Riverview Bancorp, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended March 31, 2017, with fiscal 2016 comparisons. The filing is an annual report, not a report for calendar 2016 Q4. It also presents quarterly data for the three months ended March 31, 2017.
Business context and reporting period
Riverview is a community banking and financial services company operating primarily in southwest Washington and the Portland-area counties of Oregon. Its strategy emphasizes commercial lending, core customer deposits, asset quality and growth in trust and fee-based services. At year-end, it operated 19 bank branches and its Trust Company managed $425.9 million in assets.
On February 17, 2017, Riverview completed its purchase and assumption of certain MBank assets and liabilities. The transaction expanded its Portland-area presence and materially increased its loans and deposits. The consolidated financial statements received an unqualified audit opinion; the auditor also gave an unqualified opinion on internal control over financial reporting.
Financial performance and condition
| Metric | FY2017 / March 31, 2017 | FY2016 / March 31, 2016 |
|---|---|---|
| Net income | $7.4 million; $0.33 diluted EPS | $6.4 million; $0.28 diluted EPS |
| Net interest income | $33.8 million | $29.2 million |
| Net interest margin | 3.79% | 3.67% |
| Non-interest income | $10.0 million | $9.4 million |
| Non-interest expense | $33.0 million | $29.9 million |
| Total assets | $1.134 billion | $921.2 million |
| Net loans | $768.9 million | $614.9 million |
| Deposits | $980.1 million | $779.8 million |
| Shareholders’ equity | $111.3 million | $108.3 million |
- Profitability: Return on average assets was 0.76%, return on average equity 6.66%, and the efficiency ratio 75.35% (versus 0.72%, 5.93%, and 77.62%, respectively, in FY2016).
- Cash flow: Operating activities provided $18.3 million, investing activities used $76.8 million, and financing activities provided $67.7 million. Cash and cash equivalents rose by $9.2 million to $64.6 million.
- Credit quality: Nonperforming assets were $3.0 million, or 0.27% of assets, versus $3.3 million, or 0.36%, a year earlier. Net recoveries were $643,000. Classified loans rose to $10.0 million from $4.3 million.
- Allowance: The allowance for loan losses was $10.5 million, 1.35% of loans, compared with $9.9 million, 1.58%. The company recorded no provision or recapture in FY2017, versus a $1.15 million recapture in FY2016. Including the remaining acquired-loan discount, management reported an adjusted coverage ratio of 1.73%.
- Funding and capital: The Bank had no FHLB advances or Federal Reserve borrowings at year-end. Junior subordinated debentures were $26.4 million, up from $22.7 million. The Bank was categorized as well capitalized: total risk-based capital was 14.06%, CET1 was 12.81%, and leverage was 10.21%.
- Dividends: The company declared $0.08 per share for FY2017, totaling approximately $1.8 million. It did not repurchase shares.
For the quarter ended March 31, 2017, net income was $2.03 million, compared with $1.41 million in the quarter ended March 31, 2016. Quarterly net interest income was $9.35 million versus $7.43 million.
Material changes versus the prior comparable period
- Loans increased by $154.0 million, including $104.0 million of acquired loans and $50.6 million of organic growth. Deposits increased by $200.3 million, including deposits assumed in the MBank transaction.
- The transaction involved $12.1 million cash consideration; Riverview acquired loans with a fair value of $112.0 million and assumed deposits with a fair value of $130.8 million. It recorded $1.5 million of goodwill and assumed $5.2 million face amount of MBank trust preferred obligations, recorded at a fair-value-adjusted amount.
- Net interest income rose 15.6%, reflecting higher average loan and securities balances; margin improved by 12 basis points. Non-interest expense rose about $3.0 million, in part due to acquisition staffing, integration and professional costs.
- Reported earnings benefited from a $423,000 BOLI death benefit. Offsetting unusual items included a $240,000 investment-security impairment charge, $500,000 of litigation settlement expense and $748,000 of MBank-related costs. The trust-preferred CDO was liquidated, producing $1.8 million in proceeds and an $82,000 realized gain.
- Available-for-sale securities rose to $200.2 million from $150.7 million; accumulated other comprehensive income shifted from positive $1.1 million to a loss of $1.7 million, largely reflecting unrealized securities losses.
Outlook, management commentary and risks
Management anticipated continued organic loan growth and planned to focus on core deposits, commercial lending and fee income. It said it would manage and control construction-loan growth in FY2018 while continuing selected originations. The company described a profit improvement plan and reported a multi-year decline in its efficiency ratio. The filing provides no specific quantitative earnings or revenue guidance.
- Credit exposure is concentrated in commercial and commercial real estate lending: commercial and construction loans were 84.7% of total loans. The Bank’s commercial real estate concentration was reported at 349% of total risk-based capital, a potential focus of regulatory scrutiny.
- Classified loans increased, and other loans of concern rose to $7.3 million from $1.6 million. Two modified commercial business loans totaling $294,000 and two modified commercial real estate loans totaling $1.3 million had defaulted after restructuring.
- Management identified local economic and real-estate conditions, construction and land lending, commercial borrower cash flows, rising rates, deposit competition, liquidity access, acquisition integration, regulatory costs and cyber/third-party risks as material uncertainties.
- Interest-rate modeling estimated net interest income would decline 0.7% over 12 months in a +100-basis-point scenario, but increase 4.2% over 24 months; results are model-dependent. The filing warns that loan floors may weigh on near-term results as rates rise.
- The company expects the future CECL credit-loss standard to increase its allowance, but did not quantify the impact. Goodwill was $27.1 million after the acquisition; the annual impairment test found no impairment.
- Liquidity disclosures report $275.9 million of cash and available-for-sale securities and total available liquidity of $728.9 million. However, the filing gives differing FHLB capacity figures in separate sections ($235.3 million and $344.4 million); the applicable available amount is not clear from the text.
Important facts for investors to verify
- Reconcile the reported FHLB borrowing capacity and confirm collateral availability and borrowing conditions.
- Track post-acquisition integration, deposit retention, loan growth, realized cost savings and any further acquisition-related costs.
- Monitor commercial real estate concentration, classified loans, loan delinquencies, TDR defaults and the adequacy of the allowance, including acquired-loan discounts.
- Assess sensitivity of net interest income, deposit costs and liquidity to rate changes and competitive deposit pricing.
- Evaluate recurring earnings separately from the BOLI death benefit, security impairment/liquidation effects, litigation settlement and acquisition expenses.
- Confirm future CECL implementation effects and the continued recoverability of goodwill and other fair-value-sensitive assets.