Business context and reporting period
Riverview Bancorp, Inc. is a Washington-based savings and loan holding company whose principal subsidiary, Riverview Community Bank, operates in southwest Washington and Oregon. Its business centers on commercial and commercial real estate lending, deposits, and trust and asset-management services. This 10-K reports the fiscal year ended March 31, 2020—not calendar-year 2019 or a standalone 2019 fourth quarter. The filing was signed June 17, 2020.
The company reported 18 branches and $1.2 billion in assets at fiscal year-end. Its loan book was heavily weighted toward commercial and construction lending: those loans were 90.4% of total loans.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net income | $15.7 million | $17.3 million |
| Diluted earnings per share | $0.69 | $0.76 |
| Net interest income | $45.7 million | $47.1 million |
| Net interest margin | 4.26% | 4.45% |
| Non-interest income | $12.4 million | $11.1 million |
| Non-interest expense | $36.3 million | $35.7 million |
| Provision for loan losses | $1.25 million | $50,000 |
| Operating cash flow | $15.9 million | $20.2 million |
For the three months ended March 31, 2020, net income was $2.9 million versus $4.2 million in the comparable quarter of fiscal 2019. The filing attributes the annual earnings decline primarily to the larger loan-loss provision. It provides quarterly figures, but no standalone quarterly cash-flow statement.
At March 31, 2020, total assets were $1.181 billion, loans receivable net of allowance were $898.9 million, deposits were $990.4 million, and shareholders’ equity was $148.8 million. Gross loans grew $35.4 million year over year. Commercial real estate loans increased $46.4 million and commercial business loans increased $16.2 million; construction loans decreased $26.0 million.
Cash and cash equivalents were $42.0 million, up from $23.0 million. Cash, certificates of deposit held for investment, and available-for-sale securities totaled $190.5 million, or 16.1% of assets. The bank had no FHLB advances at year-end, compared with $56.6 million a year earlier; it reported $235.9 million of FHLB borrowing capacity and a $67.3 million Federal Reserve facility, subject to collateral. Total reported available liquidity from funding sources was $676.0 million. Cash flow from investing was a use of $0.9 million and financing provided $4.0 million; cash increased $19.0 million during the year.
The allowance for loan losses was $12.6 million, or 1.38% of loans, versus $11.5 million, or 1.31%. Nonperforming assets were $1.4 million (0.12% of assets), down from $1.5 million. Net charge-offs were $83,000, compared with net recoveries of $641,000 in fiscal 2019. Regulatory capital remained strong: the bank’s total risk-based capital ratio was 17.01%, CET1 ratio 15.76%, and leverage ratio 11.79%; regulators classified it as well capitalized.
Changes versus the prior period
- Net income declined 8.8% and diluted EPS fell from $0.76 to $0.69. Net interest income decreased 2.8%, while net interest margin compressed 19 basis points.
- Interest expense rose $1.9 million, principally as the average cost of interest-bearing deposits increased from 0.15% to 0.43% amid deposit competition. Net interest income was also affected by lower average loan yields.
- Non-interest income rose $1.3 million, including higher asset-management fees and deposit fees. Assets under Trust Company management increased to $1.2 billion from $646.0 million.
- Deposits increased $65.4 million; core branch deposits rose $58.7 million. Investment securities declined $29.9 million as cash flows were used in part to fund loan growth.
- Credit indicators improved before the pandemic’s effects were fully known: classified loans declined to $1.6 million from $6.3 million, and nonperforming loans fell to $1.4 million from $1.5 million. The allowance nevertheless increased, largely reflecting COVID-19 uncertainty.
Outlook, risks, contingencies and unusual items
- COVID-19: Management warned that pandemic-related disruption could weaken borrower repayment capacity, collateral values, loan demand, deposits, net interest income and margin, and could increase delinquencies, provisions and charge-offs. The filing states that the duration and financial effects were uncertain. About 40% of employees were working remotely at the time described; branch services were adapted, including lobby restrictions.
- Borrower relief and PPP: At March 31, 2020, ten commercial loan modifications totaling $36.2 million had been approved. By May 31, 2020, the bank reported 91 commercial deferrals totaling $145.8 million, plus approved consumer and mortgage deferrals. These May figures are subsequent-period information, not March 31 balances. By May 31, the bank had funded 781 PPP loans totaling $116.2 million; PPP loans carry a 1% rate and are SBA-guaranteed, subject to program requirements. The bank noted potential SBA-guaranty disputes and PPP-related litigation risk.
- Credit concentration: Commercial real estate and related lending expose the bank to local economic and property-market conditions. CRE concentration was 358% of risk-based capital under the supervisory measure described in the filing. COVID-sensitive exposures reported as of May 31 included hotel/motel loans of $108.1 million and retail strip-center loans of $79.9 million.
- Funding and rates: Management expected pandemic conditions and very low rates to pressure net interest income and margin in fiscal 2021 and possibly longer. Deposit pricing competition, rate sensitivity, and reliance on local markets remain relevant risks. Interest-rate simulations showed net interest income could vary by scenario; results are model-based and dependent on assumptions.
- Plans: Management intended to continue targeted commercial lending and core-deposit growth, control construction-loan growth, and pursue fee income and expense initiatives. Two new branches were planned for 2020 and a Ridgefield opening was delayed to early 2021 due to COVID-19. The company planned to transition mortgage originations to third-party brokers beginning in fiscal 2022 and said it did not intend to originate and sell new mortgages to FHLMC beginning in fiscal 2021. No formal earnings or margin guidance was provided.
- Capital returns and unusual items: The board authorized repurchases of up to 500,000 shares. By March 31, 204,100 shares had been repurchased at an average $4.94; the remaining 295,900 were repurchased by April 17 at an average $4.85. Dividends declared were $0.19 per share for fiscal 2020. Fiscal 2019 included a $355,000 gain on sale of the former Longview branch property, absent in fiscal 2020. No investment-security other-than-temporary impairment charge was recorded.
- Contingencies and accounting: Management said ordinary-course litigation was not expected to materially affect the company. Off-balance-sheet commitments totaled $160.7 million, including $122.8 million in undisbursed loan funds and unused lines and $2.0 million in standby letters of credit. The company identified CECL adoption, expected for its fiscal years beginning after December 15, 2022, as a potential source of a higher allowance; the eventual effect was not yet quantified. Goodwill was $27.1 million; management found no impairment but cautioned that sustained adverse conditions could trigger a future charge.
Important facts for investors to verify
- Track subsequent loan performance, deferral extensions, COVID-sensitive borrower exposures, and the adequacy of the $12.6 million allowance as pandemic effects emerge.
- Confirm the performance and forgiveness process for the $116.2 million of PPP loans reported funded by May 31, 2020, including any fee recognition and guaranty compliance matters.
- Monitor net interest margin, deposit costs and retention, and the effects of low rates and funding competition on earnings.
- Assess CRE concentration, construction-loan exposure, collateral values, and borrower or guarantor concentration in the Washington and Oregon markets.
- Review liquidity and capital after loan growth, repurchases, dividends, and any stress-related provision increases; confirm available borrowing capacity remains usable with eligible collateral.
- Confirm execution and costs of branch expansion and mortgage-brokerage strategy, and assess whether trust-management fee growth is sustainable.