laundering compliance officer, (iii) ongoing
employee training programs and (iv) an independent audit function to test the
anti-money laundering program.
Financial institutions must implement a risk-based customer identification
program in connection with opening new accounts. The program must contain
requirements for identity verification, record-keeping, comparison of
information to government-maintained lists and notice to customers.
Financial institutions that establish, maintain, administer, or manage private
banking accounts or correspondent accounts in the United States for non-United
States persons or their representatives must establish appropriate, specific
and, where necessary, enhanced due diligence policies, procedures and controls
designed to detect and report money laundering.
Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks that
do not have a physical presence in any country and will be subject to certain
recordkeeping obligations with respect to correspondent accounts of foreign
banks.
Bank regulators are directed to consider a holding company's effectiveness in
combating money laundering when ruling on Federal Reserve Act and Bank Merger
Act applications. Our policies and procedures have been updated to reflect the
requirements of the USA Patriot Act. The impact on business and customers was
minimal.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act") was signed into law on July 30, 2002 in response to public concerns
regarding corporate accountability in connection with the recent accounting
scandals at Enron and WorldCom. The stated goals of the Sarbanes-Oxley Act
are to increase corporate responsibility, to provide for enhanced penalties
for accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally
applies to all companies, both U.S. and non-U.S., that file or are required to
file periodic reports with the Securities and Exchange Commission ("SEC")
under the Securities Exchange Act of 1934.
E-33
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate
law, such as the relationship between a board of directors and management and
between a board of directors and its committees.
The Sarbanes-Oxley Act addresses, among other matters:
* audit committees;
* certification of financial statements by the chief executive officer
and the chief financial officer;
* the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of
any financial statements that later require restatement;
* a prohibition on insider trading during pension fund black out periods;
* disclosure of off-balance sheet transactions;
* a prohibition on personal loans to directors and officers;
* expedited filing requirements for Form 4s;
* disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
* "real time" filing of periodic reports;
* the formation of a public company accounting oversight board;
* auditor independence; and
* various increased criminal penalties for violations of securities laws.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift lender
test, within one year the Company must register as, and will become subject
to, the significant activity restrictions applicable to bank holding
companies. See "- Federal Regulation of Savings Institutions - Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift
lender test.
TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Company or the Bank.
Bad Debt Reserve. Historically, savings institutions, such as the Bank, which
met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift"), were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
Congress revised the thrift bad debt rules in 1996. The new rules eliminated
the 8% of taxable income method for deducting additions to the tax bad debt
reserves for all thrifts for tax years beginning after December 31, 1995.
These rules also required that all institutions recapture all or a portion of
their bad debt reserves added since the base year (last taxable year beginning
before January 1, 1988). At March 31, 2004, the Bank had a taxable temporary
difference of approximately $760,000 that arose before 1987 (base-year
amount). For taxable years beginning after December 31, 1995, the Bank's bad
debt deduction will be determined under the experience method using a formula
based on actual bad debt experience over a period of years. The unrecaptured
base year reserves will not be subject
E-34
to recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1987 bad debt reserves continues
to be subject to provisions of present law referred to below that require
recapture in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend distributions"
to the Company, such distributions will be considered to result in
distributions from the balance of its bad debt reserve as of December 31, 1987
(or a lesser amount if the Bank's loan portfolio decreased since December 31,
1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion and Reorganization, the Bank makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See
"Regulation" for limits on the payment of dividends by the Bank. The Bank
does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Company's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Company, whether
or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Bank and the Company will not file a consolidated tax return, except that if
the Bank or the Company owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
Audits. The Company's federal income tax returns have been audited through
the tax year ended March 31, 1999.
State Taxation
General. The Company is subject to a business and occupation tax imposed
under Washington law at the rate of 1.50% of gross receipts; however, interest
received on loans secured by mortgages or deeds of trust on residential
properties is exempt from such tax.
Audits. The Company's business and occupation tax returns have been audited
through the tax year ended March 31, 2001. The audit determined there was an
additional $5,500 owing in tax.
Competition
There are several financial institutions in the Company's primary market area
from which the Company faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of
loans. Its most direct competition for savings deposits and loans has
historically come from other thrift institutions, credit unions and commercial
banks located in its market area. Particularly in times of high interest
rates, the Company has faced additional significant competition for investors'
funds from money market mutual funds, other
E-35
short-term money market securities, corporate and government securities. The
Company's competition for loans comes principally from other thrift
institutions, credit unions, commercial banks, mortgage banking companies and
mortgage brokers.
Subsidiary Activities
Under OTS regulations, the Bank is authorized to invest up to 3% of its assets
in subsidiary corporations, with amounts in excess of 2% only if primarily for
community purposes. At March 31, 2004, the Bank's investments of $790,000 in
Riverview Services, Inc. ("Riverview Services"), its wholly owned subsidiary,
and $556,000 in Riverview Asset Management Corp. ("RAM Corp"), a 85% owned
subsidiary, were within these limitations.
Riverview Services acts as trustee for deeds of trust on mortgage loans
granted by the Bank, and receives a reconveyance fee of approximately $70 for
each deed of trust. Riverview Services had net income of $65,000 for the
fiscal year ended March 31, 2004 and total assets of $793,000 at that date.
Riverview Services' operations are included in the Consolidated Financial
Statements of the Company.
RAM Corp is an asset management company providing trust, estate planning and
investment management services. RAM Corp commenced business in December 1998
and had net income of $13,100 for the fiscal year ended March 31, 2004 and
total assets of $758,000 at that date. RAM Corp earns fees on the management
of assets held in fiduciary or agency capacity. At March 31, 2004, the fair
market value of total assets under management approximated $134.6 million.
RAM Corp's operations are included in the Consolidated Financial Statements of
the Company.
Personnel
As of March 31, 2004, the Company had 186 full-time equivalent employees, none
of whom are represented by a collective bargaining unit. The Company believes
its relationship with its employees is good.
Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.
Name Age (1) Position
---- ------ --------
Patrick Sheaffer 64 Chairman of the Board and Chief Executive Officer
Ron Wysaske 51 President and Chief Operating Officer
Ron Dobyns 55 Senior Vice President and Chief Financial Officer
(1) At March 31, 2004.
Patrick Sheaffer is Chairman of the Board and Chief Executive Officer of the
Company and Chief Executive Officer of the Bank. Prior to February 2004, Mr.
Sheaffer served as Chairman of the Board, President and Chief Executive
Officer of the Company since inception in 1997. He became Chairman of the
Board of the Bank in 1993. Mr. Sheaffer joined the Bank in 1965. He is
responsible for leadership and management of the Company. Mr. Sheaffer is
active in numerous professional and civic organizations.
Ron Wysaske is President and Chief Operating Officer of the Bank. Prior to
February 2004, Mr. Wysaske served as Executive Vice President, Treasurer and
Chief Financial Officer of the Bank from 1981 to 2004 and of the Company at
inception in 1997. He joined the Bank in 1976. Mr. Wysaske is responsible for
daily operations and management of the Bank. He holds a M.B.A. from Washington
State University and is active in numerous professional and civic
organizations.
Ron Dobyns is Senior Vice President and Chief Financial Officer of the
Company. Prior to February 2004, Mr. Dobyns served as Controller since 1996.
He is responsible for accounting, SEC reporting as well as treasury functions
for the Bank and the Company. He is a State of Oregon certified public
accountant, holds an M.B.A. from the University of Minnesota and is a graduate
of Pacific Coast Banking School.
E-36
Item 2. Properties
-------------------
The following table sets forth certain information relating to the Company's
offices as of March 31, 2004.
Approximate
Location Year Opened Square Footage Deposits
-------- ----------- -------------- --------
Main Office: (In millions)
900 Washington, Suite 900
Vancouver, Washington (1) 2000 16,000 $ 28.2
Branch Offices:
700 N.E. Fourth Avenue
Camas, Washington (2) 1975 25,000 44.1
3307 Evergreen Way
Washougal, Washington (1)(2)(3) 1963 3,200 28.5
225 S.W. 2nd Street
Stevenson, Washington (2) 1971 1,700 26.6
330 E. Jewett Boulevard
White Salmon, Washington (2)(4) 1977 3,200 25.4
15 N.W. 13th Avenue
Battle Ground, Washington (2)(5) 1979 2,900 28.8
412 South Columbus
Goldendale, Washington (2) 1983 2,500 14.7
11505-K N.E. Fourth Plain Boulevard
Vancouver, Washington (2) 1994 3,500 19.2
7735 N.E. Highway 99
Vancouver, Washington (1)(6)(3) 1994 4,800 23.3
1011 Washington Way
Longview, Washington (6)(2) 1994 2,000 15.7
900 Washington St., Suite 100
Vancouver, Washington (1)(2) 1998 5,300 79.1
1901-E N.E. 162nd Avenue
Vancouver, Washington (1)(2) 1999 3,200 10.1
800 N.E. Tenny Road, Suite D
Vancouver, Washington (2) 2000 3,200 15.6
915 MacArthur Blvd.
Vancouver, Washington (1)(2)(7) 2003 3,000 50.0
37
204 S.E. Park Plaza Dr., #109
Vancouver, Washington (1)(2)(7)
Cascade Park Mortgage Center 2003 2565 -
(1) Leased.
(2) Location of an automated teller machine.
(3) New facility in 2001.
(4) New facility in 2000.
(5) New facility in 1994.
(6) Former branches of Great American Federal Savings Association, San Diego,
California, that were acquired from the Resolution Trust Corporation on
May 13, 1994. In the acquisition, the Company assumed all insured
deposit liabilities of both branch offices totaling approximately $42.0
million.
(7) Former location of Today's Bank, Vancouver, Washington, acquired on July
18, 2003.
During second quarter of fiscal year 2001, the Company's main office for
administration was relocated from Camas to the downtown Vancouver address of
900 Washington Street. The Washougal branch office was relocated during the
first quarter of the fiscal year 2001.
The Company uses an outside data processing system to process customer records
and monetary transactions, post deposit and general ledger entries and record
activity in installment lending, loan servicing and loan originations. At
March 31, 2004, the net book value of the Company's office properties,
furniture, fixtures and equipment was $9.7 million.
Management believes that the facilities are of sound construction and good
operating condition, and are appropriately insured and adequately equipped for
carrying on the business of the Company.
Item 3. Legal Proceedings
--------------------------
Periodically, there have been various claims and lawsuits involving the
Company, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Company's business. The Company is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2004.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
------------------------------------------------------------------------
Matters and Issuer Purchases of Equity Securities
-------------------------------------------------
At March 31, 2004, there were 4,974,979 shares Company Common Stock issued and
4,777,911 outstanding, 850 stockholders of record and an estimated 1,000
holders in nominee or "street name."
Under Washington law, the Company is prohibited from paying a dividend if, as
a result of its payment, the Company would be unable to pay its debts as they
become due in the normal course of business, or if the Company's total
liabilities would exceed its total assets. The principal source of funds for
the Company is dividend payments from the Bank. OTS regulations require the
Bank to give the OTS 30 days' advance notice of any proposed declaration of
dividends to the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. The OTS imposes
certain limitations on the payment of dividends from the Bank to the Holding
Company which utilize a three-tiered approach that permits various levels
E-38
of distributions based primarily upon a savings association's capital level.
See "REGULATION Federal Regulation of Savings Associations Limitations on
Capital Distributions." In addition, the Company may not declare or pay a
cash dividend on its capital stock if the effect thereof would be to reduce
the regulatory capital of the Company below the amount required for the
liquidation account established pursuant to the Company's Plan of Conversion
adopted in connection with the Conversion and Reorganization. See Note 1 of
Notes to Consolidated Financial Statements.
The common stock of the Company has traded on the Nasdaq National Market
System under the symbol "RVSB" since October 2, 1997. From October 22, 1993
until October 2, 1997, the common stock of the Company traded on The Nasdaq
SmallCap Market under the same symbol. The following table sets forth the
high and low trading prices, as reported by Nasdaq, and cash dividends paid
for each quarter during 2004 and 2003 fiscal years. At March 31, 2004, there
were nine market makers in the Company's common stock as reported by the
Nasdaq Stock Market.
Cash Dividends
Fiscal Year Ended March 31, 2004 High Low Declared
-------------------------------- ------ ----- --------------
Quarter Ended March 31, 2004 $21.43 $19.35 $0.140
Quarter Ended December 31, 2003 21.74 19.09 0.140
Quarter Ended September 30, 2003 20.50 18.08 0.140
Quarter Ended June 30, 2003 18.30 16.30 0.140
Cash Dividends
Fiscal Year Ended March 31, 2003 High Low Declared
-------------------------------- ------ ----- --------------
Quarter Ended March 31, 2003 $17.04 $14.64 $0.125
Quarter Ended December 31, 2002 15.24 13.63 0.125
Quarter Ended September 30, 2002 15.71 14.00 0.125
Quarter Ended June 30, 2002 14.75 13.05 0.125
Equity Compensation Plan Information. The following table summarizes share
and exercise price information about the Company's equity compensation plan as
of March 31, 2004.
Number of securities
remaining available
for future issuance
Number of securities Weighted- under equity
to be issued upon average price compensation plans
exercise of of outstanding excluding securities
Plan category outstanding options options reflected in column (A)
-------------- -------------------- -------------- ----------------------
Equity compensation
plans approved by
security holders: (A) (B) (C)
2003 Stock Option
Plan(1) 229,227 - 229,227
1998 Stock Option
Plan 245,269 $13.57 38,483
Equity compensation
plans not approved
by security holders: - - -
------- -------
Total 474,496 267,710
======= =======
(1) At March 31, 2004, no options had been granted under the 2003 Plan.
E-39
Stock Repurchase
The shares are being repurchased from time-to-time in open market
transactions. The timing, volume and price of purchases will be made at our
discretion, and will also be contingent upon our overall financial condition,
as well, as market conditions in general. The following table reflects
activity for the three months ended March 31, 2004.
Common Stock Repurchased
---------------------------------
Total Number of Average Price Maximum Number of shares
Shares Purchased Paid per that May Yet Be Purchased
(1) Share Under the Program (2)
- - -
------- ------- -------
Balance at
March 31, 2004 - - 133,204
======= ======= =======
(1) Of these shares, no shares were purchased other than through a publicly
announced program.
(2) In September 2002, the Company announced a stock repurchase of up to 5%,
or 214,000 shares, of its outstanding common stock. This program expires
when all shares under the plan have been repurchased.
E-40
Item 6. Selected Financial Data
---------------------------------
The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Company at the dates and
for the periods indicated.
At March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
FINANCIAL CONDITION DATA:
Total assets $520,487 $419,904 $392,101 $431,996 $344,680
Loans receivable, net (1) 381,534 301,811 288,530 296,861 249,034
Mortgage-backed securities
held to maturity, at
amortized cost 2,517 3,301 4,386 6,405 8,657
Mortgage-backed securities
available for sale, at
fair value 10,607 13,069 36,999 43,139 39,378
Cash and interest-bearing
deposits 47,907 60,858 22,492 38,935 15,786
Investment securities held
to maturity, at amortized
cost - - - 861 903
Investment securities
available for sale, at
fair value 32,883 20,426 18,275 25,561 12,883
Deposit accounts 409,115 320,742 259,690 295,523 232,355
FHLB advances 40,000 40,000 74,500 79,500 60,550
Year Ended March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
OPERATING DATA:
Interest income $ 27,584 $ 26,461 $ 29,840 $ 31,343 $ 25,438
Interest expense 6,627 8,417 14,318 16,288 11,073
-------- -------- -------- -------- --------
Net interest income 20,957 18,044 15,522 15,055 14,365
Provision for loan losses 210 727 1,116 949 675
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 20,747 17,317 14,406 14,106 13,690
Gains (losses) from sale of
loans, securities and real
estate owned 1,003 (531) 1,964 129 151
Gain on sale of land and
fixed assets 3 - 4 540 -
Other non-interest income 5,583 4,469 4,583 3,293 2,746
Non-interest expenses 17,572 14,908 13,953 12,867 10,832
-------- -------- -------- -------- --------
Income before federal
income tax provision 9,764 6,347 7,004 5,201 5,755
Provision for federal
income taxes 3,210 1,988 2,136 1,644 1,878
-------- -------- -------- -------- --------
Net income $ 6,554 $ 4,359 $ 4,868 $ 3,557 $ 3,877
======== ======== ======== ======== ========
(1) Includes loans held for sale
E-41
At March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
OTHER DATA:
Number of:
Real estate loans
outstanding 3,141 2,904 2,176 2,510 2,188
Deposit accounts 27,209 25,752 26,625 26,068 23,653
Full service offices 13 12 12 12 12
At or For the Year Ended March 31,
------------------------------------------------
2004 2003 2002 2001 2000
------- ------ ------ ------ -------
(In thousands)
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets 1.35% 1.07% 1.16% 0.94% 1.22%
Return on average equity 10.60 7.99 9.01 7.04 7.15
Dividend payout ratio (1) 39.72 50.00 41.51 51.94 48.65
Interest rate spread 4.42 4.28 3.29 3.37 3.88
Net interest margin 4.76 4.83 4.04 4.27 4.78
Non-interest expense to
average assets 3.61 3.66 3.34 3.41 3.41
Efficiency ratio (2) 63.79 67.82 63.21 67.66 62.75
Asset Quality Ratios:
Average interest-earning
assets to interest-bearing
liabilities 122.53 124.62 120.49 119.75 124.51
Allowance for loan losses
to total net loans at end
of period 1.16 0.90 0.87 0.64 0.54
Net charge-offs to average
outstanding loans during
the period 0.31 0.12 0.14 0.14 0.21
Ratio of nonperforming
assets to total assets 0.39 0.18 0.61 0.24 0.39
Capital Ratios:
Average equity to average
assets 12.72 13.39 12.93 13.41 17.05
Equity to assets at end of
fiscal year 12.52 12.98 13.69 12.20 14.07
(1) Dividends per share divided by net income per share
(2) Non-interest expense divided by the sum of net interest income and
non-interest income
E-42
Item 7. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Form 10-K.
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis and other portions of this report contain
certain "forward-looking statements" concerning the future operations of the
Company. Management desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing the Company of the protections
of such safe harbor with respect to all "forward-looking statements" contained
in our Annual Report. The Company has used "forward-looking statements" to
describe future plans and strategies, including its expectations of the
Company's future financial results. Management's ability to predict results
or the effect of future plans or strategies is inherently uncertain. Factors
which could affect actual results include interest rate trends, the general
economic climate in the Company's market area and the country as a whole, the
ability of the Company to control costs and expenses, deposit flows, demand
for mortgages and other loans, real estate value and vacancy rates, the
ability of the Company to efficiently incorporate acquisitions into its
operations, competition, loan delinquency rates, and changes in federal and
state regulation. These factors should be considered in evaluating the
"forward-looking statements," and undue reliance should not be placed on such
statements. The Company does not undertake to update any forward-looking
statement that may be made on behalf of the Company.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America ("GAAP") in the preparation of the Company's Consolidated Financial
Statements. The Company has identified three policies, that due to judgments,
estimates and assumptions inherent in those policies, are critical to an
understanding of the Company's Consolidated Financial Statements. These
policies relate to the methodology for the determination of the allowance for
loan losses, the valuation of the mortgage servicing rights ("MSR's") and the
impairment of investments. These policies and the judgments, estimates and
assumptions are described in greater detail in subsequent sections of
Management's Discussions and Analysis and in the notes to the Consolidated
Financial Statements included herein. In particular, Note 1 to the
Consolidated Financial Statements, "Summary of Significant Accounting
Policies," describes generally the Company's accounting policies and Note 10
provides details used in valuing the Company's MSR's and the effect of changes
to certain assumptions. Management believes that the judgments, estimates and
assumptions used in the preparation of the Company's Consolidated Financial
Statements are appropriate given the factual circumstances at the time.
However, given the sensitivity of the Company's Consolidated Financial
Statements to these critical accounting policies, the use of other judgments,
estimates and assumptions could result in material differences in the
Company's results of operations or financial condition.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level sufficient to provide
for probable loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not be
assured. The detailed analysis includes techniques to estimate the fair value
of loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance level is estimated based upon factors and
trends identified by management at the time the consolidated financial
statements are prepared.
E-43
Mortgage Servicing Rights
-------------------------
The Company stratifies its MSR's based on the predominant characteristics of
the underlying financial assets including coupon interest rate and contractual
maturity of the mortgage. An estimated fair value of MSR's is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected prepayments
speeds, discount rate, loan maturity and interest rate. The effect of changes
in market interest rates on estimated rates of loan prepayments represents the
predominant risk characteristic underlying the MSR's portfolio.
The Company's methodology for estimating the fair value of MSR's is highly
sensitive to changes in assumptions. For example, the determination of fair
value uses anticipated prepayment speeds. Actual prepayment experience may
differ and any difference may have a material effect on the fair value. Thus,
any measurement of MSR's fair value is limited by the conditions existing and
assumptions made as of the date made. Those assumptions may not be appropriate
if they are applied to a different time.
Future expected net cash flows from servicing a loan in the servicing
portfolio would not be realized if the loan is paid off earlier than
anticipated. Moreover, since most loans within the servicing portfolio do not
contain penalty provisions for early payoff, the Company will not receive a
corresponding economic benefit if the loan pays off earlier than expected.
MSR's are the discounted present value of the future net cash flows projected
from the servicing portfolio. Accordingly, prepayment risk subjects the
Company's MSR's to impairment. MSR's impairment is recorded in the amount that
the estimated fair value is less than the MSR's carrying value on a strata by
strata basis.
Investment Valuation
--------------------
The Company's determination of impairment for various types of investments
accounted for in accordance with SFAS No. 115 is predicated on the notion of
other-than-temporary. The key indicator that an investment may be impaired is
that the fair value of the investment is less than its carrying value. Each
reporting period, the Company reviews those investments the fair value is less
than carrying value. The review includes determining whether certain
indicators indicated the fair value of the investment has been negatively
impacted. These indicators include deteriorating financial condition,
regulatory, economic or technological changes, downgrade by a rating agency
and length of time the fair value has been less than carrying value. If any
indicators of impairment are present, management determines the fair value of
the investment and compares this to its carrying value. If the fair value of
the investment is less than the carrying value of the investment, the
investment is considered impaired and a determination must be made as to
whether the impairment is other-than-temporary.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. If the cost basis of these securities is
determined to be other-than-temporary impaired, the amount of the impairment
is charged to operations.
Securities available for sale are carried at fair value. Premiums and
discounts are amortized using the interest method over the remaining period to
contractual maturity. Unrealized holding gains and losses, or valuation
allowances established for net unrealized losses, are excluded from earnings
and reported as a separate component of shareholders' equity as accumulated
other comprehensive income, net of income taxes, unless the security is deemed
other-than-temporary impaired. If the security is determined to be
other-than-temporary impaired, the amount of the impairment is charged to
operations.
The Company's underlying principle in determining whether impairment is
other-than temporary is an impairment shall be deemed other-than-temporary
unless positive evidence indicating that an investment's carrying value is
recoverable within a reasonable period of time outweighs negative evidence to
the contrary. Evidence that is objectively determinable and verifiable is
given greater weight than evidence that is subjective and or not verifiable.
Evidence based on future events will generally be less objective as it is
based on future expectations and therefore is generally less verifiable or not
verifiable at all. Factors considered in evaluating whether a decline in
value is other-than-temporary include, (a) the length of time and the extent
to which the fair value has been less than amortized cost, (b) the financial
condition and near-term prospects of the issuer and (c) our intent and ability
to retain the
E-44
investment for a period of time. In situations in which the security's fair
value is below amortized cost but it continues to be probable that all
contractual terms of the security will be satisfied, and that the decline is
due solely to changes in interest rates (not because of increased credit
risk), and the Company asserts that it has positive intent and ability to hold
that security to maturity, no other-than-temporary impairment is recognized.
Operating Strategy
In the fiscal year ended March 31, 1998, the Company began to implement a
growth strategy to broaden the products and services from traditional thrift
offerings to those more closely related to commercial banking. The growth
strategy included four elements: geographic and product expansion, loan
portfolio diversification, development of relationship banking and maintenance
of asset quality.
Since the end of fiscal 1998, the Company has added three branches including
the branch at the main office for administration in downtown Vancouver. In
addition, the July 2003 acquisition of Today's Bancorp, Inc. added one branch
and a commercial lending center. The Washougal branch was relocated to a new
facility, and the Stevenson, White Salmon and Goldendale branches were
remodeled. The number of automated teller machines increased from six to
seventeen so that each branch location now is serviced by at least one
automated teller machine.
The Company's growing commercial customer base has enjoyed new products and
the improvements in existing products. These new products include business
checking, internet banking and new loan products. Retail customers have
benefited from expanded choices ranging from additional automated teller
machines, consumer lending products, checking accounts, debit cards, 24 hour
account information service and internet banking.
Fiscal 2004 marked the 81st anniversary since Riverview Community Bank opened
its doors in 1923. The historical emphasis has been on residential real
estate lending. The Company is focused on diversifying the loan portfolio
through expansion of commercial loans. In fiscal 2000, the Company had four
experienced commercial lenders and currently there are seven commercial
lenders who are expanding the commercial lending services available to
Riverview's customers. In the fiscal 2000, commercial loans as a percentage
of the loan portfolio were 5.87%. Commercial loans were 13.73% of total loans
at the end of fiscal year 2004. Commercial lending has higher credit risk,
wider interest margins and shorter loan terms than residential lending which
can increase the loan portfolio profitability.
The Company's relationship banking has been enhanced by the 1998 addition of
RAM Corp, a trust company directed by experienced trust officers, through
expanded loan products serviced by experienced commercial and consumer lending
officers, and an expanded branch network led by experienced branch managers.
Development of relationship banking has been the key to the Company's growth.
The fair market value of assets under management has increased from $114.8
million at March 31, 2003, to $134.6 million at March 31, 2004.
Net Interest Income
The Company's profitability depends primarily on its net interest income,
which is the difference between the income it receives on interest-earning
assets and its cost of funds, which consists of interest paid on deposits and
borrowings. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The level of
non-interest income and expenses also affects the Company's profitability.
Non-interest income includes deposit service fees, income associated with the
origination and sale of mortgage loans, brokering loans, loan servicing fees,
income from real estate owned, net gains and losses on sales of
interest-earning assets, bank-owned life insurance income and asset management
fee income. Non-interest expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses and other operating costs. The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
regulation, and monetary and fiscal policies.
E-45
Comparison of Financial Condition at March 31, 2004 and 2003
At March 31, 2004, the Company had total assets of $520.5 million compared
with $419.9 million at March 31, 2003. The increase in total assets reflects
the July 2003 acquisition of Today's Bancorp. The increase in total assets
was primarily an increase in loans outstanding, goodwill and bank-owned life
insurance. Cash, including interest-earning accounts, totaled $47.9 million at
March 31, 2004, compared to $60.9 million at March 31, 2003. The $1.1 million
decrease in loans held for sale to $407,000 at March 31, 2004 compared to $1.5
million at March 31, 2003, reflects the variable demand for residential loan
refinancing. As interest rates fall, loan volume shifts to fixed rate
production. Conversely, in a rising interest rate environment, loan volume
will shift to adjustable rate production. Selling fixed interest rate mortgage
loans allows the Company to reduce the interest rate risk associated with long
term fixed interest rate products. It also frees up funds to make new loans
and diversify the loan portfolio. We continue to service the loans we sell,
maintaining the customer relationship and generating ongoing non-interest
income.
Loans receivable, net, were $381.1 million at March 31, 2004, compared to
$300.3 million at March 31, 2003, a 26.9% increase. The acquisition of Today's
Bancorp in July 2003 increased gross loans $85.4 million. The increases were
primarily in commercial, land, commercial real estate and residential
construction, consumer loans were partially offset by decreases in one- to
four- family residential, multi-family, multi-family construction and
commercial construction loans. A substantial portion of the Company's loan
portfolio is secured by real estate, either as primary or secondary collateral
located in its primary market areas.
Cash decreased to $47.9 million at March 31, 2004, from $60.9 million at March
31, 2003 as a result of investment in securities and bank owned life
insurance.
Investment securities available-for-sale was $32.9 million at March 31, 2004,
compared to $20.4 million at March 31, 2003. The $12.5 million increase
reflects the $6.9 million of securities acquired in the Today's Bancorp
acquisition, and purchase of $12.1 million of securities, called and paydowns
of $6.3 million and unrealized market gains and losses.
Mortgage-backed securities held-to-maturity was $2.5 million at March 31,
2004, compared to $3.3 million at March 31, 2003. The $800,000 decrease was a
result of pay downs.
Mortgage-backed securities available-for-sale was $10.6 million at March 31,
2004, compared to $13.1 million at March 31, 2003. The $2.5 million net
decrease reflects $5.2 million in purchases and $7.7 million in paydowns and
unrealized market gains and losses.
Deposits totaled $409.1 million at March 31, 2004 compared to $320.7 million
at March 31, 2003. The deposit increase is primarily due to the increase in
non-interest bearing account balances. Checking accounts and money market
accounts ("transaction accounts") total average outstanding balance increased
33.8% to $220.1 million at March 31, 2004, compared to $164.5 million at March
31, 2003. Transaction accounts represented 57.9% and 55.4% of average total
outstanding balance of deposits at March 31, 2004 and March 31, 2003,
respectively.
FHLB advances were $40.0 million at March 31, 2004 and 2003. There were no
new borrowings in fiscal year 2004.
Shareholders' equity increased $10.7 million to $65.2 million at March 31,
2004 from $54.5 million at March 31, 2003. The increase was primarily as a
result of the $7.3 million of stock issued in the acquisition of Today's
Bancorp and $6.4 million of total comprehensive income, offset by $1.5
million stock repurchased and retired and $2.6 million of cash dividends paid
to shareholders.
