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RVSB > SEC Filings for RVSB > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for RIVERVIEW BANCORP INC

Form 10-Q for RIVERVIEW BANCORP INC


13-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Management uses these non-GAAP measures in its analysis of the Company's performance. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 34% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Critical Accounting Policies

Critical accounting policies and estimates are discussed in our 2013 Form 10-K under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies." That discussion highlights estimates the Company makes that involve uncertainty or potential for substantial change. There have not been any material changes in the Company's critical accounting policies and estimates as compared to the disclosure contained in the Company's 2013 Form 10-K.

Regulatory Developments and Significant Events

In January 2009, the Bank entered into a Memorandum of Understanding ("MOU") with the Office of Thrift Supervision ("OTS"), at the time the Bank's primary regulator. Following the transfer of the responsibilities and authority of the OTS to the OCC on July 21, 2011, the MOU was enforced by the OCC. On January 25, 2012, the Bank entered into a formal written agreement ("Agreement") with the OCC. Upon effectiveness of the Agreement, the MOU was terminated by the OCC. The Agreement will remain in effect and enforceable until modified, waived or terminated in writing by the OCC.

Entry into the Agreement does not change the Bank's "well capitalized" status as of the date of this Form 10-Q. The Agreement is based on the findings of the OCC during its on-site examination of the Bank as of June 30, 2011 ("OCC Exam"). Since the completion of the OCC Exam, the Bank's Board of Directors ("Board") and its management have successfully implemented initiatives and strategies to address and resolve the issues noted in the Agreement. The Bank continues to work in cooperation with its regulators to ensure its policies and procedures remain in conformity with the requirements contained in the Agreement.

Under the Agreement, the Bank is required to take the following actions: (a) refrain from paying dividends without prior OCC non-objection; (b) adopt, implement and adhere to a three year capital plan, including objectives, projections and implementation strategies for the Bank's overall risk profile, dividend policy, capital requirements, primary capital structure sources and alternatives, various balance sheet items, as well as systems to monitor the Bank's progress in meeting the plans, goals and objectives of the plan; (c) add a credit risk management function and appoint a Chief Lending Officer that is independent from the credit risk management function; (d) update the Bank's credit policy and not grant, extend, renew or alter any loan over $250,000 without meeting certain requirements set forth in the Agreement; (e) adopt, implement and adhere to a program to ensure that risk associated with the Bank's loans and other assets is properly reflected on the Bank's books and records;
(f) adopt, implement and adhere to a program to reduce the Bank's criticized assets; (g) retain a consultant to perform semi-annual asset quality reviews of the Bank's loan portfolio; (h) adopt, implement and adhere to policies related to asset diversification and reducing concentrations of credit; and (i) submit quarterly progress reports to the OCC regarding various aspects of the foregoing actions.

The Bank's Board must ensure that the Bank has the processes, personnel and control systems in place to ensure implementation of, and adherence to, the requirements of the Agreement. In connection with this requirement, the Bank's Board has appointed a compliance committee to submit reports to the OCC and to monitor and coordinate the Bank's performance under the Agreement. The Bank believes it is currently in compliance with all of the requirements of the Agreement through its normal business operations. These requirements will remain in effect until modified or terminated by the OCC.

The Bank has also separately agreed to the OCC establishing higher minimum capital ratios for the Bank, specifically that the Bank maintain a Tier 1 capital (leverage) ratio of not less than 9.00% and a total risk-based capital ratio of not less than 12.00%. As of December 31, 2013, the Bank's Tier 1 capital (leverage) ratio was 10.42% and its total risk-based capital ratio was 16.76%.

In October 2009, the Company entered into a separate MOU agreement with the OTS, at the time the Company's primary regulator. In May 2013, the Company entered into a written agreement with the Federal Reserve, at which time the MOU agreement with the OTS was terminated. This written agreement requires the Company to: (a) provide notice to and obtain written approval from the Federal Reserve prior to the Company declaring a dividend or redeeming any capital stock or receiving dividends or other payments from the Bank; (b) provide notice to and obtain written approval from the Federal Reserve prior to the Company incurring, issuing, renewing or repurchasing any new debt; (c) provide notice to and obtain


written approval from the Federal Reserve prior to the Company making payments on its Debentures; (d) submit written statement of its planned sources and uses of cash for debt service, operating expenses, and other purposes ("Cash Flow Projection") beginning for calendar year 2013 and submit progress reports related to its Cash Flow Projections and financial results.

