RIVERVIEW BANCORP INC (RVSB) RVSB
August 11, 2015 - 4:46pm EST by
dman976
2015 2016
Price: 4.27 EPS 0 0
Shares Out. (in M): 23 P/E 0 0
Market Cap (in $M): 96 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Community Bank

Description

Riverview Bancorp is a valuable community banking franchise located in southern Washington within miles of the Portland, Oregon MSA.  As the last community bank of size in the region, RVSB is slated to receive a sizable premium to its current price in a sale, which I view as likely in the next 12-24 months. I believe the upside to be 40-50% with limited downside risk. The rationale behind this is the following:

1.)    Scarcity value as the last community bank of size in the region

2.)    High quality and low cost deposit base, an important consideration for strategic buyers

3.)    Improving business fundamentals

4.)    Long list of buyers with interest in the asset (Banner, Columbia, Glacier, Heritage, Pacific Continental)

5.)    Pro forma valuation metrics suggest ability of strategic buyers to pay substantial premium

6.)    Age of management team and lack of succession plan

7.)    Active and disgruntled shareholder base

 

 

Scarcity value as the last community bank of size in the region

Many of the regional players in the Pacific Northwest have grown substantially over the last several years via M&A. As a result, few community banks of any size ($500 million-$1.5 billion in assets) remain independent in the region. I’ve seen large premiums paid in bank M&A when these regionals bid against each other for the final property remaining. I witnessed this most recently with LNB Bancorp (LNBB) in Ohio which was the last sizable community bank in the Cleveland area.  Prior to activists getting involved in the stock it was trading between $9-$10 per share (or right around book value). Approximately one year later the bank was purchased by Northwest Bancshares (NWBI) for $18.64 per share (about 2x tangible book) after an auction which included six bidders submitting initial indications of interest. We expect the process here to be similar with numerous bidders for a scarce asset, always a good dynamic.

High quality and low cost deposit base, an important consideration for strategic buyers

Despite Riverview’s thrift legacy, the company’s total deposit costs are commercial bank-like, evidenced by an extremely low 0.18% deposit cost.  Riverview’s core deposit ratio is approximately 95% and is highly concentrated within the Portland, OR / Vancouver, WA markets.  Combined with the general scarcity value of the bank, the company’s growing, low cost core deposits provides an additional enticement to prospective buyers. 

Management has had difficulty increasing its Loan-to-Deposit Ratio (currently 79%), which has impacted overall earnings, but is a likely benefit to a buyer where the company’s untapped low cost deposits provide additional lending capital and market flexibility.

As an aside, the bank also has a very nice trust department with almost $409.3 million in AUM and $3 million in revenues, a nice fee business pick up for a buyer.

Improving business fundamentals

Riverview did not fully address its post-recession loan portfolio until FY 2012, when the company charged-off (net) $24.4 million of loans, and took a $15.6 valuation allowance against the company’s Deferred Tax Assets.  Prior to 2008, Riverview had underwritten a significant amount of construction and spec loans, which during the boom days of the pre-2008 market resulted in high Net Interest Margins (over 5%), yet by 2012 were the primary source of NPAs. 

 

 

 

 

 

 

 

 

 

 

 

FY 2012

FY 2013

 

LTM FY '16

 

 

ROA

-3.64%

0.33%

 

0.64%

 

 

ROAE

-30.19%

3.41%

 

5.22%

 

 

EPS

($1.42)

$0.12

 

$0.24

 

 

Net Charge-Offs (in mil. $)

($24.4)

($5.2)

 

$0.0

 

 

NPAs % of Assets

7.30%

4.70%

 

0.80%

 

 

 

 

 

 

 

 

 

As Riverview’s management began to work its way out of high-levels of NPAs and restore the company to profitability, the Company was able to reinstate its deferred tax asset in FY ’14 ($15.1 million).  In FY ’15, the company resumed net loan growth with a healthy 9% net growth for the year.  The company’s exposure to construction loans has decreased from 20%+ in 2012 to approximately 5% today.  Management has also reduced net charge-offs to effectively zero, and reduced NPAs to less than 1%.