E-46
Comparison of Operating Results for the Years Ended March 31, 2004 and 2003
Net Income. Net income was $6.6 million, or $1.39 per diluted share for the
year ended March 31, 2004, compared to $4.4 million, or $0.99 per diluted
share for the year ended March 31, 2003. Earnings were lower for the year
ended March 31, 2003, primarily as a result of the pre-tax
other-than-temporary non-cash charges of $1.6 million for FHLMC preferred
stock and $700,000 for FNMA preferred stock.
Net Interest Income. Net interest income for fiscal year 2004 was $21.0
million, representing a $3.0 million, or a 16.7% increase, from fiscal year
2003. This improvement reflected a 16.7% increase in average balance of
interest earning assets (primarily increases in the average balance of non
mortgage loans, investment securities and daily interest bearing assets,
partially offset by a decrease in the average balance of mortgage loans and
mortgage-backed securities) to $443.5 million, which was offset by a 18.7%
increase in average balance of interest-bearing liabilities (a increase in all
deposit categories and a decrease in FHLB borrowings) to $362.0 million. The
ratio of average interest earning assets to average interest bearing
liabilities decreased to 122.5% in fiscal 2004 from 124.6% in fiscal 2003
which indicates that the interest-earning asset growth is being funded more by
interest-bearing liabilities as compared to capital and non-interest-bearing
demand deposits.
Interest Income. Interest income totaled $27.6 million and $26.5 million, for
fiscal 2004 and 2003, respectively. Average interest-bearing assets increased
$63.6 million to $443.5 million for fiscal 2004 from $379.9 million for fiscal
2003. The yield on interest-earning assets was 6.25% for fiscal year 2004
compared to 7.04% for fiscal 2003. The decreased yield is the primarily the
result of the lower yields on loans that reflect the Federal Reserve Board
discount rate cuts that occurred during fiscal years 2003 and 2004.
Interest Expense. Interest expense for the year ended March 31, 2004 totaled
$6.6 million, a $1.8 million decrease from $8.4 million for the year ended
March 31, 2003. The decrease in interest expense is the result of lower rates
of interest paid on deposits and FHLB borrowings due to the Federal Reserve
Board discount rate cuts that occurred during fiscal years 2003 and 2004. The
weighted average interest rate of total deposits decreased from 2.18% for the
year ended March 31, 2003 to 1.44% for the year ended March 31, 2004. The
weighted average interest rate of FHLB borrowings decreased from 5.53% for the
year ended March 31, 2003 to 4.96% for the year ended March 31, 2004. The
level of liquidity in fiscal year 2004 allowed the runoff of high interest
rate deposits acquired in the acquisition of Today's Bancorp and held the FHLB
borrowings stable at $40.0 million.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2004 was $210,000 compared to $727,000 for the year ended March 31,
2003. The fiscal 2004 provision for loan losses was less than the $1.1
million net charge-offs for the year. The allowance for loan losses increased
$1.7 million to $4.5 million at March 31, 2004 from $2.7 million at March 31,
2003. The ratio of allowance for loan losses to total net loans increased to
1.16% compared to 0.90% at March 31, 2003. Net charge-offs to average net
loans for fiscal 2004 increased to 0.31% from 0.12% for fiscal 2003. The
increase in the balance of the allowance for loan losses at March 31, 2004
reflects the acquisition of Today's Bancorp, the proportionate increase in
loan balances, the change in mix of loan balances, the increase in substandard
assets and a change in loss rate when compared to March 31, 2003. The
acquisition of Today's Bancorp added $2.6 million to the allowance for loan
losses and approximately $900,000 of the charge-offs was related to loans
acquired in the acquisition. The mix of the loan portfolio showed an increase
in the balances of commercial, commercial real estate loans, and construction,
and consumer loans at March 31, 2004 as compared to balances at March 31,
2003. Substandard assets increased by $3.0 million to $5.7 million at March
31, 2004 compared to $2.7 million at March 31, 2003. The balance of
substandard asset of $5.7 million at March 31, 2004 is a decrease of $5.2
million from the $10.9 million balance of substandard assets after the
acquisition of Today's Bancorp. The loss rate for other mention loans was
increased from 1.5% at March 31, 2003 to 4.0% at March 31, 2004 in order to
reflect the risk of loss. Management considered the allowance for loan losses
at March 31, 2004 to be adequate to cover probable losses inherent in the loan
portfolio based on the assessment of various factors affecting the loan
portfolio
The Company establishes a general reserve for loan losses through a periodic
provision for loan losses based on management's evaluation of the loan
portfolio and current economic conditions. The provisions for loan losses are
E-47
based on management's estimate of net realizable value or fair value of the
collateral, as applicable, and the Company's actual loss experience, and
standards applied by the OTS and the FDIC. The Company regularly reviews its
loan portfolio, including non-performing loans, to determine whether any loans
require classification or the establishment of appropriate reserves. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. These agencies may require the Company to provide additions to the
allowance for loan losses based upon judgments different from those of
management. The allowance for loan losses is provided based upon management's
continuing analysis of the pertinent factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of
the loan portfolio, actual loan loss experience, current economic conditions,
and detailed analysis of individual loans for which full collectibility may
not be assured. The detailed analysis includes techniques to estimate the fair
value of the loan collateral and the existence of potential alternative
sources of repayment. Assessment of the adequacy of the allowance for loan
losses involves subjective judgments regarding future events, and thus there
can be no assurance those additional provisions for credit losses will not be
required in future periods. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions that may be beyond the
Company's control. Any increase or decrease in the provision for loan losses
has a corresponding negative or positive effect on net income.
Non-Interest Income. Non-interest income increased $2.7 million or 67.3% for
the twelve months ended March 31, 2004 to $6.6 million compared to $3.9
million for the same period in 2003. Excluding the fiscal 2003 $2.1 million
pretax loss on sale of securities and other-than-temporary impairment on
equity investments, non-interest income increased $513,000 or 8.4% for the
year ended March 31, 2004 when compared to the prior year. The increase was
due primarily to the loan servicing income of $158,000 for fiscal year 2004
compared to a loss of $619,000 for fiscal year 2003. The increase in loan
servicing income for fiscal year 2004 reflects the $307,000 increase in market
valuation of mortgage servicing rights in fiscal 2004 as compared to the
$320,000 write-down of mortgage servicing rights in fiscal 2003. For the year
ended March 31, 2004, fees and service charges increased $61,000 or 1.4% when
compared to the year ended March 31, 2003. The $61,000 increase in fees and
service charges is primarily due to the $275,000, or 10.1%, growth in fee
income from deposit services that was offset by the $214,000 decrease in
mortgage broker fees in fiscal year 2004 as compared to fiscal year 2003. The
rise in mortgage rates experienced in fiscal 2004 reduced the volume of
mortgage refinance activity as compared to the mortgage finance activity in
fiscal 2003. The reduced mortgage refinance activity resulted in reduced
mortgage broker activity and reduced gains on sale of loans held for sale.
Mortgage brokered loan production decreased from $200.3 million in 2003 to
$183.0 million in 2004. Mortgage broker fees (included in fees and service
charges) totaled $1.3 million for the year ended March 31, 2004 compared to
$1.5 million for the previous year. Mortgage broker commission compensation
expense was $976,000 for the fiscal ended March 31, 2004 compared to $1.1
million for the fiscal ended March 31, 2003. Asset management services income
was $906,000 for the fiscal year 2004 compared to $742,000 for the fiscal year
2003. RAMCorp. had $134.6 million in total assets under management at March
31, 2004 compared to $114.8 million at March 31, 2003. In fiscal year 2004,
the Bank purchased $12.0 million of bank-owned life insurance that increased
non-interest income by $121,000.
Non-Interest Expense. Non-interest expense increased $2.7 million, or 17.9%,
to $17.6 million for fiscal year 2004 compared to $14.9 million for fiscal
year 2003. One measure of a bank's ability to contain non-interest expense is
the efficiency ratio. It is calculated by dividing total non-interest expense
(less intangible asset amortization) by the sum of net interest income plus
non-interest income (less intangible asset amortization and lower of cost or
market adjustments). The Company's efficiency ratio excluding intangible asset
amortization and lower cost or market adjustments was 61.84% in fiscal 2004
compared to 63.57% in fiscal 2003.
Merger related expenses that were non-capitalizable were not material to the
Company in fiscal year 2004. The principal component of the Company's
non-interest expense is salaries and employee benefits. For the year ended
March 31, 2004, salaries and employee benefits, which includes mortgage broker
commission compensation, was $9.9 million, or a 18.0% increase over the prior
year total of $8.4 million. Full-time equivalent employees increased to 186 at
March 31, 2004 from 157 at March 31, 2003. The primary reason for the
increase was the expansion of lending and branch locations and the related
staffing resulting from the acquisition of Today's Bancorp. This expansion
also contributed to increase expense in occupancy, depreciation, data
processing, telecommunication and other expense.
E-48
The acquisition of Today's Bancorp and the related acquisition of $105.1
million in deposits accounts created an $820,000 core deposit intangibles
("CDI"), representing the excess of cost over fair market of acquired
deposits. The CDI is being amortized over a ten-year life using an
accelerated amortization method. The amortization expense was $103,000 for
fiscal 2004.
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation in fiscal 1995 (see Item 2. Properties), and the related
acquisition of $42.0 million in customer deposits created a $3.2 million core
deposit intangible asset, representing the excess of fair value of deposits
over the acquired cost. The CDI ($42,000 at March 31, 2004) is being
amortized over the remaining life of the underlying customer relationships
currently estimated at two months. The amortization expense of CDI was
$327,000 for both fiscal years 2004 and 2003.
Provision for Federal Income Taxes. Provision for federal income taxes was
$3.2 million for the year ended March 31, 2004 compared to $2.0 million for
the year ended March 31, 2003 as a result of higher income before taxes in
2004. The effective tax rate for fiscal year 2004 was 32.8% compared to 31.3%
for fiscal 2003. Reference is made to Note 14 of the Notes to Consolidated
Financial Statements, in Item 8, Financial Statements and Supplementary Data,
herein for further discussion of the Company's federal income taxes.
Comparison of Operating Results for the Years Ended March 31, 2003 and 2002
Net Income. Net income was $4.4 million, or $0.99 per diluted share for the
year ended March 31, 2003, compared to $4.9 million, or $1.06 per diluted
share for the year ended March 31, 2002. Earnings were lower for the year
ended March 31, 2003, primarily as a result of the pre-tax
other-than-temporary non-cash charges of $1.6 million for FHLMC preferred
stock and $700,000 for FNMA preferred stock.
Net Interest Income. Net interest income for fiscal year 2003 was $18.0
million, representing a $2.5 million, or a 16.2% increase, from fiscal year
2002. This improvement reflected a 3.4% decrease in average balance of
interest earning assets (primarily decreases in the average balance of
mortgage-backed securities partially offset by an increase in the average
balance of non-mortgage loans) to $379.9 million, which was offset by a 6.6%
decrease in average balance of interest-bearing liabilities (primarily a
decrease in FHLB borrowings and certificates of deposits) to $304.8 million.
The ratio of average interest earning assets to average interest-bearing
liabilities increased to 124.6% in 2003 from 120.5% in 2002 which indicates
that the interest earning asset growth is being funded less by
interest-bearing liabilities as compared to capital and non-interest-bearing
demand deposits.
Interest Income. Interest income totaled $26.5 million and $29.8 million, for
fiscal 2003 and 2002, respectively. Average interest-bearing assets decreased
$13.3 million to $379.9 million for fiscal 2003 from $393.2 million for fiscal
2002. The yield on interest-earning assets was 7.04% for fiscal year 2003
compared to 7.68% for fiscal 2002. The decreased yield is primarily the
result of the lower yields on loans that reflect the Federal Reserve Board
discount rate cuts that occurred during the fiscal 2002 and 2003.
Interest Expense. Interest expense for the year ended March 31, 2003 totaled
$8.4 million, a $5.9 million decrease from $14.3 million for the year ended
March 31, 2002. The decrease in interest expense is the result of lower rates
of interest paid on deposits and FHLB borrowings due to the Federal Reserve
Board discount rate cuts that occurred during the fiscal years 2002 and 2003.
The weighted average interest rate of total deposits decreased from 3.69% for
the year ended March 31, 2002 to 2.18% for the year ended March 31, 2003. The
weighted average interest rate of FHLB borrowings decreased from 6.25% for the
year ended March 31, 2002 to 5.53% for the year ended March 31, 2003. The
decrease in certificate of deposits average balance, combined with the
decrease in average balance of FHLB borrowings was a significant contributor
to lower interest expense in fiscal 2003.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 2003 was $727,000 compared to $1.1 million for the year ended March
31, 2002. The fiscal 2003 provision for loan losses exceeded net loan charge-
offs by $377,000, resulting in an increase in the allowance for loan losses to
$2.7 million. Net charge-offs to average net loans for fiscal 2003 declined
to 0.12% from 0.14% for fiscal 2002. The mix of the loan portfolio showed an
increase in the balances of commercial, land and commercial real estate loans
for fiscal 2003 as
E-49
compared to fiscal 2002. The reduced balances in fiscal 2003 substandard
assets and the reallocation of allowance among different parts of the
portfolio offset these increases in loan balances. The reallocation of the
allowance resulted from the annual review of the allocation of general
allowances for each major loan type based on applying loss factors that take
into consideration past loss experience, asset duration, economic conditions
and overall portfolio quality to the associated loan balance.
The allowance for loan losses at March 31, 2003 was $2.7 million, or 0.90% of
period end net loans, compared to $2.5 million, or 0.86% of period end net
loans, at March 31, 2002. Management considered the allowance for loan losses
at March 31, 2003 to be adequate to cover probable losses inherent in the loan
portfolio based on the assessment of various factors affecting the loan
portfolio. As a result of the decrease in nonaccrual loans during the year
ended March 31, 2002, the ratio of the allowance for loan losses to nonaccrual
loans increased to 847.99% at March 31, 2003 from 166.69% at March 31, 2002.
This ratio is subject to significant fluctuations from year to year as a
result of various factors such as the mix of loan types in the portfolio,
economic prospects of the borrowers, and in the case of secured loans, the
value and marketability of collateral .
Non-Interest Income. Non-interest income decreased $2.6 million or 40.0% for
the twelve months ended March 31, 2003 to $3.9 million compared $6.6 million
for the same period in 2002. Excluding the fiscal 2003, $2.1 pretax loss on
sale of securities and other-than-temporary impairment on equity investments
and the fiscal 2002 $863,000 pretax gain on sale of securities, non-interest
income increased $388,000 or 6.8% for the year ended March 31, 2003 when
compared to the prior year. The fiscal 2003 $162,000 gain on sale of equity
securities available for sale was more than offset by the $2.3 million for the
write-downs in the amortized cost basis of equity investments where the
decline in value was deemed other-than-temporary. These write-downs are
non-cash charges that are recorded as realized losses in the income statement,
with a corresponding reduction in unrealized losses in shareholders' equity,
even though there were no sales of the securities. As such, the write-downs
do not impact shareholders' equity or the carrying value of the investments
since the investments are marked to market value, in accordance with SFAS No.
115. For the year ended March 31, 2003, fees and service charges increased
$556,000 or 15.0% when compared to the year ended March 31, 2002. The
increase in fees and service charges is primarily due to the growth in deposit
products and mortgage broker fees. Mortgage broker fees (included in fees and
service charges) totaled $1.5 million for the year ended March 31, 2003
compared to $1.3 million for the previous year. Mortgage broker commission
compensation expense was $1.1 million for the fiscal year ended March 31, 2003
compared to $1.0 million for the fiscal year ended March 31, 2002. Increases
in mortgage broker fees and commission compensation expense are a result of
the increase in brokered loan production from $188.4 million in 2002 to $200.3
million in 2003. Asset management services income was $742,000 for the year
2003 compared to $745,000 for the year 2002. RAM Corp had $114.8 million in
total assets under management at March 31, 2003 compared to $109.8 million at
March 31, 2002.
Non-Interest Expense. Non-interest expense increased $955,000, or 6.8%, to
$14.9 million for fiscal year 2003 compared to $14.0 million for fiscal year
2002. The principal component of the Company's non-interest expense is
salaries and employee benefits. For the year ended March 31, 2003, salaries
and employee benefits, which includes mortgage broker commission compensation,
was $8.4 million, or a 8.1% increase over the prior year total of $7.8
million. Full-time equivalent employees increased to 157 at March 31, 2003
from 147 at March 31, 2002.
Provision for Federal Income Taxes. Provision for federal income taxes was
$2.0 million for the year ended March 31, 2003 compared to $2.1 million for
the year ended March 31, 2002 as a result of lower income before taxes. The
effective tax rate for fiscal year 2003 was 31.3% compared to 30.5% for fiscal
2002. Reference is made to Note 14 of the Notes to Consolidated Financial
Statements, in Item 8, Financial Statements and Supplementary Data, herein for
further discussion of the Company's federal income taxes.
Average Balance Sheet
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin. Average balances for a period have been
calculated using the
E-50
monthly average balances during such period. Interest income on tax exempt
securities has been adjusted to a taxable-equivalent basis using the statutory
federal income tax rate of 34%. Non-accruing loans were included in the
average loan amounts outstanding. Loan fees of $2.2 million, $2.1 million and
$1.9 million are included in interest income for the twelve months ended March
31, 2004, 2003 and 2002, respectively.
E-51
Year Ended March 31,
-------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- --------------------------- ---------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ------ ------- --------- ------ ------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans $145,537 $11,153 7.66% $173,486 $13,854 7.99% $195,419 $16,786 8.59%
Non-mortgage loans 211,352 14,481 6.85 129,254 9,816 7.59 95,004 8,086 8.51
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total net loans (1) 356,889 25,634 7.18 302,740 23,670 7.82 290,423 24,872 8.56
Mortgage-backed
securities(2) 13,170 613 4.65 28,615 1,241 4.34 49,575 2,677 5.40
Investment
securities(2) 28,283 889 3.14 20,914 1,204 5.76 22,567 1,511 6.70
Daily interest-
bearing assets 39,334 372 0.95 22,190 319 1.44 25,583 798 3.12
Other earning assets 5,849 231 3.93 5,440 329 6.05 5,078 342 6.73
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
earning assets 443,525 27,739 6.25 379,899 26,763 7.04 393,226 30,200 7.68
Non-interest-earning
assets:
Office properties and
equipment, net 10,165 10,060 10,365
Other non-interest-
earning assets 32,400 17,809 14,402
-------- -------- --------
Total assets $486,090 $407,768 $417,993
======== ======== ========
Interest-bearing
liabilities:
Regular savings
accounts $ 27,534 163 0.59 $ 22,861 182 0.80 $ 19,747 292 1.48
NOW accounts 97,017 836 0.86 64,916 960 1.48 29,442 215 0.73
Money market
accounts 65,176 582 0.89 54,514 692 1.27 53,761 1,307 2.43
Certificates of
deposit 132,257 3,062 2.32 109,380 3,642 3.33 133,907 6,915 5.16
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total deposits 321,984 4,643 1.44 251,671 5,476 2.18 236,857 8,729 3.69
Other interest-
bearing liabilities 40,000 1,984 4.96 53,174 2,941 5.53 89,499 5,589 6.25
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing
liabilities 361,984 6,627 1.83 304,845 8,417 2.76 326,356 14,318 4.39
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 57,899 45,109 32,529
Other liabilities 4,390 3,246 5,078
-------- -------- --------
Total liabilities 424,273 353,200 363,963
Shareholders' equity 61,817 54,568 54,030
-------- -------- --------
Total liabilities
and shareholders'
equity $486,090 $407,768 $417,993
======== ======== ========
Net interest income $21,112 $18,346 $15,882
======= ======= =======
Interest rate spread 4.42% 4.28% 3.29%
====== ====== ======
Net interest margin 4.76% 4.83% 4.04%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 122.53% 124.62% 120.49%
====== ====== ======
Tax Equivalent
Adjustment $ 155 $ 302 $ 360
======= ======= =======
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available for sale, historical cost
balances were utilized, therefore, the yield information does not give effect to change in fair value
that are reflected as a component of shareholders' equity.
E-52
Yields Earned and Rates Paid
The following table sets forth for the periods and at the date indicated the
weighted average yields earned on the Company's assets, the weighted average
interest rates paid on the Company's liabilities, together with the net yield
on interest-earning assets on a tax equivalent basis.
At March 31, Year Ended March 31,
------------ ----------------------------
2004 2004 2003 2002
------ ------ ------ ------
Weighted average yield earned on:
Total net loans (1) 6.39% 6.53% 7.13% 7.91%
Mortgage-backed securities 4.06 4.65 4.34 5.40
Investment securities 3.40 3.14 5.76 6.70
All interest-earning assets (1) 5.70 5.73 6.49 7.19
Weighted average rate paid on:
Deposits 1.20 1.44 2.18 3.69
FHLB advances and other
borrowings 4.88 4.96 5.53 6.25
All interest-bearing liabilities 1.52 1.83 2.76 4.39
Interest rate spread (spread
between weighted average rate
on all interest-earning assets
and all interest-bearing
liabilities)(1) 4.18 3.90 3.73 2.81
Net interest margin (net
interest income(expense) as a
percentage of average interest-
earning assets)(1) 4.53 4.23 4.28 3.56
(1) Weighted average yield on total net loans excludes deferred loan fees.
E-53
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to:
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii)
changes in rate/volume (change in rate multiplied by change in volume).
Rate/volume variance is allocated based on the percentage relationship of
changes in volume and changes in rate to the total net change.
Year Ended March 31,
---------------------------------------------------------------------
2004 vs 2003 2003 vs 2002
------------------------------ -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due To Total
---------------- Increase ---------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- -------- ------ ---- --------
(In thousands)
Interest Income:
Mortgage loans $ (2,160) $ (541) $ (2,701) $ (1,803) $ (1,129) $ (2,932)
Non-mortgage loans 5,706 (1,040) 4,666 2,468 (738) 1,730
Mortgage-backed securities (713) 85 (628) (980) (456) (1,436)
Investment securities (1) 340 (655) (315) (106) (201) (307)
Daily interest-bearing 188 (135) 53 (95) (384) (479)
Other earning assets 23 (122) (99) 28 (41) (13)
-------- ------- -------- -------- -------- --------
Total interest income 3,384 (2,408) 976 (488) (2,949) (3,437)
-------- ------- -------- -------- -------- --------
Interest Expense:
Regular savings accounts 33 (52) (19) 57 (167) (110)
NOW accounts 368 (492) (124) 403 342 745
Money market accounts 119 (229) (110) 18 (634) (616)
Certificates of deposit 668 (1,248) (580) (1,114) (2,159) (3,273)
Other interest-bearing liabilities (675) (282) (957) (2,065) (582) (2,647)
-------- ------- -------- -------- -------- --------
Total interest expense 513 (2,303) (1,790) (2,701) (3,200) (5,901)
-------- ------- -------- -------- -------- --------
Net interest income (1) $ 2,871 $ (105) $ 2,766 $ 2,213 $ 251 $ 2,464
======== ======= ======== ======== ======== ========
(1) Taxable equivalent
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Company has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest rate sensitivity of the
Company's interest-earning assets. Interest rate sensitivity will increase by
retaining portfolio loans with interest rates subject to periodic adjustment
to market conditions and selling fixed-rate one- to four- family mortgage
loans with terms of more than 15 years. However, the Company may originate
fixed rate loans for investment when funded with long-term funds to mitigate
interest rate risk. The Company relies on retail deposits as its primary
source of funds. Management believes retail deposits reduce the effects of
interest rate fluctuations because they generally represent a stable source of
funds. As part of its interest rate risk management strategy, the Company
promotes transaction accounts and certificates of deposit with terms up to ten
years.
The Company has adopted a strategy that is designed to maintain or improve the
interest rate sensitivity of assets relative to its liabilities. The primary
elements of this strategy involve: the origination of adjustable rate loans or
purchase of adjustable rate mortgage-backed securities for its portfolio;
growing commercial, consumer and residential construction loans as a portion
of total net loans receivable because of their generally shorter terms and
higher yields than other one- to four-family residential mortgage loans;
matching asset and liability maturities; investing in short term
mortgage-backed and other securities; and the origination of fixed-rate loans
for sale in the secondary market and the retention of the related loan
servicing rights. This approach has remained consistent throughout the past
year as the Company has experienced a change in the mix of loans, deposits and
FHLB advances.
E-54
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect the Company's
earnings while decreases in interest rates may beneficially affect the
Company's earnings. To reduce the potential volatility of the Company's
earnings, management has sought to improve the match between asset and
liability maturities and rates, while maintaining an acceptable interest rate
spread. Pursuant to this strategy, the Company actively originates ARM loans
for retention in its loan portfolio. Fixed-rate mortgage loans with terms of
more than 15 years generally are originated for the intended purpose of resale
in the secondary mortgage market. The Company has also invested in adjustable
rate mortgage-backed securities to increase the level of short-term adjustable
assets. At March 31, 2004, ARM loans and adjustable rate mortgage-backed
securities constituted $217.9 million, or 62.8%, of the Company's total
combined mortgage loan and mortgage-backed securities portfolio. This
compares to ARM loans and adjustable rate mortgage-backed securities at March
31, 2003 that totaled $195.2 million, or 65.3%, of the Company's total
combined mortgage loan and mortgage-backed securities portfolio. Although the
Company has sought to originate ARM loans, the ability to originate and
purchase such loans depends to a great extent on market interest rates and
borrowers' preferences. Particularly in lower interest rate environments,
borrowers often prefer to obtain fixed rate loans.
The Company's mortgage servicing activities provide additional protection from
interest rate risk. The Company retains servicing rights on all mortgage
loans sold. As market interest rates rise, the fixed rate loans held in
portfolio diminish in value. However, the value of the servicing portfolio
tends to rise as market interest rates increase because borrowers tend not to
prepay the underlying mortgages, thus providing an interest rate risk hedge
versus the fixed rate loan portfolio. The loan servicing portfolio totaled
$133.5 million at March 31, 2004, including $3.4 million of purchased mortgage
servicing. The purchase of loan servicing replaced loan servicing balances
extinguished through prepayment of the underlying loans. The average balance
of the servicing portfolio was $130.3 million and produced loan servicing
income of $158,000 for the year ended March 31, 2004. See "Item 1. Business
-- Lending Activities -- Mortgage Loan Servicing."
Consumer loans, commercial loans and construction loans typically have shorter
terms and higher yields than permanent residential mortgage loans, and
accordingly reduce the Company's exposure to fluctuations in interest rates.
Adjustable interest rate consumer, commercial, construction and other loans
totaled $276.7 million or 65.8% of total gross loans at March 31, 2004 as
compared to $203.3 million or 60.0% at March 31, 2003. At March 31, 2004,
the construction, commercial, consumer and other loan portfolios amounted to
$93.0 million, $57.8 million, $28.5 million and $196.4 million, or 22.1%,
13.8%, 6.8% and 46.7% of total gross loans, respectively. See "Item 1.
Business -- Lending Activities -- Construction Lending" and " -- Lending
Activities -- Consumer Lending."
The Company also invests in short-term to medium-term U.S. Government
securities as well as mortgage-backed securities issued or guaranteed by U.S.
Government agencies. At March 31, 2004, the combined portfolio carried at
$33.6 million had an average term to repricing or maturity of 10.56 years,
excluding equity securities. See "Item 1. Business -- Investment
Activities."
A measure of the Company's exposure to differential changes in interest rates
between assets and liabilities is provided by the test required by OTS Thrift
Bulletin No. 13a, "Interest Rate Risk Management." This test measures the
impact on net interest income and on net portfolio value of an immediate
change in interest rates in 100 basis point increments. Using data compiled by
the OTS, the Company receives a report which measures interest rate risk by
modeling the change in net portfolio value ("NPV") over a variety of interest
rate scenarios. This procedure for measuring interest rate risk was developed
by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period). NPV is the present value of expected
cash flows from assets, liabilities and off-balance sheet contracts. Following
are the estimated impacts of immediate changes in interest rates at the
specified levels based on the latest OTS report dated December 31, 2003.
E-55
At December 31, 2003
-------------------------------------------------------------------
Net Portfolio Value Net Portfolio Value as a
----------------------------- ----------------------------------
Change Dollar Dollar Percent Percent of Present Value of Assets
In Rates Amount Change Change NPV Ratio Change
-------- ------- ------ ------- --------- --------
(Dollars in thousands)
300 bp $77,263 $295 0% 14.59% 8 bp
200 bp 77,666 698 +1 14.64 +14 bp
100 bp 77,717 749 +1 14.64 +13 bp
0 bp 76,968 - - 14.51 -
(100) bp 75,552 (1,417) (2) 14.25 (26) bp
(200) bp(1) - - - - -
(300) bp(1) - - - - -
(1) No minus 200-300 bp because the 3-month treasury bill was 0.95% at
December 31, 2003.
For example, the above table illustrates that an instantaneous 100 basis point
increase in market interest rates at December 31, 2003 would increase the
Company's NPV by approximately $749,000, or 1%, at that date. At December 31,
2002, an instantaneous 100 basis point increase in market interest rates would
have increased the Company's NPV by approximately $497,000, or 1%, at that
date. The $497,000 increase in the reduction of NPV to $749,000 at December
31, 2003 is the result of the impact of more adjustable loan balances in the
loan portfolio at December 31, 2003 as compared to December 31, 2002.
Certain assumptions used by the OTS in assessing the interest rate risk of
savings associations within its region were used in preparing the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates and the market values of certain assets under differing
interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Furthermore, in the event of a change in interest rates, expected
rates of prepayments on loans and early withdrawals from certificates could
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At March 31, 2004,
cash totaled $47.9 million, or 9.2%, of total assets. The Bank has a 35% of
total assets line of credit with the FHLB-Seattle to the extent the Bank
provides qualifying collateral and holds sufficient FHLB stock. At March 31,
2004, the Bank had $40.0 million of outstanding advances from the FHLB-Seattle
under an available credit facility of $180.3 million, limited to available
collateral.