The Company believes it is currently in compliance with all of the requirements of the written agreement with the Federal Reserve through its normal business operations. The written agreement will remain in effect until modified or terminated by the Federal Reserve.

Executive Overview

As a progressive, community-oriented financial services company, the Company emphasizes local, personal service to residents of its primary market area. The Company considers Clark, Cowlitz, Klickitat and Skamania counties of Washington and Multnomah and Marion counties of Oregon as its primary market area. The counties of Multnomah, Clark and Skamania are part of the Portland metropolitan area as defined by the U.S. Census Bureau. The Company is engaged predominantly in the business of attracting deposits from the general public and using such funds in its primary market area to originate commercial business, commercial real estate, multi-family real estate, real estate construction, residential real estate and other consumer loans. Commercial business, commercial real estate and real estate construction loans have decreased to 80.3% of the loan portfolio at December 31, 2013 from 81.5% at March 31, 2013. The Company's strategy over the past several years has been to control balance sheet growth, including the targeted reduction of nonperforming and classified loans, in order to improve its regulatory capital ratios. The Company's loan portfolio declined from $520.4 million at March 31, 2013 to $505.6 million at December 31, 2013 due to the Company's efforts to restructure its balance sheet and reduce its overall loans receivable as part of the Company's asset quality, capital and liquidity strategies.

Most recently, the Company's primary focus has been on increasing commercial business loans and owner occupied commercial real estate loans with a specific focus on medical professionals and the medical industry. The Company also made the decision during the third fiscal quarter of 2014 to purchase, from time to time, pools of automobile loans from another financial institution as a way to further diversify its loan portfolio and to earn a higher yield than on its cash or short-term investments. These indirect automobile loans are originated through a single dealership group located outside the Company's primary market area. The collateral for these loans is comprised of a mix of used automobiles. These loans are purchased with servicing retained by the seller. The Company has entered into an agreement to purchase up to $25 million of automobile loan pools which meet our investment criteria and are subject to our underwriting standards. The Company purchased $7.6 million of automobile loans during the quarter-ended December 31, 2013. The Company anticipates that the majority of the remaining purchases will be completed during the fourth fiscal quarter of fiscal 2014; however, the Company is not obligated to purchase any additional loans over the initial $7.6 million purchase.

Through the Bank's subsidiary, Riverview Asset Management Corp. ("RAMCorp"), the Company's trust and financial services company which is located in downtown Vancouver, Washington, RAMCorp provides full-service brokerage activities, trust and asset management services. The Bank's Business and Professional Banking Division, with two lending offices in Vancouver and one in Portland, offers commercial and business banking services.

Vancouver is located in Clark County, Washington, which is just north of Portland, Oregon. Many businesses are located in the Vancouver area because of the favorable tax structure and lower energy costs in Washington as compared to Oregon. Companies located in the Vancouver area include Sharp Microelectronics, Hewlett Packard, Georgia Pacific, Underwriters Laboratory, Wafer Tech, Nautilus, Barrett Business Services, PeaceHealth and Fisher Investments, as well as several support industries. In addition to this industry base, the Columbia River Gorge Scenic Area is a source of tourism, which has helped to transform the area from its past dependence on the timber industry.

The Company's strategic plan includes targeting the commercial banking customer base in its primary market area for loan originations and deposit growth, specifically small and medium size businesses, professionals and wealth building individuals. In pursuit of these goals, the Company will seek to modestly increase the loan portfolio consistent with its strategic plan and asset/liability and regulatory capital objectives, which includes maintaining a significant amount of commercial and commercial real estate loans in its loan portfolio. Significant portions of our new loan originations carry adjustable rates, higher yields or shorter terms and higher credit risk than traditional fixed-rate mortgages

The Company's strategic plan also stresses increased emphasis on non-interest income, including increased fees for asset management through RAMCorp, and deposit service charges. The strategic plan is designed to enhance earnings, reduce interest rate risk and provide a more complete range of financial services to customers and the local communities the Company serves. The Company believes it is well positioned to attract new customers and to increase market share through its 18 branches, including ten in Clark County, three in the Portland metropolitan area and three lending centers, including a new full-service branch in Gresham, Oregon.