Riverview is still managing its way through a bloated cost structure but has been reducing its efficiency ratio from approximately 89% to 83%.  Growth in earnings has been achieved by a combination of the strong performance from Riverview’s Trust department, overall net loan growth, revised underwriting procedures, reductions in loan allocations to single family mortgages and construction/spec loans, and a strong Pacific Northwest economy.  EPS has effectively doubled from a post clean-up 2013, and ROAs / ROEAs have increased 94% and 53% respectively.

From a risk capital standpoint, Riverview’s loan loss reserves remain a healthy 1.81%, and the TCE ratio has improved from approximately 6% to a healthy 9.4%.  The bank’s Tier 1 leverage, Tier 1 risk-based, and TRBC ratios of 10.89%, 14.63%, and 15.89%, respectively, are all improved and healthy metrics.

 

Long list of buyers with interest in the asset

There will likely be a long list of potential strategic buyers for Riverview, the most likely of which are as follows:

Columbia Banking System, Inc. (NASDAQ: COLB)

Tacoma, WA

Share price

$32.93

 

P / E (2015)

17.7x

Shares out

57.7

 

P / E (2016)

16.5x

Market cap

$1,901.2

 

 

 

 

 

 

P / B

1.5x

Total assets

$8,518.0

 

P / TB

2.3x

Total loans

5,611.9

 

 

 

 

 

 

 

 

BVPS

21.38

 

Efficiency ratio

60.25

TBVPS

14.29

 

ROA

1.1%

Div. Payout Ratio

78.71

 

ROE

7.3%

 

Columbia Banking System, Inc. operates as the bank holding company for Columbia State Bank that provides various banking products and services to small and medium-sized businesses, professionals, and individuals in Washington, Oregon, and Idaho.  As of December 31, 2014, the company had 154 branches, including 78 branches in Washington, 60 branches in Oregon, and 16 branches in Idaho. The company was founded in 1993 and is headquartered in Tacoma, Washington.

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P/E

Core Deposit Premium

7/23/2014

Intermountain Bancorp

Completed

$910.5

1.36x

13.50x

3.9%

9/26/2012

West Coast Bancorp

Completed

$2,408.4

1.46x

21.30x

11.0%

Columbia has the highest dividend payout ratio and currency value of the prospective buyers.

 

 

Cascade Bancorp (NASDAQ: CACB)

Bend, OR

Share price

$5.46

 

P / E LTM

22.8x

Shares out

72.8

 

P / E (2015)

18.8x

Market cap

$397.4

 

P / E (2016)

16.5x

 

 

 

 

 

Total assets

$2,418.5

 

P / B

1.2x

Total loans

1,624.6

 

P / TB

1.7x

 

 

 

 

 

BVPS

4.47

 

Efficiency ratio

71.41

TBVPS

3.29

 

ROA

0.7%

Div. Payout Ratio

0.00

 

ROE

5.5%

 

Cascade Bancorp operates as the bank holding company for Bank of the Cascades that offers a range of commercial and retail banking services to small to medium-sized businesses, municipalities and public organizations, and professional and consumer relationships. As of January 29, 2015, it operated 40 branches in Central, Southern, and Northwest Oregon, as well as in the Boise/Treasure Valley, Idaho area. The company was founded in 1977 and is headquartered in Bend, Oregon.

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P/E

Core Deposit Premium

10/23/2013

Home Federal Banc.