Liquidity management is both a short- and long-term responsibility of the
Company's management. The Company adjusts its investments in liquid assets
based upon management's assessment of (i) expected loan demand, (ii) projected
loan sales, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits and (v) liquidity of its asset/liability management
program. Excess liquidity is invested generally in interest-bearing overnight
deposits and other short-term government and agency obligations. If the
Company requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral for borrowing at
the Federal Reserve Bank discount window. At March 31, 2004, the Bank's ratio
of cash and eligible investments to the sum of withdrawable savings and
borrowings due within one year was 17.89%.
E-56
The Company's primary investing activity is the origination of loans. During
the years ended March 31, 2004, 2003 and 2002, the Company originated $375.8
million, $298.4 million and $273.9 million of loans, respectively. At March
31, 2004, the Company had outstanding mortgage loan commitments of $3.6
million and undisbursed balance of mortgage loans closed of $31.2 million.
Consumer loan commitments totaled $1.4 million and unused lines of consumer
credit totaled $18.6 million at March 31, 2004. Commercial real estate loan
commitments totaled $3.4 and undisbursed balance of commercial real estate
loans closed was $13.9 million at March 31, 2004. Commercial loan commitments
totaled $600,000 and unused commercial lines of credit totaled $29.4 million
at March 31, 2004. The Company anticipates that it will have sufficient funds
available to meet current loan commitments. Certificates of deposit that are
scheduled to mature in less than one year from March 31, 2004 totaled $86.3
million. Historically, the Company has been able to retain a significant
amount of its deposits as they mature.
At March 31, 2004, scheduled maturities of certificates of deposit, FHLB
advances, commitments to originate loans, undisbursed loan funds, unused lines
of credit, standby letters of credit and future operating minimum lease
commitments were as follows:
Within 1-3 4-5 Over Total
(In thousands) 1 year Years Years 5 Years Balance
------ ----- ----- ------- -------
Certificates of deposit $ 86,272 $32,422 $10,241 $ 3,574 $132,509
FHLB advances - 35,000 5,000 - 40,000
Commitments to originate
loans
Adjustable 7,886 - - - 7,886
Fixed 1,090 - - - 1,090
Undisbursed loan funds,
unused lines of credit
and standby letters of
credit 85,649 7,647 - - 93,296
Operating leases 891 1,629 1,531 2,393 6,444
-------- ------- ------- ------- --------
Total other contractual
obligations $181,788 $76,698 $16,772 $ 5,967 $281,225
======== ======= ======= ======= ========
The Bank's primary sources of funds are deposits, FHLB borrowings, proceeds
from the principal and interest payments on loans and securities. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit flows, prepayment of mortgage loans and
mortgage-backed securities are greatly influenced by general interest rates,
economic conditions and competition.
The increase in interest rates during the fiscal year 2004 has created an
interest rate environment that caused the demand for fixed rate single family
loans and repayment of existing single family mortgage loans and
mortgage-backed securities to be less than in prior year. The Company's
business plan emphasizes the sale of fixed rate mortgages as part of its
interest rate risk strategy. The decrease in the cash flows from operating
activities of loans sold to $50.4 million for the fiscal 2004 compared to
$55.8 million for fiscal 2003 reflects this strategy under the changing
interest rate environment.
The Bank has experienced growth in deposit accounts due to organic growth and
the $105.1 million of deposits acquired in the acquisition of Today's Bancorp.
The schedule Deposit Flows on page 23 reflects this net increase in cash flows
from deposits of $88.4 million for fiscal 2004 as compared to a $61.1 million
increase in net cash flows for the same period in the prior year. The higher
interest rate certificates of deposit have been allowed to runoff.
Should the Bank require funds beyond its ability to generate them internally,
additional funds are available through the use of FHLB borrowings. At March
31, 2004 advances from FHLB totaled $40.0 million and the Bank had additional
borrowing capacity available of $140.3 million from the FHLB, subject to
collateral limitations. At March 31, 2004 the Bank's available borrowing
line subject to collateral limitations was $40.6 million.
Sources of capital and liquidity for the Company on a stand-alone basis
include distributions from the Bank and the issuance of debt or equity.
Dividends and other capital distributions from the Bank are subject to
regulatory restrictions.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of March 31, 2004, the Bank complied with all regulatory capital
requirements as of that date with tangible, core and risk-based capital ratios
of 9.81%, 9.81% and 12.78%, respectively. For a detailed discussion of
regulatory capital requirements, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."
E-57
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of
money over time due to inflation. The primary impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, Amendments of Statement No. 133 on Derivative Instruments and
Hedging. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
The Statement was effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
Implementation of the Statement on July 1, 2003 did not have a significant
impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This SFAS
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the SFAS was effective July
1, 2003, and implementation had no significant impact on the consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46 Consolidation
of Variable Interest Entities, and Interpretation of Accounting Research
Bulletin No. 51. FIN No. 46 establishes accounting guidance for consolidation
of variable interest entities ("VIE") that function to support the activities
of the primary beneficiary. For the Company, the provisions of FIN No. 46 are
effective for the year ending March 31, 2005 and implementation is not
expected to have a significant impact on the consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
Quantitative Aspects of Market Risk. The Company does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments. Furthermore, the
Company is not subject to foreign currency exchange rate risk or commodity
price risk. For information regarding the sensitivity to interest rate risk
of the Company's interest-earning assets and interest-bearing liabilities, see
the tables under "Item 1. Business -- Lending Activities -- Loan Portfolio
Analysis," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Certificates of Deposit by Rates and Maturities" contained
herein.
Qualitative Aspects of Market Risk. The Company's principal financial
objective is to achieve long-term profitability while limiting its exposure to
fluctuating market interest rates. The Company intends to reduce risk where
appropriate but accept a degree of risk when warranted by economic
circumstances. The Company has sought to reduce the exposure of its earnings
to changes in market interest rates by attempting to manage the mismatch
between asset and liability maturities and interest rates. The principal
element in achieving this objective is to increase the interest rate
sensitivity of the Company's interest-earning assets. Interest rate
sensitivity will increase by retaining portfolio loans with interest rates
subject to periodic adjustment to market conditions and selling fixed-rate
one- to four- family mortgage loans with terms of more than 15 years.
Interest rates on residential one- to four- family mortgage loan applications
are typically locked during the application stage for periods ranging from 30
to 90 days, the most typical period being 45 days. These loans are locked
with FHLMC under a best-efforts delivery program. The Company makes every
effort to deliver these loans before their rate locks expire. This
arrangement requires the Company to deliver the loans to FHLMC within ten days
of funding. Delays in funding the loans can require a lock extension. The
cost of a lock extension at times is borne by the borrower and at times by the
Company. These lock extension costs paid by the Company are not expected to
have a material impact to operations. This activity is managed daily.
E-58
Consumer and commercial loans are originated and held in portfolio as the
short term nature of these portfolio loans match durations more closely with
the short term nature of retail deposits such as NOW accounts, money market
accounts and savings accounts. The Company relies on retail deposits as its
primary source of funds. Management believes retail deposits reduce the
effects of interest rate fluctuations because they generally represent a more
stable source of funds. As part of its interest rate risk management
strategy, the Company promotes transaction accounts and certificates of
deposit with longer terms to maturity. Except for immediate short term cash
needs, and depending on the current interest rate environment, FHLB advances
will usually be of longer term. For additional information, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at March 31, 2004. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.
One After After
Within Year 3 Years 5 years Beyond
Average One to 3 to 5 to 10 10 Fair
Rate Year Years Years Years Years Total Value
------- ------ ----- ------- ------- ------ ------- -----
(Dollars in thousands)
Interest-Sensitive Assets:
Loans receivable 6.39% $229,888 $105,958 $59,485 $15,871 $9,124 $420,326 $429,905
Mortgage-backed securities 4.06 6,255 2,087 4,782 - - 13,124 13,198
Investments and other
interest-earning assets 2.15 52,647 8,664 1,173 1,243 1,490 65,217 65,217
FHLB stock 3.93 1,207 2,414 2,414 - - 6,035 6,035
Interest-Sensitive
Liabilities:
NOW accounts 0.20 13,144 26,287 26,287 - - 65,718 65,718
High-yield checking 1.30 9,934 19,867 19,867 - - 49,668 49,668
Non-interest checking
accounts - 12,380 24,761 24,761 - - 61,902 61,902
Savings accounts 0.55 5,867 11,734 11,734 - - 29,335 29,335
Money market accounts 0.95 13,997 27,994 27,994 - - 69,985 69,985
Certificate accounts 2.49 86,272 32,422 10,241 3,518 56 132,509 131,890
FHLB advances 4.88 35,000 - 5,000 - - 40,000 42,011
Off-Balance Sheet Items:
Commitments to extend
credit - 8,963 - - - - 8,963 8,963
Unused lines of credit - 93,123 - - - - 93,123 93,123
E-59
Item 8. Financial Statements and Supplementary Data
-----------------------------------------------------
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Consolidated Financial Statements for Years Ended March 31, 2004, 2003 and
2002 Independent Auditor's Reports
TABLE OF CONTENTS
------------------------------------------------------------------------------
Page
Independent Auditor's Reports 61
Consolidated Balance Sheets as of March 31, 2004 and 2003 63
Consolidated Statements of Income for the Years Ended March 31,
2004, 2003 and 2002 64
Consolidated Statements of Shareholders' Equity for the Years Ended
March 31, 2004, 2003 and 2002 65
Consolidated Statements of Cash Flows for the Years Ended March 31,
2004, 2003 and 2002 66
Notes to Consolidated Financial Statements 67
E-60
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Riverview
Bancorp, Inc. and Subsidiary as of March 31, 2004 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Riverview Bancorp, Inc. and
Subsidiary as of March 31, 2004, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/S/ McGladrey & Pullen LLP
Tacoma, Washington
April 23, 2004
E-61
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Riverview Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Riverview
Bancorp, Inc. and Subsidiary as of March 31, 2003, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years ended March 31, 2003 and 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Riverview Bancorp, Inc. and
Subsidiary as of March 31, 2003, and the results of their operations and their
cash flows the years ended March 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.
/S/ Deloitte & Touche LLP
Portland, Oregon
May 2, 2003
E-62
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
(In thousands, except share data) 2004 2003
----------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $32,334
and $42,464) $ 47,907 $ 60,858
Loans held for sale 407 1,501
Investment securities available for sale, at fair
value (amortized cost of $32,751 and $20,265) 32,883 20,426
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $2,591 and $3,403) 2,517 3,301
Mortgage-backed securities available for sale, at
fair value (amortized cost of $10,417 and $12,669) 10,607 13,069
Loans receivable (net of allowance for loan losses
of $4,481 and $2,739) 381,127 300,310
Real estate owned 742 425
Prepaid expenses and other assets 1,289 1,052
Accrued interest receivable 1,786 1,492
Federal Home Loan Bank stock, at cost 6,034 5,646
Premises and equipment, net 9,735 9,505
Deferred income taxes, net 2,736 1,321
Mortgage servicing rights, net 624 629
Goodwill 9,214 -
Core deposit intangible, net 758 369
Bank owned life insurance 12,121 -
--------- ---------
TOTAL ASSETS $ 520,487 $ 419,904
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 409,115 $ 320,742
Accrued expenses and other liabilities 5,862 4,364
Advance payments by borrowers for taxes and insurance 328 287
Federal Home Loan Bank advances 40,000 40,000
--------- ---------
Total liabilities 455,305 365,393
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000
authorized, issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000 authorized,
issued and outstanding:
2004 - 4,974,979 issued, 4,777,911 outstanding 50 46
2003 - 4,585,543 issued, 4,358,704 outstanding
Additional paid-in capital 40,187 33,525
Retained earnings 26,330 22,389
Unearned shares issued to employee stock ownership trust (1,598) (1,804)
Unearned shares held by the management recognition
and development plan - (15)
Accumulated other comprehensive income 213 370
--------- ---------
Total shareholders' equity 65,182 54,511
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 520,487 $ 419,904
========= =========
See notes to consolidated financial statements.
E-63
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands, except share data) 2004 2003 2002
------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans receivable $ 25,634 $ 23,670 $ 24,872
Interest on investment securities 478 200 327
Interest on mortgage-backed securities 613 1,241 2,677
Other interest and dividends 859 1,350 1,964
-------- -------- --------
Total interest income 27,584 26,461 29,840
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits 4,643 5,475 8,729
Interest on borrowings 1,984 2,942 5,589
-------- -------- --------
Total interest expense 6,627 8,417 14,318
-------- -------- --------
Net interest income 20,957 18,044 15,522
Less provision for loan losses 210 727 1,116
-------- -------- --------
Net interest income after provision for
loan losses 20,747 17,317 14,406
-------- -------- --------
NON-INTEREST INCOME:
Fees and service charges 4,324 4,263 3,707
Asset management fees 906 742 745
Gain on sale of loans held for sale 954 1,552 1,067
(Loss) gain on sale/impairment of securities - (2,138) 863
Gain on sale of other real estate owned 49 55 34
Loan servicing income (expense) 158 (619) 57
Gain on sale of land and fixed assets 3 - 4
Bank owned life insurance 121 - -
Other 74 83 74
-------- -------- --------
Total non-interest income 6,589 3,938 6,551
-------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits 9,910 8,395 7,763
Occupancy and depreciation 2,900 2,481 2,199
Data processing 917 834 776
Amortization of core deposit intangible 430 327 327
Advertising and marketing expense 772 605 540
FDIC insurance premium 64 47 51
State and local taxes 426 383 402
Telecommunications 269 225 259
Professional fees 501 399 346
Other 1,383 1,212 1,290
-------- -------- --------
Total non-interest expense 17,572 14,908 13,953
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 9,764 6,347 7,004
PROVISION FOR FEDERAL INCOME TAXES 3,210 1,988 2,136
-------- -------- --------
NET INCOME $ 6,554 $ 4,359 $ 4,868
======== ======== ========
Earnings per common share:
Basic $ 1.41 $ 1.00 $ 1.06
Diluted 1.39 0.99 1.06
Weighted average number of shares outstanding:
Basic 4,640,485 4,365,855 4,572,253
Diluted 4,714,329 4,424,733 4,612,468
See notes to consolidated financial statements.
E-64
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands, except share data)
Unearned
Shares
Issued to
Employee Unearned Accumulated
Common Stock Additional Stock Shares Other
----------------- Paid-In Retained Ownership Issued to Comprehensive
Shares Amount Capital Earnings Trust MRDP Income (Loss) Total
-------- ------ --------- -------- -------- -------- ------------ -------
Balance March 31,
2001 4,655,040 $ 50 $38,687 $17,349 $ (2,217) $ (762) $ (386) $ 52,721
Cash Dividends
($0.44 per
share) - - - (2,009) - - - (2,009)
Exercise of
stock options 22,345 - 91 - - - - 91
Stock repurchased
and retired (268,700) (3) (3,120) - - - - (3,123)
Earned ESOP
shares 24,633 - 77 - 207 - - 284
Earned MRDP
shares 25,138 - (10) - - 544 - 534
---------- ------ -------- -------- -------- ----- ------ -------
4,458,456 47 35,725 15,340 (2,010) (218) (386) 48,498
Comprehensive
income:
Net income - - - 4,868 - - - 4,868
Other comprehensive
income:
Unrealized holding
gain on
securities of
$881 (net of $454
tax effect) less
reclassification
adjustment for net
gains included
in net income of
$570 (net of $293
tax effect) - - - - - - 311 311
-------
Total comprehensive
income - - - - - - - 5,179
---------- ------ -------- -------- -------- ----- ------ -------
Balance March 31,
2002 4,458,456 47 35,725 20,208 (2,010) (218) (75) 53,677
Cash dividends
($0.50 per
share) - - - (2,178) - - - (2,178)
Exercise of
stock options 46,577 - 417 - - - - 417
Stock repurchased
and retired (196,100) (1) (2,881) - - - - (2,882)
Earned ESOP
shares 24,633 - 166 - 206 - - 372
Tax benefit, stock
option and MDRP - - 98 - - - - 98
Earned MRDP
shares 25,138 - - - - 203 - 203
---------- ------ -------- -------- -------- ----- ------ -------
4,358,704 46 33,525 18,030 (1,804) (15) (75) 49,707
Comprehensive
income:
Net income - - - 4,359 - - - 4,359
Other comprehensive
income:
Unrealized holding
loss on
securities of
$966 (net of $498
tax effect) less
reclassification
adjustment for
net losses
included in net
income of $1,411
(net of $727 tax
effect) - - - - - - 445 445
-------
Total comprehensive
income - - - - - - - 4,804
--------- ------ ------- ------- -------- ----- ------ -------
Balance March 31,
2003 4,358,704 46 33,525 22,389 (1,804) (15) 370 54,511
Cash dividends
($0.56 per
share) - - - (2,613) - - - (2,613)
Exercise of
stock options 40,281 1 484 - - - - 485
Stock repurchased
and retired (81,500) (1) (1,509) - - - - (1,510)
Stock issued in
connection with
acquisition
(Note 2) 430,655 4 7,343 7,347
Earned ESOP
shares 24,633 - 271 - 206 - - 477
Tax benefit,
stock option
and MDRP - - 73 - - - - 73
Earned MRDP
shares 5,138 - - - - 15 - 15
--------- ------ ------- ------- -------- ----- ------ -------
4,777,911 50 40,187 19,776 (1,598) - 370 58,785
Comprehensive
income:
Net income - - - 6,554 - - - 6,554
Other comprehensive
income:
Unrealized holding
loss on
securities of
$157 (net of $81
tax effect) - - - - - - (157) (157)
-------
Total comprehensive
income - - - - - - - 6,397
--------- ------ ------- ------- -------- ----- ------ -------
Balance March 31,
2004 4,777,911 $ 50 $40,187 $26,330 $ (1,598) $ - $ 213 $65,182
========= ====== ======= ======= ======== ===== ====== =======
See notes to consolidated financial statements.
E-65
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,554 $ 4,359 $ 4,868
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,157 2,108 1,623
Mortgage servicing rights valuation adjustment (307) 320 44
Provision for loan losses 210 727 1,116
Provision (benefit) for deferred income taxes 421 (942) 89
Noncash expense related to ESOP 477 372 284
Noncash expense related to MRDP 15 203 544
Noncash expense related to REO donation 61 - -
Increase (decrease) in deferred loan
origination fees, net of amortization 759 728 (79)
Federal Home Loan Bank stock dividend (229) (329) (342)
Origination of loans held for sale (50,472) (55,771) (36,959)
Proceeds from sales of loans held for sale 51,700 56,311 35,686
Net (gain) loss on loans held for sale, sale
of real estate owned, mortgage-backed
securities, investment securities and premises
and equipment (852) 582 (1,941)
Changes in assets and liabilities:
Increase (decrease) in prepaid expenses and
other assets, net of acquisition 69 (463) 866
Increase (decrease) in accrued interest
receivable (294) 280 417
Increase in accrued expenses and other
liabilities, net of acquisition 521 173 2
--------- --------- ---------
Net cash provided by operating activities 10,790 8,658 6,218
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (325,366) (242,620) (236,904)
Principal repayments/refinance on loans 329,443 227,101 203,466
Proceeds from call, maturity, or sale of
investment securities available for sale 6,250 1,518 2,500
Principal repayments on investment securities
available for sale - - 4,641
Purchase of investment securities available
for sale (12,490) (5,000) -
Purchase of mortgage-backed securities
available for sale (4,937) - (4,967)
Proceeds from sale of mortgage-backed
securities available for sale - - 25,944
Principal repayments on mortgage-backed
securities available for sale 7,690 23,728 25,754
Principal repayments on mortgage-backed
securities held to maturity 782 1,084 2,017
Principal repayments on investment securities
held to maturity - - 861
Purchase of premises and equipment (307) (33) (1,835)
Purchase of Federal Home Loan Bank stock - - (543)
Acquisition, net of cash received 7,206 - -
Additions to real estate owned (546) - -
Purchase of bank-owned life insurance (12,000) - -
Proceeds from sale of real estate owned and
premises and equipment 749 1,915 2,264
--------- --------- ---------
Net cash (used in) provided by
investing activities (3,526) 7,693 23,198
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposit accounts (16,740) 61,052 (35,833)
Dividends paid (2,490) (2,126) (2,009)
Repurchase of common stock (1,510) (2,882) (3,123)
Proceeds from Federal Home Loan Bank advances - 5,000 23,300
Repayment of Federal Home Loan Bank advances - (39,500) (28,300)
Net increase in advance payments by borrowers 40 54 15
Proceeds from exercise of stock options 485 417 91
--------- --------- ---------
Net cash (used in) provided by financing
activities (20,215) 22,015 (45,859)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (12,951) 38,366 (16,443)
CASH, BEGINNING OF YEAR 60,858 22,492 38,935
--------- --------- ---------
CASH, END OF YEAR $ 47,907 $ 60,858 $ 22,492
========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 6,741 $ 8,666 $ 14,610
Income taxes 3,070 2,912 2,025
NONCASH INVESTING AND FINANCING ACTIVITIES:
Mortgage loans securitized and classified as
mortgage-backed securities available
for sale $ - $ - $ 40,347
Transfer of loans to real estate owned 340 1,527 2,373
Dividends declared and accrued in other
liabilities 668 545 494
Fair value adjustment to securities
available for sale (238) 674 472
Income tax effect related to fair value
adjustment 81 (229) (161)
Common stock issued upon business combination 7,347 - -
See notes to consolidated financial statements.
E-66
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements of
Riverview Bancorp, Inc. and Subsidiary (the "Company") include all he
accounts of Riverview Bancorp, Inc. and the consolidated accounts of its
wholly-owned subsidiary, Riverview Community Bank (the "Bank"), the Bank's
wholly-owned subsidiary, Riverview Services, Inc., and the Bank's majority
owned subsidiary, Riverview Asset Management Corp. All inter-company
transactions and balances have been eliminated in consolidation.
Nature of Operations - The Bank is a thirteen branch community-oriented
financial institution operating in rural and suburban communities in southwest
Washington State. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such funds, together with other
borrowings, to invest in various consumer-based real estate loans, other
consumer and commercial loans, investment securities and mortgage-backed
securities.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America ("generally accepted accounting
principles" or "GAAP"), requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of related revenue and expense during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and the
valuation of mortgage servicing rights, goodwill, core deposit intangibles and
deferred tax assets.
Loans - Loans are stated at the amount of unpaid principal, reduced by
deferred loan origination fees and an allowance for loan losses. Interest on
loans is accrued daily based on the principal amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when they are past due 90 days as to either principal or
interest, unless they are well secured and in the process of collection. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal balance on a cash-basis method, until the
loans qualify for return to accrual status. Loans are returned to accrual
status when all principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and amortized as an adjustment of the yield of the related loan.
Securities - In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, investment securities are classified as held to maturity where the
Company has the ability and positive intent to hold them to maturity.
Investment securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Unrealized
losses on securities held to maturity or available for sale due to
fluctuations in fair value are recognized when it is determined that an other
than temporary decline in value has occurred. Investment securities bought and
held principally for the purpose of sale in the near term are classified as
trading securities. Securities that the Company intends to hold for an
indefinite period, but not necessarily to maturity are classified as available
for sale. Such securities may be sold to implement the Bank's asset/liability
management strategies and in response to changes in interest rates and similar
factors, and certain equity. Securities available for sale are reported at
fair value. Unrealized gains and losses, net of related deferred tax effect,
are reported as net amount in a separate component of shareholders' equity
entitled "accumulated other comprehensive income (loss)." Realized gains and
losses on securities available for sale, determined using the specific
identification method, are included in earnings. Amortization of premiums and
accretion of discounts are recognized in interest income over the period to
maturity.
Real Estate Owned ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken based upon detailed analysis of
the fair value of collateral underlying loans on which the Company is in the
process of foreclosing. Such collateral is transferred into REO at the lower
of recorded cost or fair value less estimated costs of disposal.
Subsequently, properties are evaluated and for any additional declines in
value, the Company writes down the REO directly and charges operations for the
diminution in value. The amounts the Company will ultimately recover from REO
may differ from the amounts used in arriving at the net carrying value of
these assets because of future market factors beyond the Company's control or
because of changes in the Company's strategy for the sale of the property.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level sufficient to provide for probable loan losses based on evaluating known
and inherent risks in the loan portfolio. The allowance is provided based upon
management's continuing analysis of the pertinent factors underlying the
quality of the loan portfolio. These factors include
E-67
changes in the size and composition of the loan portfolio, delinquency levels,
actual loan loss experience, current economic conditions, and detailed
analysis of individual loans for which full collectibility may not be assured.
The detailed analysis includes techniques to estimate the fair value of loan
collateral and the existence of potential alternative sources of repayment.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio. The appropriate
allowance level is estimated based upon factors and trends identified by
management at the time the consolidated financial statements are prepared.
When available information confirms that specific loans or portions thereof
are uncollectible, identified amounts are charged against the allowance for
loan losses. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not demonstrated the ability or intent to
bring the loan current; the Bank has no recourse to the borrower, or if it
does, the borrower has insufficient assets to pay the debt; the estimated fair
value of the loan collateral is significantly below the current loan balance,
and there is little or no near-term prospect for improvement.
In accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, An amendment of SFAS No. 114, a loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts (principal and interest) due according to the contractual terms of the
loan agreement. Large groups of smaller balance homogenous loans such as
consumer secured loans, residential mortgage loans and consumer unsecured
loans are collectively evaluated for potential loss. When a loan has been
identified as being impaired, the amount of the impairment is measured by
using discounted cash flows, except when, as a practical expedient, the
current fair value of the collateral, reduced by costs to sell, is used. When
the measurement of the impaired loan is less than the recorded investment in
the loan (including accrued interest, net deferred loan fees or costs, and
unamortized premium or discount), an impairment is recognized by creating or
adjusting an allocation of the allowance for loan losses.
A provision for loan losses is charged against income and is added to the
allowance for loan losses based on regular assessments of the loan portfolio.
The allowance for loan losses is allocated to certain loan categories based on
the relative risk characteristics, asset classifications and actual loss
experience of the loan portfolio. While management has allocated the allowance
for loan losses to various loan portfolio segments, the allowance is general
in nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market factors
beyond the Bank's control. These factors may result in losses or recoveries
differing significantly from those provided in the consolidated financial
statements. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan loses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
Federal Home Bank Loan Bank Stock The Bank, as a member of Federal Home Loan
Bank (FHLB), is required to maintain an investment in capital stock of the
FHLB in an amount equal to or greater of 1% of its outstanding home loans or
5% of advances from the FHLB. The recorded amount of FHLB stock equals its
fair value because the shares can only be redeemed by the FHLB at the $100
per share value.
Allowance for Unfunded Loan Commitments - The allowance for unfunded loan
commitments is maintained at a level believed by management to be sufficient
to absorb estimated probable losses related to these unfunded credit
facilities. The determination of the adequacy of the allowance is based on
periodic evaluations of the unfunded credit facilities including an assessment
of the probability of commitment usage, credit risk factors for loans
outstanding to these same customers, and the terms and expiration dates of the
unfunded credit facilities. The allowance for unfunded loan commitments is
included in other liabilities on the consolidated balance sheets, with changes
to the balance charged against the allowance for loan losses.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Leasehold improvements are amortized over the term
of the lease or the estimated useful life of the improvements, whichever is
less. Gains or losses on dispositions are reflected in earnings. Depreciation
is generally computed on the straight-line method over the estimated useful
lives as follows:
Buildings and improvements 3 to 40 years
Furniture and equipment 3 to 20 years
Leasehold improvements 15 to 25 years
Loans Held for Sale - The Company identifies loans held for sale at the time
of origination and they are carried at the lower of aggregate cost or net
realizable value. Market values are derived from available market quotations
for comparable pools of mortgage loans. Adjustments for unrealized losses, if
any, are charged to income.
E-68
Gains or losses on sales of loans held for sale are recognized at the time of
the sale and are determined by the difference between the net sales proceeds
and the allocated basis of the loans sold. The Company capitalizes mortgage
servicing rights ("MSR's") acquired through either the purchase of MSR's, the
sale of originated mortgage loans or the securitization of mortgage loans with
servicing rights retained. Upon sale of mortgage loans held for sale the total
cost of the mortgage loans designated for sale is allocated to mortgage loans
with and without MSR's based on their relative fair values. The MSR's are
included as a component of gain on sale of loans. The MSR's are amortized in
proportion to and over the estimated period of the net servicing life. This
amortization is reflected as a component of loan servicing income (expense).
Mortgage Servicing - Fees earned for servicing loans for the Federal Home Loan
Mortgage Corporation ("FHLMC") are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
MSR's are the rights to service loans. Loan servicing includes collecting
payments, remitting funds to investors, insurance companies and tax
authorities, collecting delinquent payments, and foreclosing on properties
when necessary.
The Company records its originated mortgage servicing rights at fair values in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, which requires the Company
to allocate the total cost of all mortgage loans sold to the MSR's and the
loans (without the MSR's) based on their relative fair values if it is
practicable to estimate those fair values. The Company stratifies its MSR's
based on the predominant characteristics of the underlying financial assets
including coupon interest rate and contractual maturity of the mortgage. An
estimated fair value of MSR's is determined quarterly using a discounted cash
flow model. The model estimates the present value of the future net cash
flows of the servicing portfolio based on various factors, such as servicing
costs, servicing income, expected prepayments speeds, discount rate, loan
maturity and interest rate. The effect of changes in market interest rates on
estimated rates of loan prepayments represents the predominant risk
characteristic underlying the MSR's portfolio. The Company is amortizing the
MSR's assets, which totaled $624,000 and $629,000 at March 31, 2004 and 2003,
respectively, over the period of estimated net servicing income.
