Business context and reporting period
Riverview Bancorp, Inc., a Washington community banking company operating primarily in Washington and Oregon, filed this unaudited Form 10-Q for the quarter ended September 30, 2011, the second quarter of its fiscal 2012. Comparisons below are with the quarter and six months ended September 30, 2010, or with March 31, 2011 for balance-sheet measures. Financial statement amounts are in U.S. dollars; amounts are shown in millions unless stated otherwise.
Financial results and condition
| Metric | Three months ended Sep. 30, 2011 | Six months ended Sep. 30, 2011 |
|---|---|---|
| Interest income | $10.0 million | $20.4 million |
| Net interest income | $8.4 million | $17.3 million |
| Net interest margin | 4.35% | 4.50% |
| Provision for loan losses | $2.2 million | $3.8 million |
| Non-interest income | $1.8 million | $3.7 million |
| Non-interest expense | $7.8 million | $16.0 million |
| Net income | $0.181 million | $0.895 million |
| Basic and diluted EPS | $0.01 | $0.04 |
- For the six months, operating cash flow was $6.1 million, investing cash outflow was $20.5 million, and financing cash inflow was $12.8 million. Cash declined $1.6 million to $50.1 million.
- At September 30, total assets were $873.4 million; net loans were $680.8 million; deposits were $729.3 million; total liabilities were $764.7 million; and total equity was $108.7 million.
- Cash and short-term certificates of deposit totaled $74.0 million, or 8.5% of assets. The Bank had no FHLB or Federal Reserve advances and no wholesale-brokered deposits at quarter-end. Disclosed available borrowing capacity was subject to collateral and other conditions.
- Junior subordinated debentures were $22.7 million. The Company continued deferring interest payments and had deferred $1.9 million cumulatively; the deferral restricts common-stock dividends.
- The Bank reported a 10.79% Tier 1 leverage ratio and 14.29% total risk-based capital ratio. It met the elevated capital requirements imposed by its regulatory MOU and was categorized as well capitalized.
Material changes versus comparable periods
- Quarterly net income fell to $181,000 from $1.117 million; six-month net income fell to $895,000 from $2.882 million. Six-month EPS declined to $0.04 from $0.20.
- Six-month net interest income decreased $403,000 and net interest margin fell to 4.50% from 4.63%. Lower loan balances and yields, loan repricing, and interest reversals on nonperforming loans reduced interest income; lower deposit costs partly offset the decline.
- Six-month loan-loss provision increased to $3.75 million from $2.98 million. Net charge-offs were $4.0 million, versus $5.6 million in the prior-year period.
- Nonperforming assets increased to $55.3 million, or 6.33% of assets, from $39.9 million, or 4.65%, at March 31, 2011. Nonperforming loans rose to $29.7 million from $12.3 million; REO declined to $25.6 million from $27.6 million. Allowance coverage of nonperforming loans fell to 49.43% from 121.46%.
- Classified loans increased to $70.1 million from $36.4 million at March 31. Loans 30–89 days past due rose to $16.1 million from $7.8 million. Management cited worsening borrower and collateral conditions, particularly in land and construction lending.
- Deposits increased $12.7 million from March 31, while net loans rose $8.2 million. The Company continued shifting toward selected commercial, multifamily, and residential mortgage lending and away from land development and speculative construction.
- Quarterly non-interest expense increased $433,000; six-month expense increased $1.3 million, driven in part by higher REO costs and a $277,000 Internet-banking contract termination fee. Lower salaries and FDIC premiums provided partial offsets.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management said elevated credit costs and loan delinquencies could persist for the foreseeable future amid weak regional economic and real-estate conditions, despite some signs of stabilization in home values and local employment.
- Management expects cost reductions to produce $300,000–$400,000 in savings in the current fiscal year and annual savings of $1.4–$1.7 million beginning in fiscal 2013; much of the current-year benefit was expected in the fourth fiscal quarter.
- The Bank remained subject to regulatory MOUs requiring, among other things, minimum leverage and risk-based capital ratios, asset-quality plans, and regulatory non-objection for specified actions. Management stated it believed the Company and Bank were in compliance.
- The Company and Bank sought regulatory approval for a plan to convert the Bank to a Washington-chartered commercial bank and reorganize the Company as a bank holding company.
- Credit risk remains concentrated in real-estate-secured lending. The allowance was $14.7 million, or 2.11% of total loans; management considered it adequate but warned that further economic or collateral deterioration, or regulatory review, could require additional provisions. The filing reports $40.6 million of other loans of concern.
- A pooled trust-preferred security had a $1.795 million unrealized loss and was valued using significant unobservable inputs. Four underlying issuers had defaulted and seven were in deferral; management estimated a 44% expected default rate and recorded no additional other-than-temporary impairment during the quarter.
- Goodwill was $25.6 million. The prior annual impairment test required a second-step analysis but resulted in no impairment; management saw no need for an interim test as of September 30, 2011, while noting future impairment risk.
- Commitments to extend credit totaled $84.2 million. Loans under sale-related warranties totaled $97.2 million; management considered potential loss remote and recorded no liability. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether the sharp increase in nonperforming and classified loans, past-due loans, and other loans of concern leads to further charge-offs or provision expense, especially in land and construction portfolios.
- Whether the $14.7 million allowance remains adequate as its coverage of nonperforming loans has fallen, and whether updated collateral valuations or regulatory examinations change reserve needs.
- Whether net interest margin and earnings stabilize as deposit costs decline, loans reprice, and nonaccrual loans reduce interest income.
- Progress on regulatory MOU compliance and the pending charter conversion and bank-holding-company reorganization, including any additional restrictions or conditions.
- The duration and consequences of the $22.7 million debenture interest deferral, including accrued interest, dividend restrictions, and access to funding.
- Actual realization and timing of forecast cost savings, and the potential impact of continued REO carrying costs and write-downs.