Riverview Bancorp, Inc. — Form 10-Q summary
Business context and reporting period. Unaudited consolidated results for the quarter and nine months ended December 31, 2012 (the third quarter of fiscal 2013), compared with the corresponding 2011 periods. The company is a Washington- and Oregon-focused community bank, with lending concentrated in commercial real estate, commercial business and other real estate loans. Unless otherwise noted, amounts below are in millions.
Financial performance and condition
- Quarterly results: Net interest income was $7.4 million, down from $8.4 million; non-interest income was $2.1 million, up from $1.5 million. Net income was $1.0 million, or $0.05 per diluted share, versus a net loss of $16.6 million, or $0.74 per share, a year earlier. The prior-year loss included an $8.7 million deferred-tax-asset valuation allowance and an $8.1 million loan-loss provision.
- Nine-month results: Net interest income was $23.2 million versus $25.7 million; non-interest income was $6.8 million versus $5.3 million. Net income was $1.0 million, or $0.05 per diluted share, compared with a $15.7 million net loss, or $0.70 per share, in 2011.
- Margins and credit costs: Tax-equivalent net interest margin declined to 4.03% for the quarter and 4.19% for the nine months, from 4.21% and 4.40%, respectively. Loan-loss provision was zero for the quarter and $4.5 million for the nine months, compared with $8.1 million and $11.9 million in the prior-year periods. Nine-month net charge-offs were $4.8 million, down from $10.9 million.
- Cash flow: Nine-month operating cash flow was $8.6 million, investing cash flow was positive $114.0 million, and financing cash flow was negative $62.0 million. Cash increased $60.7 million to $107.1 million. Investing inflows principally reflected loan repayments and loan-sale proceeds; financing outflows principally reflected a $61.7 million decline in deposits.
- Balance sheet and liquidity: Total assets were $794.6 million, down from $856.0 million at March 31, 2012. Net loans fell to $539.5 million from $664.9 million, including the planned sale of $31.4 million of residential mortgages to FHLMC. Deposits declined to $682.8 million from $744.5 million. The company reported no FHLB or Federal Reserve advances and no wholesale-brokered deposits at quarter-end; it stated available liquidity sources totaled $482.8 million, subject to collateral and other conditions.
- Capital and obligations: Total equity was $77.4 million. The Bank reported a 9.50% Tier 1 leverage ratio and 14.25% total risk-based capital ratio, above its regulator-imposed minimums of 9.00% and 12.00%. Junior subordinated debentures remained $22.7 million. Interest payments have been deferred since fiscal 2011; $3.2 million was deferred by December 31, 2012. The deferral restricts common dividends.
Material changes and asset quality
- Nonperforming assets declined to $45.4 million, or 5.71% of assets, from $62.9 million, or 7.35%, at March 31, 2012. Nonperforming loans fell to $24.7 million from $44.2 million, while real estate owned increased to $20.7 million from $18.7 million.
- Classified loans decreased to $66.4 million from $86.0 million, but classified commercial real estate loans increased to $43.4 million from $35.1 million. Allowance for loan losses was $19.6 million, or 3.51% of loans, and covered 79.60% of nonperforming loans.
- Management said weaker local economic conditions and lower property values could continue to pressure borrowers and collateral. The company continued reducing land-development and speculative-construction exposure and sold $5.2 million of land and lot real estate-owned properties during the nine months.
Outlook, commentary, risks and unusual items
- Management described its priorities as resolving problem assets, growing commercial lending and core deposits, controlling expenses, and maintaining liquidity and capital. It expects to continue selling conforming newly originated residential mortgages. No numerical earnings or revenue guidance was provided.
- The Bank remains subject to a formal OCC agreement requiring, among other things, asset-quality and criticized-asset reduction programs, capital planning, credit-risk controls and quarterly reporting. A separate Federal Reserve memorandum restricts certain company dividends, debt actions and receipts of Bank distributions. Management stated it believed it was in compliance with both supervisory arrangements.
- Risks include continued deterioration in commercial real estate or local economic conditions, further loan losses or collateral-value declines, deposit outflows, interest-rate and funding changes, and regulatory requirements. Management cautioned that the existing allowance may prove inadequate.
- The company’s annual goodwill test found reporting-unit fair value below carrying value in step one, requiring step two analysis; step two indicated implied goodwill fair value exceeded carrying value by $13.6 million, so no impairment was recorded. Management cautioned future impairment remained possible.
- The company carried a $16.8 million deferred-tax-asset valuation allowance, leaving a net deferred tax asset of $0.5 million. Nine-month loan-sale gains increased to $1.1 million, including a $0.7 million gain on the planned bulk mortgage sale. Ordinary-course litigation was disclosed; management did not expect a material adverse effect.
Important facts for investors to verify
- Whether nonperforming assets, classified commercial real estate loans and real estate-owned balances continue to improve, and whether further charge-offs or provisions are needed.
- Whether the Bank maintains capital above its OCC-imposed minimums and complies with the OCC agreement and Federal Reserve memorandum.
- Whether deposit trends and the stated $482.8 million of available liquidity remain stable, including the collateral and other conditions on borrowing capacity.
- Whether the $16.8 million tax valuation allowance, deferred debenture interest and goodwill valuation assumptions change in subsequent filings.
- How much reported earnings depend on mortgage-sale gains and other nonrecurring or volatile items, given lower net interest income and net interest margin.