Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2018 (the second fiscal quarter of fiscal 2019). The filing is unaudited; amounts below are in millions unless otherwise stated.
Business context and results
Riverview is a community banking and financial services company operating primarily in Washington and Oregon. Its business includes commercial, commercial real estate, construction and consumer lending, deposit services, and trust and asset management. Management’s strategy emphasizes commercial loan growth, core deposits, fee income, asset quality and expense control.
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net income | $4.229 in 2018 vs. $3.059 in 2017; diluted EPS $0.19 vs. $0.14 | $8.671 vs. $5.713; diluted EPS $0.38 vs. $0.25 |
| Net interest income | $11.602 vs. $10.725 | $23.089 vs. $21.158 |
| Net interest margin | 4.33% vs. 4.03% | 4.36% vs. 4.06% |
| Non-interest income | $3.016 vs. $2.713 | $6.068 vs. $5.451 |
| Non-interest expense | $8.915 vs. $8.759 | $17.934 vs. $17.933 |
| Provision for loan losses | $0.250 vs. none | $0.050 vs. none |
Financial position, cash flow and liquidity
- At September 30, total assets were $1,148.4, net loans $838.3, deposits $982.3 and shareholders’ equity $122.4. Since March 31, net loans increased $37.7, deposits declined $13.4, and equity increased $5.5.
- Cash and cash equivalents fell to $27.1 from $44.8, principally to fund loan growth and deposit outflows. Available-for-sale securities were $190.8; cash plus those securities totaled $221.9, or 19.3% of assets.
- Six-month operating cash flow was $13.2, investing cash flow was negative $16.6, and financing cash flow was negative $14.3; cash declined $17.7 overall. The company reported $59.7 of borrowing proceeds and an equal amount of repayments during the period.
- Junior subordinated debentures were $26.5 and the capital lease obligation was $2.4. There were no FHLB or Federal Reserve borrowings outstanding at quarter-end. Available capacity was $268.9 at the FHLB and $55.2 at the Federal Reserve; reported total available liquidity, including other sources, was $709.2.
- The Bank was classified as well-capitalized: total capital ratio 15.82%, Tier 1 ratio 14.57%, CET1 ratio 14.57%, and Tier 1 leverage ratio 10.72%.
Material changes and management commentary
- Year-over-year earnings rose as net interest and non-interest income increased and the effective tax rate declined following the Tax Act; higher non-interest expense partially offset these gains. Effective tax rate was 22.4% for both 2018 periods, versus 34.6% for the quarter and 34.2% for the six-month period in 2017.
- Net interest margin benefited from loan growth and a $0.684 recovery of nonaccrual interest on two previously charged-off loans; management said this recovery added 16 basis points to the six-month margin.
- Loan growth reflected $25.7 of organic growth and a $12.7 net increase in purchased guaranteed SBA loans. Total loans were $849.8 before the $11.5 allowance; commercial and construction loans represented 88.4% of total loans.
- Nonperforming assets declined to $2.3, or 0.20% of assets, from $2.7, or 0.24%, at March 31. The allowance was 1.35% of total loans and 504.29% of nonperforming loans. Management considered the allowance adequate, while cautioning that economic deterioration, regulatory examinations or falling collateral values could require a material increase.
- In September, the Bank sold deposits of approximately $3.2 from its Longview, Washington branch, recognized an approximately $0.070 gain, closed the branch and planned to sell its land and building. Management reported no impairment of the property.
- Management reported generally positive local economic conditions but noted higher housing inventory and lower year-over-year closed home sales in Clark County and Portland. It anticipated continued organic loan growth and maintained a strategic focus on commercial lending and core deposits. No quantitative earnings or margin guidance was provided.
- Available-for-sale securities had $8.5 of unrealized losses, compared with $6.2 at March 31. Management attributed losses primarily to higher market interest rates and considered them temporary, with no other-than-temporary impairment charge recorded.
Risks, contingencies and other items
- Commercial real estate, commercial business and construction lending carries greater credit and interest-rate sensitivity than traditional residential lending; the portfolio is concentrated in the company’s Washington and Oregon markets.
- Off-balance-sheet commitments totaled $206.4, including $42.1 to originate loans, $161.9 in undisbursed loan funds and unused lines, and $2.4 in standby letters of credit. Loan commitments are conditional and may not all be drawn.
- Loans under representations and warranties totaled $113.9, substantially related to loans serviced for FHLMC; management considered potential loss remote and held a $0.025 allowance. Ordinary-course litigation was not expected by management to have a material effect.
- Management identified interest-rate, deposit-retention, credit, real-estate-value, regulatory, competition, technology and third-party-service risks. It also noted that adoption of the expected-credit-loss standard may increase the allowance, but the amount was not yet known.
- The company adopted ASC 606 on April 1, 2018 with no cumulative adjustment and no material change to revenue recognition. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan growth, deposit trends and funding costs support continued net interest margin performance, particularly as interest rates change.
- Whether the $0.684 recovery of previously charged-off interest and other recoveries affect the sustainability of reported earnings and credit metrics.
- Credit quality and concentration trends in commercial real estate, construction, land-development and purchased SBA loans, including the adequacy of the allowance.
- How unrealized securities losses, deposit outflows and available borrowing capacity affect liquidity and capital under stress.
- The effects of the Longview branch closure and property sale, and the eventual allowance impact of the expected-credit-loss accounting standard.