| RIVERVIEW BANCORP INC Item1A Risk Factors An investment in our common stock is subject to risks inherent in our business |
| Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this report |
| In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations |
| The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment |
| 35 Fluctuations in interest rates could reduce our profitability and affect the value of our assets |
| Like other financial institutions, we are subject to interest rate risk |
| Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings |
| We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other |
| Over any period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa |
| In addition, the individual market interest rates underlying our loan and deposit products may not change to the same degree over a given time period |
| In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected |
| In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates |
| Changes in levels of market interest rates could materially adversely affect our net interest spread, asset quality, origination volume and overall profitability |
| Interest rates have recently been at historically low levels |
| However, since June 30, 2004, the US Federal Reserve has increased its target for the federal funds rate fifteen times, from 1dtta00prca to 4dtta75prca |
| While these short-term market interest rates (which we use as a guide to price our deposits) have increased the pricing of our loans have more than offset the rise in funding cost |
| In a sustained rising interest rate environment the asset yields are expected to closely match rising funding costs |
| A sustained falling interest rate environment would negatively impact margins |
| Opportunities to reduce non-maturity deposit rates become more difficult to realize in a protracted decline in rates, while asset yields come under constant pressure |
| We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities |
| In a changing interest rate environment, we may not be able to manage this risk effectively |
| If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed |
| Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings |
| Our business is subject to various lending risks which could adversely impact our results of operations and financial condition |
| Our commercial real estate loans involve higher principal amounts than other loans, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers |
| At March 31, 2006, we had dlra328dtta4 million of loans secured by commercial real estate loans, representing 52dtta1 % of our total loans and loans held for sale portfolio |
| The income generated from the operation of the property securing the loan is generally considered by us to be the principal source of repayment on this type of loan |
| The commercial real estate lending in which we engage typically involves larger loans to a single borrower and is generally viewed as exposing the lender to a greater risk of loss than one-four family residential lending because these loans generally are not fully amortizing over the loan period, but have a balloon payment due at maturity |
| A borrowerapstas ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property |
| Repayment of our commercial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value |
| At March 31, 2006, commercial loans totaled dlra59dtta8 million, or 9dtta5prca, of our total loan and loans held for sale portfolio |
| Our commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower |
| Most often, this collateral consists of accounts receivable, inventory or equipment |
| Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists |
| As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers |
| The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business |
| Our construction and land loans are based upon estimates of costs and value associated with the complete project |
| These estimates may be inaccurate |
| We originate construction loans for commercial properties, as well as for single 36 family home construction |
| At March 31, 2006, construction loans totaled dlra127dtta3 million, or 20dtta2prca of total loans and loans held for sale while land loans totaled dlra49dtta2 million or 7dtta8prca of total loans and loans held for sale |
| Construction and land acquisition and development lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion |
| There are also risks associated with the timely completion of the construction activities for their allotted costs, as a number of factors can result in delays and cost overruns, and the time needed to stabilize income producing properties or to sell residential tract developments |
| Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio |
| As a result, construction loans and land acquisition and development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness, rather than the ability of the borrower or guarantor to repay principal and interest |
| If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss |
| Our consumer loans generally have a higher risk of default than our other loans |
| At March 31, 2006, consumer loans totaled dlra31dtta4 million, or 5dtta0prca, of our total loan and loans held for sale portfolio |
| Consumer loans typically have shorter terms and lower balances with higher yields as compared to one- to four-family residential mortgage loans, but generally carry higher risks of default |
| Consumer loan collections are dependent on the borrowerapstas continuing financial stability, and thus are more likely to be affected by adverse personal circumstances |
| Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans |
| An inadequate allowance for loan losses would reduce our earnings |
| We are exposed to the risk that our borrowers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment |
| Volatility and deterioration in the economy may also increase our risk for credit losses |
| We evaluate the collectibility of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as: * Cash flow of the borrower and/or the project being financed; * in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; * the credit history of a particular borrower; * changes in economic and industry conditions; and * the duration of the loan |
| If our evaluation is incorrect and borrower defaults cause losses exceeding our allowance for loan losses, our earnings could be materially and adversely affected |
| We cannot assure you that our allowance will be adequate to cover loan losses inherent in our portfolio |
| We may experience losses in our loan portfolio or perceive adverse trends that require us to significantly increase our allowance for loan losses in the future, which would also reduce our earnings |
| In addition, the Bankapstas regulators, as an integral part of their examination process, may require us to make additional provisions for loan losses |
| The unseasoned nature of many of the commercial real estate loans we originated may lead to additional provisions for loan losses or charge-offs, which would hurt our profits |
| The diversification of our real estate loan portfolio has led to a significant increase in the number of commercial real estate loans in our portfolio |
| Many of these loans are unseasoned and have not been subjected to unfavorable economic conditions |
| We have limited experience in originating these types of loans and as a result do not have a 37 significant payment history pattern with which to judge future collectibility |
| As a result, it is difficult to predict the future performance of this part of our real estate loan portfolio |
| These loans may have delinquency or charge-off levels above our historical experience, which could adversely affect our profitability |
| Our real estate lending also exposes us to the risk of environmental liabilities |
| In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties |
| We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property |
| The costs associated with investigation or remediation activities could be substantial |
| In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property |
| If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected |
| Our success depends primarily on the general economic conditions of the States of Washington and Oregon and the specific local markets in which we operate |
| Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers located primarily in seven counties of Washington and Oregon |
| The local economic conditions in our market areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources |
| Adverse economic conditions unique to these Northwest markets could have a material adverse effect on our financial condition and results of operations |
| Further, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these state and local markets and, in turn, also have a material adverse effect on our financial condition and results of operations |
| Our funding sources may prove insufficient to replace deposits and support our future growth |
| We rely on customer deposits and advances from the FHLB-Seattle and other borrowings to fund our operations |
