Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2016. The unaudited consolidated results compare with the same periods in 2015; balance-sheet comparisons are with March 31, 2016. Amounts below are in U.S. dollars.
Business context and reporting period
Riverview is a community banking and financial services company operating primarily in Washington and Oregon through Riverview Community Bank and Riverview Trust Company. It gathers deposits and lends mainly to commercial, commercial real estate, construction, residential and consumer borrowers. Management’s strategy emphasizes commercial lending, core deposit growth, asset quality and expense control.
Financial and operating metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net interest income | $8.1 million in 2016; $7.2 million in 2015 | $15.9 million in 2016; $14.3 million in 2015 |
| Net income | $1.68 million in 2016; $1.65 million in 2015 | $3.38 million in 2016; $3.25 million in 2015 |
| Diluted earnings per share | $0.07 in both years | $0.15 in 2016; $0.14 in 2015 |
| Net interest margin | 3.70% in 2016; 3.64% in 2015 | 3.72% in 2016; 3.67% in 2015 |
| Non-interest income | $2.58 million in 2016; $2.22 million in 2015 | $5.10 million in 2016; $4.77 million in 2015 |
| Non-interest expense | $8.40 million in 2016; $7.28 million in 2015 | $16.21 million in 2016; $15.03 million in 2015 |
- Balance sheet at September 30: Total assets were $984.0 million, versus $921.2 million at March 31. Net loans were $640.9 million, up from $614.9 million; deposits were $838.9 million, up from $779.8 million. Shareholders’ equity was $111.0 million, versus $108.3 million.
- Cash flow: For the six months, operating activities provided $6.6 million, investing activities used $27.4 million, and financing activities provided $58.4 million. Cash and cash equivalents rose $37.6 million to $93.0 million, mainly reflecting deposit growth.
- Debt and liquidity: Junior subordinated debentures totaled $22.7 million and the capital lease obligation was $2.5 million. The company reported no FHLB or FRB advances and no brokered deposits at September 30. Cash plus available-for-sale securities totaled $260.5 million; stated total available liquidity, including funding sources, was $690.4 million, or 70.2% of assets.
- Capital and credit: The Bank was categorized as “well capitalized”; its total risk-based capital ratio was 16.05%, Tier 1 risk-based ratio 14.80%, and Tier 1 leverage ratio 10.95%. Nonperforming assets were $2.9 million, or 0.29% of assets. The allowance for loan losses was $10.1 million, or 1.55% of loans; no loan-loss provision was recorded for the six months.
- Commitments: Off-balance-sheet commitments totaled $146.3 million, including $113.1 million of undisbursed loan funds and unused lines of credit.
Material changes versus comparable periods
- Net interest income increased $925,000 for the quarter and $1.6 million for the six months, primarily as average loan balances grew. The six-month net interest margin rose to 3.72% from 3.67%.
- Quarterly net income increased modestly year over year; six-month net income rose by $130,000. The 2015 six-month comparison included an $800,000 loan-loss recapture, while 2016 had no provision or recapture.
- Non-interest expense increased $1.1 million for the quarter and $1.2 million for the six months, including higher salaries, professional fees and litigation settlement expense. Professional fees were attributed mainly to the MBank transaction.
- Non-interest income included a $407,000 BOLI death benefit in 2016. Its tax-exempt character contributed to lower effective tax rates of 26.1% for the quarter and 29.6% for the six months, compared with 31.0% and 32.7% in 2015.
- Nonperforming assets declined from $3.3 million at March 31 to $2.9 million at September 30. Total loans and deposits grew over that period.
Outlook, management commentary, risks and unusual items
- On September 29, 2016, Riverview agreed to acquire certain MBank assets and assume certain liabilities in a cash transaction. The agreement includes Riverview’s assumption of Merchants Bancorp’s trust preferred obligations. The transaction was expected to close in the quarter ending March 31, 2017, subject to regulatory and shareholder approvals and other conditions. Management estimated approximately $129.9 million of loans would be acquired, mostly commercial and commercial real estate loans.
- Management anticipated continued organic loan growth and emphasized commercial and commercial real estate lending, core deposits, expense control, and selective expansion. The filing gives no specific earnings or revenue guidance.
- The quarter included a $132,000 other-than-temporary impairment charge on a pooled trust-preferred security following notice that it would be liquidated. The security is Level 3, with valuation based partly on unobservable credit and discount-rate assumptions.
- Litigation settlement expense was $475,000 for the quarter and $575,000 for the six months, related to an anticipated settlement of ongoing litigation. Management stated that ordinary-course litigation was not expected to have a material effect; the filing does not specify the settlement’s final terms.
- Key risks include commercial real estate and geographic concentration, borrower and collateral deterioration, interest-rate and funding changes, regulatory actions, and execution, approval and integration risks related to the MBank transaction. Management also noted that floating-rate loans represent 6.88% of the loan portfolio, and many have floors that could delay repricing as rates rise.
- Management reported that disclosure controls were effective as of September 30, 2016, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the MBank transaction received required approvals, closed on schedule, and achieved expected benefits; confirm the assumed trust preferred obligations and integration costs.
- Whether loan growth, especially in commercial real estate and construction, is accompanied by stable credit quality; monitor nonperforming loans, criticized loans, TDRs, recoveries and allowance adequacy.
- Whether earnings trends persist after excluding the BOLI death benefit and considering litigation, transaction-related professional fees and the securities impairment charge.
- Whether deposit growth and available liquidity remain adequate as lending commitments fund and deposits mature; review the concentration and terms of contingent funding sources.
- Whether interest-rate changes affect net interest margin, deposit costs, loan repricing and the value of investment securities.