The MSR's are periodically reviewed for impairment based on their fair value.
The fair value of the MSR's, for the purposes of impairment, is measured using
a discounted cash flow analysis based on market adjusted discount rates,
anticipated prepayment speeds, mortgage loan term and coupon rate. Market
sources are used to determine prepayment speeds and the Office of Thrift
Supervision ("OTS") is the source for ancillary income, servicing cost and
pre-tax required yield. Impairment losses are recognized through a valuation
allowance for each impaired stratum, with any associated provision recorded as
a component of loan servicing income (expense).
Goodwill - Goodwill represents costs in excess of net assets acquired, and
will be evaluated annually for impairment, in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.
Core Deposit Intangible - The core deposit intangible is being amortized to
non-interest expense using a straight line method and an accelerated method,
(based on expected attrition and cash flows of core deposit accounts
purchased) over ten years.
Advertising and Marketing Expense - Cost incurred for advertising,
merchandising, market research, community investment, travel and business
development are classified as marketing expense and are expensed as incurred.
Income Taxes - Income taxes are accounted for using the asset and liability
method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in the Company's income tax
returns. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation
allowances are established to reduce the net carrying amount of deferred tax
assets if it is determined to be more likely than not, that all or some
portion of the potential deferred tax asset will not be realized. The Company
files a consolidated federal income tax return. The Bank provides for income
taxes separately and remits to the Company amounts currently due.
Trust Assets - Assets held by Riverview Asset Management Corporation in a
fiduciary or agency capacity for Trust customers are not included in the
consolidated financial statements because such items are not assets of the
Company. Assets totaling $134.7 million and $114.8 million were held in trust
as of March 31, 2004 and 2003, respectively.
Earnings Per Share - The Company accounts for earnings per share in accordance
with SFAS No. 128, Earnings Per Share, which requires all companies whose
capital structure include dilutive potential common shares to make a dual
presentation of basic and diluted earnings per share for all periods
presented. Basic earnings per share is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period, excluding restricted stock. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and has been computed after
giving consideration to the weighted average diluted effect of the Company's
stock options and the shares issued under the Company's Management Recognition
and Development Plan ("MRDP").
Cash and Cash Flows - Cash includes amounts on hand, due from banks and
interest-earning deposits in other banks. Cash flows from interest-earning
deposits in other banks and deposits are reported net.
Stock-Based Compensation - At March 31, 2004, the Company had two stock option
plans, which are described further in Note 15. The Company accounts for these
plans under the recognition and measurement principles of Accounting
Principles
E-69
Board No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no stock-based compensation cost is reflected
in net income as all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
SFAS No. 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of
fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions:
Risk Free Expected Expected Expected
Interest Rate Life (yrs) Volatility Dividends
------------- --------- ---------- ---------
Fiscal 2004 4.00% 10.00 31.02% 3.07%
Fiscal 2003 4.01% 5.42 31.59% 3.23%
Fiscal 2002 5.14% 6.15 33.67% 2.92%
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. The weighted average grant-date
fair value of 2004, 2003 and 2002 awards was $5.47, $3.54 and $2.87,
respectively. Only stock options are considered in this calculation and not
MRDP shares. If the accounting provisions of the SFAS No. 123 had been
adopted, the effect on 2004, 2003 and 2002 net income would have been reduced
to the following pro forma amounts (dollars in thousands, except per share
amounts):
Year ended March 31,
--------------------------------
2004 2003 2002
------ ------ ------
Net income:
As reported $6,554 $4,359 $4,868
Deduct: Total stock based
compensation expense determined
under fair value based method for
all options, net of related tax
benefit 109 180 228
Pro forma 6,445 4,179 4,640
Earnings per common share - basic:
As reported $1.41 $1.00 $1.06
Pro forma 1.39 0.96 1.01
Earnings per common share -
fully diluted:
As reported $1.39 $0.99 $1.06
Pro forma 1.37 0.94 1.01
Employee Stock Ownership Plan ("ESOP") - The Company sponsors a leveraged
ESOP. The ESOP is accounted for in accordance with the American Institute of
Certified Public Accountants Statement of Position ("SOP") 93-6, Employer's
Accounting for Employee Stock Ownership Plans. Stock and cash dividends on
allocated shares are recorded as a reduction of additional paid in capital and
paid directly to plan participants or distributed directly to participants'
accounts. As shares are released, compensation expense is recorded equal to
the then current market price of the shares and the shares become available
for earnings per share calculations. The Company records cash dividends on
unallocated shares as a reduction of debt and accrued interest.
Reclassification - Certain 2003 and 2002 amounts have been reclassified in
order to conform to the 2004 presentation, with no impact on net income or
shareholders' equity as previously reported.
Business segments - The Company operates a single business segment. The
financial information that is used by the chief operating decision maker in
allocating resources and assessing performance is only provided for one
reportable segment as of March 31, 2004, 2003 and 2002.
Acquisitions - Acquisitions are accounted for under the purchase method of
accounting, which allocates costs to assets purchased and liabilities assumed
at their estimated fair market values. The results of operations subsequent
to the date of acquisition are included in the consolidated financial
statements of the Company.
Recently Issued Accounting Pronouncements - In April 2003, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 149, Amendments of
Statement No. 133 on Derivative Instruments and Hedging. This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The Statement was
effective for contracts entered into or
E-70
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. Implementation of the Statement on July 1, 2003 did not have
any impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This SFAS
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that certain freestanding financial instruments be reported as
liabilities in the balance sheet. For the Company, the SFAS was effective July
1, 2003, and implementation had no significant impact on the consolidated
financial statements.
In December 2003, the FASB issued Interpretation ("FIN") No. 46, Consolidation
of Variable Interest Entities, and Interpretation of Accounting Research
Bulletin No. 51. FIN No. 46 establishes accounting guidance for consolidation
of variable interest entities ("VIE") that function to support the activities
of the primary beneficiary. For the Company, the provisions of FIN No. 46 are
effective for the year ending March 31, 2005 and implementation is not
expected to have a significant impact on the consolidated financial
statements.
2. ACQUISITION
On July 18, 2003, the Company completed the acquisition of Today's Bancorp,
Inc. ("Today's Bancorp"). Each share of Today's Bancorp was exchanged for
0.826 shares of the Company's common stock, or $13.64 in cash, or a
combination thereof, resulting in the issuance of 430,655 new shares. Total
stock and cash consideration for Today's Bancorp's was $17.2 million. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the assets and liabilities of Today's Bancorp were recorded at
their respective fair values. Core deposit intangible is being amortized using
an accelerated method over ten years. Goodwill, the excess of the purchase
price over net fair value of the assets and liabilities acquired was recorded
at $9.2 million. The goodwill is not tax deductible because this was a
nontaxable transaction. The purchased assets and assumed liabilities were
recorded as follows: (dollars in thousands):
Assets
------
Cash $ 17,054
Investments 6,895
Building and equipment 1,130
Loans 85,427
Core deposit intangible 820
Goodwill 9,214
Other, net 1,768
---------
Total Assets 122,308
Liabilities
-----------
Deposits $(105,113)
---------
Net Acquisition costs $ 17,195
Less:
Stock issued in acquisition (7,347)
Cash Acquired (17,054)
---------
Cash used in acquisition, net
of cash acquired $ 7,206
=========
The following unaudited pro forma financials for the twelve months ended March
31, 2004 and 2003 assumes that the Today's Bancorp acquisition occurred as of
April 1, 2002, after giving effect to certain adjustments. The pro forma
results have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which occur in the future
or that would have occurred had the Today's Bancorp acquisition been
consummated on the date indicated.
Pro Forma Financial Information for
the Twelve Months Ended March 31,
2004 2003
-----------------------------------
(in thousands)
Net Interest Income $ 22,037 $ 23,276
Non-interest Income 6,687 4,270
Non-interest Expense 18,945 18,447
Net Income $ 6,698 $ 3,546
Earnings per common share:
Basic $ 1.41 $ 1.00
Diluted 1.39 0.99
E-71
3. RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain minimum
reserve balances either on hand or on deposit with the Federal Reserve Bank,
based on a percentage of deposits. The amounts of such balances for the years
ended March 31, 2004 and 2003 were approximately $832,000 and $9.1 million,
respectively.
4. INTEREST RATE RISK MANAGEMENT
The Company is engaged principally in gathering deposits supplemented with
Federal Home Loan Bank ("FHLB") advances and providing first mortgage loans to
individuals and commercial enterprises, commercial loans to businesses, and
consumer loans to individuals. At March 31, 2004 and 2003, the asset portfolio
consisted of fixed and variable rate interest-earning assets. Those assets
were funded primarily with short-term deposits and advances from the FHLB that
have market interest rates that vary over time. The shorter maturity of the
interest-sensitive liabilities indicates that the Company could be exposed to
interest rate risk because, generally in an increasing rate environment,
interest-bearing liabilities will be repricing faster at higher interest rates
than interest-earning assets, thereby reducing net interest income, as well as
the market value of long-term assets. Management is aware of this interest
rate risk and actively monitors such risk and manages it to the extent
practicable.
5. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2004
--------------
Trust Preferred $ 5,000 $ 19 $ - $ 5,019
Agency securities 11,000 194 - 11,194
Equity securities 12,700 - (300) 12,400
Municipal bonds 4,051 219 - 4,270
--------- --------- -------- ---------
Total $ 32,751 $ 432 $ (300) $ 32,883
========= ========= ======== =========
March 31, 2003
--------------
Trust Preferred $ 5,000 $ - $ (25) $ 4,975
Equity securities 12,700 - - 12,700
Municipal bonds 2,565 186 - 2,751
--------- --------- -------- ---------
Total $ 20,265 $ 186 $ (25) $ 20,426
========= ========= ======== =========
The fair value of temporarily impaired securities, the amount of unrealized
losses and the length of time these unrealized losses existed as of March 31,
2004 are as follows (in thousands):
12 months
Less than 12 months or longer Total
---------------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
------ ----------- ----- ---------- ----- ----------
Equity
securities $12,400 $(300) $ - $ - $12,400 $(300)
------- ----- ----- ------- ------- -----
Total
temporarily
impaired
securities $12,400 $(300) $ - $ - $12,400 $(300)
======= ===== ===== ======= ======= =====
The Company has evaluated these securities and has determined that the decline
in the value is temporary. The decline in value is not related to any company
or industry specific event. The Company anticipates full recovery of amortized
cost with respect to these securities at maturity or sooner in the event of a
more favorable market interest rate environment. The contractual maturities
of investment securities available for sale are as follows (in thousands):
Amortized Estimated
Cost Fair Value
---------- ------------
March 31, 2004
Due after one year through five years $ 12,414 $ 12,731
Due after five years through ten years 530 587
Due after ten years (1) 19,807 19,565
---------- ----------
Total $ 32,751 $ 32,883
========== ==========
(1) Includes equity securities amortized cost of $12,700 and estimated fair
value of $12,400.
E-72
Investment securities with an amortized cost of $16.5 million and $12.7
million and a fair value of $16.3 million and $12.7 million at March 31, 2004
and March 31, 2003, respectively, were pledged as collateral for advances at
the FHLB. Investment securities with an amortized cost of $753,000, and a fair
value of $760,000 at March 31, 2003 were pledged as collateral for government
public funds held by the Bank. The Bank pledged investment securities with an
amortized cost of $500,000 and a fair value of $504,000 at March 31, 2004, as
collateral for treasury tax and loan funds.
In the fourth quarter of fiscal 2003, the Company recognized a pre-tax
other-than-temporary impairment for investments in Federal Home Loan Mortgage
Corporation ("FHLMC") preferred stock and Federal National Mortgage
Association ("FNMA") preferred stock that totaled $2.3 million. The Company
accounts for these securities in accordance with SFAS No. 115. Under SFAS No.
115, if the decline in fair market value below cost is determined to be other
than temporary, the unrealized loss will be realized as expense on the
consolidated income statement. Based on a number of factors, including the
magnitude of the drop in the market value below the Company's cost and the
length of time the market value had been below cost, management concluded that
the decline in value was other than temporary at the end of the fourth quarter
of fiscal 2003. Accordingly, the pre-tax other-than-temporary impairment was
realized in the income statement, in the amount of $700,000 for FNMA preferred
stock and $1.6 million FHLMC preferred stock. A corresponding reduction in
unrealized losses in shareholders' equity was realized in fiscal 2003 in the
amount of $462,000 for FNMA preferred stock and $1.1 million for FHLMC
preferred stock.
The Company realized no gains or losses on sales of investment securities
available for sale in fiscal 2004 or fiscal 2002. The Company realized
$162,000 in gains on sales of investment securities available for sale in
fiscal 2003.
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
--------- ---------- ---------- ---------
March 31, 2004
--------------
Real estate mortgage
investment conduits $ 1,802 $ 55 $ - $ 1,857
FHLMC mortgage-backed
securities 332 8 - 340
FNMA mortgage-backed
securities 383 11 - 394
------- ----- ----- -------
Total $ 2,517 $ 74 $ - $ 2,591
======= ===== ===== =======
March 31, 2003
--------------
Real estate mortgage
investment conduits $ 1,803 $ 57 $ - $ 1,860
FHLMC mortgage-backed
securities 589 13 - 602
FNMA mortgage-backed
securities 909 32 - 941
------- ----- ----- -------
Total $ 3,301 $ 102 $ - $ 3,403
======= ===== ===== =======
Mortgage-backed securities held to maturity with an amortized cost of $1.8
million and $2.2 million and a fair value of $1.9 million and $2.3 million at
March 31, 2004 and 2003, respectively, were pledged as collateral for
governmental public funds held by the Bank. Mortgage-backed securities held to
maturity with an amortized cost of $332,000 and $385,000 and a fair value of
$341,000 and $399,000 at March 31, 2004 and March 31, 2003, respectively, were
pledged as collateral for treasury tax and loan funds held by the Bank. The
real estate mortgage investment conduits consist of FHLMC and FNMA securities.
E-73
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
March 31, 2004 Cost Fair Value
-------------- --------- ----------
Due in one year or less $ 8 $ 8
Due after one year through five years 34 36
Due after five years through ten years 7 8
Due after ten years 2,468 2,539
-------- -------
Total $ 2,517 $ 2,591
======== =======
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
March 31, 2004
--------------
Real estate mortgage
investment conduits $ 2,943 $ 72 $ - $ 3,015
FHLMC mortgage-backed
securities 7,086 104 - 7,190
FNMA mortgage-backed
securities 388 14 - 402
-------- ----- ------ --------
Total $ 10,417 $ 190 $ - $ 10,607
======== ===== ====== ========
March 31, 2003
--------------
Real estate mortgage
investment conduits $ 6,327 $ 100 $ (6) $ 6,421
FHLMC mortgage-backed
securities 5,811 286 - 6,097
FNMA mortgage-backed
securities 531 20 - 551
-------- ----- ------ --------
Total $ 12,669 $ 406 $ (6) $ 13,069
======== ===== ====== ========
The contractual maturities of mortgage-backed securities available for sale
are as follows (in thousands):
Amortized Estimated
March 31, 2004 Cost Fair Value
-------------- --------- ----------
Due in one year or less $ 16 $ 16
Due after one year through five years 2,722 2,789
Due after five years through ten years 4,736 4,782
Due after ten years 2,943 3,020
-------- --------
Total $ 10,417 $ 10,607
======== ========
Expected maturities of mortgage-backed securities held to maturity and
available for sale will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
Mortgage-backed securities available for sale with an amortized cost of $9.9
million and $11.9 million and a fair value of $10.1 million and $12.2 million
at March 31, 2004 and March 31, 2003, respectively, were pledged as collateral
for advances at the Federal Home Loan Bank, Seattle ("FHLB"). Mortgage-backed
securities with an amortized cost of $274,000 and a fair value of $283,000 at
March 31, 2003 were pledged as collateral for governmental public funds by the
Bank. Mortgage-backed securities available for sale with an amortized cost of
$105,000 and $316,000 and a fair value of $111,000 and $327,000 at March 31,
2004 and March 31, 2003, respectively, were pledged as collateral for treasury
tax and loan funds held by the Bank.
The Company realized gains on sale of mortgage-backed securities available for
sale of $863,000 in fiscal 2002 and none in fiscal year 2004 or 2003. The
Company realized no losses on sale of mortgage- backed securities available
for sale in fiscal 2004, 2003 and 2002.
E-74
7. LOANS RECEIVABLE
Loans receivable excluding loans held for sale consisted of the following (in
thousands):
March 31,
---------------------
2004 2003
-------- --------
Residential:
One- to- four family $ 44,194 $ 58,498
Multi-family 5,074 6,313
Construction:
One- to- four family 78,094 70,397
Multi-family - 2,100
Commercial real estate 1,453 4,531
Commercial 57,702 34,239
Consumer
Secured 26,908 23,458
Unsecured 1,689 1,334
Land 27,020 34,630
Commercial real estate 177,785 101,672
-------- --------
419,919 337,172
Less:
Undisbursed portion of loans 31,204 31,222
Deferred loan fees 3,107 2,901
Allowance for loan losses 4,481 2,739
-------- --------
Loans receivable, net $381,127 $300,310
======== ========
The Company originates residential real estate loans, commercial real estate,
multi-family real estate, commercial and consumer loans. Substantially all of
the mortgage loans in the Company's portfolio are secured by properties
located in Washington and Oregon. A further economic downturn in these areas
would likely have a negative impact on the Company's results of operations
depending on the severity of such downturn.
Loans receivable including loans held for sale, by maturity or repricing date,
were as follows (in thousands):
March 31,
---------------------
2004 2003
-------- --------
Adjustable rate loans:
Within one year $181,790 $155,289
After one but within three years 68,752 29,084
After three but within five years 26,145 18,662
After five but within ten years - 265
-------- --------
276,687 203,300
Fixed rate loans:
Within one year 48,098 34,360
After one but within three 37,206 26,647
After three but within five years 33,340 34,675
After five but within ten years 15,871 23,540
After ten years 9,124 16,151
-------- --------
143,639 135,373
-------- --------
$420,326 $338,673
======== ========
Mortgage loans receivable with adjustable rates primarily reprice based on the
one year U.S. Treasury index and reprice a maximum of 2% per year and up to 6%
over the life of the loan. The remaining adjustable rate loans reprice based
on the prime lending rate or the FHLB cost of funds index. Commercial loans
with adjustable rates primarily reprice based on the prime rate.
E-75
Aggregate loans to officers and directors, all of which are current, consist
of the following (in thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 315 $ 539 $ 813
Originations 753 368 184
Principal repayments (336) (592) (458)
------- ------- -------
Ending balance $ 732 $ 315 $ 539
======= ======= =======
8. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in
thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 2,739 $ 2,537 $ 1,916
Provision for losses 210 727 1,116
Charge-offs (1,182) (428) (439)
Recoveries 91 78 25
Allowance reclassified with
loan securitization - - (81)
Allowance transferred from
Today's Bancorp acquisition 2,639 - -
Net change in allowance for
unfunded loan commitments and
lines of credit (16) (175) -
------- ------- -------
Ending balance $ 4,481 $ 2,739 $ 2,537
======= ======= =======
Changes in the allowance for unfunded loan commitments and lines of credit
were as follows (in thousands):
Year Ended March 31,
--------------------------
2004 2003 2002
------- ------- -------
Beginning balance $ 175 $ - $ -
Net change in allowance for
unfunded loan commitments and
lines of credit 16 175 -
------- ------- -------
Ending balance $ 191 $ 175 $ -
======= ======= =======
The allowance for unfunded loan commitments is included in other liabilities
on the consolidated balance sheets.
At March 31, 2004, 2003 and 2002, the Company's recorded investment in
impaired loans was $1.3 million, $323,000 and $1.4 million respectively. None
of the impaired loans for March 31, 2004, 2003 or 2002 had specific valuation
allowance. 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 $1.2
million, $1.1 million, and $1.1 million during the years ended March 31, 2004,
2003 and 2002, respectively. Interest income recognized on impaired loans was
$44,000, $56,000 and $20,000 during the years ended March 31, 2004, 2003 and
2002, respectively. There were no loans past due 90 days or more and still
accruing interest at March 31, 2004 and 2003. At March 31, 2002, loans past
due 90 days or more and still accruing interest totaled $122,000.
E-76
9. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following (in thousands):
March 31,
-------------------------
2004 2003
-------- --------
Land $ 2,026 $ 2,026
Buildings and improvements 7,128 7,008
Leasehold improvements 1,396 927
Furniture and equipment 6,599 5,266
Subtotal 17,149 15,227
Less accumulated depreciation
and amortization (7,414) (5,722)
-------- --------
Total $ 9,735 $ 9,505
======== ========
Depreciation expense was $1.1 million, $1.0 million and $1.0 million for years
ended March 31, 2004, 2003 and 2002, respectively. The Company is obligated
under various noncancelable lease agreements for land and buildings that
require future minimum rental payments, exclusive of taxes and other charges,
as follows (in thousands):
Year ending March 31,
---------------------
2005 $ 891
2006 843
2007 786
2008 784
2009 747
After 2009 2,393
------
Total $6,444
======
Rent expense was $857,000, $634,000 and $619,000 for the years ended March 31,
2004, 2003 and 2002, respectively.
10. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in MSR's and the related
allowance for the periods indicated and other related financial data (in
thousands):
March 31,
-------------------------
2004 2003 2002
------ ------ ------
Balance at beginning of year, net $ 629 $ 912 $ 447
Additions 167 671 704
Amortization (479) (634) (195)
Change in valuation allowance 307 (320) (44)
------- ------- -------
Balance end of year, net $ 624 $ 629 $ 912
======= ======= =======
Valuation allowance at beginning
of year $ 413 $ 93 $ 49
Change in valuation allowance (307) 320 44
------- ------- -------
Valuation allowance balance at
end of year $ 106 $ 413 $ 93
======= ======= =======
The Company evaluates MSR's for impairment by stratifying MSR's based on he
predominant risk characteristics of the underlying financial assets. At March
31, 2004 and 2003, the MSR's fair value totaled $669,000 and $629,000,
respectively. The 2004 fair value was estimated using discount rate and a
range of PSA values (The Bond Market Association's standard prepayment values)
that ranged from 205 to 1,399.
Amortization expense for the net carrying amount of MSR's at March 31, 2004 is
estimated as follows (in thousands):
Year ending March 31,
---------------------
2005 $207
2006 136
2007 98
2008 91
2009 72
After 2009 20
----
Total $624
====
E-77
Mortgage loans serviced for others (in millions):
March 31,
-------------------------
2004 2003 2002
------ ------ ------
Total $ 133.5 $ 128.2 $ 123.6
======= ======= =======
The sensitivity analysis in the table below is hypothetical and should be used
with caution. As the figures indicate changes, in fair value based on a 25%
or 50%, decrease or increase in assumptions generally cannot be easily
extrapolated because the relationship of the change in the assumptions to the
change in fair value may not be linear. Also, in this table, the effect that
a change in a particular assumption may have on the fair value is calculated
without changing any other assumption. In reality, changes in one factor may
result in changes in another, which might magnify or counteract the
sensitivities (in thousands):
March 31, 2004
5 Year 7 Year 15 Year 30 Year
Mortgages Mortgages Mortgages Mortgages Total
--------- --------- --------- --------- ------
Fair Value of MSR's $ 34 $ 108 $ 199 $ 328 $ 669
Impact of changes in PSA
Impact on fair value of
25% decrease 6 23 42 80 151
Impact on fair value of
50% decrease 15 49 106 203 373
Impact on fair value of
25% increase (3) (11) (16) (39) (69)
Impact on fair value of
50% increase (6) (22) (29) (72) (129)
Impact of changes in discount
Future cash flows
discounted at 9.00% 9.00% 8.25% 8.25%
Impact on fair value of
25% decrease $ 3 $ 9 $ 14 $ 23 $ 49
Impact on fair value of
50% decrease 4 15 23 39 81
Impact on fair value of
25% increase - (1) (1) (7) (9)
Impact on fair value of
50% increase (1) (6) (8) (20) (35)
11. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $758,000 and $369,000 at March
31, 2004 and 2003, respectively. Amortization expense related to the core
deposit intangible during the year ended March 31, 2004, 2003 and 2002 totaled
$430,000, $327,000 and $327,000, respectively. During the year ended March 31,
2004, the Company had additions to core deposit intangibles totaling $820,000
in connection with the acquisition of Today's Bancorp (See Note 2).
Amortization expense for the net core deposit intangible at March 31, 2004 is
estimated to be as follows (in thousands):
Year Ending
March 31,
----------------
2005 $ 180
2006 116
2007 98
2008 83
2009 71
After 2009 210
-----
Total $ 758
=====
E-78
12. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following (dollars in thousands):
Weighted Weighted
Average March 31, Average March 31,
Account Type Rate 2004 Rate 2003
------------ -------- --------- -------- --------
NOW Accounts:
Non-interest-bearing 0.00% $ 61,902 0.00% $ 78,464
Regular 0.20 65,718 0.35 27,113
High yield checking 1.30 49,668 1.82 35,537
Money market 0.95 69,984 1.01 53,717
Savings accounts 0.55 29,334 0.75 24,855
Certificates of deposit 2.49 132,509 2.77 101,056
---- --------- ---- ---------
Total 1.20% $ 409,115 1.33% $ 320,742
==== ========= ==== =========
The weighted average rate is based on interest rates at the end of the period.
Certificates of deposit as of March 31, 2004, mature as follows (in
thousands):
Amount
--------
Less than one year $ 86,272
One year to two years 25,726
Two years to three years 6,696
Three years to four years 4,699
Four years to five years 5,542
After five years 3,574
--------
Total $132,509
========
Deposit accounts in excess of $100,000 are not insured by the Federal Deposit
Insurance Corporation ("FDIC"). Deposits with balances in excess of $100,000
totaled $186.2 million and $138.1 million at March 31, 2004 and 2003,
respectively.
Interest expense by deposit type was as follows (in thousands):
Year Ended March 31,
------------------------------
2004 2003 2002
------- ------- -------
NOW Accounts:
Regular $ 122 $ 138 $ 211
High yield checking 713 821 4
Money market 583 692 1,307
Savings accounts 163 182 292
Certificates of deposit 3,062 3,642 6,915
------- ------- -------
Total $ 4,643 $ 5,475 $ 8,729
======= ======= =======
13. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 2004, advances from FHLB, totaled $40.0 million with a weighted
average interest rate of 4.875%. The fixed rate borrowings of $35.0 million
had fixed interest rates ranging from 4.65% to 6.38%. The remaining $5.0
million adjustable rate advance had a weighted average interest rate of 1.26%,
which is based on 3 month London Interbank Offered Rate Index ('LIBOR") plus
11 basis points as quoted by the FHLB. The weighted average interest rate for
fixed and adjustable rate advances was 4.96%, 5.53% and 6.25% for the years
ended March 31, 2004, 2003 and 2002, respectively.
The Bank has a credit line with the FHLB equal to 35% of total assets, limited
by available collateral. At March 31, 2004, based on collateral values, the
Bank had additional borrowing commitments available of $40.6 million from the
FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge and
Security Agreements with the FHLB by certain investment and mortgage-backed
securities, FHLB stock owned by the Company, deposits with the FHLB, and
certain mortgages on deeds of trust securing such properties as provided in
the agreements with the FHLB. At March 31, 2004, loans carried at $69.1
million and investments and mortgage-backed securities carried at $16.3
million were pledged as collateral to the FHLB.
Payments required to service the Bank's FHLB advances during the next five
years ended March 31 are as follows: 2006 - $15.0 million; 2007 - $20.0
million; and 2008 - $5.0 million.
E-79
14. FEDERAL INCOME TAXES
Federal income tax provision for the years ended March 31 consisted of the
following (in thousands):
2004 2003 2002
------- ------- -------
Current $ 2,789 $ 2,930 $ 2,047
Deferred 421 (942) 89
------- ------- -------
Total $ 3,210 $ 1,988 $ 2,136
======= ======= =======
A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the years ended March 31 is as follows:
2004 2003 2002
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
ESOP market value adjustment 0.9 0.9 0.4
Interest income on municipal securities (0.4) (0.6) (0.7)
Dividend received deduction (0.6) (2.6) (2.8)
Other, net (1.1) (0.4) (0.4)
---- ---- ----
Effective federal income tax rate 32.8% 31.3% 30.5%
==== ==== ====
Taxes related to gains on sales of securities were none, $55,000 and $276,000
for the years ended March 31, 2004, 2003 and 2002, respectively.
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at March 31, 2004 and 2003
are as follows (in thousands):
2004 2003
------- -------
Deferred tax assets:
Deferred compensation $ 491 $ 436
Loan loss reserve 1,589 907
Core deposit intangible 365 328
Accrued expenses 208 137
Accumulated depreciation 54 129
Net operating loss carryforward 1,171 -
Net realized loss on securities available
for sale 782 782
Other 83 58
------- -------
Total deferred tax asset 4,743 2,777
------- -------
Deferred tax liabilities:
FHLB stock dividend (934) (851)
Tax qualified loan loss reserve (360) (47)
Purchase accounting (247) -
Net unrealized gain on securities available
for sale (109) (190)
Other (357) (368)
------- -------
Total deferred tax liability (2,007) (1,456)
------- -------
Deferred tax asset, net $ 2,736 $ 1,321
======= =======
At March 31, 2004, the Company had a taxable temporary difference of
approximately $760,000 that arose before 1987 (base-year tax reserve). In
accordance with SFAS No. 109, a deferred tax liability has not been recognized
for the temporary difference. Management does not expect this temporary
difference to reverse in the foreseeable future.