There continues to be indications that economic conditions are improving in the Company's market areas from the recent recessionary downturn, however, the pace of recovery has been modest and uneven and ongoing stress in the economy will likely continue to be challenging going forward. Unemployment in the Company's market areas decreased in both Clark


County, Washington and Portland, Oregon. According to the Washington State Employment Security Department, unemployment in Clark County decreased to 7.0% at November 30, 2013 compared to 10.1% at March 31, 2013 and 8.3% at December 31, 2012. According to the Oregon Employment Department, unemployment in Portland decreased to 6.5% at November 30, 2013 compared to 7.5% at March 31, 2013 and 7.6% at December 31, 2012. Home values in December 31, 2013 remained lower than 2011 and 2010; however, home values have increased since March 31, 2013. According to the Regional Multiple Listing Services ("RMLS"), inventory levels in Portland, Oregon have remained at 3.2 months at December 31, 2013 compared to March 31, 2013 and decreased compared to 3.6 months at December 31, 2012. Inventory levels in Clark County have slightly increased to 4.5 months at December 31, 2013 compared to 4.4 months at March 31, 2013 and decreased compared to 5.1 months at December 31, 2012. According to the RMLS, closed home sales in Clark County increased 3.0% and 21.8% during December 2013 compared to March 2013 and December 2012, respectively. Closed home sales in Portland decreased 7.9% and increased 1.3% during December 2013 compared to March 2013 and December 2012, respectively. Commercial real estate leasing activity in the Portland/Vancouver area has performed better than the residential real estate market; however, it is generally affected by a slow economy later than other indicators. According to Norris Beggs Simpson (a firm specializing in Pacific Northwest commercial real estate sales and management) commercial vacancy rates in Clark County and Portland, Oregon were approximately 10.8% and 15.2%, respectively, as of December 31, 2013 compared to 16.6% and 20.7%, respectively, at December 31, 2012. The Company has also seen an increase in sales activity for building lots during the past twelve months.

Operating Strategy

The Company's goal is to deliver returns to shareholders by managing problem assets, increasing higher-yielding assets (in particular commercial real estate and commercial business loans), increasing core deposit balances, reducing expenses, hiring experienced employees with a commercial lending focus and exploring expansion opportunities. The Company seeks to achieve these results by focusing on the following objectives:

Focusing on Asset Quality. The Company is focused on monitoring existing performing loans, resolving nonperforming loans and selling foreclosed assets. The Company has aggressively sought to reduce its level of nonperforming assets through write-downs, collections, modifications and sales of nonperforming loans and real estate owned. The Company has taken proactive steps to resolve its nonperforming loans, including negotiating repayment plans, forbearances, loan modifications and loan extensions with borrowers when appropriate, and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss than foreclosure. In connection with the downturn in real estate markets, the Company applied more conservative and stringent underwriting practices to new loans, including, among other things, increasing the amount of required collateral or equity requirements, reducing loan-to-value ratios and increasing debt service coverage ratios. The Company has continued to reduce its exposure to land development and speculative construction loans. The total land development and speculative construction loan portfolios declined to $20.3 million at December 31, 2013 as compared to $26.9 million at March 31, 2013. Nonperforming assets decreased $11.4 million to $25.3 million at December 31, 2013 compared to $36.8 million at March 31, 2013. However, there can be no assurance that the ongoing economic conditions affecting our borrowers will not result in future increases in nonperforming and classified loans.

Improving Earnings by Expanding Product Offerings. The Company intends to prudently increase the percentage of its assets consisting of higher-yielding commercial real estate and commercial loans, which offer higher risk-adjusted returns, shorter maturities and more sensitivity to interest rate fluctuations, while maintaining compliance with its heightened regulatory capital requirements. The Company also intends to selectively add additional products to further diversify revenue sources and to capture more of each customer's banking relationship by cross selling loan and deposit products and additional services to Bank customers, including services provided through RAMCorp to increase its fee income. Assets under management by RAMCorp totaled $335.6 million and $337.5 million at December 31, 2013 and March 31, 2013, respectively.

