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
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine 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) | $0.60 | Not directly comparable |
| Net interest margin | 3.18% | 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.