Richmond Mutual Bancorporation, Inc. quarterly report, Q2 FY2021

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Richmond Mutual Bancorporation, Inc. — Q2 2021 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2021. The company is the bank holding company for First Bank Richmond, a community bank and equipment lessor operating primarily in Indiana and Ohio. Financial amounts below are in U.S. dollars unless otherwise noted.

Financial performance

  • Q2 earnings: Net income was $2.78 million, up 11.0% from $2.51 million in Q2 2020. Diluted EPS was $0.24 versus $0.20.
  • First-half earnings: Net income was $5.34 million, up 7.8% from $4.96 million; diluted EPS was $0.45 versus $0.40.
  • Net interest income: Q2 was $8.93 million, up 11.2%; first-half NII was $17.69 million, up 11.2%. Annualized net interest margin increased to 3.18% from 3.03% for Q2, and to 3.38% from 3.25% for the first half.
  • Interest income and funding costs: Q2 interest income rose 3.3% to $10.85 million, while interest expense fell 22.3% to $1.92 million. Lower deposit rates drove much of the expense decline. Q2 loan and lease yield eased to 4.93% from 4.98%.
  • Credit provision: Q2 provision for loan and lease losses was $530,000, down from $1.32 million; first-half provision was $930,000, down from $1.53 million. First-half net charge-offs were $85,000.
  • Other income and expenses: Q2 noninterest income declined 8.5% to $1.90 million, mainly as gains on loan and lease sales fell. First-half noninterest income rose 20.9% to $3.67 million. Noninterest expense increased 21.8% in Q2 to $6.88 million and 24.0% for the first half to $13.86 million, including higher compensation, equity-award, pension, and technology costs.

Financial position, cash flow and capital

  • Total assets increased 9.6% from year-end 2020 to $1.19 billion. Net loans and leases grew 6.9% to $785.3 million; deposits increased 14.4% to $793.1 million. Available-for-sale securities were $329.8 million, compared with $244.5 million at year-end.
  • Cash and cash equivalents declined 65.0% to $17.1 million. FHLB advances rose to $189.0 million from $170.0 million. Management reported $177.9 million in cash and unpledged available-for-sale securities, plus $51.0 million of additional FHLB borrowing capacity. The company had no PPPLF borrowings and reported up to $34.6 million of potential PPPLF capacity; the program was scheduled to end July 30, 2021.
  • First-half operating cash flow was negative $2.5 million, investing cash flow was negative $133.4 million, and financing cash flow was positive $104.2 million, chiefly reflecting a $100.0 million net increase in deposits. Cash declined $31.7 million over the period.
  • Stockholders’ equity was $182.6 million, down 5.3% from year-end; the equity-to-assets ratio was 15.4%. First Bank Richmond was well-capitalized, with a 19.1% total risk-based capital ratio and a 13.7% Tier 1 leverage ratio.
  • The company repurchased 512,783 shares for $7.2 million during the first half and paid $7.7 million in dividends. Subsequent to quarter-end through August 13, it repurchased a further 214,096 shares.

Material changes, outlook and risks

  • Loan growth was concentrated in multifamily and construction and development lending. Nonperforming loans and leases rose to $7.7 million, or 0.97% of loans and leases, from $4.8 million, or 0.65%, at year-end. The increase included a $4.9 million nonaccrual commercial real estate construction loan more than 90 days past due and subject to litigation between the developer and other parties.
  • The allowance was $11.4 million, or 1.43% of loans and leases, versus $10.6 million, or 1.42%, at year-end. Management cited improving economic conditions as a factor in the lower provision, while noting uncertainty from COVID-19 and the Delta variant and continued monitoring of credit quality.
  • Six COVID-related loan and lease modifications totaling $2.5 million remained outstanding at June 30, down from 48 totaling $54.7 million at December 31, 2020. PPP loans outstanding were $34.6 million; the company had originated approximately $103.1 million cumulatively. Management said requests for payment relief had declined and reported no deferred loans in higher-risk hospitality segments.
  • Management expected COVID-related effects, including the low-rate environment, to weigh on net interest income and margin in 2021 and possibly longer. The filing provides no specific earnings or revenue guidance. Management also flagged the potential for renewed restrictions, higher credit-loss provisions, interest-rate and real-estate-market changes, funding pressures, competition, cybersecurity and third-party risks.
  • The defined-benefit pension plan remains frozen and its termination is pending. A $17.5 million withdrawal liability is accrued, but management said actual termination cost could be higher or lower and that low interest rates could require substantial additional expense; timing and final cost remain uncertain.
  • Unrealized losses on securities were attributed primarily to interest-rate changes and considered temporary by management. Fair value of securities in a loss position was $141.7 million at June 30, compared with $45.3 million at year-end. First-half other comprehensive income included a $2.05 million loss, largely reflecting available-for-sale securities valuation changes.
  • Loan and lease commitments, including unused lines and letters of credit, totaled $175.7 million, including $93.2 million of undisbursed construction and land loans. Certificates of deposit maturing within one year totaled $153.7 million.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material pending legal proceedings and no material changes to the risk factors in the 2020 Form 10-K.

Important facts for investors to verify

  • Performance of the $4.9 million construction loan under litigation, the broader increase in nonperforming loans, and the adequacy of the allowance.
  • Whether deposit growth and available liquidity remain sufficient as cash balances have fallen, commitments are drawn, and certificates mature.
  • The sustainability of net interest margin and earnings as PPP fee income changes, rates remain low, and deposit and borrowing costs reset.
  • The eventual cost and timing of pension-plan termination, including any expense beyond the accrued $17.5 million liability.
  • Developments in COVID-19-related credit performance, securities valuations, and the company’s ongoing share repurchases and dividends.