The Company continuously reviews new products and services to provide its customers more financial options. All new technology and services are generally reviewed for business development and cost saving purposes. The Bank has implemented remote check capture at all of its branches and for selected customers of the Bank. The Company continues to experience growth in customer use of its online banking services, which allows customers to conduct a full range of services on a real-time basis, including balance inquiries, transfers and electronic bill paying. The Company also upgraded its online banking product for consumer customers, providing consumer customers greater flexibility and convenience in conducting their online banking. The Company's online service has also enhanced the delivery of cash management services to business customers. The Company introduced its mobile banking application during the second fiscal quarter of 2013 to further allow flexibility and convenience to its customers related to their banking needs. During June 2013, the Company also implemented a new core banking platform that will enable the Company to better serve its customer base. The Company also participates in an internet deposit listing service which allows the Company to post time deposit rates on an internet site where institutional investors have the ability to deposit funds with the Company. Furthermore, the Company may utilize the internet deposit listing service to purchase certificates of deposit at other financial institutions. The Company also offers Insured Cash Sweep (ICS™), a reciprocal money market product, to its customers along with the


Certificate of Deposit Account Registry Service (CDARS™) program which allows customers access to FDIC insurance on deposits exceeding the $250,000 FDIC insurance limit.

Attracting Core Deposits and Other Deposit Products. The Company's strategic focus is to emphasize total relationship banking with its customers to internally fund its loan growth. The Company has reduced its reliance on other wholesale funding sources, including FHLB and FRB advances, by focusing on the continued growth of core customer deposits. The Company believes that a continued focus on customer relationships will help to increase the level of core deposits and locally-based retail certificates of deposit. In addition to its retail branches, the Company maintains technology-based products, such as personal financial management, business cash management, and business remote deposit products, that enable it to compete effectively with banks of all sizes. Core branch deposits (comprised of all demand, savings, interest checking accounts and all time deposits but excludes wholesale-brokered deposits, trust account deposits, Interest on Lawyer Trust Accounts ("IOLTA"), public funds and Internet based deposits) increased $33.8 million during the nine months ended December 31, 2013. At December 31, 2013, checking accounts totaled $223.0 million, or 32.4% of our total deposit mix compared to $216.1 million or 31.7% a year ago. The Company had no outstanding advances from the FHLB or the FRB at December 31, 2013.

Continued Expense Control. Since fiscal 2009, management has undertaken several initiatives to reduce non-interest expense and continues to make it a priority to identify cost savings opportunities throughout all aspects of the Company's operations. The Company has instituted expense control measures such as cancelling certain projects and capital purchases, and reducing travel and entertainment expenditures. The Company has formed a cost saving committee whose mission is to find additional cost saving opportunities at the Company.

Recruiting and Retaining Highly Competent Personnel With a Focus on Commercial Lending. The Company's ability to continue to attract and retain banking professionals with strong community relationships and significant knowledge of its markets will be a key to its success. The Company believes that it enhances its market position and adds profitable growth opportunities by focusing on hiring and retaining experienced bankers focused on owner occupied commercial real estate and commercial lending, and the deposit balances that accompany these relationships. The Company emphasizes to its employees the importance of delivering exemplary customer service and seeking opportunities to build further relationships with its customers. The goal is to compete with other financial service providers by relying on the strength of the Company's customer service and relationship banking approach. The Company believes that one of its strengths is that its employees are also significant shareholders through the Company's employee stock ownership ("ESOP") and 401(k) plans.

Disciplined Franchise Expansion. The Company believes opportunities currently exist within its market area to grow its franchise. The Company anticipates organic growth as the local economy and loan demand strengthens, through its marketing efforts and as a result of the opportunities being created as a result of the consolidation of financial institutions occurring in its market area. The Company expects to gradually expand its operations further in the Portland, Oregon metropolitan area which has a population of approximately two million people. The Company will continue to be disciplined as it pertains to future expansion focusing on the Pacific Northwest markets it knows and understands.

