Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2013, the company’s fiscal 2014 third quarter, with nine-month results compared with the same period in 2012. The filing is unaudited. Amounts below are U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Prior-year comparable | Nine months ended Dec. 31, 2013 | Prior-year comparable |
|---|---|---|---|---|
| Net interest income | $6.0 million | $7.4 million | $18.3 million | $23.2 million |
| Provision for (recapture of) loan losses | None | None | $(2.5) million recapture | $4.5 million provision |
| Non-interest income | $2.4 million | $2.1 million | $6.5 million | $6.8 million |
| Non-interest expense | $7.6 million | $8.4 million | $24.5 million | $24.5 million |
| Net income | $801,000 | $1.03 million | $2.78 million | $1.04 million |
| Diluted earnings per share | $0.04 | $0.05 | $0.12 | $0.05 |
| Net interest margin | 3.29% | 4.03% | 3.39% | 4.19% |
- Quarterly net income fell year over year as lower loan balances and loan yields reduced interest income; lower expenses and higher non-interest income partly offset the decline.
- Nine-month earnings improved primarily because the company recorded a $2.5 million loan-loss provision recapture, versus a $4.5 million provision in the prior-year period. Management cautioned that results for the nine months are not necessarily indicative of full-year results.
- Quarterly interest income was $6.7 million, down from $8.1 million; interest expense declined to $645,000 from $752,000. Nine-month interest income was $20.3 million versus $26.0 million, while interest expense was $2.0 million versus $2.8 million.
Financial condition, liquidity and capital
- At December 31, 2013, total assets were $804.9 million, up from $777.0 million at March 31, 2013. Deposits were $689.3 million, up $25.5 million; net loans were $505.6 million, down $14.7 million; and total equity was $81.7 million, compared with $79.0 million.
- Cash was $123.1 million, or 15.3% of assets. The Bank reported no outstanding FHLB or Federal Reserve advances and no wholesale-brokered deposits. Available borrowing capacity was $54.2 million at the Federal Reserve and $175.9 million at the FHLB, subject to collateral and other conditions. The company reported total available liquidity of $535.9 million, or 66.6% of assets.
- Nine-month cash flows: operating activities provided $4.7 million; investing activities used $21.0 million; financing activities provided $24.0 million. Cash increased $7.7 million to $123.1 million.
- Junior subordinated debentures were $22.7 million. The company continued deferring interest payments, with $3.6 million cumulatively deferred at December 31, 2013. The deferral restricts common-stock dividends and may affect access to wholesale funding or debt financing. Capital lease obligations were $2.4 million.
- The Bank was classified as “well capitalized.” Its Tier 1 leverage ratio was 10.42% and total risk-based capital ratio was 16.76%, above the OCC-agreed minimums of 9.00% and 12.00%, respectively.
Asset quality and material changes
- Nonperforming assets declined to $25.3 million, or 3.15% of assets, from $36.8 million, or 4.73%, at March 31, 2013. Nonperforming loans fell to $13.4 million from $21.1 million; real estate owned fell to $12.0 million from $15.6 million.
- The allowance for loan losses was $14.0 million, 2.70% of loans, versus $15.6 million, 2.92%, at March 31. Allowance coverage of nonperforming loans improved to 105.02% from 74.02%. The filing attributes the improvement to lower delinquency and classified-loan levels, reduced charge-offs, recoveries and stabilizing property values.
- Classified loans declined $12.0 million during the nine months. Land development and speculative construction loans declined to $20.3 million from $26.9 million. However, nonperforming and classified loans remained elevated relative to historical levels.
- Total loans fell as the company reduced its balance sheet and problem-asset exposure. During the quarter it purchased $7.6 million of automobile loans and entered an agreement to purchase up to $25 million of qualifying pools; it is not obligated to make further purchases. Management said most potential remaining purchases were expected in fiscal fourth quarter 2014.
- The company increased available-for-sale investment and mortgage-backed securities as it placed excess cash into higher-yielding securities. These portfolios were $19.8 million and $34.5 million, respectively, at December 31. Management reported no additional other-than-temporary impairment charge during the quarter.
Outlook, risks and unusual items
- Management’s strategy is to pursue measured loan growth, emphasizing commercial business and owner-occupied commercial real estate lending, grow core deposits and fee income, control expenses, and continue reducing nonperforming assets. It described the local economic recovery as modest and uneven. No specific earnings or revenue guidance was provided.
- The Bank remains subject to an OCC written agreement requiring, among other things, capital planning, credit-risk controls, asset-quality measures and prior non-objection for dividends. The company is also subject to a Federal Reserve written agreement requiring approvals or notice for specified dividends, debt actions and payments on debentures. Management stated it believed it was complying with both agreements.
- Credit risks include real-estate concentration, collateral-value declines, borrower stress and possible future increases in credit provisions. Management noted that adverse economic conditions or regulatory examinations could require additional reserves and harm earnings or liquidity.
- Interest-rate risk is material: declining average loan balances and loan repricing reduced margins. The company also cited potential funding and liquidity effects from competition, deposit behavior and its interest deferral. Securities and collateral valuations rely in part on management estimates; the trust-preferred security is a Level 3 valuation with significant unobservable inputs.
- A $15.6 million deferred-tax-asset valuation allowance was maintained, leaving a net deferred tax asset of $348,000. Although the company reported its sixth consecutive profitable quarter, it remained in a cumulative three-year loss position; future tax-allowance releases were not assured.
- The annual goodwill test found no impairment, although the first-step fair value was below carrying value and required a second-step analysis. Goodwill’s estimated implied fair value exceeded its carrying value by $24.6 million; future impairment remains possible if assumptions or business conditions worsen.
- Loan commitments, unused lines and undisbursed funds totaled $86.1 million, including $70.6 million of unused lines and undisbursed funds. Loans under representations and warranties totaled $121.0 million; management considered potential loss remote and recorded no liability. Ordinary-course litigation was not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether asset-quality improvement and loan-loss recoveries continue, and whether the allowance remains adequate as problem loans resolve.
- Whether net interest margin stabilizes despite lower loan yields, loan runoff and reinvestment of cash into lower-yielding assets.
- Progress and ongoing compliance under OCC and Federal Reserve agreements, including capital requirements and restrictions on dividends and debt payments.
- The economic and credit risks of the new indirect automobile-loan purchases, including underwriting, servicing and concentration exposure.
- Liquidity and funding resilience while $22.7 million of debentures remain outstanding and interest deferral continues, as well as the potential realization of deferred tax assets.