Riverview Bancorp, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012; comparisons are primarily with the year ended March 31, 2011. This is an annual filing, not a calendar-year fourth-quarter report. Deloitte & Touche issued an unqualified opinion on the consolidated financial statements.
Business context and financial position
Riverview is a community bank holding company operating mainly in southwest Washington and parts of Oregon. Its lending remains concentrated in commercial and commercial real estate, with a strategy to reduce land-development and speculative construction exposure while growing higher-quality residential and commercial lending.
| Metric | March 31, 2012 / FY2012 | Prior comparable |
|---|---|---|
| Total assets | $856.0 million | $859.3 million |
| Deposits | $744.5 million | $716.5 million |
| Net loans | $664.9 million | $672.6 million |
| Shareholders’ equity | $75.6 million | $106.9 million |
| Net interest income | $33.7 million | $35.2 million |
| Net income (loss) | $(31.7) million; $(1.42) per diluted share | $4.3 million; $0.24 per diluted share |
Earnings, credit quality and cash flow
- Net interest margin: 4.33%, down from 4.64%; net interest income declined 4.3%. Management attributed the decline to interest reversals on nonaccrual loans, lower-yielding cash and short-term investments, and loan repricing.
- Credit costs: Loan-loss provision was $29.4 million versus $5.1 million; net charge-offs were $24.4 million versus $11.7 million. The allowance was $19.9 million, or 2.91% of loans, covering 45.11% of nonperforming loans versus 121.46% a year earlier.
- Problem assets: Nonperforming loans rose to $44.2 million from $12.3 million; nonperforming assets increased to $62.9 million, or 7.35% of assets, from $39.9 million, or 4.65%. Land-development and speculative construction loans remained major problem areas. REO was $18.7 million; FY2012 included $4.2 million of REO write-downs.
- Other income and expense: Non-interest income fell to $6.8 million from $7.9 million, including a $556,000 net loss on REO sales. Non-interest expense rose to $34.4 million from $31.5 million, mainly due to higher REO-related costs. The company recorded an $8.4 million income-tax provision and established a $16.8 million deferred-tax-asset valuation allowance.
- Cash flow: Operating activities provided $12.0 million, investing activities used $45.4 million, and financing activities provided $28.0 million. Cash and cash equivalents declined $5.4 million to $46.4 million. The filing reports cash flows, but does not present a standalone “free cash flow” measure.
Liquidity, debt and capital
- Deposits increased $27.9 million; core branch deposits were 92.5% of total deposits. Average deposit cost fell to 0.60% from 0.93%. The company reported no wholesale brokered deposits excluding CDARS/ICS; those reciprocal deposits totaled $37.2 million.
- Cash and certificates of deposit held for investment totaled about $87.9 million. The Bank had no FHLB or Federal Reserve borrowings outstanding at year-end and reported $513.6 million of available liquidity, subject to collateral, eligibility and regulatory constraints.
- Debt included $22.7 million of junior subordinated debentures and $2.5 million of capital lease obligations. The company deferred interest on the debentures beginning in FY2011; $2.6 million had accrued as deferred interest by year-end. While deferral continues, common dividends are prohibited.
- The OCC required Bank minimums of 9.00% for Tier 1 leverage and 12.00% for total risk-based capital. At year-end the ratios were 8.76% and 12.11%, respectively. The company subsequently invested $2.7 million in the Bank, which management said raised leverage above 9%. A planned $32 million residential-loan sale could add an estimated 30 basis points to leverage if completed.
Changes, outlook and key risks
- Residential one-to-four-family loans increased to $100.6 million from $70.2 million. Land acquisition and development loans declined to $38.9 million from $55.3 million, while commercial and construction loans fell to 80.0% of the portfolio from 83.6%.
- Management said credit costs could remain elevated for the foreseeable future and warned that a prolonged weak local economy could further increase nonperforming assets, provisions and charge-offs. The filing provides no quantified earnings or revenue guidance.
- The Bank entered a formal OCC agreement in January 2012, replacing its prior MOU. Requirements include a capital plan, enhanced credit-risk oversight and asset-quality reviews, criticized-asset reduction, limits on certain loans and prior OCC non-objection for dividends. The parent company also remains subject to a Federal Reserve MOU.
- The Bank did not meet the qualified thrift lender test at March 31, 2012. Management withdrew its application to convert the Bank to a Washington commercial bank and reorganize the parent as a bank holding company in April 2012.
- Management disclosed ineffective disclosure controls and internal control over financial reporting due to a material weakness in timely monitoring, documentation and valuation of loans. It reported implementing tracking systems to address the deficiencies. The auditor did not audit internal control effectiveness.
- Other material risks include regional real estate and commercial-credit concentration, collateral valuation uncertainty, interest-rate and deposit competition, restricted funding options, regulatory compliance, deferred debenture interest, and potential FHLB-stock or Level 3 investment valuation losses. Management reported no goodwill impairment, but the annual test required a second-step analysis.
Important facts for investors to verify
- Whether the $2.7 million capital contribution and proposed $32 million loan sale brought the Bank into sustained compliance with OCC capital requirements.
- Subsequent trends in nonperforming loans, classified assets, charge-offs, REO values and the adequacy of the $19.9 million loan-loss allowance.
- Progress under the OCC agreement and Federal Reserve MOU, including restrictions on dividends, debt and deposit funding.
- Whether management remediated the loan-monitoring and valuation material weakness and whether control effectiveness was independently assessed.
- Assumptions supporting the $16.8 million deferred-tax valuation allowance and the valuation of the Level 3 trust-preferred security.
- Cash-flow sustainability, deposit retention and the availability of borrowing capacity under collateral and regulatory limits.