Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 31, 2017, with year-to-date results for the nine months then ended. Comparisons are to the corresponding 2016 periods unless otherwise noted. Dollar amounts are in millions except per-share data. The filing is unaudited.
Business context and financial performance
Riverview is a community banking and financial services company serving southwest Washington and Oregon. Its business includes commercial, real estate, construction and consumer lending, deposits, and trust and asset management. The MBank purchase-and-assumption transaction closed in February 2017, so its acquired business contributed to the current-period results.
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Net interest income | $10.8 (2016: $8.5) | $32.0 (2016: $24.4) |
| Non-interest income | $2.9 (2016: $2.3) | $8.3 (2016: $7.4) |
| Non-interest expense | $8.6 (2016: $7.9) | $26.5 (2016: $24.1) |
| Income before taxes | $5.1 (2016: $3.0) | $13.8 (2016: $7.8) |
| Net income | $1.5 (2016: $2.0) | $7.2 (2016: $5.4) |
| Diluted EPS | $0.07 (2016: $0.09) | $0.32 (2016: $0.24) |
| Net interest margin | 4.06% (2016: 3.75%) | 4.06% (2016: 3.73%) |
Balance sheet at Dec. 31, 2017: Assets were $1,128.3, loans receivable net of allowance were $786.5, deposits were $972.2, and shareholders’ equity was $116.8. At March 31, 2017, the respective figures were $1,133.9, $768.9, $980.1 and $111.3. The allowance for loan losses was $10.9, or 1.36% of total loans.
Cash flow and liquidity: For the nine months, operating cash flow was $6.9 (prior year: $12.3); investing cash outflow was $40.0 (prior year: $98.3); and financing cash outflow was $8.4, versus financing inflow of $58.9. Cash and cash equivalents declined $41.5 to $23.1. Cash plus available-for-sale securities totaled $255.0, or 22.6% of assets. FHLB advances were $1.1; the company reported no FRB advances and available borrowing capacity, subject to collateral, of $54.3 from the FRB and $275.4 from the FHLB.
Capital and debt: The Bank was categorized as well capitalized. Its total capital ratio was 15.07%, Tier 1 risk-based ratio 13.82%, CET1 ratio 13.82%, and Tier 1 leverage ratio 9.82%. Liabilities included $26.5 of junior subordinated debentures and $2.4 of capital lease obligations.
Material changes versus comparable periods
- Year-to-date net income increased 35% while quarterly net income declined 24%. Pretax income improved in both periods, but reported earnings were reduced by a one-time $1.8 tax charge related to the Tax Cuts and Jobs Act; the quarterly effective tax rate was 70.4% and the nine-month rate was 47.6%.
- Net interest income rose $2.3 for the quarter and $7.5 year to date. Management attributed the improvement primarily to loan growth, acquired MBank loans and higher average investment securities. Net interest margin expanded by 31 basis points for the quarter and 33 basis points year to date.
- Loan growth was concentrated in commercial and construction lending: net loans increased $17.6 from March 31, and commercial and construction loans were 86.3% of total loans, compared with 84.7%. Deposits declined $7.8 from March 31.
- Non-interest expense increased $0.7 for the quarter and $2.4 year to date, principally reflecting MBank-related staffing, occupancy and core deposit intangible amortization. Year-to-date comparisons also benefited from the absence of a $0.5 litigation settlement recorded in 2016.
Outlook, risks and unusual items
- Management expects continued organic loan growth and emphasizes commercial lending, core deposit growth, fee income, expense control and asset quality. The filing provides no quantified earnings or revenue guidance.
- The portfolio has meaningful commercial real estate and other commercial/construction exposure. Management notes these loans can carry greater credit risk and interest-rate sensitivity than traditional residential mortgages. Geographic concentration, real estate values, economic conditions, loan demand and funding competition are identified risks.
- Asset quality was broadly stable: nonperforming assets were $3.0, or 0.26% of assets, versus $3.0, or 0.27%, at March 31. Nonperforming loans were $2.7; the allowance covered nonperforming loans by 409%. The company recorded no loan-loss provision for the quarter or nine-month period and reported $0.339 of net recoveries year to date. Management considers the allowance adequate but cautions that deterioration or regulatory review could require increases.
- Troubled debt restructurings totaled $8.0; four defaulted after modification: two commercial business loans totaling $0.289 and two commercial real estate loans totaling $1.3. The company reported $3.949 of other loans of concern classified as substandard but not non-accrual.
- Available-for-sale securities had $3.169 of gross unrealized losses at Dec. 31, attributed primarily to interest-rate movements; management considered the losses temporary. Goodwill was $27.1, and the October 2017 impairment assessment found no impairment.
- Off-balance-sheet commitments totaled $168.1, including $133.1 of undisbursed loan funds and unused lines, $32.5 of loan origination commitments and $2.5 of standby letters of credit. Management said ordinary-course litigation was not expected to have a material effect.
- The Tax Act reduced deferred tax assets and produced a net one-time tax charge; the company said transition estimates remained subject to finalization. Management anticipated adoption of the expected-credit-loss standard would increase the allowance, though the amount was not provided.
Important facts for investors to verify
- How much of loan growth and net interest income reflects ongoing organic activity versus MBank acquisition effects and acquired-loan discount accretion ($0.632 year to date).
- Whether core deposit trends, funding costs and cash levels remain adequate as loan commitments are funded and interest rates change.
- Trends in commercial real estate concentrations, classified loans, land-development credit quality, TDR defaults and allowance adequacy.
- The ultimate tax effects of the Tax Act and the resulting effective tax rate after the one-time revaluation is finalized.
- Potential allowance and implementation effects of the expected-credit-loss accounting standard, for which management anticipated an increase but gave no estimate.