Completed

$1,007.7

1.54x

NM

12.9%

 

 

Banner Corp. (NASDAQ: BANR)

Walla Walla, WA

Share price

$48.36

 

P / E (2015)

18.0x

Shares out

21.0

 

P / E (2016)

15.2x

Market cap

$1,013.7

 

 

 

 

 

 

P / B

1.8x

Total assets

$5,194.3

 

P / TB

1.6x

Total loans

4,245.3

 

 

 

 

 

 

 

 

BVPS

31.50

 

Efficiency ratio

64.73

TBVPS

30.22

 

ROA

1.1%

Div. Payout Ratio

27.59

 

ROE

8.6%

 

Banner Corporation operates as the bank holding company for Banner Bank and Islanders Bank that provide commercial banking and financial products and services to individuals, businesses, and public sector entities primarily in the United States. As of December 31, 2014, Banner Bank operated 90 branch offices and 10 loan production offices in Washington, Oregon, and Idaho; and Islanders Bank conducted business from 3 locations in San Juan County, Washington. Banner Corporation was founded in 1890 and is based in Walla Walla, Washington.

 

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P/E

Core Deposit Premium

11/5/2014

AmericanWest Bank

Pending

$4,500.0

1.67x

21.00x

7.8%

8/7/2014

Siuslaw Financial

Completed

$360.0

1.56x

17.30x

7.9%

Banner Pro Forma Assets will be approximately $9.7 billion post-closing.

Although Banner’s valuation and dividend payout ratio is lower than the other potential buyers, the overall valuation would represent an attractive currency for Riverview shareholders and members of management that wish to remain long-term investors in the company.

 

Heritage Financial Corp. (NASDAQ: HFWA)

Olympia, WA

Share price

$18.00

 

P / E (2015)

15.1x

Shares out

30.0

 

P / E (2016)

13.1x

Market cap

$539.2

 

 

 

 

 

 

P / B

1.2x

Total assets

$3,480.3

 

P / TB

1.6x

Total loans

2,347.3

 

 

 

 

 

 

 

 

BVPS

15.33

 

Efficiency ratio

65.25

TBVPS

11.03

 

ROA

1.0%

Div. Payout Ratio

50.93

 

ROE

7.2%

 

Heritage Financial Corporation operates as the bank holding company for Heritage Bank that provides various financial services to small businesses and general public. As of July 23, 2015, the company had a network of 66 branches located in Washington and Oregon. The company was formerly known as Heritage Financial Corporation, M.H.C. and changed its name to Heritage Financial Corporation in 1998. Heritage Financial Corporation was founded in 1994 and is headquartered in Olympia, Washington.

 

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P/E

Core Deposit Premium

10/23/2013

Washington Banking Co.

Completed

$1,648.2

1.49x

19.00x

7.0%

3/12/2013

Valley Community Banc.

Completed

$242.2

1.53x

25.60x

8.9%

 

Pacific Continental Corp. (NASDAQ: PCBK)

Eugene, OR

Share price

$13.35

 

P / E (2015)

14.2x

Shares out

19.6

 

P / E (2016)

11.9x

Market cap

$261.5

 

 

 

 

 

 

P / B

1.2x

Total assets

$1,830.9

 

P / TB

1.5x

Total loans

1,304.9

 

 

 

 

 

 

 

 

BVPS

10.82

 

Efficiency ratio

57.70

TBVPS

8.62

 

ROA

1.0%

Div. Payout Ratio

55.81

 

ROE

8.3%

 

Pacific Continental Corporation operates as the bank holding company for Pacific Continental Bank that provides commercial banking, financing, mortgage lending, and other services to community-based businesses, nonprofit organizations, professional service providers, and business owners and executives. As of May, 22, 2015, it operated approximately 15 banking offices in Oregon and Washington; and 2 loan production offices in Tacoma, Washington, as well as Denver, Colorado. The company was founded in 1972 and is headquartered in Eugene, Oregon.

Notable M&A Activity:

Date

Target

Status

Target Assets

P / TBV

P/E

Core Deposit Premium

11/19/2014

Capital Pacific Bancorp

Completed

$255.9

1.76x

18.00x

10.3%

 

Pro forma valuation metrics suggest ability of strategic buyers to pay substantial premium

The majority of strategic bank acquirers look to synergy adjusted EPS multiples to help drive their decision on prices paid. I have generally seen these multiples creeping up over the last several years and we currently see multiples paid from 10-12x adjusted earnings. Given the attractiveness of this bank and the scarcity value, we believe RVSB will sell for the middle to high end of this range. Additionally, we expect synergies to run at 35-45% of costs given the poor expense controls exhibited by current management and the overlap with the strategic buyers. The result of the analysis below suggests that a motivated strategic buyer (of which we think there are many) could easily pay over $6 per share for RVSB:

Pro Forma Purchase Price / Synergy Adjusted EPS

     
             

Riverview Bancorp, Inc.