As a result of the acquisition of Today's Bancorp, Inc. net deferred tax
assets increased $1.8 million. The Company also has net operating loss
carryforwards of approximately $3.4 million for federal tax purposes due to
the acquisition of Today's Bancorp, Inc. Utilization of net operating losses,
which begin to expire at various times starting in 2019, may be subject to
certain limitations under Section 382 of the Internal Revenue Code.
The tax effects of certain tax benefits related to stock options are recorded
directly to shareholder's equity.
No valuation allowance for deferred tax assets was deemed necessary at March
31, 2004 or 2003 based upon the Company's anticipated future ability to
generate taxable income from operations.
E-80
15. EMPLOYEE BENEFITS PLANS
Retirement Plan - The Riverview Bancorp, Inc. Employees' Savings and Profit
Sharing Plan (the "Plan") is a defined contribution profit-sharing plan
incorporating the provisions of Section 401(k) of the Internal Revenue Code.
The plan covers all employees with at least six months and 500 hours of
service who are over the age of 18. The Company matches 50% of the employee's
elective contribution up to 3% of the employee's compensation. Company
expenses related to the Plan for the years ended March 31, 2004, 2003 and 2002
were $93,000, $88,000 and $76,000, respectively.
Directors Deferred Compensation Plan - Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. Executive and Senior Vice
Presidents of the Company may also defer salary into this plan. This
alternative is made available to them through a nonqualified deferred
compensation plan. The Company accrues annual interest on the unfunded
liability under the Directors Deferred Compensation Plan based upon a formula
relating to gross revenues, which amounted to 7.12%, 7.82%, and 8.32% for the
years ended March 31, 2004, 2003 and 2002, respectively. The estimated
liability under the plan is accrued as earned by the participant. At March 31,
2004 and 2003, the Company's aggregate liability under the plan was $1.4
million and $1.1 million, respectively.
Bonus Programs - The Company maintains a bonus program for senior management
and certain key individuals. The senior management bonus represents
approximately 5% of fiscal year profits, assuming profit goals are attained,
and is divided among senior management members in proportion to their
salaries. The Company has an incentive program for branch managers that is
paid to the managers based on the attainment of certain goals. The Company
expensed $482,000, $414,000, $360,000 in bonuses during the years ended March
31, 2004, 2003 and 2002, respectively.
Management Recognition and Development Plan - On July 23, 1998, shareholders
of the Company approved the adoption of the MRDP for the benefit of officers,
employees and non-employee directors of the Company.
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 reserved 142,830 shares of common stock to be issued under the
MRDP which are authorized but unissued shares. Awards under the MDRP were
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 was recognized over a five-year vesting period, with 20% vesting
immediately upon grant. At March 31, 2004, all shares has been issued and
full vested. Compensation expense of $15,000, $203,000 and $534,000 was
recognized for the years ended March 31, 2004, 2003 and 2002, respectively.
Stock Option Plans - In July 1998, shareholders of the Company approved the
adoption of the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan was
effective October 1, 1998 and will expire on the tenth anniversary of the
effective date, unless terminated sooner by the Board. Under the 1998 Plan,
the Company may grant both incentive and non-qualified stock options up to
357,075 shares of its common stock to officers, directors and employees. The
exercise price of each option granted under the 1998 Plan equals the fair
market value of the Company's stock on the date of grant with a maximum term
of ten years and options vest over five years. At March 31, 2004, there were
options for 38,483 shares available for grant under the 1998 plan.
In July 2003, shareholders of the Company approved the adoption of the 2003
Stock Option Plan ("2003 Plan"). The 2003 Plan was effective July 2003 and
will expire on the tenth anniversary of the effective date, unless terminated
sooner by the Board. Under the 2003 Plan, the Company may grant both
incentive and non-qualified stock options up to 229,227 shares of its common
stock to officers, directors and employees. The exercise price of each option
granted under the 2003 Plan equals the fair market value of the Company's
stock on the date of grant with a maximum term of ten years from date of grant
and options vest over five years. At March 31, 2004, no options had been
granted under the 2003 plan.
E-81
Stock option activity is summarized in the following table:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding March 31, 2001 361,838 $ 11.99
Grants 5,000 9.30
Options exercised (22,345) 4.09
------- -------
Outstanding March 31, 2002 344,493 12.46
Grants 15,000 14.00
Forfeited (50,366) 13.75
Options exercised (46,577) 8.96
------- -------
Outstanding March 31, 2003 262,550 12.92
Grants 23,000 18.30
Options exercised (40,281) 12.02
------- -------
Outstanding March 31, 2004 245,269 $ 13.57
======= =======
Additional information regarding options outstanding as of March 31, 2004 is
as follows:
Options Outstanding Options Exercisable
---------------------- ----------------------
Weighted Avg Weighted Weighted
Remaining Average Average
Range of Contractual Number Exercise Number Exercise
Exercise Price Life (years) Outstanding Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
$8.06 - $12.31 5.74 49,498 $ 10.68 45,298 $ 10.81
13.51 - 13.75 4.72 167,771 13.74 161,771 13.74
14.97 - 19.02 9.16 28,000 17.71 6,600 17.29
---- ------- ------- ------- -------
5.43 245,269 $ 13.57 213,699 $ 13.23
==== ======= ======= ======= =======
16. EMPLOYEE STOCK OWNERSHIP PLAN
The Company ESOP covers all employees with at least one year and 1000 hours of
service who are over the age of 21. Shares are released for allocation at the
discretion of the Board of Directors and allocated to participant accounts on
December 31 of each year until 2011. ESOP compensation expense included in
salaries and benefits was $477,000, $372,000 and $284,000 for years ended
March 31, 2004, 2003 and 2002, respectively.
In conjunction with the Conversion and Reorganization, the Company purchased
an additional 285,660 shares equal to eight percent of the total number of
shares issued in the offering, for future allocation to eligible participants.
ESOP share activity is summarized in the following table:
Fair Value Allocated
of Unreleased and
Unreleased ESOP Released
Shares Shares Shares Total
---------- ---------- --------- -------
Balance, March 31, 2001 270,963 210,329 481,292
Allocation December 31, 2001 (24,633) 24,633 -
------- -------
Balance, March 31, 2002 $3,077,000 246,330 234,962 481,292
-------
Allocation December 31, 2002 (24,633) 24,633 -
------- -------
Balance, March 31, 2003 $3,490,000 221,697 259,595 481,292
-------
Allocation December 31, 2003 (24,633) 24,633 -
------- -------
Balance, March 31, 2004 $4,083,000 197,064 284,228 481,292
======= ======= -------
17. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Company's Board of Directors authorized 250,000 shares of serial preferred
stock as part of the Conversion and Reorganization completed on September 30,
1997. No preferred shares were issued or outstanding at March 31, 2004 or
2003.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by
E-82
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk,
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, of core capital to total assets and tangible
capital to tangible assets (set forth in the table below). Management believes
the Bank meets all capital adequacy requirements to which it is subject as of
March 31, 2004.
As of March 31, 2004, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Company must
maintain minimum total capital and Tier I capital to risk weighted assets,
core capital to total assets and tangible capital to tangible assets (set
forth in the table below). There are no conditions or events since that
notification that management believes have changed the Company's category.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table (dollars in thousands):
For Categorized as "Well
Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2004
Total Capital:
(To Risk Weighted Assets) $53,952 12.78% $33,760 8.0% $42,200 10.0%
Tier I Capital:
(To Risk Weighted Assets) 49,471 11.72 16,880 4.0 25,320 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 49,471 9.81 15,125 3.0 25,209 5.0
Tangible Capital:
(To Tangible Assets) 49,471 9.81 7,563 1.5 N/A N/A
For Categorized as "Well
Capital Capitalized" Under
Adequacy Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2003
Total Capital:
(To Risk Weighted Assets) $50,893 15.89% $25,629 8.0% $32,037 10.0%
Tier I Capital:
(To Risk Weighted Assets) 48,154 15.03 12,815 4.0 19,222 6.0
Tier I Capital:
(To Adjusted Tangible
Assets) 48,154 11.66 12,389 3.0 20,649 5.0
Tangible Capital:
(To Tangible Assets) 48,154 11.66 6,195 1.5 N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at March 31, 2004 (in thousands):
Equity $ 59,960
Net unrealized securities loss (213)
Core deposit intangible (10,215)
Servicing asset (61)
---------
Tangible capital 49,471
General valuation allowance 4,481
---------
Total capital $ 53,952
=========
At periodic intervals, the OTS and the FDIC routinely examine the Company's
financial statements as part of their legally prescribed oversight of the
savings and loan industry. Based on their examinations, these regulators can
direct that the
E-83
Company's financial statements be adjusted in accordance with their findings.
A future examination by the OTS or the FDIC could include a review of certain
transactions or other amounts reported in the Company's 2004 financial
statements. In view of the uncertain regulatory environment in which the
Company operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 2004 financial
statements cannot presently be determined.
The following table summarizes the Company's common stock repurchased in each
of the last three fiscal years (dollars in thousands):
Shares Value
------- ------
2004 81,500 $1,510
2003 196,100 $2,882
2002 268,700 $3,123
18. EARNINGS PER SHARE
Basic earning per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering any dilutive items. Diluted EPS is
computed by dividing net income applicable to common stock by the weighted
average number of common shares and common stock equivalents for items that
are dilutive, net of shares assumed to be repurchased using the treasury stock
method at the average share price for the Company's common stock during the
period. Common stock equivalents arise from assumed conversion of outstanding
stock options and from assumed vesting of shares awarded but not released
under the Company's MRDP plan. ESOP shares are not considered outstanding for
earnings per share purposes until they are committed to be released.
Years Ended March 31,
-------------------------------------
2004 2003 2002
---------- ---------- ----------
Basic EPS computation:
Numerator-Net income $6,554,000 $4,359,000 $4,868,000
Denominator-Weighted average
common shares outstanding 4,640,485 4,365,855 4,572,253
Basic EPS $ 1.41 $ 1.00 $ 1.06
========== ========== ==========
Diluted EPS computation:
Numerator-Net Income $6,554,000 $4,359,000 $4,868,000
Denominator-Weighted average
common shares outstanding 4,640,485 4,365,855 4,572,253
Effect of dilutive stock
options 72,149 50,437 32,940
Effect of dilutive MRDP 1,695 8,441 7,275
---------- ---------- ----------
Weighted average common
shares and common stock
equivalents 4,714,329 4,424,733 4,612,468
Diluted EPS $ 1.39 $ 0.99 $ 1.06
========== ========== ==========
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The Company, using available market
information and appropriate valuation methodologies, has determined the
estimated fair value amounts. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
E-84
The estimated fair value of financial instruments is as follows (in
thousands):
March 31,
----------------------------------------------
2004 2003
-------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- -------- --------- ---------
Assets:
Cash $ 47,907 $ 47,907 $ 60,858 $ 60,858
Investment securities
available for sale 32,833 32,883 20,426 20,426
Mortgage-backed securities
held to maturity 2,517 2,591 3,301 3,403
Mortgage-backed securities
available for sale 10,417 10,607 13,069 13,069
Loans receivable, net 381,127 390,750 300,310 308,204
Loans held for sale 407 407 1,501 1,501
Mortgage servicing rights 624 669 629 629
FHLB stock 6,034 6,034 5,646 5,646
BOLI 12,121 12,121 - -
Liabilities:
Demand - Savings deposits 276,606 276,881 219,686 219,753
Time deposits 132,509 134,926 101,056 102,322
FHLB advances - long-term 40,000 42,011 40,000 42,267
Fair value estimates, methods and assumptions are set forth below.
Investments and Mortgage-Backed Securities - Fair values were based on quoted
market rates and dealer quotes.
Loans Receivable - Loans were priced using a discounted cash flow method. The
discount rate used was the rate currently offered on similar products, risk
adjusted for credit concerns or dissimilar characteristics. For variable rate
loans that reprice frequently and have no significant change in credit, fair
values are based on carrying values.
No adjustment was made to the entry-value interest rates for changes in credit
of performing loans for which there are no known credit concerns. Management
believes that the risk factor embedded in the entry-value interest rates,
along with the general reserves applicable to the loan portfolio for which
there are no known credit concerns, result in a fair valuation of such loans
on an entry-value basis.
Mortgage Servicing Rights - The fair value of mortgage servicing rights was
determined using the Company's model, which incorporates the expected life of
the loans, estimated cost to service the loans, servicing fees received and
other factors. The Company calculates MSR's fair value by stratifying MSR's
based on the predominant risk characteristics that include the underlying
loan's interest rate, cash flows of the loan, origination date and term. Key
economic assumptions that vary due to changes in market interest rates are
used to determine the fair value of the MSR's and include expected prepayment
speeds, which impact the average life of the portfolio, annual service cost,
annual ancillary income and the discount rate used in valuing the cash flows.
At March 31, 2004, the MSR's fair value totaled $669,000, which was estimated
using a range of PSA (The Bond Market Association's standard prepayment)
values that ranged from 205 to 1,399.
Bank owned life insurance - The carrying amount is the cash surrender value of
all policies.
Deposits - The fair value of time deposits with no stated maturity such as
non-interest-bearing demand deposits, savings, NOW accounts, and money market
and checking accounts was equal to the amount payable on demand. The fair
value of time deposits with stated maturity was based on the discounted value
of contractual cash flows. The discount rate was estimated using rates
currently available in the local market.
Federal Home Loan Bank Advances - The fair value for FHLB advances was based
on the discounted cash flow method. The discount rate was estimated using
rates currently available from the FHLB.
Off-Balance Sheet Financial Instruments - The estimated fair value of loan
commitments approximates fees recorded associated with such commitments as of
March 31, 2004 and 2003. Since the majority of the Bank's off-balance-sheet
instruments consist of non-fee producing, variable rate commitments, the Bank
has determined they do not have a distinguishable fair value.
Other - The carrying value of other financial instruments was determined to be
a reasonable estimate of their fair value.
Limitations - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 2004 and 2003.
Although management was not aware of any factors that would significantly
affect the estimated
E-85
fair value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements on those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments.
20. COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments generally include commitments to originate
mortgage, commercial and consumer loans. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit are conditional, and are honored for up to 45
days subject to the Company's usual terms and conditions. Collateral is not
required to support commitments.
At March 31, 2004, the Company had commitments to originate fixed rate
mortgage loans of $886,000 at interest rates ranging from 4.5% to 5.5%. At
March 31, 2004, commitments to originate adjustable rate mortgage loans were
$2.7 million at an average interest rate of 5.82%. Undisbursed balance of
mortgage loans closed was $31.2 million at March 31, 2004. Commitments to
originate consumer loans totaled $1.4 million and unused lines of consumer
credit totaled $18.6 million at March 31, 2004. Commercial real estate loan
commitments to originate loans totaled $3.4 million. Undisbursed balance of
commercial real estate mortgage loans closed was $13.9 million at March 31,
2004. Commercial loan commitments totaled $600,000 and unused commercial lines
of credit totaled $29.4 million.
The allowance for unfunded loan commitments was $191,000 at March 31, 2004.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily used to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary. At March 31, 2004 and 2003, standby letters of credit totaled
$173,000 and $136,000, respectively.
Most of the Bank's business activity is with customers located in the states
of Washington and Oregon. Investments in state and municipal securities
involve government entities primarily within the state of Washington. Loans
are generally limited, by federal and state banking regulation, to 10% of the
Bank's shareholder's equity, excluding accumulated other comprehensive income.
As of March 31, 2004 and 2003, the Bank had no individual industry
concentrations.
At March 31, 2004, the Company had firm commitments to sell $407,000 of
residential loans to FHLMC. These agreements are short term fixed rate
commitments and no material gain or loss is likely.
In connection with certain asset sales, the Bank typically makes
representation and warranties about the underlying assets conforming to
specified guidelines. If the underlying assets do not conform to the
specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss. As of March 31, 2004, loans under
warranty totaled $125.0 million, which substantially represents the unpaid
principal balance of the Company's loans serviced for other portfolio. The
Bank believes that the potential for loss under these arrangements is remote.
Accordingly, no contingent liability is recorded in the financial statements.
At March 31, 2004, scheduled maturities of certificates of deposit, FHLB
advances and future operating minimum lease commitments were as follows:
Within 1-3 4-5 Over Total
(In thousands) 1 year Years Years 5 Years Balance
------- ----- ----- ------- -------
Certificates of deposit $86,272 $32,422 $10,241 $ 3,574 $132,509
FHLB advances - 35,000 5,000 - 40,000
Operating leases 891 1,629 1,531 2,393 6,444
------- ------- ------- ------- --------
Total other contractual
obligations $87,163 $69,051 $16,772 $ 5,967 $178,953
======= ======= ======= ======= ========
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
liquidity.
The Bank has entered into employment contracts with certain key employees
which provide for contingent payment subject to future events.
E-86
21. RIVERVIEW BANCORP, INC. (PARENT COMPANY)
BALANCE SHEETS
March 31, 2004 AND 2003
(In thousands) 2004 2003
------------------------------------------------------------------------------
ASSETS
Cash (including interest earning accounts of
$5,268 and $5,663) $ 5,400 $ 5,717
Investment in the Bank 59,960 48,956
Other assets 423 505
Deferred income taxes 109 (4)
-------- --------
TOTAL ASSETS $ 65,892 $ 55,174
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 41 $ 118
Dividend payable 669 545
Shareholders' equity 65,182 54,511
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,892 $ 55,174
======== ========
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
------------------------------------------------------------------------------
INCOME:
Dividend income from bank $ 12,952 $ 6,094 $ 4,000
Interest on investment securities and other
short-term investments 28 48 93
Interest on loan receivable from the Bank 180 193 206
Gain on sale of securities - 162 -
Other income 2 - -
-------- -------- --------
Total income 13,162 6,497 4,299
-------- -------- --------
EXPENSE:
Management service fees paid to the Bank 122 107 28
Other expenses 189 165 159
-------- -------- --------
Total expense 311 272 187
-------- -------- --------
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES AND
EQUITY IN UNDISTRIBUTED INCOME OF THE BANK 12,851 6,225 4,112
(BENEFIT) PROVISION FOR FEDERAL INCOME TAXES (117) 1 31
-------- -------- --------
INCOME OF PARENT COMPANY 12,968 6,224 4,081
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF THE BANK (6,414) (1,865) 787
-------- -------- --------
NET INCOME $ 6,554 $ 4,359 $ 4,868
======== ======== ========
E-87
RIVERVIEW BANCORP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2004, 2003 AND 2002
(In thousands) 2004 2003 2002
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,554 $ 4,359 $ 4,868
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed earnings of the Bank 6,414 1,865 (787)
Provision for deferred income taxes 2 - -
Earned ESOP shares 477 372 284
Earned MRDP shares 15 203 544
Net gain on sale of investment securities - (162) -
Changes in assets and liabilities:
(Increase) in other assets, net of acquisition (536) (156) (460)
(Decrease) increase accrued expenses and other
liabilities (245) 84 54
-------- -------- --------
Net cash provided by operating activities 12,681 6,565 4,503
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from call, maturity, or sale of
investment securities available for sale - 1,518 -
Acquisition (9,482) - -
-------- -------- --------
Net cash (used) provided by investing
activities (9,482) 1,518 -
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,490) (2,127) (2,009)
Repurchase of common stock (1,510) (2,882) (3,123)
Proceeds from exercise of stock options 484 417 91
-------- -------- --------
Net cash used by financing activities (3,516) (4,592) (5,041)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (317) 3,491 (538)
CASH, BEGINNING OF YEAR 5,717 2,226 2,764
-------- -------- --------
CASH, END OF YEAR $ 5,400 $ 5,717 $ 2,226
======== ======== ========
E-88
RIVERVIEW BANCORP, INC.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except share data) Three Months Ended
------------------------------------------------------------------------------
March 31 December 31 September 30 June 30
-------- ----------- ------------ -------
Fiscal 2004:
Interest income $ 7,035 $ 7,191 $ 7,227 $ 6,131
Interest expense 1,572 1,729 1,822 1,504
Net interest income 5,463 5,462 5,405 4,627
Provision for loan losses 140 - - 70
Non-interest income 1,505 1,419 2,049 1,616
Non-interest expense 4,489 4,570 4,578 3,935
Income before income taxes 2,339 2,311 2,876 2,238
Provision for income taxes 742 772 958 738
------- ------- ------- -------
Net income $ 1,597 $ 1,539 $ 1,918 $ 1,500
======= ======= ======= =======
Basic earnings per share (1) $ 0.33 $ 0.32 $ 0.41 $ 0.34
======= ======= ======= =======
Diluted earnings per
share (1) $ 0.33 $ 0.32 $ 0.41 $ 0.34
======= ======= ======= =======
Fiscal 2003:
Interest income $ 6,377 $ 6,494 $ 6,810 $ 6,780
Interest expense 1,651 1,935 2,107 2,724
Net interest income 4,726 4,559 4,703 4,056
Provision for loan losses 210 190 82 245
Non-interest income (730) 1,994 1,264 1,410
Non-interest expense 3,804 3,695 3,717 3,692
Income before income taxes (18) 2,668 2,168 1,529
Provision for income taxes (39) 896 674 457
------- ------- ------- -------
Net income $ 21 $ 1,772 $ 1,494 $ 1,072
======= ======= ======= =======
Basic earnings per share (1) $ 0.00 $ 0.41 $ 0.34 $ 0.24
======= ======= ======= =======
Diluted earnings per
share (1) $ 0.00 $ 0.40 $ 0.34 $ 0.24
======= ======= ======= =======
(1) Quarterly earnings per share varies from annual earnings per share due to
rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------
Information concerning a change in accountants included in the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission
on October 6, 2003 and the Company's Current Report on Form 8-K/A filed with
the Securities and Exchange Commission on November 7, 2003.
Item 9A. Controls and Procedures
--------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section 13(a)-
15(e) and 15d 15(e) of the Securities Exchange Act of 1934 was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the
Securities and Exchange Act of 1934 is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
(b) Changes in Internal Controls: There was no change in the Company's
internal control over financial reporting during the Company's most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
E-89
PART III
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information contained under the section captioned "Proposal I - Election
of Directors" contained in the Company's Proxy Statement for the 2004 Annual
Meeting of Stockholders, and "Part I -- Business -- Personnel -- Executive
Officers" of this report, is incorporated herein by reference. Reference is
made to the cover page of this report for information regarding compliance
with Section 16(a) of the Exchange Act.
In December 2003, the Board of Directors adopted the Officer and Director Code
of Ethics. The code is applicable to each of the Company's officers,
including the principal executive officer and senior financial officers, and
requires individuals to maintain the highest standards of professional
conduct. A copy of the Code of Ethics is available on the Company's website
at www.riverviewbank.com.
Item 11. Executive Compensation
--------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" under "Proposal I - Election of
Directors" in the Proxy Statement for the 2004 Annual Meeting of Stockholders
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required by this item is incorporated herein by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Executive Compensation" in the Proxy Statement for the 2004
Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information set forth under the section captioned "Proposal I - Election
of Directors - Transactions with Management" in the Proxy Statement for the
2004 Annual Meeting of Stockholders is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
------------------------------------------------
This information set forth under the section captioned "Independent Auditors"
in the Proxy statement for the 2004 Annual Meeting of Stockholders is
incorporated herein by reference.
E-90
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
--------------------------------------------------------------------------
(a) 1. Financial Statements
See "Part II Item 8. Financial Statements and Supplementary
Data."
2. Financial Statement Schedules
All schedules are omitted because they are not required or
applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
3. Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
4 Form of Certificate of Common Stock of the Registrant*
10.1 Employment Agreement with Patrick Sheaffer**
10.2 Employment Agreement with Ronald A. Wysaske**
10.3 Severance Agreement with Karen Nelson**
10.4 Severance Agreement with John A. Karas*****
10.5 Employee Severance Compensation Plan**
10.6 Employee Stock Ownership Plan***
10.7 Management Recognition and Development Plan****
10.8 1998 Stock Option Plan****
10.9 1993 Stock Option and Incentive Plan****
10.10 Form of Severance Agreement Entered into by Officers
10.11 2003 Stock Option Plan******
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
23.1 Consent of Independent Auditors
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 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 on October 23, 1998, as an exhibit to the Registrant's
Registration Statement on Form S-8, and incorporated herein by
reference.
***** Filed as an exhibit to the Registrant's Form 10-K for the year ended
March 31, 2002, and incorporated herein by reference.
****** Filed as an exhibit to the Registrant's Annual Meeting Proxy Statement
dated June 5, 2003, and incorporated herein by reference.
(b) Reports on Form 8-K
Form 8-K was filed February 12, 2004 announcing change in
Riverview Bancorp, Inc. executive officers.
E-91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RIVERVIEW BANCORP, INC.
Date: May 28, 2004 By: /s/ Patrick Sheaffer
-----------------------------
Patrick Sheaffer
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Patrick Sheaffer By: /s/ Ronald A. Wysaske
-------------------------- --------------------------
Patrick Sheaffer Ronald A. Wysaske
Chairman of the Board and President and Chief
Chief Executive Officer Operating Officer
(Principal Executive Officer) Director
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Ron Dobyns By: /s/ Paul L. Runyan
-------------------------- --------------------------
Ron Dobyns Paul L. Runyan
Senior Vice President and Director
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Robert K. Leick By: /s/ Gary R. Douglass
-------------------------- --------------------------
Robert K. Leick Gary R. Douglass
Director Director
Date: May 28, 2004 Date: May 28, 2004
By: /s/ Edward R. Geiger By: /s/ Michael D. Allen
-------------------------- --------------------------
Edward R. Geiger Michael D. Allen
Director Vice Chairman of the Board and
Director
Date: May 28, 2004 Date: May 28, 2004
E-92
Exhibit 10.10
Form of Severance Agreement Entered Into
By Dave Dalhstrom, Chief Credit Officer and Executive Vice President
Jim Baldovin Senior Vice President Retail Banking
Jeff Donaldson Senior Vice President
E-93
AGREEMENT
This AGREEMENT is made effective as of ___________, by and between
RIVERVIEW COMMUNITY BANK (the "BANK"), RIVERVIEW BANCORP, INC. (the
"COMPANY"), and _______________ ("EXECUTIVE").
WHEREAS, the BANK recognizes the substantial contribution EXECUTIVE will
be making to the BANK and wishes to protect his position therewith for the
period provided in this Agreement in the event of a Change in Control (as
defined herein): and
WHEREAS, EXECUTIVE serves in the position of Executive Vice President of
the BANK, a position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other
terms and conditions hereinafter provided, the parties hereto agree as
follows:
1. Term of Agreement
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date of this Agreement and continuing at each anniversary date thereafter,
the Board of Directors of the BANK ("Board") may extend the Agreement for
an additional year. The Board will conduct a performance evaluation of
EXECUTIVE for purposes of determining whether to extend the Agreement, and
the results thereof shall be included in the minutes of the Board's
meeting.
2. Payments to EXECUTIVE Upon Change in Control
(a) Upon the occurrence of a Change in Control (as herein defined)
followed within twelve (12) months of the effective date of the
Change in Control by the voluntary or involuntary termination of
EXECUTIVE's employment, other than for Cause, as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. For purposes
of this Agreement, "voluntary termination" shall be limited to the
circumstances in which EXECUTIVE elected to voluntarily terminate his
employment within twelve (12) months of the effective date of a
Change in Control following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or
benefits (other than a reduction affecting the Bank's personnel
generally), or relocation of his principal place of employment by
more than 35 miles from its location immediately prior to the Change
of Control.
(b) A "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) an offeror or other than the Corporation
purchases shares of the stock of the Corporation or the Bank pursuant
to a tender or exchange offer for such shares, (b) any person (as
such term is used in Section 13(d) and 14(d)(2) of the Exchange Act)
is or becomes the beneficial owner, directly or indirectly, of
securities of the Corporation or the Bank representing twenty-five
percent (25%) or more of the combined voting power of the
Corporation's or the Bank's then outstanding securities, (c) the
membership of the board of directors of the Corporation or the
Bank changes as the result of a contested election, such
E-94
that individuals who were directors at the beginning of any
twenty-four (24) month period (whether commencing before or after the
date of adoption of this Agreement) do not constitute a majority of
the Board at the end of such period, or (d) shareholders of the
Corporation or the Bank approve a merger, consolidation, sale or
disposition of all or substantially all of the Corporation's or the
Bank's assets, or a plan of partial or complete liquidation.
(c) EXECUTIVE shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term
"Termination for Cause" shall mean termination because of EXECUTIVE's
intentional failure to perform stated duties, personal dishonesty,
incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, willful violation of any law, rule,
regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material
provision of this Agreement. In determining incompetence, the acts
or omissions shall be measured against standards generally prevailing
in the savings institution industry. Notwithstanding the foregoing,
EXECUTIVE shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a
resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board
called and held for that purpose (after reasonable notice to
EXECUTIVE and an opportunity for him, together with counsel, to be
heard before the Board), finding that in the good faith opinion of
the Board, EXECUTIVE was guilty of conduct justifying Termination for
Cause and specifying the particulars thereof in detail. EXECUTIVE
shall not have the right to receive compensation or other benefit for
any period after Termination for Cause.
3. Termination
(a) Upon the occurrence of a Change in Control, followed within twelve
(12) months of the effective date of a Change in Control by the
voluntary or involuntary termination of EXECUTIVE's employment other
than Termination for Cause, the BANK shall be obligated to pay
EXECUTIVE, or in the event of his subsequent death, his beneficiary
or beneficiaries, or his estate, as the case may be, as severance
pay, a sum equal to 2.99 times EXECUTIVE's "base amount," within the
meaning of 280G(b)(3) of the Internal Revenue Code of 1986 ("Code"),
as amended. Such payment shall be made in a lump sum paid within ten
(10) days of EXECUTIVE's date of termination.
