Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2013, the company’s fiscal 2014 first quarter. The filing compares results with the three months ended June 30, 2012; balance-sheet changes are generally compared with March 31, 2013. Amounts are in U.S. dollars unless noted.
Business context
Riverview Bancorp is a Washington-based community banking company operating primarily in Washington and Oregon through Riverview Community Bank and related financial-services subsidiaries. Its business centers on deposits and commercial, commercial real estate, construction, residential real estate, and consumer lending. Management is emphasizing commercial lending, core deposits, asset-quality improvement, and fee income while controlling balance-sheet growth.
Financial performance and condition
| Metric | June 2013 quarter / June 30, 2013 | Comparison |
|---|---|---|
| Net income (loss) | $1.64 million; diluted EPS $0.07 | Net loss of $1.78 million; diluted loss per share $0.08, prior-year quarter |
| Net interest income | $6.15 million | $8.07 million, down 23.8% |
| Net interest margin | 3.51% | 4.22% in prior-year quarter |
| Provision for loan losses | $2.50 million recapture | $4.00 million provision in prior-year quarter |
| Non-interest income / expense | $2.25 million / $9.24 million | $2.44 million / $8.28 million, prior-year quarter |
| Cash from operations | $1.59 million | $4.42 million, prior-year quarter |
| Total assets | $774.6 million | $777.0 million at March 31, 2013 |
| Net loans / deposits | $511.7 million / $659.5 million | $520.4 million / $663.8 million at March 31, 2013 |
| Cash and certificates of deposit held for investment | $111.9 million / $42.7 million | $115.4 million / $44.6 million at March 31, 2013 |
| Shareholders’ equity | $80.1 million | $78.4 million at March 31, 2013 |
Net income improved chiefly because of the $2.5 million loan-loss recapture, despite lower net interest income and higher non-interest expense. Interest income fell to $6.83 million from $9.24 million, reflecting lower average loan balances and loan repricing. Interest expense declined to $677,000 from $1.17 million. Operating cash flow was positive, but cash declined $3.54 million after financing outflows, chiefly a $4.31 million decrease in deposits.
The allowance for loan losses was $13.7 million, 2.61% of loans, versus $15.6 million, 2.92%, at March 31. Nonperforming assets were $34.6 million, or 4.46% of assets, down from $36.8 million, or 4.73%. Nonperforming loans were $21.4 million, slightly above $21.1 million at March 31; real estate owned declined to $13.2 million from $15.6 million. Total capital and Tier 1 leverage ratios for the Bank were 15.81% and 10.27%, respectively, above its regulator-agreed minimums of 12.00% and 9.00%.
Material changes and management commentary
- Average net loans fell $140.4 million year over year to $531.4 million; the period-end loan balance declined $8.7 million from March 31 as the company reduced classified and nonperforming exposures.
- Non-interest expense rose $967,000 year over year. Data-processing expense increased $374,000 following conversion to a new core banking platform; real-estate-owned expense increased $673,000, mainly because of $1.3 million in property write-downs.
- Loan-loss experience improved: the quarter recorded net recoveries of $554,000 versus net charge-offs of $2.9 million in the prior-year quarter. Management cited improving asset quality and stabilizing real estate values, while warning that problem loans remained elevated versus historical levels.
- Available-for-sale investment securities increased to $14.6 million from $6.2 million at March 31, and available-for-sale mortgage-backed securities increased to $6.1 million from $431,000, primarily reflecting purchases.
- Management described local economic recovery as modest and uneven. Its stated strategy is to pursue measured commercial and owner-occupied real estate lending, especially to medical-sector customers, and to increase fee income and core customer deposits. No specific financial guidance was provided.
Guidance, risks, contingencies, and unusual items
- The Bank remains subject to an OCC written agreement requiring, among other matters, enhanced credit-risk and asset-quality controls, quarterly progress reporting, and prior OCC non-objection for dividends. The company entered a separate Federal Reserve written agreement in May 2013 requiring approval for specified dividends, debt actions, payments on debentures, and cash-flow reporting. Management said it believed it was complying with both agreements.
- The company continued deferring interest on $22.7 million of junior subordinated debentures; deferred interest totaled $3.4 million at June 30. The deferral restricts common-stock dividends and may impair access to wholesale funding or debt financing on acceptable terms.
- Liquidity included $111.9 million of cash, no FHLB or FRB advances, and stated available borrowing capacity of $160.3 million at the FHLB and $66.6 million at the FRB. The company reported total available liquidity of $489.2 million, or 63.2% of assets, while noting borrowing capacity depends on collateral acceptability and counterparty terms.
- Credit and valuation risks include real-estate concentration, borrower stress, collateral-value changes, regulatory examinations, and uncertainty in the allowance estimate. Commercial real estate represented 55.61% of total loans. Nonperforming commercial real estate loans increased as a share of nonperforming loans, to 62.67% from 48.81% at March 31.
- A pooled trust-preferred security had a $2.07 million fair value and was classified as Level 3; the company estimated a 37% expected default rate and reported no additional other-than-temporary impairment charge this quarter. Management also stated no interim goodwill impairment test was necessary; goodwill was $25.6 million.
- Off-balance-sheet commitments totaled $82.8 million, including $68.4 million of undisbursed loan funds and unused lines. Loans under warranty totaled $122.1 million; management considered potential loss remote and recorded no liability. Ordinary-course litigation was not expected by management to have a material effect.
Important facts for investors to verify
- Whether the improvement to profitability is sustainable without a further loan-loss recapture, given the 23.8% year-over-year decline in net interest income and lower net interest margin.
- Trends in nonperforming and classified commercial real estate loans, foreclosed-property sales and write-downs, and the adequacy of the $13.7 million allowance.
- Compliance with OCC and Federal Reserve requirements, progress toward required capital ratios, and the conditions for ending the debenture-interest deferral and related dividend restrictions.
- Stability and composition of deposits, renewal of the $126.3 million in certificates of deposit scheduled to mature within one year, and continued availability of stated secured borrowing capacity.
- Effects of the new core banking platform on recurring operating costs, and the underlying assumptions supporting fair values for the Level 3 trust-preferred security, impaired loans, REO, and goodwill.