Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of fiscal 2019 (not calendar 2018 Q1). Income and cash flow comparisons are against the three months ended June 30, 2017; balance-sheet comparisons are against March 31, 2018. Unless noted, amounts are in millions.
Business context
Riverview is a community banking and financial services company serving markets in Washington and Oregon. It attracts deposits and makes commercial business, commercial real estate, construction, residential real estate and consumer loans. Its strategy emphasizes commercial lending, core deposits and growth in Trust Company fee income.
Financial performance and position
| Metric | June 2018 quarter / June 30, 2018 | Comparable period / March 31, 2018 |
|---|---|---|
| Net income | $4.442 million; diluted EPS $0.20 | $2.654 million; diluted EPS $0.12 |
| Net interest income | $11.487 million; net interest margin 4.40% | $10.433 million; margin 4.09% |
| Interest and dividend income | $12.105 million | $11.023 million |
| Non-interest income | $3.052 million | $2.738 million |
| Non-interest expense | $9.019 million | $9.174 million |
| Cash flow | Operating +$4.222 million; investing −$1.658 million; financing −$14.063 million; cash decreased $11.499 million to $33.268 million | Prior-year quarter: operating −$0.770 million; investing −$22.723 million; financing −$7.012 million; ending cash $34.108 million |
| Total assets | $1,140.268 million | $1,151.535 million |
| Loans, net | $815.237 million | $800.610 million |
| Deposits | $982.350 million | $995.691 million |
| Shareholders’ equity | $119.828 million | $116.901 million |
At June 30, cash and available-for-sale securities totaled $238.3 million, or 20.9% of assets. The Bank had no FHLB or Federal Reserve advances outstanding and reported borrowing capacity of $279.8 million from the FHLB and $54.9 million from the Federal Reserve, subject to collateral. Total available liquidity, including funding sources, was $738.6 million. The Company had $26.5 million of junior subordinated debentures and a $2.4 million capital lease obligation. The Bank was classified as well capitalized, with a 15.59% total capital ratio and a 10.46% leverage ratio.
The allowance for loan losses was $11.349 million, or 1.37% of loans. Nonperforming loans were $2.344 million; nonperforming assets were 0.21% of total assets. Total commitments to extend credit, unused lines and standby letters of credit were $209.0 million.
Material changes versus comparable periods
- Net income rose 67% year over year, and diluted EPS increased from $0.12 to $0.20. Management attributed the improvement to higher interest and non-interest income and the lower effective tax rate following the Tax Act.
- Net interest income increased 10.1% year over year, and net interest margin rose 31 basis points. Management cited loan and securities balances and a $585,000 recovery of nonaccrual interest from two previously charged-off loans; it said this recovery added 23 basis points to quarterly margin.
- Loans, net, grew $14.6 million from March 31, primarily from $10.6 million of organic growth and a $4.6 million net increase in purchased guaranteed SBA loans. Deposits fell $13.3 million.
- The Company recorded a $200,000 recapture of loan losses, compared with no provision or recapture in the prior-year quarter. Net recoveries were $783,000, including recovery payments on two previously charged-off loans.
- Non-interest income increased $314,000 year over year, principally from fees and service charges and asset management fees. Non-interest expense declined $155,000; lower professional fees and FDIC premiums more than offset increased salaries and benefits.
- Available-for-sale securities declined to $200.1 million from $213.2 million at March 31. Accumulated other comprehensive loss worsened by $736,000 during the quarter, primarily reflecting unrealized securities losses; management attributed these losses mainly to higher market interest rates and considered them temporary.
Outlook, commentary and risks
- Management anticipated continued organic loan growth and described local economic conditions as generally positive. The Company’s stated strategy targets commercial lending and core deposit growth; it did not provide numerical earnings or revenue guidance.
- Commercial and construction loans were 87.8% of total loans; commercial real estate alone was 54.2%. Management notes these loans generally carry higher credit risk and greater interest-rate sensitivity than traditional residential mortgages.
- Management considered the allowance adequate, but warned that weaker local conditions, lower collateral values or regulatory examination findings could require a material increase. Land acquisition and development loans had $751,000 of nonperforming balances; nonperforming loans overall were down from March 31.
- Three TDRs totaling approximately $1.4 million had defaulted after modification: one commercial business loan and two commercial real estate loans. The Company reported no new TDRs in the quarter.
- Interest-rate, deposit-retention and funding risks remain relevant. Deposits declined during the quarter, and management noted that deposit and counterparty behavior can change. A substantial portion of securities had unrealized losses, and the filing identifies commercial real estate and geographic concentration as risks.
- Off-balance-sheet commitments totaled $209.0 million; the Company said it expected to have sufficient funds to meet current loan commitments. Loans under representation-and-warranty coverage totaled $117.3 million; management considered potential losses remote and reported a $26,000 allowance for FHLMC loans. Ordinary-course litigation was not expected to have a material effect.
- The Company adopted ASC 606 with no cumulative adjustment and no material change to revenue timing or amount. It expected adoption of the new lease standard to increase reported assets and liabilities, but not materially affect future financial statements. Management anticipated that the future expected-credit-loss standard (CECL) could increase the loan-loss allowance; the amount was not yet known.
Important facts for investors to verify
- Whether loan growth and core deposit retention continue, particularly given the quarter’s $13.3 million deposit decline.
- Credit trends in the concentrated commercial real estate, construction and land portfolios, including TDR defaults, nonperforming loans and subsequent allowance changes.
- Whether recoveries from previously charged-off loans were nonrecurring and how margin performs excluding the reported 23-basis-point benefit from recovered interest.
- The effect of rising rates on deposit costs, securities valuations, net interest margin and the $26.5 million of variable-rate junior subordinated debentures.
- Whether the $738.6 million stated liquidity capacity remains available under actual collateral and funding conditions, and how the $209.0 million of commitments are drawn.
- The eventual CECL allowance impact and the implementation and balance-sheet effects of the new lease accounting standard.