RIVERVIEW BANCORP INC quarterly report, Q3 FY2012

Riverview Bancorp, Inc. — Form 10-Q

Reporting period: Quarter and nine months ended December 31, 2011 (fiscal third quarter), compared with the periods ended December 31, 2010. Balance-sheet comparisons are to March 31, 2011. Amounts are in U.S. dollars; financial statement amounts below are rounded to millions unless otherwise noted.

Business context

Riverview is a Washington- and Oregon-focused community bank whose business is primarily taking deposits and making commercial, commercial real estate, construction, residential mortgage, and consumer loans. Commercial and construction loans were 81.0% of the loan portfolio. Management is shifting toward commercial business, owner-occupied commercial real estate, multifamily, and higher-quality residential mortgage lending, while reducing land-development and speculative-construction exposure.

Financial performance and position

Metric	Three months ended Dec. 31	Nine months ended Dec. 31
Net interest income	$8.4m, versus $8.8m	$25.7m, versus $26.5m
Provision for loan losses	$8.1m, versus $1.6m	$11.9m, versus $4.6m
Net income (loss)	$(16.6)m, versus $0.6m	$(15.7)m, versus $3.5m
Basic and diluted EPS	$(0.74), versus $0.03	$(0.70), versus $0.20
Net interest margin	4.21%, versus 4.60%	4.40%, versus 4.62%

• Income and margins: Interest income fell to $9.8m for the quarter and $30.2m for nine months, largely from lower loan yields and interest reversals on nonaccrual loans. Lower deposit costs reduced interest expense, but did not offset the decline in interest income. Noninterest income was $1.5m for the quarter and $5.3m for nine months; noninterest expense was $10.2m and $26.2m, respectively.
• Unusual earnings items: The company recorded an $8.7m deferred-tax-asset valuation allowance, substantially increasing income-tax expense. Management cited cumulative losses as objective negative evidence. The quarter also included increased loan-loss provision and real-estate-owned (REO) costs and write-downs.
• Balance sheet at Dec. 31: Total assets were $862.3m; net loans were $678.6m, up $6.0m from March 31; deposits were $735.0m, up $18.5m. Shareholders’ equity was $91.6m, down from $106.9m, primarily reflecting the nine-month net loss. Total liabilities were $770.2m.
• Cash flow and liquidity: For nine months, operating cash flow was $9.1m, investing cash flow was $(42.7)m, and financing cash flow was $18.2m. Cash declined $15.4m to $36.3m. Cash and short-term certificates of deposit totaled $79.0m, or 9.2% of assets. The Bank reported no FHLB or Federal Reserve advances and no wholesale-brokered deposits; stated borrowing capacity was subject to collateral and other conditions.
• Debt and distributions: Junior subordinated debentures totaled $22.7m. The company continued deferring interest payments, with $2.3m deferred by December 31. The deferral prohibits common-stock dividends until payments are current. Capital lease obligations were $2.5m.

Material changes and asset quality

• Nonperforming assets rose to $52.7m, or 6.11% of assets, from $39.9m, or 4.65%, at March 31. Nonperforming loans increased to $32.0m from $12.3m; REO decreased to $20.7m from $27.6m.
• Past-due loans of 30–89 days increased to $28.2m from $7.8m. Impaired loans reached $80.4m, compared with $27.3m at March 31; troubled debt restructurings rose to $13.4m from $5.9m.
• The allowance for loan losses was $15.9m, or 2.29% of loans, versus $15.0m, or 2.18%. Allowance coverage of nonperforming loans fell to 49.71% from 121.46%. Nine-month net charge-offs were $10.9m, compared with $8.8m.
• Credit deterioration was concentrated in land, construction, and real estate exposures. Land and speculative-construction loans totaled $58.5m, down from $71.7m at March 31, but land delinquencies and updated collateral valuations contributed to elevated provisions and charge-offs. REO write-downs were $3.3m for nine months, including $2.5m in the quarter.
• Core branch deposits increased $28.6m from March 31 and represented 92.7% of total deposits. The company reported $42.7m of certificates of deposit held for investment, all stated to be FDIC-insured.

Outlook, regulation, and other risks

• Management said credit costs could remain elevated for the foreseeable future and warned that further weakness in the local economy or property values, regulatory examinations, or additional loan deterioration could require higher provisions or charge-offs. It reported some signs of stabilization in local housing indicators but noted continued weakness in land and lot values.
• On January 25, 2012, after the quarter-end, the Bank entered a formal written agreement with the OCC, replacing its prior MOU. Requirements include a three-year capital plan, enhanced credit-risk oversight, restrictions on certain loans, criticized-asset reduction, semiannual independent asset-quality reviews, quarterly reporting, and no dividends without OCC non-objection. A separate Federal Reserve MOU applies to the parent company.
• The Bank reported regulatory capital ratios of 9.74% Tier 1 leverage and 13.14% total risk-based capital at December 31, above the agreement’s respective minimums of 9.0% and 12.0%. Management stated the Bank remained “well capitalized” under the regulatory framework.
• The annual goodwill impairment test’s first step indicated reporting-unit fair value below carrying value. The second step was incomplete at filing, and management expected to finalize the analysis in fiscal Q4; a goodwill impairment charge remained possible.
• Other risks include a highly real-estate-secured loan portfolio, concentrated regional exposure, regulatory enforcement, interest-rate and deposit-funding sensitivity, and $86.8m of lending commitments. Loans under sale-related warranties totaled $92.5m; management considered potential loss remote and recorded no liability. Ordinary-course litigation was not expected by management to have a material adverse effect.
• No quantified earnings or financial guidance was provided. Management described a plan to grow selected commercial and residential lending, increase core deposits and fee income, control expenses, and gradually expand in its region, including a planned Gresham, Oregon branch.

Important facts for investors to verify

1. Whether the OCC agreement and Federal Reserve MOU requirements are being met, and whether either regulator imposes further restrictions or actions.
2. Whether nonperforming loans, delinquencies, classified assets, collateral values, and charge-offs improve or worsen, and whether the allowance remains adequate.
3. The completed goodwill impairment test and any resulting impairment charge.
4. Whether the $8.7m deferred-tax valuation allowance changes as profitability and taxable-income evidence develop.
5. The duration and accumulated cost of debenture interest deferral, its effect on funding access, and the conditions for resuming common dividends.
6. Whether reported liquidity and available borrowing capacity remain accessible under applicable collateral, regulatory, and counterparty conditions.