Riverview Bancorp, Inc. — FY2015 Form 10-K
Period note: This is the annual report for the fiscal year ended March 31, 2015, not a calendar-year 2014 Q4 report. Unless noted, comparisons are with the year ended March 31, 2014; financial amounts are in U.S. dollars.
Business context and reporting period
Riverview Bancorp is a Washington-based savings and loan holding company operating primarily through Riverview Community Bank in southwest Washington and Oregon. It gathers local deposits and lends mainly to businesses and real estate borrowers. Management’s strategy emphasizes commercial lending, core deposit growth, asset quality, expense control, and fee income.
Key financial metrics
| Metric | FY2015 / March 31, 2015 | Prior comparable |
|---|---|---|
| Total assets | $858.8 million | $824.5 million |
| Net loans | $569.0 million | $520.9 million |
| Deposits | $720.9 million | $690.1 million |
| Net interest income | $26.7 million | $24.2 million |
| Net interest margin | 3.59% | 3.37% |
| Non-interest income | $8.9 million | $8.4 million |
| Non-interest expense | $30.7 million | $32.0 million |
| Net income | $4.5 million; $0.20 diluted EPS | $19.4 million; $0.87 diluted EPS |
| Operating cash flow | $5.6 million | $6.5 million |
| Cash and cash equivalents | $58.7 million | $68.6 million |
| Shareholders’ equity | $103.8 million | $98.0 million |
FY2015 net income included a $1.8 million recapture of loan losses. The Bank’s reported capital ratios were 15.89% total risk-based capital, 14.63% Tier 1 risk-based capital, and 10.89% leverage. It was categorized as well capitalized, while subject to higher OCC-agreed minimums of 12% total risk-based capital and 9% Tier 1 leverage.
Liquidity included $197.1 million of cash and available-for-sale investments and reported available funding sources of $532.3 million. No FHLB advances or Federal Reserve borrowings were outstanding at year-end. Junior subordinated debentures were $22.7 million; capital lease obligations were $2.3 million. Deposits included $151.953 million of non-interest-bearing accounts.
Material changes versus the prior year
- Net income fell to $4.5 million from $19.4 million, principally because FY2014 included a $15.1 million income-tax benefit from reversing the deferred-tax-asset valuation allowance. FY2015 recorded $2.2 million of income-tax expense.
- Net interest income rose 10.2%, and margin improved to 3.59%, reflecting higher average loan and securities balances and lower deposit costs. Average loan yield declined to 4.65% from 4.86%.
- Net loans grew $48.1 million, including $34.2 million of organic growth and a $12.1 million net increase in purchased auto loans. Commercial and construction loans were 78.2% of gross loans; commercial real estate, land, and multifamily exposure remained significant.
- Credit indicators improved: nonperforming assets declined to $6.9 million, or 0.81% of assets, from $21.8 million, or 2.64%; nonperforming loans fell to $5.3 million from $14.1 million. Classified loans declined to $13.3 million from $33.8 million.
- The allowance for loan losses declined to $10.8 million, or 1.86% of loans, from $12.6 million, or 2.35%. The allowance covered 202.37% of nonperforming loans, compared with 89.25%.
- Deposits increased $30.8 million, with no wholesale-brokered deposits at either year-end. Core branch deposits were 96.2% of total deposits.
- Non-interest expense fell $1.2 million, including lower REO and FDIC insurance costs, partly offset by a $2.1 million increase in salaries and benefits. The Company closed one Portland-area branch in October 2014.
Outlook, risks, contingencies, and unusual items
- Management anticipated continued organic loan growth and planned to continue selectively expanding commercial, commercial real estate, and construction lending. It also planned to keep building core deposits and asset-management fees. The filing provides no quantified earnings or revenue guidance.
- Management described local economic and real-estate conditions as improving, but warned that renewed weakness could increase delinquencies, credit losses, REO valuation adjustments, and required loan-loss reserves. Commercial real estate and construction lending are concentrated risks; repayment can depend on property cash flows, refinancing, or project completion.
- The Company held $34.7 million of purchased automobile loans sourced through one dealership group outside its core market, with servicing retained by the seller. Management identified indirect auto lending and third-party servicing as additional credit and operational risks.
- REO was $1.6 million at year-end after $6.9 million of sales and $715,000 of write-downs during FY2015. Future sale timing and proceeds remain uncertain. TDRs totaled $21.4 million; three restructured loans totaling $2.0 million had defaulted after modification.
- Interest-rate sensitivity modeling estimated net interest income changes of -3.2% over 12 months and +5.3% over 24 months for a 300-basis-point increase; a 100-basis-point decline produced estimated decreases of 1.3% and 5.3%, respectively. These are model estimates, not guidance, and management cautioned that actual results may differ.
- In December 2014 the Company paid $4.0 million of interest previously deferred on its $22.7 million junior subordinated debentures. FY2014 earnings benefited from the tax valuation-allowance reversal; this was not a recurring operating item.
- A $1.8 million pooled trust-preferred security was valued using Level 3 inputs in an inactive market. Management recorded no FY2015 impairment, but valuation relies on assumptions about defaults, repayments, and discount rates.
- Potential risks include competition for deposits and loans, low or changing interest rates, regulatory and compliance costs, capital and dividend restrictions, cybersecurity and third-party service-provider disruption, and local economic deterioration. The Bank had $90.7 million of certificates of deposit maturing within one year and $82.0 million of unused lines of credit at year-end.
- Management reported no pending litigation expected to have a material adverse effect. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality continues to improve and whether the $10.8 million allowance remains adequate as loan growth and commercial real estate exposure increase.
- The performance and concentration risk of purchased auto loans, construction commitments, TDRs, and the remaining REO portfolio.
- The sustainability of earnings excluding the loan-loss recapture, the prior-year tax benefit, and other unusual items; also monitor net interest margin and funding costs.
- The assumptions and sensitivity of the Level 3 trust-preferred security valuation, and the carrying value and future realization of the $12.6 million deferred tax asset.
- Deposit retention and liquidity against near-term certificate maturities, customer credit commitments, and regulatory capital-buffer requirements.
- Whether the $4.0 million deferred-interest payment and the $0.01125-per-share FY2015 dividend affect future capital distributions or holding-company liquidity.