Loan Composition

The following table sets forth the composition of the Company's commercial and
construction loan portfolios based on loan purpose at the dates indicated.

                                      Other Real                      Commercial &
                       Commercial       Estate       Real Estate      Construction
                        Business       Mortgage      Construction        Total
December 31, 2013                           (in thousands)

Commercial business  $     69,659   $          -   $            -   $       69,659
Commercial
construction                    -              -           10,573           10,573
Office buildings                -         83,165                -           83,165
Warehouse/industrial            -         44,900                -           44,900
Retail/shopping
centers/strip malls             -         63,963                -           63,963
Assisted living
facilities                      -          7,622                -            7,622
Single purpose
facilities                      -         93,276                -           93,276
Land                            -         16,004                -           16,004
Multi-family                    -         23,443                -           23,443
One-to-four family
construction                    -              -            4,468            4,468
Total                $     69,659   $    332,373   $       15,041   $      417,073


                                      Other Real                      Commercial &
                       Commercial       Estate       Real Estate      Construction
                        Business       Mortgage      Construction        Total
March 31, 2013                              (in thousands)

Commercial business  $     71,935   $          -   $            -   $       71,935
Commercial
construction                    -              -            5,719            5,719
Office buildings                -         86,751                -           86,751
Warehouse/industrial            -         41,124                -           41,124
Retail/shopping
centers/strip malls             -         67,472                -           67,472
Assisted living
facilities                      -         13,146                -           13,146
Single purpose
facilities                      -         89,198                -           89,198
Land                            -         23,404                -           23,404
Multi-family                    -         34,302                -           34,302
One-to-four family
construction                    -              -            3,956            3,956
Total                $     71,935   $    355,397   $        9,675   $      437,007

Comparison of Financial Condition at December 31, 2013 and March 31, 2013

Cash, including interest-earning accounts, totaled $123.1 million at December 31, 2013 compared to $115.4 million at March 31, 2013. The Company has been maintaining a higher liquidity position as compared to historical levels for regulatory and asset-liability matching purposes. As a part of the Company's liquidity strategy, the Company invests a portion of its excess cash in short-term certificates of deposit, investment and mortgage-backed securities at higher yields than cash held in interest-earning accounts based on its asset/liability program objectives in order to maximize earnings. All of the certificates of deposit held for investment are fully insured under the FDIC. At December 31, 2013, certificates of deposits held for investment totaled $37.2 million compared to $44.6 million at March 31, 2013.

Investment securities available for sale totaled $19.8 million and $6.2 million at December 31, 2013 and at March 31, 2013, respectively. The $13.6 million increase was a result of purchases totaling $16.4 million during the nine month period ended December 31, 2013. The increase was due to a decision by the Company to invest additional excess cash into higher yielding investment securities. The Company primarily purchases agency securities with maturities of five years or less. For the quarter ended December 31, 2013, the Company determined that none of its investment securities required an OTTI charge. For additional information, see Note 11 of the Notes to Consolidated Financial Statements contained in Item 1 of this Form 10-Q.

Mortgage-backed securities available-for-sale totaled $34.5 million at December 31, 2013, compared to $431,000 at March 31, 2013. The $34.1 million increase was a result purchases totaling $35.8 million during the nine month period ended December 31, 2013 partially offset by principal repayments. The increase was due to a decision by the Company to invest additional excess cash into higher yielding mortgage-backed securities. The Company primarily purchases a combination of mortgage-backed securities backed by government agencies (FHLMC, FNMA, SBA or GNMA). The Company does not believe that it has any exposure to sub-prime mortgage backed securities.

Loans receivable, net, totaled $505.6 million at December 31, 2013, compared to $520.4 million at March 31, 2013, a decrease of $14.7 million. The decrease was due to principal repayments and the Company's efforts to reduce classified and nonperforming commercial business, commercial real estate and land loans to improve its risk profile. The decrease in loans was offset by a purchase of an automobile loan pool during the three months ended December 31, 2013 totaling $7.6 million. For the nine months ended December 31, 2013, the Company reduced classified loans a total of $12.0 million. Land development loans also decreased $7.4 million during the nine months ended December 31, 2013. A substantial portion of the loan portfolio is secured by real estate, either as primary or . . .

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