| Although we have historically been able to replace maturing deposits and advances if desired, no assurance can be given that we would be able to replace such funds in the future if our financial condition or the financial condition of the FHLB or market conditions were to change |
| Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates |
| Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs |
| In this case, our profitability would be adversely affected |
| Although we consider such sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives |
| There can be no assurance additional borrowings, if sought, would be available to us or, if available, would be on favorable terms |
| If additional financing sources are unavailable or are not available on reasonable terms, our growth and future prospects could be adversely affected |
| Competition with other financial institutions could adversely affect our profitability |
| The banking and financial services industry is very competitive |
| Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us |
| Consolidation among financial service providers has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation of assets |
| These institutions generally have significantly greater resources, a wider geographic presence or greater accessibility |
| Our competitors sometimes are also able to offer more services, more favorable pricing or greater customer convenience than we do |
| In addition, our competition has grown from new banks and 38 other financial services providers that target our existing or potential customers |
| As consolidation continues among large banks, we expect additional institutions to try to exploit our market |
| Technological developments have allowed competitors including some non-depository institutions, to compete more effectively in local markets and have expanded the range of financial products, services and capital available to our target customers |
| If we are unable to implement, maintain and use such technologies effectively, we may not be able to offer products or achieve cost-efficiencies necessary to compete in our industry |
| In addition, some of these competitors have fewer regulatory constraints and lower cost structures |
| We rely heavily on the proper functioning of our technology |
| We rely heavily on communications and information systems to conduct our business |
| Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems |
| While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations |
| We rely on third-party service providers for much of our communications, information, operating and financial control systems technology |
| If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality, as found in our existing systems, without the need to expend substantial resources, if at all |
| Any of these circumstances could have an adverse effect on our business |
| We are dependent upon the services of our management team |
| We are dependent upon the ability and experience of a number of our key management personnel who have substantial experience with our operations, the financial services industry and the markets in which we offer our services |
| It is possible that the loss of the services of one or more of our senior executives or key managers would have an adverse effect on our operations |
| Our success also depends on our ability to continue to attract, manage and retain other qualified personnel as we grow |
| We cannot assure you that we will continue to attract or retain such personnel |
| We may be unable to successfully integrate any acquisition we may make |
| We regularly explore opportunities to acquire financial services businesses or assets and may also consider opportunities to acquire other banks or financial institutions |
| We cannot predict the number, size or timing of acquisitions |
| Difficulties in integrating an acquired business or company may cause us not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition |
| The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of our business and the loss of deposits, customers and key personnel |
| The diversion of managementapstas attention and any delays or difficulties encountered in connection with any merger could have an adverse effect on our business and results of operations following the acquisition or otherwise adversely affect our ability to achieve the anticipated benefits of the acquisition |
| An increase in interest rates may reduce our mortgage revenues, which would negatively impact our non-interest income, which would negatively impact our net interest income |
| Our mortgage banking operations provide a significant portion of our non-interest income |
| We generate mortgage revenues primarily from broker loan fees on the sale of loans to investors on a servicing released basis |
| In a rising or 39 higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors |
| This would result in a decrease in mortgage revenues and a corresponding decrease in non-interest income |
| In addition, our results of operations are affected by the amount of non-interest expenses associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense and other operating costs |
| During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations |
| Terrorist activities could cause reductions in investor confidence and substantial volatility in real estate and securities markets |
| It is impossible to predict the extent to which terrorist activities may occur in the United States or other regions, or their effect on a particular security issue |
| It is also uncertain what effects any past or future terrorist activities and/or any consequent actions on the part of the United States government and others will have on the United States and world financial markets, local, regional and national economics, and real estate markets across the United States |
| Among other things, reduced investor confidence could result in substantial volatility in securities markets, a decline in general economic conditions and real estate related investments and an increase in loan defaults |
| Such unexpected losses and events could materially affect our results of operations |
| We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business |
| We are subject to extensive federal and state regulation and supervision, primarily through the Bank |
| Banking regulations are primarily intended to protect depositors &apos funds, federal deposit insurance funds and the banking system as a whole, not shareholders |
| These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things |
| Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes |
| Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways |
| Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things |
| Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations |
| While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur |
| We rely on dividends from subsidiaries for most of our revenue |
| Riverview Bancorp, Inc is a separate and distinct legal entity from its subsidiaries |
| We receive substantially all of our revenue from dividends from our subsidiaries |
| These dividends are the principal source of funds to pay dividends on our common stock and interest and principal on our debt |
| Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay us |
| Also, our right to participate in a distribution of assets upon a subsidiaryapstas liquidation or reorganization is subject to the prior claims of the subsidiaryapstas creditors |
| In the event the Bank is unable to pay dividends to us, we may not be able to service our debt, pay obligations or pay dividends on our common stock |
| The inability to receive dividends from the Bank could have a material adverse effect on our business, financial condition and results of operations If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in our financial reporting, which could adversely affect our business, the trading price of our stock and our ability to attract additional deposits |
| In connection with the enactment of the Sarbanes-Oxley Act of 2002 ( "e Act "e ) and the implementation of the rules and regulations promulgated by the SEC, we document and evaluate our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Act |
| This requires us to prepare an annual management report 40 on our internal control over financial reporting, including among other matters, managementapstas assessment of the effectiveness of internal control over financial reporting and an attestation report by our independent auditors addressing these assessments |
| If we fail to identify and correct any significant deficiencies in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential shareholders and depositors could lose confidence in our internal controls and financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits |
| Changes in accounting standards may affect our performance |
| Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations |
| From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements |
| These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations |
| In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements |