Richmond Mutual Bancorporation, Inc. — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparisons are generally with 2019. The company is the parent of First Bank Richmond, an Indiana-chartered community bank operating in Indiana and Ohio.
Financial performance and condition
- Profit: Net income was $10.0 million, versus a $14.1 million net loss in 2019. The 2019 loss reflected significant one-time costs, including the planned pension-plan termination and charitable foundation contribution.
- Income and margins: Interest income was $42.3 million, up 1.9%; net interest income rose 8.4% to $32.9 million. Net interest margin declined to 3.22% from 3.34%, as asset yields fell more than funding costs. Noninterest income increased to $7.3 million, mainly from mortgage and loan-sale gains. The $3.8 million loan-loss provision was up from $2.6 million.
- Expenses: Noninterest expense fell to $24.0 million from $51.0 million, principally because 2019 included pension, foundation and deferred-compensation charges. Excluding those items, expenses increased $219,000.
- Balance sheet: Assets grew 10.0% to $1.084 billion. Net loans and leases increased 7.2% to $736.4 million; securities available for sale were $244.5 million. Deposits rose 12.3% to $693.0 million, while stockholders’ equity increased 2.6% to $192.7 million.
- Funding and liquidity: FHLB advances were $170.0 million, up from $154.0 million. Cash and cash equivalents were $48.8 million. Operating cash flow was $16.6 million; investing activities used $89.3 million and financing activities provided $80.9 million. The bank reported $32.7 million of additional FHLB borrowing capacity, based on collateral, and a separate $10 million FHLB line with no balance drawn at year-end.
- Capital: First Bank Richmond’s total risk-based capital ratio was 21.9% and Tier 1 leverage ratio 14.3%; the bank was classified as well capitalized.
Material changes and notable items
- Loan and lease originations increased 69.3% to $404.6 million. Growth included $64.9 million of PPP originations; $43.3 million remained outstanding at year-end. SBA processing fees contributed $2.3 million of 2020 income.
- Customer deposits grew, particularly demand and savings balances, while brokered deposits declined to $23.3 million, or 3.4% of deposits, from $56.7 million, or 9.2%.
- The allowance for loan and lease losses increased to $10.6 million, or 1.42% of gross loans and leases, from $7.1 million, or 1.02%. Net charge-offs fell to $273,000 from $1.1 million.
- Nonperforming loans and leases rose to $4.8 million, or 0.64% of loans and leases, from $3.8 million, or 0.55%. The increase chiefly reflected a $1.1 million commercial real estate participation loan past due over 90 days but still accruing.
- At year-end, 48 loans and leases totaling $54.7 million had COVID-related payment deferrals. Hotel loans made up $37.4 million of these deferred balances. Management reported that deferral requests had fallen significantly from earlier in 2020.
- The company repurchased 781,951 shares for approximately $9.1 million and paid dividends of $0.15 per share. A second repurchase authorization covered up to 664,969 shares and remained in effect after year-end.
Outlook, risks and contingencies
- The filing gives no quantified earnings or growth guidance. Management cautioned that pandemic uncertainty could pressure net interest income and margin, credit quality, asset values and operating costs; the full effects were not yet known.
- Management increased qualitative credit-loss factors and said it was stress-testing the portfolio and closely monitoring higher-risk sectors, including hotels and restaurants. PPP loans carry risks related to borrower eligibility, servicing and SBA forgiveness or guarantee determinations.
- Commercial real estate, multifamily, commercial and industrial, and construction lending expose the bank to borrower, collateral and regional economic risks. The portfolio has grown, and management notes that a significant portion of commercial lending is relatively unseasoned.
- The bank had an estimated $17.5 million liability for its planned withdrawal from the multi-employer defined benefit plan; the final termination cost could differ. The bank also had $179.3 million in commitments to extend credit and $558,000 in standby letters of credit.
- Interest-rate risk is material. The filing reports that a modeled immediate 200-basis-point rate increase would raise first-year net interest income by 7.29%, while a 200-basis-point decrease would reduce it by 4.79%; actual outcomes may differ. Certain $131 million FHLB advances can convert to a variable rate based on LIBOR.
- CECL was expected to take effect for the company in 2023; management had not quantified the impact. Other disclosed risks include LIBOR transition, cybersecurity and third-party service providers, regulatory changes, and possible securities valuation changes.
- The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor attestation of internal control.
Important facts for investors to verify
- Whether COVID-related deferrals, especially hotel exposures, resume contractual payments and how credit quality and required reserves evolve.
- The status and forgiveness of outstanding PPP loans, and whether SBA processing fees and guarantees are recognized and collected as expected.
- The final pension-plan withdrawal liability and timing of plan termination.
- Whether net interest margin, loan-sale income and deposit funding costs remain sustainable as market rates and customer balances change.
- The remaining share-repurchase authorization, dividend capacity and any effect of stock compensation on per-share results.
- Management’s CECL adoption estimates, LIBOR transition plans and the bank’s available liquidity under stressed conditions.