(b) Upon the occurrence of a Change in Control of the Bank followed
within twelve (12) months of the effective date of a Change in
Control by EXECUTIVE's voluntary or involuntary termination of
employment, other than Termination for Cause, the BANK shall cause to
be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the BANK for
EXECUTIVE prior to his severance. Such coverage and payments shall
cease upon expiration of thirty-six (36) months from the date of
EXECUTIVE's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded
to EXECUTIVE under this Section, together with any other payments or
benefits received or to be received by EXECUTIVE in connection with a
Change of Control, would be deemed to include an "excess parachute
payment" under 280G of the Code, then, at the election of EXECUTIVE,
(i) such payments or benefits shall be payable or provided to
EXECUTIVE over the minimum period
E-95
necessary to reduce the present value of such payments or benefits to
an amount which is one dollar ($1.00) less than three (3) times
EXECUTIVE's "base amount" under 280G(b)(3) of the Code or (ii) the
payments or benefits to be provided under this Section 3 shall be
reduced to the extent necessary to avoid treatment as an excess
parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12
U.S.C. 1828(k) and any regulations promulgated thereunder.
4. Effect on Prior Agreements and Existing Benefit Plans
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the BANK and EXECUTIVE,
except that this Agreement shall not affect or operate to reduce any
benefit or compensation inuring to EXECUTIVE of a kind elsewhere
provided. No provision of this Agreement shall be interpreted to mean
that EXECUTIVE is subject to receiving fewer benefits than those available
to him without reference to this Agreement.
5. No Attachment
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or
to execution, attachment, levy, or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to
affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the COMPANY, the BANK and their respective successors and
assigns.
6. Modification and Waiver
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the
party charged with such waiver or estoppel. No such written waiver
shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific
term or condition waived and shall not constitute a waiver of such
term or condition for the future or as to any act other than that
specifically waived.
7. Required Provisions
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not
prejudice EXECUTIVE's right to compensation or other benefits under
this Agreement. EXECUTIVE shall not have the right to receive
compensation or other benefits for any period after Termination for
Cause as defined in Section 2(c) herein.
E-96
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. 1818(e)(3) and (g)(1), the BANK's obligations
under the Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the BANK may, in its discretion, (i) pay
EXECUTIVE all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate (in whole or in part)
any of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued
under Section 8(e)(4) and (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or
(g)(1), all obligations of the BANK under the Agreement shall
terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this paragraph shall not affect any vested
rights of the parties.
All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or
her designee at the time the Federal Deposit Insurance Corporation enters
into an agreement to provide assistance to or on behalf of the BANK under
the authority contained in Section 13(c) of the FDIA and (ii) by the
Director, or his or her designee at the time the Director or such
designee approves a supervisory merger to resolve problems related to
operation of the BANK or when the BANK is determined by the Director to be
in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
8. Severability
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall to the full
extent consistent with law continue in full force and effect.
9. Headings for Reference Only
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
10. Governing Law
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Washington, unless
preempted by Federal law as now or hereafter in effect. In the event that
any provision of this Agreement conflicts with 12 C.F.R. Section
563.39(b), the latter provision shall prevail.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within fifty (50) miles from the location of the BANK, in accordance with
the rules of the American Arbitration Association then in effect.
E-97
11. Source of Payments
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however,
guarantees all payments and the provision of all amounts and benefits due
hereunder to EXECUTIVE and, if such payments are not timely paid or
provided by the BANK, such amounts and benefits shall be paid or provided
by the COMPANY.
12. Payment of Legal Fees
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be
paid or reimbursed by the BANK if EXECUTIVE is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
13. Successor to the BANK or the COMPANY
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to
all or substantially all the business or assets of the BANK or the
COMPANY, expressly and unconditionally to assume and agree to perform the
BANK's or the COMPANY's obligations under this Agreement, in the same
manner and to the same extent that the BANK or the COMPANY would be
required to perform if no such succession or assignment had taken place.
14. Signatures
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized
officer, and EXECUTIVE has signed this Agreement, with an effective date
of the 6th day of May, 2002.
ATTEST: RIVERVIEW COMMUNITY BANK
--------------------------- BY: ------------------------------
ATTEST: RIVERVIEW BANCORP, INC.
--------------------------- BY: ------------------------------
---------------------------
---------------------------
WITNESS
E-98
Exhibit 21
Subsidiaries of the Registrant
Parent
------
Riverview Bancorp, Inc.
Subsidiaries (a) Percentage State of Incorporation
---------------- ---------- ----------------------
Owned
-----
Riverview Community Bank 100% Federal
Riverview Services, Inc. (b) 100% Washington
Riverview Asset Management Corp. (b) 85% Washington
(a) The operation of the Registrant's wholly and majority owned subsidiaries
are included in the Registrant's Financial Statements contained in Item 8
of this Form 10-K.
(b) This corporation is a subsidiary of Riverview Community Bank.
E-99
Exhibit 23
Consent of Independent Auditors
E-100
Consent of Independent Auditors
We consent to the incorporation by reference in Registrations Statements Nos.
333-66049, 333-38887 and 333-109894 on Form S-8 of Riverview Bancorp, Inc., of
our report dated April 23, 2004 appearing in the Annual Report on Form 10K of
Riverview Bancorp, Inc. for the year ended March 31, 2004.
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
May 28, 2004
E-101
Exhibit 23.1
Consent of Independent Auditors
E-102
Exhibit 23.1
Independent Auditors Consent
We consent to the incorporation by reference in Registration Statements Nos.
333-66049, 333-38887, and 333-109894 on Form S-8 and 333-104538 on Form S-4 of
Riverview Bancorp, Inc., of our report dated May 2, 2003, appearing in the
Annual Report on Form 10-K of Riverview Bancorp, Inc. for the year ended March
31, 2004.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
May 28, 2004
E-103
Exhibit 31.1
------------
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Patrick Sheaffer, certify that:
1. I have reviewed this annual report on Form 10-K of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 28, 2004 /S/ Patrick Sheaffer
--------------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
E-104
Exhibit 31.2
------------
Certification Required
By Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934
I, Ron Dobyns, certify that:
1. I have reviewed this annual report on Form 10-K of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fiscal
fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 28, 2004 /S/ Ron Dobyns
-----------------------------
Ron Dobyns
Chief Financial Officer
E-105
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC.
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley
act of 2002 and in connection with this annual report on Form 10-K that:
1. the report fully complies with the requirements of sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all material
respects, the company's financial condition and results of operations.
/S/ Patrick Shaeffer /S/ Ron Dobyns
--------------------------- ---------------------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: May 28, 2004
E-106
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
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 incorporation (I.R.S. Employer
or organization) I.D. Number)
900 Washington St., Ste. 900,Vancouver, Washington 98660
-------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 693-6650
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: Common Stock, $.01 par
value per share, 4,829,144 shares outstanding as of January 31, 2005.
E-107
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, 2004 and March 31, 2004 E-109
Consolidated Statements of Income
Three and Nine Months Ended December 31, 2004 and 2003 E-110
Consolidated Statements of Shareholders' Equity
for the Year Ended March 31, 2004 and the
Nine Months Ended December 31, 2004 E-111
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2004 and 2003 E-112
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended December 31, 2004
and 2003 E-113
Notes to Consolidated Financial Statements E-114 - E-123
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations E-124 - E-138
Item 3: Quantitative and Qualitative Disclosures
About Market Risk E-138
Item 4: Controls and Procedures E-139
Part II. Other Information E-140 - E-141
-----------------
SIGNATURES E-142
E-108
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND MARCH 31, 2004
DECEMBER 31, MARCH 31,
(In thousands, except share data)(Unaudited) 2004 2004
-----------------------------------------------------------------------------
ASSETS
Cash (including interest-earning accounts of $40,914
and $32,334) $ 55,423 $ 47,907
Loans held for sale 140 407
Investment securities available for sale, at fair
value (amortized cost of $29,324 and $32,751) 29,438 32,883
Mortgage-backed securities held to maturity, at
amortized cost (fair value of $2,455 and $2,591) 2,407 2,517
Mortgage-backed securities available for sale, at fair
value (amortized cost of $12,645 and $10,417) 12,696 10,607
Loans receivable (net of allowance for loan losses of
$4,391 and $4,481) 398,421 381,127
Real estate owned - 742
Prepaid expenses and other assets 1,262 1,289
Accrued interest receivable 1,874 1,786
Federal Home Loan Bank stock, at cost 6,119 6,034
Premises and equipment, net 8,416 9,735
Deferred income taxes, net 2,827 2,736
Mortgage servicing rights, net 518 624
Goodwill 9,214 9,214
Core deposit intangible, net 611 758
Bank owned life insurance 12,521 12,121
-------- --------
TOTAL ASSETS $ 541,887 $ 520,487
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 427,649 $ 409,115
Accrued expenses and other liabilities 5,645 5,862
Advance payments by borrowers for taxes and insurance 75 328
Federal Home Loan Bank advances 40,000 40,000
-------- --------
Total liabilities 473,369 455,305
SHAREHOLDERS' EQUITY:
Serial preferred stock, $.01 par value; 250,000 authorized,
issued and outstanding, none - -
Common stock, $.01 par value; 50,000,000 authorized,
issued and outstanding:
December 31, 2004-5,001,579 issued, 4,829,144 outstanding 50 50
March 31, 2004-4,974,979 issued, 4,777,911 outstanding
Additional paid-in capital 40,847 40,187
Retained earnings 28,956 26,330
Unearned shares issued to employee stock ownership trust (1,443) (1,598)
Accumulated other comprehensive (loss) income 108 213
-------- --------
Total shareholders' equity 68,518 65,182
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 541,887 $ 520,487
======== ========
See notes to consolidated financial statements.
E-109
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) Three Months Ended Nine Months Ended
(Unaudited) December 31, December 31,
------------------------------------------------------------------------------
2004 2003 2004 2003
INTEREST INCOME: ------ ------ ------ ------
Interest and fees on loans receivable $6,883 $6,673 $20,506 $19,069
Interest on investment securities 162 146 498 301
Interest on mortgage-backed securities 158 143 482 478
Other interest and dividends 293 229 633 701
------ ------ ------ ------
Total interest income 7,496 7,191 22,119 20,549
------ ------ ------ ------
INTEREST EXPENSE:
Interest on deposits 1,438 1,230 3,741 3,564
Interest on borrowings 509 499 1,509 1,491
------ ------ ------ ------
Total interest expense 1,947 1,729 5,250 5,055
------ ------ ------ ------
Net interest income 5,549 5,462 16,869 15,494
Less provision for loan losses 70 - 260 70
------ ------ ------ ------
Net interest income after provision for
loan losses 5,479 5,462 16,609 15,424
------ ------ ------ ------
NON-INTEREST INCOME:
Fees and service charges 1,127 954 3,439 3,372
Asset management fees 286 229 815 666
Gain on sale of loans held for sale 97 198 409 789
Gain on sale of other real estate owned - 1 - 49
Loss on impairment of securities (1,349) - (1,349) -
Loan servicing income (expense) 11 (2) 45 149
Gain on sale of premises and equipment - - 829 -
Bank owned life insurance 124 - 400 -
Other 27 39 73 59
------ ------ ------ ------
Total non-interest income 323 1,419 4,661 5,084
------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,796 2,575 8,029 7,324
Occupancy and depreciation 749 782 2,261 2,137
Data processing 254 233 740 675
Amortization of core deposit intangible 33 121 148 310
Advertising and marketing 165 183 638 696
FDIC insurance premium 14 24 44 49
State and local taxes 116 110 391 317
Telecommunications 79 64 213 185
Professional fees 143 147 395 341
Other 394 331 1,330 1,049
------ ------ ------ ------
Total non-interest expense 4,743 4,570 14,189 13,083
------ ------ ------ ------
INCOME BEFORE FEDERAL INCOME TAXES 1,059 2,311 7,081 7,425
PROVISION FOR FEDERAL INCOME TAXES 299 772 2,220 2,468
------ ------ ------ ------
NET INCOME $ 760 $ 1,539 $ 4,861 $ 4,957
====== ====== ====== ======
Earnings per common share:
Basic $ 0.16 $ 0.32 $ 1.01 $ 1.08
Diluted 0.16 0.32 1.00 1.06
Weighted average number of shares
outstanding:
Basic 4,824,731 4,757,750 4,809,290 4,594,958
Diluted 4,900,108 4,844,247 4,883,628 4,673,038
Cash Dividends Per Share $ 0.155 $ 0.14 $ 0.465 $ 0.42
See notes to consolidated financial statements.
E-110
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2004
AND THE NINE MONTHS ENDED DECEMBER 31, 2004(Unaudited)
Unearned
Shares
Issued to
Employee Unearned Accumulated
Common Stock Additional Stock Shares Other
---------------- Paid-In Retained Ownership Issued to Comprehensive
(In thousands, except share data) Shares Amount Capital Earnings Trust MRDP Income(Loss) Total
----------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2003 4,358,704 $ 46 $33,525 $ 22,389 $ (1,804) $ (15) $ 370 $ 54,511
Cash dividends($0.56 per share) - - - (2,613) - - - (2,613)
Exercise of stock options 40,281 1 484 - - - - 485
Stock repurchased and retired (81,500) (1) (1,509) - - - - (1,510)
Stock issued in connection with
acquisition 430,655 4 7,343 7,347
Earned ESOP shares 24,633 - 271 - 206 - - 477
Tax benefit, stock option and MDRP - - 73 - - - - 73
Earned MRDP shares 5,138 - - - - 15 - 15
--------- ------- ------- -------- --------- --------- ----------- --------
4,777,911 50 40,187 19,776 (1,598) - 370 58,785
Comprehensive income:
Net income - - - 6,554 - - - 6,554
Other comprehensive income:
Unrealized holding loss on
securities of $157 (net of $81
tax effect) - - - - - - (157) (157)
--------
Comprehensive income - - - - - - - 6,397
--------- ------- ------- -------- --------- --------- ----------- --------
Balance March 31, 2004 4,777,911 50 40,187 26,330 (1,598) - 213 65,182
Cash dividends ($0.465 per share) - - - (2,235) - - - (2,235)
Exercise of stock options 26,600 - 350 - - - - 350
Earned ESOP shares 24,633 - 234 - 155 - - 389
Tax benefit, stock option - - 76 - - - - 76
--------- ------- ------- -------- --------- --------- ----------- --------
4,829,144 50 40,847 24,095 (1,443) - 213 63,762
Comprehensive income:
Net income - - - 4,861 - - - 4,861
Other comprehensive income:
Unrealized holding loss on
securities of $995 (net of $512
tax effect) less reclassification
adjustment for net impairment
loss included in net
income of $890 - - - - - - (105) (105)
(net of $459 tax effect) --------
Comprehensive income - - - - - - - 4,756
--------- ------- ------- -------- --------- --------- ----------- --------
Balance December 31, 2004 4,829,144 $ 50 $40,847 $28,956 $ (1,443) $ - $ 108 $ 68,518
========= ======= ======= ======== ========= ========= =========== ========
See notes to consolidated financial statements.
E-111
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
(In thousands) (Unaudited) 2004 2003
------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,861 $ 4,957
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 1,171 1,641
Mortgage servicing rights write-up impairment (22) (304)
Provision for loan losses 260 70
(Benefit) provision for deferred income taxes (38) 237
Noncash expense related to ESOP 389 353
Noncash expense related to MRDP - 15
Noncash loss on impairment of securities 1,349
Increase in deferred loan origination fees, net of
amortization 172 669
Federal Home Loan Bank stock dividend (85) (182)
Origination of loans held for sale (18,152) (43,706)
Proceeds from sales of loans held for sale 18,478 44,888
Net gain on loans held for sale, sale of real estate
owned, and premises and equipment (1,040) (699)
Changes in assets and liabilities:
Decrease (Increase) in prepaid expenses and other assets 1,835 (2,949)
(Decrease) increase in accrued interest receivable (88) 195
Decrease in accrued expenses and other liabilities (880) (815)
-------- --------
Net cash provided by operating activities 8,210 4,370
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (296,382) (232,828)
Principal repayments/refinance on loans 279,532 245,679
Purchase of investment securities available for sale - (11,000)
Purchase of mortgage-backed securities available for sale (5,000) (4,937)
Principal repayments on mortgage-backed securities
available for sale 2,769 6,823
Principal repayments on investment securities available
for sale 75 -
Proceeds from call or maturity of investment securities
available for sale 2,000 250
Principal repayments on mortgage-backed securities held
to maturity 110 632
Purchase of premises and equipment (348) (380)
Acquisition, net of cash received - 7,206
Purchase of first mortgage or improvement of REO (47) (159)
Purchase bank-owned life insurance - (9,000)
Proceeds from sale of real estate owned and premises and
equipment 122 654
-------- --------
Net cash (used in) provided by investing activities (17,169) 2,940
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 18,534 (20,302)
Dividends paid (2,155) (1,821)
Repurchase of common stock - (1,510)
Proceeds from Federal Home Loan Bank advances 15,100 -
Repayment of Federal Home Loan Bank advances (15,100) -
Net decrease in advance payments by borrowers (254) (179)
Proceeds from exercise of stock options 350 422
-------- --------
Net cash provided by (used in) financing activities 16,475 (23,390)
-------- --------
NET INCREASE (DECREASE) IN CASH 7,516 (16,080)
CASH, BEGINNING OF PERIOD 47,907 60,858
-------- --------
CASH, END OF PERIOD $ 55,423 $ 44,778
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 5,290 $ 5,158
Income taxes 2,275 2,170
NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to real estate owned $ - $ 688
Dividends declared and accrued in other liabilities 748 668
Financed sale of real estate owned 578 -
Receivable due to sale & leaseback of branch 2,391 -
Fair value adjustment to securities available for sale (159) (599)
Income tax effect related to fair value adjustment 54 204
Noncash loss on impairment of securities 1,349 -
Common stock issued upon business combination - 7,347
See notes to consolidated financial statements.
E-112
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Nine Months
Ended December 31, Ended December 31,
-------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
(In thousands)
Net Income $ 760 $ 1,539 $ 4,861 $ 4,957
Other Comprehensive Income (Loss)
Change in fair value of securities
available for sale of less
reclassification adjustment for
net impairment included in net income 613 (654) (105) (396)
------ ------ ------ ------
Comprehensive Income $ 1,373 $ 885 $ 4,756 $ 4,561
====== ====== ====== ======
See notes to consolidated financial statements.
E-113
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Quarterly Reports on 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
("GAAP"). However, all adjustments that are, in the opinion of management,
necessary for a fair presentation of the interim unaudited financial statements
have been included. All such adjustments are of a normal recurring nature.
The unaudited consolidated financial statements should be read in conjunction
with the audited financial statements included in the Riverview Bancorp, Inc.
Annual Report on Form 10-K for the year ended March 31, 2004. The results of
operations for the three and nine months ended December 31, 2004 are not
necessarily indicative of the results which may be expected for the fiscal year
ending March 31, 2005. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Riverview Bancorp, Inc. and Subsidiary
include all the accounts of Riverview Bancorp, Inc. (the "Company") and the
consolidated accounts of its wholly-owned subsidiary, Riverview Community Bank
(the "Bank"), the Bank's wholly-owned subsidiary, Riverview Services, Inc., and
the Bank's majority-owned subsidiary, Riverview Asset Management Corp. ("RAM
Corp."). All inter-company transactions and balances have been eliminated in
consolidation.
3. STOCK-BASED COMPENSATION
At December 31, 2004, the Bank had two stock-based employee compensation plans.
The Bank accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no stock-based
compensation cost is reflected in net income as all options granted under the
Bank's plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Bank had applied the fair value
recognition provision of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation" to stock-based compensation
awards:
Three Months Nine Months
Ended December 31, Ended December 31,
-------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
Net income (in thousands):
As reported $ 760 $1,539 $4,861 $4,957
Deduct: Total stock based compensation
expense determined under fair value
based method for all options, net of
related tax benefit (23) (17) (70) (50)
------ ------ ------ ------
Pro forma 727 1,522 4,791 4,907
Earnings per common share - basic:
As reported $ 0.16 $ 0.32 $ 1.01 $ 1.08
Pro forma 0.15 0.32 1.00 1.07
Earnings per common share - fully diluted:
As reported $ 0.16 $ 0.32 $ 1.00 $ 1.06
Pro forma 0.15 0.31 0.98 1.05
E-114
4. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income applicable
to common stock by the weighted average number of common shares outstanding
during the period, without considering the impact of 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 from assumed vesting of shares awarded but not
released under the Company's Management Recognition Development Plan ("MRDP")
plan. Employee Stock Ownership Plan ("ESOP") shares are not considered
outstanding for earnings per share purposes until they are committed to be
released.
Three Months Nine Months
Ended December 31, Ended December 31,
--------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
Basic EPS computation:
Numerator-Net income $ 760,000 $1,539,000 $4,861,000 $4,957,000
Denominator-Weighted average
common shares outstanding 4,824,731 4,757,750 4,809,290 4,594,958
Basic EPS $ 0 .16 $ 0.32 $ 1 .01 $ 1.08
========= ========= ========= =========
Diluted EPS computation:
Numerator-Net Income $ 760,000 $1,539,000 $4,861,000 $4,957,000
Denominator-Weighted average
common shares outstanding 4,824,731 4,757,750 4,809,290 4,594,958
Effect of dilutive stock options 75,377 86,497 74,338 73,095
Effect of dilutive MRDP shares - - - 2,820
Weighted average common shares --------- --------- --------- ---------
and common stock equivalents 4,900,108 4,844,247 4,883,628 4,670,873
Diluted EPS $ 0.16 $ 0.32 $ 1.00 $ 1.06
========= ========= ========= =========
5. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
December 31, 2004
-----------------
Trust Preferred $ 5,000 $ 19 $ - $ 5,019
U.S. Agency securities 9,000 - (37) 8,963
U.S. Government Equity securities 11,351 - - 11,351
Municipal bonds 3,973 132 - 4,105
--------- ---------- ---------- -------
Total $29,324 $ 151 $ (37) $29,438
========= ========== ========== =======
March 31, 2004
--------------
Trust Preferred $ 5,000 $ 19 $ - $ 5,019
U.S Agency securities 11,000 194 - 11,194
U.S. Government Equity securities 12,700 - (300) 12,400
Municipal bonds 4,051 219 - 4,270
--------- ---------- ---------- -------
Total $32,751 $ 432 $ (300) $32,883
========= ========== ========== =======
E-115
The contractual maturities of investment securities available for sale are as
follows (in thousands):
Amortized Estimated
December 31, 2004 Cost Fair Value
----------------- ---------- ----------
Due after one year through five years $ 10,940 $ 11,008
Due after five years through ten years - -
Due after ten years (1) 18,384 18,430
---------- ----------
Total $ 29,324 $ 29,438
========== ==========
(1) Includes U.S. Government equity securities with an amortized cost and
estimated fair value of $11,351 that are redeemable by the agencies
every two years on the respective dividend reset dates.
Investment securities with an amortized cost of $13.9 million and $16.5 million
and a fair value of $13.8 million and $16.3 million at December 31, 2004 and
March 31, 2004, respectively, were pledged as collateral for advances at the
Federal Home Loan Bank ("FHLB") of Seattle. The Bank pledged investment
securities with an amortized cost of $1,148,000 and $500,000 and a fair value
of $1,210,000 and $504,000 at December 31, 2004 and March 31, 2004,
respectively, as collateral for treasury tax and loan funds.
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, are as follows (in
thousands):
Less than 12 months
12 months or longer Total
----------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
U.S. Agency securities $8,963 $ (37) $ - $ - $8,963 $ (37)
Total temporarily ----- ------ ----- ------ ----- ------
impaired securities $8,963 $ (37) $ - $ - $8,963 $ (37)
====== ====== ===== ====== ===== ======
The Company has evaluated these securities and has determined that the decline
in the value is temporary and not related to any company or industry specific
event. The Company has the ability and intent to hold the securities for a
reasonable period of time for a forecasted recovery of the amortized cost in
the event of a more favorable market interest rate environment.
The Company realized no gains or losses on sales of investment securities
available for sale for the nine-month periods ended December 31, 2004 and 2003.
In the fiscal third quarter 2005, the Company recorded an other-than-temporary
impairment charge of $890,000 after-tax, or $0.18 per diluted share related to
certain Fannie Mae and Freddie Mac preferred stock that it holds.
6. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
Real estate mortgage investment
conduits $ 1,802 $ 33 $ - $ 1,835
FHLMC mortgage-backed securities 267 5 - 272
FNMA mortgage-backed securities 338 10 - 348
--------- ---------- ---------- -------
Total $ 2,407 $ 48 $ - $ 2,455
========= ========== ========== =======
March 31, 2004
--------------
Real estate mortgage investment
conduits $ 1,802 $ 55 $ - $ 1,857
FHLMC mortgage-backed securities 332 8 - 340
FNMA mortgage-backed securities 383 11 - 394
--------- ---------- ---------- -------
Total $ 2,517 $ 74 $ - $ 2,591
========= ========== ========== =======
E-116
The contractual maturities of mortgage-backed securities classified as held to
maturity are as follows (in thousands):
Amortized Estimated
December 31, 2004 Cost Fair Value
----------------- ---------- ----------
Due after one year through five years $ 24 $ 25
Due after five years through ten years 26 27
Due after ten years 2,357 2,403
---------- ----------
Total $ 2,407 $ 2,455
========== ==========
Mortgage-backed securities held to maturity with an amortized cost of $1.8
million and $1.8 million and a fair value of $1.9 million and $1.9 million at
December 31, 2004 and March 31, 2004, respectively, were pledged as collateral
for governmental public funds held by the Bank. Mortgage-backed securities held
to maturity with an amortized cost of $282,000 and $332,000 and a fair value of
$289,000 and $341,000 at December 31, 2004 and March 31, 2004, respectively,
were pledged as collateral for treasury tax and loan funds held by the Bank.
The real estate mortgage investment conduits consist of Freddie Mac and Fannie
Mae securities.
Mortgage-backed securities available for sale consisted of the following (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
Real estate mortgage investment
conduits $ 2,032 $ 38 $ - $ 2,070
FHLMC mortgage-backed securities 10,350 37 (33) 10,354
FNMA mortgage-backed securities 263 9 - 272
--------- ---------- ---------- -------
Total $ 12,645 $ 84 $ (33) $12,696
========= ========== ========== =======
March 31, 2004
--------------
Real estate mortgage investment
conduits $ 2,943 $ 72 $ - $ 3,015
FHLMC mortgage-backed securities 7,086 104 - 7,190
FNMA mortgage-backed securities 388 14 - 402
--------- ---------- ---------- -------
Total $ 10,417 $ 190 $ - $ 10,607
========= ========== ========== =======
The contractual maturities of mortgage-backed securities available for sale are
as follows (in thousands):
Amortized Estimated
December 31, 2004 Cost Fair Value
----------------- ---------- ----------
Due after one year through five years $ 1,800 $ 1,830
Due after five years through ten years 8,910 8,893
Due after ten years 1,935 1,973
---------- ----------
Total $ 12,645 $ 12,696
========== ==========
Expected maturities of mortgage-backed securities held to maturity and
available for sale will differ from contractual maturities because borrowers
may have the right to prepay obligations with or without prepayment penalties.
Mortgage-backed securities available for sale with an amortized cost of $12.4
million and $9.9 million and a fair value of $12.4 million and $10.1 million at
December 31, 2004 and March 31, 2004, respectively, were pledged as collateral
for advances at the FHLB. Mortgage-backed securities available for sale with
an amortized cost of $66,000 and $105,000 and a fair value of $69,000 and
$111,000 at December 31, 2004 and March 31, 2004, respectively, were pledged as
collateral for treasury tax and loan funds held by the Bank.
E-117
Information pertaining to securities with gross unrealized losses at December
31, 2004, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, are as follows (in
thousands):
Less than 12 months
12 months or longer Total
----------------------------------------------------
Description of Fair Unrealized Fair Unrealized Fair Unrealized
Securities Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Mortgage-backed
securities $4,576 $ (33) $ - $ - $4,576 $ (33)
Total temporarily ----- ------ ----- ------ ------ ------
impaired securities $4,576 $ (33) $ - $ - $4,576 $ (33)
===== ====== ===== ====== ====== ======
The Company has evaluated these securities and has determined that the decline
in the value is temporary and not related to any company or industry specific
event. The Company has the ability and intent to hold the securities for a
reasonable period of time for a forecasted recovery of the amortized cost in
the event of a more favorable market interest rate environment.
The Company realized no gains or losses on sales of mortgage-backed securities
available for sale for the nine months ended December 31, 2004 and 2003.
7. LOANS RECEIVABLE
Loans receivable excluding loans held for sale, consisted of the following (in
thousands):
December 31, March 31,
2004 2004
----------- ---------
Residential:
One-to-four-family $ 38,297 $ 44,194
Multi-family 3,856 5,074
Construction:
One-to-four-family 64,448 78,094
Commercial real estate 1,453 1,453
Commercial 57,154 57,702
Consumer:
Secured 29,849 26,908
Unsecured 1,788 1,689
Land 31,035 27,020
Commercial real estate 207,979 177,785
------- -------
435,859 419,919
Less:
Undisbursed portion of loans 30,067 31,204
Deferred loan fees 2,980 3,107
Allowance for loan losses 4,391 4,481
------- -------
Loans receivable, net $ 398,421 $ 381,127
======= =======
Most of the Bank's business activity is with customers located in the states of
Washington and Oregon. Loans and extensions of credit outstanding at one time
to one borrower are generally limited by federal regulation to 15% of the
Bank's shareholders' equity, excluding accumulated other comprehensive income.
As of December 31, 2004 and March 31, 2004, the Bank had no loans to one
borrower in excess of the regulatory limit and also had no individual industry
concentrations of credit.
