RIVERVIEW BANCORP INC quarterly report, Q3 FY2019

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Riverview Bancorp, Inc. — Form 10-Q Summary

Reporting period: The filing covers the quarter and nine months ended December 31, 2018, Riverview’s fiscal third quarter of fiscal 2019. The supplied metadata’s “2018 Q3” label does not match the filing’s period end. Dollar amounts below are in millions unless stated otherwise.

Business context and financial performance

Riverview is a community banking and financial services company operating primarily in southwest Washington and Oregon. Its strategy emphasizes commercial, commercial real estate and construction lending, core deposits, and trust and asset-management services.

  • Quarterly earnings: Net income was $4.4 million, or $0.19 per diluted share, versus $1.5 million, or $0.07, in the prior-year quarter. For the nine months, net income was $13.1 million, or $0.58 per diluted share, versus $7.2 million, or $0.32.
  • Interest income and margin: Quarterly net interest income was $11.7 million, up $0.9 million year over year; nine-month net interest income was $34.8 million, up $2.8 million. Net interest margin was 4.39% for the quarter and 4.37% for the nine months, compared with 4.06% in each prior-year period. Management attributed improvement to loan growth and, in part, recovery of previously charged-off interest.
  • Other income and expenses: Non-interest income was $2.8 million for the quarter, down $0.1 million year over year, and $8.9 million for the nine months, up $0.5 million. Non-interest expense was $8.8 million for the quarter and $26.7 million for the nine months, modestly higher year over year.
  • Taxes: The effective tax rate was 22.5% for the quarter and 22.4% for the nine months, compared with 70.4% and 47.6%, respectively, in the prior-year periods. The earlier period included a $1.8 million charge from revaluing deferred taxes after the Tax Act, so the earnings comparison is materially affected by taxes.
  • Balance sheet and lending: Total assets were $1.151 billion, broadly unchanged from March 31, 2018. Net loans rose to $857.1 million from $800.6 million, including $42.3 million of net organic growth and a $15.0 million increase in purchased guaranteed SBA loans. Commercial and construction loans were 89.0% of total loans.
  • Deposits and funding: Deposits declined $52.1 million to $943.6 million, which management attributed to competition and pricing pressure. FHLB advances were $34.5 million, versus none at March 31, 2018; junior subordinated debentures were $26.6 million.
  • Cash flow and liquidity: For the nine months, operating cash flow was $20.7 million; investing cash outflow was $21.9 million and financing cash outflow was $20.1 million. Cash declined $21.4 million to $23.4 million. Cash plus available-for-sale securities totaled $206.4 million. The company reported $205.0 million of remaining FHLB facility capacity and $54.4 million of FRB borrowing capacity, with no FRB advances outstanding.
  • Capital: Shareholders’ equity was $128.1 million, up $11.2 million from March 31, 2018. The Bank was classified as well capitalized; its total capital ratio was 16.35%, CET1 ratio 15.10%, and leverage ratio 11.22% at December 31, 2018.

Material changes and asset quality

  • Loans increased 7.1% from March 31, while deposits fell 5.2%; available-for-sale securities declined to $182.3 million from $213.2 million.
  • Nonperforming assets decreased to $1.6 million, or 0.14% of assets, from $2.7 million, or 0.24%, at March 31. The allowance for loan losses was $11.5 million, or 1.32% of loans, compared with $10.8 million, or 1.33%.
  • Nine-month net recoveries were $686,000. Management reported $823,000 in recovery payments on two previously charged-off loans during the first fiscal quarter; it said no further recoveries on those loans were expected. These recoveries also contributed to reported margin improvement.
  • Troubled debt restructurings totaled $5.7 million; all were reported as paying as agreed, with no defaults of modified terms during the period. The filing reports no new TDRs.
  • Riverview sold its Longview branch deposits in September and recognized a gain of approximately $70,000. It sold the branch property in December and recorded a $355,000 gain, included in the non-interest expense line.

Outlook, commentary and risks

  • Management anticipated continuing organic loan growth and said it expected sufficient funds to meet current loan commitments. The filing gives no quantified earnings or margin guidance.
  • Management’s strategy includes expanding higher-yielding commercial and construction lending, growing core deposits and fee income, and controlling expenses. Trust Company assets under management were $570.4 million, up from $484.3 million at March 31, 2018.
  • Management identified market-area housing indicators to monitor: home inventory increased in Portland and Clark County, while December closed home sales declined year over year in both areas.
  • Key risks include commercial real estate and construction concentration; changes in property values and local economic conditions; loan-credit deterioration and the adequacy of the allowance; deposit competition and funding costs; interest-rate movements; and reliance on borrowing capacity and collateral availability. The company warned that the forthcoming expected-credit-loss standard could increase the allowance, but said the amount was not yet known.
  • The company reported no material change in previously disclosed market-risk factors or risk factors. It reported no material litigation exposure in management’s view and no goodwill impairment in its October 2018 test.

Important facts for investors to verify

  1. Separate recurring earnings growth from the unusually low prior-year tax comparison and the recovery of previously charged-off interest.
  2. Track deposit trends, deposit pricing and the extent to which loan growth continues to require FHLB or other wholesale borrowing.
  3. Review commercial real estate and construction concentrations, delinquency and classified-loan trends, and allowance adequacy as the portfolio grows.
  4. Confirm future liquidity capacity against loan commitments, deposit maturities and the availability and collateral terms of FHLB and FRB facilities.
  5. Assess the effect of local housing-market changes and implementation of the expected-credit-loss accounting standard on credit costs and reported capital.