Richmond Mutual Bancorporation, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results include First Bank Richmond and subsidiaries. The company operates a community bank, with lending, leasing, deposit, and wealth-management businesses.
Financial performance and position
- Q2 earnings: Net income was $2.69 million, down 22.8% from $3.49 million in Q2 2022. Diluted EPS was $0.26 versus $0.31.
- First-half earnings: Net income was $5.60 million, down 13.9% from $6.50 million; diluted EPS was $0.53 versus $0.58.
- Revenue and margins: Q2 net interest income was $9.33 million, down 11.5%; annualized net interest margin was 2.77% versus 3.45%. First-half net interest income was $19.20 million, down 6.8%, and net interest margin was 2.90% versus 3.36%. Interest income rose, but higher deposit and borrowing costs more than offset the increase.
- Expenses and credit provision: Q2 noninterest expense increased 2.5% to $7.34 million; first-half expense increased 1.4% to $14.70 million. Credit-loss provision was $8,000 for Q2 and $178,000 for the first half; comparisons with 2022 are affected by adoption of CECL.
- Assets and loans: Total assets were $1.409 billion, up 6.1% from year-end 2022. Net loans and leases were $1.043 billion, up 8.5%; growth included commercial real estate, direct financing leases, and multifamily loans.
- Deposits and borrowings: Deposits were $1.040 billion, up 3.4% from year-end. FHLB advances rose to $226.0 million from $180.0 million. Brokered deposits were $291.0 million, or 28.0% of deposits; uninsured deposits were estimated at $206.9 million, or 19.9%, excluding collateralized public deposits.
- Credit quality: Nonperforming loans and leases were $8.5 million, or 0.81% of total loans and leases, versus $9.2 million, or 0.94%, at year-end. The allowance for loan and lease losses was $15.4 million, or 1.45% of loans and leases. First-half net charge-offs were $137,000.
- Cash flow and liquidity: First-half operating cash flow was $6.4 million, investing cash outflow was $78.6 million, and financing cash inflow was $73.8 million. Cash and cash equivalents ended at $17.5 million. Management reported $299.3 million in cash, time deposits, and available-for-sale securities; remaining FHLB borrowing capacity was approximately $51.6 million, with additional borrowing capacity supported by unpledged securities.
- Capital and securities: Stockholders’ equity was $130.8 million, down 1.6% from year-end; equity-to-assets was 9.28%. The Bank’s total risk-based capital ratio was 14.0%, above the 10.0% well-capitalized threshold. Available-for-sale securities had $61.0 million of gross unrealized losses, which management attributed primarily to interest rates and said it did not expect to realize through required sales before recovery.
Material changes versus comparable periods
- Q2 and first-half net income declined as sharply higher deposit and borrowing costs compressed net interest spread and margin. Q2 average interest-bearing deposit cost rose to 2.42% overall from 0.76% a year earlier; loan yield rose to 5.48% from 4.88%.
- Loan growth was funded by deposit growth and increased FHLB advances. Deposit mix shifted toward time deposits as customers sought higher rates; savings and money-market balances declined.
- Data-processing and FDIC deposit-insurance expenses increased, while salaries and benefits fell, primarily due to lower bonus expense.
- The fair value of available-for-sale securities improved during the first half, contributing $1.6 million of other comprehensive income, but Q2 included a $4.6 million other comprehensive loss.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management expects current dividend practice to continue, subject to Board discretion; the quarterly dividend rate was $0.14 per share.
- Management identified persistent inflation, higher interest rates, weaker growth and employment expectations, geopolitical risk, and possible tighter credit conditions as factors that could adversely affect borrowers and the allowance through the rest of 2023 and potentially into 2024. It is monitoring higher-risk sectors, including hotels and restaurants.
- On January 1, 2023, the company adopted CECL. Adoption increased the loan-and-lease allowance by $2.7 million and established a $2.4 million allowance for unfunded commitments; retained earnings was reduced by $3.8 million in total, net of tax. The loan allowance was $15.4 million and unfunded-commitment allowance $2.1 million at June 30.
- The company repurchased $3.6 million of shares in the first half. Its repurchase authorization was amended in June and extended to June 6, 2024; 1,108,157 shares remained available at June 30. It subsequently repurchased 25,546 additional shares through August 10.
- Management stated that it knew of no events reasonably likely to materially harm liquidity, capital resources, or operations. It reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were concluded effective; no material change in internal control was reported.
Investor verification priorities
- Track deposit pricing, brokered and uninsured deposit concentrations, deposit retention, and the cost and availability of FHLB and other funding.
- Monitor net interest margin and whether asset yields catch up with rising deposit and borrowing costs.
- Review commercial real estate and lease portfolio growth, delinquency and nonaccrual trends, charge-offs, and CECL allowance assumptions under weaker economic scenarios.
- Assess the duration and potential liquidity implications of the securities portfolio’s unrealized losses, including whether securities might need to be sold before maturity.
- Confirm capital and liquidity remain adequate after dividends and share repurchases, and review subsequent repurchase activity and the outstanding authorization.