Richmond Mutual Bancorporation, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. The company is a bank holding company whose subsidiary, First Bank Richmond, serves Indiana and Ohio markets and also provides equipment leasing and wealth management services.
Key financial results
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.008 billion | $986.0 million at Dec. 31, 2019 |
| Loans and leases, net | $687.1 million | $687.3 million at Dec. 31, 2019 |
| Deposits | $605.2 million | $617.2 million at Dec. 31, 2019 |
| FHLB advances | $182.0 million | $154.0 million at Dec. 31, 2019 |
| Stockholders’ equity | $193.2 million; 19.2% of assets | $187.8 million at Dec. 31, 2019 |
| Net interest income | $7.89 million | $7.12 million in Q1 2019 |
| Net income | $2.45 million; diluted EPS $0.20 | $1.37 million in Q1 2019; prior-year EPS not comparable because the stock conversion occurred in July 2019 |
| Operating cash flow | $4.77 million | $1.66 million in Q1 2019 |
| Cash and cash equivalents | $27.46 million | $40.60 million at Dec. 31, 2019 |
Interest income rose 7.1% to $10.45 million, while interest expense fell 2.8% to $2.56 million. Net interest margin was 3.32%, down from 3.44% in Q1 2019; the net interest rate spread declined to 2.96% from 3.23%. The loan yield was 5.28%, versus 5.25%.
Provision for loan and lease losses was $210,000, down from $525,000. The allowance was $7.31 million, or 1.05% of loans and leases, compared with $7.09 million, or 1.02%, at year-end. Net recoveries were $7,000; nonaccrual loans and leases totaled $1.18 million.
Net cash used in investing activities was $34.00 million, chiefly reflecting securities purchases; financing activities provided $16.08 million, including $30 million of FHLB advance proceeds. The bank reported a 19.1% total risk-based capital ratio, 18.2% Tier 1 risk-based and common equity Tier 1 ratios, and a 14.3% Tier 1 leverage ratio. Wealth-management assets under management and administration were $143.5 million.
Material changes and unusual items
- Net income increased about 79% year over year, helped by higher net interest income, lower provision expense, and lower non-interest expenses. Non-interest expense decreased $281,000 to $5.52 million.
- Non-interest income increased 5.4% to $953,000. Loan and lease sale gains rose to $228,000, while servicing fees were negative $65,692; management cited a $114,000 mortgage-servicing-rights impairment.
- Assets increased 2.2% from year-end, primarily from higher cash and investments. Deposits fell 1.9%, while FHLB advances increased 18.2%. Brokered deposits declined to $48.0 million from $56.7 million.
- Loan balances were nearly flat, but commercial mortgage, construction and lease balances grew while commercial and industrial and multifamily balances declined.
- Accumulated other comprehensive income improved by $2.77 million, principally reflecting unrealized gains on available-for-sale securities. Management considered reported investment-security fair-value declines temporary and said it did not intend, or expect to be required, to sell affected securities before recovery.
- Lower Q1 2020 employee-benefit expense partly reflected a $19.3 million accrual in December 2019 related to freezing and proposed termination of the defined-benefit plan. Freezing the plan is expected to reduce, but not eliminate, related costs until termination.
COVID-19, outlook and risks
- Management expects COVID-19 and the 150-basis-point reduction in the federal funds target rate to adversely affect net interest income and margin during 2020 and possibly longer. It warned that delinquencies, classified loans, charge-offs and credit-loss provisions may rise; the pandemic’s eventual financial effect was uncertain.
- At March 31, 220 loans totaling $42.7 million had been modified for COVID-related relief. These short-term modifications were not classified as troubled debt restructurings under the CARES Act. Through April 30, the company reported 639 modifications granted totaling $142.5 million out of 660 requests totaling $144.1 million; this is post-quarter information.
- Beginning April 3, the company processed 438 Paycheck Protection Program loans totaling $63.9 million through April 30. PPP loans carry a 1% rate, are SBA-guaranteed subject to program terms, and may generate SBA processing fees. Management said it might use the Federal Reserve’s PPP Liquidity Facility.
- Branch services were adjusted, with appointment-based and drive-up access, and some staff working remotely. The filing identifies potential operational, cybersecurity, vendor, staffing, credit, collateral-value and liquidity risks arising from the pandemic.
- Liquidity sources include loan repayments, securities maturities, FHLB borrowing, brokered CDs and potentially the PPP facility. The company had $136.8 million of loan commitments and unused lines at March 31.
- No quantified earnings or margin guidance was provided. Management said the pandemic’s duration and economic effects were not yet knowable. The company reported no material pending litigation and effective disclosure controls.
Important facts for investors to verify
- Subsequent trends in COVID-related deferrals, borrower payment performance, credit grades, charge-offs and the adequacy of the loan-loss allowance.
- PPP loan balances, forgiveness and fee recognition, any use of the Federal Reserve liquidity facility, and potential SBA-guaranty or litigation exposure.
- Whether deposit outflows and increased FHLB funding persist, and how funding costs and falling asset yields affect net interest margin.
- Progress and costs associated with the defined-benefit plan’s proposed termination and the resulting effects on expenses and capital.
- Whether available-for-sale securities recover as management expects and whether liquidity needs could require sales or recognition of losses.