E-118
8. ALLOWANCE FOR LOAN LOSSES
A reconciliation of the allowance for loan losses is as follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
Beginning balance $ 4,424 $ 5,205 $ 4,481 $ 2,739
Provision for losses 70 - 260 70
Charge-offs (105) (333) (501) (575)
Recoveries 2 13 151 51
Acquisition - - - 2,639
Net change in allowance for unfunded
loan commitments and lines of credit - - - (39)
------ ------ ------ ------
Ending balance $ 4,391 $ 4,885 $ 4,391 $ 4,885
====== ====== ====== ======
Changes in the allowance for unfunded loan commitments and lines of credit were
as follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
Beginning balance $ 207 $ 214 $ 191 $ 175
Net change in allowance for unfunded
loan commitments and lines of credit 20 - 36 39
------ ------ ------ ------
Ending balance $ 227 $ 214 $ 227 $ 214
====== ====== ====== ======
The allowance for unfunded loan commitments is included in other liabilities on
the consolidated balance sheets. Beginning the quarter ending June 30, 2004,
the provision for unfunded commitments was charged to non-interest expense and
prior to this it was charged to the allowance for loan losses. The change was
made to be consistent with regulatory accounting.
At December 31, 2004 and March 31, 2004, the Company's recorded investment in
impaired loans was $782,000 and $1.3 million respectively. As of December 31,
2004, there were no loans classified as impaired requiring an allowance for
loan losses in accordance with SFAS 114 (as amended by SFAS 118). A loan is
considered impaired when it is probable that a creditor will be unable to
collect all amounts (principal and interest) due according to the contractual
terms of the loan agreement. When a loan has been identified as being
impaired, the amount of the impairment is measured by using discounted cash
flows, except, when, as a practical expedient, the current fair value of the
collateral, reduced by costs to sell is used. The average investment in
impaired loans was approximately $1.1 million, $1.0 million and $1.2 million
during the nine months ended December 31, 2004, and 2003 and the year ended
March 31, 2004, respectively. Interest income recognized on impaired loans was
$4,000, none and $44,000 for the nine months ended December 31, 2004, and 2003
and the year ended March 31, 2004, respectively. There were no loans past due
90 days or more and still accruing interest at December 31, 2004 and March 31,
2004.
9. LOANS HELD FOR SALE
The Company identifies loans held for sale at the time of origination, which
are carried at the lower of aggregate cost or net realizable value. Market
values are derived from available market quotations for comparable pools of
mortgage loans. Adjustments for unrealized losses, if any, are charged to
income.
E-119
10. MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in mortgage servicing rights
("MSRs") and the related allowance for the periods indicated and other related
financial data (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------------------
2004 2003 2004 2003
------ ------ ------ ------
Balance at beginning of period, net $ 564 $ 718 $ 624 $ 629
Additions 26 36 97 166
Amortization (76) (87) (225) (431)
Change in valuation allowance 4 1 22 304
------ ------ ------ ------
Balance at end of period, net $ 518 $ 668 $ 518 $ 668
====== ====== ====== ======
Valuation allowance at beginning
of period $ 88 $ 110 $ 106 $ 413
Change in valuation allowance (4) (1) (22) (304)
------ ------ ------ ------
Valuation allowance balance at end
of period $ 84 $ 109 $ 84 $ 109
====== ====== ====== ======
The Company evaluates MSRs for impairment by stratifying MSRs based on the
predominant risk characteristics of the underlying financial assets. At
December 31, 2004 and March 31, 2004, the fair value of MSRs totaled $844,000
and $669,000, respectively. The December 31, 2004 fair value was estimated
using various discount rates and a range of PSA values (the Bond Market
Association's standard prepayment values) that ranged from 153 to 1,506.
Amortization expense for the net carrying amount of MSRs at December 31, 2004
is estimated as follows (in thousands):
Year Ending
March 31,
-----------------
2005 $ 57
2006 162
2007 99
2008 91
2009 73
After 2009 36
-----
Total $ 518
=====
11. CORE DEPOSIT INTANGIBLE
Net unamortized core deposit intangible totaled $611,000 at December 31, 2004
and $879,000 at December 31, 2003. Amortization expense related to the core
deposit intangible during the three months ended December 31, 2004 and 2003
totaled $32,000 and $121,000, respectively.
Remaining amortization expense for the net core deposit intangible at December
31, 2004 is estimated to be as follows (in thousands):
Year Ending
March 31,
-----------------
2005 $ 32
2006 116
2007 98
2008 83
2009 71
After 2009 211
-----
Total $ 611
=====
E-120
12. BORROWINGS
Borrowings are summarized as follows (in thousands):
At December 31, 2004 At March 31, 2004
-------------------- -----------------
Federal Home Loan Bank advances $40,000 $40,000
Weighted average interest rate: 4.98% 4.88%
Borrowings have the following maturities at December 31, 2004 (in thousands):
Year Ending
March 31,
-----------------
2006 $ 15,000
2007 20,000
2008 5,000
--------
Total $ 40,000
========
13. NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which is an Amendment of FASB Statement Nos. 123 and 95 SFAS No. 123R changes,
among other things, the manner in which share-based compensation, such as stock
options, will be accounted for by both public and non-public companies, and
will be effective as of the beginning of the first interim or annual reporting
period that begins after June 15, 2005. For public companies, the cost of
employee services received in exchange for equity instruments including options
and restricted stock awards generally will be measured at fair value at the
grant date. The grant date fair value will be estimated using option-pricing
models adjusted for the unique characteristics of those options and
instruments, unless observable market prices for the same or similar options
are available. The cost will be recognized over the requisite service period,
often the vesting period, and will be remeasured subsequently at each reporting
date through settlement date.
The changes in accounting will replace existing requirements under SFAS No.
123, "Accounting for Stock-Based Compensation," and will eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees," which does not require companies to
expense options if the exercise price is equal to the trading price at the date
of grant. The accounting for similar transactions involving parties other than
employees or the accounting for employee stock ownership plans that are subject
to American Institute of Certified Public Accountants ("AICPA") Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans,"
would remain unchanged.
14. COMMITMENTS AND CONTINGENCIES
Off-balance Sheet Arrangements. The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments
generally include commitments to originate mortgage, commercial and consumer
loans, and 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. Because some
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. 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. The allowance for unfunded loan
commitments was $227,000 at December 31, 2004.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily used to support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. Collateral held varies and is
required in instances where the Bank deems necessary.
E-121
The following is a summary of commitments and contingent liabilities with
off-balance sheet risk as of December 31, 2004:
Contract or
(In Thousands) Notional
-------------- Amount
-----------
Commitments to originate loans
Adjustable $ 18,115
Fixed 1,469
Standby letters of credit 346
Undisbursed portion of loan funds 30,067
Unused lines of credit 76,169
-----------
Total $ 126,166
===========
At December 31, 2004, the Company had firm commitments to sell $140,000 of
residential loans to Freddie Mac. These agreements are short-term, fixed-rate
commitments and no material gain or loss is likely.
Other Contractual Obligations. In connection with certain asset sales, the
Bank typically makes representations and warranties about the underlying assets
conforming to specified guidelines. If the underlying assets do not conform to
the specifications, the Bank may have an obligation to repurchase the assets or
indemnify the purchaser against loss. As of December 31, 2004, loans under
warranty totaled $123.5 million, which substantially represents the unpaid
principal balance of the Company's loans serviced for others portfolio. The
Bank believes that the potential for loss under these arrangements is remote.
Accordingly, no contingent liability is recorded in the financial statements.
At December 31, 2004, scheduled maturities of certificates of deposit, FHLB
advances and future minimum operating lease commitments were as follows (in
thousands):
Within 1-3 4-5 Over 5 Total
1 year Years Years Years Balance
------ ----- ----- ------ -------
Certificates of deposit $75,453 $30,063 $27,923 $ 4,476 $137,915
FHLB advances 15,000 25,000 - - 40,000
Operating leases 1,047 1,785 1,671 1,942 6,445
------- ------- ------- ------- --------
Total other contractual
obligations $91,500 $56,848 $29,594 $ 6,418 $184,360
======= ======= ======= ======= ========
The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
liquidity.
15. ACQUISITION
On July 18, 2003, the Company completed the acquisition of Today's Bancorp,
Inc. Each share of Today's Bancorp was exchanged for 0.826 shares of the
Company's common stock, or $13.64 in cash, or a combination thereof, resulting
in the issuance of 430,655 new shares. Total stock and cash consideration for
Today's Bancorp was $17.2 million. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the assets and liabilities of
Today's Bancorp were recorded at their respective fair values. Core deposit
intangible is being amortized using an accelerated method over ten years.
Goodwill, the excess of the purchase price over net fair value of the assets
and liabilities acquired, was recorded at $9.2 million. The goodwill is not
tax deductible because this was a nontaxable transaction. The purchased assets
and assumed liabilities were recorded as follows (in thousands):
E-122
Assets
------
Cash $ 17,054
Investments 6,895
Building and equipment 1,130
Loans 85,427
Core deposit intangible 820
Goodwill 9,214
Other, net 1,768
-------
Total Assets 122,308
Liabilities
-----------
Deposits $(105,113)
Net Acquisition costs $ 17,195
Less:
Stock issued in acquisition (7,347)
Cash Acquired (17,054)
Cash used in acquisition, net
of cash acquired $ 7,206
The following unaudited pro forma financials for the three and nine months
ended December 31, 2004 and 2003 assume that the Today's Bancorp acquisition
occurred as of April 1, 2003, after giving effect to certain adjustments. The
pro forma results have been prepared for comparative purposes only and are not
necessarily indicative of the results of operations which may occur in the
future or that would have occurred had the Today's Bancorp acquisition been
consummated on the date indicated.
Pro Forma Financial Pro Forma Financial
Information for Information for
the Three Months the Nine Months
Ended December 31, Ended December 31,
2004 2003 2004 2003
-------------------------------------------
(in thousands, (in thousands
except per share data) except per share data)
Net Interest Income $ 5,549 $ 5,462 $16,869 $16,596
Non-interest Income 323 1,419 4,661 5,182
Non-interest Expense 4,743 4,570 14,189 14,424
Net Income $ 760 $ 1,539 $ 4,861 $ 5,138
Earnings per common share:
Basic $ 0.16 $ 0.32 $ 1.01 $ 1.08
Diluted 0.16 0.32 1.00 1.06
16. PROPOSED ACQUISITION
On November 9, 2004, the Company announced the signing of a definitive
agreement for the acquisition of American Pacific Bank by merger with the Bank.
Upon completion of the merger, shareholders of American Pacific Bank will be
entitled to receive either cash or shares of the Company's common stock in
exchange for each share of American Pacific Bank common stock. The aggregate
consideration payable to stockholders of American Pacific Bank will be composed
of approximately $17.6 million in cash (including cash paid to stock option
holders) and 788,593 shares of the Company's common stock. These amounts are
subject to adjustment for any American Pacific Bank stock options that are
exercised prior to the closing of the merger. The transaction is intended to
qualify as a tax-free exchange for federal income tax purposes. As a result,
the shares of the Company's common stock issued in exchange for American
Pacific Bank common stock, will be received by shareholders on a tax-free
basis. The transaction will increase the Company's assets from $525 million as
of September 30, 2004, to approximately $648 million, and will increase its
number of banking offices from 14 to 17. Pursuant to the merger agreement,
American Pacific Bank has agreed to pay the Company a termination fee of $1.2
million in the event the merger agreement is terminated under certain
conditions, including any agreement between American Pacific Bank and a third
party to engage in a merger or consolidation.
The merger, which has been unanimously approved by the directors of both
companies, is subject to certain conditions, including the approval of the
shareholders of American Pacific Bank, the receipt of regulatory approvals, and
the registration of the shares to be issued in the merger with the Securities
and Exchange Commission. The merger is expected to be completed in the first
or second calendar quarter of 2005.
E-123
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
------------------------------------------------------------------------
Management's Discussion and Analysis and other portions of this report contain
certain "forward-looking statements" concerning the future operations of the
Company. Management desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing the Company of the protections of
such safe harbor with respect to all "forward-looking statements" contained in
our Quarterly Report. The Company has used "forward-looking statements" to
describe future plans and strategies, including its expectations of the
Company's future financial results. Management's ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors
which could affect actual results include interest rate trends, the general
economic climate in the Company's market area and the country as a whole, the
ability of the Company to control costs and expenses, deposit flows, demand for
mortgages and other loans, real estate values and vacancy rates, the ability of
the Company to efficiently incorporate acquisitions into its operations,
competition, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the
"forward-looking statements," and undue reliance should not be placed on such
statements. The Company undertakes no obligation to publish revised forward-
looking statements to reflect the occurrence of unanticipated events or
circumstances after the date hereof.
Critical Accounting Policies
The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States of
America ("GAAP") in the preparation of the Company's Consolidated Financial
Statements. The Company has identified four policies, that as a result of
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 determining the allowance for loan
losses, the impairment of goodwill, the valuation of the mortgage servicing
rights and the impairment of investments. These policies and the judgments,
estimates and assumptions are described in greater detail in subsequent
sections of Management's Discussions and Analysis and in the Notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended March 31, 2004. Management believes that the
judgments, estimates and assumptions used in the preparation of the Company's
Consolidated Financial Statements are appropriate given the factual
circumstances at the time. However, given the sensitivity of the Company's
Consolidated Financial Statements to these critical accounting policies, the
use of other judgments, estimates and assumptions could result in material
differences in the Company's results of operations or financial condition.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is maintained at a level sufficient to provide
for probable loan losses based on evaluating known and inherent risks in the
loan portfolio. The allowance is provided based upon management's continuing
analysis of the pertinent factors underlying the quality of the loan portfolio.
These factors include changes in the size and composition of the loan
portfolio, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not be
assured. The detailed analysis includes techniques to estimate the fair value
of loan collateral and the existence of potential alternative sources of
repayment. The appropriate allowance level is estimated based upon factors and
trends identified by management at the time the consolidated financial
statements are prepared.
Goodwill
--------
Goodwill is initially recorded when the purchase price paid for an acquisition
exceeds the estimated fair value of the net identified tangible and intangible
assets acquired. Goodwill is presumed to have an indefinite useful life and is
tested, at least annually, for impairment at the reporting unit level. We
perform an annual review in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist, to determine if the recorded
goodwill is impaired. Our impairment review process compares the fair value of
the Bank to its carrying value, including the goodwill related to the Bank. If
the fair value exceeds the carrying value, goodwill of the Bank unit is not
considered impaired and no additional analysis is necessary. As of December
31, 2004, there have been no events or changes in circumstances that would
indicate a potential impairment.
Mortgage Servicing Rights
-------------------------
The Company stratifies its MSRs based on the predominant characteristics of the
underlying financial assets, including coupon interest rate and contractual
maturity of the mortgage. An estimated fair value of MSRs is determined
quarterly using a discounted cash flow model. The model estimates the present
value of the future net cash flows of the servicing portfolio based on various
factors, such as servicing costs, servicing income, expected
E-124
prepayments speeds, discount rate, loan maturity and interest rate. The effect
of changes in market interest rates on estimated rates of loan prepayments
represents the predominant risk characteristic underlying the MSRs portfolio.
The Company's methodology for estimating the fair value of MSRs is highly
sensitive to changes in assumptions. For example, the determination of fair
value uses anticipated prepayment speeds. Actual prepayment experience may
differ and any difference may have a material effect on the fair value. Thus,
any measurement of fair value of MSRs is limited by the existing conditions and
assumptions made as of the date of analysis. Those assumptions may not be
appropriate if they are applied to a different time.
Future expected net cash flows from servicing a loan in the servicing portfolio
would not be realized if the loan is paid off earlier than anticipated.
Moreover, because most loans within the servicing portfolio do not contain
penalty provisions for early payoff, the Company will not receive a
corresponding economic benefit if the loan pays off earlier than expected. MSRs
are the discounted present value of the future net cash flows projected from
the servicing portfolio. Accordingly, prepayment risk subjects the Company's
MSRs to impairment. MSR impairment is recorded in the amount that the estimated
fair value is less than the MSRs' carrying value on a strata by strata basis.
Investment Valuation
--------------------
The Company's determination of impairment for various types of investments
accounted for in accordance with SFAS No. 115 is predicated on the notion of
other-than-temporary. The key indicator that an investment may be impaired is
that the fair value of the investment is less than its carrying value. Each
reporting period, the Company reviews those investments for which the fair
value is less than the carrying value. The review includes determining whether
certain indicators demonstrate the fair value of the investment has been
negatively impacted. These indicators include deteriorating financial
condition, regulatory, economic or technological changes, downgrade by a rating
agency and length of time the fair value has been less than carrying value. If
the fair value of the investment is less than the carrying value of the
investment, the investment is considered impaired and a determination must be
made as to whether the impairment is other-than-temporary.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method. If the cost basis of these securities is determined
to be other-than-temporary impaired, the amount of the impairment is charged to
operations.
Securities available for sale are carried at fair value. Premiums and
discounts are amortized using the interest method over the remaining period to
contractual maturity. Unrealized holding gains and losses, or valuation
allowances established for net unrealized losses, are excluded from earnings
and reported as a separate component of shareholders' equity as accumulated
other comprehensive income (loss), net of income taxes, unless the security is
deemed other-than-temporary impaired. If the security is determined to be
other- than-temporary impaired, the amount of the impairment is charged to
operations.
An impairment shall be deemed other-than-temporary unless positive evidence
indicating that the investment's carrying value is recoverable within a
reasonable period of time outweighs negative evidence to the contrary.
Evidence that is objectively determinable and verifiable is given greater
weight than evidence that is subjective and/or not verifiable. Evidence based
on future events will generally be less objective as it is based on future
expectations and therefore is generally less verifiable or not verifiable at
all. Factors considered in evaluating whether a decline in value is
other-than-temporary include, (a) the length of time and the extent to which
the fair value has been less than amortized cost, (b) the financial condition
and near-term prospects of the issuer and (c) our intent and ability to retain
the investment for a period of time. In situations in which the security's fair
value is below amortized cost but it continues to be probable that all
contractual terms of the security will be satisfied, and that the decline is
due solely to changes in interest rates (not because of increased credit risk),
and the Company asserts that it has positive intent and ability to hold that
security to maturity, no other-than-temporary impairment is recognized.
General
A progressive, community-oriented financial institution, the Company emphasizes
local, personal service to residents of its primary market area, which
encompasses Clark, Cowlitz, Klickitat and Skamania Counties in Washington
State. The Company is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate loans for commercial
and consumer purposes in its primary market area.
E-125
The Company continues to change the composition of its loan portfolio and
deposit base as part of the transition to commercial banking. Commercial real
estate loans and commercial loans have grown from 17.04% and 5.87% of the loan
portfolio at March 31, 2000, to 48.05% and 13.11% at December 31, 2004.
The Company's strategic plan includes the diversification of its loan portfolio
to include a larger portion of commercial and commercial real estate loans.
Targeting the commercial banking customer base, specifically small- and medium-
sized businesses, professionals and wealth building individuals within the
Company's primary market area, is an objective of the Company. Significant
portions of the growing commercial loan portfolio carry adjustable rates,
higher yields or shorter terms, and higher credit risk than traditional
fixed-rate mortgages. The strategic plan stresses increased emphasis on
non-interest income, including increased fees for asset management and deposit
service charges. This focus is designed to enhance earnings and reduce
interest rate risk.
A related goal is to increase the proportion of personal and business checking
account deposits and provide a more complete range of financial services to
customers in the local communities. Whether increasing loan portfolio size or
deposit base, the Company will continue to emphasize controlled growth. The
Company is well positioned to attract new customers and to increase its market
share given that the administrative headquarters and nine of its thirteen
branches are located in Clark County, which is one of the fastest growing
counties in the state, according to the U.S. Census Bureau 2000 census.
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 Company's management.
The Company continuously reviews new products and services to give its
customers more financial options. With an emphasis on growth of non-interest
income and control of non-interest expense, all new technology and services are
reviewed for business development and cost saving purposes. The in house
processing of checks and production of images has supported the Bank's
increased service to customers and at the same time has increased efficiency.
The Company continues to experience growth in customer use of the online
banking services. Customers are able to conduct a full range of services on a
real-time basis, including balance inquiries, transfers and electronic bill
paying. This online service has also enhanced the delivery of cash management
services to commercial customers. The internet banking web site is
www.riverviewbank.com .
---------------------
Market Area
With its home office and six branches in Vancouver, Washington and branch
offices in Camas, Washougal, Stevenson, White Salmon, Battle Ground, Goldendale
and Longview, the Company continues to provide local, personal service to its
customers. The 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, RAM Corp., located
in downtown Vancouver. Riverview Mortgage, a mortgage broker division of the
Company, originates mortgage (including construction) loans for various
mortgage companies in the Portland metropolitan area, as well as for the
Company. Commercial and business banking services are offered by the Business
and Professional Banking Division located at the downtown Vancouver branch.
Vancouver, located in Clark County, is north of Portland, Oregon. Several
large employers including Sharp Microelectronics, Hewlett Packard, Georgia
Pacific, Underwriters Laboratory and Wafer Tech are located in Clark County.
In addition to the expanding industry base, the Columbia River Gorge is a
popular tourist destination, generating revenue for all the communities with
the area. As a result, Southwest Washington's economy has become less
dependent on the timber industry.
Comparison of Financial Condition at December 31, 2004 and March 31, 2004
E-126
At December 31, 2004, the Company had total assets of $541.9 million, compared
with $520.5 million at March 31, 2004. The increase in total assets was
primarily due to an increase in net loans receivable.
Cash, including interest-earning accounts, totaled $55.4 million at December
31, 2004, compared to $47.9 million at March 31, 2004. The increase is
reflected in the increase in deposit accounts.
Loans held for sale decreased $267,000 to $140,000 at December 31, 2004,
compared to $407,000 at March 31, 2004. The decrease reflects the variable
demand for residential loan financing. As interest rates fall, loan volume
shifts to fixed rate production. Conversely, in a rising interest rate
environment, loan volume will shift to adjustable rate production. The Company
originates fixed-rate residential loans for sale in the secondary market and
retains the related loan servicing rights. Selling fixed interest rate
mortgage loans allows the Company to reduce the interest rate risk associated
with long term, fixed interest rate products. It also frees up funds to make
new loans and diversify the loan portfolio. We continue to service the loans we
sell, maintaining the customer relationship and generating ongoing non-interest
income.
Loans receivable, net, were $398.4 million at December 31, 2004, compared to
$381.1 million at March 31, 2004. Commercial real estate loans increased $30.2
million, consumer loans increased $3.0 million and land loans increased $4.0
million, which offset decreases of $13.6 million in net residential
construction loans and $5.9 million in residential loans. A substantial
portion of the Company's loan portfolio is secured by real estate, either as
primary or secondary collateral, located in its primary market areas.
Investment securities available-for-sale totaled $29.4 million at December 31,
2004, compared to $32.9 million at March 31, 2004. The decrease of $3.5
million was primarily due to pay downs and impairment loss.
Mortgage-backed securities held-to-maturity totaled $2.4 million at December
31, 2004, a slight decrease from $2.5 million at March 31, 2004.
Mortgage-backed securities available-for-sale were $12.7 million at December
31, 2004, compared to $10.6 million at March 31, 2004. The $2.1 million net
increase reflects $5.0 million in purchases and $2.9 million in pay downs and
unrealized market gains and losses.
Bank-owned life insurance increased to $12.5 million at December 31, 2004, from
$12.1 million at March 31, 2004. The $400,000 increase reflects an increase in
cash surrender value of the policies.
Prepaid expenses and other assets were $1.3 million at December 31, 2004 and
March 31, 2004.
Deposit accounts totaled $424.6 million at December 31, 2004, compared to
$409.1 million at March 31, 2004. Wholesale deposits decreased by $10 million
for the nine months ended December 31, 2004 and core deposits increased by
$28.5 million. The total average outstanding balance of checking accounts,
savings and money market accounts ("transaction accounts") increased 9.3% to
$281.5 million for the quarter ended December 31, 2004, compared to $257.6
million for the quarter ended March 31, 2004. Transaction accounts represented
66.8% and 65.3% of average total outstanding balance of deposits for the
quarters ended December 31, 2004 and March 31, 2004, respectively. The
quarterly average outstanding balance of certificates of deposit increased $3.2
million to $139.9 million, compared to $136.7 million for the quarter ended
March 31, 2004.
FHLB advances were $40.0 million at both December 31, 2004 and March 31, 2004.
Shareholders' Equity and Capital Resources
Shareholders' equity increased $3.3 million to $68.5 million at December 31,
2004 from $65.2 million at March 31, 2004. The increase was primarily as a
result of the $4.8 million total comprehensive income, $350,000 exercise of
stock options and $389,000 earned ESOP shares, partially offset by $2.2 million
in cash dividends paid to shareholders.
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision ("OTS"), its primary federal regulator.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's
E-127
assets, liabilities and certain off-balance sheet items as calculated in
accordance with regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk, weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total capital to
risk-weighted assets, Tier I capital to risk-weighted assets, core capital to
total assets and tangible capital to tangible assets (set forth in the table
below). Management believes the Bank meets all capital adequacy requirements to
which it was subject at December 31, 2004.
As of December 31, 2004, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain minimum total capital and Tier I capital to risk weighted assets, core
capital to total assets and tangible capital to tangible assets (set forth in
the table below). There are no conditions or events since that notification
that management believes have changed the Bank's category.
The Bank's actual and required minimum capital amounts and ratios are presented
in the following table (dollars in thousands):
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
-----------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2004
Total Capital:
(To Risk Weighted Assets) $55,486 12.48% $35,560 8.0% $44,450 10.0%
Tier I Capital:
(To Risk Weighted Assets) 51,095 11.50 17,780 4.0 26,670 6.0
Tier I Capital:
(To Adjusted Tangible Assets) 51,095 9.75 15,722 3.0 26,204 5.0
Tangible Capital:
(To Tangible Assets) 51,095 9.75 7,861 1.5 N/A N/A
Categorized as "Well
Capitalized" Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provision
------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
March 31, 2004
Total Capital:
(To Risk Weighted Assets) $53,952 12.78% $33,760 8.0% $42,200 10.0%
Tier I Capital:
(To Risk Weighted Assets) 49,471 11.72 16,880 4.0 25,320 6.0
Tier I Capital:
(To Adjusted Tangible Assets) 49,471 9.81 15,125 3.0 25,209 5.0
Tangible Capital:
(To Tangible Assets) 49,471 9.81 7,563 1.5 N/A N/A
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles to regulatory tangible
and risk-based capital at December 31, 2004 (in thousands):
Equity $ 61,220
Net unrealized securities loss (109)
Goodwill and other intangibles (9,964)
Servicing asset (52)
---------
Tangible capital 51,095
Allowance for loan losses 4,391
---------
Total capital $ 55,486
=========
E-128
Liquidity
The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, satisfy other financial commitments and to take advantage of
investment opportunities. The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At December 31,
2004, cash totaled $55.4 million, or 10.23% of total assets. The Bank has a
line of credit with the FHLB of Seattle. The line of credit is 30% of total
assets to the extent the Bank provides qualifying collateral and holds
sufficient FHLB stock. At December 31, 2004, the Bank had $40.0 million of
outstanding advances from the FHLB of Seattle under an available credit
facility of $154.4 million, limited to available collateral.
Sources of capital and liquidity for the Company on a stand-alone basis include
distributions from the Bank and the issuance of debt or equity. Dividends and
other capital distributions from the Bank are subject to regulatory
restrictions.
Off-Balance Sheet Arrangements and Other Contractual Obligations
Through the normal course of operations, the Company has entered into certain
contractual obligations and other commitments. Our obligations generally
relate to funding of operations through deposits and borrowings as well as
leases for premises. Our commitments generally relate to our lending
operations.
The Company has obligations under long-term operating leases, principally for
building space and land. Lease terms generally cover a five-year period, with
options to extend, and are non-cancelable.
The Company has commitments to originate fixed and variable rate mortgage loans
to customers. Because some commitments expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Undisbursed loan funds and unused lines of credit include funds not disbursed,
but committed to construction projects and home equity and commercial lines of
credit. Standby letters of credit are conditional commitments issued by us to
guarantee the performance of a customer to a third party.
For further information regarding the company's off-balance sheet arrangements
and other contractual obligations, see Note 14 of the Notes to the Consolidated
Financial Statements.
Asset Quality
The allowance for loan losses was $4.4 million at December 31, 2004 and $4.5
million at March 31, 2004. Management believes the allowance for loan losses
at December 31, 2004 is adequate to cover probable credit losses existing in
the loan portfolio at that date. No assurances, however, can be given that
future additions to the allowance for loan losses will not be necessary. The
allowance for loan losses is maintained at a level sufficient to provide for
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, industry trends and data, current economic
conditions, and detailed analysis of individual loans. The appropriate
allowance level is estimated based upon factors and trends identified by
management at the time the consolidated financial statements are prepared.
Commercial loans are considered to involve a higher degree of credit risk than
one-to-four-family residential loans, and tend to be more vulnerable to adverse
conditions in the real estate market and deteriorating economic conditions.
Non-performing assets were $782,000, or 0.14% of total assets at December 31,
2004, compared with $2.0 million, or 0.39% of total assets at March 31, 2004.
The $782,000 balance of non-accrual loans is composed of two residential real
estate loans, two commercial real estate loans, two commercial loans and one
consumer loan. The following table sets forth information regarding the
Company's non-performing assets.
