Richmond Mutual Bancorporation, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; financial statements are unaudited. Richmond Mutual Bancorporation is the holding company for First Bank Richmond, a community bank operating in Indiana and Ohio, with a nationwide equipment-leasing business. Comparisons are with the corresponding 2019 periods unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $10.50 million | $10.40 million | $20.95 million | $20.16 million |
| Net interest income | $8.02 million | $7.48 million | $15.91 million | $14.60 million |
| Provision for loan and lease losses | $1.32 million | $0.49 million | $1.53 million | $1.01 million |
| Non-interest income | $2.08 million | $0.90 million | $3.04 million | $1.80 million |
| Non-interest expense | $5.65 million | $7.60 million | $11.17 million | $13.41 million |
| Net income | $2.51 million | $0.34 million | $4.96 million | $1.71 million |
| Diluted EPS | $0.20 | Not comparable | $0.40 | Not comparable |
| Net interest margin | 3.03% | 3.27% | 3.25% | 3.35% |
Q2 net income rose substantially, while net interest margin declined. The company attributed the margin pressure to asset yields falling faster than funding costs; PPP loans also reduced reported margin. Q2 non-interest income benefited from higher mortgage loan-sale gains, while lower expenses partly reflected a $1.7 million deferred-compensation-plan expense recorded in Q2 2019. The 2019 EPS comparison is unavailable because the company’s stock conversion and offering closed July 1, 2019.
Financial position, liquidity and credit
- At June 30, 2020, total assets were $1.140 billion, up 15.6% from year-end 2019. Net loans and leases were $752.9 million, deposits $739.1 million, FHLB advances $180.0 million and stockholders’ equity $196.1 million. Equity was 17.2% of assets.
- Deposits increased $121.9 million, including a $64.0 million increase in brokered deposits to $120.7 million. FHLB advances rose $26.0 million. Management said these funding increases supported its liquidity strategy.
- Cash and cash equivalents were $110.6 million, compared with $40.6 million at December 31, 2019. First Bank Richmond reported $204.1 million of cash and unpledged available-for-sale securities, $41.7 million of additional FHLB borrowing capacity, and up to $64.3 million of potential PPPLF borrowing against unpledged PPP loans; it had not used the PPPLF at quarter-end.
- For the first half, operating cash flow was $7.5 million, investing cash flow was negative $84.7 million, and financing cash flow was positive $147.2 million. Financing inflows primarily reflected deposit growth and net FHLB advances.
- Gross loans and leases were $763.9 million. The allowance was $8.5 million, or 1.12% of loans and leases (1.22% excluding PPP loans); allowance coverage of nonperforming loans and leases was 197.5%. Nonperforming loans and leases were approximately $4.3 million, or 0.57% of the portfolio. First-half net charge-offs were $98,000.
- The bank reported that it exceeded regulatory capital requirements and was well-capitalized. The capital-ratio presentation in the filing is not fully consistent across sections; see investor verification items below.
Material developments, outlook and risks
- COVID-19 response included 752 approved loan and lease modifications totaling approximately $175.1 million, or 22.9% of total loans and leases. They were treated as non-TDR modifications under applicable CARES Act guidance, but remain subject to impairment evaluation and ongoing monitoring.
- The bank reported processing 465 PPP loans totaling $64.3 million as of June 30, 2020, with $72,000 approved and awaiting funding. PPP loans carry a 1% stated interest rate, with SBA-paid origination fees, and are fully SBA-guaranteed. Management expected most borrowers to seek forgiveness.
- Management expects COVID-19 uncertainty to continue affecting credit quality and said additional loan-loss provisions may be required. It expects net interest income and margin to be adversely affected in 2020 and possibly longer, citing low rates and pandemic-related uncertainty. The filing provides no quantitative earnings or margin guidance.
- Key risks include borrower payment stress, rising delinquencies and charge-offs, real-estate and market conditions, funding access, and uncertainty around pandemic duration and economic recovery. The company also disclosed operational, cybersecurity, staffing and third-party-provider risks related to remote work and pandemic disruption.
- On July 8, 2020, after quarter-end, the board authorized a repurchase program for up to 676,331 shares, approximately 5% of shares outstanding. No repurchases occurred during Q2.
- Management stated there were no material pending legal proceedings and no material change in market-risk disclosures. Disclosure controls were deemed effective as of June 30, 2020.
Important facts for investors to verify
- The COVID-19 risk-factor section says the PPP portfolio was approximately $75.1 million, whereas the operating discussion reports $64.3 million. Confirm the correct balance and reconcile it with the loan data.
- Confirm the bank’s regulatory capital ratios: the filing narrative cites a 13.4% total risk-based capital ratio, while the regulatory-capital table reports 20.1% total risk-based capital and 13.4% Tier 1 leverage, with figures that appear inconsistent across rows.
- Monitor performance of the $175.1 million of modified loans and leases, including subsequent deferrals, credit-rating changes, delinquencies and any resulting allowance increases.
- Assess the effect of deposit growth, brokered funding and FHLB advances on funding costs and liquidity, and whether available borrowing capacity remains accessible.
- Track margin sensitivity to low interest rates, PPP fee recognition and loan repricing, as well as the sustainability of mortgage-sale gains and lower expenses.