Riverview Bancorp, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (fiscal Q2 2018; the filing metadata’s “2017 Q2” label does not match the period shown in the filing). Unaudited consolidated results include Riverview Community Bank and subsidiaries.
Business context and results
Riverview is a community banking and financial services company serving southwest Washington and the Portland, Oregon area. It attracts deposits and lends primarily to local businesses and real estate borrowers. The February 2017 MBank purchase and assumption expanded its Portland presence and added loans, deposits and trust-preferred obligations; current-period results include the acquired business, while prior-year comparisons do not include it for the same full period.
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net interest income | $10.7 million, up from $8.1 million | $21.2 million, up from $15.9 million |
| Net income | $3.1 million, versus $1.7 million | $5.7 million, versus $3.4 million |
| Diluted earnings per share | $0.14, versus $0.07 | $0.25, versus $0.15 |
| Net interest margin | 4.03%, versus 3.70% | 4.06%, versus 3.72% |
| Non-interest income | $2.7 million, versus $2.6 million | $5.5 million, versus $5.1 million |
| Non-interest expense | $8.8 million, versus $8.4 million | $17.9 million, versus $16.2 million |
Net interest margin and related yield measures are presented on a fully tax-equivalent basis where applicable. Management attributed higher earnings mainly to increased net interest and non-interest income, partly offset by higher operating expenses, primarily associated with MBank. Acquired-loan discount accretion contributed $457,000, or nine basis points, to the six-month margin increase.
Financial position, cash flow and liquidity
- Balance sheet at September 30: Total assets were $1.148 billion, compared with $1.134 billion at March 31, 2017. Net loans were $773.1 million, compared with $768.9 million; deposits were $990.3 million, compared with $980.1 million.
- Cash and investments: Cash and cash equivalents were $76.2 million, up from $64.6 million at March 31. Available-for-sale securities were $200.6 million. Cash plus available-for-sale investments totaled $286.6 million, or 25.0% of assets.
- Six-month cash flows: Operating activities provided $5.1 million, versus $6.6 million in the prior-year period; investing activities used $3.2 million, versus $27.4 million; financing activities provided $9.7 million, versus $58.4 million. Cash increased $11.6 million during the six months to $76.2 million.
- Debt and funding: Junior subordinated debentures were $26.4 million and the capital lease obligation was $2.4 million. There were no FHLB or Federal Reserve borrowings outstanding. Available borrowing capacity was reported as $294.8 million from the FHLB and $57.3 million from the Federal Reserve.
- Capital: Shareholders’ equity was $116.7 million, up from $111.3 million at March 31. The Bank was categorized as well capitalized; its total capital ratio was 15.07%, common equity tier 1 ratio 13.82%, and leverage ratio 9.75%.
Material changes and credit quality
- Commercial and construction loans were 85.8% of total loans, up from 84.7% at March 31. Commercial real estate was the largest category, at 56.22% of total loans.
- The allowance for loan losses was $10.6 million, or 1.35% of total loans. No provision was recorded in the three- or six-month periods; six-month net recoveries were $89,000. Management cited lower delinquent, nonperforming and classified loan levels, net recoveries and stabilizing real estate values.
- Nonperforming assets were $3.0 million, or 0.27% of assets, broadly unchanged from March 31. Nonperforming loans were $2.745 million; allowance coverage of nonperforming loans was 386.78%.
- Troubled debt restructurings totaled $8.7 million, including $6.3 million on accrual. Four modified loans had defaulted after restructuring: two commercial business loans totaling $290,000 and two commercial real estate loans totaling $1.3 million.
- Core branch deposits increased $17.4 million during the quarter. The company reported no wholesale-brokered deposits, and core branch deposits represented 97.4% of total deposits at quarter-end.
Outlook, risks and unusual items
Management anticipated continued organic loan growth and focused on expanding commercial lending, core deposits and fee income, while controlling expenses. It reported generally improved local economic conditions, but identified real estate values, local economic weakness, credit quality and interest rates as key sensitivities. The business strategy’s emphasis on commercial real estate and construction lending brings higher credit risk and greater interest-rate sensitivity than traditional residential mortgage lending.
Management reported $169.1 million of off-balance-sheet commitments, including $137.6 million of undisbursed loan funds and unused lines of credit. It believed available funding would be sufficient for current commitments, while noting that deposits, collateral values and counterparty behavior could affect liquidity. The filing also identifies regulatory, competition, technology and cybersecurity, acquisition-integration, and goodwill-valuation risks. Management expected adoption of the new expected-credit-loss standard (ASU 2016-13) to increase the allowance, but did not quantify the expected increase. No formal earnings or financial guidance is provided.
Prior-year comparisons include a $407,000 non-taxable BOLI death benefit and $575,000 of litigation settlement expense for the six months; neither item recurred in the current six-month period. The current six-month effective tax rate was 34.2%, versus 29.6% in the prior year, partly reflecting the prior-year death benefit. Unrealized losses on available-for-sale securities were attributed primarily to interest-rate movements and were considered temporary by management. The company reported ordinary-course litigation, which management did not expect to have a material effect.
Important facts for investors to verify
- How much of earnings and margin growth is sustainable after MBank-related acquired-loan discount accretion and the acquisition’s expense effects?
- Whether commercial real estate and construction concentration, classified loans, TDR defaults and collateral values warrant changes to the allowance, particularly under the forthcoming expected-credit-loss standard.
- Whether deposit growth, funding costs, maturing certificates of deposit and access to secured borrowing capacity remain adequate under changing market conditions.
- Whether higher interest rates or adverse local real estate conditions could pressure margins, loan performance, securities values or goodwill valuation.
- Whether the reported capital ratios and liquidity remain sufficient as the company pursues commercial loan growth and manages its $169.1 million in commitments.