E-129
December 31, 2004 March 31, 2004
----------------- --------------
(dollars in thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate $ 235 $ 24
Commercial real estate 309 309
Land - 31
Commercial 77 872
Consumer 161 65
------- -------
Total 782 1,301
------- -------
Accruing loans which are contractually
past due 90 days or more - -
------- -------
Total of nonaccrual and 90 days past due loans 782 1,301
------- -------
Real estate owned (net) - 742
------- -------
Total nonperforming assets $ 782 $ 2,043
======= =======
Total loans delinquent 90 days or more to net loans 0.19% 0.34%
Total loans delinquent 90 days or more to total assets 0.14% 0.25%
Total nonperforming assets to total assets 0.14% 0.39%
Comparison of Operating Results for the Three Months Ended December 31, 2004
and 2003
Financial Highlights. Net income for the three months ended December 31, 2004
was $760,000, or $0.16 per basic share ($0.16 per diluted share), compared to
net income of $1.5 million, or $0.32 per basic share ($0.32 per diluted share)
for the three months ended December 31, 2003. Earnings were lower for the
three months ended December 31, 2004 as a result of the after-tax
other-than-temporary non-cash charges of $461,000 for Freddie Mac preferred
stock and $429,000 for Fannie Mae preferred stock. Excluding the impairment
charge, net income increased 7% to $1.7 million, or $0.34 per diluted share.
Average interest- earning assets increased 2.7% and average interest-bearing
liabilities increased 1%.
The annualized return on average assets was 0.56% for the three months ended
December 31, 2004, compared to 1.18% for the three months ended December 31,
2003. The annualized return on average equity was 4.36% for third quarter,
compared to 9.52% for the same period in the prior year. For the current
quarter, the annualized return on average assets excluding the impairment
charge was 1.22% and the annualized return on average equity excluding the
impairment was 9.47%. In addition, the efficiency ratio (excluding intangible
asset amortization and impairment charge), which is defined as the percentage
of non-interest expenses to total revenue, was 64.61% compared to 63.86% for
the three months ended December 31, 2003.
E-130
Net Interest Income. The Company's profitability depends primarily on its net
interest income, which is the difference between the income it receives on
interest-earning assets and its cost of funds, which consists of interest paid
on deposits and borrowings. Net interest income is also affected by the
relative amounts of interest-earning assets and interest-bearing liabilities.
When interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The level of
non-interest income and expenses also affects the Company's profitability.
Non-interest income includes deposit service fees, income associated with the
origination and sale of mortgage loans, brokering loans, loan servicing fees,
income from real estate owned, net gains on sales of assets, bank-owned life
insurance income and asset management fee income. Non-interest expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and regulation, and monetary and fiscal policies.
Net interest income for the three months ended December 31, 2004 was $5.5
million, representing an $87,000, or a 1.6% increase, compared to the same
prior year period. This improvement reflected a 2.8% increase in the average
balance of interest-earning assets (primarily increases in the average balance
of commercial loans, commercial real estate loans, mortgage backed securities
and daily interest-bearing assets, partially offset by a decrease in the
average balance of residential mortgage loans and investment securities) to
$484.2 million. The average balance of interest-bearing liabilities increased
by $3.1 million to $394.9 million. The increase in savings and money market
accounts was off-set by the decreases in NOW accounts and certificates of
deposit accounts. The ratio of average interest-earning assets to average
interest- bearing liabilities increased to 122.6% in the three-month period
ended December 31, 2004 from 120.2% in the same prior year period. The ratio
indicates that the interest-earning asset growth is being funded less by
interest-bearing liabilities as compared to capital and non-interest-bearing
demand deposits.
Interest Income. Interest income totaled $7.5 million and $7.2 million, for the
three months ended December 31, 2004 and 2003, respectively. Average
interest-earning assets increased $13.1 million to $484.2 million for the three
months ended December 31, 2004 from $471.1 million for the same period in 2003.
The yield on interest-earning assets was 6.18% for the three months ended
December 31, 2004 compared to 6.09% for the three months ended December 31,
2003. The increased yield reflects the higher yields received on investment
securities and daily interest-bearing assets at December 31, 2004 as compared
to December 31, 2003.
Interest Expense. Interest expense was $1.9 million for the three months ended
December 31, 2004 and $1.7 million for the three months ended December 31,
2003. Average interest-bearing liabilities increased $3.1 million to $394.9
million for the three months ended December 31, 2004 from $391.8 million for
the same prior year period. The weighted average interest rate on total
deposits was 1.61% and 1.39% for the three months ended December 31, 2004 and
2003, respectively. The weighted average interest rate of FHLB borrowings was
5.06% for the three months ended December 31, 2004 from 4.95% for same period
in the prior year. The level of liquidity in the third quarter of fiscal year
2005 allowed the runoff of high interest rate deposits acquired in the
acquisition of Today's Bancorp and held the FHLB borrowings stable at $40.0
million.
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin.
E-131
Three Months Ended December 31,
-------------------------------------------------
2004 2003
----------------------- -----------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ----- ------- --------- -----
(Dollars in thousands)
Interest-earning assets:
Residential mortgage
loans $117,815 $ 2,229 7.51% $139,783 $ 2,662 7.56%
Commercial and consumer
loans 278,191 4,654 6.64 233,100 4,011 6.83
------- --------- ----- ------- --------- -----
Total net loans (1) 396,006 6,883 6.90 372,883 6,673 7.10
Mortgage-backed
securities(2) 15,415 159 4.09 12,306 143 4.61
Investment
securities(2), (3) 30,684 281 3.63 32,695 248 3.01
Daily interest-bearing
assets 35,977 190 2.10 47,288 105 0.88
Other earning assets 6,119 31 2.01 5,928 59 3.95
Total interest- ------- --------- ----- ------- --------- -----
earning assets 484,201 7,544 6.18 471,100 7,228 6.09
Non-interest-earning assets:
Office properties and
equipment, net 8,500 10,304
Other non-interest-earning
assets 44,236 35,935
------- -------
Total assets $536,937 $517,339
======= =======
Interest-bearing liabilities:
Regular savings accounts $33,499 46 0.54 $ 28,650 40 0.55
NOW accounts 103,036 227 0.87 104,796 217 0.82
Money market accounts 78,438 240 1.21 71,551 150 0.83
Certificates of deposit 139,914 925 2.62 146,847 823 2.22
------- --------- ----- ------- --------- -----
Total deposits 354,887 1,438 1.61 351,844 1,230 1.39
Other interest-bearing
liabilities 40,000 510 5.06 40,000 499 4.95
Total interest-bearing ------- --------- ----- ------- --------- -----
liabilities 394,887 1,948 1.96 391,844 1,729 1.75
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 66,570 57,589
Other liabilities 6,390 3,779
------- -------
Total liabilities 467,847 453,212
Shareholders' equity 69,090 64,127
Total liabilities ------- -------
and shareholders'
equity $536,937 $517,339
======= =======
Net interest income $ 5,596 $ 5,499
===== =====
Interest rate spread 4.22% 4.34%
==== ====
Net interest margin 4.59% 4.63%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 122.62% 120.23%
====== ======
Tax Equivalent Adjustment $ 48 $ 37
======= ========
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available
for sale, historical cost balances were utilized, therefore, the yield
information does not give effect to change in fair value that are reflected
as a component of shareholders' equity.
(3) Includes tax equivalent adjustment in interest income.
E-132
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company for the quarter ended December 31, 2004.
Variances that were immaterial have been allocated based upon the percentage
relationship of changes in volume and changes in rate to the total net change.
Three Months Ended December 31,
-------------------------------
2004 vs 2003
-------------------------------
Increase (Decrease)
Due to Total
------------------ Increase
Volume Rate (Decrease)
-------- ------ --------
(In thousands)
Interest Income:
Residential mortgage loans $ (416) $ (17) $ (433)
Commercial and consumer loans 757 (114) 643
Mortgage-backed securities 33 (17) 16
Investment securities (1) (16) 49 33
Daily interest-bearing (30) 115 85
Other earning assets 2 (30) (28)
-------- ------ --------
Total interest income 330 (14) 316
-------- ------ --------
Interest Expense:
Regular savings accounts 7 (1) 6
NOW accounts (4) 14 10
Money market accounts 15 75 90
Certificates of deposit (40) 142 102
Other interest-bearing liabilities - 11 11
-------- ------ --------
Total interest expense (22) 241 219
-------- ------ --------
Net interest income (1) $ 352 $ (255) $ 97
======== ====== ========
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the three-month
period ended December 31, 2004 was $70,000, compared to zero for the same
period in the prior year. Net charge-offs for the current period were
$103,000, compared to $320,000 for the same period of the prior year. The ratio
of allowance for loan losses to total net loans was 1.09% at December 31, 2004,
compared to 1.29% at December 31, 2003. Net charge-offs to average net loans
for the three-month period ended December 31, 2004 decreased to 0.10% from
0.34% for the same period in the prior year. Improvement continues to be made
both in the dollar amount of loans classified and the mix of classified loans
at December 31, 2004 as compared to December 31, 2003. Loans classified as
substandard and doubtful were $7.0 million at December 31, 2004 compared to
$7.3 million at December 31, 2003. Management considered the allowance for
loan losses at December 31, 2004 to be adequate to cover probable losses
inherent in the loan portfolio based on the assessment of various factors
affecting the loan portfolio.
Non-Interest Income. Non-interest income was $323,000 for the quarter ended
December 31, 2004 compared to $1.4 million for the quarter ended December 31,
2003. Non-interest income was lower for the three months ended March 31, 2004
as a result of the after-tax other-than-temporary non-cash charges of $650,000
for Freddie Mac preferred stock and $699,000 for Fannie Mae preferred stock.
Excluding the impairment charge, non-interest income increased 17.8% to $1.7
million, or $0.34 per diluted share.
Reduced mortgage refinance activity resulted in gains on the sale of loans
decreasing $101,000 for the quarter ended December 31, 2004 to $97,000 from
$198,000 for the quarter ended December 31, 2003. For the same periods, loan
servicing income also included amortization of mortgage servicing rights of
$76,000 and $87,000, respectively. The decrease in amortization is due to the
reduction of early payoffs of loans sold with servicing retained. Asset
management services income was $286,000 for the quarter ended December 31,
2004, compared to $229,000 for the quarter ended December 31, 2003. RAMCorp.
had $164.7 million in total assets under management at December 31, 2004,
compared to $138.1 million at December 31, 2003.
E-133
Non-Interest Expense. Non-interest expense increased $173,000, or 3.8%, to $4.7
million for the three month period ended December 31, 2004, compared to $4.6
million for the three months ended December 31, 2003. One measure of a bank's
ability to contain non-interest expense is the efficiency ratio. It is
calculated by dividing total non-interest expense (less intangible asset
amortization) by the sum of net interest income plus non-interest income (less
intangible asset amortization, impairment charge and lower of cost or market
adjustments). The Company's efficiency ratio excluding intangible asset
amortization, impairment charge, and lower cost or market adjustments was
64.61% for the three months ended December 31, 2004, compared to 63.86% for the
same period in the prior year.
The principal component of the Company's non-interest expense is salaries and
employee benefits. For the three months ended December 31, 2004, salaries and
employee benefits, which include mortgage broker commission compensation, was
$2.8 million, an 8.6% increase over the three months ended December 31, 2003
total of $2.6 million. Full-time equivalent employees increased to 195 at
December 31, 2004 from 181 at December 31, 2003. The majority of the increase
in full-time equivalent employees is due to increased staffing at retail
branches.
The July 2003 acquisition of Today's Bancorp and the related acquisition of
$105.1 million in deposits accounts created an $820,000 core deposit intangible
("CDI"), representing the excess of cost over fair market of acquired deposits.
The CDI is being amortized over a ten-year life using an accelerated
amortization method. The amortization expense was $32,000 for the three months
ended December 31, 2004 and $39,000 for the same period in the prior year.
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation in fiscal 1995 and the related acquisition of $42.0 million
in customer deposits created a $3.2 million CDI. The amortization expense was
none for the three months ended December 31, 2004 compared to $82,000 for the
prior year period. As of June 30, 2004, this CDI was fully amortized.
Provision for Federal Income Taxes. Provision for federal income taxes was
$299,000 for the three months ended December 31, 2004, compared to $772,000 for
the three months ended December 31, 2003 as a result of lower income before
taxes. The effective tax rate for three months ended December 31, 2004 was
28.2% compared to 33.4% for the three months ended December 31, 2003. The
effective tax rate declined from the prior quarter, reflecting the impact of
the purchase of bank-owned life insurance.
Comparison of Operating Results for the Nine Months Ended December 31, 2004 and
2003
Financial Highlights. Net income for the nine months ended December 31, 2004
was $4.9 million, or $1.01 per basic share ($1.00 per diluted share), compared
to net income of $5.0 million, or $1.08 per basic share ($1.06 per diluted
share) for the nine months ended December 31, 2003. The Company's fiscal year
2005 operating results reflect growth in average interest earning-assets and
interest-bearing liabilities, combined with an $828,000 pre-tax gain on the
sale and leaseback of the Company's Camas branch and operations center, that
was partially offset by the $1.3 million pre-tax other-than-temporary
impairment charge related to Fannie Mae and Freddie Mac preferred stock.
The annualized return on average assets was 1.24% for the nine months ended
December 31, 2004, compared to 1.37% for the nine months ended December 31,
2003. For the same periods, the annualized return on average common equity was
9.53% compared to 10.85%. In addition, the efficiency ratio excluding the
intangible asset amortization, which is defined as the percentage of non-
interest expenses to total revenue, was 64.61% compared to 61.78% for the nine
months ended December 31, 2003.
The annualized return on average assets excluding the impairment charge was
1.46% for the current year-to-date period compared to 1.37% for the same period
in the prior year. The annualized return on average equity excluding the
impairment charge was 11.28% for the nine-month period compared to 10.85% for
the same period a year ago. The efficiency ratio excluding the intangible asset
amortization and impairment charge was 60.83% for the nine months ended
December 31, 2004 compared to 61.78% for the same period in the prior year.
Net Interest Income. Net interest income for the nine months ended December
31, 2004 was $16.9 million, representing a $1.4 million, or a 8.9% increase,
compared to the same prior year period. This improvement reflected a 7.2%
increase in the average balance of interest-earning assets to $471.3 million,
consisting primarily of increases in the average balance of commercial loans,
consumer loans and investment securities, partially offset by a decrease in the
average balance of residential mortgage loans and daily interest-earning
assets. The increase in interest-earning assets was offset by a 7.3% increase
in average balance of interest-bearing liabilities (an increase in all deposit
E-134
categories) to $383.7 million. The ratio of average interest-earning assets to
average interest-bearing liabilities decreased slightly to 122.84% in the nine-
month period ended December 31, 2004 from 122.95% in the same prior year
period. The ratio indicates that the interest-earning asset growth is being
funded more by interest-bearing liabilities as compared to capital and
non-interest-bearing demand deposits.
Interest Income. Interest income totaled $22.1 million and $20.5 million, for
the nine months ended December 31, 2004 and 2003, respectively. Average
interest-earning assets increased $31.6 million to $471.3 million for the nine
months ended December 31, 2004 from $439.7 million for the same period in 2003.
The yield on interest-earning assets was 6.27% for the nine months ended
December 31, 2004 compared to 6.24% for the nine months ended December 31,
2003. The increased yield reflects the mixture of interest rate changes
experienced during this period in the prime rate and other indexes used to
price existing variable rate loans and new fixed and adjustable loan
originations.
Interest Expense. Interest expense was $5.3 million and $5.1 million for the
nine months ended December 31, 2004 and 2003, respectively. Average
interest-bearing liabilities increased $26.1 million to $383.7 million for the
nine months ended December 31, 2004 from $357.6 million for the same prior year
period. The lack of change in interest expense reflects the fact that lower
rates of interest paid on deposits were offset by the increased balance of
deposits when comparing average balances at December 31, 2004 and December 31,
2003. The weighted average interest rate on total deposits decreased to 1.45%
for the nine months ended December 31, 2004 from 1.49% for the same period in
the prior year. The weighted average interest rate of FHLB borrowings
increased to 4.96% for the nine months December 31, 2004 from 4.95% for same
period in the prior year. The level of liquidity in the first nine months of
fiscal year 2005 reflects the runoff of $10.1 million of high interest rate
wholesale deposits acquired in the acquisition of Today's Bancorp and
stabilized the FHLB borrowings at $40.0 million.
E-135
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin.
Nine Months Ended December 31,
-------------------------------------------------
2004 2003
----------------------- -----------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ----- ------- --------- -----
(Dollars in thousands)
Interest-earning assets:
Residential mortgage loans $125,510 $ 7,165 7.58% $148,577 $ 8,620 7.70%
Commercial and consumer
loans 266,072 13,341 6.66 200,580 10,449 6.91
------- --------- ----- ------- --------- -----
Total net loans (1) 391,582 20,506 6.95 349,157 19,069 7.25
Mortgage-backed
securities(2) 15,981 482 4.00 13,062 478 4.86
Investment
securities(2)(3) 31,824 837 3.49 26,266 606 3.06
Daily interest-bearing
assets 25,866 316 1.62 45,413 326 0.95
Other earning assets 6,077 117 2.56 5,804 182 4.16
Total interest-earning ------- --------- ----- ------- --------- -----
assets 471,330 22,258 6.27 439,702 20,661 6.24
Non-interest-earning assets:
Office properties and
equipment, net 8,895 10,072
Other non-interest-earning
assets 41,373 30,237
------- -------
Total assets $521,598 $480,011
======= =======
Interest-bearing liabilities:
Regular savings accounts $ 31,683 131 0.55 $ 27,150 124 0.61
NOW accounts 101,725 613 0.80 94,926 636 0.89
Money market accounts 73,684 593 1.07 64,770 443 0.91
Certificates of deposit 136,247 2,404 2.34 130,789 2,361 2.40
------- --------- ----- ------- --------- -----
Total deposits 343,339 3,741 1.45 317,635 3,564 1.49
Other interest-bearing
liabilities 40,364 1,509 4.96 40,000 1,491 4.95
Total interest-bearing ------- --------- ----- ------- --------- -----
liabilities 383,703 5,250 1.82 357,635 5,055 1.88
Non-interest-bearing liabilities:
Non-interest-bearing
deposits 64,144 58,307
Other liabilities 6,056 3,439
------- -------
Total liabilities 453,903 419,381
Shareholders' equity 67,695 60,630
Total liabilities and ------- -------
shareholders' equity $521,598 $480,011
======== ========
Net interest income $17,008 $15,606
======= =======
Interest rate spread 4.45% 4.36%
==== ====
Net interest margin 4.79% 4.71%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 122.84% 122.95%
====== ======
Tax Equivalent Adjustment $ 139 $ 112
======= =======
(1) Includes non-accrual loans.
(2) For purposes of the computation of average yield on investments available
for sale, historical cost balances were utilized, therefore, the yield
information does not give effect to change in fair value that are reflected
as a component of shareholders' equity.
(3) Includes tax equivalent adjustment in interest income.
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The following table sets forth the effects of changing rates and volumes on net
interest income of the Company for the nine months ending December 31, 2004.
Variances that were immaterial have been allocated based upon the percentage
relationship of changes in volume and changes in rate to the total net change.
Nine Months Ended December 31,
-------------------------------
2004 vs 2003
-------------------------------
Increase (Decrease)
Due to Total
------------------ Increase
Volume Rate (Decrease)
-------- ------ --------
(In thousands)
Interest Income:
Residential mortgage loans $ (1,319) $ (136) $ (1,455)
Commercial and consumer loans 3,297 (405) 2,892
Mortgage-backed securities 96 (92) 4
Investment securities (1) 139 92 231
Daily interest-bearing (178) 168 (10)
Other earning assets 9 (74) (65)
-------- ------ --------
Total interest income 2,044 (447) 1,597
-------- ------ --------
Interest Expense:
Regular savings accounts 20 (13) 7
NOW accounts 44 (67) (23)
Money market accounts 66 84 150
Certificates of deposit 98 (55) 43
Other interest-bearing liabilities 14 4 18
-------- ------ --------
Total interest expense 242 (47) 195
-------- ------ --------
Net interest income (1) $ 1,802 $ (400) $ 1,402
======== ====== ========
(1) Taxable equivalent
Provision for Loan Losses. The provision for loan losses for the nine-month
period ended December 31, 2004 was $260,000, compared to $70,000 for the same
period in the prior year. Net charge-offs for the current period were
$350,000, compared to $524,000 for the same period of last year. The ratio of
allowance for loan losses to total net loans decreased to 1.09% from 1.29% at
December 31, 2003. The acquisition of Today's Bancorp in July 2003 added $2.6
million to the allowance for loan losses. Net charge-offs to average net loans
for the nine-month period ended December 31, 2004 decreased to 0.12% from 0.20%
for the same period in the prior year. During the nine months ended December
31, 2004, management evaluated known and inherent risks in the loan portfolio.
Management considered the allowance for loan losses at December 31, 2004 to be
adequate to cover probable losses inherent in the loan portfolio based on the
assessment of various factors affecting the loan portfolio.
Non-Interest Income. Non-interest income decreased $423,000 or 8.3% for the
nine months ended December 31, 2004 to $4.7 million from $5.1 million for the
nine months ended December 31, 2003. The decrease reflects the pre-tax
other-than-temporary non-cash charges of $699,000 for Freddie Mac preferred
stock and $650,000 for Fannie Mae preferred stock taken during the third fiscal
quarter of 2005. This decrease was partially offset by the pre-tax gain on the
sale and leaseback of the Camas branch and operations center of $828,000 during
the first fiscal quarter of 2005 and the increase in the cash surrender value
of bank-owned life insurance of $400,000. The bank-owned life insurance was
purchased in December 2003. This increase was partially offset by the
reduction in residential loan refinance activity in the nine months ended
December 31, 2004 compared to the same period in the prior year as reflected in
the reduced gain on sale of loans held for sale.
Reduced mortgage refinance activity resulted in gains on the sale of loans
decreasing $380,000 for the nine months ended December 31, 2004 to $409,000
from $789,000 for the same prior year period. The decrease in loan servicing
income of $104,000 for the same period also reflects the decrease in mortgage
refinancing activity. Loan servicing income for the nine months ended
December 31, 2004 includes a $22,000 write-up to the market value of mortgage
servicing rights as compared to a $304,000 write-up in market value of mortgage
servicing rights for the same prior year period. For the same periods, loan
servicing income also included amortization of mortgage servicing rights of
E-137
$225,000 and $431,000, respectively. The decrease in amortization is due to
the reduction of early payoffs of loans sold with servicing retained. Asset
management services income was $815,000 for the nine months ended December 31,
2004, compared to $666,000 for the nine months ended December 31, 2003.
RAMCorp. had $164.7 million in total assets under management at December 31,
2004, compared to $138.1 million at December 31, 2003.
Non-Interest Expense. Non-interest expense increased $1.1 million, or 8.5%, to
$14.2 million for the nine month period ended December 31, 2004, compared to
$13.1 million for the nine months ended December 31, 2003. The Company's
efficiency ratio excluding intangible asset amortization and lower cost or
market adjustments was 64.61% for the nine months ended December 31, 2004,
compared to 61.78% for the same period in the prior year. Excluding the net of
intangible amortization and impairment charge, the efficiency ratio for the
current nine months was 60.83%.
The principal component of the Company's non-interest expense is salaries and
employee benefits. For the nine months ended December 31, 2004, salaries and
employee benefits, which include mortgage broker commission compensation, was
$8.0 million, a 9.6% increase over the nine months ended December 31, 2003
total of $7.3 million. Full-time equivalent employees increased to 195 at
December 31, 2004 from 181 at December 31, 2003. The majority of the increase
in full-time equivalent employees is due to additional branch personnel. The
July 2003, acquisition of Today's Bancorp contributed to increases in
occupancy, depreciation, data processing, telecommunication and other expense.
The acquisition of Today's Bancorp and the related acquisition of $105.1
million in deposits accounts created an $820,000 core deposit intangible
("CDI"), representing the excess of cost over fair market of acquired deposits.
The CDI is being amortized over a ten-year life using an accelerated
amortization method. The amortization expense was $105,000 for the nine months
ended December 31, 2004 and $64,000 for the like period a year ago.
The acquisition of the Hazel Dell and Longview branches from the Resolution
Trust Corporation in fiscal 1995 and the related acquisition of $42.0 million
in customer deposits created a $3.2 million CDI. The amortization expense was
$42,000 for the nine months ended December 31, 2004 compared to $245,000 for
the prior year period. As of June 30, 2004, this CDI was fully amortized.
Other non-interest expense was $1.3 million, or a 26.8% increase over the nine
months ended December 31, 2003 total of $1.0 million. The majority of the
increase over the prior period was due to the termination of a former Today's
Bancorp branch operating lease. A loss of $107,000 was incurred to write off
the remaining net book value of the leasehold improvements of the branch.
Provision for Federal Income Taxes. Provision for federal income taxes was $2.2
million for the nine months ended December 31, 2004, compared to $2.5 million
for the nine months ended December 31, 2003 as a result of higher income before
taxes. The effective tax rate for nine months ended December 31, 2004 was 31.4%
compared to 33.2% for the nine months ended December 31, 2003. The effective
tax rate declined from the prior quarter, reflecting the impact of the purchase
of bank-owned life insurance and additional investments in municipal
securities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our Asset Liability Committee is responsible for implementing the interest rate
risk policy, which sets forth limits established by the Board of Directors of
acceptable changes in net interest income, and the portfolio value from
specified changes in interest rates. The OTS defines net portfolio value as
the present value of expected cash flows from existing assets minus the present
value of expected cash flows from existing liabilities plus the present value
of expected cash flows from existing off-balance sheet contracts. Our Asset
Liability Committee reviews, among other items, economic conditions, the
interest rate outlook, the demand for loans, the availability of deposits and
borrowings, and our current operating results, liquidity, capital and interest
rate exposure. In addition, the Asset Liability Committee monitors asset and
liability characteristics on a regular basis and performs analyses to determine
the potential impact of various business strategies in controlling interest
rate risk and other potential impact of these strategies upon future earnings
under various interest rate scenarios. Based on these reviews, our Asset
Liability Committee formulates a strategy that is intended to implement the
objectives contained in our business plan without exceeding losses in net
interest income and net portfolio value limits set forth in our interest rate
risk policy.
There has not been any material change in the market risk disclosures contained
in the Company's Annual Report on Form 10-K for the year ended March 31, 2004.
E-138
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) of the Securities Exchange Act of 1934) was carried out under the
supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management as of the end of the period covered by this report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Securities and Exchange
Act of 1934 is (I) accumulated and communicated to the Company's management
(including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
(b) Changes in Internal Controls: There was no change in the
Company's internal control over financial reporting during the Company's most
recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
E-139
RIVERVIEW BANCORP, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company's financial position,
results of operations, or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table summarizes the Company's share repurchases for the
quarter ended December 31, 2004.
Total Number
Of Shares Maximum Number
Purchased as of Shares that
Total Part of May Yet Be
Number Average Publicly Purchased
of Shares Price Paid Announced Under
Period Purchased per Share Program the Program(1)
10/01/04-10/31/04 - $ - - 133,204
11/1/31-11/30/04 - - - 133,204
12/1/04-12/31/04 - - - 133,204
------- ------- ------- -------
Total - $ - - 133,204
======= ======= ======= =======
(1) In September 2002, the Company announced a stock repurchase of up
to 5%, or 214,000 shares of its outstanding common stock. This
program expires when all shares under the plan have been
repurchased.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits
--------
Exhibits:
3.1 Articles of Incorporation of the Registrant(1)
3.2 Bylaws of the Registrant(1)
4 Form of Certificate of Common Stock of the Registrant(1)
10.1 Employment Agreement with Patrick Sheaffer(2)
10.2 Employment Agreement with Ronald A. Wysaske(2)
10.3 Severance Agreement with Karen Nelson(2)
10.4 Severance Agreement with John A. Karas(3)
10.5 Employee Severance Compensation Plan(2)
E-140
10.6 Employee Stock Ownership Plan(4)
10.7 Management Recognition and Development Plan(5)
10.8 1998 Stock Option Plan(5)
10.9 1993 Stock Option and Incentive Plan(5)
10.10 2003 Stock Option Plan (6)
31.1 Certifications of the Chief Executive 0fficer Pursuant to Section
302 of the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act
32 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
_____________
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-30203), and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997, and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 2002, and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1998, and incorporated herein by reference.
(5) Filed on October 23, 1998, as an exhibit to the Registrant's Registration
Statement on Form S-8, and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Definitive Annual Meeting Proxy
Statement for the 2003 Annual Meeting of Shareholders, and incorporated
herein by reference.
E-141
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIVERVIEW BANCORP, INC.
By: /s/ Patrick Sheaffer By: /s/ Ron Dobyns
-------------------- ---------------
Patrick Sheaffer Ron Dobyns
Chairman of the Board Senior Vice President
Chief Executive Officer (Chief Financial and Accounting
(Principal Executive Officer) Officer)
Date: February 8, 2005 Date: February 8, 2005
E-142
Exhibit 31.1
------------
Section 302 Certification
I, Patrick Sheaffer, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fiscal fourth quarter
in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 8, 2005 /s/Patrick Sheaffer
---------------------
Patrick Sheaffer
Chairman and Chief Executive Officer
E-143
Exhibit 31.2
------------
Section 302 Certification
I, Ron Dobyns, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Riverview Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fiscal fourth quarter
in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial data information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 8, 2005 /s/Ron Dobyns
-------------------------
Ron Dobyns
Chief Financial Officer
E-144
Exhibit 32
----------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF
RIVERVIEW BANCORP, INC. PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
The undersigned herby certify, pursuant to Section 906 of the Sarbanes-Oxley
act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of sections 13(a) and 15(d)
of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all material
respects, the company's financial condition and results of operations.
/s/ Patrick Sheaffer /s/ Ron Dobyns
--------------------------- ----------------------------
Patrick Sheaffer Ron Dobyns
Chief Executive Officer Chief Financial Officer
Dated: February 8, 2005
E-145