Richmond Mutual Bancorporation, Inc. quarterly report, Q3 FY2020

Richmond Mutual Bancorporation, Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. The company is a bank holding company whose subsidiary, First Bank Richmond, provides banking, lending, equipment leasing, and wealth-management services. Financial statements are unaudited. Comparisons with 2019 are affected by the July 2019 conversion to stock ownership and related offering.

Key financial results

MetricQ3 2020Q3 2019Nine months 2020Nine months 2019
Net interest income$8.3 million$7.9 million$24.2 million$22.5 million
Provision for loan and lease losses$1.3 million$0.7 million$2.8 million$1.7 million
Non-interest income$2.2 million$1.1 million$5.2 million$3.0 million
Non-interest expense$6.0 million$12.5 million$17.2 million$25.9 million
Net income (loss)$2.5 million$(3.3) million$7.5 million$(1.5) million
Diluted EPS$0.21$(0.26)$0.60Not directly comparable
Net interest margin3.18%3.31%3.30%3.34%

Q3 interest income was $10.6 million, down 2.1% year over year; nine-month interest income was $31.5 million, up 1.8%. Q3 pre-provision net interest income increased 4.6%, but higher credit-loss provisions reduced net interest income after provision to $7.0 million from $7.2 million. Nine-month pre-tax income was $9.4 million, versus a $2.2 million loss in 2019.

Financial position, liquidity, and capital

  • At September 30, 2020, total assets were $1.055 billion, up 7.0% from year-end 2019. Net loans and leases were $750.6 million, up 9.2%; total investment securities were about $244.2 million.
  • Deposits were $663.1 million, up 7.4%. Non-interest-bearing deposits rose to $88.7 million from $60.3 million; brokered deposits declined to $32.4 million from $56.7 million.
  • FHLB advances were $176.0 million, up from $154.0 million. Stockholders’ equity was $191.7 million, or 18.2% of assets.
  • Cash and cash equivalents were $16.7 million, down from $40.6 million at year-end. For the nine months, operating cash flow was $7.6 million, investing cash flow was negative $91.5 million, and financing cash flow was positive $60.0 million.
  • Management reported $141.7 million of cash and unpledged available-for-sale securities, $56.3 million of additional FHLB borrowing capacity, and up to $64.9 million of potential PPPLF borrowing capacity; the PPPLF had not been used.
  • The Bank’s total risk-based capital ratio was 20.1%, and its Tier 1 leverage ratio was 13.9%; the Bank exceeded well-capitalized thresholds.

Material changes and notable items

  • Loan and lease balances grew mainly from $64.9 million of PPP lending. The company funded 482 PPP loans; they carry a 1% stated rate, are SBA-guaranteed, and generate SBA processing fees.
  • The allowance for loan and lease losses increased to $9.8 million from $7.1 million. It equaled 1.29% of loans and leases, or 1.41% excluding PPP loans. Nine-month net charge-offs were $110,000, down from $419,000 a year earlier.
  • COVID-19 modifications outstanding fell to 70 loans and leases totaling $35.3 million at September 30 from 752 totaling $175.1 million at June 30. Thirteen hotel loans totaling $24.4 million remained deferred, representing 34.83% of the hotel loan category.
  • Q3 non-interest income benefited from $1.3 million of gains on loan and lease sales, compared with $232,000 a year earlier, amid increased mortgage activity. Deposit service charges declined, partly because overdraft fees were waived for part of the quarter.
  • Lower expenses partly reflect that Q3 2019 included a $6.3 million charitable foundation expense related to the company’s 2019 reorganization and stock offering. Nine-month 2019 expenses also included a $1.7 million nonqualified deferred compensation plan expense.
  • The company repurchased 582,079 shares in Q3 for $6.6 million at an average $11.37 per share and paid $1.2 million in dividends during the first nine months. After quarter-end it completed the program and authorized another repurchase program for up to 664,969 shares.

Outlook, risks, and contingencies

  • No numerical earnings or margin guidance was provided. Management expects COVID-19 and low interest rates to pressure net interest income and net interest margin in the near term, potentially beyond 2020. It also expects continued asset-quality pressure and says further provisions may be required.
  • The company had accrued $17.5 million for its frozen defined-benefit pension plan. Management estimated termination at current low interest rates could require an additional $8 million to $10 million; timing and final cost remain under review.
  • COVID-19-related uncertainty could lead to higher delinquencies, criticized loans, charge-offs, and allowance needs. The company highlighted risks to hospitality borrowers, borrower repayment after deferrals, remote operations, cybersecurity, key staffing, third-party vendors, and PPP loan forgiveness administration or litigation.
  • Loan and lease commitments, including unused lines and letters of credit, totaled $154.0 million, including $69.9 million of undisbursed construction and land loans. Certificates of deposit maturing within one year totaled $154.1 million.
  • Management considered unrealized securities losses to be temporary, attributing them primarily to interest-rate changes and illiquidity. Securities with fair value of $43.0 million were in an unrealized-loss position at quarter-end.
  • The company reported no material pending legal proceedings and no material change in market-risk disclosures. Management concluded disclosure controls were effective.

Most important facts for investors to verify

  • Whether COVID-19 deferrals, especially the remaining hotel exposures, convert into renewed payment stress, downgrades, or losses.
  • How the allowance and provision evolve as pandemic-related credit uncertainty and PPP loan forgiveness are resolved.
  • Whether deposit growth and available borrowing capacity remain sufficient against commitments, deposit maturities, and reduced cash balances.
  • The eventual pension-plan termination timing and cost relative to the $17.5 million accrual and estimated additional $8 million to $10 million.
  • Whether lower rates, PPP lending, and mortgage-sale activity sustain reported earnings and how the second share-repurchase program affects capital and liquidity.