   

Operating Expense Reduction

       

45.0%

40.0%

35.0%

Synergy Adjusted Purchase Price Analysis

 

 Projected

 Projected

 Projected

       

 3/31/16E

 3/31/16E

 3/31/16E

       

 

 

 

 Operating Revenues

   

                37.75

                37.75

                37.75

 Non-Interest Expense

   

                31.58

                31.58

                31.58

 Provision for Loan Losses

   

                       -  

                       -  

                       -  

 Pre-Tax Income

     

                   6.17

                   6.17

                   6.17

       

 

 

 

 Income Tax Expense

   

                   2.10

                   2.10

                   2.10

 Net Income

     

                   4.07

                   4.07

                   4.07

       

 

 

 

 Fully Diluted Shares O/S

   

                22.43

                22.43

                22.43

       

 

 

 

 EPS

     

                   0.18

                   0.18

                   0.18

       

 

 

 

 After-Tax Synergy Reduction

   

                   9.38

                   8.34

                   7.29

 Tax Rate

     

34.00%

34.00%

34.00%

       

 

 

 

 Adjusted EPS

     

                   0.60

                   0.55

                   0.51

       

 

 

 

 Efficiency Ratio

   

58.8%

61.57%

64.33%

       

 

 

 

 Acquisition Price of Bank Operations:

 

 

 

 

 Forward P/E Multiple

10.50x

 

 $               6.30

 $               5.81

 $               5.32

   

11.50x

 

 $               6.90

 $               6.36

 $               5.83

   

12.00x

 

 $               7.20

 $               6.64

 $               6.08

       

 

 

 

 Purchase of Excess Capital per Share

1.00x

 

 $               0.21

 $               0.21

 $               0.21

       

 

 

 

 Total Purchase Price Per share:

   

 

 

 

 Implied P/E Multiple

10.85x

 

 $               6.51

 $               6.02

 $               5.53

   

11.85x

 

 $               7.11

 $               6.57

 $               6.04

   

12.35x

 

 $               7.41

 $               6.85

 $               6.29

 

Age of Management team and lack of succession plan

The management team is led by Pat Sheaffer. Mr. Sheaffer is 74 years old. The President of the bank, Ron Wysaske is 61 years old and we believe does not have much interest in running the bank for the next five to ten years. The youngest board member is 60 years old and the average age is 69. The board owns approximately 8% of the stock and could clear anywhere from $10-$12 million (excluding severance for the 2 management team board members) in a sale of the company. The CEO stands to make $4-$5 million personally and we believe has the vast majority of his net worth tied up in the company.

Active Shareholder Base

The shareholder base is solid and I believe supportive of a sale. An activist investor has filed a 13D on the company with an agenda of a company sale. Recent reports indicate that the company and the activist are in discussions on board representation. Other well known bank investors in the name include Wellington, Basswood, Banc Funds, Jacobs, Elizabeth Park and Maltese. These investors are typically supportive of sell-side M&A.  Collectively these entities represent approximately 38% of Riverview’s shares.

Conclusion

What I have found over time is that community bank M&A is all about incentives at the senior management and board level. Here we have a situation with an older CEO who clearly has a self interest to monetize the asset. I believe he is held back by his feelings toward his community and employees and is reluctant to do the right thing for shareholders. However, with a shareholder base and activist pushing on him from the outside, he now has external motives that justify his self-interest.  We believe that a number of unique factors are at play in this deal, including a deep and highly motivated list of buyers, a lack of quality assets/alternatives for these folks to buy and an ability to pay up to a 50% premium over the current price. 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Sale of the Company

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